Japan’s new Prime Minister (PM) Shigeru Ishiba called an election immediately after taking office on October 1. Counter to his hopes, voters offered a strong rebuke to the incumbent Liberal Democratic Party (LDP), ending its 15-year Parliamentary majority. This raised questions about economic strategy in Japan, but the diet is likely to stay the current course.
In addition to controversy surrounding the use of political funds, the rising cost of living motivated Japanese voters to opt for change. Japan’s rate of core inflation (excluding food and energy) has averaged 2.3% year over year since the start of 2023. Though the rate may seem tame, it was enough to shock a population that was accustomed to decades of deflation. While earnings are also on the rise, the experience of inflation can be disconcerting and lead to electoral upsets.
For Japan, renewed inflation has been a blessing and a curse.
Japan appears to be of two minds in this area. Falling prices created decades of economic stagnation, so a return to more normal levels of inflation should be hailed. Japan’s markets have performed much better this year, and Japan has made great strides toward positive nominal growth. But as is the case elsewhere, the theory and perceptions surrounding inflation can diverge.
With the election result, the LDP will need to form a new, wider coalition in order to govern. As governments get broader, they are challenged to form a consensus. Fortunately, the wage growth championed by the LDP is broadly popular; that is key to staying out of deflation.
