Economic policy in Japan may be hindered by political instability, leading to a cycle of prime ministers.

• Any economic package could be more populist, with social spending and tax cuts, despite the uncertain policy outlook, analysts said.
• One analyst predicts that Japan may return to a time of "revolving door" prime ministers with the short tenure of current Prime Minister Shigeru Ishiba.

The ruling Liberal Democratic Party's failure to secure a majority in the lower house election on Oct. 27 will leave Japan's government weaker to tackle challenges facing the country.

In the words of Prime Minister Shigeru Ishiba, voters delivered a "severe verdict" to the LDP.

The formation of a coalition government and the selection of a prime minister are still uncertain, with 30 days remaining for parties to try. The composition of the coalition government is unclear, casting doubt on the economic policy and the future of Ishiba.

It is likely that Ishiba and the LDP will still be able to form a coalition government, according to William Pesek, author of the book Japanization: What the World Can Learn from Japan's Lost Decades, who spoke on CNBC's "Squawk Box Asia."

"However, the government will be weakened, and there are numerous challenges ahead, including a potential Trump 2.0 presidency," he stated.

Macquarie Capital's Japan equity research head, Damian Thong, wrote in a note that he will monitor Ishiba's efforts to strengthen his position and form a stable coalition to support clear policy.

Thong anticipates that the overall policy status quo will continue under a coalition government, as it will be easier to enact common ground policies such as investing in renewables, regional development, and increasing social spending and tax cuts.

Although Thong predicted no significant changes to the country's defense policy, he noted that a major increase in defense exports may be challenging.

In late 2023, Japan, under then Prime Minister Fumio Kishida, updated its guidelines for selling defense equipment abroad, enabling the country to export finished products to licensee nations, among others.

State Street Global Advisors' senior fixed income strategist, Masahiko Loo, stated that the firm anticipates a larger and more populist fiscal package, regardless of the coalition outcome.

Ishiba on the way out?

The outcome of Ishiba's leadership is uncertain due to the LDP's loss of a majority in the lower house after he called for a snap election.

Ishiba's days as prime minister are "numbered," according to Pesek. The author stated that the government's policy chaos, the big gamble with a snap election, and the resulting blowback are reasons why Ishiba may not deserve to remain prime minister after 30 days.

Ishiba's stubbornness in staying on as prime minister would "certainly" require the party to force him out, according to the embattled politician.

"At some point, party elders may find a way to give him political cover, allowing him to step aside gracefully. As a result, you may witness another party election where they select a new prime minister."

Ishiba's tenure as prime minister is likely to be short due to the election outcome, as James Brady, vice president at consulting and advisory firm Teneo, noted.

Brady predicts a longer timeline for the embattled politician due to the LDP's exhaustion from the prolonged leadership contest in September and the election results.

He believes that Ishiba may be able to guide the party in completing the budget for the 2025 financial year, which begins in April 2025.

Despite the possibility of Ishiba's removal as party leader, there is no clear successor. Analysts have suggested several potential candidates, including former economic security minister Sanae Takaichi, Chief Cabinet Secretary Yoshimasa Hayashi, and finance minister Katsunobu Kato.

The Japanese prime minister's office is at risk of returning to a "revolving door" situation, as noted by State Street's Loo. He pointed out that before Shinzo Abe took office in 2013, the country's prime ministers on average lasted only 382 days.

Since 1972, Japan's prime ministers have typically served less than three years in office, with the exception of Junichiro Koizumi and Shinzo Abe.