Japan's next prime minister is a career dissenter, but experts believe he may struggle to govern as one.

Japan's next prime minister is a career dissenter, but experts believe he may struggle to govern as one.
Japan's next prime minister is a career dissenter, but experts believe he may struggle to govern as one.
  • On Friday, the experienced politician who won his fifth term as leader of the Liberal Democratic Party was a long-time critic of former Prime Minister Shinzo Abe and his economic policies.
  • The new leader may moderate on some of his positions, posing challenges to Shigeru Ishiba's agenda.

Despite being the next leader of Japan, Shigeru Ishiba, a political outsider known for opposing party orthodoxy, may struggle to govern as such, according to some experts.

The politician who won his fifth term as head of the Liberal Democratic Party on Friday has consistently criticized former Prime Minister Abe's "Abenomics" policies, which include loose monetary policy, fiscal stimulus, and structural economic reforms such as tax cuts.

Ishiba has expressed support for increasing taxes and fiscal tightening, while also opposing the Bank of Japan's negative interest rate policy, which was initiated under Abe.

The legacy of Shinzo Abe remains significant, and the question of how to engage with it and whether it's time to make it a divisive issue in the LDP race is a topic of discussion, according to Tobias Harris, founder and principal of Foresight.

Ishiba emerged victorious in the runoff election, defeating Takaichi, who was aligned with Abenomics. Japan's parliament will officially appoint Ishiba as prime minister on Tuesday.

According to Sayumi Shirai, a professor at Keio University and a former BOJ board member, Ishiba and Takaichi represent different wings of the party based on their past statements.

The economist expressed doubt about Ishiba's ability to implement his outsider policies and philosophies.

Ishiba's statement at a press conference after his victory could signal a shift from past support of interest rate hikes, suggesting that Japan's monetary policy should remain accommodative to the economy.

According to Shirai, Japan's deflation struggles are linked to low domestic demand, despite reporting an inflation rate of 3% in August. He also suggested following Prime Minister Fumio Kishida's approach to address years of deflationary pressures.

The continuation of the concept of deflation from Abenomics to Kishida's term implies that the BOJ will need to maintain very low interest rates for an extended period.

Analyst: Ishiba becoming Japan's Prime Minister increases our resolve that BOJ will not hike rates

On Monday, Japan's stocks fell as traders responded to the election, with some experts predicting that it would pave the way for the BOJ to increase rates further. The benchmark had its worst day since 1987 following the BOJ's rate hike at the end of July.

Ishiba may face challenges in supporting rate hikes due to market and economic uncertainty, as one BOJ member stated in a Tuesday summary of opinions that the Bank will not raise its policy interest rate during periods of financial and capital market instability.

On Monday, Steven Glass of Pella Funds stated on CNBC's "Squawk Box Asia" that Japan's economic conditions were weak and would not support another interest rate hike at the moment.

The politician's victory has increased our conviction that BOJ will not raise rates at this time, as we believe it does not make sense to do so, and Ishiba supports this policy, according to what he said.

Ishiba's policy proposals to support rural and young communities and reduce Japan's budget deficit may require tax increases, which could be unpopular among certain political groups.

On Tuesday, Mio Kato of LightStream Research stated on CNBC's "Squawk Box Asia" that Kishida initially proposed bolder policies, including tax increases, but later backed down due to opposition and unfavorable market reactions.

According to him, altering the overall direction of the LDP is challenging for individual politicians, and he predicts that Japan's current economic policy direction will not undergo significant changes.

Professor Shirai from Keio University believes that Ishiba may feel a greater urge to satisfy Kishida's more moderate faction within the party, who played a crucial role in his election on Friday.

Ishiba must be able to communicate openly with the public and promote policies that may be controversial and face opposition in order to become a transformative leader. It remains uncertain if he can handle this challenge.

Japan Foresight's Harris believes that Japan may not be fully prepared to abandon elements of Abenomics, including fiscal spending and the notion that the government can stimulate economic growth through deficit spending.

Despite Ishiba's criticism of Abenomics, it seems that there is not much enthusiasm to prioritize spending cuts or tax hikes, indicating that we may not be ready to completely abandon Abenomics.

by Dylan Butts

Politics