A staff member hands out leaflets 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 ‘harsh judgement’ to the LDP, in the words of Prime Minister Shigeru Ishiba.
After this result, the parties have 30 days to try to form a coalition government and choose a prime minister. It is still unclear what the exact composition of a coalition government might look like, clouding the outlook for both 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 it’s possible Ishiba and the LDP could still cobble together some sort of coalition government.
“But it will be a very weakened government and there are many challenges ahead, not the least of which is perhaps a Trump 2.0 presidency,” he said.
Damian Thong, head of Japan equity research at Macquarie Capital, wrote in a note that “we will be watching to see if Ishiba can support his position and build a stable coalition that can support a coherent policy.”
Thong expects the overall policy status quo to remain even under a coalition government, noting that common ground policies will be easier to implement, such as renewable energy investment, regional investment and further social spending and tax cuts.
Thong predicted that there would be no major changes in the country’s defense policy, although he pointed out that “a significant increase [defense] exports can be challenging.”
In late 2023, Japan, under then-Prime Minister Fumio Kishida, made one revision of its instructions for the sale of defense equipment abroad, allowing the country to export finished goods to licensed countries, among others.
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 doubt. While he won the LDP leadership race on September 27, the long-time ruling party lost its majority in the lower house after calling for early elections.
Pesek is of the opinion that Isiba’s days are “numbered”. The author said, “the ways we’ve seen this policy mess from his administration over the last 30 days, the way he’s taken this very big bet with early elections that blow him up spectacularly. You can argue that he doesn’t deserve to be prime minister 30 days from now.”
He also added that the party should “definitely” force Ishiba out, noting that the embattled politician “is stubborn at this point” from signaling his intention to remain as prime minister.
“But at some point, the elders of the party may find some way to give him political cover, to step aside gracefully in some way. And you will probably see another party election where they choose a new, new prime minister.”
James Brady, vice president at consulting and advisory firm Teneo, similarly noted, “The election result is likely to mean Isiba’s tenure as prime minister will be short.”
But Brady predicts a longer timetable for the embattled politician, saying the LDP is tired of the long September leadership contest and election results.
As such, he believes Ishiba could potentially lead the party in the coming months to finalize the budget for fiscal year 2025, starting in April 2025.
However, even if Ishiba is ousted, there is no clear candidate for party leader. Analysts cited a number of names including former economic security minister Sanae Takaichi, Chief Cabinet Secretary Yoshimasa Hayashi as well as Finance Minister Katsunobu Kato.
Therefore, State Street’s Loo noted that there is an increased risk that Japan’s 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 ministers lasted only 382 days on average.
Japanese prime ministers have rarely lasted more than three years in office since Eisaku Sato in 1972, excluding Junichiro Koizumi, who served from 2001 to 2006, and the late Abe.