LDP Victory in Japan Could Boost Economy

The key result of Sunday’s parliamentary election in Japan could be the reemergence of the Liberal Democrats as the clearly dominant force in Japanese politics. And that could be good for Japan’s economy.

While many voters say they are still undecided, several media polls in recent days have predicted that the Liberal Democrats, who head the current three-party ruling coalition, will either win an outright majority or capture enough seats to easily dominate a new government. Polls also predict the near-collapse of the Socialists, who have been uneasy members of every ruling coalition since Japan’s last election in 1993.

The Nikkei Shimbun, Japan’s leading financial daily, reported Tuesday that the Liberal Democrats, a conservative pro-business party, appeared ahead in races for about 250 seats. It showed the New Frontier Party, which is stressing tax cut proposals and deregulation, ahead for about 150 seats, and the newly formed Democratic Party--the most liberal of these three--ahead for about 60 seats.

The Liberal Democrats’ current coalition partners--the former Socialists, now called the Social Democratic Party, and the New Party Harbinger--both are likely to lose about half their current seats, leaving the Social Democrats with about 15 seats and the New Party Harbinger with only a few seats, according to the poll.

The Nikkei Shimbun report, together with Monday gains on Wall Street, helped boost the Tokyo stock market’s 225-issue Nikkei index by 400.68 points, to close Tuesday at 21,429.93, up 1.91%. The Nikkei index dropped slightly on Wednesday, closing down 32.74 points, or 0.15%, at 21,397.19.

The past few years, the Socialists abandoned most of their traditional leftist positions as the price of sharing power. But some observers feel they have obstructed pro-business policy proposals that could help rev up the Japanese economy, which is now emerging from its longest post-World War II recession.

Chief among these are a law allowing the establishment of financial holding companies, seen as a way to help Japanese banks write off bad debts and regain global competitiveness, and a proposal to break up Japan’s main telecommunications firm, Nippon Telegraph & Telephone Corp. (NTT), in order to promote competition.

“The Socialists were the main obstacle to progress on (these) two key issues,” said Jesper Koll, vice president of J.P. Morgan Securities Asia Ltd. “If, as is widely expected, the Socialists become marginalized as a political force and get pushed outside government, more rapid progress on policy issues is to be expected.”

It makes little difference, Koll said, whether or not Prime Minister Ryutaro Hashimoto’s Liberal Democrats win an outright majority, because in any case they will “run the shop”--in coalition with the Democratic Party if necessary.

“I think what you’ll get with this election is four years of stable government,” Koll said. “For the economy, it will be positive. Until Sunday, policy is unpredictable; after Sunday, it will be clear. I think the government is going to be more efficient than any government you’ve had the past four years--efficient in the sense of turning bills into law.”

That could augur well for further liberalization of the Japanese economy, despite the Liberal Democrats’ image of being less reformist than the New Frontier Party, Koll said. The Liberal Democrats, after all, are themselves calling for the number of government ministries and agencies to be cut nearly in half by 2010. And bureaucrat-bashing is so popular in Japan these days, every party has engaged in it.

Even though “the LDP is deep in vested interests,” all major parties have been advocating administrative reform and deregulation during the campaign, and this is “a good thing,” said Kunio Miyamoto, chief economist at Sumitomo Life Research Institute. “This is election time, so they are promising more than they can deliver, but this is a commitment from all sides, and no one can ignore the fact they made this commitment,” he said.

Koll said he believes the Liberal Democrats’ reform proposals are more than campaign rhetoric. “Hashimoto is a good enough economist and a strong enough nationalist to understand that the current administrative structure of Japan is not capable of leading it into the 21st Century,” he said.

The New Frontier Party has made even more dramatic proposals that could give the economy a boost, at least in the short term. But there is wide skepticism about both its ability to win and its ability to carry out its pledges if elected.

In television advertising, this main opposition party captures its key campaign theme in a short poem: “If something’s to be raised, make it the economy first, before the consumption tax.” The screen then flashes a written pledge not to raise the tax, due to jump next year to 5% from 3%, and shows New Frontier leader Ichiro Ozawa declaring: “You can count on us.” Other commercials stress the party’s promise of a 50% cut in income taxes.

The New Frontier Party is also calling for the 22 current government ministries and agencies to be slashed first to 15, and later to just 10, with a 25% reduction in central government employees. In effect, the New Frontier program is an exaggerated version of the “supply side” economic policies of former U.S. President Reagan.

The pledges, to the extent they are believed, may reinforce the party’s reformist image in this election for the 500 seats of the parliament’s powerful lower house.

But few analysts think any Japanese government could simultaneously hold down the consumption tax and slash income taxes.

“No matter which party wins the election, there will be only a slight difference in the economy,” said Kenji Mizutani, president of Tokai Research & Consulting Inc. Even if the New Frontier Party were to head the next government, it would be nearly impossible for it to cut government expenditures enough to be able to put off a consumption tax hike, he said.