Koizumi’s Art of War – Elections in November?

By Scott B. MacDonald

Like a skillful shogun, maneuvering among his restless ranks of samurai and daimyo, Prime Minister Koizumi is preparing for his campaign to keep his leadership position within the LDP, set for a party vote in September, and as prime minister, with a snap election for the lower house of the Diet probably to be called in October and held in early November. He faces a complex political terrain, filled with opposition parties and questionable allies within his own camp.

Yet, the Prime Minister has momentum. The long disappointment over the economy and gloom over prospects for economic reform are giving way to cautious smiles over an improving Nikkei performance, signs of stronger export growth, and headway on bank reform as reflected by Resona. Corporate bankruptcies are also slowing. For the first half of 2003 Japan had 8,984 cases of corporate bankruptcy. This was the first time in four years in the January-June period that bankruptcies came in below 9,000. At the same time, banks have disposed of a hefty Y11.7 trillion in bad loans in the fiscal year ended March 31, 2003 and are continuing the process. Significantly, job losses associated with bad loan write-offs have been estimated at between 50,000-70,000, far less than earlier projections of 1.7 million workers made two years earlier by a Cabinet Office report.

Although major questions remain over the sustainability of the economic “recovery”, Prime Minister Koizumi is using the harvest of good news to position himself for victory in the LDP leadership vote in September and for a probable snap election in early November. He is currently higher in the opinion polls than any other Japanese political leader, something he wants to use in September. By pushing for an early election so soon after the LDP leadership convention, he puts the anti-reform factions on the defensive as they know without Koizumi their chances at the polls will be much weaker.

While Koizumi maneuvers against the anti-reformers in the LDP, he is also making certain that his Economy Minister Heizo Takenaka has a stronger hand. Koizumi made certain that an opposition vote in July demanding Takenaka’s resignation was soundly defeated. The Prime Minister fully understands that he must move in the next few months to make certain that the momentum in the economy transforms into a sustainable recovery. In particular, bad loan disposal remains a big issue. The banks still carry an estimated Y20.8 trillion in troubled loans, which explains the reluctance of the banks to make a lot of new loans.

There is another part of this story. The government is claiming that the bank clean up has not resulted in massively higher unemployment or bankruptcies. Statistically this is true and plays well for Koizumi with the public. What is not immediately evident is that the banks decided to rescue a large number of troubled borrowers rather than let them fail. Companies that probably should have been forced into bankruptcy are still lurching about like so many zombies. Consequently, Japan continues to have a bad loan problem, which threatens to choke any recovery. Koizumi knows this, but he needs to first make certain that he wins both the LDP leadership vote and returns with a new mandate from the people in a general election. If that unfolds, we would expect another round of bad debt disposals later in the year – and higher unemployment and bankruptcies. The bet being taken is that the harsher aspects of these developments will be cushioned by ongoing export growth, helped by central bank interventions seeking to maintain a weaker Yen.

As for the opposition outside of the LDP, Koizumi remains difficult to beat. This has forced the leading opposition party, the Democratic Party of Japan (DPJ), led by Naoto Kan, into a merger with the smaller Liberal Party, led by the flamboyant and articulate Ichiro Ozawa, once a member of the LDP. Kan wants to be prime minister and Ozawa wants to be back in power, hence the confluence of interests. Yet, even with the possibility of alliance or merger with the Social Democrats, the opposition will be hard pressed to make inroads against Koizumi. Yes the elections will be more competitive and the opposition stands to gain seats, but only if it can give the Japanese voter clear reasons that it is different from what the LDP represents. Considering that a number of opposition party members came from the ranks of the LDP and that they are supportive of many of the policies advocated by Koizumi, it is hard to make a difference. In addition, the opposition did vote in July to oust Takenaka.

Where the opposition does stand a chance to weaken Koizumi is over the deployment of Self Defense Forces (SDF) to Iraq. The Japanese public was strongly opposed to the Iraq war. Despite that, Koizumi backed the Bush administration with the view that Japan had an opportunity to support its ally, the United States. In return, Japan expects Washington’s commitment to peacefully resolving the situation with North Korea, which could now strike Japan with missiles, and more discreetly, with the growing power of China.

In July, the government pushed through a measure to allow the SDF to send troops to Iraq to help in the reconstruction of the country. The debate over the issue was heated and the opposition used it as an issue to gain public favor. For Koizumi, this is an issue to handle with care. While he is willing to help the Americans, he will be slow in doing so. No SDF forces have left Japan. There will be a delay related to what kind of role will Japanese troops play. In addition, there is growing concern that Japan could be committing troops to what some are now calling a new Vietnam. Koizumi does not want to be in the middle of an election with dead Japanese soldiers coming home in body bags. Consequently, the process by which SDF forces are inserted into Iraq will be slow, probably until after the elections.

At the end of the day, Koizumi remains Japan’s best hope. The political landscape is complicated and many of the issues are tricky. Compounding the situation is that Koizumi has foes both within his camp and outside. Hopefully his art of war will allow him to maintain movement toward the next round of economic reform.

Scott B. MacDonald is a Senior Consultant at KWR International, Inc. KWR International is a consulting firm specializing in the delivery of research, public/investor relations and advisory services.