Japanese Politics Updates – November 3, 2024

Welcome to November and the #195th episode of Japanese Politics One-on-One produced by Langley Esquire and Japan Expert Insights.

This has been a tumultuous and exciting week of this-way and then that-way. What a time to be alive!

Here are the critical Japanese political happenings from just this last week, served exclusively for your personal consumption! 

• Yen closes the week at $/¥152.952, mostly due to what is happening in other markets, including the uncertainty of what the US election will be bringing.
• Today is Culture Day, observed tomorrow… a 3 day-weekend!
• LDP lost its Lower House majority last week, ceding 68 seats, which means: if it wants to remain ‘in-power’, the Party needs to build a new coalition that includes another player.
• Komeito lost its party leader, two members of the Cabinet also lost their seats (Justice & Agriculture)!
• Ishiba Cabinet’s approval sinks to around 30% (though disapproval seems not to be aimed squarely at Ishiba himself).
• North Korea launches a ballistic missile with the longest flight time on record.
• Ishiba will be traveling, APEC and then G20. Diet session will open on the 11th-14th where the PM will be formally nominated. Very brief.
• The EU and Japan agree to craft a forward-looking military alliance.

Post-Election Landscape

The LDP/Komieto coalition has lost their combined majority in the House. Japan is experiencing a significant political shift, moving away from four decades of relative stability. The recent election results have weakened the long-standing coalition between the Liberal Democratic Party (LDP) and Komeito, which have dominated Japanese politics for two decades.

Key Election Outcomes

• LDP: Lost 68 seats, compromising its majority position.
• Komeito: Lost 8 seats, now holding 24 seats, significantly weakening its influence.
• Constitutional Democratic Party (CDP): Gained 52 seats, reaching a total of 148, establishing itself as the largest opposition party.
• Democratic Party for the People (DPP): Increased its seats from 7 to 28, positioning itself as the critical player in forming a coalition.
• Japan Innovation Party (Ishin-no-Kai): Lost 6 seats, down to 19, limiting its expansion beyond the Osaka region.

Coalition Dynamics

With LDP and Komeito unable to secure a majority independently, the LDP is exploring new alliances:

DPP as a Potential Partner: DPP leader Mr. Tamaki is hesitant to formally align with the LDP due to ideological differences and corruption concerns. However, he is open to strategic cooperation on select issues. This conditional alliance would allow the LDP and Komeito to achieve a tentative majority, securing some control over Committee leadership and advancing legislative initiatives (it is hoped).

CDP Alliance: While a potential partner, the CDP’s alignment with the DPP alone is insufficient to outnumber the LDP-Komeito bloc.

Key Leaders and Factional Influence

Mr. Ishiba (Prime Minister, LDP): Facing challenges in coalition-building due to internal factional shifts and recent election losses.

Factions:

• Abe Faction: Was the largest faction within the LDP but suffered a significant loss, decreasing from 54 to currently 22 seats.
• Aso Faction: Dropped from 40 to 31 seats, now the largest existing formal Faction.
• Kishida Faction: Reduced from 34 to 26 seats, diminishing former Prime Minister Kishida’s influence.
• Motegi Faction: Lost five seats, now at 27.
• Nikai Faction: Lost 10 seats, with Mr. Nikai’s influence waning following his son’s unsuccessful election bid.

The factional system has largely fragmented but still affects key appointments and strategic alignments. Although nominally disbanded, faction members maintain alliances based on longstanding relationships and shared interests.

Strategic Considerations and Potential Scenarios

Cabinet and Committee Negotiations: LDP is likely to offer a Cabinet seat to potential coalition partners, with the Justice Minister and Agriculture Minister roles available. Komeito already holds a Cabinet position, making additional concessions complex.

Timing of Elections: The decision to hold the election early has drawn criticism, with some blaming Secretary General Moriyama and campaign strategist Koizumi for misjudging the timing, though some seat losses were deemed inevitable.

Outlook and Next Steps

Negotiations continue, with significant attention on potential alignments with DPP and the outcome of the U.S. presidential election, which may influence Japan’s political and foreign policy considerations. The upcoming week’s meetings, particularly between Mr. Ishiba and Mr. Tamaki, will be pivotal in shaping Japan’s political direction.

IMF Warning on Japan’s Economic Policy

The International Monetary Fund (IMF) has recently cautioned Japan to exercise fiscal prudence, especially in light of political transitions and economic pressures:

Potential Spending Plans: The IMF noted that Japan might be tempted to introduce a supplemental budget with measures such as reducing the gasoline tax, expanding aid for the disadvantaged, or enhancing economic safety nets to ease consumer burdens. However, the IMF warned that such actions could further escalate Japan’s debt, which is currently twice the size of its annual economic output.

