Japan’s new Prime Minister Ishiba Shigeru has had a rapid-fire introduction to financial markets, sending Japanese stocks and the currency on a rollercoaster ride following some seemingly conflicting comments. After such a rocky start, what policy measures can the world expect from the leader of Asia’s second-biggest economy?
The Japanese yen weakened in the lead-up to the September 27 leadership contest for the ruling Liberal Democratic Party (LDP), on comments by then front-runner, Economic Security Minister Takaichi Sanae, opposing another interest rate hike by the Bank of Japan (BOJ). This compared with Ishiba’s longstanding preference for higher interest rates to curb inflation and strengthen the yen.
Yet after losing the first round of voting in the LDP poll to rival Takaichi, Ishiba turned the tables in the second round, winning the contest by 215 votes to 194 in his fifth attempt at the LDP leadership. The 67-year-old former defense minister beat eight other candidates to become party president, ensuring he would become Japan’s next prime minister after his predecessor, former Prime Minister Kishida Fumio, decided to step down amid low poll ratings following a fund-raising scandal.
The election result saw the yen immediately strengthen, rising to 143 against the U.S. dollar compared to 146 earlier, while Nikkei 225 futures plunged 5 percent in after-hours trading in what some commentators described as the “Ishiba shock.”
The BOJ has already hiked official interest rates twice in 2024 to combat inflation, although it held rates steady at its latest policy meeting in September.
Speaking after his victory, Ishiba suggested that more interest rate increases would be necessary to quell inflation, while also proposing more support for Japan’s regional economies.
On September 30, he announced a general election for October 27, saying it was “important for the new administration to be judged by the people as soon as possible.”
‘Anti-Abe’ Cabinet
Having described the race as his “last battle,” Ishiba has finally triumphed against the opposition of party heavyweights such as former Prime Minister Aso Taro, who joked he might “flee the country” if Ishiba won. Ishiba gained a reputation as a “double-crosser” within the LDP after briefly quitting the party in the 1990s and then rejoining it, as well as publicly criticizing both Aso and Abe.
The conservative Takaichi – described as the “standard bearer” of the late Abe Shinzo’s policies – gained most of her endorsements from the former Abe faction. Aso reportedly directed his faction members to back Takaichi in the final round of voting, seeking to block former Prime Minister Suga Yoshihide’s influence over rival candidates Ishiba and Koizumi Shinjiro, son of the former reformist Japanese Prime Minister Koizumi Junichiro.
Two days before the poll, however, Ishiba vowed to continue Kishida’s policies, winning him support from the outgoing leader and ultimately helping deliver him key votes from Kishida and Suga supporters.
Notably, Ishiba’s new Cabinet excluded members of the Abe faction, which has been tainted by the political funds scandal. Takaichi also reportedly declined the post of chairperson of the LDP’s General Council, leaving her and the party’s largest faction without any top leadership posts.
After officially taking office on October 1 and announcing his new Cabinet, Ishiba vowed to strengthen Japan’s defense while continuing Kishida’s strategy of raising wages and combatting rising prices. However, just two female Cabinet members were appointed, despite continued calls for more female representation in Japanese politics and business given Japan’s lowly ranking on gender equality.
A longtime Abe rival, Ishiba has mainly been known for his defense posts and promotion of the revitalization of Japan’s rural communities. A Nikkei poll conducted September 13-15 ranked him as the most popular LDP candidate, thanks to his “train otaku” (“train geek”) image and frequent criticism of party heavyweights.
Ishiba has previously served as defense minister, agriculture minister, and minister in charge of rural revitalization, as well as LDP Policy Research Council chairman and secretary-general.
He has called for a NATO-style collective defense agreement in Asia, potentially combining existing alliance agreements between Japan and South Korea with the United States. Ishiba is expected to continue Kishida’s rapprochement with Seoul, avoid regional confrontations, and seek to strengthen Japan’s defense against increasing threats from China, North Korea, and Russia.
On economic policy though, he has described the importance of rejuvenating the agricultural, fishing, forestry, and service industries to bolster rural employment and prevent the further decline of Japan’s depopulating and graying rural areas.
Based in Tottori Prefecture in western Japan, Ishiba declared after launching his leadership campaign that he wanted to “change this country from Tottori,” promising “large-scale regional development policies as Japan’s economic catalyst.”
He has also backed renewable power, seeking to reduce nuclear’s share of the overall energy mix.
However, market watchers have been left confused over Ishiba’s policy stance following some conflicting commentary. After his first meeting on October 2 with Bank of Japan (BOJ) Governor Ueda Kazuo, Ishiba declared, “I do not believe that we are in an environment that would require us to raise interest rates further.”
