Japan's Prime Minister Ishiba Vows To Stay On Despite Historic Election Defeat

Japanese Prime Minister Shigeru Ishiba said he intended to stay on even as his ruling coalition suffered a historic setback in an upper house election on Sunday, an outcome that may further unsettle markets.

The ruling Liberal Democratic Party along with longtime partner Komeito lost its majority in the chamber, public broadcaster NHK reported, saying the bloc failed to win the 50 seats it needed to maintain control. That marks the first time since 1955 that a leader from the storied Japanese party will govern the country without a majority in at least one of the legislative bodies. 

The result is the second dismal election showing for Ishiba since he became premier last October, even though the coalition’s tally of 47 seats may yet be enough to keep his job. Asked repeatedly on Sunday night if he intended to stay on, he answered with a simple “that’s right.” 

“I continue to have a number of duties I must fulfill for the nation, including achieving wage growth that exceeds inflation, achieving gross domestic product of a quadrillion yen, and responding to an increasingly tense security environment,” Ishiba said. “Though the votes are still being counted, we do seem to have won the most number of seats out of the parties.”

Overall, the ruling coalition lost 19 seats, falling three seats short of a majority according to the NHK. The outcome showed simmering discontent over a cost-of-living crunch, draining support from the ruling coalition and benefiting smaller populist parties offering tax cuts or opposition to an influx of foreigners into the country. 

Market participants have been concerned that a further weakening of Ishiba’s leadership will nudge the coalition into giving concessions to the opposition, including cuts to the sales tax. Investors are increasingly doubtful that lawmakers can rein in spending, one factor that has helped push yields on Japanese debt to the highest levels in more than two decades. 

The yen rose as much as 0.7% in early trading following the results, before paring much of the gain. Stock and bond markets are closed for a public holiday in Japan, but stock futures were little changed in early trading Monday.

The tighter margins in the upper house threaten to throw Ishiba’s policy agenda into further disarray, complicate trade talks with the US and potentially cost him his job. The last three LDP prime ministers who lost an upper house majority stepped down within two months, including Shinzo Abe in 2007 during his first stint as premier.

While an eight-party coalition briefly ousted the LDP from office after a lower house election in 1993, that looks unlikely this time around. The opposition is split among roughly a dozen parties that are too fractured to pull together any kind of stable alternative if it brings a no-confidence vote against Ishiba, meaning the LDP will probably trudge along by cutting deals to cobble together support on an issue-by-issue basis. 

On a broader level, the results point to the nation’s long-established parties drifting further out of touch with younger, urban voters. They are questioning whether social welfare is worth the tax burden, and are growing skeptical of the influx of foreigners visiting and working in the nation.

“There is a real drop in support for old, traditional parties,” said Yuri Kono, a professor of law at Hosei University who writes frequently on politics. “This may be the beginning of a very fundamental change in Japanese politics.”

While there still seems little appetite among the public for a rapid rise in interest rates to cool inflation, voters are becoming impatient with the government’s ad-hoc utility subsidies and other cash handouts preferred by Ishiba. Opposition parties that campaigned on a sales tax cut to help ease household budgets did well on Sunday.

The main opposition Constitutional Democratic Party, which called to exempt food from the sales tax for as many as two years, came in second place with 22 seats. The populist Democratic Party for the People finished third with 17 seats, up from four earlier, after seeking a sales tax cut and more take-home pay. 

Sanseito, a right-wing party that tapped anti-foreigner sentiment with a “Japanese First” message, managed to win 14 seats from just a single seat, establishing itself as the third largest opposition party in the upper house.

Japan’s main opposition leader, Yoshihiko Noda of the CDP, said he’d consider whether to submit a no confidence motion in the lower house after hearing what Ishiba says at a press conference likely to take place Monday.

The less powerful upper house can’t appoint a prime minister, hold a no-confidence vote or stop the passage of a budget. But it can delay or block other legislation, potentially leading to gridlock in the policymaking process. 

Back in 2008, the upper house famously blocked the government’s nomination for BOJ governor at a time when problems with subprime mortgages in the US were bubbling up into what would become the global financial crisis.

The fight over spending comes as Japan faces an Aug. 1 deadline to strike a deal with US President Donald Trump before across-the-board tariffs on exports to the US jump to 25% from 10%. Such a move would reduce Japan’s gross domestic product by 0.9% over the medium term, according to Bloomberg Economics. Japan is also facing calls from Trump to further boost defense spending.

“For Ishiba, continuing in his role will be an exceptionally challenging prospect under the current circumstances,” said Chihiro Okawa, political expert and professor at Kanagawa University. 

“When it comes to the question of who would take over leadership at this point, it becomes a matter of ‘picking chestnuts out of the fire’ — an extremely risky and undesirable task,” he added. “It’s entirely possible that no one will be eager to step into such a precarious position.”