Newly elected leader and incumbent leader of the Liberal Democratic Party (LDP) Shigeru Ishiba speaks during a press conference after his election in the party leadership election on September 27, 2024 in Tokyo, Japan.
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Shigeru Ishiba, the man expected to become Japan's next leader, has made a career as a political outsider and opponent of party orthodoxy. However, some experts doubt that the former defense minister will be able to govern as such.
The veteran politician, who won his fifth bid to lead the Liberal Democratic Party on Friday, has long been a critic of former Prime Minister Shinzo Abe and his legacy of “Abenomics,” commonly defined by loose monetary policy, fiscal stimulus and structural economic reforms such as tax cuts.
Ishiba, on the other hand, has expressed support for tax hikes and fiscal tightening while opposing the Bank of Japan's long-standing negative interest rate policy that began under Abe.
“Shinzo Abe's legacy is still enormous, and how to deal with that legacy and whether it is time to correct course has become a crucial question in the race for the LDP,” said Tobias Harris, founder and Director of Japan Foresight.
The election ultimately ended in a runoff in which Ishiba defeated Economic Security Minister Sanae Takaichi, who presented herself as the more pro-Abenomics candidate. The Japanese parliament is expected to formally elect Ishiba for the role on Tuesday.
“Based on what he has said in the past, he seems to be a leader with a new mindset and vision for the country,” said Sayuri Shirai, a professor at Keio University and former BOJ board member, adding, that Ishiba and Takaichi represented very different wings of the party.
However, the economist said there was still much uncertainty over whether Ishiba could actually implement some of the outsider policies and philosophies that have characterized his political career.
In a news conference shortly after his victory, Ishiba advised reporters that Japan's monetary policy should remain accommodative to the economy, in a statement that could signal a break with previous support for interest rate hikes.
He also reportedly suggested he would follow Prime Minister Fumio Kishida's approach and try to pull Japan out of years of deflationary pressures. While Japan reported an inflation rate of 3% in August, the idea that it is struggling with deflation is linked to low domestic demand, according to Shirai.
“This deflation concept is a continuation of Abenomics during Kishida’s term. As long as they continue to say this, it suggests that the BOJ will have to keep interest rates very low for a very long time,” she said.
Regardless, Japanese stocks fell on Monday as traders reacted to the election. Some experts predicted this would pave the way for the BOJ to raise interest rates further. Japan's benchmark Nikkei 225 Shortly after the BOJ raised interest rates in late July, the country recorded its worst day since 1987.
Experts warned that market and economic uncertainties could make it harder for Ishiba to support interest rate hikes. In a summary of opinions from the September meeting published on Tuesday, a BOJ member said: “The bank will not raise its key interest rate if financial and capital markets are unstable.”
Speaking to CNBC's “Squawk Box Asia” on Monday, Steven Glass of Pella Funds said he felt Japan's economy was weak and would not support another rate hike at the moment.
“We don't think it makes sense for the BOJ to raise interest rates at this time and we see Ishiba supporting this policy,” he said, adding that the politician's victory reinforces the company's belief that interest rates remain unchanged will remain.
Meanwhile, Ishiba's policy proposals aimed at increasing public support for rural and young communities, coupled with his desire to reduce Japan's budget deficit, could require tax increases. This would be unpopular with certain political factions in the country.
Speaking to CNBC's “Squawk Box Asia” on Tuesday, LightStream Research's Mio Kato said that Kishida proposed bolder measures such as tax hikes when he was first elected, but ultimately withdrew many of them amid opposition and negative market reactions.
“In terms of how the LDP works, it is much more difficult for individual politicians to change the overall direction of the party very much,” he said, adding that he doesn't expect too much of a change in Japan's current economic policy direction.
According to Keio Professor Shirai, Ishiba may also feel an increased need to appease Kishida's more moderate party faction after it helped elect him on Friday.
“To be a transformational leader, Ishiba must be able to be honest with the public and sell policies such as taxes that may be unpopular and attract criticism. So far it is uncertain whether he can withstand this,” said Shirai.
Meanwhile, Harris of Japan Foresight says he doubts Japan is ready to fully abandon aspects of Abenomics such as government spending and the belief that the government can lead the economy out of its deficit problems.
“It lacks the guts to prioritize spending cuts or tax increases… in that sense we don't seem ready to abandon Abenomics, even though Ishiba was a big critic of it,” he said.
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