Japan’s ruling coalition is in turmoil after the Komeito party quit the government, dealing a major blow to Sanae Takaichi’s bid to become the country's first female prime minister and deepening uncertainty over the country’s political future.

Tokyo

Japan is experiencing a leadership crisis after the Komeito party announced its withdrawal from the ruling coalition with the Liberal Democratic Party (LDP). The split is linked to unresolved demands and the ongoing slush fund scandal that has affected the LDP's standing since 2023, leading to significant electoral losses.

With no party holding a majority in either house, the selection of the next prime minister remains uncertain. Multiple parties are now negotiating alliances, and Yuichiro Tabaki of the Democratic Party of the People has emerged as a potential contender. The political instability is expected to impact financial markets and could affect upcoming diplomatic events.

Takaichi in trouble: Japan faces leadership crisis as coalition splits

But Saito-san, the head of the Komeito, this is what he had to say about the reasoning for pulling out of the coalition. SAITO YAMAMOTO, Komeito Leader, Saito-san, Japan Time is short. If we cannot secure clear, concrete cooperation from the LDP regarding our demands, and if it should prove impossible to achieve these reforms, then we cannot support the nomination of Sanae Takahichi to be prime minister. This is regarding the slush fund scandal that has dogged the LDP ever since erupted back in 2023, and it cost them so many seats in rounds of elections. Now, this is what it looks like on paper. But I think when you dial back, the writing was a little bit on the wall with the displeasure that the Komeito had with the LDP, because they have the power to mobilize people. I mean, they're backed by the lay Buddhist group, the Soka Gakkai. They have manpower when it comes to election time, and they've been scrambling to do that. And they've been asking all along, is this really benefiting us? So what happens from here on, we don't even know when the vote is going to take place to choose the next prime minister, is a lot of dealing as to which party can team up with some other party to try and get enough votes to win the premiership, Martin. Yeah. So talk to us a little bit more about the horse trading, which is probably going on right now as we speak, and frantically as well. That vote you talk about was originally scheduled for, I think, the 15th. That got pushed back to the 20th. Now, I guess nobody really has a sense when it could actually come to pass, but it depends on what happens with the horse trading. Exactly. I mean, it could be October 20th. It could be October 21st. There's no actual playbook as to when that date is actually decided, because it's not like Ishiba resigned. If you resign, you have 10 days to call this vote. But that is not the case. So let's say, theoretically, it happens next week sometime. So they have about a week to band together to try to form new allies. So let's take a look at this chart, because after this is going to be a serious number game, because no one has a majority in either house. Now, what's going to happen is that the lower house votes first. Anyone from the chamber can be a candidate. So it's not like a yea or nay vote on Sanae Takahichi. You can write someone else's name down on the ballot. If there's no majority, it goes into a runoff between the top two candidates, and then the upper house votes. But if the two houses disagree, and that has happened in the past, the lower house prevails because they are the stronger chamber. Now, take a look at the seats in the lower house, 465 seats in total, which means you need 233 for a majority, right? But look at those numbers, LDP 196. In the Komeito, they would have had 220 seats, but that is no longer the case. The three that you really want to watch on that list are the CDP, 148, the Japan Innovation Party, 35, and really critically right now is the DPP, the Democratic Party of the People, with 27. So Yuichiro Tabaki is the head of that party, and he has emerged as a potential contender to become the next prime minister. And that is because the CDP has said, look, if you're willing to run, I'm willing to back you up. So if that means if these three parties combine, you add those three numbers together, it becomes 210, which is more than the LDP has. And that means they need to find new partners if they are going to win this. And we could see a rainbow coalition, but in any event, possibly the most important change in Japanese politics since the 1980s. Indeed. So what we're talking about is the possibility of a new coalition, which is more heavily weighted towards the opposition. So what are the market implications of that, Kaori? What should we be watching out for? Well, for the immediate reaction, we're in a three-day weekend, right? So when the market reacts on Tuesday, they had a bit of a pullback after the so-called Takaichi trade. But this was a bombshell, and I think it's one that the equity markets will not be able to avoid. So that's one. The very near term. But over the long term, I think you really have to determine who the LDP is going to team up with. So I think the worst for the markets in terms of fiscal discipline, worries about fiscal health of the Japanese government, is a combination between the LDP and the DPP. I mean, stocks, I think, would fare pretty poorly on fiscal fears. But I think right now, the immediate reaction is a concern. And then you have to think about the diplomatic timetable as well. I mean, President Trump, widely expected to come at the end of the month, but does it give them enough time to regroup to make this summit meeting a success?

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