The remarks conflicted with Ishiba’s previous stance as a monetary policy hawk, with analysts suggesting it could see the BOJ’s next rate hike pushed back to early 2025.
The yen dropped to the 147 range against the U.S. dollar following Ishiba’s comments, its sharpest one-day sell-off in two years, while the benchmark Nikkei Stock Average jumped 2.8 percent.
In his first policy address as prime minister on October 4, Ishiba promised to support households against higher prices, push for higher wages and “decisively conquer” deflation within his initial three-year term.
“It’s necessary that we provide support to those reeling from rising prices until a virtuous cycle of growth and redistribution is certainly in motion, where pay hikes outpace inflation and companies invest proactively,” Ishiba told Diet lawmakers.
Ishiba also announced the compilation of a new economic package, including payouts to low-income households and subsidies to local governments, saying, “We’re still half way through to achieve an economy where people can feel safe to spend.”
The Diplomat’s Daisuke Akimoto noted that the word “economy” was mentioned as many as 30 times during Ishiba’s speech, “showing his strong will to revitalize the Japanese economy.”
“Ishibanomics” could also entail higher taxes on corporations and high-income earners, according to Akimoto, as well as a potential hike in the consumption tax rate to 15 percent from 10 percent.
Japan’s general government debt has risen to more than 250 percent of GDP, with interest payments on government borrowing set to rise due to higher interest rates.
While Ishiba is said to be concerned about fiscal discipline, any policy tinkering is likely to be postponed as the LDP campaigns for the upcoming lower house poll together with an upper house election, due by July 2025.
Ishiba has already started his administration on a weaker basis than his predecessor. A Kyodo News poll found his Cabinet had a public approval rating of 50.7 percent, compared to 55.7 percent at the start of Kishida’s administration.
Tokyo-based economist Jesper Koll said the risk of taxes going up in 2025 was “basically nil” because of the upcoming elections.
“The risk of tax policy changing significantly, such as taxes on capital gains, corporations, or high income earners is very low because of the electoral cycle,” Koll said.
The International Monetary Fund’s (IMF) latest “World Economic Outlook” report in July 2024 projected gross domestic product (GDP) growth of just 0.7 percent for Japan in 2024, rising to 1 percent in 2025. The latest GDP data showed an annualized 2.9 percent rise in the June quarter for the world’s fourth-biggest economy, with a majority of economists polled by Reuters suggesting the BOJ could deliver its next rate hike in December.
The BOJ ended its negative interest rate policy in March and raised short-term borrowing costs by 0.25 percent in July, amid persistent inflation above the central bank’s 2 percent target.
The IMF has suggested the BOJ should stay “data-dependent” and gradually raise rates in line with inflation data, saying it is on track to return price rises to target.
However, while fiscal and monetary policy under Ishiba could reflect that of his predecessor, there has been little discussion regarding structural reforms to boost productivity, such as those promised as Abenomics’ “third arrow.”
Ishiba appears to favor “old Japan, supporting the regions, not focusing on competition, not prioritizing private-sector initiative,” Koll said.
“He pays lip service to start-ups and entrepreneurship, but economic policy and fiscal policy is not his forte.”
In its May 2024 report, the IMF said that “further structural reforms are needed to support fertility, female leaders, start-ups, and a green economy, with labor market reforms at the forefront of the agenda… these reforms should include a further expansion of childcare facilities, progress on workstyle reforms, reducing labor market dualism, and greater firm dynamism.”
Nikko Asset Management’s chief strategist Naoki Kamiyama argued that the financial markets’ “immediate focus will be how much support the ruling party can secure at the snap election. The stronger the support, the more influence the next prime minister will wield in enacting policy.”
He added: “While Kishida had some commendable policies, his dwindling popularity hindered his ability to effectively implement them.”
Can Ishiba succeed where Kishida failed?
“Many people are very skeptical – it was a very tight race – and more importantly, for the first time in about 30 years, Aso, the most powerful man in Japanese politics, did not orchestrate the winner,” Koll said.
“Does Aso want to go down in history as a loser or a winner? My personal view is the Ishiba administration will be rather short-lived,” Koll predicted. “As we’ve seen with the younger Koizumi and the other challenger Takayuki Kobayashi, the generation in their 40s and 50s are ready to not just raise their hand, but actually to build significant support.”
“So my view is that the LDP will do very poorly in the upper house election next year, and by this time next year there will be significant pressure for the LDP to look for another leader.”