[2024 Japan Election Issue Briefing] ③ LDP's 'Preserve' Orientation and the Future of Economic Policy

Prime Minister Ishiba Shigeru's Liberal Democratic Party (LDP) and its coalition partner, Komeito, suffered a crushing defeat in the general election held on October 27, obtaining only 215 seats, 18 short of a majority, after Ishiba, who took office on October 1, 2024, dissolved the House of Representatives just eight days later, the shortest period in post-war history. This marks the first time the LDP has failed to secure a single-party majority in a House of Representatives election since 2012. The LDP had secured a single-party majority in the general elections of 2012, 2014, 2017, and 2021. Therefore, the outcome of this election signifies a crack in the LDP-dominant system that has been in place since the launch of the second Abe Shinzo administration in 2012. Looking further back, this election result is the first instance since the establishment of the LDP-Komeito coalition in 1999 where the combined seats of both parties did not reach a majority, excluding the exceptional election of 2009 when the Democratic Party secured a single-party majority, thus raising doubts about the sustainability of stable government operations based on the LDP-Komeito coalition.

The primary cause of the House of Representatives election results, which have led to a crack in the LDP-dominant system that lasted for about twelve years and the stability of the LDP-Komeito coalition that has lasted for about a quarter of a century, is the negative judgment of Japanese society regarding the LDP's political funding scandal. However, the negative assessment of the political funding scandal in Japanese society is linked to dissatisfaction with the economic policy management of the LDP-Komeito coalition government. This article aims to analyze the political and economic dissatisfactions in Japanese society that are key causes of the election results, identify the shortcomings in the Ishiba LDP's response, and forecast the direction of Japan's economic policy in the context of a closely contested House of Representatives composition between the ruling and opposition parties.

I. General Election Amidst Inflation

Setting aside the intricate details of domestic Japanese politics, a review of recent Japanese economic indicators clearly shows that inflation is a reason why the election could not be favorable to the ruling party. As seen in [Figure 1], Japan's inflation rate has been at a very high level since 2022. Of course, when compared globally, Japan's inflation figures themselves are not particularly exceptional. It is well known that macroeconomic policies implemented in many countries during the post-COVID phase to stimulate their economies in response to the crisis have led to inflation.

From the perspective of the policy objective of economic growth through price increases, which the Japanese government and the Bank of Japan have pursued since 2012 with Abenomics, and the creation of a virtuous cycle that leads this growth to income increases across society, rising prices are not a negative indicator. However, the quantitative easing measures implemented since 2012 to achieve price increases did not cause a significant surge in prices before the COVID era in 2020, resulting in lukewarm economic improvement. During the second Abe administration, the Japanese government urged Japanese companies to link the improved corporate earnings, driven by the weak yen and rising stock prices resulting from quantitative easing, to an increase in the labor share of income. The link between rising prices, improved corporate earnings, and wage increases during the second Abe administration can be said to have operated on a modest scale.

The characteristic of Japan's price increases since 2022 is that their scale is larger and their pace is much faster compared to the 2010s. Furthermore, the scale and speed of price increases are largely influenced by the weak yen, which resulted from decoupling with the macroeconomic policies of other advanced countries, including the United States, rather than being an intended outcome of Japanese government policy. Even under the Fumio Kishida administration, which took office in October 2021, wage increases to strengthen the labor share of income were consistently emphasized, but the rate of increase struggled to keep pace with the scale and speed of price increases combined with the weak yen.

[Figure 1] Trends in Consumer Price Index, Wage Index, and Consumer Sentiment Index (January 2016 - August 2024)

Data Sources: Ministry of Internal Affairs and Communications "Consumer Price Index," Ministry of Health, Labour and Welfare "Monthly Labour Survey," Cabinet Office "Survey on Household Economy"

Notes: 1. Consumer Price Index and Wage Index are based on 2020=100.

