Japan faces political turmoil as LDP coalition loses majority

Japan faces political instability after Prime Minister Shigeru Ishiba’s bid to call early elections failed and the ruling coalition failed to win a majority in parliament for the first time since 2009.

Voter discontent over an illicit funds scandal has hit support for Ishiba’s Liberal Democratic Party, causing it and its ruling partner Komeito to fall short of the 233 seats needed for a majority in the lower house, according to a broadcast tally. public NHK. Polls from other media showed similar results.

Public support for the LDP has plummeted after revelations last year that party members were secretly enriching themselves with funds from their supporters. Amid growing uncertainty after the coalition failed to retain its majority, the yen fell to its lowest level in three months and Japanese stocks were set to fall on Monday. The results also raise questions about Ishiba’s future.

“We were unable to dissipate public anger over the issue of political funds,” Ishiba said Sunday before the latest result. When asked if he would consider forming a coalition with other parties, he said no decision had been made, but added that he was willing to cooperate with others if policies aligned.

The vote count shows the LDP and Komeito with a combined total of 215 seats, and the rest with 250 seats, according to NHK. The main opposition party, the Constitutional Democratic Party of Japan, has won 148 seats, the broadcaster reported.

The result may also complicate the outlook for the Bank of Japan, which is trying to find the right time for another rate hike. The central bank will meet on October 31 and is expected to leave rates unchanged for now.

The biggest risk for the BOJ is that it could increase pressure within the LDP to replace Ishiba with another candidate who favors fiscal expansion, said Nobuyasu Atago, chief economist at the Rakuten Securities Economic Research Institute. “If that happens, the Bank of Japan will find it difficult to continue raising interest rates.”

So far, no other party has indicated that it would be willing to join the coalition and help the LDP stay in power. Leaders of the third and fourth opposition parties said they had no intention of negotiating with the ruling coalition but could cooperate on specific policy issues.

The biggest winner in the elections is the CDP, which has significantly increased its number of seats from the 98 it had before the vote. CDP leader Yoshihiko Noda said he would seek to take over the government if the coalition loses its majority.

The LDP will remain the largest party in parliament, but the challenge now will be for Ishiba to find a route to a stable government. Talks on cooperation between the parties could last up to weeks, with no guarantee that a stable government will emerge.

“This could create a logjam regarding the legislative process, a scenario that may not bode well for the yen and Nikkei, at least in the near term,” said Tim Waterer, chief market analyst at KCM Trade-based in Sydney.

Ishiba took over the party leadership just last month, as the LDP sought to break away from the scandal that had eroded the popularity of former Prime Minister Fumio Kishida.

He banned some legislators involved in the scandal from running as LDP candidates in the elections, with the aim of asserting his authority and regaining public trust. That left 10 of them running as independents, and two more expelled from the party also ran.

He may now need their support to remain in power, although many of them lost their electoral bids.

“If we lose the majority, we will seek the cooperation of as many people as possible,” Shinjiro Koizumi, the LDP’s electoral point man, said after the NHK exit poll. “The PLD must change more radically, reflecting on this harsh judgment.”

Ishiba’s bid to win a mandate has also been hampered by shifting political stances, including his views on the BOJ’s rate normalization path.

“The fact that the LDP appears to have lost its majority for the first time since 2009 is an indication of how poorly the Ishiba administration has implemented its policies, in addition to the impact of the slush fund scandal.” said Rintaro Nishimura, a Japanese associate at The Asia Group, an advisory firm.

Ishiba’s challenge will likely be made more difficult by the demands that potential partners could make as the price of cooperation. For example, the People’s Democratic Party is ideologically close to the LDP, but wants the sales tax cut in half and income tax breaks increased.

“If the LDP needs other parties, what can Ishiba give them?” Nishimura said. “Other parties may feel there is no point in helping a sinking ship,” he said.

The LDP faces a situation similar to that of the 1993 lower house elections, when it lost its majority but remained the largest party in parliament. After weeks of negotiations, seven opposition parties formed a coalition and ousted the LDP from power for the first time since 1955. The coalition collapsed in less than a year and the LDP returned to government.

Even if Ishiba wins enough support to remain prime minister, the expected outcome will complicate his ability to pursue policy goals such as increasing funding for regional growth and raising taxes to pay for increased defense spending. A lost coalition majority could push him to adopt more populist measures, such as additional spending on social assistance or even tax cuts.

“There are strong calls within opposition parties for expansionary fiscal policies as well as consumption tax cuts, so I think the LDP may be pushed in that direction,” said Yuichi Kodama, an economist at the Meiji Yasuda Research Institute. “If the supplementary budget includes generous subsidies for price relief measures, there is a good chance it will be oversized and long-term issues such as fiscal consolidation will be delayed.”