Facing a general election for the House of Representatives within a year, the Kishida administration, struggling with persistently low approval ratings, stepped down, entrusting Japanese Prime Minister Shigeru Ishiba with the task of recovering lost ground for the Liberal Democratic Party (LDP).

However, despite his initial popularity, especially in rural constituencies, Ishiba’s support has seen a steady decline since he assumed office, culminating in a surprising electoral outcome where the LDP failed to secure a majority, both independently and in coalition.

The recent general election, which posed significant challenges for the ruling party, ended in a scenario few had anticipated. Analysts point to the LDP’s ambiguous handling of a political funding scandal linked to the former Prime Minister Shinzo Abe’s faction as one contributing factor. However, the broader issue appears to be widespread dissatisfaction with rising inflation—a sentiment mirrored in electoral trends worldwide.

Japan at a political crossroad

As Japan grapples with political instability, the need for a strategic response, particularly one that addresses the concerns of lower-income groups, has become increasingly evident. Prime Minister Ishiba, despite initially refusing to step down, has vowed to take responsibility for the election’s outcome by dutifully serving his role. Yet, with another critical election for the House of Councillors on the horizon, maintaining a stable government under the current conditions seems an uphill battle.

The country now stands at a crossroads, contemplating three potential paths forward: forming a coalition government with an opposition party, navigating the complexities of a minority government, or witnessing the Constitutional Democratic Party of Japan (CDPJ) spearhead a coalition with other opposition entities. Given the significant policy discrepancies among these opposition parties, the likelihood of a unified opposition appears slim.

A decision regarding the new government framework is anticipated within the month, amidst ongoing market instability. Since August, market trends have been unpredictable, and this trend is expected to persist until a stable government is established.

Capital markets responded unfavourably to policies implemented by the DPJ between 2009 and 2012. As such, the prospect of opposition parties, such as the CDPJ gaining power has prompted concerns over potential market aversion to risk. Conversely, should the LDP remain at the helm, capital market’s focus may gradually shift towards identifying undervalued assets and recognising solid corporate performance.