Japan’s Debt Concerns

Japan’s debt has reached critical levels, now totaling approximately double its GDP. This raises risks associated with additional spending without accompanying revenue growth. The IMF’s recommendation to Japan’s policymakers is to be cautious in expanding expenditures that would likely require further debt issuance.

Bank of Japan’s Monetary Policy

Following a recent two-day end-of-month session, the Bank of Japan (BOJ) has opted to maintain its current monetary policy stance:

Interest Rates: BOJ Governor Kazuo Ueda, following the Prime Minister’s guidance, announced that the BOJ will keep its long-term interest rate at 0.25%. This low rate ensures accessible borrowing and supports economic stability.

Inflation Target: The BOJ is continuing to aim for a 2% inflation target, holding steady despite pressures to stimulate the economy more aggressively. The bank is adopting a cautious “wait-and-see” approach, balancing between inflationary goals and a stable yen.

Economic Impact

Market Reactions: Analysts and investors were hoping for a policy adjustment from the BOJ, especially given current economic uncertainties. Some observers, however, see the BOJ’s decision to hold firm as a stabilizing move during a period of financial market volatility.

Currency Concerns: A stronger yen remains a key objective for Japan’s policymakers. The BOJ’s conservative stance reflects a commitment to gradual economic recovery while mitigating any abrupt market fluctuations.

Democratic Party for The People (DPP) Demands

The Democratic Party for The People (DPP) has outlined several demands in exchange for joining the coalition government. These demands, which align with their election manifesto, are largely aimed at reducing financial burdens on younger voters and addressing fuel costs. Key demands include:

1. Gasoline Tax and Price Controls:
   1. Gasoline Tax Reduction: The DPP wants to lower the gasoline tax.
   1. Trigger Price Adjustment: Currently, the government steps in to stabilize gasoline prices when they reach a certain level. The DPP wants to raise this threshold.
2. Income Tax Exemption and Consumption Tax Reduction:
   1. Raise Income Tax Exemption Threshold: This would allow more individuals to earn tax-free income, benefiting lower-income earners.
   1. Lower Consumption Tax: The DPP proposes reducing the consumption tax from its current rate of 10% down to 5%, aiming to alleviate the general cost of living.

• Social Security Adjustments:
  • Reduce Burden on Younger People: They aim to lessen the social security tax burden on younger generations.
  • End Co-Payment Exemption for Older People: The DPP wants older citizens to contribute more to their medical expenses, reducing the financial strain on younger voters who increasingly support the DPP.

These demands reflect the DPP’s electoral support base, predominantly younger voters, in contrast to the Liberal Democratic Party (LDP), which traditionally holds stronger support among older citizens.

Upcoming Confirmation of Prime Minister and Diet Session

The election for Japan’s Prime Minister will take place on November 11, when both Houses of the Diet will hold an independent vote. Key points to note:

Voting Process: The election involves a first-round vote where any candidate with a majority will win. If no candidate gets majority, a second-round runoff occurs between the two candidates with the highest vote counts.

Coalition Dynamics: In the first round, opposition parties generally support their own candidates. If a second round is necessary, these parties often form temporary alliances, negotiating support in exchange for concessions. This vote-bargaining process could influence the final outcome, though Mr. Ishiba remains the leading candidate.

Expectations and International Engagement

Prime Minister’s Likely Re-election: While Mr. Ishiba is expected to retain his role as Prime Minister, he will certainly only lead a fractured government, reflecting coalition tensions and demands from parties like the DPP.

Upcoming International Travels: After the brief Diet session, Mr. Ishiba is set to visit Peru and Brazil, with a potential but uncertain trip to the United States to meet the incoming U.S. president-elect. As the U.S. election results could face possible delays, the timing and nature of this meeting remain tentative.

Questions from the Audience Addressed Exclusively During the Briefing

• Is the Democratic Party for the People playing hardball politics?
• Is it theoretically possible to hold a parliamentary debate on economic policy differences before the nomination of the Prime Minister?
• What can you tell us about some of the smaller populist parties like Sanseito and Reiwa Shinsengumi? Do you see them having an increasing influence on policy moving forward?
• Former LDP Secretary General Amari has lost his seat. He played a key role in semiconductor related policies. Will these now be toned-down?
• Will the agreement with Poland on technical cooperation in nuclear power generation and renewable energy be affected by the next administration?
• Could you comment on the speculation that Ishiba should have resigned in the face of the substantial loss of LDP seats?
• Do you think Ishin-no-kai leader Nobuyuki Baba can retain his position as leader?