Japan’s shock election defeat for the LDP, but policy shift unlikely

The ruling Liberal Democratic party and its partner Komeito lost their majority in Japan’s lower house elections on Sunday, which means the two parties will likely be forced to manage the government as a minority ruling coalition.

What you will learn:

• Despite the febrile political situation, we don’t intend to change our forecasts at this point because the LDP’s wage-driven growth strategy has broad support among opposition parties.
• The Prime Minister Shigeru Ishiba has committed to maintain the economic policy framework of the previous administration. Under greater political pressure, we expect he will focus on pro-growth and market-friendly policies that support vulnerable households and regional economies. Opposition parties may call for greater fiscal expansion to support vulnerable households. However, we think Ishiba will likely refrain from discussing painful revenue measures.
• On monetary policy, although we still assume the Bank of Japan will hike rates in December, the government could become more cautious about the pace of normalization.