Commentary: Why Koizumi Is On Thin Ice

Why Japan's Prime Minister is facing voter backlash

Could Japanese Prime Minister Junichiro Koizumi be out of a job soon? That prospect is spooking Japan's markets in the runup to Upper House elections on July 11. Despite Japan's surging economy, polls show Koizumi's Liberal Democratic Party trailing the Democratic Party of Japan. Although the election won't determine who runs Japan -- the government's ruling majority comes out of the Lower House -- it's a crucial litmus test. And some LDP elders are saying Koizumi ought to resign if the party takes a drubbing. Given the robust economy, "Koizumi should be getting a lot more support than he is -- it appears to be unfair," says Akio Mikuni, co-author of Japan's Policy Trap, a book on the financial challenges confronting the country.

What gives? Few fault Koizumi for his handling of the economy, but he's taking the heat for two unpopular policies: pension reform and support for the U.S. in Iraq. In an effort to shore up Japan's nearly insolvent pension system, the LDP-led coalition in June hiked premiums and cut benefits, alienating millions of retirees. And in the spring, Koizumi dispatched 550 soldiers to Iraq despite massive public opposition.

So is it time to contemplate a Japan without Koizumi? Not so fast. The LDP is shooting for 51 of the 121 seats up for grabs, but even if it wins only 45 -- which seems doable -- it will still hold an overall Upper House majority. And a recent poll found that voters prefer the LDP'S economic policies to the DPJ's.

But after a bad LDP showing, party elders could force a Cabinet reshuffle. Anti-reform elements might then demand the resignation of the man they love to hate, Economy & Financial Services Minister Heizo Takenaka. Without the forceful Takenaka on board -- he earlier crushed LDP opposition to bank reform -- Koizumi's efforts to close Japan's yawning budget gap and privatize state-owned assets might fall by the wayside. Foreign investors could bail out of Japanese stocks and bonds. And Koizumi would spend the rest of his term, which ends in 2006, essentially a figurehead. "This could be a slippery slope," warns James Barber, an analyst with Barclays Capital Research Japan. Koizumi will probably keep his job. But unless he and the LDP prove the polls wrong on July 11, he could be facing a tough stretch.

By Brian Bremner

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