Lawmakers of Japan's ruling party will vote on Monday whether to hold an extraordinary leadership election that could oust embattled premier Shigeru Ishiba and have a significant impact on the world's fourth largest economy.

Concern over political uncertainty has led to a sell-off in the yen and Japanese government bonds this week, with the yield on 30-year bonds hitting a record high on Wednesday.

While the policy paralysis around such a vote could add pain for an economy hit by US tariffs, markets are focusing more on the chance of Ishiba's replacement by an advocate of looser fiscal and monetary policy such as Sanae Takaichi, who has criticised the Bank of Japan's interest rate hikes.

"The dominant market bet is for the LDP to hold a leadership race and for Ishiba, known as a fiscal hawk, to lose his job," said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management.

"We'll likely see further selling in Japanese government bonds, as whoever succeeds Ishiba probably will be more open to loosening fiscal policy than him."

Ishiba has refused calls from within his Liberal Democratic Party (LDP) to step down and take responsibility for its July loss in an upper house election.

Staying in power, however, has become increasingly hard for him.

Having lost a majority in both houses of parliament, his ruling coalition needs opposition support to pass legislation.

Wary of being attached to the unpopular premier, opposition parties have refused to cooperate.

Even some of Ishiba's cabinet members are now calling for the choice of a new party leader.

Party rules require at least half the LDP members to request holding the race, which could follow this month or in October.

Such a contest could delay parliament's passage of an expected supplementary budget aimed at cushioning the blow to households from rising living costs.

Ishiba said on Friday he plans to compile this autumn a package of measures to support the economy.

Asked whether he would step down, he said: "All I can say is that my government will fulfil its responsibility to the public."

Eurasia Group gave odds of 60 percent that Ishiba would not survive.

"Ishiba's poor performance as party leader in lower and upper house elections and events in recent days, including former prime minister Aso Taro announcing his support for the special election, has turned the tide against Ishiba," said David Boling, director of Japan and Asian Trade at Eurasia.

That puts the focus on his potential successor, with front-runners including Takaichi and 44-year-old Shinjiro Koizumi, a charismatic agriculture minister popular with the public, but whose views on economic policy are unknown. (Reuters)