Japan: With Reform Crumbling, Obuchi May Take A Fall

He was the paternal politician who calmed the storm and assured voters Japan was back on track. He averted a crisis with a rescue of the deeply troubled bank sector. By the end of his first year in office last August, Prime Minister Keizo Obuchi had confounded his numerous critics, who initially dismissed the career Liberal Democratic Party man as a hack with a tenuous hold on the top job. Instead, talk started to circulate that Obuchi was a behind-the-scenes fixer who could bring together the quarrelsome LDP and create conditions for real recovery.

But perhaps the critics were right after all. Since October, Obuchi's approval rating has declined steadily. Economic recovery is taking longer than anticipated, despite three stimulus packages totaling $560 billion. That's bad enough. But Obuchi's party also faces an uphill battle in a general election to be held by October. Unless he recovers his touch--or robust growth bails him out--he may end up in the same predicament as several of his predecessors: resigning over miserable election results. Meanwhile, efforts to reform and deregulate the financial sector appear to be waning, too.

PUBLIC DISGUST. What went wrong? For starters, Obuchi cut a deal with a political devil and miscalculated how bad public reaction would be. In order to seal a majority in the Upper House last October, Obuchi brought into his coalition the New Komei Party, a fringe organization affiliated with the politically ambitious Soka Gakkai Buddhist group, which is viewed with suspicion by the Japanese public. The Prime Minister should have known better. Japanese voters are wary of the LDP's tactics to cling to power, and this latest move only helped rekindle public disgust with Obuchi's party.

Obuchi also blundered by failing to reform the LDP, a promise party leaders have been repeating for the last decade. As recent economic packages show, the party continues to lay out pork-barrel projects for rural constituencies, where most of its politicians are based. As a result, the disaffection of urban voters with the LDP has continued to grow. It hasn't helped that Obuchi has given ground to the LDP's anti-reform camp. The conservatives have reduced pressure to carry through on more bank restructuring: That would cause pain to rural voters, who depend on rickety local banks for financing.

There are more signs that reform is adrift. Tokyo has eased capital requirements for regional banks, and has indicated that foreign financial institutions may no longer be welcome to take over ailing banks. In a move that shocked many, the Obuchi administration recently decided to extend, to 2003, a blanket protection for bank deposits. "I'm concerned about the entire reform process," says James Fiorillo, a senior bank analyst at ING Barings (Japan). "Obuchi is letting the election interfere with policy."

The mounting unpopularity of the Obuchi administration has analysts predicting a tough election for the LDP. The party is likely to lose seats in the Lower House, though it may manage to stay in power with its coalition. If so, Obuchi would likely step down. "It'll be a tough year for the Prime Minister," predicts veteran political commentator Minoru Morita. "Many believe it's only a matter of time before he'll resign, either before or after the election."

One possible successor is senior LDP member Koichi Kato, whom many regard as a genuine reformer. He has publicly criticized the Obuchi administration for dodging true reform. "We can no longer afford to curry favor with the masses," Kato told the Gendai, a respected Japanese journal. "We must carry out fiscal reconstruction, raise taxes, and limit public-works spending." Tough talk. Maybe someday Japan will have a leader who acts tough, too.

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