Japanese Media Predicts a Landslide Victory for Democratic Party of Japan

By September 1 (next month), Japan could well see the first real change in Japanese politics since the end of World War II.

Recent voter surveys by the Asahi Newspaper and the Nikkei (Japan Economic Journal) are now predicting a landslide victory for the Democratic Party of Japan (DPJ, Japan's equivalent of the Democrats in the US) over the Liberal Democratic Party (LDP, Japan's equivalent of the Republicans), which has ruled Japan for all but a couple of weeks since the end of World War II.

The Nikkei survey between August 18 and August 20 of 210,000 voters nationwide with 110,000 respondents indicates that the DPJ could win over 300 seats in the Lower House, or easily more than the minimum 241 seats required to capture a simple majority. If so, the win will be even more of a landslide than when the extremely popular Junichiro Koizumi and his band of reformists won for the LDP in 2005.

One of the DPJ's main political platforms is administrative reform, which has become one of the Japanese electorate's consistent demands and was a major driver for the Koizumi Administration's popularity. Since Koizumi stepped down as Prime Minister in September 2006, the ruling LDP has substantially backed away from administrative reform.

The DPJ plans to strengthen its power to determine and implement policy by appointing more than 100 DPJ politicians to government positions, and bring leading party politicians into the cabinet. Favoring a Westminster-style (U.K.) parlimentary Cabinet, the DPJ not only wants to expand the power of the prime minister's office, but also to make the cabinet the center of national policymaking by wresting de-facto control from Japan's various bureaucracies, such as METI (Ministry of Economy, Trade and Industry, industrial policy), the MOF (Ministry of Finance) and ministries that have long aggressively resisted reform, like the Ministry of Agriculture, Forestry and Fisheries (MAFF) and the Ministry of Land, Infrastructure, Transportation and Tourism.

If they do gain power, the DPJ must be prepared for a long, hard struggle to implant not only formal policy making but new customs and informal practices into long-standing collusive relationships between governing politicians and bureaucrats, and they will very much need the support of voters for the freedom to experiment, float trial balloons and launch test programs to mold Japanese politics and policy, and to redeploy still substantial national savings away from extremely wasteful and often pork-barrel existing government programs and institutions in order to put Japan back on the road to sustainable growth and generate sufficient revenue to meet the Japanese people's need for social security.

The twin challenges will be re-inventing Japan's outdated growth model while repairing government finances to stem what will soon be government debt in excess of 200% of Japan's GDP. Even with strong voter support, the DPJ is unlikely to easily loosen the bureacracy's grip on pubblic coffers, which means comprehensive fiscal reform could take the better part of the next decade.

With Japan's growth potential now estimated to be a mere 1% versus twice that during the economic recovery to 2007 and 4% in the late 1990s, the first priority of the DPJ will have to be to get beyond mere government support for employment that is transitory and has a limited economic multiplier, and address declining productivity as well as re-trenching deflation. Basically, the DPJ will be faced with:

1. Cleaning up the government's debt-ridden balance sheet with deep administrative reforms to ferret out structural waste to streamline and make government more efficient. This would include the disposal of under-utilized government-owned assets.
2. With only half of Japanese large corporations paying taxes, the DPJ will need to broaden the corporate tax base to reduce the current burden to individual consumers, and incentivize companies to become profitable, particularly in the services sector, which is around 70% of GDP but is dominated by small and medium-sized firms with chronic low productivity and profitability.
3. Indefinitely postpone and even lower consumption taxes and income taxes to revive domestic consumption.
4. And finally, to address a ballooning fiscal deficit after by reinstating the abandoned goal of achieving a basic balance in the fiscal budget.

The initial reaction from both domestic and foreign investors is likely to be positive for stocks and the yen, but slightly negative for Japanese bonds (JGBs).

But it is far from certain that the DPJ can achieve such lofty goals on its first try, and the DPJ could in the worst case become bogged down in a war of attrition in trying to wrest control for Japan's government from the bureacracies, which of course would be a longer-term negative for Japanese stocks. That, said, the Japanese voting public for the first time since World War II will now have a real political choice, and a de-facto two party system that will eventually reinvigorate an out-dated, sclerotic political system.

Disclosure: No positions in EWJ or FXY.

