Abe’s Party Suffers “Historic Defeat” In Tokyo Elections, USDJPY Slides

On Sunday Japanese PM Shinzo Abe’s Liberal Democratic Party suffered what Reuters called a “historic defeat” in the Tokyo assembly election, losing to an upstart outfit in an vote that is seen as a harbinger for Japan’s national elections, and signaling trouble ahead for the premier who has suffered from slumping support after a series of political scandals.

“We must recognize this as an historic defeat,” former defense minister Shigeru Ishiba was quoted by NHK as saying. “Rather than a victory for Tokyo Citizens First, this is a defeat for the LDP,” said Ishiba, who is widely seen as an Abe rival within the ruling party.

“We must accept the results humbly,” said Hakubun Shimomura, a close Abe ally and head of the LDP’s Tokyo chapter. “The voters have handed down an extremely severe verdict.”

According to Bloomberg, the ruling LDP party was projected to win its lowest number of seats ever in the capital, a crushing blow for Abe, which sent the USDJPY sliding after suddenly the very fate of Abenomics is in question, as past Tokyo elections have been bellwethers for national trends. A 2009 Tokyo poll in which the LDP won just 38 seats was followed by its defeat in a general election that year, although this time no lower house poll need be held until late 2018.

Tokyo Governor and head of Tokyo Citizens First party Yuriko Koike

As Reuters adds, the Tokyo Metropolitan assembly election was a referendum on Governor Yuriko Koike’s year in office, but the dismal showing for Abe’s party is also a stinging rebuke of his 4-1/2-year-old administration. Koike’s Tokyo Citizens First party and its allies were on track for between 73 to 85 seats in the 127-seat assembly, according to NHK TV exit polls. Later vote counts showed the LDP was certain to post its worst-ever result, winning at most 37 seats compared with 57 before the election, NHK said, while Koike’s party and allies were assured a majority.

Koike, a media-savvy ex-defense minister and former LDP member, took office a year ago as the first female governor in the capital, defying the local LDP chapter to run and promising to reform governance of a megacity with a population of 13.7 million and an economy bigger than Holland’s.

Among her allies is the Komeito party, the LDP’s national coalition partner.

“I am excited but at the same time, I am also keenly aware of the weight of my responsibility,” Koike told NHK, adding the results had exceeded her expectations.

It was not immediately clear how the LDP’s loss would alter Japan’s political landscape: according to Japanese press, the strong showing by Koike’s party will fuel speculation that she will make a bid for the nation’s top job, though that may not be until after the 2020 Tokyo Olympics. It could also widen cracks between the LDP and the Komeito while damaging prospects for the opposition Democratic Party.

What is more troubling for the Yen and global capital markets, is that Abe’s rivals in his party could be encouraged by the LDP’s dismal performance to challenge him in a leadership race in September 2018, victory in which would set Abe on course to become Japan’s longest-serving leader and bolster his hopes of revising the post-war, pacifist constitution.

Meanwhile, according to Gerry Curtis, professor emeritus at Columbia University, Japan’s political landscape could be set for a shake-up.

“We may discover that Japan is not all that different from Britain, France, and the U.S. in its ability to produce a big political surprise,” he said, referring to recent elections in those countries.

The LDP’s thrashing could also make it harder for Abe to pursue his cherished goal of revising the U.S.-drafted constitution’s pacifist Article 9 by 2020, a politically divisive agenda, said Sophia University professor Koichi Nakano.

“His prime motive to stay in power is his desire to revise the constitution, but once his popularity really starts to fall, that becomes very difficult to do,” Nakano said.

Having been hit by a wave of favoritism scandals in recent months, Abe’s the most recent troubles center on concern he may have intervened to help Kake Gakuen (Kake Educational Institution), whose director, Kotaro Kake, is a friend, win approval for a veterinary school in a special economic zone. As noted here previously, Abe got in trouble because the government has not granted such an approval in decades due to a perceived glut of veterinarians. Abe and his aides have denied doing Kake any favors.

But potentially more devastating – according to Reuters  – is “the impression among many voters that Abe and his inner circle have grown arrogant.” Perhaps it is because instructing your central banker to monetize all your GDP in debt, and boost the stock market takes some serious skills?

Meanwhile, the scapegoating process is being prepared: Abe is expected to reshuffle his cabinet in coming months in an effort to repair his damaged ratings, a step often taken by beleaguered leaders but one that can backfired if novice ministers become embroiled in scandals or commit gaffes. Among those many political insiders expect to be replaced is Defense Minister Tomomi Inada. Inada’s remark during the Tokyo campaign seeking voter support in the name of the Self-Defense Forces, as the military is known, came under heavy fire. By law, the military is required to be politically neutral.

In a kneejerk response, the USD/JPY fell as much as 0.4% to 111.90 in early Asia trading Monday in the wake of the shock loss.

The reason why suddenly Japan’s political process may go under the microscope, is that if indeed the LDP and Abe are in trouble, then the future of the BOJ’s QQE (with Yield Control) are in question. This is a problem because as Deutsche Bank reported late on Friday, “[our model] highlights the relative importance of BoJ purchases to Fed and ECB. For a 100 bn in annualized purchases of each, the BoJ has been associated with a 15 bps decline in term premium, almost twice the impact of either the Fed or the ECB. While the market is rightly concerned about the extent and timing of ECB taper, the BoJ is potentially much more important to the rate outlook as it was in the middle of last year.”

With everyone expecting a political black swan to emerge out of Europe at the start of the year – only for all concerns to be laid to rest by the summer – could the source of 2017’s true political shock end up being Japan?

Shinzo Abe shouts ‘Banzai!’ with members of the ruling Liberal Democratic Party
during the annual party convention in Tokyo