Japan is facing significant political uncertainty after the ruling Liberal Democratic Party (LDP) failed to secure a majority in the lower house election on October 27. Prime Minister Shigeru Ishiba described the election result as a “harsh judgement” from voters, leaving the government in a weakened position to tackle the country’s pressing challenges.
Following the election, parties have 30 days to attempt to form a coalition government and choose a prime minister. However, the composition of any potential coalition remains unclear, casting doubt on the future of both economic policy and Shigeru Ishiba’s leadership. Despite the setback, some experts, including William Pesek, author of Japanization: What the World Can Learn from Japan’s Lost Decades, believe Shigeru Ishiba and the LDP will likely form a coalition. However, it is expected to be a fragile government with limited capacity to address Japan’s growing challenges, including the potential impact of a Trump 2.0 presidency in the U.S.
Damian Thong, head of Japan equity research at Macquarie Capital, noted that while Shigeru Ishiba might succeed in creating a stable coalition, it would likely support only the continuation of existing policies, such as investment in renewable energy, regional development, and social spending. Thong also predicted that the country’s defense policy would remain largely unchanged, despite the 2023 revision under then-Prime Minister Fumio Kishida, which allowed Japan to export defense equipment abroad. A significant increase in defense exports, Thong suggested, would remain challenging.
In terms of fiscal policy, Masahiko Loo, senior fixed-income strategist at State Street Global Advisors, expects a more populist fiscal package, regardless of the coalition’s composition. He anticipates increased social spending as a key component of any new government’s economic agenda.
However, Shigeru Ishiba’s future as prime minister remains in doubt. Although he won the LDP leadership race in September, his decision to call a snap election has backfired, leading to widespread speculation about his imminent ousting. William Pesek suggested that Shigeru Ishiba’s days in office are “numbered” due to the policy chaos of the past 30 days. Party elders, he added, may soon push for him to step down gracefully.
While James Brady, vice president at Teneo, believes Shigeru Ishiba could remain in power long enough to finalize the 2025 financial year budget, analysts agree that his tenure will likely be short. With no clear frontrunner to replace him, Japan risks returning to the “revolving door” of short-lived prime ministers, a pattern seen before Shinzo Abe’s extended tenure beginning in 2013.