Comments

[Camel King:]

There was a period of several years (not a couple of weeks) when Hosokawa, Hata and Murayama were elected Prime Minister of Japan. None of these people represented LDP at that time (though they the fist two men were originally from LDP). So even if DPJ wins the elecion, it would not be the first time LDP lost power. Please study Japanese political history first before you write the catch phrase in the first paragraph.

Aug 21 11:13 AM

[Darrel Whitten:]

Perhaps you should revisit the Hosokawa, Hata and Murayama Administrations again.

Since the LDP was formed in November 1955 and Ichiro Hatoyama (Democratic Party of Japan leader Yukio Hatoyama’s father) formed the first LDP-led administration, the LDP lost its control (majority) in the House of Councillors in 1989, 1998 and 2007 because of voter dissatisfaction, but they have maintained control in the House of Representatives for all but some 40 weeks between August 1993 and June 1994. As you are probably aware, the lower house is where the real power lies in Japan’s government, as the lower house is able to override vetoes on bills imposed by the House of Councillors with a two-thirds majority, and in the case of treaties, the budget, and the selection of the prime minister, the House of Councillors can only delay passage, not block the legislation.

The LDP lost control of the lower house in 1993 not because they were voted out but because a number of its members broke from the Party to form the Renewal Party and the New Party Sakigake. Voters actually gave the LDP more seats in the 1993 election, it was not enough to offset the losses from the defections. Ex-LDP member Morihiro Hosokawa of the Japan New Party was installed as Prime Minister and head of a coalition of seven parties (Renewal Party, Japan New Party, the New Party Sakigake, the Social Democratic Party and the Komeito). But the coalition government soon fizzled and the Hosokawa coalition government cabinet was a disaster. More ironic was the fact that Prime Minister Hosokawa stated that he would “continue the policies of the Liberal Democratic Party”.

The only lesson that the Hosokawa, Hata and Murayama Administrations demonstrated to Japanese voters was that Japan’s opposition parties were incapable of running the country. The LDP soon regained its pivotal position in government eleven months later when it joined with the Social Democratic Party and the New Party Sakigake in late June of 1994 to establish a coalition government under Prime Minister Murayama. In the midst of 1993~1994 confusion, the LDP did temporarily lose many of its leadership posts in the Lower House. One of these, the Speaker of the House, was assumed for the first time in Japanese history by a woman, Takako Doi of the Social Democratic Party.

Through various “coalitions” since the 1990s, LDP leaders have shown themselves to be adroit at cooperating with other parties while simultaneously sucking the life out of them. The Socialists, for example were the major opposition party for most of the postwar period but were virtually destroyed after trading principle for power by joining with the LDP in the 1990s. They now of course are in a ruling coalition with the Komeito.

The Liberal Democratic Party's fall from power in 1993 was due in part to its failure to carry out fundamental political reforms. As an opposition party in the post-Miyazawa Cabinet era, finding ways to get this stalled process moving again became one of the LDP's top priorities, and this gained voter support. Voters turned back to the LDP after seeing the political turmoil and inability to implement policy in the coalition government.

Aug 21 11:54 PM

[rosey99:]

Thanks for this post. It does indeed seem as if the Japanese people have had more than enough over the last twenty years or so, and the appetite for change is real. Every day, all I hear is ChinaChinaChina, it's nice to see some informed discussion of the second largest economy in the world.

Speaking of China, I regularly read mpettis.com for interesting discussion. Is the author aware of comparable sites covering Japan?

Thanks again.

Aug 22 08:21 PM

[Darrel Whitten:]

Dear Rosey99;

All (and more) than you ever wanted to know about Japanese politics is at the Observing Japan blog by Tobias Harris (observingjapan.com). Glocom (International University) www.glocom.ac.jp/e/ has academic discussions about Japanese policy.

Aug 23 07:48 PM

[rosey99:]

Thanks, these are very interesting. I had to add "www" to the first link, like so - www.observingjapan.com


On Aug 23 07:48 PM Darrel Whitten wrote:

> Dear Rosey99;
>
> All (and more) than you ever wanted to know about Japanese politics
> is at the Observing Japan blog by Tobias Harris (observingjapan.com).
> Glocom (International University) www.glocom.ac.jp/e/ has
> academic discussions about Japanese policy.

Aug 25 08:17 PM

[User 479389:]

Very interesting. I thought that the world ecomony had recovered, according to Benny and Baraky. What does all this mean?

Aug 30 02:23 PM