Japan: Ishiba loses majority, but does not resign

The new defeat does not lead to the automatic fall of the government. But it is bound to significantly increase the instability of the majority, which in order to legislate will have to lean on one or more opposition parties in both houses of parliament from time to time, or permanently broaden the coalition.

It is an extremely fragile picture that in the coming weeks could see the opposition parties banding together, voting no confidence and leading the country to new elections. "The political situation," explains Norihiro Yamaguchi, lead Japan economist at Oxford Economics in Tokyo, "has become fluid and could lead to a change of leadership or a reshuffle of the coalition in the coming months, but Prime Minister Shigeru Ishiba is likely to remain in office to conclude the tariffs negotiations with the United States, at least for now.

"Having lost its majority in both the lower house and the Senate, the Ishiba administration will struggle to legislate and will have to seek support from opposition parties on a case-by-case basis," Yamaguchi concludes.

The second major fact to emerge from the vote is the result of Sanseito, a right-wing populist party that gave itself a Trumpian slogan (Japanese First, First the Japanese) and won 14 seats from a single MP. A remarkable result for a party that was born on the web during the pandemic and has grown impetuously in recent weeks demanding stricter rules for foreigners in the country.

In recent years, Japan has relaxed rules for the entry of immigrants and facilitated the arrival of tourists, generating wealth but creating friction with part of the local population. A phenomenon exacerbated by the contraction of the purchasing power of many Japanese (in May wages fell by 2.9% in real terms) in the face of the strong spending power of foreign tourists benefiting from the weak yen.

The Democratic Party for the People, a centre-right party, gained a lot of positions, reaching 17 seats from 4 three years ago, but its leader has already announced that he does not intend to join the majority. The progressive Constitutional Democratic Party remained the second largest political force in the country with the same 22 seats it had before the vote.

The loss of the majority even in the upper house of the governing coalition did not have the feared consequences on the markets for the time being. The yen is stable against the dollar after gaining 0.7 per cent at the opening of trading. "Some investors had positioned themselves in anticipation of a more significant setback for the coalition and even anticipated Ishiba's resignation," explains Akira Moroga, chief market strategist at Aozora Bank. "The liquidation of those positions, coupled with relief at overcoming a moment of political risk, contributed to the yen's initial rebound." Futures on the Tokyo Stock Exchange - which is closed for holidays and will reopen on Tuesday - are down.

Japanese government bonds have suffered in recent days in anticipation of increased bargaining power of opposition parties calling for more expansionary policies to cushion the impact of inflation, such as a cut in the consumption tax, a VAT-like tax.

Thanks in part to a chronically fragmented opposition, the conservatives of Ishiba's Liberal Democratic Party have ruled Japan almost uninterruptedly since World War II, but last October they recorded their worst election result in 15 years. If an eventual early vote coincided with a further contraction of the LDP electorate, a change of majority would potentially be possible.

It has been 13 years since the last time Japan had a premier from a party other than the LDP.