The Japan Cheat Sheet
What you need to know during a busy October.
Unless you’ve been living under a rock for the past week, you’ll have noticed elevated vol in the Japanese Yen, as well as shifts in short-dated JGBs.
Although it’s easy to say “politics” to a client who rings you up for a market update on Japan and then move on to chat about other things, it’s important to understand what exactly is going on right now in Japan, alongside the potential implications for FX and rates.
Therefore, we wanted to provide a concise cheat sheet on Japan right now, including our own opinions and trade ideas for the coming couple of months.
The Past Two Weeks
Over the past few weeks, Japanese politics has seen significant shifts, especially following Shigeru Ishiba’s election as the new Prime Minister.
Former Prime Minister Fumio Kishida had been in power since 2021 but announced in August that he would be stepping down, paving the way for a leadership contest within his party.
Kishida oversaw a period with the Liberal Democratic Party (LDP) that saw underwhelming economic reform. He also went through several scandals, including the behaviour of his son, who seemed to be using his post from his Dad to mix business with pleasure. This included using official residences to throw personal parties, using official cars for sightseeing in London and Paris, as well as buying souvenirs for cabinet members during those trips.
There has also been broad unhappiness with the party’s ties to the Unification Church and the involvement of many of its members in a slush fund scandal.
The leadership contest was won last week by Ishiba, who is a long-standing figure in Japanese politics. This was, in fact, his fifth attempt at becoming the party leader. However, it did come as somewhat of a surprise to markets, given that Ishiba had come second to Takaichi Sanae, a hard-right nationalist, in the first round of voting.
One of his early moves was forming a new cabinet, which drew attention due to the reduced number of women in key positions—only two, compared to five under Kishida's administration.
Outside of this initial feather-ruffling, the next big step from Ishiba came on Monday with the calling of an early general election in a bid to secure public support. The election has been called for October 27th, with campaigning to run for the 12 days preceding it.
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The Next Four Weeks
Ishiba will be hoping that the election gives him the ability to cement power in the lower house. At the moment, the LDP (shown in green below) have 258 of 465 seats in the lower house. 233 seats are needed to have a majority:
However, the golden number is often seen as 261, which provides enough of a buffer to be referred to as an “absolute stable majority”, meaning that it can push through bills even with some minor resistance from policymakers.
In terms of the opposition (shown in blue above), the Constitutional Democratic Party of Japan has 97 seats from the last 2021 election. Based on recent approval ratings, it seems unlikely that they will manage to stage a large surprise later this month.
Although we speak of the next four weeks as being noteworthy, lower house campaigns are very short, with just 12 days allowed for it. There are also some peculiarities of campaign advertising, which the Tokyo Review mentioned in detail:
“Once the campaign commences, candidates’ activities are heavily restricted by a stringent set of electoral regulations that define what they may do right down to the minutiae of what size their posters may be, how many cars can be used by the campaign, and how many people may speak at a campaign event. Political advertising in the media is strictly controlled, and until as recently as 2013, candidates were forbidden to use the Internet for campaigning.