It’s the first time in 15 years that Japan’s ruling coalition loses its majority, with the LDP seeing their number of seats erased from 247 coming into the election to just 191 seats. Together with their coalition partner, Komeito, they only managed 209 seats this time around and well short of the 233 seats needed for a majority to govern.
What a backfire for Ishiba, who dissolved the lower house just eight days into his tenure as prime minister at the start of the month.
Komeito chief, Keiichi Ishii, also lost his seat in what is the first time since 2009 that a Komeito leader did lose their seat in the election.
The result is a reflection of sentiment in Japan right now, with many voters feeling frustrated by the LDP’s handling of the economy and inflation pressures. The main opposition, Constitutional Democratic Party of Japan (CDP), were the biggest winners as such as they won 148 seats – up from 96 seats previously.
The election “uncertainty” has weighed on the Japanese yen currency as such to start the week. USD/JPY opened with a gap higher and is holding to that, trading up 0.9% to 153.50-60 levels currently.
USD/JPY daily chart
That is keeping the upside momentum from the break higher last week, with price also creeping past the 61.8 Fib retracement level at 153.40 currently.
So, what’s next for Japan in terms of the election aftermath?
As much as the CDP were the biggest winners, they don’t present much of any threat in stealing a majority. They just don’t have the backing of the other smaller parties as well given their political leanings and the fragmented and diverse agenda among Japan’s other political parties.
As such, the likeliest outcome will just be LDP and Komeito teaming up with another one or two smaller players to reach the needed 233 seats to govern.
In all likelihood, they will be partnering with the Nippon Ishin no Kai party which may align with the LDP on certain economic policies. They are one to push for economic and regulatory reform but in a moderate manner. They aren’t bold enough to push their agenda at the risk of major disruptions to the economy and I think the LDP can live with that.
The only question then is what happens to pressure on monetary policy?
I don’t think any new partners to the coalition will make a significant enough difference to pressure the BOJ into acting quicker. The LDP will still hold the biggest sway in that regard. However, they now have to be more “open” into listening to the views of their potential coalition mates. But that’s about it.
The key question is now whether the BOJ will see fit to act in December to hike rates again. October is definitely off the table and more so given the drama here.
Policymakers might prefer more political stability before taking any drastic measures and that’s about the only reason I can think of in putting off the central bank from acting before year-end.
I reckon it’s now a case of waiting to see how quickly the drama dies down after the coalition majority is formed. Otherwise, the BOJ might have to look to January instead as the next possible time to finally move things along again.