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LDP must find a new leader quickly or face markets' wrath
Selecting a suitable replacement for Ryutaro Hashimoto may not be that easy, write PAUL ABRAHAMS and MICHIYO NAKAMOTO
IT WAS more than just a defeat. It was a humiliation. The most pessimistic of pundits had predicted that Japan's ruling Liberal Democratic Party might lose one or two of its seats in Sunday's upper house polls. Instead, the LDP was routed. It lost more than a quarter of its seats, ending up with its lowest ever number of upper house members. In many big conurbations, such as Tokyo and Osaka, the party failed to win a single seat. Even in its rural heartlands it lost constituencies. The vote was a devastating electoral indictment of the LDP's policies and performance and made the resignation of Ryutaro Hashimoto as prime minister inevitable. Humiliating the election might have been, but the LDP stays in power. The election was for the upper house, whose powers are restricted (it cannot, for example, overturn a budget or pass a vote of no confidence in the government). The opposition remains incapable of mustering the two-thirds majority there to block legislation. More important, the LDP still controls the lower house. Elections to that body need not take place until 2000 - and they are unlikely to be brought forward. Nevertheless, the election could mark the beginning of the end of the LDP's stranglehold on Japanese politics which, since the Second World War, has only once - in 1993 - been interrupted. On that occasion, the party lost power largely because of corruption scandals. It soon returned when the opposition proved too fractious to govern. This time, however, the electorate turned against the party not because of corruption but for a more fundamental failure: economic mismanagement and the inability to maintain living standards. It will be hard for LDP to undo this perception. The implication is that the party will have to replace Hashimoto with someone willing to act promptly and decisively on the economy - something Hashimoto was blamed for not doing. This means getting to grips with Japan's worst recession since the Second World War. The need for a radical policy shift is urgent. Next year, Japan's economy could record its third year of falling nominal gross domestic product. That would be a worse performance than that during the Great Depression of the early 1930s, says Nikko Research, the Japanese brokerage. That dismal performance is likely despite the government's 16 000-billion yen spending package announced recently. So far, public spending has failed to reflate the economy, and there is no help from the private sector where demand continues to collapse. In manufacturing, for example, machinery orders last month were nearly 30% lower than they had been a year earlier. Consumer demand - hampered by record unemployment - remains lacklustre. So do exports. Hit by the Asian economic crisis, they are actually falling. Given the scale of the economic crisis, the LDP needs to act fast to find a credible replacement for Hashimoto. If it does not, the markets could punish the country. Although the Nikkei 225 benchmark index rose 1.7% on news of the prime minister's resignation, the yen fell sharply in early trading against the dollar, before recovering strongly in the week. But the Japanese currency is likely to prove vulnerable until a new prime minister is chosen. That vulnerability could have devastating effects on Asian equities markets which tumbled across the board on fears that a weaker yen could damage their competitiveness. Parts of the LDP appear to recognise the need for speed. Koichi Kato, secretary-general of the LDP, indicated the party could select a new leader within days. By Japanese standards that would be lightning fast. However, other LDP politicians, such as Kanezo Muraoka, chief cabinet secretary, sowed confusion by saying a decision might not be made until the end of the month. The markets are unlikely to be impressed. Regardless of when the choice is made, the bigger question is who should be chosen. It might seem relatively easy to improve on a man who narrowed his policy options by ruling out significant tax cuts to boost consumer spending. Actually, it might not be. The country needs a prime minister who is more than a figurehead and someone who does not just talk big but is able to deliver, says Kenneth Landon, economist at Deutsche Bank in Tokyo. It must also be a man who understands the economy. Such an individual may not exist within the ranks of the LDP. The leading candidate is someone who falls into the "business as usual" category. Keizo Obuchi, the foreign minister, is a likeable, honest and hard-working politician from the largest faction in the LDP. He is described by Russell Jones, strategist at Lehman Brothers in Tokyo, as "Hashimoto with a charisma bypass". His ability to implement radical reform would be limited. A more dynamic candidate would be Seiroku Kajiyama, the chief cabinet secretary, who has repeatedly criticised Hashimoto's fiscally strict economic policies and called for massive public investment. But he remains something of a maverick, having proposed increasing interest rates to boost the return on savings. That might seem a worthy ambition, but it would have a devastating impact on Japan's heavily indebted corporations. There remains the most internationally-minded of the possible candidates and the choice probably most favoured by the markets: Junichiro Koizumi. A fluent English speaker, he would be able to develop Japan's crucial relationship with the US. Although at present health minister, having cleaned up the ministry after it was hit by a scandal over blood tainted by the HIV virus, he is an outsider and has been unusually outspoken against Hashimoto's government. His ability to break the mould of Japanese politics is unrivalled among LDP leaders. Even if the LDP does choose a dynamic figure, he must then end the policy paralysis that stymied much of Hashimoto's premiership. At the top of the markets' and most outsiders' wish-list is a firm commitment to end Hashimoto's obsession with the budget deficit. The prime minister's decision last year to increase taxes and cut public spending contributed greatly to the recession. "'The LDP will have to reverse policy in order to overcome this crisis," pointed out Minoru Morita, a political analyst. "Hashimoto's successor will have to be someone who can adopt an expansionary fiscal policy, boosting spending and cutting taxes." Also required will be an undertaking to push banking reform further. So far, the LDP has pledged to create a "bridge bank", which would wind up failed banks and maintain lending to healthy borrowers. However, implementation will be critical. For the bridge bank to work, the politicians will need to demonstrate a willingness to make unpalatable decisions such as forcing the merger or even closure of failing institutions. Such determination has so far been lacking. As Koji Tanami, vice-finance minister, said: "The economic issue is the big issue. It is our duty to implement the economic package and the plan to revive the financial sector." Although the new prime minister will have a window of opportunity to push through such reforms, the markets are likely to be unforgiving if he stumbles. "With the markets at an expectant level, the politicians have to deliver," explained Pelham Smithers, a strategist at ING Barings in Tokyo. The LDP cannot afford such a stumble. This is probably the party's last chance to stay in government. It has little more than two years before the next lower house elections to turn around the economy and regain the confidence of the electorate. The party must raise its performance not least because a more coherent opposition may now be emerging. In the past, it could count on an ineffective and disjointed opposition. But the elections saw the rise of a potentially powerful political force - the Democratic Party which was formed three months ago. Pre-election opinion polls suggested the party would be among the also-rans. In the event, it became the second-largest party in the upper house after the LDP. "The result shows that the people have sent a red card to the Liberal Democratic Party," said Naoto Kan, its charismatic party leader. His grouping remains small: it has 47 upper house seats compared with the LDP's 102, and 92 lower house seats against the LDP's 263. But the Communist Party has said it is prepared to support Kan. The electorate may soon have a real choice for the first time in years. Ordinary Japanese seemed shocked by the scale of the LDP's defeat and the speed of Hashimoto's departure. Many were astonished at the power of the electoral process, even though many voters, particularly among traditional LDP supporters, would have felt freer to vote against the ruling party in the knowledge that the upper house has less influence over government than the lower. The public's reaction was in stark contrast to recent elections. Turnouts have been falling consistently (to just 44.5% in 1995) as a result of disillusionment with the political process and the apparently unshakeable rule of the LDP. On Sunday, the turnout was 59%. The electorate has tasted the power of democracy to create havoc among a complacent political class. It is a flavour voters may come to relish. - Financial Times.
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