Due to our Party's historic defeat at the elections for the House of Councillors, the positions of the ruling and opposition parties were reversed, making it extremely difficult for the LDP to carry out its agenda at the Diet's 168th extraordinary session. Although Prime Minister Abe was determined to maintain the role of the Maritime Self-Defense Force in the Indian Ocean, he announced his resignation just before a formal Diet session citing ill-health and the need for a fresh approach to the current political impasse.

Immediately after his resignation, a Party presidential election was called and which Mr.Taro Aso and Mr.Yasuo Fukuda announced their candidacy on September 14, 2007. A vote was held at the Joint Plenary Meeting of Party Members of Both Houses of the Diet on September 23. Of a total of 528 votes - 387 votes from LDP's Diet members and 141 votes of party members with three ballots allocated to each Party branch - Mr.Fukuda received the majority and was elected the 22nd President of the LDP.

President Fukuda appointed Mr.Bunmei Ibuki as Secretary-General, Mr.Toshihiro Nikai as Chairman, General Council and Mr.Sadakazu Tanigaki as Chairman, Policy Research Council. He also upgraded the office of General Election Bureau to Election Strategy Council and appointed Mr.Makoto Koga as chair. The post, chairman of the Election Strategy Council, became one of the four major Party Executives.

The elections to appoint a Prime Minister were held at the plenary session of the House of Representatives and the House of Councillors on September 25; two candidates stood for the position, which was the first time in nine years. Mr.Yasuo Fukuda received 338 votes and Mr.Ichiro Ozawa, President of Democratic Party of Japan (DPJ), 117 at the House of Representatives. In the House of Councillors, Mr.Fukuda received 106 votes and Mr.Ozawa received 133. Although the Houses could not reach agreement, based on the Law of superiority on the House of Representatives prescribed on the Constitution, LDP President Fukuda became the 91st Prime Minister. He was the first son of former Japanese Prime Minister Takeo Fukuda.

The Fukuda Cabinet was announced the next day with 13 of 17 Cabinet members being re-appointed to avoid unnecessary disorder due to the Diet being in session. At his first press conference, Prime Minister Fukuda warned that the LDP would lose its grip on government if it took even a single wrong step, and that the Party must work hard to maintain the support of the Japanese people. He declared it essential that the government regains the faith of the people in politics, naming his Cabinet “a cabinet with its back against the wall”.

On October 1, Prime Minister Fukuda delivered his inaugural address; he first apologized that the proceedings of the Diet had to be halted in order to hold the presidential election of the LDP. He stressed his determination to discharge his duties as prime minister, putting first and foremost the goal of securing Japan's future development and the stability of people's lives. Regarding the issue of political funding, he said that “the ruling parties have compiled their views on what must be done to improve the situation and enhance transparency in political funding”, emphasizing the need for full discussions with the opposition parties.
With regard to the pension issue, he stated “it is important that the pension records of each and every person be reviewed and that pension payments be correctly made”. He added “it is essential that we design the system for a long-term perspective to ensure that stable pension payments will be made in the future.”
In the field of foreign policy, Prime Minister said “maintaining the solid Japan-U.S. alliance and promoting international cooperation are the foundation of Japan's diplomacy”, and furthermore expressed his desire to “promote active diplomacy toward Asia” for peace and stability in the region. “The most pressing issues we are facing are the continuation of the Maritime Self-Defense Force's support activities in the Indian Ocean and the early resolution of issues related to North Korea.” He promised to do his utmost effort to bring early resolutions to both. He said “I will implement policies based on the principle of “self-reliance and mutual cooperation” and conduct politics with warm compassion.”

