Kan Election Loss May Impede Effort to Cut Japan Debt

Japan’s Prime Minister Naoto Kan lost control of parliament’s upper house, undermining legislative efforts to cut the world’s largest public debt and creating the possibility of a third leadership change in a year.

The ruling Democratic Party of Japan won 44 seats, compared with 51 for the opposition Liberal Democratic Party, according to results compiled by public broadcaster NHK. Your Party, a new group founded by former LDP cabinet minister Yoshimi Watanabe, won 10. Half of the 242 seats in the less powerful of Japan’s two houses of parliament were up for grabs.

Kan, who took office a month ago, stoked voter resentment by calling for a debate on whether to raise the 5 percent sales tax, drawing attention to a national debt that amounts to $80,000 per person. Losing his coalition government’s majority will mean he has to reach out to smaller groups to ensure smooth passage of legislation to bolster growth and social welfare spending.

“The results were far from what we sought,” Kan said in an early morning press conference in Tokyo today. “One major reason was that my remarks on the consumption tax left an abrupt impression to the public and my explanation was insufficient.”

Policy Alliances

Kan said he wouldn’t step down after failing to meet his goal of winning at least 54 seats in yesterday’s election, adding that he will pursue “policy-based” alliances with other parties. He said he will maintain the coalition with the People’s New Party, which lost all three seats up for re- election, cutting its strength in the chamber by half.

Justice Minister Keiko Chiba was among the DPJ lawmakers who lost their seats.

The Nikkei 225 Stock Average fell 0.1 percent to 9,575.20 as of 9:56 a.m. in Tokyo and the yen weakened to 89.07 per dollar from 88.62 in New York on July 9.

“This makes it impossible for Mr. Kan to push too much” in confronting Japan’s fiscal problems, said Koichi Nakano, a political science professor at Sophia University in Tokyo. “The issue is not going away, because it’s such a huge problem. Kan’s skills for political survival will be tested to the limit.”

Kan last month released plans to boost the world’s second- largest economy by lowering the corporate tax rate from as high as 40 percent while balancing the budget in 10 years, which won praise from world leaders at the June 26-27 Group of 20 summit in Toronto. Japan is still grappling with 12 years of deflation, and the Nikkei Average dropped 8.9 percent this year.

‘Divided Parliament’

“The markets won’t like a divided parliament, but that will only somewhat depress foreign investor sentiment because it’s already low,” said Chiwoong Lee, senior economist at Goldman Sachs Group Inc. in Tokyo. “Most parties are calling for cutting corporate taxes, so it will be positive if the DPJ can actually work with them.”

Japan’s biggest business lobby called on all parties to work together to boost the economy and the nation’s finances.

“Policy implementation shouldn’t be stagnated because of the divided parliament,” Hiromasa Yonekura, head of the Japan Business Federation, said in a statement. The group is commonly known as Keidanren.

The DPJ had 54 of its 116 seats at stake and will remain the biggest party in the House of Councillors. It has more than 60 percent of lawmakers in the lower chamber, the House of Representatives, which chooses prime ministers and can overrule the upper house.

Your Party leader Watanabe said that while he isn’t interested in joining Kan’s coalition, he will work with the government “if we have common agendas” on specific issues. Kan said he will maintain an alliance with the PNP.

Fifth Leader

Kan, 63, became Japan’s fifth leader in four years when he replaced party colleague Yukio Hatoyama, who quit over campaign funding scandals and a broken promise to relocate a U.S. military base from the island of Okinawa. An Asahi newspaper poll last week predicted the DPJ would win fewer than 50 seats and that the LDP would add about six lawmakers.

Jun Azumi, head of the DPJ’s election committee, said on TBS Television that Kan shouldn’t be held responsible for the results.

“Kan will stay in power and the DPJ will have to find a consensus with opposition parties on each piece of legislation until it can form a new coalition,” said Tomoaki Iwai, a political science professor at Nihon University in Tokyo.

Still, failure to reach his goal of maintaining the party’s strength may increase the chances of a challenge when Kan’s term as party leader is up for re-election in September. DPJ power broker Ichiro Ozawa, who quit as the party’s No. 2 official when Hatoyama stepped down, criticized Kan’s sales tax proposal.

Kan’s Vulnerability

“Kan will be vulnerable in the September leadership battle ,” said Jeff Kingston, head of Asian Studies at Temple University’s Tokyo campus. “I don’t think he’ll resign, but he might be ousted.”

The prime minister’s suggestion that the government may have to as much as double the 5 percent consumption tax cut into his popularity. He framed the debate in terms of the need to pay for rising social welfare costs, and said any increase is “at least two to three years off.”

Kan’s approval rating declined to 43 percent from 66 percent after he took office on June 8, the Mainichi newspaper said July 9. Hatoyama, who last year led the party to victory in the more-powerful lower house, shifted spending from public works to households. The DPJ passed legislation to give families a monthly stipend of 13,000 yen ($147) per child and eliminate public high school fees.

“I punished the DPJ and voted for Your Party,” said Ken Fukushi, a 45-year-old company employee in Tokyo. “Spending cuts should take priority over” raising the consumption tax.

One of the few bright spots for the DPJ was the election of two-time Olympic Judo gold medalist Ryoko Tani. The 34-year-old, a political novice, said in announcing her candidacy in May that she intends to compete in the 2012 Summer Olympic Games in London.

To contact the reporters on this story: Sachiko Sakamaki in Tokyo at Ssakamaki1@bloomberg.net; Takashi Hirokawa in Tokyo at thirokawa@bloomberg.net

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