Japanese stocks dropped – and the yen rallied in choppy, indecisive trade – late Friday as the political fortunes of Sanae Takaichi dimmed dramatically and her ascension to Japan’s prime ministership was suddenly brought into real doubt.

“We should be prepared that the dollar-yen rate could fluctuate in a wide range, up to the ¥155 level, over the coming month,” said Hideo Kumano, executive economist at Dai-Ichi Life Research Institute, in a report released on Thursday.

The Nikkei 225 stock average rallied after Takachi, an outspoken proponent of aggressive fiscal spending and loose money, became the president of the Liberal Democratic Party (LDP) – and thus the presumptive prime minister – on Saturday, while the yen weakened.

Just before the election, the currency was trading around ¥147 to the dollar. After the victory of Takaichi, it quickly lost value, breaking the ¥153 mark on Friday morning.

This was dubbed the “Takaichi trade.”

Markets turned on a dime late Friday after Komeito said that it would be parting ways with the LDP after 26 years as a coalition partner, making the political math for the LDP far more complicated and Takaichi’s rise to the prime minister's office far less certain.

In futures market trading, the Nikkei 225 stock average was down more than 2%, while the yen traded back into ¥152-to-the-dollar territory right after news broke of the Komeito-LDP breakup.

The outlook for the yen is far from certain. Its weakness is a function of a number of factors, and not only the expectations of fiscal and monetary largesse under Takaichi, while economic realities prevent a Japanese prime minister from being too aggressive with stimulus.

The interest rate differential between Japan and the United States – now more than 3.5 percentage points – is widely seen as the primary reason for the weakening of the yen.

Kumano suggests that other factors – such as domestic political instability and expectations for continued monetary stimulus – are responsible for ¥8.6 of depreciation already.

“If the yen continues to weaken, it will only trouble Takaichi. Further price hikes will likely result in lowering her support ratings,” Kumano wrote.

A weak yen increases import costs, which eventually leads to price increases. Takaichi has said high prices are her immediate priority.

Taking a tolerant stance toward a rate increase would help stop the weakening of the yen, so it would benefit Takaichi, Kumano wrote.

Appearing on a TV Tokyo program Thursday night, Takaichi refrained from commenting on the exchange rate but said “I don’t intend to provoke an excessive depreciation of the yen.”

She added that a weak yen comes with both positives and negatives, saying that it could mitigate the impact of the increased U.S. tariff rates. Takaichi said she plans to implement measures for higher import costs through an extra budget.

As for monetary policy, Takaichi stuck to her talking points, saying the government is ultimately responsible for both fiscal policy and monetary policy, but execution is up to the central bank.

Compared to last year when she also ran in the LDP leadership race, Takaichi has softened her stance on fiscal policy and pressure on the BOJ.

“I have never said even once that fiscal consolidation is unnecessary,” Takaichi said in the TV Tokyo program. "An economy that won’t grow would be the biggest burden for future generations,” she said, adding that this is why investments are needed to facilitate sustainable growth.

“Takaichi’s tone on fiscal expansion and monetary policy has become much more moderate, so I think the market reaction has been a bit excessive,” said Soichiro Tateishi, a vice senior economist at the Japan Research Institute.

Kumano said another factor for the yen’s plunge is the intensifying political turmoil.

Without Komeito’s help, it is uncertain whether Takaichi will be elected prime minister, as the LDP lacks a majority in either chamber of parliament.

“Political instability is fueling the yen's depreciation,” Kumano wrote.

Constitutional Democratic Party of Japan (CDP), the largest opposition party, has hinted that it will be flexible and might vote for someone other than its leader for prime minister when parliament selects Japan’s new leader later this month.

The CDP’s move could also block Takaichi from becoming prime minister if enough opposition parties get on board.

Tateishi said the yen could rise or fall on political instability, but the currency will likely gain if Takaichi’s chance to become prime minister diminishes.

Other than domestic factors, Tateishi said there is also a risk for the yen to fall further due to the U.S. economic situation.

Once the U.S. government shutdown ends, key economic indicators, such as jobs data and inflation, will be released and their results might lower expectations for anticipated rate cuts by the U.S. Federal Reserve.

“I'm a little concerned that the yen would be under downward pressure from both the domestic and U.S. sides," Tateishi said.