By Tim Kelly and Sakura Murakami
TOKYO (Reuters) -Japan's Prime Minister Fumio Kishida said on Wednesday he would step down next month, succumbing to public disaffection over political scandals and rising living costs that marred his three-year term, and setting off a scramble to replace him.
"Politics cannot function without public trust," he told a press conference to reveal his decision not to seek re-election as the leader of the ruling Liberal Democratic Party (LDP).
"I made this heavy decision thinking of the public, with the strong will to push political reform forward."
The LDP will hold a contest in September to replace him as president of the party, and, by extension, as prime minister.
Kishida's ratings dipped after he took office in 2021 following revelations about the LDP's ties to the controversial Unification Church.
His popularity took another hit when a slush fund of unrecorded political donations made at LDP fundraising events came to light.
He also faced public discontent as wages failed to keep pace with rising living costs as Japan 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," said Koichi Nakano, a professor of political science at Sophia University.
"It's like the grand champion yokozunas of sumo. You don't just win, but you need to win with grace."
His successor as LDP leader will face the task of restoring the public's confidence in the party 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.
U.S. President Joe Biden called Kishida's tenure "nothing short of historic" and praised his new national security strategy, support for Ukraine, and steps to usher in a new era of U.S.-South Korea-Japan cooperation.
"Prime Minister Kishida’s courageous leadership will be remembered on both sides of the Pacific for decades to come, and I will always be grateful to call him my friend," Biden said in a statement.
U.S. State Department spokesperson Vedant Patel told a regular briefing he had no doubt that whoever took over from Kishida "we will continue to deepen our alliance and partnership with Japan."
MONETARY POLICY AND MILITARY BUILDUP
Through his stint as Japan's eighth-longest serving post-war leader, Kishida broke from previous economic policy by eschewing corporate profit-driven trickledown economics to set his sights on boosting household income, including wage hikes and promoting share ownership.
He led Japan out of the COVID-19 pandemic with massive stimulus spending and also appointed academic Kazuo Ueda as head of the Bank of Japan to guide the country out of his predecessor's radical monetary stimulus.
In July, the BOJ 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, said 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.
Kishida's premiership was also marked by a changing security environment that spurred Japan to revisit its traditionally pacifist policy.
He unveiled Japan's biggest military buildup since World War Two with a commitment to double defence spending aimed at deterring neighbouring China from pursuing its territorial ambitions in East Asia through military force.
At Washington's prodding, Kishida also mended Japan's strained ties with South Korea, enabling the two and their mutual ally, the United States, to pursue deeper security co-operation against the threat from North Korea's missile and nuclear weapons programs.
"Personally, I wish he continued a little bit more as prime minister," said Naoya Okamoto, a 22-year-old office worker in Tokyo, the capital.
"Maybe he was stressed (with the low ratings), and with all the circumstances around him, I guess he has no choice but to step down."
NEXT LEADER
Former defence minister Shigeru Ishiba has already thrown his hat in the ring as a prospective replacement for Kishida, saying he would like to "fulfil his duty" if he gained enough support, public broadcaster NHK said.
Other names floated as potential contenders include Foreign Minister Yoko Kamikawa, Digital Minister Taro Kono, and former Environment Minister Shinjiro Koizumi.
Experts say the LDP will have to pick a fresh face that breaks from the scandals if it is to survive a general election due by the third quarter of 2025.
"If the LDP picks its next leader in a way that disregards public criticism against political funding scandals, the party could suffer a crushing defeat," said political analyst Atsuo Ito.
"The party must choose someone young who has no ties with the present administration and thus can present a new LDP."