Shigeru Ishiba Elected as Leader of Japan’s Liberal Democratic Party

Unexpected Victory for Ishiba

In a surprising turn of events, Shigeru Ishiba, who was not the favored candidate in the Liberal Democratic Party (LDP) leadership election, has been elected as the leader of Japan's ruling party. Ishiba, known for his hawkish stance on China and monetary policy, has pledged to fight against the nation falling back into deflation and to strive for a more balanced defense relationship with the United States. The 67-year-old former defense and agriculture minister, on his fifth attempt, will succeed Fumio Kishida as Japan’s prime minister after a parliamentary vote on October 1. His main competitor, Sanae Takaichi, a popular follower of Abenomics and monetary dove, was expected to win the first vote round, but lost in the runoff, leading to a surge in the yen.

Unusual LDP Leadership Race

The LDP leadership race was highly unusual this year, with a record nine candidates contesting. The race was further intensified by the party's decision to disband most of the factions that have historically controlled internal votes. Takaichi had a firm lead after the first round, securing 181 or 25% of the vote, leading both Ishiba and Koizumi. However, in the runoff round, she ended up losing, having barely picked up any votes.

Market Reactions to Ishiba’s Victory

Following the declaration of Ishiba’s victory, the yen surged more than 1 per cent against the dollar. This surge was due to market perceptions that Ishiba would not resist efforts by the Bank of Japan to normalize monetary policy and to push ahead with interest rate increases. However, with the latest Japanese inflation figures confirming the country's inflation rate is now tumbling fast, the Bank of Japan will likely have to cut rates soon.

Ishiba’s Future Plans

Ishiba, who has been a consistent hawk on China, has also expressed dissatisfaction with what he sees as Japan’s structurally unequal alliance with the US. In recent years, he has proposed changes to the relationship, including shared access to US bases on Japanese soil. During his campaign, Ishiba stated that he favored companies shouldering a greater part of the tax burden. He also expressed the need to ensure the country does not fall back into deflation. However, he will soon discover which outcome the people prefer: overtightening monetary policy or another stock market crash.

Continuity in Economic Policy

According to Katsuhiko Aiba, chief economist at Citi, Ishiba's economic policy is unlikely to be significantly different from that of Kishida. Ishiba will probably put together a new economic package aimed at combating higher prices and promoting wage hikes before the year-end.

Security and Disaster Management

Ishiba’s campaign proposals included the creation of an “Asian NATO” to counter the rise of China. He also plans to create a full ministry to handle disaster management in a country regularly hit by earthquakes and increasingly dealing with large-scale flooding and other extreme weather events.

Impact on Japanese Equities

Japanese equities had risen earlier in the day amid expectations that one of Ishiba’s more market-friendly rivals would win. However, Nikkei 225 futures slumped more than 3% in the first hours of trading in Chicago, suggesting share prices could come under pressure when the Tokyo market reopens on Monday.

Bottom Line

The unexpected victory of Shigeru Ishiba in the LDP leadership race has significant implications for Japan's future economic and security policies. It will be interesting to see how Ishiba's leadership will impact Japan's relationship with China, its monetary policy, and its approach to disaster management. What are your thoughts on this development? Share this article with your friends and let us know your views. Don't forget to sign up for the Daily Briefing, which is everyday at 6pm.