Keizo Obuchi wasn't supposed to last this long. When he became Japan's prime minister on July 30, the ruling Liberal Democratic Party had just been battered by an election defeat. Passing legislation through parliament to deal with bad banks looked like an impossible task. And many outsiders wondered whether the colourless prime minister, with few accomplishments to show for a 35-year parliamentary career, could keep his faction-ridden party in check.Yet a half-year later, Obuchi is more secure in office than ever. The banking legislation made it through parliament in October, and thanks to a new alliance with Ichiro Ozawa's Liberal Party, cemented on January 14, Obuchi can count on easy passage of his fiscal 1999 budget, with its extra helping of pump-priming spending. Already the prime minister is looking towards the autumn, when he hopes to be re-elected to lead his party, and beyond that to a general election that must be held by October 2000.
For a country that has seen nine prime ministers in the last decade, a little stability might seem like a welcome change. But there's a catch: The very traits that have made Obuchi a survivor are the ones that may keep him from leading a decisive charge towards reform this year. Japan faces economic contraction in fiscal 1999 for the third year in a row, yet many observers fear Obuchi will try to dodge the hard choices he faces.
"It's the same old story--keep cranking out the public works," says Brian Rose, an economist at Warburg Dillon Read in Tokyo, who echoes other analysts at foreign brokerages. "The long-term problems aren't getting solved."
Obuchi's saving grace is also his greatest weakness: a lack of firm ideas on where he wants to take Japan. In some cases, that has led to surprising flexibility. In the banking legislation, he gave in to many key opposition demands, including the creation of a scheme to nationalize insolvent banks. In the coalition talks with the Liberal Party, sharp-tongued Ozawa's demands for greater Japanese participation in UN peacekeeping forces didn't faze Obuchi; he managed to negotiate an ambiguous agreement.
But that kind of politicking has its limits, and they're likely to be tested this year. At the moment, there are two schools of thought on fixing Japan's economy. The more commonly held view among foreign and Japanese government critics sees a need for broad structural changes. These steps would include nationalization of many banks and rapid disposal of their bad assets; liberalization of the job market; and an end to spendthrift budgets loaded with favours for ruling-party supporters.
A minority view, which Massachusetts Institute of Technology economist Paul Krugman favours, says that while structural reforms can't hurt, Japan needs short-term help through "managed inflation." This means the Bank of Japan needs to print a lot of money to pump up the economy. (Ruling-party lawmaker, Yoshimi Watanabe, a proponent of this method, calls it the "Viagra strategy.") The move would be aimed at producing negative real interest rates. It might also nudge consumers into spending, out of fear that their money would be devalued if they saved it.
Whichever the course, Obuchi will need to be bold. The structural changes would cause pain for the ruling party's traditional supporters in construction and farming, while managed inflation would challenge the prevailing orthodoxy at the central bank that inflation must be avoided at all cost.
Some fear that Obuchi and his allies think their work is over with the passage of the banking legislation and the imminent approval of the budget. U.S. congressional sources, speaking privately after meetings in mid-January with top government and ruling-party leaders, said they sensed little urgency among the Japanese they met about fixing the economy. "I'm very pessimistic," said one congressional source.
Obuchi also may be too busy handling the prickly Ozawa to focus on the economy. No sooner had a new coalition cabinet been sworn in, with one of Ozawa's Liberal Party allies installed as home minister, than Ozawa began attacking the government's stand on the U.S.-Japan military alliance. Ozawa takes a more hawkish view than the LDP mainstream on the issue of new guidelines stipulating how the Japanese military can help the U.S. if a conflict breaks out in the "areas surrounding Japan."
To avoid offending China, Tokyo says the "surrounding areas" phrase doesn't refer to a specific geographical region, but rather to the nature of the conflict. Ozawa snarled that if this was the way the government defined its terms, it would have to rewrite Japanese dictionaries. "It's because they carry on with this kind of lying and deception that they're not trusted by anyone," he said on a television programme. When the host produced a map of Asia, Ozawa outlined what a more precisely defined coverage area would include, clearly encompassing China. A quick protest from Beijing ensued. The government's top spokesman then announced that Tokyo will stick to its previous definition of "surrounding areas," regardless of what Ozawa says.
The issue matters because parliament is set to debate legislation over the guidelines this spring. The legislation would allow Japanese troops to inspect ships in enforcing an economic embargo and provide rear support such as refuelling for U.S. troops--issues that may come to the fore as tensions over North Korea heat up again.
Opposition parties are seizing on disputes such as this one to attack the coalition. "The alliance between the LDP and the Liberal Party is just to increase the number of seats in the Diet," said Naoto Kan, leader of the Democratic Party. But Kan's party, the biggest in the opposition, faces hurdles of its own, such as intra-party strife between younger reformers and old-style labour interests.
The difficulties were brought home at the party's convention on January 18, which re-elected Kan as party leader over token opposition from one of the young Turks. An invited speaker, associate professor Setsuko Egami of Sanno College, surprised the delegates by blasting the party as a "mini-LDP" and accusing Kan of being a manager instead of a leader. Kan meekly responded that he would try harder.
The opposition's disarray gives Obuchi an opportunity to continue his death-defying act. If the 5.4% increase in government spending for the year beginning in April starts to perk up the economy, a mood of optimism could spread. As always, consumer confidence is the key to a recovery, and Obuchi might see a bright sign in the improvement in his poll ratings. An Asahi Shimbun survey released on January 19 gave his cabinet 32% support, up from 26% in December. Obuchi would probably take advantage of any improvement in the economy to call an election, perhaps in the fall.
But the odds are still against such a scenario. With more banks and construction companies teetering--not to mention big exporters such as Nissan Motor, which is trying to save itself through an alliance with a foreign car maker--the possibility of some sort of shock to the Japanese economy this year is rising. And doomsayers like Yukio Hatoyama, a leading legislator in the Democratic Party, say that will be more than the prime minister can bear: "The Obuchi government is sure to reach the end of its tether."
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