Financial scandals, yawning budget deficits, a fits-and-starts economy. Such things usually spell death to political careers. Not so with Japanese Prime Minister Ryutaro Hashimoto. After 19 months in office, Hashimoto is shaping up to be the most effective Japanese leader at home and abroad since Yasuhiro Nakasone in the mid-1980s. One big reason is that his Liberal Democratic Party, once viewed as beholden to vested interests, has outmaneuvered rivals by crusading for economic reform. Concedes a senior member of the opposition New Frontier Party: "They have played their cards very deftly."

That much became clear on July 6, when the LDP triumphed in Tokyo metropolitan elections by increasing its seats in the local council by 40%, to 54, in a race widely viewed as a harbinger of national trends. The New Frontier Party, the reformist but feud-ridden group led by former LDP kingpin Ichiro Ozawa, was trounced. And in the 500-seat Diet, the powerful lower house of parliament, so many New Frontier members have defected to the LDP that Hashimoto's party is just three seats shy of regaining the majority control it lost in 1993 after four decades in power.

GUNG HO. The LDP's revival owes much to Hashimoto's assertive style, which plays well with a public anxious about the stumbling economy and resentful of Washington's lecturing. Last month, Hashimoto spooked Wall Street by hinting that Japan might sell off its Treasury bonds if the U.S. used the dollar as a trade weapon. It was an idle threat, but many Japanese were privately delighted. And in Japan's first unilateral military action since 1945, Hashimoto sent three C-130 transport planes to Thailand for a possible evacuation of Japanese nationals from Cambodia.

These are easy victories, though, compared with the work that awaits Hashimoto. He's under pressure from Washington to win Diet approval for a new security agreement this fall that calls for Japan's military to give the U.S. more backup during regional conflicts. The LDP's left-leaning coalition partners, including the Social Democratic Party, are likely to attack such plans. Another challenge is to tame the squabbling among the LDP's zoku-gin, or special-interest groups, which still press for bullet train lines and other goodies in their districts even as Hashimoto tries to close the deficit.

CHANGE PARTNERS AND DANCE? A bigger dilemma for Hashimoto is whether the LDP should dump its shaky coalition partners and tie up with the New Frontier Party. By embracing reform, he has pushed the LDP much closer to the New Frontier on many issues. LDP leaders such as Chief Cabinet Secretary Seiroku Kajiyama are open to a formal New Frontier alliance. But others, including Secretary-General Koichi Kato, oppose it, since they want to punish the LDP renegades who founded New Frontier.

Hashimoto needs to keep these rifts from endangering his broad reform drive. Voters and global investors praise his plan to overhaul Tokyo's inefficient financial markets by early next century, but bureaucrats still resist. He also aims to downsize the bloated government and open long-protected service sectors such as wholesale distribution and utilities to more foreign competition. Many smaller companies are bound to fight such threats to their franchises.

Another danger is that without any serious opposition, the LDP will be tempted to sidestep meaningful reforms. But with the economic and social challenges facing Japan, Hashimoto and the LDP know that by abandoning all pledges to initiate serious change, the party could find itself back in the wilderness. The only way out is for Hashimoto to complete the difficult task he started.

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