(Bloomberg) — Japan is grappling with unprecedented political instability following a high-stakes decision by Prime Minister Shigeru Ishiba to initiate a snap election. This gamble backfired dramatically as the ruling coalition, which has dominated the political landscape since 2009, fell short of securing a majority in parliament for the first time in 14 years.
Voter discontent has surged in response to the fallout from a slush-fund scandal that has severely damaged the reputation of Ishiba’s Liberal Democratic Party (LDP). As a result, the coalition alongside its partner Komeito was unable to achieve the 233 seats required for a majority in the lower house, according to the latest tally conducted by Japan’s public broadcaster, NHK.
The LDP has seen its public support plummet sharply following shocking revelations detailing how party members clandestinely profited from funds donated by supporters. As uncertainty sweeps through the coalition that now lacks a majority, the yen showed signs of weakness, and early trading indicated that Japanese stock markets could face significant downward pressure. This election outcome further raises critical questions about Ishiba’s political future.
“We couldn’t dispel public anger over the political funds issue,” Ishiba acknowledged on Sunday ahead of the results. While he declined to comment definitively on the possibility of forming new coalitions with other parties, he expressed a willingness to explore collaboration if their policies align with his administration’s goals.
The vote results show that the combined total of seats held by the LDP and Komeito stands at 210, while the rest of the parliament occupies 240 seats. Notably, the main opposition party, the Constitutional Democratic Party of Japan (CDP), has made significant gains, securing an impressive 145 seats according to NHK’s report.
The outcome of the election poses challenges for the Bank of Japan (BoJ), which is currently navigating the delicate timing of potential rate hikes. The central bank is scheduled to convene on October 31 and is expected to maintain current interest rates for the time being.
“If a push arises within the LDP to replace Ishiba with a candidate who supports fiscal expansion, this could impede the BoJ’s efforts to steadily increase interest rates,” cautioned Nobuyasu Atago, chief economist at Rakuten Securities Economic Research Institute.
At this point, no other parties have demonstrated an inclination to join forces with the LDP to sustain its grip on power. Leaders of the third- and fourth-largest opposition parties have made it clear that they have no intention of negotiating with the ruling coalition, though they may consider cooperation on specific policy matters.
The biggest victor in this election is the CDP, which has significantly expanded its representation from just 98 seats prior to the vote. CDP leader Yoshihiko Noda boldly stated his intention to pursue government leadership if the ruling coalition ultimately loses its majority.
Despite the LDP maintaining its status as the largest party in parliament, Ishiba now faces the daunting challenge of establishing a stable government. Inter-party talks pertaining to cooperation could stretch on for weeks without any assurance of yielding a strong and stable coalition.
“This situation could lead to a legislative quagmire, which might negatively impact both the yen and the Nikkei index in the near term,” analyzed Tim Waterer, chief market analyst at KCM Trade based in Sydney.
Ishiba assumed leadership of the LDP just last month in a bid to distance the party from the ongoing scandal that tarnished the reputation of former Prime Minister Fumio Kishida. In a decisive move, he excluded certain lawmakers implicated in the scandal from running as LDP candidates, aiming to re-establish authority and regain public trust. However, this meant that 10 of these lawmakers ran as independents, while two were expelled from the party altogether.
Facing potential reliance on these former colleagues to retain power, Ishiba may encounter difficulties, particularly as several of them were unsuccessful in their election bids.
“If we lose the majority, we’ll seek the cooperation of as many people as possible,” Shinjiro Koizumi, the LDP’s election point man, remarked following the NHK exit poll. “The LDP must embrace significant changes in light of this harsh judgment from the electorate.”
Ishiba’s efforts to obtain a public mandate have been further complicated by inconsistent policy positions, particularly regarding the BoJ’s approach to interest rate normalization.
“The loss of a parliamentary majority for the LDP after 14 years speaks volumes about the failures of the Ishiba administration in executing its policies, compounded by the damaging effects of the slush-fund scandal,” asserted Rintaro Nishimura, an associate at The Asia Group advisory firm.
Ishiba’s task becomes increasingly daunting as potential partners may demand significant concessions as a cost for their cooperation. The Democratic Party for the People, which shares similar ideological views with the LDP, has expressed a desire to see the sales tax halved and income tax allowances increased.
“If the LDP is in need of external support, what can Ishiba offer in return?” pondered Nishimura. “Other parties may perceive that there’s little incentive to assist a party facing decline,” he added.
The LDP now finds itself in a predicament reminiscent of the lower house elections of 1993, when the party lost its majority yet remained the largest faction in parliament. After protracted negotiations, seven opposition parties banded together to oust the LDP from power for the first time since 1955, although that coalition dissolved within a year, ushering the LDP back into governance.
Should Ishiba manage to secure sufficient backing to remain as prime minister, the anticipated outcome will convolute his ability to advance key policy initiatives, including increased funding for regional growth and tax hikes to support bolstered defense spending. The loss of a coalition majority may compel Ishiba towards more populist approaches, potentially resulting in additional welfare programs or tax cuts.
“There are strong calls within the opposition for expansionary fiscal policies and cuts to the consumption tax, suggesting that the LDP could be drawn toward these directions,” asserted Yuichi Kodama, an economist at Meiji Yasuda Research Institute. “If a supplementary budget is put together to include generous funding for measures to alleviate prices, it may be excessively large, thus postponing crucial issues like fiscal consolidation.”
–With assistance from Umesh Desai, Takashi Hirokawa and Go Onomitsu.
(Updates with yen seen lower in early trading in third paragraph.)