2. The Wage Index uses the index of contractual cash earnings for establishments with 5 or more employees.

3. The Consumer Sentiment Index uses the raw score (total households).

The political and economic dissatisfaction in Japanese society during this general election can be found in the gap between the consumer price index and the wage index over the past two years. The consumer sentiment index, which had improved compared to the past within the context of modest virtuous economic cycles in the 2010s, deteriorated again in the post-COVID era. The recent high growth in the Japanese stock market is a distant reality for Japanese society as a whole.

II. Ishiba's Vision of 'Preserve'

Ishiba's victory in the LDP presidential election on September 27 was a strategic choice by LDP politicians. Replacing a leader with low approval ratings with a new figure to boost government support ahead of national elections is a common occurrence in Japanese political history. The election of Kishida in the LDP presidential election in September 2021 and the LDP's victory in the subsequent House of Representatives election in October, with Kishida as the new face, serve as typical examples. In 2024, LDP politicians hoped to repeat the pattern of Kishida's choice and electoral victory from 2021 through Ishiba. Ishiba, who had long been in the LDP's non-mainstream faction, was relatively free from the political funding scandal that engulfed the Abe faction. Although Sanae Takaichi, a representative of the Abe faction and former Minister of State for Economic Security, showed considerable competitiveness in the presidential election, Ishiba's opportunity arose through a process of elimination to avoid the political backlash that would have occurred if the Abe faction, the center of the political funding scandal, had regained LDP leadership. The fact that former Prime Minister Yoshihide Suga, who had supported Shinjiro Koizumi, and Prime Minister Kishida, who had not shown support for any particular candidate, supported Ishiba in the run-off vote symbolizes a strategic choice to appeal to voters with the LDP's novelty.

However, in terms of economic policies that could address the backlash from Japanese society regarding the economic situation during the Kishida administration, Ishiba's novelty is absent. While Ishiba has been highly regarded for his expertise in security affairs, he has never demonstrated a distinct policy orientation in socio-economic policy. Nevertheless, in the 2024 LDP presidential election and House of Representatives election, Japanese society expected not only a proactive stance on political reform but also alternatives in economic policy. Ishiba's position within the party's non-mainstream during the Abe and Kishida administrations is not sufficient to fill the content of this novelty. For instance, in 2021, Kishida appealed for novelty by proposing 'New Capitalism,' which aimed for a 'virtuous cycle of growth and distribution' distinct from Abenomics, upon becoming president and prime minister.

In 2024, Ishiba lacked this novelty in socio-economic policy orientation. The 'Preserve' rhetoric that Ishiba utilized in his policy speech to the Diet on October 4 after becoming Prime Minister and in the LDP's policy pledges for the House of Representatives election lacks specificity. Prime Minister Ishiba structured his policy speech into five 'Preserve' sections (Preserve Rules, Preserve Japan, Preserve the People, Preserve Regional Areas, Preserve Opportunities for Youth and Women), and the LDP's policy pledges for the House of Representatives general election also presented five 'Preserve' items (Preserve Rules, Preserve Livelihoods, Preserve the Nation and Protect the People, Preserve the Future, Preserve Regional Areas). Each item to be preserved signifies a specific policy area. 'Rules' refers to political reform; 'Japan' or 'Nation' refers to foreign and security policy and disaster response measures; 'People' or 'Livelihoods' refers to economic policies centered on price measures; 'Regional Areas' refers to regional revitalization policies; and 'Future' or 'Opportunities' refers to measures for low birth rates and education policies.

The 'Preserve' rhetoric put forth by Ishiba is reminiscent of the slogan 'Livelihoods and Local Communities First' advocated by the Democratic Party of Japan (DPJ) in the 2007 House of Councillors election and the 2009 House of Representatives election. The DPJ's slogan at the time, which directly addressed the issues of a widening gap caused by Junichiro Koizumi's neoliberal reforms, clearly articulated the DPJ's policy orientation of strengthening universal welfare, which led to their landslide victories in both elections. Ishiba's 'Preserve' vision also has the potential to differentiate itself from the Kishida administration, depending on its content. However, the specific content under Ishiba's 'Preserve' slogan has not deviated from the discussion of a 'virtuous cycle of growth and distribution' that has been consistently mentioned during the Kishida administration.

