Japan’s political instability could cloud economic policy, herald ‘revolving door’ of prime ministers

Japan’s government will be in a weaker position to deal with challenges facing the country, after the ruling Liberal Democratic Party failed to secure a majority in the lower house election on Oct. 27.

Voters delivered a “harsh judgement” to the LDP, in the words of Prime Minister Shigeru Ishiba.

Following that result, parties have 30 days to try to form a coalition government and pick a prime minister. It’s still unclear what the exact makeup of a coalition government could look like, clouding the outlook for both economic policy and Ishiba’s fate.

William Pesek, author of the book Japanization: What the World Can Learn from Japan’s Lost Decades, told CNBC’s “Squawk Box Asia” that it’s likely Ishiba and the LDP will still manage to bring together some kind of coalition government.

“But it will be a very weakened government, and there are a lot of challenges that lie ahead, least of which is a Trump 2.0 presidency, perhaps,” he said.

Damian Thong, head of Japan equity research at Macquarie Capital, wrote in a note that “we will be watching to see whether Ishiba can shore up his position, and create a stable coalition that can support coherent policy.”

Thong expects the overall policy status quo to persist even under a coalition government, noting that common ground policies will be easier to enact such as investment in renewables, regional investment, and further social spending and tax cuts.

Thong predicted there will be no significant changes to the country’s defense policy, although he pointed out that “a major increase in [defense] exports may be challenging.”

In late 2023, Japan, under then Prime Minister Fumio Kishida, made a revision to its guidelines for selling defense equipment overseas, allowing the country to export finished products to licensee countries, among others.

Masahiko Loo, senior fixed income strategist at State Street Global Advisors, said the firm expects a larger and more populist fiscal package, irrespective of the coalition outcome.

Ishiba’s own fate is in question now. While he won the LDP leadership race on Sept. 27, the longtime ruling party lost its majority in the lower house after he called for a snap election.

Pesek is of the view that Ishiba’s days are “numbered.” The author said, “the ways in which we’ve seen this policy chaos from his government in the last 30 days, the way that he’s taken this very big gamble with a snap election that’s blowing up on him spectacularly. You can argue that he doesn’t deserve to be prime minister after 30 days from now.”

He also added the party would “certainly” have to force Ishiba out, noting that the embattled politician “is being stubborn at this point” by signaling his intention to stay on as prime minister.

“But at some point, party elders might find some way to give him political cover, to step aside gracefully in some way. And you probably will see another party election where they do choose a new, new prime minister.”

James Brady, vice president at consulting and advisory firm Teneo, similarly noted, “The election outcome is likely to mean that Ishiba’s tenure as prime minister will be short.”

However, Brady does predict a longer timeline for the embattled politician, saying that the LDP is weary from the lengthy leadership contest in September and the election results.

As such, he thinks that Ishiba could possibly lead the party through the coming months to finalize the budget for the 2025 financial year, starting in April 2025.

However, even if Ishiba is ousted, there is no clear frontrunner for party leader. Analysts have mentioned a number of names such as former minister in charge of economic security Sanae Takaichi, Chief Cabinet Secretary Yoshimasa Hayashi as well as finance minister Katsunobu Kato.

As such, State Street’s Loo noted there is an increased risk of the Japanese prime minister’s office returning to a “revolving door” situation. He pointed out that before Shinzo Abe took office in 2013, the country’s prime ministers on average lasted only 382 days.

Japan’s prime ministers have rarely lasted more then three years in office after Sato Eisaku in 1972, barring Junichiro Koizumi, who served from 2001 to 2006, and the late Abe.