Japan's Prime Minister Resigns

Slumping approval ratings, a gaffe-prone Cabinet, and missing pension data help oust Shinzo Abe, but the impact on business looks benign

When Shinzo Abe took over from Junichiro Koizumi a year ago, there were bright hopes that the soft-spoken 52-year-old—Japan's youngest Prime Minister in 65 years—would continue Koizumi's legacy of reform.

But on Sept. 12, after a year of Cabinet scandals, government incompetence, and crumbling voter support, Abe fell on his sword. "I've decided to create a new situation by resigning," Abe said in a live TV broadcast. "It is my responsibility that my old and new Cabinet could not secure the public's trust."

The sudden announcement, while earlier than some expected, wasn't all that surprising. Just three days earlier, Abe had told reporters he would quit if his government didn't win backing for anti-terrorism legislation. The bill would let the Japan Maritime Self-Defense Forces continue supplying fuel and providing other logistical support for the U.S.-led military operations in Afghanistan. That support now looks unlikely after the opposition Democratic Party of Japan said it wouldn't back the proposal.

Markets Shrug

But many experts had already been predicting Abe's ouster: After his ruling Liberal Democratic Party's disastrous showing in a July 29 Upper House election (BusinessWeek.com, 7/30/07), Abe was regarded as a lame duck who was only holding on until his party could reach a consensus about his replacement. No consensus on a successor has emerged yet, but the three front-runners—LDP Secretary General Taro Aso, former Finance Minister Sadakazu Tanigaki, and former Chief Cabinet Secretary Yasuo Fukuda—are all party bigwigs who would protect the status quo. "It's hard to see how this could be bad news—it probably does not make much difference to policymaking," says Richard Jerram, chief economist at Macquarie Securities (MQBKY) in Tokyo.

And some analysts predict the end of speculation about Abe's exit might even help stocks. "I'm sorry to say this, but his resignation will have a positive impact on the economy, at least in the stock market," says Tosihiro Nagahama, an economist at Dai-ichi Life Research Institute.

That explains why the markets were unfazed by the day's events. As the news broke, the Nikkei 225 stock market index initially recouped losses before ending 0.5% lower at 15,797.60, and the yen weakened slightly against the dollar. Barring a major market sell-off, there's unlikely to be any lasting impact on the Bank of Japan's interest-rate policy, which currently has a key benchmark rate at 0.5%. "I don't expect that Abe's resignation has an impact on the BOJ," says Hisashi Yamada, an economist at the Japan Research Institute in Tokyo. As for a rate rise, "I don't think it will take place this month," Yamada added.

Out-of-Touch Administration

In reality, no single event caused Abe's downfall. Even before the embarrassing Upper House defeat, Abe's reign in office had been marred by the slipups of his Cabinet: several ministers' gaffes and resignations, one suicide, and accusations of financial irregularities related to political funds. Among the memorable departures were those of three agriculture ministers in just over three months and Defense Minister Fumio Kyuma in July. Kyuma, who hails from Nagasaki, drew criticism for saying the World War II nuclear bombing of Japan "couldn't be helped." In all, five ministers were sacked, quit, or died. Former Health, Labor & Welfare Minister Hakuo Yanagisawa didn't quit at the time, but sparked outcry when he called women "baby-giving machines" in January.

The misfiling of records linked to 50 million pension claims didn't help matters. To many voters, who wanted a leader to tackle rising inequality, pensions, and taxes, the bungling symbolized just how out of touch Abe's administration was. After a Cabinet reshuffle, the Yomiuri Shimbun, Japan's largest daily newspaper, found in a Sept. 11 poll that only 29% of respondents supported the Abe Cabinet, compared with 70% when he took office.

Perhaps one of Abe's biggest misfortunes was that he came to power so soon after the charismatic Koizumi. Abe's political pedigree—he's the grandson of former Prime Minister Nobusuke Kishi—was no match for the force of Koizumi's personality and instinct for getting voters to back his ideas. Unlike premiers of the past who took orders from party leaders, Koizumi was a maverick who pursued his own pet projects and then rallied public opinion, forcing conservatives to fall in line. As Koizumi's protégé, Abe tried a similar tack. But his declaration that constitutional reform would be a key tenet of his policies got nowhere with voters.

Next for Ruling Party?

Whether Abe's successor can revive the LDP's flagging fortunes is an open question. Though the LDP now lacks a majority in the Upper House of the Diet, it still controls the more influential Lower House, and that gives the party dibs on filling the Prime Minister's post. The next leader will have to rebuild the ruling party's popularity in the countryside, once a traditional stronghold but now a weak point. Some analysts worry the LDP could backslide on much-needed health, pension, and tax reforms.

LDP Secretary General Aso is arguably the party's top choice. But his appointment would not be without risk. Like Abe, Aso hails from a powerful political family: His grandfather was former Prime Minister Shigeru Yoshida. But Aso, 66, has had his own slips of the tongue. Recently, he mocked people with Alzheimer's disease in a speech, saying "even people with Alzheimer's could understand" that Japanese rice is more expensive in China than in Japan.

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