Political Drift Has Consequences
A short note on Japan's fiscal worries following the election.
For the second time in under a year, Japan’s ruling coalition has suffered a bruising electoral setback. Prime Minister Shigeru Ishiba said he intends to remain in power after Sunday’s upper house vote, but the numbers tell a different story: the coalition secured just 47 seats, losing its majority and raising serious questions about Ishiba’s political viability.
The historical precedent is sobering. The last three LDP prime ministers who lost an upper house majority resigned within two months, including Shinzo Abe in 2007. While Ishiba’s defiance may buy time, precedent and pressure suggest that political churn is likely.
What’s changed isn’t just the leadership calculus. It’s the fiscal risk profile of the world’s most indebted major economy. The coalition’s loss doesn’t spell legislative paralysis, but it does mean the government must now court opposition support to pass key bills—and the opposition isn’t campaigning on fiscal restraint.
Fiscal Drift, Not Disorder
Opposition-driven fiscal expansion is now on the table. With inflation still elevated by Japanese standards and wage growth lagging, calls for fresh stimulus (especially via consumption tax cuts) are gaining traction. Even if Ishiba’s government retains lower house control and can prevent a radical shift, the path of least resistance may be to accommodate, not confront, these demands. But that isn’t a path Ishiba wants to take.
This comes at a critical juncture. Japan’s post-COVID fiscal consolidation has already been tentative. The temptation to roll out inflation-linked support risks hardcoding temporary measures into permanent liabilities. And in a market where the Bank of Japan is already stepping back from JGB purchases, even marginal shifts in fiscal trajectory matter.
This isn’t a crisis moment for Japan. But drift has consequences. And the risk now is not a bond market revolt, but the gradual erosion of fiscal discipline through democratic arithmetic. What markets may soon have to price isn’t panic, but persistence: a political cycle that can’t say no to spending, even as yields quietly rise.
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