Prime Minister Miyazawa's dissolution of the Lower House was followed by a general election on July 18, 1993. Prior to the election, the LDP had lost its majority in this body when a number of its members broke from the Party and formed the Renewal Party and the New Party Sakigake. Although the LDP actually managed to increase its strength to 223 seats in the election, it was unable to make up for the losses it suffered from early defections and its seat count in the House of Representatives remained well below the threshold of 256 required for a majority.

Despite these setbacks, the LDP remained in control of a larger number of seats than any other party. It was also clear that only the LDP had the administrative capabilities to govern the country. For these reasons, many individuals in the media and political circles believed there was a strong possibility that the LDP might remain in power by forming a coalition government with the New Party Sakigake.

However, political events suddenly took an unexpected turn. On July 29, a conference was held by the leaders of seven non-LDP parties (including the Renewal Party, the Japan New Party, the New Party Sakigake, the Social Democratic Party, and the Komeito) and one parliamentary group. At the conclusion of the conference, these leaders agreed to support the candidacy of Morihiro Hosokawa of the Japan New Party in the election for Prime Minister that was scheduled to be held during the next special session of the Diet. This agreement was made possible in large part through the efforts of Ichiro Ozawa of the Renewal Party who had earlier approached the Social Democratic Party and Hosokawa in a bid to take control of the government from the LDP. All of this was taking place against the backdrop of a fierce propaganda campaign conducted by a part of the media that argued that "the LDP is incapable of carrying out fundamental political reforms because it contains so many inveterate conservative members."

Morihiro Hosokawa was elected Prime Minister at a plenary session of both houses of the Diet held on August 6. With this, the LDP lost control of the government and became an opposition party for the first time since the formation of the Conservative Alliance in 1955. The LDP regained its pivotal position in government eleven months later when it joined with the Social Democratic Party and the New Party Sakigake in late June of 1994 to establish a coalition government under Prime Minister Murayama. Until then, however, the government remained under the control of an extremely fragile non-LDP, non-Communist Party coalition led by the Hosokawa Cabinet. In the midst of this transition, the LDP also lost many of its leadership posts in the Lower House. One of these, the Speaker of the House, was assumed for the first time in Japanese history by a woman, Takako Doi of the Social Democratic Party.

In an election held on July 30, Chief Cabinet Secretary Yohei Kono was chosen to succeed Miyazawa and became the LDP's 16th President. He was opposed in the race by the Deputy Prime Minister and Foreign Minister at the time, Michio Watanabe. Watanabe received 159 votes in comparison to 208 cast for Kono. Because Kono was not the head of a faction, many people within the Party believed that he was the most suitable individual to oppose Prime Minister Hosokawa who was gaining in popularity due to his fresh image.

The Miyazawa Cabinet resigned on August 5. Normally, the new LDP President becomes the new Prime Minister. President Kono, however, was involved in the national administration as the leader of the largest opposition party. Under the leadership of President Kono and the new Party Secretary-General, Yoshiro Mori, the LDP rejected the traditional opposition party strategy of "opposing everything" or "opposing for the sake of opposition." Instead, the Party committed itself to working to improve people's lives and pursuing the national interest by assuming a pragmatic, flexible stance in its relations with the Hosokawa administration.

Because of difficulties encountered by the Hosokawa coalition government in forming a cabinet, the start of the new government was delayed until August 9. The leader of the Renewal Party, Tsutomu Hata, was chosen to serve both as the Deputy Prime Minister and the Foreign Minister. New Party Sakigake leader Masayoshi Takemura assumed the post of Chief Cabinet Secretary. Members of the Social Democratic Party secured five cabinet portfolios, including that of Minister in Charge of Political Reform (Seiji Kaikaku Tanto sho) that went to SDP Chairman Sadao Yamahana. In his first policy address on August 23, Prime Minister Hosokawa announced that his cabinet would be "an administration of political reform" (Seiji Kaikaku Seiken). Then at a later news conference, he expressed his intention to resign from office if his government failed to secure passage of political reform legislation by the end of 1993.

