Chairman’s Message

This month’s chairman’s message follows up the developments since the Upper House election held on July 20. With the ruling coalition parties’ defeat, politics is becoming very fluid. Let me explain Japan’s political situation, which is increasingly complex and confusing.

<Main Points>

The ruling coalition parties lost their majority in the Upper House.

Despite the defeat, PM Ishiba has vowed to remain in office.

The ruling party, LDP, is split on the future of PM Ishiba.

Turmoil is expected towards the end of August.

The opposition parties are not united on when to call a vote of no-confidence.

Muddling through? Or a breakthrough

The additional gasoline tax is to be repealed, but no other energy policy changes are expected.

1. Defeat of the coalition parties in the Upper House Election

The July 20 Upper House election was a major disappointment for PM Shigeru Ishiba. The coalition parties failed to secure the 50 seats necessary to control the Upper House. They ended up with 47 seats, down from the 75 seats they held going into the election.
　Two parties emerged as big winners. A newly formed party, Sanseito, made a surprising jump from 1 to 14 seats. The party’s slogan is “Japanese First”, resonating with President Trump’s MAGA. They are anti-immigration, pro-fiscal spending, and vaccine-skeptical. They succeeded in attracting the conservative elements within the LDP (The Liberal Democratic Party), including the support base of the late former PM Shinzo Abe.
　　The second winner was the DPP (The Democratic Party for the People), advancing from 4 seats to 17 in the election. Their slogan is “Increase the Disposable Income of the people”. The main pillar of their policies is tax cuts, especially raising the level of minimum taxable income. DPP appealed to the people who are exposed to inflation.
　The result shows that PM Ishiba lost to the growing anti-immigration sentiment among the public and resentment against the cost-of-living increase. For readers outside of Japan, you may feel surprised by the growing anti-immigration sentiment in Japan which has traditionally been known for the low level of immigration. Out of a population of roughly 120 million, the number of foreign residents was just 900 thousand in 1990. The number reached 1.97 million in 2004. It has increased to 3.77 million last year. While still relatively modest compared with many other advanced economies, the rate of increase is very fast. In addition to the numbers, the public is influenced by the perceived increase in crimes attributed to foreigners. Reports highlighting the buying up of real estate by Chinese nationals are not helping the public sentiment either. Over-tourism is apparently having a significant impact on negative feelings.

2. PM Ishiba is vowing to stay in power.

Following the loss of the Upper House majority, many people expected PM Ishiba to take responsibility and resign. Several leading journals even issued reports predicting his departure.
　Against conventional wisdom, however, PM Ishiba made it clear he intends to stay in his position despite the defeat. He cited several ongoing issues, including the tariff negotiation with President Trump, as the reasons that he cannot leave his position and create a political vacuum. He is also referring to a series of diplomatic events that he cannot forfeit. As the World Expo is being held in Osaka through mid-October, many foreign leaders are visiting Japan every week. Between August 20th and 22nd , the TICAD meeting with the leaders of Africa will be convened. This is its first meeting in Japan since 2019, an important diplomatic event which is used as a convenient reason for PM Ishiba to remain in his position.

3. The ruling party is split on the fate of PM Ishiba

As expected, there was a momentum within the LDP to call for his resignation after the defeat. But as the movement was perceived to be led by the members of the former faction of late Shinzo Abe, it faced criticism within the party and by the public. The former Abe faction is widely viewed as being responsible especially for the defeat in the Lower House election last October for causing a political money scandal. Since the public generally consider that the scandal is not fully resolved, the group pushing for the resignation of PM Ishiba is criticized that they are the ones who should take the responsibility first.
　It is now clear that a split is developing within the party. The split is not helping the image of the LDP as it is viewed by the public as a political battle among factions to grab power.

