News about Japan

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Japan’s deepening political woes cloud budget, rate hike timing

Japan’s deepening political uncertainty risks prolonging policy paralysis that could affect the drafting of next year’s budget and the timing of the central bank’s next interest rate hike, analysts say, clouding the outlook for the fragile economy.
Prime Minister Shigeru Ishiba is facing increased calls from within his ruling Liberal Democratic Party (LDP) to step down and take responsibility for the party’s huge defeat in an upper house election in July and a lower house poll last year.

While Ishiba has denied he has any plans to resign, his fading support has triggered inevitable questions about his political future and analysts say a leadership change would likely have implications for the outlook for fiscal and monetary policy.
In a meeting on Friday, lawmakers decided to consider holding a rare leadership race even with the party head Ishiba still presiding. Under LDP rules, such a race would take place if the majority of the party’s lawmakers and regional heads agreed to hold one.
But it is uncertain how long it would take for the party to decide, according to lawmakers and government officials familiar with the procedure told Reuters.

That contest could happen in September at the earliest, they say, which would allow the new administration to compile a spending package to cushion the economic blow from U.S. tariffs.
But if the race does not take place in September, it may have to wait until early next year to avoid disrupting the government’s drafting of next fiscal year’s budget, they say.
“We would not be surprised if the LDP calls for a leadership election in September,” UBS analysts said in a research note. “It seems that uncertainties regarding politics are unlikely to resolve soon.”
In Japan, the Ministry of Finance collects spending requests from ministries in August and finalises the government’s draft budget in late December. The budget must pass parliament in time to take effect from the April start of a new fiscal year.

Failure to pass the budget through parliament would force the government to compile a stop-gap budget, which could hurt the economy by causing delays in expenditure.
Some ruling party lawmakers say there is no choice but for Ishiba to step down to resolve the deadlock.
Having lost control in both houses of parliament, the LDP-led ruling coalition needs opposition party support to pass legislation and budget through parliament. Opposition parties have ruled out forming a coalition unless Ishiba steps down.
“Japan needs a stable coalition government. Otherwise, it’s impossible to pursue consistent policies,” LDP heavyweight Ken Saito told Reuters last week. “It’s best for the LDP to seek a coalition partner under a new leader.”

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