Hashimoto May Resign in Wake of Election Defeat

Japanese Prime Minister Ryutaro Hashimoto was expected to resign today and become the third Asian leader to be toppled in less than a year by the regionwide financial crisis, after voters angry over Japan’s economic tailspin defied all predictions and turned out in startling numbers to vote against his ruling Liberal Democratic Party.

“This is entirely my responsibility,” a grim-looking Hashimoto, 60, said Sunday as it became clear that his party had suffered a rout of historic proportions in elections for the upper house of parliament.

Hashimoto and the three top leaders of the Liberal Democratic Party, or LDP, were expected to announce their resignations at a meeting of party directors early this afternoon. But it was not immediately clear how soon a successor might be chosen--or how a new government would calm the turmoil that is expected to erupt in the international stock and currency markets as a result of Hashimoto’s departure.

The LDP’s titanic defeat casts the direction of Japanese economic policy into question and is expected to send the skittish financial markets tumbling--at least temporarily.

The yen and the Nikkei stock index both fell in early trading today. Analysts were predicting more mayhem with the opening of the New York markets.

Voter ire over the deterioration of the economy has been growing in recent months, as bankruptcies have hit a record high, unemployment has skyrocketed to 4.1%, and growing anxiety about the future has led consumers to slam their wallets shut.

The Japanese economy contracted by 0.7% last year, the worst performance in 23 years, raising world concerns that a faltering Japan, which accounts for 70% of Asia’s gross domestic product, could sink the other ailing economies of the region and eventually pull down the buoyant U.S. economy as well.

The election setback could make the LDP more eager to embrace the swift financial reforms that the U.S. government and world markets have been demanding--or it could send the embattled leadership scurrying back to appease its conservative core constituencies, said Ron Bevacqua, an economist at Merrill Lynch Japan.

The party won only 44 of the 126 upper house seats that were contested Sunday--a far cry from the 59 to 65 seats that polls had predicted. The big winners were the fledgling Democratic Party of Japan, led by the popular Naoto Kan, and the Communist Party, which nearly tripled its strength in the upper house.

Although the LDP still holds a comfortable majority in the more powerful lower house, party Secretary-General Koichi Kato acknowledged that it will now find passing legislation “difficult.” That legislation would include a crucial bill to restructure Japan’s debt-ridden banks that had been scheduled to come before parliament later this month.

Kato said that the ruling party would seek the cooperation of the opposition--meaning a coalition. But triumphant opposition leaders were in no mood to compromise and instead apparently hoped to use the victory to break the LDP’s hold on the lower house.

“The people have repudiated Mr. Hashimoto, the LDP and the long-standing system of government by bureaucrats,” declared Kan. “Voters have seen through it. Now that we’ve reached this point, we should allow the people an opportunity to choose their government directly. We should allow them to vote for the lower house.”

Other opposition leaders also indicated that they would like to see the lower house dissolved and new elections held before the legislature reopens later this month. But the LDP was expected to resist such a potentially suicidal move.

State-run NHK television reported that a new prime minister will probably be named officially July 27, a day after the new parliament is to open. However, the scrambling to replace Hashimoto began within hours after the polls closed Sunday night, when amiable and well-liked Foreign Minister Keizo Obuchi, 60, and conservative former Chief Cabinet Secretary Seiroku Kajiyama, 71--the two LDP figures most often mentioned as candidates to succeed Hashimoto--went to meet with former Prime Minister Noboru Takeshita, the preeminent kingmaker of Japanese politics.

Also mentioned as possible successors were former Prime Minister Kiichi Miyazawa and LDP President Yohei Kono. Earlier this year, Miyazawa was instrumental in pushing the LDP to move faster on financial reform, precipitating a $124-billion economic stimulus package aimed at reviving the faltering economy.

If, in the wake of Sunday’s vote, the government decides to alleviate pressure on its traditional constituents, that might mean going easy on the construction companies and other small businesses that have long provided the political contributions and electoral support for the LDP--and which could be fatally wounded if debt-ridden banks are forced into bankruptcy.

“It could go either way, but for the financial markets, it’s way too much uncertainty,” Bevacqua said.

International criticism of the LDP’s reaction to Japan’s economic woes as painfully slow, vague and at times cosmetic was widely reported here. While some Japanese expressed irritation especially at American “gaiatsu,” or political pressure, and arrogance, others welcomed the foreign nagging as necessary to galvanize the change-averse LDP into action.

Two Hashimoto economic blunders were seen as particularly to blame in Sunday’s electoral defeat.

First, just when the nation appeared to be recovering from the collapse of the “bubble” economy and growth had reached a robust 3.6% annually, Hashimoto campaigned for and won the 1996 lower house elections by promising to raise the consumption tax on all goods and services from 3% to 5%.

The LDP argued that the austerity measure was needed to cover a budget deficit that is the largest in the industrialized world and growing rapidly. But the timing could not have been worse, as the tax went into effect in April 1997 and killed domestic demand on the eve of the Asian financial crisis.

Second, Hashimoto appeared to flip-flop last week on the issue of a permanent tax cut to stimulate the economy, a measure enthusiastically endorsed by Japan’s opposition parties as well as by international investors. Four days before the election, Hashimoto reversed course and announced that the tax cut would be implemented next year--but the move was apparently seen by voters as too little, too late.

“It’s time for the LDP to step down,” said Hiroshi Moriya, a 50-year-old “salaryman” casting his vote Sunday in Sayama City, a Tokyo suburb. “It’s clear they’ve failed as a leader. All their policies have been too late and unsuccessful.

“If the LDP loses, I suppose there will be some chaos, but I think it’s necessary,” he added. “It’s necessary if we want change.”

Moriya, his wife, Yumiko, and their daughter helped explain how pollsters for every major Japanese newspaper could have been so wrong in their predictions that the LDP would probably squeak by or lose a few seats at worst: All three family members politely declined to say how they had cast their ballots.

But voters did not display the apathy that their leaders and pollsters had predicted. Turnout was a stunning 58.8%, about 15 points higher than the record low in the previous upper house election, in 1995. (Half of the 252 seats in the upper chamber are up for election every three years.)

Including candidates who ran as independents but who are expected to join various parties immediately after the election, the LDP won 47 seats, diluting its strength in the upper house to 105 seats, NHK reported. The Democrats will claim 30 seats, bringing their total to 50. The Communists won 15 seats for a total of 23, and the Clean Government Party, the political arm of Japan’s largest lay Buddhist organization, won 11 seats.

Minor parties fared poorly, with the Socialists, New Party Harbinger and Ichiro Ozawa’s Freedom Party increasingly marginalized.

If Hashimoto resigns as expected today, Japan will become the fourth Asian nation to change leaders in less than nine months. Thai Prime Minister Chavalit Yongchaiyudh resigned in November, and, in December, South Korean voters rejected the ruling party candidate endorsed by outgoing President Kim Young Sam and instead selected longtime dissident and opposition leader Kim Dae Jung as president. In Indonesia, riots forced the resignation of President Suharto in May.

Hashimoto’s scheduled trip to the United States later this month is expected to be canceled.

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Times Tokyo Bureau researchers Makiko Inoue and Chiaki Kitada contributed to this report.