In spite of the fact that he was heading a "non-LDP" government, Prime Minister Hosokawa stated that he would "continue the policies of the Liberal Democratic Party." Unfortunately, the process through which the Hosokawa government formulated and decided policies was fundamentally flawed. In addition to the fact that the cabinet was responsible for representing the views of seven different political parties and one parliamentary group, none of its members, except for Tsutomu Hata, had any previous experience serving in Ministerial posts. In this sense, the Hosokawa administration was managed by a group of comparative novices. To remedy this situation, eight parties and one parliamentary group set up a "Policy Coordination Council" (Seisaku Chosei Kaigi). Unfortunately, this body failed to function effectively and the Hosokawa administration was left with no choice but to rely on bureaucrats.

Structural flaws within the Hosokawa administration were likely the indirect cause of several notable mishaps including Prime Minister Hosokawa's widely-criticized assertion at a press conference that Japan had acted as an aggressor in the Second World War (Nihon no shinryaku senso) and the government's ill-conceived formulation and subsequent hasty retraction in February of 1994 of a plan advocated by the Finance Ministry to introduce a new 7 percent indirect tax, the "National Welfare Tax" (Kokumin Fukushi Zei). These and other misfortunes prompted the media to characterize the Hosokawa administration as one in which bureaucrats dominated politicians (Kan ko sei tei).

The Liberal Democratic Party's fall from power was due in part to its failure to carry out fundamental political reforms. As an opposition party in the post-Miyazawa Cabinet era, finding ways to get this stalled process moving again became one of the LDP's top priorities. Specifically, the most pressing task at hand was to reform the electoral system for the House of Representatives. With President Kono leading the way, the LDP continued lively discussions of this issue until an outline for political reform was finalized on September 2, 1993. Included in this were proposals to reduce　the number of seats in the Lower House to 471 and replace multi-member districts with single-member and proportional representation districts. It was not until approximately two weeks later that the Hosokawa Cabinet was able to produce four bills of its own related to political reform. A special committee of the Lower House began actual deliberations on these bills in mid-October. Following this, negotiations began between the LDP and the coalition government concerning issues such as the distribution of seats for new Lower House election districts.

Around the same time, the Tokyo District Public Prosecutors Office was in the process of arresting the vice-chairman of a major general contractor for offering a bribe, and the governor of Miyagi Prefecture for accepting it. This incident sparked public criticism of the relationship between politics and public works in the country. Another important development was the change in leadership that occurred within the Social Democratic Party in the wake of a dispute within this party concerning political reform. Tomiichi Murayama replaced Yamahana as Chairman and Wataru Kubo became General Secretary.

The mass media labeled Diet members who supported political reform as "reformists" and those who opposed it as "conservatives." This undoubtedly affected public opinion that appeared to be heavily in favor of political reform. In the midst of this, negotiations between the ruling and opposition camps began on November 5 and continued for ten days with the LDP adopting a flexible stance. The participants concentrated on seven major issues, including the distribution of seats across single-member and proportional representation electoral districts. In addition, Kono and Hosokawa met on November 15 but failed to reach an agreement on a compromise bill. In a plenary session of the Lower House held on November 16, the LDP's bill was rejected while that of the ruling party was passed and sent on to the House of Councillors.

Unfortunately, deliberation on the bill in the Upper House stalled because of the Hosokawa administration's weak leadership and the belief of many in the coalition cabinet that the economy's poor performance necessitated the prioritization of work on the 1994 budget over political reform. At a plenary session of the Upper House held on January 21 of the following year, the political reform bill was voted down. Efforts to resuscitate the bill by modifying it in a Joint Meeting of Both Houses failed when negotiations broke down there as well.

