Japan’s opposition unifies, bringing risks for investors in the 2018 elections
Japan’s opposition have pledged to work closely to counter the ruling LDP coalition in upcoming elections. What do these developments mean for investors in Japan?
On February 26, two of Japan’s main opposition parties, the Democratic Party of Japan (DPJ) and the Japan Innovation Party (JIP) agreed to merge and invited other opposition parties to do the same. This announcement followed on the heels of an agreement between the DPJ, JIP, and three other opposition parties to coordinate in Japan’s upcoming upper house elections against the ruling Liberal Democratic Party (LDP)-Komeito coalition.
What are the possible consequences of these developments for investors?
A marriage of convenience
Under the current plan, the JIP (the smaller of the two parties) will disband and join the DPJ. This will add 21 seats to a renamed DPJ in the lower house (for a total of 93), but none in the upper house, where Diet rules prevent members from joining a party they ran against in the last elections. It will also help combine the limited support each party enjoys on its own (9.3% for the DPJ and 1.2% for the JIP in the most recent polls).
As the numbers indicate, a rebranded DPJ party will still be a long way from challenging the ruling coalition, which enjoys the support of roughly 38% of the Japanese public. As a result, the DPJ and JIP have joined forces with numerous other opposition parties – the Social Democratic Party (SDP), People’s Life Party (PLP), and (controversially) the Communist Party (JCP) – in forming a consultative panel to coordinate the upper house elections this summer.
The panel will also discuss potential coordination of the lower house elections, which are scheduled for 2018 – although the LDP’s leader, Japan’s current PM Shinzo Abe, may call snap elections this year.
Still, these parties’ combined public support is less than half that of the LDP’s in recent polls. The parties hope that by coordinating and presenting a viable alternative to LDP rule, they can win over some of the uncommitted independent voters who make up as much as 35% of the population. The parties also hope to build momentum, gather support, and develop a united front in the lead up to the 2018 lower house elections.
Short-term nuisance, long-term threat
If current polling data is any indication, the opposition coalition is unlikely to unseat the ruling LDP-Komeito government in either the scheduled upper house elections or in potential lower house snap elections. It is quite possible, however, that the DPJ and its partners will stop the ruling coalition from getting a 2/3 majority in the upper house, which would allow the LDP to amend Japan’s “pacifist” constitution.
If the opposition unites and gains momentum, they could eventually present a threat to the LDP dominance in the 2018 general elections. Investors need to hedge against the possibility that the LDP-Komeito coalition could find itself facing a credible threat in the near future.
The viability of the opposition coalition as a contender will be affected by three variables, which investors should monitor closely.
First, the economy will have a dramatic impact on how successful a DPJ-led opposition will prove. Polls indicate that Japanese voters care first and foremost about the health of the economy. Much of the existing discontent with the government stems from Japan’s continued economic struggles and the trials and tribulations of Prime Minister Abe’s “Abenomics.” If Japan’s economy continues to decline, it could galvanize support for the opposition.
Second, Sino-Japanese relations could affect support for the opposition. If relations stabilize, it will hurt the LDP’s claims that its controversial security legislation and the goal of revising the Japanese constitution are necessary for the national security. This could, in turn, erode support for the party and its policies and strengthen support for the more China-friendly JCP and SDP.
Third, intra-opposition politics and maneuvering will play a decisive role in determining whether or not the various opposition parties can present a united front in future elections. The realpolitik logic of “unite or die” is certainly compelling for many party members. Still, there are significant ideological differences between the opposition parties: conservative members of the DPJ and staunch communists in the JCP are less than enthusiastic about working with one another.
Risks for investors and businesses
A DPJ-led challenge to LDP rule would bring with it significant uncertainty for investors. Most of Japan’s opposition parties do not have much experience in governing. In fact, the DPJ’s short term in power from 2009-2012 was marked by poor governance and frequent errors. The competence of a new opposition government would likely be a substantial concern for many investors.
An opposition victory in 2018 could also lead to changes in tax policy. The DPJ, JCP, and SDP have been pushing for more redistributive policies, including more substantial social spending and a tax on financial transactions. Opposition policies could increase the burden on businesses operating in Japan while not addressing Japan’s mounting public debt.
Finally, an opposition victory would likely affect trade policy. The JCP and SDP are opposed to free trade and the DPJ relies heavily on labor union support. These inclinations could lead to greater protectionism and disrupt Japan’s involvement in the recently negotiated Trans-Pacific Partnership. This could curtail emerging opportunities for exporters looking to tap into traditionally protected components of Japan’s market, and could hurt Japanese consumers and importers as well.
The new DPJ-JIP party and its partners do not yet pose a significant threat to LDP-Komeito rule. Still, if Japan’s economy worsens, relations with China remain stable, and the DPJ can rally the disparate opposition parties, the general elections in 2018 could see a range of new political risks for the Japanese economy.