Japan: LDP suffers historic loss in Tokyo election – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, notes that Tokyo Governor Yuriko Koike's Tokyo Citizens First Party and its allies handily won yesterday's Tokyo Metropolitan assembly election, securing 79 of the government's 127 seats.

Key Quotes

“The LDP saw its presence plunge to an all-time low of 23 seats. Citizens had become increasingly put off by the Abe administration and LDP leaders amid a wave of issues, including frictions over preparations for the Tokyo Olympics, the battle over relocation of Tokyo's Tsukiji fish market, allegations of political intervention in the granting of approval for private schools, the steamrolling of anti-terrorism legislation through the Diet, and numerous personal scandals involving government officials. The Tokyo election indicated that the Abe government's support base is not necessarily invulnerable when there is an opposition party capable of serving as an outlet for anti-Abe sentiment. Still, the election was a single regional government vote for metro Tokyo alone.”

“At the national level, the Democratic Party, the largest opposition force, continues to struggle with poor ratings even as the LDP's support falters, and the truth is that there is no broad-based party that can act like Koike's Tokyo Citizens First as an anti-Abe vote-getter. The Komeito Party allied with Koike in the Tokyo election, but remains a coalition partner alongside the LDP in the national government. The Abe administration does not have to call an election until December next year and will maintain its absolute majority in the Diet until that time even if its popularity should fall further.”

“A drop in the public's approval rating below 30% is said to be a yellow light and below 20%, a flashing red danger signal. While a good many citizens are wary of the government's increasingly forceful political ways recently, they are well aware of the lack of plausible alternatives to Abe at present. Helped by this absence of rivals either in the opposition or within the LDP, Abe has time to take measures to straighten out his government and regain his support, starting with a reshuffling of the Cabinet.”

“Consequently, we believe the LDP's defeat in the Tokyo election results will have minimal near-term impact on the yen market. Over the medium term, any further weakening of Abe's support base could prompt fears of a loss of backing from the ultra-accommodative monetary policy driven by the BoJ under Governor Haruhiko Kuroda, which could have negative impact to the stock markets, which could bring negative market color to make the yen higher. To gauge prospects for that scenario, we should monitor the extent of decline in the government's approval ratings through August and any anti-Abe moves not only from the opposition but, to an even greater extent, from within the LDP.”