Japanese Prime Minister Shigeru Ishiba said on Sunday he had decided to resign, ushering in a potentially lengthy period of policy paralysis at a shaky moment for the world's fourth-largest economy.

Ishiba, 68, instructed his Liberal Democratic Party - which has governed Japan for almost all of the post-war era - to hold an emergency leadership race, he told a press conference, adding he would continue his duties until his successor was elected.

Since coming to power less than a year ago, Ishiba has overseen his ruling coalition lose its majorities in elections for both houses of parliament amid voter anger over rising living costs.

Until Sunday, he had refused calls to step down following the latest of those losses in July's upper house vote. He had focused instead on ironing out details of a trade deal with the United States on President Donald Trump's tariffs, which have roiled Japan's critical automotive industry and cast a shadow over weak growth.

"With Japan having signed the trade agreement and the president having signed the executive order, we have passed a key hurdle," Ishiba said, his voice seeming to catch with emotion. "I would like to pass the baton to the next generation."

Concern over political uncertainty led to a sell-off in Japan's yen currency and its government bonds last week, with the yield on the 30-year bond hitting a record high on Wednesday.

Speculation over Ishiba's fate was stoked by the LDP's decision to schedule a vote for Monday on whether to hold an extraordinary leadership election.

KOIZUMI, TAKAICHI AMONG POSSIBLE SUCCESSORS

While a fresh leadership race could add pain for an economy hit by U.S. tariffs, markets are focusing more on the chance of Ishiba being replaced by an advocate of looser fiscal and monetary policy, such as LDP veteran Sanae Takaichi, who has criticised the Bank of Japan's interest rate hikes.

Ishiba narrowly defeated Takaichi in last year's LDP leadership run-off. Shinjiro Koizumi, the telegenic political scion who has gained prominence as Ishiba's farm minister tasked with trying to cap soaring prices, is another possible successor.

"Given the political pressure mounting on Ishiba after the LDP's repeated election losses, his resignation was inevitable," said Kazutaka Maeda, economist at Meiji Yasuda Research Institute.

"As for potential successors, Koizumi and Takaichi are seen as the most likely candidates. While Koizumi is not expected to bring major changes, Takaichi’s stance on expansionary fiscal policy and her cautious approach to interest rate hikes could draw scrutiny from financial markets," Maeda said.

Since the party does not have a majority in either house, it is not guaranteed that the next LDP president will become prime minister.

Whoever becomes the next leader may choose to call a snap election to seek a mandate, analysts said. While Japan's opposition remains fractured, the far-right, anti-immigration Sanseito party made big gains in July's upper house election, bringing once-fringe ideas into the political mainstream.

Nearly 55% of respondents to a poll by Kyodo news agency published on Sunday said there was no need to hold an early election.

Ishiba's last act as premier will have been to finalise the trade deal with the United States last week, under which Japan pledged $550 billion of investments in return for lower tariffs from U.S. President Donald Trump.