Saruhan Hatipoglu (sshatipoglu@beri.com)

A DIFFERENT KIND OF "DIET" FOR JAPAN:

Koizumi's Political Gamble Pays Off

Roll of the Dice.   Only a few were surprised when Prime Minister Junichiro Koizumi called for snap elections following the blocking of his pivotal Japan Post privatization bill in the upper house of the Diet (Japanese parliament).  The renegade reformer decided on this poll largely to show who the real boss was to members of his own party that voted against the initiative together with the opposition.  The outcome was not only a clear victory for Mr. Koizumi but also for post office privatization, which has become the poster child of reform measures in the country.  The Liberal Democratic Party (LDP) increased its number of seats in the lower house from 212 to a remarkable 296 (second highest in the history of the party).  Winners for the main opposition Democratic Party of Japan (DPJ) declined by 64 to 113, effectively ending the DPJ power aspirations for some time to come.  The LDP decided to continue its alliance with the Komeito party, which adds another 30 seats for a total of 326 seats in the lower house.

Another interesting outcome of the snap elections was the large turnout (67.6%), which was the highest participation rate in 15 years.  This was a clear indication of support for Mr. Koizumi and his strong and colorful personality that electrified the population and enticed people to vote in the election.  The Prime Minister took a huge gamble that risked his political career and leadership position of the LDP.  The reactionary decision for early elections could have backfired, energizing the previously strengthening DPJ.  However, the outcome not only gave the LDP a two-thirds majority in the lower house but caused a political disaster for the DPJ that led to the resignation of its leader, Katsuya Okada. Two birds with one stone for Mr. Koizumi.  He now has a clear mandate for his reformist vision for the country.     

Recent Economic Success of Japan.    Most Japanese people did not place their confidence in Mr. Koizumi because of his renegade personality.  The Prime Minister earned their trust because of his reformist agenda and the economic results that he has achieved since taking power.  One of the recent important developments is that bank lending showed its first expansion in August in seven years.  Putting aside bad-loan write offs and the impact of currency fluctuations, the scope indicated that more is on the way.  This is a clear sign that confidence, both by the lender and the borrower, is improving in Japan.  The future increase in bank loans will raise money supply and create another mechanism by which deflationary pressures will be controlled.

The condition of the Japanese economy is improving.  Recent statistics showed that real GDP increased 3.3% in the second quarter of 2005, compared to the 2004 period, three times faster than the predicted rate for that period.  The Basic Nikkei 225 Index jumped 34% during Mr. Koizumi's term as Japanese prime minister.  Strong leadership, fiscal discipline, easy credit policies, and reform measures were all factors in the favorable economic and financial performance.  This will motivate more consumer spending in the coming year as confidence in the government improves.  The Japanese economy will grow steadily for the next two to three years.  Mr. Koizumi led by example and at the end was rewarded by the voters.

Is Japan Going "Postal" Now?   You can count on it.  The government will accelerate the  process, and it is even likely to bypass the lower house as a result of its majority.  In case the upper house rejects the privatization bill, the lower house two-thirds majority will enable the government to pass the bill.  The actual privatization of Japan Post is an enormous task that will take the government a decade to complete.  Although April 2017 is provided as the final date, delays are likely to take place and should be interpreted as normal.  After all, the organization holds ¥350 trillion (over US$3 trillion) in public savings. 

The privatization of Japan Post has been made to be more than what it is because of politics.  Its implementation still remains the most important issue in Mr. Koizumi's agenda.  Although the privatization of this large entity signifies a reformist victory over the status quo, spending too much political capital and executive time on one issue carries some serious risks for an economy that is about to turn the corner.  Japan needs to give attention to such other issues as civil service and political reform.  The opposition DPJ had a very strong agenda, promising to reduce civil payrolls by almost 20% (twice the rate the LDP was expected to cut).  In addition, the DPJ had proposed to strengthen local governments at the expense of central leadership.  Japan has a long way to go in reforming its economy and politics to assure sustained economic growth.  The country progressed rapidly and steadily under the leadership of Mr. Koizumi, but the post office saga should not take the time and energy needed for other crucial reforms.  Mr. Koizumi should proceed with the privatization of Japan Post and use the incident as the means to jumpstart other reform initiatives that the country desperately needs.        

Conclusion.  The LDP consolidated its position in Japan's politics with the early elections.  The outcome signaled change for both the governing LDP and the opposition DPJ.  The conservative, traditionalist faction of the LDP is beaten and will no longer be able to pose a strong challenge to Mr. Koizumi's reform measures.  The party has extended its strength in the Japanese politics at the expense of a weakened and widely-distraught DPJ.  The opposition's failure in the elections had one negative implication: Democracy in Japanese politics is not yet fully mature.  The governing LDP has been in strong control of the country's leadership for the past 50 years.  The election confirmed that another long spell of ruling by the LDP is probable and that the DPJ was unable to take advantage of serious internal divisions among the Liberals.  In failing to do that, it has not only reduced hopes for providing serious competition to the LDP, but it has also caused its own demise.  Japan is now on the road to consistent reform, but it will continue this journey in a one-party democracy as the DPJ heals its wounds in private.

 DIRECTOR'S PERSPECTIVE Last Updated 19 September 2005