Shadow Shoguns Will Trash $5 Trillion Economy: William Pesek

Even for a guy dubbed Japan’s “Shadow Shogun,” it was a breathtaking moment.

There he was, scandal-tainted powerbroker Ichiro Ozawa, announcing a move to challenge his own ruling party’s leader this month. Why? Prime Minister Naoto Kan refused to make backroom deals to secure Ozawa’s support.

Kan could have easily forgone a mess that is roiling markets. He took the high road, though, declining to promise Cabinet or party posts to Ozawa’s supporters. Good for Kan.

This is a pivotal moment for those wondering if Japan can right its off-course economic system. It’s quite simple: a Kan win on Sept. 14 will challenge a status quo that left Japan trailing China sooner than many had imagined. An Ozawa victory may push Japan further off investors’ radar screens.

This election also gets at an old, yet growing problem in Japan. It’s the fact that the political shoguns of elections past never seem to go away, hence they block radical change in a nation calling out for it.

Ozawa, 68, is the poster child. The former leader of the Democratic Party of Japan is under investigation for his role in a campaign-finance scandal. Such alleged shenanigans kept him from the ultimate prize: prime minister. When his DPJ finally topped the mighty Liberal Democratic Party in August 2009, that honor went to Yukio Hatoyama.

Neglected Economy

The hapless Hatoyama stepped down in June amid his own political-funding investigation. That paved the way for the reformist Kan, 63, to take over and tend to a long-neglected economy.

Not so fast, say Ozawa and Hatoyama. They are teaming up to retake the helm. This will destroy any hope for major structural change in Asia’s second-biggest economy.

Let’s not count out the LDP, which until last year ran Japan virtually uninterrupted for 54 years. Yet it, too, is looking like a has-been. Two of its former prime ministers, Yoshiro Mori and Shinzo Abe, are brawling publicly over the direction their wing of the party should take.

Japan is also rich with economic has-beens filling the airwaves with advice for the Kan government. Never mind that Eisuke Sakakibara was a Finance Ministry bigwig during a particularly undistinguished period of policy making (1997-1999). We in the media can’t get enough of the guy known as “Mr. Yen.”

Reforms Backfire

Or take Heizo Takenaka, who pushed economic reform under former Prime Minister Junichiro Koizumi. While Takenaka is a very smart guy, news anchors clamoring to interview him gloss over the extent to which Koizumi-era policies backfired and are pretty irrelevant today.

Japan hardly has a monopoly on has-beens who hog the debate with limited accountability. Yet there are a few too many political traffic cops slowing the drive toward change in Tokyo at the moment.

There is a genuine chance that Ozawa will become Japan’s sixth prime minister in three years next week. Never mind that polls show a clear majority of Japanese favor Kan -- Ozawa is masterful at winning elections.

What would Ozawa bring to the table? Intervention to tame the strong yen, more pressure on the Bank of Japan to pump up liquidity and increased pork-barrel government spending. If you think you’ve see this movie before, you have. Several times.

‘I Have a Dream’

Ozawa seems to be borrowing famous words from far more durable leaders of the past. For example, he’s using language that’s eerily similar to Martin Luther King’s “I Have a Dream” speech, to woo voters. His economic policies may lead to something closer to a nightmare.

To be fair, some in Tokyo wonder if Ozawa might surprise us. He may be a strong leader, with a solid mandate. Yet what good is power if your policies won’t move Japan forward?

“Amid a deteriorating financial situation for the nation, Prime Minister Kan has at least spoken out on the need to bring Japan’s finances back under control,” says Brian Nicol, director of equity sales at MF Global FXA Securities in Tokyo. “Should Ozawa assume the leadership in the upcoming election, we can hardly expect the same approach.”

Prime ministers don’t often run Japan’s economy; change- resistant bureaucrats do. That’s why Kan is more focused on reducing their influence than any prime minister in many a year. Japan would be well-served by giving Kan’s anti-bureaucrat platform more time to shift the balance of power.

National competitiveness is just as important as the strong yen. That was the message from reports last week that the Renault SA-Nissan Motor Co. alliance is boosting production in South Korea to be less reliant on Japan as a manufacturing base.

Japan has had enough backroom deals that put the interests of politicians ahead of its 126 million people. It’s time to shine some daylight on this corrupting and growth-killing dynamic. Next week’s election may say much about whether the sun is about to come out.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

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