Japan’s Prime  Minister Yoshihide Suga withdrew from the leadership contest of the ruling Liberal Democratic Party (LDP) on Friday (September 3), effectively resigning from his post, after the failure of the Tokyo Olympics to deliver the political lifeline they seemed to promise when his early momentum flagged thanks to the building onslaught of the pandemic.

His departure could mark a watershed as Japan struggles to overcome years of sclerosis thanks to a forbidding demographic gifted by an ageing population and its attendant economic stupor and the failure of years of seemingly radical monetary policy to deliver its intended aim of inflation and growth.

The games – a sterile affair from an entertainment perspective, although not as a public health proposition – and an ongoing surge in Covid cases within Japan combined to bring down the curtain on Suga’s short reign, inflicting a free-fall in his public approval ratings to below 30%.

From the start of Suga’s incumbency, the impending September 29 election for the Liberal Democratic Party leadership had been widely portrayed as a likely bookend to his tenure when he replaced Shinzo Abe – who resigned for health reasons – a year ago.

Only a tamed pandemic and a show-stopping Olympics could have rescued this seemingly doomed premiership, fatally short of charisma in the shape of the dogged, surly Suga, despite the unveiling of some on-the-mark policies.

That auspicious outcome for this pop-up premiership wasn’t to be. But what comes next for Japan and its capital markets after the general election which must be called by November 30?

A likely outcome would seem to be a return to the “revolving door” phenomenon which saw six prime ministers installed in as many years before Abe took the reins in 2012 for his second term, ushering in a period of stability and ambition which allowed the introduction of “Abenomics” and its policies of ultra-loose money, fiscal stimulus and yen depreciation enacted in a bid to kick-start the moribund Japanese economy.

Of course, to suggest that outcome would be to downplay the qualities of the candidates vying for the top job at the end of this month. Although Japanese politics always tends not to surprise on the downside, it’s well to remember there have been many underestimated leaders who have ushered in radical periods of change – one thinks of the Clement Attlee administration in Britain immediately after the Second World War and of Lyndon B. Johnson’s in the United States in the 1960s.

Perhaps a radical leader will emerge in a Japan that is crying out for a fresh start and one who can last longer than the customary year which had become the norm prior to Abe’s record-breaking eight years in the chair.

If the breaking of the glass ceiling for women were to occur within the stifled ranks of the LDP, Takaichi Sanae would be elected as Japan’s first woman prime minister on September 29.

That would sit well within the zeitgeist, and over the weekend she secured the backing of the 20 lawmakers required for her to be able to stand in the contest. Sanae has voiced her support of a 2% inflation target, which is straight from the Abenomics playbook and which suggests ultra-easy money wouldn’t end with her premiership.

Fumio Kishida is the most telegenic of the candidates and has voiced concerns about income inequality in Japan, is fervently pro-democracy – his comments on the subject have seemed designed to decry Suga’s authoritarian approach and emphasis on self-reliance –  and he has been loud about the need to inject “tens of trillions” of yen into the Japanese economy to counter the effects of the pandemic.

Meanwhile, the English-speaking, US-educated vaccine minister Taro Kono is the favourite, backed as he is by the LDP faction led by powerful finance minister Taro Aso, even though he has yet to announce his formal candidacy. He had 32% public approval according to a recent survey conducted by the Kyodo news agency, while Kishida was at 26.6%. A Nikkei poll conducted at the end of August showed 3% public support for Sanae.

An intriguing victor in the LDP vote would be Shigeru Ishiba, who has advocated for higher Japanese interest rates in order to protect income-starved regional banks. That would jar with the Abenomics narrative and appears to be heresy as far as generating inflation in Japan is concerned.

But perhaps he’s onto something. Negative interest rates have failed to produce meaningful economic growth nor inflation in Japan and have along the way damaged its bond market. Vast structural economic reform might be the way out of the morass in a higher rate environment. The job creation and stimulus possibilities of a green economy could provide the boost that negative interest rates and quantitative easing did not.

In all this, it’s perhaps hard not to feel sorry for Suga, previously Japan’s longest serving cabinet secretary. He was Abe’s enforcer and noted for his pugnacious determination to impose policy within both branches of government and on the civil service, a stern reputation which delivered him the LDP leadership.

His policies have borne fruit: capex and consumption increased markedly in the second quarter and his forward-looking policies on digitalization, reform of the mobile phone market and childcare helped power Japanese stocks in the early days of his premiership. Under his watch, the Nikkei 225 crossed the 30,000 mark for the first time since 1990 before running out of steam in February as his popularity and influence within government waned.

He would not have been heartened by the rally in Japanese stocks last Friday   – the Topix hit a 30-year high – as he announced his withdrawal from the LDP presidential race. Japan’s 10-year, 20-year and 30-year bonds also added around half a basis point in yield on average, hardly a radical move but it might indicate a future path.

If the pandemic has brought anything into focus it has been the increasing dominance of fiscal over monetary policy. That dynamic is likely to come into further relief in Japan as a successor to Suga emerges. Imposing negative policy rates, tinkering with JGB yield curves, buying corporate bonds, stocks and exchange-traded funds, has been the job assumed by the Bank of Japan for almost a decade but it hasn’t worked

As mentioned above, there may be an alternative to a failed monetary policy in the form of sustainable transformation. Where negative interest rates failed to provide a multiplier effect the impact of transitioning to a sustainable economy might do – every green yen will have more impact than a yen created in the Bank of Japan ledger as the result of quantitative easing.

Meanwhile, the Bank of Japan’s inaugural Strategy on Climate Change, published in July contains transformative potential. It includes special funding terms for financial institutions (FIs) that make declarations based on the Financial Stability Board’s Task Force on Climate-related Financial Disclosures.

If they meet the disclosure standards, FIs will be able to borrow for 10 years at 0% interest  and also add double any borrowed amount to their macro add-on balance with the BoJ, a reserve ratio requirement measure by the back door, given that it will allow banks to reduce the amount they hold in reserves at the central bank which pay a negative interest rate of return.

The borrowed funds must be applied to green bonds or loans, sustainability-linked bonds or loans with climate change related targets and for transition finance.

This is a significant move: despite making a net zero carbon commitment by 2050 last October, Japan has lagged the developed economies in terms of green finance, ranking 10th globally for green bond issuance, although its social bond issuance, emerging largely from government agencies has outstripped green bond issuance.

Whoever wins the LDP presidential vote on September 29 – for what it’s worth, my money’s on Kishida – should be super-focused on the sustainability dynamic and its transformative potential. If it isn’t to be a return to revolving door prime ministers the new incumbent must sell policies built around this dynamic.

As the Covid-19 pandemic has coalesced in the global imagination with the challenges of climate change, the demands of recovery from the former chime with the urgencies of the latter. A prime minister who grasps this reality has the potential to be a radical reformer and last longer then the customary year in the post.