Determined to break this deadlock, LDP President Kono met with Prime Minister Hosokawa on January 29. He succeeded in convincing Hosokawa to accept a revised bill that contained a number of LDP-sponsored modifications. This paved the way for the eventual passage in both houses of the Diet of bills related to political reform including one that established a new electoral system for the Lower House consisting of 300 seats in single-member districts and 200 more from proportional representation blocks.

Political reform had finally been accomplished. However, by the spring of 1994 the future of the Hosokawa administration was already in serious doubt. At the end of the previous year, multilateral trade talks at the Uruguay Round of the GATT had entered into their final phase with Japan agreeing to the partial liberalization ("minimum access") of its rice market and the tariffication of import restrictions on this commodity. Unfortunately, the government's failure to develop adequate domestic measures to cope with these changes left many people in agriculture extremely unsatisfied. In addition, in December of 1993 the Director General of the Defense Agency and a member of the Japan Renewal Party, Keisuke Nakanishi, was forced to resign from office after making controversial remarks about the Constitution. In the same month, bureaucrats in the Ministry of International Trade and Industry resisted an attempt by MITI Minister Hiroshi Kumagai (also a member of the Japan Renewal Party) to shuffle personnel within this organization. Then in February of 1994, talks between Prime Minister Hosokawa and U.S. President Clinton on the U.S.-Japan Framework for a New Economic Partnership broke down when the Japanese government refused to accept the use of numerical targets to measure the expansion of access for imports to the country's markets. Finally, efforts to develop a National Welfare Tax failed as well.

Individual policy failures such as this certainly created many problems for the government. Conflict within the coalition between the Japan Renewal Party and the New Party Sakigake undoubtedly did even more to shorten the life of the Hosokawa administration. However, the final blow was delivered by a devastating scandal involving the Prime Minister himself. In December of 1993, suspicions surfaced that Prime Minister Hosokawa had accepted a 100 million yen loan from Tokyo Sagawa Kyubin, a parcel delivery and courier service. The LDP could not of course turn a blind eye to possible improprieties committed by the country's Prime Minister. In March of 1994, the Party established the Special Committee to Investigate Suspicions about Prime Minister Hosokawa (Hosokawa Sori No Giwaku Ni Kan Suru Tokubetsu Chosa Kai) and began a thorough examination of the affair. During questioning in the Diet, Hosokawa initially denied the allegations being made against him. He later admitted that he had accepted a 100 million yen loan but maintained that it had been repaid. When asked to produce a receipt, however, Hosokawa was unable to do so.

On April 25 of 1994, the Hosokawa Cabinet resigned. At a plenary session of the Lower House held on the same day, the coalition of seven parties and one parliamentary group chose the head of the Japan Renewal Party, Tsutomu Hata, as the new Prime Minister. A Hata Cabinet was formed and began work on April 28. Immediately after this, however, an unusual event took place within the coalition government. The Renewal Party and the Democratic Socialist Party established a new group in the Diet, the "Kaishin," which excluded the Social Democratic Party. Enraged by what it felt was an attempt to marginalize it, the SDP abruptly left the coalition. When this occurred, the Hata administration was relegated to the status of a minority government.

Because of this change, the Hata Cabinet was thrown into confusion and became completely incapable of formulating coherent policies. For the sake of the nation, President Kono and Party Secretary-General Mori introduced a bill into the Diet that called for a vote of no-confidence in the cabinet. A closed-door meeting at the Prime Minister's official residence between Hata and Renewal Party leader Ichiro Ozawa resulted in a decision to end Hata's administration after only two short months.

In the midst of such turmoil, it was only natural that the people looked to the LDP for responsible leadership. The LDP faced the choice of joining with either the former Hata Cabinet and its allies or the Social Democratic Party. Since various groups within the Liberal Democratic Party favored an alliance with the New Party Sakigake and the Social Democratic Party, the LDP began to explore this possibility.

