Why Japan Inc. Is Turning Its Back On The Politicians

For decades, it was a familiar Japanese ritual. Every campaign season, the pro-business Liberal Democratic Party, flush with corporate contributions, would trounce smaller opposition parties and install a party elder as Prime Minister. In return, LDP-led governments made sure Japan Inc. didn't face too much foreign competition at home and that domestic consumers bore the cost of their overseas export assaults.

So why now, with a crucial general election looming on Oct. 20, have Japanese companies turned off the LDP's campaign cash spigot? Despite plenty of LDP pleading, the powerful Japan Federation of Economic Organizations, or Keidanren, has refused to help foot the $110 million or so the party needs to mount its nationwide campaign. "The old system has been totally demolished," says Tadahiro Sekimoto, chairman of NEC Corp. "And I don't think it will come back."

True, the LDP will probably get by on contributions from its ties to the powerful farm lobby, its strong grassroots organization, and commercial bank loans. It's the odds-on favorite to win a near-majority of seats in the 500-member lower house of parliament, and anchor the next coalition government. Prime Minister Ryutaro Hashimoto is expected to strengthen his hand.

SCANDALS. Still, the once ironclad ties that bound business to the LDP are fraying. The need to improve public relations explains some of business' reluctance to fund campaigns. Recent bribery scandals have intensified voters' belief that corporate donations are a corrupting influence. New legal limits on company contributions, while not overly restrictive with a $1 million annual cap, also have curbed Japan Inc.'s largesse. But far more critical is the turmoil in Japanese politics that began in 1993, when a band of LDP defectors triggered the fall of the government and snapped the party's 38-year reign of uncontested power. Since then, there have been four Prime Ministers in three years, and little has been accomplished except that the reform-minded in business have had their hopes dashed.

A revolving door at the top wouldn't matter that much, except that it occurred the same time Japan suffered through its deepest recession in postwar history. Confronted with labor costs that are among the highest in the industrialized world, Japanese multinationals started shifting production to cheaper locations in Southeast Asia. Increasingly, Japan Inc.'s interests lie in expanding outside the country, not in preserving domestic employment.

It could get worse if Japan's political system doesn't begin to tackle structural woes weighing down the $5 trillion economy. Restrictive land-use laws and heavy regulation drive up costs. Japan's 50% corporate tax rate is one of the highest among industrialized countries. And the country lags in high-tech areas such as software and the Internet.

Big business, ironically, now portrays itself as one of Japan's biggest agents of change. The changes, though not the kind of market-opening reforms that would satisfy American importers, are the sort that might help business' image with the Japanese public. One proposal, for example, would shift the management of $2 trillion, held in the Japanese postal system's savings accounts, from the Ministry of Finance to money pros to boost returns. The Keidanren wants more focus on a coming social security bombshell caused by an aging population. A less popular proposal is its call for an end to Japan's social compact of lifetime job security.

WISH LIST. Yet most experts think Japan Inc.'s wish list will be largely ignored. Neither the LDP nor the opposition New Frontier Party led by Ichiro Ozawa will offer policy prescriptions to address structural problems. With the economy on track for a healthy 3% growth this year, Hashimoto's party isn't pitching radical change. His government has balked, for instance, at breaking up the Ministry of Finance or the $70 billion Nippon Telegraph & Telephone Corp. monopoly. Instead, he wants to eliminate some lesser government agencies and hike Japan's sales tax, from 3% to 5%, to tame a swelling deficit. Rival Ozawa talks more ambitiously of cutting taxes and bureaucrats' power. But with a minuscule 7% approval rating, he's unlikely to be in a position to pursue his vision.

There's a measure of hypocrisy in Japanese executives recasting themselves as crusading rebels. After all, they benefited from Japan's encrusted system as much as anybody. Yet with Japanese pols bereft of new ideas and distracted by parliamentary parlor games, business perceives that it has little choice but to step in. More than political contributions are at stake. Japanese multinationals could head for the exits, taking even more jobs and investment with them.

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