Political uncertainty following Japan’s election shock risks slowing economic reforms, increasing government spending and even delaying the Bank of Japan’s (BOJ) exit from its atypical monetary policy, economists said.
Postwar Japan has long been synonymous with political stability, with the conservative, pro-market Liberal Democratic Party (LDP) in power for all but four of the past 69 years.
However, the PDL-Komeito coalition lost its majority on Sunday, likely forcing Prime Minister Shigeru Ishiba to form a minority government that will need the support of other parties to pass the legislation.
Businesses and economists are concerned that, as concessions to other parties, Ishiba is offering tax cuts and increased spending, and that he will be slow on reforms needed to improve competitiveness.
As of 2021, “the country has had three prime ministers and Ishiba is not likely to last long in office either,” predicted Marcel Thieliant of Capital Economics.
“That means radical reform projects are unlikely to happen,” he said, changes that were already “few and far between” in the past decade.
Syetarn Hansakul of The Economist Intelligence Unit also anticipated a “dilution of (the LDP’s) reform agenda,” which included plans to increase defense and social welfare spending.
In addition to affecting investor confidence, this “will harm household and business confidence. “The recovery of domestic demand could be affected as a result,” he said.
Ishiba has promised more support to households.
