How could Japan's election affect economic policy?
Japan's Liberal Democratic Party ruling coalition may lose its majority in the upper house in an election on Sunday, which could heighten calls for the government to boost spending and cut tax.
Here is a guide on how the election outcome could affect Japan's fiscal and monetary policy:
LOOMING POLITICAL UNCERTAINTY
Recent media polls show the LDP coalition could lose its majority, heightening the risk of political instability when the country is struggling to strike a trade deal with the U.S., and stoking fears of an increase in debt. Japan's debt burden is the highest in the developed world at about 250% of GDP.
Prime Minister Shigeru Ishiba is regarded as a fiscal hawk, but concern over possible increased spending by parties to ensure political support on Tuesday pushed up bond yields to multi-decade highs. Yields may rise further if the chance of big spending or a sales tax cut increases.
WOULD JAPAN HAVE A NEW PRIME MINISTER?
If the election loss is small, Ishiba could remain prime minister and seek opposition parties' cooperation to pass bills through parliament. Faced with a big defeat, Ishiba could step down and his party will hold a leadership race to choose a successor. Depending on the extent of loss, there is a slim chance a new premier could be chosen from an opposition party.
WOULD JAPAN SEE BIGGER SPENDING?
Regardless of the election outcome, Japan will increase spending as Ishiba has pledged to offer cash payouts to households to ease the cost of living. The estimated 3.5 trillion yen ($23.6 billion) in payouts will be funded by tax revenues.
But spending may balloon if the LDP coalition suffers a big loss, as it would heighten calls from within the party and opposition forces to take bolder steps to cushion rising living costs.
Some analysts expect Japan to compile an extra budget around autumn this year to fund spending of at least 10 trillion yen, which will likely require additional debt issuance.
HOW LIKELY IS A CUT TO JAPAN'S SALES TAX RATE?
Japan's sales tax rate is set at 10%, except for food items at 8%. Ishiba has shunned opposition calls to slash the sales tax, which funds social welfare costs for a rapidly ageing population. An election defeat could force Ishiba to cut sales tax, which would leave a huge hole in Japan's finances.
Excluding proceeds from debt issuance, the sales tax is Japan's biggest source of revenue. In fiscal 2025, it collected 25 trillion yen, or 21.6% of total budget. Analysts say halving the tax rate would cut revenues by over 10 trillion yen.
A sales tax cut will require passing legislation through parliament, so will not take place until April at the earliest.
WHAT WOULD BE JAPAN'S WORST-CASE SCENARIO?
A worst-case scenario is a credit rating downgrade on Japan's sovereign debt, which could trigger a triple selling of bonds, yen and Japanese stocks - and boost the cost of dollar funding for Japanese banks.
Moody's Ratings has said an increase in tax cut pressure could be negative for Japan's rating depending on the size and duration of the cut. It rates Japan A1, the fifth-highest level.
HOW WOULD THE ELECTION OUTCOME AFFECT BOJ POLICY?
The ruling coalition has given a quite nod to gradual interest rate hikes, as has the biggest opposition Constitutional Democratic Party of Japan. If the clout of other smaller opposition parties increases, the BOJ could come under pressure to go slow in rate hikes.
But the BOJ's long-term rate hike path is unlikely to be affected unless Ishiba is replaced by vocal advocates of bold monetary easing like Sanae Takaichi, who Ishiba narrowly defeated in a LDP leadership race last year.
© (c) Copyright Thomson Reuters 2025.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Japan Today
19 minutes ago
- Japan Today
Japanese woman injured in subway station attack in China
Photo shows the subway station thought to be where a Japanese woman was attacked in Suzhou, eastern China, on Aug. 1, 2025. (Kyodo) ==Kyodo A Japanese woman was assaulted while walking with her child at a subway station in Suzhou, eastern China, sustaining a non-life-threatening injury, the Japanese Consulate General in Shanghai and sources familiar with bilateral relations said Friday. Chinese authorities detained a suspect allegedly involved in the Thursday evening incident in Suzhou, the same city in Jiangsu Province where a Japanese mother and child were injured and a Chinese woman was killed in a knife attack in June last year. The Japanese government urged China to prevent similar incidents and ensure the safety of Japanese nationals. In the latest incident, the Japanese national was struck with a hard object and was treated at a hospital, according to the Japanese consulate general. It was not immediately clear what led to the attack on Thursday. An informed source said the attack reportedly occurred after the woman and child got off the subway train and the child tried to go to the restroom. With this year marking the 80th anniversary of what China calls its victory in the 1937-1945 War of Resistance against Japanese Aggression, the Japanese Embassy in Beijing has warned citizens of rising anti-Japan sentiment. On Sept. 3, China plans to hold a military parade in the capital's Tiananmen Square to commemorate the war anniversary. The consulate general also urged Japanese expatriates in China to remain vigilant when going out, especially when accompanied by children, and to watch for suspicious individuals. A mother whose child attends a Japanese school in Suzhou said, "Parents are all shocked. I will avoid going out with my child." The Chinese Foreign Ministry said it will take effective measures to ensure the safety of foreigners. The Japanese Chamber of Commerce and Industry in China said in a statement Friday that it is "extremely regrettable" that the latest incident occurred following the knife attack in Suzhou and the fatal stabbing of a 10-year-old Japanese boy in Shenzhen in September. A Chinese film on the massacre in Nanjing committed by Japanese troops in 1937 hit screens on July 25, with more than 28 million people viewing it in a week, according to Chinese media. The Shenzhen stabbing incident occurred on Sept. 18 last year, the 93rd anniversary of the Japanese bombing of a railroad track near Shenyang -- an event that marked the start of the Manchurian Incident, leading to Japan's invasion of northeastern China. © KYODO
Nikkei Asia
19 minutes ago
- Nikkei Asia
Trump tariffs underscore need for Japan firms to cultivate new markets
A container ship at a port in Yokohama on Aug. 1. © Kyodo CHIHIRO UCHIYAMA TOKYO -- The new U.S. "reciprocal" tariffs on Japanese goods highlight the importance of developing a stronger presence in emerging markets to bolster Japan's economic resilience to risk. A 15% tariff on imports from Japan is set to take effect Aug. 7.
