Japan’s new external leader will face challenges to his dissident policies

Shigeru Ishiba, the man preparing to become the next leader of Japanmade his career as a political outsider and opponent of party orthodoxy. However, some experts doubt whether the former defense minister can manage like that.

The seasoned politician who won his fifth run to become head of the Liberal Democratic Party on Friday has long been a critic of former Prime Minister Shinzo Abe and his “Abenomics” legacy. His policy is often defined by loose monetary policy, fiscal stimulus and structural economic reform. like tax cuts.

On the other hand, Ishiba showed support for increase taxes and fiscal tightening at the same time protest against the long-standing policy of the Bank of Japan Negative interest rates began under Abe.

Tobias Harris, founder and principal of Foresight, said: “Shinzo Abe’s legacy still looms large and how to leverage that legacy and whether it is time has become a divisive question in the LDP race or not?

The election eventually went to a second round, in which Ishiba defeated Economic Security Minister Sanae Takaichi, who declared himself the leader. candidate more suited to Abenomics. Japan’s parliament is expected to officially elect Mr. Ishiba to the position on Tuesday.

“Based on what he has said before, he seems to be a leader with new thinking and vision for the country,” said Sayuri Shirai, a professor at Keio University and former BOJ board member. water”. different wings of the party.

However, the economist said there remains much uncertainty about whether Ishiba can actually pursue some of the outward-looking policies and philosophies that have shaped his political career.

In a press conference immediately after his victory, Ishiba assigned to reporters that Japan’s monetary policy should continue to accommodate the economy in a statement that could signal a break with previous support for interest rate increases.

He is also said to have suggested that he would follow Prime Minister Fumio Kishida’s approach in trying to pull Japan out of years of deflationary pressure. While Japan reported inflation rate 3% According to Shirai, in August the idea that the country was struggling with deflation was tied to low domestic demand.

“This concept of deflation is a continuation from Abenomics through Kishida’s term,” she said. As long as they keep saying this, it suggests the BOJ will need to maintain very low interest rates for a very long time.”

Either way, Japan stocks fell on Monday as traders react to the election, with some experts predicting it will clear the way for the BOJ to raise interest rates further. Japanese benchmark Nikkei 225 Record the worst day of it all since 1987 immediately after the BOJ raised interest rates at the end of July.

Experts warn that market and economic uncertainty could make it harder for Ishiba to support interest rate increases. in one summary of comments published Tuesday from the September meeting, a BOJ member said “The Bank will not raise policy interest rates when financial and capital markets are unstable.”

Speaking to CNBC”Squawk Box Asia” on Monday, Steven Glass of Pella Funds said that he felt Japan’s economic conditions were weak and would not support another interest rate hike at this time.

“We don’t think it makes sense for the BOJ to raise interest rates at this time and we see Ishiba supporting that policy,” he said. He added that the politician’s victory adds to the company’s confidence that interest rates will stay the same.

Meanwhile, Ishiba’s policy proposals to provide more public support to rural communities and youth, coupled with Japan’s desire to reduce its budget deficit, could force tax increases. This will not be popular with some political factions in the country.

Speaking to CNBC’s “Squawk Box Asia” on Tuesday, LightStream Research’s Mio Kato said that when Kishida was first elected, he proposed bolder policies such as tax increases, but in the end brought many of them back between opposition and negative market reaction.

“Given the way the LDP operates, it will be much more difficult for individual politicians to drastically change the overall direction of the party,” he said. direction.

According to Keio professor Shirai, Ishiba may also feel the need to appease the more moderate faction of Kishida’s party after they helped elect him on Friday.

“To be a transformative leader, Ishiba will need to be honest with the public and introduce policies such as taxes that may be unpopular and attract more criticism,” Shirai said. Until now, it is still uncertain whether he can cope with this or not.”

Meanwhile, Japan Foresight’s Harris said he doubts Japan’s willingness to completely leave behind aspects of Abenomics such as fiscal spending and the belief that the government can grow the economy out of its problems. deficit.

“There is not much enthusiasm to prioritize spending cuts or tax increases… in that sense, it seems we are not ready to leave Abenomics behind even though Ishiba is a strong critic of it,” he said. speak.