Differentiation from the Kishida administration in socio-economic policy is more evident in Takaichi's approach. Despite the clear limitations of representing the Abe faction, which has limited room to maneuver due to the political funding scandal, Takaichi has consistently advocated for aggressive fiscal expansion without increasing the burden on the public. While her active embrace of Modern Monetary Theory (MMT) has raised concerns from mainstream economic policy perspectives, her opposition to increasing the public burden resonated with Japanese society's dissatisfaction with the Kishida administration's economic policies.

Ishiba's unique stance in economic policy lies in his emphasis on regional revitalization. When the Abe administration launched its regional revitalization policy in 2014, Ishiba served as the first Minister for Regional Revitalization. Regardless of the political context that led him to this role after stepping down from the position of Secretary-General, the position of Minister for Regional Revitalization was fitting for Ishiba, a native of Tottori Prefecture, which represents depopulated areas, and an admirer of Kakuei Tanaka, a symbol of balanced development. He himself harbored a strong desire to make regional revitalization his political asset. Upon becoming Prime Minister in 2024, Ishiba advocated for 'Regional Revitalization 2.0,' clearly stating his policy orientation to boost regional economies by doubling the regional revitalization grants.

However, regional revitalization has clear limitations as a representative of Ishiba's 'Preserve' vision. Firstly, the scale of government support for regional revitalization policies is not substantial. Given the fiscal constraints that make it difficult to significantly increase the overall budget for regional grants, doubling the regional revitalization grants is not of great significance in terms of scale. Furthermore, emphasizing increased support for regional areas from a balanced development perspective is unlikely to appeal to urban wage earners. In the 1970s, when Kakuei Tanaka advocated for balanced development through his 'Remodeling the Japanese Archipelago' plan, there was national acceptance for balanced development through concentrated development. During the late 2000s, the Democratic Party government was able to mobilize significant voter support by combining increased support for regional areas with support for urban wage earners. However, Ishiba's regional revitalization slogan is not being developed in conjunction with livelihood support policies for urban wage earners.

III. Limitations of Inheriting the Kishida Administration

Ultimately, in terms of economic policy, the Ishiba administration has failed to successfully present effective measures to address the dissatisfaction of urban wage earners regarding inflation. Observing the significant reduction in LDP seats in the 2024 House of Representatives election by regional changes, the loss of numerous constituencies in urban areas, particularly in the Kanto region, to opposition parties, primarily the Constitutional Democratic Party, is striking. While the LDP also lost many constituencies in regional cities, especially in Hokkaido and Tohoku, to the opposition, the shift in the Kanto urban areas, which had been a stronghold for the LDP in the 2017 and 2021 elections, from a balanced competition to an opposition advantage has significantly impacted the ruling and opposition seat distribution. Had the opposition parties formed a comprehensive electoral alliance, this general election might have resulted in a clear change of government, similar to 2009, rather than the LDP-Komeito coalition failing to secure a majority.

For the Ishiba administration to prevent the dissatisfaction with the Kishida LDP among urban wage earners from spreading to the Ishiba administration, Prime Minister Ishiba himself would need the ability to present a vision distinct from the Kishida LDP's economic policies, or a consultative group to act on his behalf. Ishiba lacks both the ability and the faction for this. As mentioned earlier, Takaichi within the LDP has shown such a direction. Furthermore, Kishida's significant influence exists in the very birth of the Ishiba administration. It is well known that Kishida demanded the continuation of the Kishida administration's policy direction as a condition for his support of Ishiba. The performance of the Ishiba administration, which stands within the continuity of the Kishida administration's policy direction, is largely an evaluation of the Kishida administration rather than the Ishiba administration itself.

Former Prime Minister Kishida and the core forces of the Kishida administration may consider the high level of dissatisfaction and negative assessment of the Kishida administration in Japanese society to be unfair. As shown in [Figure 1], wage increases have been occurring since the spring of 2024. It is not that the Kishida administration did not seriously address the wage increases that were commensurate with (or, in political terms, 'exceeding') the price increases it consistently emphasized.

