(Bloomberg) -- Japan looks set for one of its closest national elections in years as voters go to the polls Sunday to decide whether to keep the scandal-tainted Liberal Democratic Party in power.
Forecasts by Japanese media outlets suggest the LDP will win the most votes but may lose its overall majority in the lower house of parliament, and possibly even control of government with its coalition partner, Komeito. In the latter scenario, the LDP may still be able to cling on to power with the help of other friendly lawmakers or by bringing another party into the coalition.
A change of government is a more remote possibility, according to the forecasts, but almost every plausible outcome will result in a weakened administration, putting Prime Minister Shigeru Ishiba on the back foot less than a month after he became national leader.
At the heart of voter discontent with the ruling party are revelations from last year that LDP lawmakers were lining their pockets by concealing income generated at fund-raising events. While dozens of LDP politicians were punished by the LDP and many powerful groups within the party disbanded, opinion polls indicate that many voters feel the response has been insufficient.
Amplifying angst among voters is the strongest inflation in decades, a factor that has squeezed household spending power despite an uptick in wage growth.
A bruising at the ballot box would likely make it harder for Ishiba to push ahead with his policy goals, including ramping up funding for regional growth and raising taxes to pay for increased defense spending. A setback could force Ishiba to take more populist steps, such as extra welfare spending or even tax cuts.
Ishiba has already pledged to make the next economic stimulus package bigger than last year’s, which was funded by a 13 trillion yen ($86 billion) extra budget requiring an issuance of more government debt.
The yen and Japanese stocks could come under pressure from the emergence of a more fragile LDP-led government after the election, strategists say while party opponents of Bank of Japan rate hikes may be emboldened to speak out.
“If Ishiba is weakened, it could be significant given that there are some strong views inside the LDP on BOJ policy, such as those of Sanae Takaichi,” said Jeff Young, the founder of New York-based consultancy DeepMacro, who worked as an economist for Japan at Salomon Brothers during the 1990s.
Takaichi narrowly lost to Ishiba in a party leadership election last month after campaigning on a platform of fiscal and monetary stimulus. During the campaign she said it was “dumb” for the BOJ to be raising interest rates.
The election pits Ishiba’s LDP against a fractured collection of opposition parties of which the biggest is the Constitutional Democratic Party led by former Prime Minister Yoshihiko Noda. The CDP is largely aligned with the LDP on Japan’s security alliance with the US, as well as the need to ease the cost-of-living crunch and to push wage growth above inflation.
The CDP may benefit from a protest vote over the ruling party’s slush-fund scandal and garner support from progressives with strong views on issues such as the right to use separate surnames after marriage. These themes appear to have resonated more with the electorate than the CDP’s aim to reduce the central bank’s inflation target to “above zero” from 2%.
The LDP-Komeito coalition had a comfortable majority of 279 of the 465 seats in parliament going into the election, but voter anger over the funding scandal is expected to lead to deep cuts to its seat count. Ishiba has set a goal of reaching the minimum 233 seats needed to keep control of the lower house, the more powerful of the two chambers of parliament, with Komeito.
Recent opinion polls suggest the coalition may fall short of that target for the first time since it lost power in a lower house election in 2009. If that happens, Ishiba may turn to the support of lawmakers from the LDP who were barred from representing the party in the election because of their role in the scandal that has undermined public support.
Of 12 LDP members stripped of official backing in the election by Ishiba, 10 are standing as independent candidates. The lawmakers include former trade minister Koichi Hagiuda and former education minister Hakubun Shimomura, both of whom had sway within the party before news of the slush funds broke last year. Media forecasts suggest a handful of the candidates will win seats in the election.
Ishiba may also need to try and bring another party into the coalition if it is still short of a majority. Ahead of the election, centrist opposition parties have said they may cooperate with the LDP on some policy issues, but none has indicated it would be willing to join the coalition.
Most forecasts predict the LDP will still be the largest party in parliament after the election, making it unlikely that Noda’s CDP can take control of government by building a coalition of its own. The CDP is the successor to the party that governed Japan during 2009 to 2012, when the LDP was last out of power.
--With assistance from Yoshiaki Nohara, Takaaki Iwabu and Isabel Reynolds.
