The loss of Japan’s ruling bloc’s parliamentary majority has heightened prospects that a new government would need to ramp up spending and of potential complications for further central bank interest rate hikes.
Japanese Prime Minister Shigeru Ishiba’s ruling Liberal Democratic Party (LDP) and its longtime partner Komeito failed to retain a majority in lower house elections on the weekend, casting doubts over how long the 67-year-old prime minister can keep his job.
“Regardless of who will be in power, the new government will be forced to take expansionary fiscal and monetary policies to avoid inflicting burdens on voters,” Mizuho Research & Technologies Ltd senior economist Saisuke Sakai said.
Photo: AFP
To stay firmly in power, the LDP, which has governed Japan for almost all its post-World War II history, would likely need to court smaller opposition parties, such as the Democratic Party for the People (DPP) and Japan Innovation Party (JIP), as coalition partners or at least for policy-based alliances.
Both smaller parties have ruled out forming a coalition with the LDP, but said they are open to some policy cooperation.
In their election campaigns, both the DPP and JIP pledged to lower consumption tax from 10 percent. DPP’s proposals also included cutting power utility bills and taxes for lower-income earners.
While Ishiba has already proposed a supplementary budget that exceeds last year’s ￥13 trillion (US$85.2 billion), he could face pressure for a package that exceeds ￥20 trillion, Sakai said.
The heightened political turmoil could make it harder for the Bank of Japan (BOJ) in its bid to wean the economy off decades of monetary stimulus, analysts say.
The central bank ended negative interest rates in March and raised short-term rates to 0.25 percent in July on the view Japan was making progress toward durably achieving its 2 percent inflation target.
BOJ Governor Kazuo Ueda has vowed to continue lifting rates and economists do not see any major immediate change to the broader policy direction.
However, a markedly new parliamentary makeup could deprive the BOJ of the political stability it needs to steer a smooth lift-off from near-zero interest rates, analysts say.
“The bar is higher for the BOJ to raise interest rates again by the end of this year amid this political noise,” State Street Global Advisors senior fixed income strategist Masahiko Loo said.
DPP leader Yuichiro Tamaki has criticized the BOJ for raising rates prematurely.
JIP proposes legislative changes that would mandate the central bank with objectives beyond just price stability, such as sustained nominal economic growth rate and maximization of employment.
Conversely, the biggest opposition, the Constitutional Democratic Party of Japan, has called for BOJ’s inflation target to be lowered to one “exceeding zero” from 2 percent, which would reduce the threshold for more rate hikes.
At the same time, a weak yen could become a headache for Japanese policymakers by boosting the cost of imported raw materials, pushing up inflation and hurting consumption.
If the yen weakens toward ￥160 per US dollar, the BOJ “would be pressured to raise rates again to stem the weakness of the Japanese currency,” Norinchukin Research Institute chief economist Takeshi Minami said.
The need for another rate hike could also grow if a yen downturn is accelerated by a former US president Donald Trump victory in the US presidential election on Tuesday next week, he added.
Trump’s tariff and stricter immigration policies are seen as inflationary, which would diminish the need for US rate cuts, in turn pushing the US dollar up against the yen.
“The visibility has gone down significantly for the BOJ,” Minami said.
In the Asia session, the yen weakened as far as 153.88 per US dollar yesterday, the softest since late July.
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