In March the Bank of Japan ended quantitative easing, the policy of flooding the banking system with liquidity to staunch deflationary pressures. In September the Liberal Democratic party will finish its five-and-half-year experiment with strong political leadership under Junichiro Koizumi, prime minister. Monetary policy is becoming more normal, which is good news. Politics is becoming more normal too, which is not. The keyword for politics after Mr Koizumi is uncertainty. There is uncertainty about who will succeed him; uncertainty about the direction of economic policy; uncertainty about the new prime minister’s ability to push his agenda, assuming he has one, through his own Liberal Democratic party; uncertainty about what Japan will do about its China problem; and uncertainty about next summer’s upper house election and the ability of the prime minister to survive what may well turn out to be an LDP rout.
There is no one in contention who can hope to emulate Mr Koizumi’s leadership style. He is a truly charismatic figure, totally confident in his political instincts, unafraid of losing and thus willing to take risks – an enigmatic politician who insisted on monopolising power and then decided to walk away from it rather than seek another term. If the next leader tries to imitate Mr Koizumi’s style of leadership, he will look like a thin shadow by comparison. If he tries to shut out the LDP from the decision-making process, as Mr Koizumi successfully did, he will face a full-scale party revolt. The next prime minister is going to have to return to a pattern of consultation, co-operation and consensus-building between the prime minister’s office and the LDP. The more skilled he is at doing that, the more he will be attacked by the media for taking Japanese politics backwards. He will also be coming into office at a time when the LDP is not as strong as it looks and the opposition Democratic Party of Japan not as weak as it appears.
The LDP’s huge victory in last September’s parliamentary election was a Koizumi victory. Without him, and with a vote-gathering machine that has been drastically weakened by changes in Japanese society over the past decades, the LDP’s hold on power is far more tenuous than it might appear. A DPJ with a strong, popular leader and an LDP with a leader seen to be weaker than Mr Koizumi could turn politics round. The test will come in the 2007 upper house election when the six-year term of members elected at the height of the Koizumi boom expires. A DPJ victory could spark a power struggle in the LDP and produce demands for an early lower house election. The end of 15 years of deflation is good news.
But better economic times drive new issues on to the political agenda that could prove to be difficult to handle. The stronger the recovery is, the more pressure there will be from the Ministry of Finance and elsewhere to raise taxes, mostly in the form of a sharp increase in the 5 per cent consumption tax – Japan’s version of a value-added tax. There will also be growing demands that the government do something to deal with allegedly growing inequality. It is doubtful whether inequality is as serious as the media makes out, but in politics perception is reality and the perception of Japan as being transformed from a society that values equality to one that sharply differentiates winners and losers is widespread. It would be political suicide for the next prime minister to dismiss it as a serious issue, especially when the DPJ can be counted on to use it to attack the LDP.
So the question is whether the next prime minister can resist the pressures to tax and spend. Japan is also emerging from 50 years of timidity, of a low posture on the international political stage. Gaiatsu, the use of public pressure to get Japan to act, is now counterproductive where once it was effective, something the Bush administration, to its credit, understands and the Chinese government totally fails to appreciate. The next prime minister, seeing his favourable rating numbers dropping in public opinion polls, may be sorely tempted to play an anti-China nationalist card as a way to shore up public support. Japan needs a prime minister who will seek to improve relations with China and pursue positive diplomacy towards its Asian neighbours. But it is not impossible that it will get one who will combine support for a so-called special relationship with the US, in a poorly thought-through effort to make Japan a Britain of the Pacific, with a defensive nationalistic posture toward its Asian neighbours. That is certain at some point to lead to complications in relations with the US. The US is trying to engage China as a responsible stakeholder in the international system and does not want to see a further deterioration in Sino-Japanese relations. Those who believe that it does not make much difference who the prime minister is because power rests with the bureaucracy, the LDP and the business leadership are woefully out of date. Mr Koizumi broke the back of that iron triangle. What the new prime minister does in the wake of that accomplishment will make a difference for Japan, east Asia and the rest of us.
This article first appeared in the Financial Times on June 8, 2006.