Japan's LDP leadership race heats up amid risky tax-cut populism

The process to select Japan's next leader and head of its ruling Liberal Democratic Party has turned into a crowded competition, with several candidates throwing their hats into the ring.

As outgoing Japanese Prime Minister Shigeru Ishiba's beleaguered LDP struggles to cobble numbers and stay in power, the country's former economic security minister Takayuki Kobayashi, Chief Cabinet Secretary Yoshimasa Hayashi and Agriculture Minister Shinjiro Koizumi have all announced their bids for the upcoming LDP leadership election.

They have emphasized the need to maintain party unity and promised measures to either promote economic growth or address rising prices.

Toshimitsu Motegi, a former foreign minister and former LDP secretary-general, was the first to raise his hand for candidacy last week, while Sanae Takaichi, a former economic security minister, is expected to announce her bid later this week.

In early September, Ishiba announced that he would resign as head of the LDP — and eventually as Japan's prime minister — to take responsibility for the historic defeat in the summer parliamentary election, making way for his successor to be chosen in a party leadership race now scheduled for Oct 4.

Japanese experts said the new LDP leader, who will head a minority government, will face the urgent challenge of working with opposition parties, most of which are pushing for "populist tax cuts", while also having to guard against the United Kingdom-style bond market volatility referred to as the "Truss shock".

Hidetoshi Tashiro, chief economist at Japanese consultancy Infinity LLC, said the willingness of LDP presidential candidates to adopt the tax-cut populism promoted by the far-right Sanseito party and the left-leaning Reiwa Shinsengumi will be crucial.

Tashiro said that this willingness will determine whether they can become qualified leaders capable of guiding the LDP to victory in the next election for the House of Representatives, the lower house of Japan's National Diet.

The latest poll conducted by Japanese public broadcaster NHK indicated that Sanseito is leading among voters ages 18 to 39, with 14.9 percent support, surpassing the LDP's 13.4 percent, while its overall backing stands at 6.3 percent, behind the LDP's 27.9 percent, making it the second most popular party.

Progressive policies

Tashiro said that Sanseito's adoption of policies from Reiwa Shinsengumi — such as abolishing the consumption tax and pursuing active fiscal measures — has quickly drawn support from young voters, as well as those in lower and middle-income groups.

This generational shift will put pressure on the new LDP leader to include clearer tax-cut positions ahead of the next lower house election, he said.

The LDP-led ruling coalition, currently without an outright majority in both houses of parliament, bears the burden of implementing tax cuts and increasing spending.

Significant shock

Following Ishiba's resignation announcement, the yield on 30-year Japanese government bonds rose by 8.5 basis points to reach a record high of 3.285 percent on Sept 8, while the 20-year yield increased by 3.5 basis points to reach 2.670 percent. There were no transactions for 40-year bonds on that day.

Tashiro said that if Ishiba's announcement alone caused such a significant shock, the election of a new leader could drive up government bond yields further, while the range of bonds that fail to trade might also widen.

The chief economist warned that the new administration will urgently need to address the risk of a repeat of the "Truss shock "that hit the UK in September 2022, following which Elizabeth Truss was forced to step down as the shortest-serving prime minister in British history.

According to media platform Nikkei Asia, estimated debt-servicing costs for the 2026 fiscal year exceed a record 32 trillion yen ($219 billion). Social welfare and other policy expenditures are also set to grow, pushing total budget requests from ministries and agencies above 122 trillion yen for the first time.

Sayuri Kawamura, chief economist at Japan Research Institute, told Nikkei Asia that if the next government pursues an expansionary fiscal policy, "Japan could face a situation similar to the UK's 'Truss shock', where concerns about fiscal policy triggered a surge in interest rates".

Ukeru Magosaki, director of the East Asian Community Institute and a former senior official at Japan's Ministry of Foreign Affairs, said that policy statements by LDP presidential candidates "should not be given too much weight".

In the first round, all candidates will engage in policy debates to win the support of party members, he said, emphasizing that the final decisions of lawmakers are not strongly influenced by their publicly stated positions, but are determined by factional ties and personal alliances.

houjunjie@chinadaily.com.cn