Japan: Government By Gaffe

Even if the LDP wins, Mori's moves sap its clout

You have to wonder whether Japanese Prime Minister Yoshiro Mori is trying to do himself in. After the previous Premier, Keizo Obuchi, died in May after a heart attack, Mori was expected to benefit from a sympathy vote in a critical general election set for the Lower House of Japan's Diet on June 25. The scenario: Mori's Liberal Democratic Party would sweep the election, reappoint Mori as Premier, and tighten its hold on Japan's entire political system.

But Mori has quickly squandered that advantage with an almost comical series of gaffes. Soon after LDP kingpins chose the former rugby player in a secret meeting when Obuchi was hospitalized in April, Mori dredged up the worst images of the country's militarist past by calling Japan a divine nation. Local media then reported that Mori spoke at a wedding attended by the boss of a major crime syndicate. In just two months, Mori has managed to irritate LDP elders, transform the bumbling Democratic Party of Japan into a credible threat, and push his approval ratings in a leading opinion poll down from 36% to under 17%.

It's shaping up as a year of political instability in Japan--and it comes at a fragile point in the country's recovery. Policy gridlock already is hampering Tokyo's ability to confront some critical issues. Statistics due soon will probably show the economy surged by 2.2% in this year's first three months. But other indicators signal the economy is slowing in the second quarter--and perhaps even contracting. Unemployment remains near record highs, consumer spending is sluggish, and bad debt weighs down the financial system.

To keep the economy from sliding yet again into recession, economists say, the government must cut Japan's $6.3 trillion fiscal deficit--a full 136% of gross domestic product. That means hiking taxes and slashing spending on public works. Analysts also urge the government to restructure the national pension and health systems, which operate in the red.

ODDS GOOD. Trouble is, such measures require bold political leadership--something the LDP couldn't provide even when it was firmly in power. Now, the party's grip is set to weaken. The LDP-led coalition, which includes the Conservative Party and the Buddhist-backed New Komeito, currently holds 67% of Lower House seats. If the LDP does as badly as polls suggest, it will be lucky to win half of the 480 seats up for grabs. A poll by the newspaper Nihon Keizai shows 37% of voters favoring the three parties in the ruling coalition. That's roughly the same as support for the three main opposition parties.

Analysts figure the odds still favor the LDP. But its tenuous hold on power could spark an internal revolt. That might force Mori--the country's eighth premier in 10 years--out the revolving door. And whomever the LDP names to replace him is expected to be little more than a caretaker. If Mori hangs on, don't expect radical policy shifts. He's a classic LDP man who prefers big government spending to serious reform. That could spook investors already worried over the deficit. "The LDP's policies are bankrupt," says UBS Warburg Securities political analyst Shigenori Okazaki. As it is, interest on national debt consumes 65% of tax receipts.

One might think the opposition would easily oust the LDP. But the Democrats will likely only win enough new seats to make trouble. And it's unclear they can set a new agenda. Even many in the party don't back leader Yukio Hatoyama's call for wider tax brackets, fewer deductions, and lower public spending.

Once, when Japan rode a seemingly endless boom, the markets cheered each LDP victory. Now they know the likely outcome will be more muddled efforts to prop up an outmoded economy. Voters are disgusted. But they lack politicians who act like leaders.

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