Japan looks set to get a new prime minister after the incumbent Fumio Kishida announced Wednesday he would step down over a graft scandal involving party members.

"Politics cannot function without public trust," Kishida said in a press conference to announce his decision not to seek re-election as the Liberal Democratic Party (LDP) leader.

"I will now focus on supporting the newly elected LDP leader as a rank-and-file member of the party," he said.

His decision to quit triggers a contest to replace him as president of the party, and by extension as the leader of the world's fourth-biggest economy.

Kishida's public support has been sliding amid revelations about the LDP's ties to the controversial Unification Church and political donations made at party fundraising events that went unrecorded.

But he also faced public discontent over the failure of wages to keep track of the rising cost of living as the country finally shook off years of deflationary pressure.

"An LDP incumbent prime minister cannot run in the presidential race unless he's assured of a victory. It's like the grand champion yokozunas of sumo. You don't just win, but you need to win with grace," said Koichi Nakano, a political science professor at Sophia University.

Whoever succeeds Kishida as the head of the LDP will have to unite a fractious ruling group and tackle the rising cost of living, escalating geopolitical tensions with China, and the potential return of Donald Trump as U.S. president next year.

COVID to inflation

As the country's eighth-longest serving post-war leader, Kishida led Japan out of the COVID-19 pandemic with massive stimulus spending. He also appointed Kazuo Ueda as head of the Bank of Japan (BOJ), an academic tasked with ending his predecessor's radical monetary stimulus.

The BOJ in July unexpectedly raised interest rates as inflation took hold, contributing to stock market instability and sending the yen sharply higher.

Kishida's departure could mean tighter fiscal and monetary conditions depending on the candidate, according to Shoki Omori, chief Japan desk strategist at Mizuho Securities in Tokyo.

"In short, risk-assets, particularly equities, will likely be hit the most," he said.

In another break from the past, Kishida also eschewed corporate profit-driven trickle-down economics in favor of policies aimed at boosting household incomes, including wage hikes and promoting share ownership.

Defense spending

Despite that departure on the economy, he stuck with the hawkish security policies of his predecessor Shinzo Abe, who was assassinated in 2022.

He unveiled Japan's biggest military buildup since World War II with a commitment to double defense spending to deter neighboring China from pursuing its territorial ambitions in East Asia through military force.

With prodding from Washington, Kishida also mended Japan's strained relations with South Korea, enabling the two countries and their mutual ally, the U.S., to pursue deeper security cooperation to counter the threat posed by North Korea's missile and nuclear weapons programs.

"Under Prime Minister Kishida’s steadfast leadership, Japan and the United States have ushered in a new era of relations for the Alliance," U.S. Ambassador Rahm Emanuel said in a post on X, formerly known as Twitter.