Hashimoto Quits After Voters Stun the Ruling Party

Japanese Prime Minister Ryutaro Hashimoto resigned today, becoming the third Asian leader to be toppled in less than nine months 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.

“The loss of the election is entirely my responsibility,” said a grim but calm-looking Hashimoto, 60, announcing that his party had accepted his resignation after a rout of historic proportions in elections for the upper house of parliament Sunday.

Hashimoto said the defeat was a failure of his personal political ability but that the party’s key financial policies, including a scheme to deal with the country’s massive bad-loan problem, will not change. However, it remains to be seen whether his successor will be able to push those policies through a hostile parliament.

The LDP’s titanic defeat casts the direction of Japanese economic policy into question and is expected to rattle the skittish financial markets--at least temporarily. It was not immediately clear how soon a successor to Hashimoto will be chosen--or how a new government would calm the market turmoil that might result if Hashimoto’s departure brings a hiatus in Japanese financial reforms.

The yen and the Nikkei stock index both fell in early trading today but later rallied. 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 beleaguered leadership scurrying back to appease its conservative core constituencies, said Ron Bevacqua, an economist at Merrill Lynch Japan.

If 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.

The LDP 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.” The most crucial piece of legislation is a bill to restructure Japan’s debt-ridden banks that had been scheduled to come before parliament later this month.

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Kato said the ruling party will 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.

Kato said today that a new prime minister will be named officially by the end of the month. 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 former 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.

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

Two Hashimoto economic blunders were seen as key to his party’s 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.”

Overall, voters did not display the apathy that their leaders and pollsters had predicted. Turnout was a stunning 58.8%, about 14 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 can count on 47 seats, diluting its strength in the upper house to 105 seats, state-run NHK television 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 Buddhist lay organization, won 11 seats.

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

With Hashimoto’s resignation, Japan becomes 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. In Indonesia, riots forced the resignation of President Suharto in May.

Hashimoto said he will cancel his scheduled trip to the U.S. on July 22. But the premier’s resignation is likely to have more impact on Japan’s warming relations with Russia than on U.S.-Japan ties.

Japan and Russia never signed a peace treaty after World War II, and relations had remained chilly. But, in the last year, Hashimoto and Russian President Boris N. Yeltsin forged a close personal relationship, and Hashimoto had hoped that signing a peace treaty with Russia would be the crowning achievement of his term in office.

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

MORE JAPAN COVERAGE

* U.S.-JAPAN TIES--Ruling party defeat adds uncertainty to relations with U.S.: A6

* MARKETS REACT--Some Asian markets slide amid new questions about Japan.: D2