Post-Vote Politics Will Determine Pace of Change in Japan

Although the Liberal Democratic Party scored well in Japan’s weekend parliamentary elections, political maneuvering and coalition-building in the next few weeks will determine how smoothly the new government can enact key policies, including measures to address the banking system’s bad loan problems, boost economic growth and promote better telecommunications at lower cost.

The Liberal Democrats won 239 seats in the 500-seat lower house of parliament, thereby boosting their strength but falling short of an absolute majority. The conservative pro-business party held 211 seats in the outgoing body.

Business leaders Monday expressed cautious optimism about the results, despite the elections’ failure to fully eliminate the possibility of infighting within a ruling coalition, such as has plagued Japan since the Liberal Democrats lost their single-party grip on power three years ago.

Strong leadership by the LDP in the next government is “crucial” to addressing Japan’s economic problems, Kosaku Inaba, chairman of the Japan Chamber of Commerce and Industry, said at a Monday news conference. He urged the new administration--expected to be installed around Nov. 7 with Prime Minister Ryutaro Hashimoto retaining his post--to quickly approve special stimulative spending of about $45 billion.

During the campaign, the LDP proposed such a package to ensure that Japan’s economic recovery does not falter. The very strong growth that prevailed early this year has shown signs of stalling, although government officials say a moderate recovery is still on track and some influential bureaucrats question the need for extra spending.

Shoichiro Toyoda, chairman of the influential Federation of Economic Organizations, said he hoped the new administration will be “a stable one with strong leadership” that will enact reforms of Japan’s tax, administrative and financial systems.

“Today’s Japan needs decisive reform, and we can’t do it without political leadership,” he said.

The Tokyo stock market’s 225-issue Nikkei index--which last week rose 644.14 points, or 3.1%, partly due to expectations of a strong Liberal Democratic showing in Sunday’s elections--was hit Monday by profit-taking and disappointment that the LDP did not win a stronger lock on power. The index fell 309.35 points, or 1.43%, to close at 21,302.95.

The yen, which has been gradually weakening due to extremely low interest rates in Japan and declining Japanese trade surpluses, weakened slightly more Monday, with the dollar hitting a 33-month high of 112.83 yen. The U.S. currency had been at 112.48 yen in late New York trading Friday.

While left without absolute control of the powerful lower house of parliament, which picks the prime minister, the LDP has several broad options that would enable it to put together a working majority. It could:

* Persuade some of the nine independents who won seats to join the LDP or work closely with it.

* Join forces with defectors from the New Frontier Party, which took 156 seats in Sunday’s elections. A group of about 10 New Frontier members, headed by former Chief Cabinet Secretary Hiroshi Kumagai, appeared likely to quit the New Frontier Party and work with the Liberal Democratic Party, Japanese media reported Monday.

* Entice the Democratic Party, which won 52 seats, to enter a new coalition by offering significant Cabinet positions to its leaders. The Democrats, who are mostly defectors from the outgoing coalition, have few differences with the LDP on concrete economic policy issues.

* Renew the outgoing coalition with the greatly weakened former Socialists, now known as the Social Democratic Party, and the tiny New Party Harbinger. Early this year, before many members of these two smaller parties broke away to form the Democratic Party, this three-party ruling coalition held a strong lower house majority.

Although Social Democratic Party leader Takako Doi said in the campaign that her party would not take posts in the next Cabinet, analysts generally expect the LDP to work out an understanding with her. In any case, the next administration will need continued cooperation from the Social Democrats in the upper house of parliament, where the Liberal Democrats hold only 110 of 252 seats.