Japan Faces Political Upheaval As LDP Coalition Loses Majority

Japan faces a period of political instability after the ruling coalition failed to win a majority in parliament for the first time since 2009, setting up a race among two main blocs to form a government. 

A gamble by Prime Minister Shigeru Ishiba to call an early election backfired, as voters punished his ruling Liberal Democratic Party after revelations last year that party members had systematically failed to declare donations from supporters. 

A tally by public broadcaster NHK showed the LDP and Komeito with a combined 215 seats, short of the 233 needed for a majority in the lower house, with more than half a dozen other parties splitting the other 250. The main opposition Constitutional Democratic Party of Japan has secured 148 seats, the broadcaster said.

The yen fell to a three-month low, weakening as much as 0.6% against the dollar, while Japanese stocks climbed on the prospect that any coalition government would need a big spending plan to shore up the economy. The results also raise questions about the future of Ishiba, who took power on Oct. 1 after narrowly winning a leadership vote in the LDP.

“We couldn’t dispel public anger over the political funds issue,” Ishiba said Sunday before the latest result. 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.

A special joint session of parliament must be held within 30 days of a general election to choose a prime minister, according to Japan’s constitution. If nobody gets a majority, a runoff is held between the top two candidates, with the winner taking the top job. The upper house of parliament, currently controlled by the LDP-led coalition, separately picks a prime minister, but the lower house’s decision takes precedence if the two bodies choose different people.

Japan appears set for a weak government either way, an outcome that may complicate the outlook for the Bank of Japan. The central bank, which is trying to seek the right timing for another rate hike, is widely expected to leave rates unchanged during its next scheduled meeting on Oct. 31.

“The LDP suffered a crushing defeat,” said Takeshi Minami, chief economist at Norinchukin Research Institute, who sees a December rate hike as the main scenario. 

“There is still time until December, but the difficulty is that the BOJ has said that it will not raise interest rates while the markets are in turmoil,” he added. “The impact of the US presidential election also remains to be seen, and so the uncertainty in the markets is increasing.”

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.

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 smaller opposition parties said they had no intention of negotiating with the ruling coalition, but might cooperate on specific policy issues.

“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.

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. 

“If we’re in an environment where we can fight for it, of course we should go for Japan’s leadership,” Noda said. “I’ve said that a change in government is the greatest political reform, and I want to pursue it.”

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. Ishiba also stumbled out of the gate after taking the premiership, making several flip-flops on policy stances, including his views on the BOJ’s rate normalization path.

“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 challenge will likely be made harder by demands that potential partners might make as the price of cooperation. For example, the conservative 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 Rintaro Nishimura, a Japan associate at The Asia Group, an advisory firm. “Other parties may feel there’s no merit in helping out a sinking ship.”

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.”