From the beginning of the "1955 System" and throughout the extended period of Liberal Democratic Party's control of the government, the LDP and the Social Democratic Party had long been in fierce competition for the public's support. Because of this, it had been difficult up until this point to imagine an alliance ever being formed between the two. However, this perception changed when the LDP's sincere efforts at conciliation resulted in a promise from the SDP to modify its policies.

On June 28, LDP Secretary-General Mori met with SDP General Secretary Wataru Kubo and proposed the formation of a coalition cabinet headed by SDP Chairman Tomiichi Murayama. On the same day, talks between Kono and Murayama produced a formal agreement to form a coalition government of the LDP, SDP, and the New Party Sakigake. A vote to elect the Prime Minister took place in the Lower House on June 29. Although the non-LDP forces fielded former Prime Minister Toshiki Kaifu as their candidate, Murayama eventually prevailed in a run-off election and returned the LDP to the ruling camp. When the Murayama Cabinet was formed on June 30, LDP President Kono was chosen to serve concurrently as the Deputy Prime Minister and the Foreign Minister, New Party Sakigake leader Masayoshi Takemura became the Finance Minister, and the SDP's Kozo Igarashi took over as the new Chief Cabinet Secretary. Needless to say, the framework of this administration was supported by the LDP and its extensive experience as a governing party.

In a historic reversal of long-standing policies, the SDP decided at a party convention held on September 3 to accept the constitutionality of the Japan Self-Defense Forces and to recognize the Japan-U.S. Security Treaty. In the opposition camp, the Japan Renewal Party disbanded in November of 1994 and joined with the Komeito members in the Lower House, the Democratic Socialist Party, and the Japan New Party to establish "Shinshin-to" (the New Frontier Party). With Toshiki Kaifu as party leader and Ichiro Ozawa as the party secretary, the Shinshin-to set out to oppose the LDP-SDP-Sakigake coalition government.

With the support of the LDP, the inexperienced Prime Minister Murayama was able to successfully conclude several important diplomatic engagements including the Napoli Summit on July 8, talks with the South Korean President on July 23 in Seoul, a tour of Southeast Asia at the end of August, an APEC meeting on November 12 in Jakarta, and talks with the U.S. President. In addition, the administration produced a number of important domestic policies such as a revision of the tax system to accommodate an increase in the consumption tax rate, legislation establishing apportionment for Lower House single-seat electoral districts, changes to the Pension Law, and the partial revision of the Self-Defense Forces Law.

Then, in the early morning hours of January 17, 1995, disaster struck Japan and the Murayama administration when the Great Hanshin-Awajishima Earthquake devastated the modern city of Kobe and resulted in the deaths of 6,425 people. This unprecedented calamity impressed on the country the urgent need to review existing systems and establish new ones for crisis management not only in the government and the Prime Minister's Office, but throughout the entire country. To provide emergency restoration funds, the Murayama administration compiled a second supplementary budget for fiscal 1994 worth approximately one trillion yen.

With the LDP providing it with a firm foundation, the coalition government of Prime Minister Murayama continued to produce impressive results. In August of 1995, a "Diet Resolution on the 50th Anniversary of the end of the War" (Sengo Gojunen No Kokkai Ketsugi) was adopted in a plenary session of the Lower House that explained Japan's view of history to countries in Asia and brought some closure to the postwar period. In spite of this, the expansion of electoral support for candidates running for office without party affiliation made for an unstable political environment. In two prominent examples, independents Yukio Aoshima and Knock Yokoyama won the Tokyo and Osaka gubernatorial races respectively during unified local elections held in the spring of 1995.

This trend was seen again in Upper House elections held on July 23 in which the LDP managed to capture only 46 seats in comparison to the 67 it had captured in the election held three years previously. In addition, although the LDP won more seats than the Shinshin-to (46 versus 40), the Shinshin-to actually secured more votes in proportional districts. These results led to the eventual replacement of Kono with Ryutaro Hashimoto in the LDP Presidential Election held in the fall of the same year.