How Japanese Elections Can Affect the U.S. Dollar

Sunday’s elections in Japan have resulted in a fundamental shift in the composition of the Japanese House of Representatives, with the decades old Liberal Democratic Party reduced to a minority, and the untested, barely ten-years old Democratic Party of Japan elevated to a position of total dominance with control of both houses of the Japanese Diet. Although Japan had a brief experience with a non-LDP government in 1993, at that time the LDP was far more powerful, and the opposition fragmented and weak in terms of seats occupied. For the first time since the end of the Second World War, the corrupt, bureaucratic, inert, and inefficient defenders of the status-quo are giving way to a new, and untested government. Clearly this is a historic result for Japan, and it will have major consequences for the world of economics as well.

The head of DPJ, Yukio Hatoyama, is almost certain to be the next prime minister of Japan. He comes from one of the important political dynasties of the country, and like many other leaders of the DPJ, is a former member of the LDP. Before Mr. Hatoyama left LDP in 1993 to join the cause of the reformists, he was a member of the powerful Tanaka faction headed by the powerful, corrupt, and jailed upstart Kakuei Tanaka. The previous leader of DPJ between 2006 and 2009, Ichiro Ozawa, has recently been forced to leave the party leadership due to a corruption scandal, and if he had not made the unfortunate mistake, he would have been the prime minister today. True to the ninja tradition, and in line with the ancient customs of LDP, Mr. Ozawa is notorious for the many backroom deals he concluded, and the numerous intrigues he spun throughout his long career as a Japanese politician.

Notwithstanding the recycling of the old guard as the vanguard of reform and regeneration, the DPJ has so far been riding on an extreme degree of dissatisfaction among the electorate, and by applying a healthy degree of populism, and borrowing President Obama’s theme of change, the party seems to have succeeded in convincing the Japanese to try a new pair of hands at the helm. But beyond slogans, and emotional oratory, it is not yet clear that the party has a fundamentally divergent view of politics or finance. For the economy, Mr. Hatoyama prefers a fraternal version of economic theory that puts the individual before firms and bureaucrats. In international affairs, he seeks to give Japan a new and independent voice that can say no to external influences (reminding us of the famous book by Akio Morita published in 1989). It is of course still quite early to judge the sincerity of these popular slogans, but certainly, with or without an ambitious agenda, Mr. Hatoyama will have his hands full as unemployment reaches the highest level of post-war history, relations with China remain unpredictable, and the Japanese people age rapidly, with no obvious enthusiasm for the joys of procreation.

What the Japanese do with their export revenues, and their relationship with the American government have important implications for the value of the dollar, and its future status as the world’s currency of trade. It is clear that if the Japanese were to assume a less than prostrate approach to American demands, if they were to throw their lot with those seeking to overthrow American dominance in economics and international politics, the effect would be nothing short of an earthquake in all these fields. But given how severe and complicated the domestic problems of Japan are, and considering the seriousness of the global economic downturn, it is highly likely that this will be an era of chaos, internal conflict, and indecision for Japan rather than the beginning of a new era of growth and dynamism, as the untested opportunists of DPJ find their plates full with much more than what they can digest.