Mizuho Market Comment 3 September, 2021

Colin Asher Senior Economist [email protected] | +44 20 7012 5262

LDP leadership elections

 Suga pulling out of the LDP leadership elections leaves the filed wide open  Kishida and Kono are the front runners, with Kono holding the upper hand  Neither is likely to strike out in radical policy directions  LDP likely to do well enough in the upcoming Lower House election to remain in power

Why has Suga stepped down now?

Japanese PM Suga planned on leading the LDP into the upcoming Lower House elections but the resurgence of the Coronavirus has scuppered his plans. There was no bounce in popular support from holding the Olympics. In addition, the economic recovery has been continually delayed as Japan experiences record Covid case numbers even as the vaccination rate is rising towards levels where the wedge between cases and severe illness starts to become significant, in that it allows restrictions on activity to be eased. Recent opinion polls put the PM’s Cabinet approval rating in the low 30s – a level which has traditionally spelled trouble for party leaders. The final straw seems to be have been Suga’s plan to reshuffle the Cabinet and call a snap election, potentially delaying the LDP leadership election until after the Lower House election. This went down very badly in the Party and Suga has been forced to withdraw from the LDP leadership race. His lack of factional support prevented him from riding out the Covid crisis

Who are the likely successors?

FUMIO KISHIDA (64): When PM Suga withdrew from the LDP leadership contest there was only one official candidate challenging him for the post – ex foreign Minister Kishida – a serious candidate who had once been seen as Abe’s heir apparent within the Party but had failed to spark much interest among the public, which is his key drawback, especially with the Lower House election shortly after the LDP leadership contest. Kishida has his own faction (46 members) and thus securing 20 members of parliament to allow his bid to go forward has been easy for him. Since announcing his bid for the leadership Kishida has pushed for a large fiscal package to get the economy back on track. He is from the dovish wing of the party in foreign affairs and is relatively uninterested in constitutional reform.

TARO KONO (58): Kono was seen as a potential leader when Abe stood down but he did not put his hat in the ring. He is a member of the Aso faction, which backed Suga in the last LDP leadership election. We see his decision not to run last time round as playing faction politics. He wouldn’t upset the apple cart as long as it meant backing next time round. Next time is now here. We expect that he will be able to count of the backing of most of the Aso faction (53 members) even if the support is a little lukewarm. Kono has a reputation as being a bit of a loose cannon, who doesn’t always do what is expected. There is some speculation that his backing from the Aso faction is less than rock solid. That said, we do not expect that he would have declared his candidacy unless he had squared support from his faction boss – Finance Minister Taro Aso. Kono’s main attraction for LDP MPs is that he polls well among the public, which would stand them in good stead in the Lower House election. He is also happy to be robust in foreign affairs, which appeals to the Conservative side of the Party, even if it might be a concern to the pro-business wing. He is also one of the more media-savvy operators in Japanese politics. Kono is currently consulting with colleagues on whether to run for leader. He will be looking for the required 20 supporters for his nomination. We assume he will get them and enter the race. If so he will be the favourite.

SHIGERU ISHIBA (64): Ishiba is a perennial candidate in the LDP leadership race, who polls well among the LDP membership but lack support among MPs. He lost in 2008, 2012 and again in 2018. He has not officially declared and we expect him to pass this time round as his lack of support among MPs makes his path to the leadership difficult.

SANAE TAKAICHI (60): Takaichi used to be a member of the Abe faction but is now unaffiliated. If the Abe faction was to back her it would make her a serious contender. With Suga standing and the Abe faction tending towards backing him again she looked to be struggling to get the 20 backers to run in the LDP race. Now that Suga has stood down and the Abe faction’s votes are again up for grabs, she may try again to find 20 MPs to support her bid but our baseline assumption is that she will come up short. We assume that the Abe faction is more likely to try and pick the winner, rather than back someone relatively junior with only an outside chance of winning. She is from the Conservative wing of the party.

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HAKUBUN SHIMOMURA (67): Shimomura had pulled out of the race but with Suga no longer running he will reconsider. He does not poll well with the public and seems to have limited support from MPs. As such we do not see him as having much chance. He too may struggle with gaining the 20 backers required to support his nomination.

Factions remain the key to the top spot in the LDP LDP factional strengths 120

100

80

60

40

20

0

Source: Bloomberg

LDP leadership election format

The LDP leadership election will take place on 29 September, with formal campaigning starting on 17 September.

It will be a full election, which includes the regional chapters of the LDP as well as members of parliament. (Suga was elected by the MPs only). The MPs will have 383 votes, as will the regional chapters, giving a total of 766 votes. If no candidate secures a majority in the first round the top two will contest a run-off.

A free vote for MPs?

There have been some speculation that the party elders will allow a MPs free vote, with factions not lining up behind their chosen candidate. The rationale for such a step is supposedly to encourage some of the more junior LDP members to throw their hat into the ring. We ask “Cui bono”? We don’t see why faction elders would give up their hard won powers unless forced to do so, unless this was the only way to secure a specific candidate – which doesn’t seem to be the case. It strikes us that to do so would be a sign of unwarranted panic.

LDP still in “poll” position for the upcoming Lower House election

28 November is the last possible date for the Lower House election. Whilst Suga’s Cabinet approval ratings have been languishing, the LDP approval ratings have held up well. It is the main opposition party that is languishing near single digits. New leaders often enjoy a honeymoon period, as Suga himself did. As such a change of leader will likely mean a boost for the LDP at the polls, especially as the Covid situation may be coming under control by then. It remains our baseline view that the LDP will lose relatively few seats in the upcoming election and that it will remain in power in coalition with Komeito. None of the candidates for the LDP leadership, especially Kono and Kishida, who seem the most likely winners, would be likely to strike out in radically different policy directions, especially on the economic front.

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