Japan: Government By Gaffe

Even if the LDP wins at the polls, Mori's moves have clobbered 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, 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%.

SLOWDOWN? 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 expanded 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 still sluggish, and the mountain of bad debt continues to weigh down the financial system.

To keep the economy from sliding yet again into recession, economists say, the government must move fast to shrink Japan's $6.3 trillion fiscal deficit--an unhealthy 136% of gross domestic product. That means hiking taxes and sharply reducing spending on public works such as dams and roads. Analysts also urge the government to restructure the national pension and health systems, which are running in the red. A report by Massachusetts Institute of Technology economists David Asher and Robert Dugger even warns that "a truly historic downside risk is emerging in Japan today, posing a threat to global economic stability."

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 diminish. 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 performs 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, who conceivably could form their own coalition.

Political 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. Experts predict the LDP would replace him with former Premier Ryutaro Hashimoto or English-speaking Foreign Minister Yohei Kono. But neither figure would probably prove to be more than a caretaker. The Democratic Party, which polls show is more popular than the LDP, should add several dozen seats to the 95 it holds now. That could enable the Democrats to build a stronger bloc in the Diet to push for reform and kill pork-barrel projects.

If Mori does manage to hang on, don't expect radical policy shifts. A politician from rural Ishikawa Prefecture, he's a classic LDP man who supports big government spending over serious reform. He will be tempted to increase the economic pump-priming.

That, of course, could spook investors already worried about Japan's mountainous deficit. "The LDP's policies are bankrupt," says Shigenori Okazaki, a political analyst at UBS Warburg Securities. Already, interest on the national debt consumes 65% of tax receipts--four times the debt-service level of the U.S. government. And a new method authorities are using to get a fix on national accounts could soon show the problem is worse. "We don't know how bad it is," says Eisuke Sakakibara, formerly Japan's top financial diplomat.

COUNTRY BLUES. The LDP could show investors it's serious about reform by preparing voters now for tax hikes and cuts in government services. But it would risk alienating its support base. A likely place to cut, for example, would be subsidies for agriculture, which absorbs 4% of the budget. But some two-thirds of LDP lawmakers come from rural areas. The party also derives support from retirees. They would be hard hit by reforms in the national pension system, which is losing more money as Japanese society ages. Each year, the government dips into pension reserves to balance the books. But those reserves are nearly exhausted. Several government panels are calling for cuts in benefits and higher worker contributions.

Some factions within the LDP do believe the ruling party should seize the initiative. The most strident advocate of fiscal retrenchment is legislator Koichi Kato. However, the former party secretary is unlikely to win a cabinet post in the next government because he has been critical of LDP coalition partner Komeito, which holds 48 seats. Kato also supported Hashimoto's controversial 1997 tax hikes and tight-money policies--which sent the economy reeling just as it seemed poised for recovery.

Considering the mess, one might think the opposition would easily oust the LDP. But this is Japan. The Democrats will likely only win enough new seats to make trouble. And it's not clear they can set a new agenda. Democrat leader Yukio Hatoyama may be better able to push for wider tax brackets, fewer deductions, and lower public spending. But not all Democrats back these goals, and the party lacks a blueprint for achieving them. "They can identify the problems, but the prescriptions are generic," says Keith Henry, a Tokyo political consultant.

Once, when Japan rode a seemingly endless boom, the markets cheered each LDP victory. Not now. They know the likely outcome will be more muddled policy as Tokyo keeps propping up an outmoded economy. Voters are disgusted. But they cannot--or will not--find politicians who act like leaders.

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