4. Turmoil is expected to continue.

The LDP has convened two meetings of its Diet members, with the attendance of PM Ishiba, to discuss about the defeat and the fate of PM Ishiba. No clear conclusion has emerged, but three procedural steps have been decided. First, the LDP will come up with a review of the result of the election, including the causes of their defeat, by the end of this month. Second, Hiroshi Moriyama, the Secretary General of LDP, the second powerful member of the LDP and PM Ishiba’s strong supporter, is expected to resign to take responsibility of the defeat after the completion of the review. Third, LDP will check the opinion of its Diet members and the leaders of each Prefecture to see if the majority favor an early election for the presidency of LDP. PM Ishiba’s term as the president of LDP is currently scheduled to end in September 2027.
　The process to determine if the majority support the early election of LDP’s presidency is unclear. Some are arguing that it should wait until the review of the defeat is completed. The prospect is also unclear. While more than a third of the LDP Diet members appear to support the early election, it is not clear if they have the majority.
　There are several possible scenarios. The first one assumes that the majority do not support the early election. In this case, PM Ishiba will stay in power. The second one assumes that the majority support the early election. In this case, many people expect PM Ishiba to resign especially with the departure of his right-hand politician Hiroshi Moriyama. The election for the presidency of LDP will then be initiated. At this moment, it is widely expected that Sanae Takaichi, a female hawkish politician, claiming herself as the successor of late Shinzo Abe, and Shinjiro Koizumi, the son of the former PM Junichiro Koizumi, will be the leading candidates to succeed PM Ishiba. There is also a third scenario in which PM Ishiba decides to run for reelection for the presidency of the LDP. He will then have to face the challenges by Takaichi and possibly by Koizumi.
　As you can see, turmoil will continue at least until the end of this month. If there should be an early election for the presidency of LDP, the turmoil will continue well into September.

　5. The opposition parties are not united.

The opposition parties hold a majority in both Houses. If they are united, they could pass a no-confidence motion, forcing the PM to resign or dissolve the Lower House for a general election. Usually, an extraordinary session of the Diet is convened at the end of September to discuss the supplementary budget. The opposition parties can theoretically call for a vote of no-confidence then.
　However, the leading opposition party, CDP (The Constitutional Democratic Party) is cautious in triggering a general election any time soon. They feel that they may be overwhelmed by Sanseito and DPP, which advanced in the recent Upper House election. CDP just managed to hold its existing seats in the election. They did not lose but neither did they win. They want to have an election later when they hope the momentum of Sanseito and DPP could be slowed down.
　The opposition parties are not united on the future PM either. With both the right-wing parties and the left-wing parties forming the opposition, they will not be able to select the next PM. The ruling coalition parties will probably continue to lead the minority government.

6. Muddling through? Or a breakthrough?

PM Ishiba has no interest in calling a general election anytime soon either. In the case he survives the late August/early September turmoil, he will probably continue leading Japan as the minority government through this fall until the end of the extraordinary Diet session in December. He will have to push for supplementary budgets and legislation during the Diet session to obtain support from one of the major opposition parties to get the Diet approval. He will literally have to muddle through.
　But if PM Ishiba is forced to resign or loses reelection and a new president of LDP emerges, he or she will probably call a general election to capitalize on the expected initial popularity of a new leader. The leader will want to recover the majority of the Lower House to break the political impasse. If this should be the case, the result of the general election will have a substantial impact on the political landscape of Japan.

7. Little impact on energy policy

Despite the political turmoil, I do not expect a major impact on energy policy. The major parties have relatively little differences in their energy policies. The only apparent difference is CDP’s opposition to the construction of new nuclear power plants. But as CDP accepts the restart of existing nuclear power plants, the difference is limited. Unless CDP wins in the general election and leads the new Cabinet, nuclear policy will stay unchanged.
　The exception is the additional gasoline tax. The original gasoline tax was set at 25.1 yen per liter of gasoline. In 1974, to finance the construction of roads, an additional 25.1 yen was levied as a temporary measure. The additional gasoline tax, which was supposed to be a temporary measure, is still in place after more than 50 years. The usage of the revenue from the additional gasoline tax was expanded to enable general financing of Government expenditure in 2009, but the additional tax remains increasingly unpopular especially after the recent energy price hike. In Japan, the energy price hike has been exacerbated by the very cheap yen which pushes up the cost of imported energy in yen terms. The additional tax represents about 15% of the gasoline retail price. The opposition parties are united on this point of abolishing the additional gasoline tax. It is expected that the additional gasoline tax will be repealed during the next extraordinary session of the Diet this fall. However, as this will result in the loss of 1.5 trillion yen of tax revenue (more than 10 billion US dollars), the parties are supposed to come up with offsetting permanent tax revenue, which is by no means easy.
　Politics in Japan is becoming fluid, complex and confusing, but energy policies will remain generally stable. This may be the silver lining we have.