A staff member hands out a brochure with a picture of Japanese Prime Minister Shigeru Ishiba before his election campaign speech in Tokyo on October 26, 2024.
Yuichi Yamazaki Afp | Getty Images
Japan’s government will be in a weaker position to deal with the challenges facing the country, after the ruling Liberal Democratic Party failed to secure a majority in lower house elections on October 27.
Voters delivered a “cruel punishment” to the LDP, according to Prime Minister Shigeru Ishiba.
After the results, the parties have 30 days to try to form a coalition government and choose a prime minister. It is still unclear what the exact coalition government will look like, clouding the outlook for economic policy and Ishiba’s fate.
William Pesek, author of the book Japanization: What the World Can Learn from Japan’s Lost Decades, told CNBC’s “Squawk Box Asia” that Ishiba and the LDP will still be able to put together some kind of coalition government.
“But it will be a weakened government, and there are many challenges ahead, not least a Trump 2.0 presidency, maybe,” he said.
Damian Thong, head of Japanese equity research at Macquarie Capital, wrote in a note that “we will be watching to see if Ishiba can achieve his position, and create a stable coalition that can support a coherent policy.”
Thong expects the overall policy status quo to remain even under the coalition government, noting that public policies will be easier to implement such as investment in renewable energy, regional investment, and social spending and tax cuts.
Thong predicted that there would be no significant changes in the country’s defense policy, although he pointed out that “a large increase in (defense) exports may be a challenge.”
By the end of 2023, Japan, according to Prime Minister Fumio Kishida, revised the guidelines for the sale of defense equipment abroad, allowing the country to export finished products to countries with licenses, etc.
Masahiko Loo, senior fixed income strategist at State Street Global Advisors, said the firm expects a bigger and more populist fiscal package, regardless of the coalition’s outcome.
Ishiba on the way out?
Ishiba’s own fate is now in question. When he won the LDP leadership race on September 27, the party’s longtime leader lost his majority in the lower house after he called for a snap election.
Pesek is of the opinion that Ishiba’s days are “numbered”. The author said, “the way we have seen this is the policy of the government in the last 30 days, the way he took this gamble is too big with the snap election that blew up in him spectacularly. You can argue that he does not deserve to be prime minister after 30 days from now on.”
He also added that the party “definitely” had to force Ishiba out, noting that the defeated politician was “stubborn” by signaling his intention to remain prime minister.
“But at some point, the party elders can find a way to give political cover, to get rid of it for good. And you will probably see another party electing a new prime minister.”
James Brady, vice president at consulting and advisory firm Teneo, also noted, “The outcome of the election may mean that Ishiba’s tenure as prime minister will be short.”
However, Brady predicted a longer timeline for the embattled politician, saying the LDP is tired of the long leadership contest in September and the election results.
So, they think that Ishiba can lead the party in a few months to finalize the budget for the 2025 financial year, starting in April 2025.
However, despite Ishiba’s ouster, there is no clear candidate for party leadership. Analysts have mentioned several names such as former minister in charge of economic security Sanae Takaichi, Chief Cabinet Secretary Yoshimasa Hayashi as well as finance minister Katsunobu Kato.
As such, State Street’s Loo notes that there is an increased risk that the Japanese prime minister’s office will return to a “revolving door” situation. He pointed out that before Shinzo Abe took office in 2013, the country’s prime minister lasted only 382 days on average.
Japanese prime ministers have rarely served more than three years since Sato Eisaku in 1972, with the exception of Junichiro Koizumi, who served from 2001 to 2006, and the late Abe.