Japan's Election May Produce Mixed Bag for Business

Prime Minister Taro Aso's Liberal Democratic Party has ruled Japan for nearly the entire post-World World II era. But the LDP may soon find itself out of power. On July 13, Aso and top officials of the LDP decided to call a national election on Aug. 30. Given the Cabinet's low support ratings and the ruling party's resounding defeat in a Tokyo assembly election over the weekend, the opposition Democratic Party of Japan (DPJ) could be in for a big win. The Democrats are widely expected to grab control of both houses of Parliament; more important, they will likely get to choose Japan's next Prime Minister from their ranks.

Voters seem eager for a change. But for business, a DPJ-led government could be more of a mixed bag, say analysts and economists. In the near term, the DPJ will probably stick with the LDP's policy of trying to revive the recession-hit economy.

DPJ lawmakers have said they favor doling out public funds to parents with young children to help with living and education expenses. They also want to leave the consumption tax unchanged for the next four years, eliminate a gasoline tax, and lower corporate tax rates from around 40% to 30%—a move that would put Japan on par with most other wealthy nations. Barclays Capital (BCS) has forecast 1.5% growth for Japan's economy next fiscal year through March 2011. The extra public outlays could boost consumer spending by some $20 billion and add 0.4% to growth, according to Barclays.

A switch in leadership wouldn't be welcomed by all executives, though. One worry: More government spending would add to Japan's ballooning debt. The country already has a public debt-to-gross domestic product ratio that's closing in on 200%, higher than almost every other industrialized nation.

Risk of Rising Rates

The DPJ is considering policies that would more than double policy spending over the next four years, to $184 billion. This fiscal year alone, the Finance Ministry has predicted that bond issuance will rise by 15%, to $1.4 trillion. That explains why, within hours of the day's news, Japanese interest rates rose, with yields on the benchmark 10-year government bond edging up to 1.3% from 1.295%. (The Nikkei stock index fell 2.6%.) The problem with higher interest rates is that it could make businesses less willing to invest in factories and consumers less eager to spend money on new homes—and weigh on the economy.

Business leaders are also wary of the opposition party's labor policies. The Democrats say they want to raise the minimum wage and tighten rules that control how companies hire and fire temp and contract workers. "This could be an opportunity to reform Japan's labor market," said one business group official, who declined to be identified. "But if you sharply raise the minimum wage, companies might decide to lay off more workers. And if there are too many labor restrictions, companies may stop manufacturing here altogether."

And while the government is investing in renewable energy technologies such as solar and wind power, the DPJ has suggested it will take such moves a step further. Last month, Aso unveiled an LDP plan to cut Japan's greenhouse gas emissions 15% from 2005 levels by 2020. The DPJ wants far bigger emissions curbs ahead of global talks in Copenhagen in December, where nations will attempt to agree on new emissions-reductions goals. Critics of the DPJ's target say that a recession isn't the right time to ask businesses to agree to more commitments.

For now few executives are willing to take sides. "For business, stability is of course important, but big change is required for major progress," Honda (HMC) CEO and President Takanobu Ito told reporters Monday at a meeting at the company's Tokyo headquarters. "The most important thing is that people have promise of a bright future. Then people will feel better, spend more money, and products will sell better."

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