On October 17, the government abandoned the continuation of the Anti-Terrorism Special Measures Law due to expire by the end of October, and instead submitted a new bill related to Anti-terrorism Special Measures Law to the House of Representatives which would limit SDF's activity to water and oil supply in the Indian Ocean and, in so doing, show Japan's continued strong determination to contribute to the international community. Around the same period, however, a fraud associated with oil supply to the US Marines and a scandal involving the Administrative Vice Minister of Defense receiving excessive entertaining were revealed. These issues seriously disrupted the Diet proceedings and the opposition parties focused on these issues alone and failed to examine the new bill related to Anti-terrorism Special Measures Law.
The original Anti-Terrorism Special Measures Law expired on November 1, and the Maritime Self-Defense Force withdrew from the Indian Ocean. Prime Minister Fukuda had a meeting with President Ozawa of the DPJ to discuss the Diet proceedings, which resulted in Mr.Ozawa's resignation due to internal friction with his stance within the DPJ.

On November 9, the 168th extraordinary Diet session was extended to December 15, and on the 12th, the New Anti-terrorism Special Measures bill was passed at the Anti-terrorism Special Committee of the House of Representatives and also at the plenary session of the House of Representatives. The next day it was sent to the House of Councillors. Because the two Houses were controlled by different parties, the deliberations were difficult. For this reason, the Government party had to extend the session once again and the Diet opened in January for the first time in 14 years.
Although the New Anti-terrorism Special Measures Law was rebuffed at the House of Councillors on January 11, it passed again at the plenary session of the House of Representatives on the same day with more than two-third of votes. It was first time in 57 years that the same bill had been approved twice by the lower house.

Despite the difficult deliberations in the Diet, a number of bills struck at the heart of the national interest and the lives of the Japanese people. These included the Special Measures Law concerning the Payment of Benefits to Relieve the Victims of Hepatitis C Contraction, the Reform of Political Fund Control Law, the Bill to Amend a Part of the Natural Disaster Victims Relief Law, the Bill to Amend a Part of the Sword and Firearms Control Law, the Bill to Amend the Labor Contract Law in addition to Amend the Minimum Wages Act, and the Act to revise the Part of Social Welfare Worker (Shakaifukushishi) and Certified Care Worker (Kaigofukushishi) Act. All these were eventually passed.

Three days after the closure of the extraordinary Diet session, the 169th ordinary Diet session was convened. In Prime Minister Fukuda's policy speech, he put the year 2008 as the year in which Japan would become “a society in which the people and the consumers play leading roles.” He would achieve this by integrating consumer related departments and offices of related ministries to establish a new organization that would enhance and promote consumer policies. He proposed five other policies: “Shift to administrative and financial policies that put the people first”; “Establish a social security system and ensure safety” so that the people can live with a sense of security; “Create an economic society with vitality” in which people can enjoy life; “Make Japan a peace fostering nation” that plays an active role in addressing global issues; and “Convert to a low-carbon society” which seeks to mitigate against global warming while achieving economic growth at the same time. However, the deliberations in the Diet continued to be difficult due to the DPJ's control of the upper house.

The main focus of the Diet was to pass the FY2008 Budget, the enactment of the revenue bill that was due to expire in the end of March, and especially the continuation of the provisional rate on a gasoline tax and the motor vehicle weight tax. The ruling party submitted a Safety Net Law, though this was a private member's bill, in order to avoid the confusion on people's lives and local government finance. The bill was passed at the Budget Committee of the House of Representatives despite strong rebuttals from the opposition parties. Through the good offices of the presidents of both Houses, the ruling party withdrew the bill, and the bills for the FY2008 Budget and the enactment of the revenue were finally approved in the House of Representatives, and sent to the House of Councillors on February 29. However, the opposition parties needlessly stalled their deliberation.

