Chairman’s Message

The general election of October 27 turned out to be a surprise to many. The ruling parties lost their majority. Prime Minister Shigeru Ishiba was confirmed to continue as Prime Minister of Japan as of November 11, despite leading a minority coalition. His government will face many challenges.

<Main Points>

1. Surprising result of the general election: Money & Politics + Cost of Living

When the new Prime Minister dissolved the Diet for a snap election, the general expectation was that the LDP, the ruling party, would win on the assumption that the voters would give him the benefit of the doubt.
　The Money & Politics scandal has been a headache for the LDP. The scandal had led to the premature departure of the former prime minister Fumio Kishida. The scandal arose from a systematic failure to report revenues from fund raising parties by the LDP, especially the faction of the late former prime minister Shinzo Abe. As many as 85 LDP Diet members failed to report properly. The total amount of misreporting by the 85 Diet members reached around 700 million yen, or 4.7 million US dollars, over five years. The maximum amount of misreporting by an individual Diet member was about 30 million yen, or 200 thousand US dollars over five years. As it was “misreporting”, it might have been viewed as “procedural”.
　But it was the handling of the scandal which angered the voters. The voters felt that the LDP was not taking the issue seriously as it decided that only eleven candidates would not be endorsed, a much smaller number than the dozens of misreporting politicians. The fatal blunder, which surfaced only a week before the voting, was the distribution of party funding to local branches that were linked to politicians not endorsed by the party. The voters felt that the LDP must be punished for its lack of sincerity.
　The LDP lost 56 seats winning only 191 seats while its coalition partner, Komeito, a Buddhist backed party, also lost 8 seats winning 24 seats. Together, the ruling coalition secured only 215 seats, 18 seats short of the majority of 233.
　In addition to the Money & Politics scandal, there was genuine resentment among the voters about the rise in the cost of living. For a country which had gone through nearly a quarter century of deflation, the rising cost of living was a shock to many. In addition to the global inflation, partly driven by the rise in energy cost, the historical depreciation of the yen aggravated the rise in the cost of imported energy and food.
　A few opposition parties, such as the Democratic Party for the People (DPP) which focused on the rising cost of living issue, advanced from 7 to 28 seats. The small populist party, Reiwa Shinsengumi, argued for the abolition of the consumption tax or VAT, and increased its seats representation from 3 to 9.

2. PM Ishiba keeps his position but with a minority coalition

After the general election, PM Ishiba tried hard to secure a majority for the selection of the new prime minister. He succeeded in securing an additional 6 independent Diet members to support the LDP, still leaving him 12 seats short of the majority.
　He has approached the DPP and other opposition parties to vote for him, but none agreed to provide the required support. On the other hand, an unification of all the opposition parties could have the majority, but as they are composed of right and left leaning parties, they could not unite to prevail either.
　Consequently, no coalition could secure an absolute majority of the Lower Chamber of the Diet (House of Representatives). Despite PM Ishiba only achieving a relative majority, he was elected to keep his position as Prime Minister as of November 11.

3. Budget and Legislation proposals will require support from opposition parties

Budget and Legislation proposals require approval from both chambers of the Diet. While a coalition of the same parties controls the Upper Chamber (House of Councilors), the coalition formed by PM Ishiba does not control the more powerful Lower Chamber. In order to pass future budget and the legislation proposals, an additional 12 votes must be obtained.
　This is the reason why PM Ishiba has been approaching the DPP with its 28 seats to support its budget and the legislation proposals. The DPP refused to join the coalition but suggested that it may support proposals if their policies are respected.
　The DPP is backed by labor unions representing the large companies including the power industry and the auto industry. With this background, their policies are considered to be relatively close to those of the coalition parties. They support business friendly policies, nuclear power, and defense policies. The difference lies in their emphasis of lower tax burden and of lower energy cost.
　As the supplementary budget must be passed to expand various measures to help reconstruct the Noto region hit by a major earthquake and a record-breaking flood, the coalition parties are engaged in a series of negotiations with the DPP. Support will also be necessary to pass the regular budget for the fiscal year 2025 which will be submitted for Diet’s approval next January. Holding the casting vote, the DPP is now enjoying a super-sized influence to advance their own position.
　The DPP appears to be pushing for two major policies. One is to raise the minimum income level for income tax purposes, arguing that it will help households affected by the rising cost of living. The other is to freeze the tax on gasoline to address the rising cost of energy.
　At the time of releasing this month’s Chairman’s Message, the results of those negotiations are not yet known. These points will continue to be negotiated between the parties.

