Critical Timing: How Prime Minister Fumio Kishida’s Resignation Affects the Japanese Economy

Japanese Prime Minister Fumio Kishida announced last week that he would step down next month, coinciding with an internal election in the ruling Liberal Democratic Party (LDP) to choose a new leader.

The announcement came amid a funding scandal involving several party lawmakers, which has led to a sharp decline in his popularity.

His government’s approval rating has fallen to 15%, due to repeated political scandals and the economic challenges facing Japan, such as the high cost of living and slowing economic growth.

The change comes at a sensitive time for Japan, which is facing increasing economic and political challenges.

His successor, chosen by the LDP, will face rising living costs, rising geopolitical tensions, and the possible return of Donald Trump as US president next year, which could affect Japan’s international and economic relations.

Economic Pressures

After three years of leading the LDP and steering Japan through economic and social challenges, Japanese PM Fumio Kishida announced the end of his term, coinciding with a sharp decline in his popularity in polls due to the price crisis and its repercussions on the incomes of Japanese people.

Kishida’s resignation from his position next September raises many questions about the future of economic policies in the world’s fourth-largest economy and the impact of this decision on markets.

He said at a press conference in Tokyo that his decision to step down came as a result of his desire to take full responsibility for the fundraising scandal that rocked his government, and to prove that his ruling party is ready to undertake a comprehensive reform process in order to restore the trust of people.

Kishida also stressed the role of the government in promoting economic growth, adding that there must be a continuous effort to boost wage increases and investment.

He believes that these measures are necessary for Japan to fully emerge from the deflation-prone economy.

Kishida’s remarks come at a critical juncture for Japan’s economy, which has been struggling with deflationary pressures for decades.

His latest call reflects an ongoing challenge for the country’s policymakers, who are trying to revive economic activity and spur inflation to a healthy level.

The LDP, which has ruled Japan almost continuously since 1945, is set to hold an election next month to choose a new party leader.

Analysts have suggested that the party will seek a leader with greater popularity and political stability to manage the country’s affairs during this critical period.

Once a new LDP leader is elected, parliament will be called to elect the next PM. The candidate who wins the majority of votes cast by members of both houses of parliament will assume the position.

Given the LDP’s majority in both chambers, the LDP leader is likely to be elected prime minister.

The new PM is also expected to form a new government and reshuffle the LDP leadership in early October.

Public discontent over the rising cost of living was one factor that prompted Kishida to announce his resignation next month.

Kengo Tanahashi, an economist at Nomura Securities, said Kishida's replacement could call a snap election in the fall if the approval rating is high, adding that the Bank of Japan (BOJ) is unlikely to opt for another rate hike during that time.

“We believe that the Bank of Japan will raise interest rates again in December,” he said.

Economy Minister Yoshitaka Shindo said in a statement that the government expects the economy to continue to recover gradually, with spring wage talks strong this year and the minimum income hike set to take place in October.

He said Japan should pay close attention to risks of an economic slowdown abroad and market volatility as investors grow wary of a possible recession in the United States, which sparked this month’s collapse in global financial markets.

Party Scandals

Fumio Kishida took office as PM in 2021. He led his ruling party to a strong showing in the October 2021 general election and maintained his coalition’s hold on the upper house of Japan’s parliament the following year.

But a wave of party scandals and public discontent over the weak national currency and rising prices have seen Kishida’s approval ratings fall, along with support for the LDP.

His diplomatic gains – an ambitious budget to expand the military, deeper ties with the US and a historic détente with South Korea – could not save him.

Kishida’s resignation marks a return to the rapid turnover that characterized Japanese leadership before former PM Shinzo Abe, who resigned in 2020 after a historic eight-year tenure as the country’s longest-serving PM.

His predecessor Yoshihide Suga had resigned after just a year in office, following dismal approval ratings as Japan weathered one of its worst Covid waves.

Kishida led Japan out of the COVID-19 pandemic with massive stimulus spending, but later appointed Kazuo Ueda, an academic tasked with unwinding the monetary stimulus implemented by his predecessor, as governor of the BOJ.

The BOJ surprised markets on July 31 by raising interest rates to a 15-year high and signaling it was prepared to raise borrowing costs further, amid growing expectations that inflation would permanently hit its 2% target.

The decision, coupled with recession fears in the United States, sent financial markets into a tailspin, leading to the biggest sell-off in the Nikkei benchmark since the 1987 Black Monday crash.

The market tremors prompted senior officials from the ruling party and major opposition parties to agree to summon Ueda to explain the central bank’s decision.

Kishida also convinced businesses to deliver the biggest pay rise in three decades (5.1% for large companies), but the increases failed to keep pace with inflation because of a weak yen.

Even as ordinary Japanese struggled with rising prices, they were shocked by a scandal that engulfed the LDP.

Dozens of party lawmakers were caught diverting money from fundraising events to undeclared funds.

It followed public outrage over the party’s ties to a controversial Unification Church that critics see as extremist.

Both scandals involved members of Shinzo Abe’s former LDP faction, on whose support Kishida relied to win a second runoff in the party’s 2021 leadership race.

The LDP and Kishida himself have come under fire for failing to take responsibility for the fundraising scandal.

Efforts to restore public trust by imposing sanctions on some party lawmakers and revising a political funds control law have also been seen as falling far short of the necessary steps.

In turn, the economic expert, Dr. Mustafa Shaheen, confirmed in a statement to Al-Estiklal that Kishida’s resignation is due to the deteriorating economic conditions suffered by one of the strongest economies in the world.

“Although Japan has a low interest rate compared to major economies, the Japanese economy has not yet recovered, which contributed to the decline in the PM’s popularity to around 15%,” he said.

Dr. Shaheen concluded that Japan is currently undergoing a structural change project for its economic policies, especially monetary one, indicating that this change will only happen with a new political administration.