Japan faces political upheaval as LDP coalition loses majority

Japan faces political instability after a gamble by Prime Minister Shigeru Ishiba to call a snap election backfired with the ruling coalition failing to win a majority in parliament for the first time since 2009.

Voter discontent over a slush-fund scandal has pummeled 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 tally by public broadcaster NHK. Surveys by other media pointed to similar results.

Public support for the LDP has nosedived after revelations last year that party members were secretly enriching themselves with funds from supporters. With uncertainty growing after the coalition failed to retain its majority, the yen was indicated lower in early Sydney trading and Japanese stocks were set to come under pressure. The results also raise questions about Ishiba’s own future.

“We couldn’t dispel public anger over the political funds issue,” Ishiba said Sunday before the latest result. When asked if he would consider forming a coalition with other parties, he said no decisions had been made, but added that he was willing to cooperate with others if policies align.

The vote count shows the LDP and Komeito with a combined 210 seats, and the rest with 240 seats, according to NHK. The main opposition Constitutional Democratic Party of Japan has secured 145 seats, the broadcaster said.

The outcome may also complicate the outlook for the Bank of Japan, which is trying to seek the right timing for another rate hike. The central bank is due to meet on Oct. 31 and is widely expected to leave rates unchanged for now.

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

So far, no other parties have indicated they would be willing to join the coalition and help the LDP stay in power. The leaders of the third- and fourth-largest opposition parties said they had no intention of negotiating with the ruling coalition, but might cooperate on specific policy issues.

The biggest winner in the election is the CDP, which has significantly boosted its seat count from 98 before the vote. CDP leader Yoshihiko Noda said he would seek to take over the government if the coalition loses its majority.

The LDP is still set to remain the largest party in parliament, but the challenge now will be for Ishiba to find a route to a stable government. Talks over cooperation between parties might take as long as weeks, without any guarantee of a stable government emerging.

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

Ishiba took over the party leadership just last month as the LDP looked to make a clean break from the scandal that had eroded the popularity of former Prime Minister Fumio Kishida.

He barred some lawmakers involved in the scandal from running as LDP candidates in the election, aiming to assert his authority and regain public trust. That left 10 of them running as independents, with two more expelled from the party also standing.

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

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

Ishiba’s bid to win a mandate has also been made more challenging by flip-flops on policy stances, including his views on the BOJ’s rate normalization path.

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

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

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

The LDP is facing a similar situation to the lower house election in 1993, when it lost its majority but remained the largest party in parliament. After weeks of negotiations, seven opposition parties formed a coalition and pushed the LDP out of power for the first time since 1955. The coalition crumbled in less than a year and the LDP returned to government.

Even if Ishiba secures enough support to stay on as prime minister, the expected outcome will complicate his ability to pursue policy goals such as ramping up funding for regional growth and raising taxes to pay for increased defense spending. A lost coalition majority might push him toward more populist measures, like additional welfare spending or even tax cuts.

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

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(With assistance from Umesh Desai, Takashi Hirokawa and Go Onomitsu.)

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