On March 27, Prime Minister Fukuda held an emergency press conference and declared that the revenue sources earmarked for roads were to be reallocated to the revenues for general purposes from 2009. The DPJ did not even agree to discuss the matter. The following day, the FY2008 Budget bill was passed, although the revenue bill was not voted on. The Special Taxation Measures Law excluding the road-related tax revenue passed on March 31 thereby minimizing the economic damage. The provisional tax rate excluding motor vehicle weight tax was abolished on April 1. The bills sent to the House of Councillors were not considered for more than 60 days. In accordance with the Constitution, these bills were sent back to the House of Representatives, and the bill related to fundamental reform of the taxation system was passed again in the House of Representatives on April 30. The provisional tax rate was restored after a month. The revenue sources earmarked for roads bill was again passed on May 13.

A new Governor of the Bank of Japan (BOJ) was required and two candidates recommended by the Government were rejected by the House of Councillors. As a result, the extraordinary situation arose whereby Japan had no Governor of the BOJ facing the global financial crisis, notably the subprime mortgage crisis and the price hike of crude petroleum. It was obvious that the DPJ deliberately delayed the progress of national affairs by such actions as opposing the Agreement on Host Nation Support.

On June 11, almost at the end of the Diet proceedings, a censure motion against Prime Minister Fukuda was passed in the House of Councillors for the first time under the current Constitution. However, the next day, the ruling party submitted a confidence resolution and the House passed a vote of confidence in the Cabinet in the House of Representatives showing how much contribution the Fukuda Cabinet had made to people's lives and stability on international society.

At the 169th ordinary Diet session, bills including the Basic Act on the reform of the civil servant system, the Juveniles Act, the Basic Act on Space, the Research and Development Enhancement Act, the Act on the Prevention of Improper Use of Mobile Phones and Act on Specified Commercial Transactions were passed during the 156 days of sitting.

During the 2008 ordinary Diet session, a scandal erupted in January involving the use of methamidophos in frozen dumplings made in China that caused serious health problems and captured the nation's attention. It provided an opportunity for the government to review the food security and the food control system. In February, the vessel Aegis Atago of the Maritime Self-Defense Force collided with a fishing boat, triggering a debate about the working conditions of ship crews at sea and the contingency plans of the Maritime Self-Defense Force. Furthermore, Asia was hit by a number of major natural disasters: a cyclone in Myanmar, the Great Sichuan Earthquake in China in May, and the Iwate-Miyagi Nairiku Earthquake in June. The government introduced swift emergency measures in all cases.

In the field of diplomatic relations, on February 25 Prime Minister Fukuda met with newly elected President Lee Myung-bak of the Republic of Korea at the latter's presidential inauguration. The two leaders agreed to resume shuttle diplomacy between their countries to further strengthen their relationship. On President Lee's visit to Japan on April 21, the two leaders held talks that culminated in a Japan-Korea Joint Press Communiqué calling for a new era of cooperation between Japan and Korea. The leaders timetabled Prime Minister Fukuda's next visit to Korea, committed to the enhancement of their economic relationship to enhance cooperation and coordination between Japan, US, and Korea in respect of North Korea's nuclear threats. On May 7, General Secretary of the Communist Party of China, Hu Jintao, held talks with the Prime Minister in Tokyo where they confirmed the importance of a mutually beneficial relationship based on common strategic interests and agreed to cooperative development of oil and gas fields in their territorial boundaries in the East China Sea.

The Osaka gubernatorial election of January 2008 saw Mr.Toru Hashimoto, endorsed by LDP's Osaka Prefecture Branch, recording a landslide victory. In February, former member of the House of Representatives Yoshihiko Fukuda,
endorsed by LDP, won the mayoral election in Iwakuni, Yamaguchi Prefecture on the platform of allowing US carrier planes stationed at the Naval Air Facility in Atsugi to move to the Iwakuni Air Base. In other key elections, all candidates endorsed or supported by the LDP were successful.

On August 1, Prime Minister Fukuda reshuffled his Cabinet to progress his reform agenda in keeping with his pledge to the Japanese people. On September 1, however, he announced his resignation and committed his support to a new administration to handle national affairs. The Fukuda Cabinet resigned en masse on the morning of September 24th and Mr.Taro Aso was elected by the Party as his successor.