Agencies
The ruling bloc in Japan losing its parliamentary majority has increased the likelihood of a new government stepping up spending and has raised concerns about potential challenges to future interest rate hikes by the central bank.
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 premier 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,” said Saisuke Sakai, senior economist at Mizuho Research and Technologies.
To stay firmly in power, the LDP, which has governed Japan for almost all its post-war history, will likely need to court smaller opposition parties, such as the DPP and 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%. DPP’s proposals also included cutting power utility bills and tax for lower-income earners.
While Ishiba has already proposed a supplementary budget that exceeds last year’s 13 trillion yen ($85 billion), he could face pressure for a package that exceeds 20 trillion yen, 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% in July on the view Japan was making progress towards durably achieving its 2% inflation target. BOJ Governor Kazuo Ueda has vowed to continue lifting rates and economists don’t see any major immediate change to the broader policy direction.