CNBC's Martin Soong, Chery Kang, and Kaori Enjoji discuss how the ruling coalition's defeat in Japan's upper house election complicates policy formation in the country, including the Bank of Japan's aim to normalize monetary policy.

Tokyo

Japan's ruling Liberal Democratic Party (LDP) and its coalition partner failed to secure a majority in the latest election, winning a combined 47 seats, short of the 50 needed. This outcome has led to concerns about policy paralysis, as the opposition, which has gained strength but remains divided, is unwilling to form a partnership with the LDP.

Prime Minister Shigeru Ishiba has stated his intention to remain in office and address key issues, including economic and energy policy. However, the loss of a majority complicates the government's ability to pass legislation, and internal party tensions are expected to rise. The result reflects public dissatisfaction with the government's handling of economic matters, and Ishiba faces significant pressure to maintain leadership.

Japan risks policy paralysis after ruling coalition's election loss

Look, they got 39 seats. This is the LDP, and the coalition got eight. So that's 47. It is shy of the 50 that they needed for a majority. But when you take a look at the broader picture, perhaps it was not as bad as the market had feared going into this. We saw the sell-off in the bond market last week, the sell-off in the yen, in anticipation that the numbers would be a little bit weaker than we actually got. This partly explains why the yen is rebounding a little bit in early Asian trading. But bear in mind, today is a public holiday. The markets are closed. Stock market, bond markets won't be up and running until Tuesday. But people are still talking about a potential triple whammy and whether or not the LDP will have to concede to the opposition, who is calling for more fiscal expansion, which would make it very difficult, much more difficult for the Bank of Japan to tighten and normalize monetary policy. Yeah. And, Kari, you briefly touched on this, that Prime Minister Ishiba may try to at least stay on for the prime minister's job. He is expected to hold a press conference later this afternoon. So we'll find out more about what he intends to do. But I wonder how this election outcome changes really the policy fabric of Japan. As you're sure, some of the opposition parties have made some headlines, you know, really showing an interesting surge, but at the same time, they're heavily divided. So does this really change the big picture dynamics going forward in terms of impact on policies? It does, because if you have no majority in either the upper house or the lower house, if you try and get anything through that requires a budget, you're going to run into headwinds and you're going to have to partner or find someone to partner with. Right now, the opposition is saying, no, no, no, we're not going to partner with you because they're coming, you know, they're negotiating for a position of strength. So even if Prime Minister Shigeru Ishiba says later this afternoon, the press conference is scheduled at 2 p.m. local, that he's going to stay on, at some point there's going to be rife within his own party because they can't simply just cannot get their agenda through. I mean, it's not just economic policy. There are other issues as well. Finance policy as well. There are energy policies as well. You know, energy is a huge issue for Japan, and they're trying to build a new, excuse me, a new nuclear plant, the first since the disaster of 2011. That has been announced over the weekend as well. So everything, I think, is up in the air. And although this final figure of 122 seats is a little bit, maybe not quite as bad as people, as the market has been expecting, this is a clear indication from the public that they are dissatisfied with him and the party and their handling of economic policy. Yeah. Kari, very quickly before I let you go, so the key question is for Ishiba, he's vowing to stay on. Right. But what is it, hours? How long does he have, days? Look, in the past, I believe in the 1980s, the LDP suffered a huge blow like this. And within the day, the prime minister, who was Mr. Uno at the time, resigned. No one expects that to happen today, especially given what he said last night, that I am going to stay on to try and take responsibility for these key trade negotiations, because the national security is at risk. But I think over the medium to longer term, I'm saying weeks and months, it is very difficult to imagine that the LDP will stick to him, with him, at a time when there are lots of issues that need to be addressed. It's a lame duck government, if you will. It kind of reminds me of Liz Truss back in 2022 and the havoc it created on the market. So right now, today, tomorrow, this week, maybe no, but I think the pressure certainly is on Shigeru Ishiba, which remember, he wasn't that popular to begin with, and he hasn't been in power less than a year. And in that time, he's lost two national elections. This is unprecedented.

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