Japan’s new outsider leader will face challenges to his dissenting policies

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Japan’s new outsider leader will face challenges to his dissenting policies

Newly-elected leader and sitting chairperson of the ******** Democratic Party (LDP) Shigeru Ishiba speaks during a press conference following his election in the party leadership elections on September 27, 2024 in Tokyo, Japan.

Pool | Getty Images News | Getty Images

Shigeru Ishiba, the man set to become the next leader of Japan, has made a career as a political outsider and opponent of party orthodoxy. However, some experts doubt that the former defense minister will manage to govern as such.

The seasoned politician who won his fifth bid to become the head of the ******** 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 shown support for

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and fiscal tightening while also having

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of negative interest rates that started under Abe.

“The legacy of Shinzo Abe is still enormous, and how to engage with that legacy and whether it’s time to became a dividing question in the LDP race,” said Tobias Harris, founder and principal of Foresight.

The election ultimately came down to a runoff in which Ishiba defeated economic security minister Sanae Takaichi, who presented herself as

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. Japan’s parliament is expected to formally vote Ishiba into the role Tuesday.

“Based on what he’s said in the past, he appears to be a leader with a new mindset and vision for the country,” said Sayuri Shirai, professor at Keio University and a former BOJ board member, adding that Ishiba and Takaichi had represented very different wings of the party.

But the economist said there’s still a lot of uncertainty about whether Ishiba can actually follow through with some of the outsider policies and philosophies that have defined his political career. 

In a press conference soon after his victory, Ishiba

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that Japan’s monetary policy should remain accommodative to the economy in a statement that could signal a break with

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.

He also reportedly suggested he would follow Prime Minister Fumio Kishida’s approach of trying to pull Japan out of years of deflationary pressures. While Japan reported an

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in August, the idea that it struggles with deflation is tied to low domestic demand, according to Shirai.

“This concept of deflation is a continuation from Abenomics through Kishida’s term. As long as they continue to say this, it suggests that the BOJ will need to keep very low interest rates for a very long time,” she said. 

Regardless, Japan stocks fell on Monday as traders reacted to the election, with some experts predicting it will clear the way for the BOJ to further raise rates. Japan’s benchmark Nikkei 225 logged its worst day since 1987 soon after the BOJ increased rates at the end of July.

Experts warned that market and economic uncertainty could make it ******* for Ishiba to support rate hikes. In a summary of opinions published Tuesday from its September meeting, one BOJ member said “the Bank will not raise its policy interest rate when financial and capital markets are unstable.”

Speaking to CNBC’s “Squawk Box Asia” on Monday, Steven Glass of Pella Funds said that he felt that Japan’s economic conditions were weak and would not support another interest rate hike at the moment.

“We don’t think it makes sense for BOJ to raise rates right now, and we see Ishiba as supportive of that policy,” he said, adding that the politician’s victory increases the firm’s conviction that rates will stay put. 

Meanwhile, Ishiba’s policy proposals aimed at providing more public support to rural and young communities, paired with his ******* to reduce Japan’s budget deficit could necessitate tax increases. This would be unpopular with certain political factions in the country.

Speaking to CNBC’s “Squawk Box Asia” on Tuesday, Mio Kato of LightStream Research said that when Kishida was first elected, he had proposed bolder policies such as tax hikes, but eventually

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amid opposition and negative market reactions.

“In terms of the way that LDP works, it’s a lot more difficult, for individual politicians to very strongly change the overall direction of the party,” he said, adding he isn’t expecting 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 faction of the party after they helped elect him on Friday.

“To be a transformative leader, Ishiba will need to be able to be honest with the public and sell policies like taxes that might be more unpopular and attract criticism. So far, it’s uncertain if he can stand up to this,” Shirai said.

Meanwhile, Japan Foresight’s Harris says he doubts that Japan is ready to completely leave behind aspects of Abenomics such as fiscal spending and the belief that the government can grow the economy out of its deficit issues.

“There’s not a whole lot of stomach to prioritize spending cuts or tax hikes … in that sense, it doesn’t seem that we’re ready to leave Abenomics behind despite all that Ishiba has been a big critic of it,” he said.

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