4. Most energy policies will remain unchanged.

Even without the majority, the government can introduce most policies which do not require the Diet’s approval. For budget and legislation proposals which require the support from the DPP, I believe that most energy related measures can be realized as the DPP’s energy policies are largely aligned with the government and the coalition parties.
　As many readers of this Message may have interest in specific policies, I would like to share with you my quick assessment of the impact of the political turmoil on energy policies.
　I believe the existing energy policies will not be changed. For example, policies to promote hydrogen/ammonia will continue to be implemented. These will include CfD, or Cost for Differentials, for hydrogen/ammonia, support for hydrogen/ammonia infrastructure and the pledge of 3 trillion yen or 20 billion US dollars to spend government funds on hydrogen/ammonia. The newly introduced legal framework for CCS will also be implemented as planned.
　The direction of new policies will not change either. Fiscal support for CCS will be introduced and the bill to formally introduce ETS will be submitted to the Diet early next year. The remaining seven trillion yen for GX policy, or Green Transformation policy, out of the 20 trillion yen pledged by former Prime Minister Kishida, will probably be allocated in the coming months.

5. Possible exceptions: Energy subsidy, Cost to users, Nuclear replacement

The subsidy for electricity and city gas, which ended last month, may soon be revived given the DPP’s emphasis to lower the cost of energy. Similarly, the subsidy for gasoline which was supposed to be terminated by the end of this year may restart next year because the DPP is arguing for a freeze on gasoline taxes. Consequently, either a freeze on the tax or an extension of the subsidy may be realized starting next year.
　Although the global energy market is now stabilized, the record cheap yen is pushing up the energy cost in Japan. While energy subsidies are not aligned with the policies to enhance energy efficiency, the political situation in Japan may extend such energy subsidies. As happens in many countries, politics unfortunately often prevails over policies.
　To expand the deployment of hydrogen/ammonia, the Government was considering measures to facilitate the passing on of the additional cost of using hydrogen/ammonia to the users of electricity and city gas. Unfortunately, measures that require legislative actions may face difficulties as the DPP could be negative to measures adding costs to the users. The Government will have to find measures that will not require legislative actions.
　The former PM Kishida endorsed the “replacement” of nuclear reactors which implied constructing new reactors. On the other hand, the new PM Ishiba has not yet explicitly endorsed such “replacement”. With the weakened position of the ruling coalition following the election and with the cautiousness of the coalition partner Komeito on new nuclear, it is not clear if “replacement” will be incorporated in the next Strategic Energy Plan which is now under development. The strong position of the DPP may be helpful on this point. Being backed by labor unions representing the power industry, the DPP should be supporting “replacement”. 　

6. More uncertainty increases the need for a closer watch

This is the first time since the LDP came back to power in December 2012 that the coalition parties do not hold the majority of the Lower Chamber of the Diet. As the support from the DPP is necessary to pass budget and legislation proposals, there is more uncertainty. Negotiations between the coalition parties and the DPP must be closely watched.
　The parties are already looking into the Upper Chamber election which is expected for July next year and they are trying to position themselves to advance in the election. PM Ishiba must convince his members that he can lead the LDP to victory next summer. Political jockeying is expected. While most energy policies are not expected to change much, we will certainly have to keep our eyes on the politics.