Furthermore, officials from the Kishida administration likely have a positive self-assessment regarding the government's decisions to make proactive investments in Japan's future-oriented challenges. The substantial increase in defense spending, proactive industrial and scientific technology investments for building a green economy through GX (Green Transformation), and expanded government expenditure on measures to address the declining birthrate have been consistently argued as necessary to respond to the structural environmental changes Japan faces both domestically and internationally. During the Abe administration, which lasted for eight years from 2012, the necessity of these challenges was strongly expressed under former Prime Minister Abe's powerful charisma. However, the actual decisions for proactive government fiscal spending measures to carry out these tasks were often made during the Kishida administration.

However, increased government spending on these future-oriented challenges inevitably leads to politics of burden sharing. Increased defense spending leads to defense tax increases, measures for the declining birthrate lead to additional premiums on social insurance such as health insurance under the guise of support for the declining birthrate, and increased industrial investment leads to an increase in national debt. The dissatisfaction of Japanese society with the Kishida administration is not solely due to inflation, which is closely linked to monetary policy and exchange rate measures. It is a complex combination of dissatisfaction with the increased burden for future-oriented challenges. The fact that various opposition parties in this election actively proposed measures to alleviate the burden on citizens, such as freezing or lowering the consumption tax, in addition to supporting livelihood stability, stems from this context.

IV. Outlook for Japan's Next Government's Economic Policy Direction

As a result of the current House of Representatives election, Japan is now in a state of a hung parliament where no single party holds a majority, and various coalition possibilities exist. Firstly, the LDP-Komeito coalition, having lost its majority in the House of Representatives, requires another partner for the election of the Prime Minister and future governance. However, given the seat distribution, it is numerically not impossible for the opposition parties, including the Constitutional Democratic Party, Japan Innovation Party, and Democratic Party for the People, to form a broad opposition coalition to create a non-LDP (or non-LDP-Komeito) coalition. Indeed, Yukio Edano, leader of the Constitutional Democratic Party, has mentioned a change of government through opposition cooperation after the election. Between the two options of an LDP-Komeito+α coalition and an opposition coalition, the former is more likely. Specifically, it is currently most likely that the Democratic Party for the People will not participate in the government coalition but will establish a partial policy cooperation relationship with the LDP-Komeito.

If the Ishiba administration of the LDP-Komeito coalition continues with policy cooperation with the Democratic Party for the People (or the Japan Innovation Party), the Ishiba administration will inevitably have to adopt various policies emphasizing expanded support for livelihood stability and alleviation of the public burden, as advocated by the Democratic Party for the People or the Japan Innovation Party. Of course, even if a new opposition coalition government were to be formed, the situation would not be different. Institutionally, the Prime Minister must be elected within 30 days after the House of Representatives election, and due to diplomatic schedules such as the Asia-Pacific Economic Cooperation (APEC) Summit and the G20 Summit in mid-to-late November, the next government structure is likely to be decided in early November.

Whether the Ishiba administration continues or a new non-LDP coalition government is formed, the Ministry of Finance is likely to be the biggest loser of this election. In the determination of the government budget and the outline of tax reforms scheduled for December, the perspective of alleviating the burden on citizens is highly likely to be strongly reflected over the perspective of fiscal soundness. Furthermore, the supplementary budget, to be implemented before March of this year or next year, is expected to be of enormous scale, and fiscal soundness will be further relegated to the background during the budget deliberations and various legislative reviews in the regular Diet session from January to June next year. The schedule for the House of Councillors election in July next year reinforces the outlook for this direction.

Professor Naohiro Yashiro, who has consistently emphasized fundamental reforms of Japan's economic structure, expresses concern that during this election, there was no discussion between the ruling and opposition parties regarding institutional reforms to enhance the sustainability of the social security system, such as healthcare and pension system reforms. However, the difficulty in advancing such institutional reform discussions stems from the status quo-oriented nature of Japanese society. ■

■ Lee Jeong-hwan_Professor, Department of Political Science and International Relations, Seoul National University.

■ Managed and Edited by: Park Han-soo_EAI Research Fellow

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