Japan LDP Leader Takaichi’s Premiership Prospects in Limbo After Sudden Exit of Coalition Partner, Stirring Market Uncertainty

TOKYO (MaceNews) - Sanae Takaichi, who became the Liberal Democratic Party’s first female leader in early October, is facing a critical moment after the abrupt departure of its long-time coalition partner, Komeito, ending more than a quarter-century of alliance.

The unexpected breakup could heighten volatility in Japanese stocks, government bonds and currency markets amid renewed political uncertainty. Earlier expectations that Takaichi could become Japan’s first female prime minister had lifted share prices but weighed on bonds.

Just a week after Takaichi’s victory in the LDP leadership race, Japan’s political landscape has entered uncharted territory as the ruling party loses the partner that had backed up its political stability for the past 26 years.

COALITION BREAKS

Komeito abruptly left its coalition with the LDP on October 10, blaming the ruling party for failing to rebuild public trust over its handling of a campaign funding scandal. The situation worsened after Takaichi announced she would no longer punish lawmakers implicated in the scandal, especially following her appointment of Koichi Hagiuda as the powerful executive acting secretary-general.

Hagiuda, a former senior member of the faction once led by the late Prime Minister Shinzo Abe, was at the center of the political slush fund scandal. He failed to report more than JPY 27 million (USD 177,000) in political funds as required by law and was suspended from the LDP for one year in April 2024.

Komeito leader Tetsuo Saito appeared on NHK’s political talk show Nichiyo Toron (Sunday Debate), where he said he hopes to start discussions with the LDP and the main opposition Constitutional Democratic Party (CDP) on tightening rules on corporate and organizational political donations.

When asked how Komeito would act in the upcoming parliamentary vote to choose Japan’s next prime minister, Saito said on the public broadcaster NHK, “If there’s a runoff, we’ll decide after carefully discussing the matter within the party while watching how the political situation unfolds. We have made no decision at this point. Having worked with the LDP for 26 years, I personally can’t imagine writing down the name of an opposition party leader right after leaving the coalition.”

On the possibility of rejoining the coalition with the LDP, the Komeito leader said the party would not rule out discussions if the LDP fully accepts its conditions, including a thorough clarification of the political funds issue and stricter rules on corporate and organizational donations. Saito added, however, “Our decision to leave the coalition carries significant weight, so it’s not something we can easily reverse by simply saying we’ll return right away.”

UNCERTAINTY OVER NEXT PREMIER

Following Komeito’s departure, it is now unclear whether Takaichi, who was only recently elected as the LDP’s first female leader, can still become Japan’s first female prime minister. The breakup may encourage opposition parties to unite behind a single candidate in a parliamentary vote now expected in late October. The vote was initially slated for October 15, but is reportedly being pushed back to later in October.

In this situation, the CDP has signaled it may back Yuichiro Tamaki, the head of the populist Democratic Party for the People (DPP), as a challenger to Takaichi. Tamaki said in a post on X that he was “prepared to serve as prime minister” and was honored by the CDP’s support.

When parliament convenes to vote on the next premier, opposition parties can nominate their own candidates. Any candidate securing a simple majority in the first round wins. Still, if not, the top two vote-getters advance to a runoff. Together, the CDP and DPP control 175 seats in the lower house. The LDP remains the largest party with 196 seats, 37 short of a majority.

Elsewhere in the lower house, the Japan Innovation Party holds 35 seats, Komeito 24, Reiwa Shinsengumi nine, the Japanese Communist Party eight, the Reformists seven, Sanseito three, and Genzei Hoshu Kodomo two, along with six independents, making up the chamber’s total of 465 seats. Each chamber of parliament votes to select its preferred candidate for prime minister, but if the lower and upper houses choose different leaders, the lower house’s vote overrides that of the upper chamber.

STOCKS DOWN, YEN UP, BOJ ON HOLD?

Markets were volatile on Friday following the news, sending the yen swinging and leaving investors on edge over Japan’s economic outlook, the Bank of Japan’s next move and the country’s rapid turnover of prime ministers.

Takaichi’s election as LDP leader last week had dampened expectations for a near-term interest rate hike, lifting stocks and weakening the yen. She is known for her staunch support of Abe’s so-called “Abenomics” reflationary policies.

The deepening political turmoil is expected to pressure Japanese assets and the yen. However, since the yen had been sold off on expectations of Takaichi’s policy stance, there could now be some short-term buying back of the currency. Bonds may attract buying while equities could retreat.

It may also be difficult for the BOJ to raise interest rates amid political turbulence of this scale. The central bank is expected to stand pat at its October 29–30 policy meeting, given the uncertainty surrounding both U.S. trade policy and Japan’s political situation. Many economists expect the next rate hike to come in December at the earliest and more likely early next year.