Yomiuri Shimbun
an hour ago
- Yomiuri Shimbun
Rapp-Hooper: Like-Minded Countries Show Resilience Despite U.S. Unpredictability; No More Important U.S. Ally Than Japan
The tariff measures of the administration of U.S. President Donald Trump have revealed that being a privileged U.S. security partner does not necessarily mean being a privileged economic partner, former Director for Indo-Pacific Strategy of the U.S. National Security Council Mira Rapp-Hooper said in a recent interview with The Yomiuri Shimbun. The following is excerpted from the interview, which was conducted by Yomiuri Shimbun Correspondent Yuko Mukai. *** I'm very relieved that the United States and Japan were able to conclude a trade negotiation after intensive engagements over the last many months. Japan is a critical ally to the United States and a critical economic partner, and having trade issues remain an irritant would have placed downward pressure on the totality of the relationship. We calculated that the LDP's setback [in the House of Councillors election on July 20] would actually make a trade deal more difficult in the coming days, but the fact that a trade deal was reached is testimony to the fact that both sides had done a good job of preparing for that moment of opportunity when it came. The critical piece, as I understand, is that the Trump administration finally demonstrated flexibility on auto tariffs, which up until that point, it had not done, and the Japanese government was then able to grant a little bit of flexibility on rice imports under the existing quota, which was something that mattered a lot to the Trump administration. I also think that elements of this trade deal recognize the critical role that Japan already plays in the U.S. economy, such as as a driver of high quality investment. I think there's no doubt that the tariff policy has impacted public opinion of the United States, in Japan and around the world, especially in allied countries. Part of what is being captured in that public opinion is, for allied countries, typically American security commitments and American economic commitments, openness to trade, have traveled together. So, part of what was demonstrated in the April 2nd tariffs was the fact that just because you are a privileged U.S. security partner did not mean you would be a privileged U.S. economic partner. The era that we knew as the post-Cold War era has come to an end, and we are at a moment of significant flux in which we don't exactly know how we will define the international order that is coming next. We are headed into a world that is much more multipolar. In that world, the United States is still extremely powerful, but it has competition when it comes to the exercise of its power on the global stage, and power is much more diffused than it has been in any time in recent memory. President Trump is playing the role of an accelerant, or an accelerator, on these trends towards multipolarity. Obviously, China is going to be extremely powerful. So too do we expect economies like India to keep growing at a significant rate. It is very hard to know after three more years of Donald Trump's presidency, where exactly this will all leave us. What is clear is that the United States is not going to be able to go back into the exact same leadership position that [it] has occupied during the post-Cold War period. It's going to need to adjust itself come 2029, once President Trump is no longer president, to a changed set of global circumstances. That certainly means finding a way to renew its relationships with key allies, because those are such an essential part of American power. And I think you even saw over the course of [former U.S.] President [Joe] Biden's four years, the challenges sort of piling up in ways that tested the United States' ability to do everything it wanted to do on the global stage. Just a year into the administration, Russia invaded Ukraine. In 2023, you saw another horrible attack on Oct. 7 that plunged the Middle East into conflict, Americans have demonstrated, in their public opinion over the course of the last couple of decades, increasing disaffection with American involvement in faraway, long-lasting wars, and have some skepticism about vast expenditure overseas, if they think those same dollars could be used at home. I think one of the really critical charges for whomever the next U.S. president will be, whether they be a Democrat or a more mainstream Republican, will be to think about how to link our foreign policy objectives on the global stage to a rhetoric and a narrative capability that actually works for the American people. Part of the beauty of what the United States built with Japan and other regional partners over recent years is that those networks of alliances and partnerships in the Indo Pacific and in Europe have actually created resilience amongst allies and partners that they can draw upon now. So whether it's Japan's leadership in the Quad [a cooperation framework among Japan, the United States, Australia and India], the U.S.-ROK-Japan trilateral, Japan's relationships with India, Australia, Vietnam individually, or the fact that Japan has forged much stronger ties with NATO [North Atlantic Treaty Organization] allies, these are all basically like-minded countries that came together because they agreed they had a common set of strategic objectives in the world at a moment where the United States may feel more unpredictable, a little bit less reliable in its day to day interactions. It is highly likely that wherever the United States winds up three years from now, we are still living in a world where Democrats and Republicans in Congress agree that Asia is the priority theater for the future and that there is no more important ally in Rapp-Hooper Mira Rapp-Hooper served as director for Indo-Pacific strategy of the U.S. National Security Council under the administration led by former U.S. President Joe Biden. She joined the administration after working on Hillary Clinton's U.S. presidential election campaign. Rapp-Hooper holds a doctorate from Columbia University. She is a partner at The Asia Group, a consulting firm led by former U.S. Deputy Secretary of State Kurt Campbell.
