Japan's minority government faces election snub as economic storm brews
Prime Minister Shigeru Ishiba's Liberal Democratic Party (LDP), which has ruled for most of the post-war period, and its partner Komeito, are forecast to lose their majority in a repeat of last year's election for the more-powerful lower house.
The ruling coalition needs to win 50 seats of the 125 up for grabs in order to retain its majority.
While the vote will not directly determine whether Ishiba's government falls, investors are nervous it will leave him beholden to opposition parties advocating fiscal largesse that could exacerbate mass selling of Japan's government bonds.
In a worst case scenario, some analysts say Ishiba may have to resign, unleashing political drama as Tokyo heads for an Aug 1 deadline to win reprieve from punishing import levies set by its largest trading partner, the United States.
"If he had an overwhelming loss, I think he would have to resign," said David Boling, director for Japan and Asian Trade at political risk consultancy Eurasia Group.
"That then creates a lot of questions about who replaces him and what impact that has on the US-Japan trade negotiations."
Other financial and political analysts, such as Joseph Kraft of Rorschach Advisory in Tokyo, say the LDP is unlikely to opt for a leadership change at a pivotal moment in talks on tariffs hammering key industries such as automakers.
In a sign of that urgency, Ishiba took a break from campaigning on Friday to ask Washington's chief tariff negotiator and Treasury Secretary Scott Bessent to continue tariff talks actively. Bessent, who is visiting Japan for the World Expo in Osaka, later said a deal with Tokyo was possible.
"BALANCING ACT"
More likely is that Ishiba will seek to either broaden his coalition or strike informal deals with opposition parties to keep his government functioning after the election, Kraft said.
That prospect has made investors nervous.
Inflation has been a killer issue for Ishiba, as it recently has been for incumbents elsewhere. The price of rice, which has doubled since last year, has become a lightning rod for voter discontent.
In response, opposition parties have promised tax cuts and welfare spending to soften the blow, while the LDP, with one eye on a very jittery government bond market, has been calling for fiscal restraint.
Any opposition deals to weaken that restraint will only heighten investor nervousness about Japan's ability to refinance the world's largest debt pile and hamper the Bank of Japan's long-held goal of normalising monetary policy.
But not only parties advocating for more spending have chipped away at LDP support. The far-right Sanseito, espousing anti-foreigner rhetoric once confined to the political fringe, has been the surprise performer of the campaign.
Birthed on YouTube spreading anti-vax conspiracy theories five years ago, the party may win 10 to 15 seats, polls show.
That would herald the arrival of a new force of populist politics that has yet to take root in Japan as it has in the United States and Europe.
One reason the LDP has stayed so long in power, analysts say, is because it has served as a "broad church" for political views. But bringing into the fold the likes of Sanseito may trigger a deeper crisis of faith.
"If the party (LDP) goes too far right, it loses the centrists," said Tsuneo Watanabe, a senior fellow at the Sasakawa Peace Foundation think tank in Tokyo.
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More significantly, the experts said, Japanese politics is now in uncharted territory, with the LDP-Komeito coalition having already lost its majority in the Lower House in an October 2024 election. Never before has the ruling government commanded only a minority in both chambers of the Diet, a situation that will drastically complicate policymaking as the coalition lacks the necessary numbers to pass legislation. One potential path forward, Dr Masuyama suggested, is for the LDP-Komeito to try to expand its coalition by bringing in other conservative-aligned parties into the fold. Alternatively, the coalition could conduct horse-trading by collaborating on an ad hoc policy basis. Senior leaders in key opposition parties have already ruled out formally joining the ruling coalition. But Sanseito leader Sohei Kamiya told reporters on July 20 that he was open to working with the LDP on individual policies. The election had been largely fought on the escalating cost-of-living crisis, with the outcome suggestive of how Mr Ishiba had failed to address bread-and-butter concerns. Inflation has remained stubbornly high, climbing 3.3 per cent in June from a year earlier. Yet, households feel poorer, with real wages dropping 2.9 per cent in May from the previous year. While the ruling coalition proposed cash handouts, the opposition has advocated for at least a temporary cut to the consumption tax , in varying degrees, to ease economic hardship. Yet these dire economic conditions, exacerbated by the weak yen, have fuelled anti-foreigner sentiment. As foreigners come to see Japan as 'too cheap', they are snapping up real estate and the country suffers the throes of overtourism. In Tokyo, where there are seven seats, Sanseito candidate Saya, a former jazz singer who goes by one name, is expected to be one of the top vote-getters among 32 candidates. This was despite having drawn controversy during the hustings for an interview with Russian state media Sputnik TV, which sparked allegations of foreign election interference . Besides staunchly backing the 'Japanese First' platform, Ms Saya, 43, raised eyebrows for advocating that Japan arms itself with nuclear weapons and gradually reduce its consumption tax to zero. The LDP represents a broad church of political views, and the dismal showing has Mr Ishiba's rivals within the party to bay for blood. Public broadcaster NHK quoted an unnamed former Cabinet minister as saying that no LDP leader has ever continued in power after losing consecutive elections, and Mr Ishiba should resign and take responsibility. Defeats in the Upper House had, in recent history, brought down the administrations of Mr Sosuke Uno in 1989 and Mr Ryutaro Hashimoto in 1998. On July 18, former economic security minister Sanae Takaichi, a hardline conservative rival who was runner-up to Mr Ishiba during the 2024 LDP presidential polls, openly declared her intention to lead the LDP – and Japan. 'The LDP needs a new backbone once again, and I have made up my mind to fight to achieve that,' she stated. Nevertheless, Japan is not due for another national election until 2028, while an LDP presidential election is only scheduled for September 2027, unless Mr Ishiba resigns prematurely. All eyes will be on what Mr Ishiba says at a press conference slated for 2pm (1pm Singapore time) on July 21. Despite the uncertainties, Dr Yoshida does not anticipate major upheavals in the Japanese political climate, especially given ongoing geopolitical and trade uncertainties, such as American 'reciprocal' tariffs . 'The situation will likely be the same as it was after last year's Lower House election,' he observed. 'Different opposition parties will try to force the ruling coalition to accept and take on board their party policies, and the LDP will create 'diagonal' partnerships each time for the expediency of passing legislation.' While the opposition remains fragmented, he noted: 'If they get organised, there is a scenario where they can submit a no-confidence motion to topple the government.'
