Lawmakers in Japan’s ruling Liberal Democratic Party (LDP) are set to vote on Monday on whether to hold an extraordinary leadership election that could unseat embattled Prime Minister Shigeru Ishiba, a decision that has already rattled financial markets and could influence the world’s fourth-largest economy.
Political uncertainty has contributed to a sell-off in the yen and Japanese government bonds (JGBs) this week, with the yield on 30-year bonds hitting a record high on Wednesday.
Markets are closely watching the potential for Ishiba to be replaced by a candidate favoring looser fiscal and monetary policy, such as Sanae Takaichi, a vocal critic of the Bank of Japan’s recent interest rate hikes.
“The dominant market bet is for the LDP to hold a leadership race and for Ishiba, known as a fiscal hawk, to lose his job,” said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management. “We’ll likely see further selling in JGBs, as whoever succeeds Ishiba probably will be more open to loosening fiscal policy than him.”
Ishiba’s weakened position
Ishiba has resisted calls from within his party to step down following the LDP’s July loss in the upper house election. However, his position has weakened after losing a majority in both parliamentary chambers.
Opposition parties have refused to cooperate with his government, and even some cabinet members are now pressing for a new party leader. Party rules require at least half of LDP members to request a leadership vote, which could be held later this month or in October.
A leadership contest could delay the passage of a supplementary budget intended to help households cope with rising living costs.
Ishiba said Friday he still plans to compile an economic support package this autumn, adding, “All I can say is that my government will fulfil its responsibility to the public.”
Political analysts view Ishiba’s position as increasingly precarious. Eurasia Group assigns a 60 percent chance he will not survive the leadership vote.
“Ishiba’s poor performance as party leader in recent elections, combined with former Prime Minister Taro Aso’s support for a special election, has turned the tide against him,” said David Boling, director of Japan and Asian Trade at Eurasia Group.
Who are the frontrunners?
Potential successors could influence both fiscal stimulus and the Bank of Japan’s interest rate decisions.
Front-runners include Shinjiro Koizumi, a popular agriculture minister whose economic policies remain unclear, and Takaichi, who represents the LDP’s right wing and could become Japan’s first female prime minister.
Takaichi, who lost a September leadership run-off to Ishiba, has criticised Bank of Japan (BOJ) rate hikes and advocated ramped-up government spending to support the fragile economy.
“Under Takaichi, fiscal discipline will be out the window,” Inadome said. “Markets still remember when she almost won in September and triggered huge selling in JGBs.”
