Wednesday, February 9, 2011

Japan Headed for Shutdown?

Gridlock threatens the bicameral parliament

If you think that President Barack Obama has trouble with gridlock in Congress, consider the position of Japan's Prime Minister Naoto Kan. All the elements of gridlock are in place: a divided legislature, an opposition bent on obstruction, falling approval ratings, a stagnant economy.

If Kan's Democratic Party of Japan cannot pass the fiscal 2011 budget and related money bills by March 31, specifically if it cannot pass legislation enabling the government to issue bonds needed to finance the government, Tokyo could be looking at a US$400 billion revenue shortfall. Roughly half of the budget is covered through borrowing.

One might wonder how a government with a more than 150-seat majority in the House of Representatives, the lower chamber of Japan's bicameral parliament, could have trouble getting its way. If Japan were Britain with its weak upper chamber the House of Lords, this wouldn't be the case.

Unfortunately for Kan, Japan is saddled with a constitution (written by the Americans after World War II) that gives the House of Councillors, Japan's upper house, virtually equal powers. It is true that the lower house can pass a budget by itself, but it would be an empty victory. Kan needs upper house concurrence to pass the related money bills, and it is now in opposition control.

The main opposition, the Liberal Democratic Party (LDP), has apparently settled on a policy of pure obstruction in the hope of forcing Kan to call a general election this spring, a couple years before the current Diet's electoral term expires in fall of 2013.

"This year's goal is to drive the Democratic Party of Japan into a snap lower house and to re-establish an LDP –led government," said the party's leader, Sadakazu Tanigaki, at a party conference. Consequently, the LDP has also spurned overtures from Kan to enter into discussions for a compromise on the budget.

The premier has spent a lot of time trying to persuade some members to vote on an issue-by-issue basis, but this kind of American-style "nonpartisanship" is basically foreign to Japan, indeed to most parliaments around the world. Parliaments act on the basis of coalitions, not on shifting nonpartisan majorities.

Almost since he took office last June, and especially since his party lost control of the upper house last July, Kan has tried to cultivate expanding the government's coalition, which now includes only the tiny People's New Party. There are plenty of partners to choose from. Seven parties hold at least a few seats in the lower house, but looked at more closely there are few choices.

The Buddhist-based Komeito has rebuffed any attempts to form a coalition. The PNP is already part of the coalition. That leaves only the Communists, who never join coalitions as a matter of policy, and the Social Democratic Party (SDP). At the moment, Kan is concentrating on its former partner the SDP.

Put together the SDP's seven members and add a couple independents, and Kan just might get the 321 votes, or a two-thirds majority, which under the constitution would allow him to override any defeat in the upper chamber.

That assumes that all 311 DPJ members of parliament vote together. This is not a foregone conclusion, as many hold their seats because of efforts of Kan's interparty rival Ichiro Ozawa. He was recently indicted for allegedly breaking political fundraising laws, though still a Diet member. He has many supporters, some of whom might vote against the government to protest the way he has been treated.

If Kan fails to put together the votes to pass the budget and associated money bills, he will be under enormous pressure to resign, never mind his party's huge majority and his own pledge to hang on even if his public approval rating falls to just one percent. In parliamentary democracies, governments that can't pass their budgets usually do resign.

The main opposition has an incentive to make Kan's life miserable. Unlike in the US, where the Republicans are saddled with Obama for two more years because he has a fixed four-year term, the prime minister can call an election at anytime. Whether a new election will benefit the LDP is a question. It's true the government is unpopular, but the LDP isn't any more popular.

Kan may be banking that the opposition's tactic of opposing everything will cost votes, or at least make them wary of facing the voters anytime soon. Many important issues are bound up in the parliamentary deadlock. The government tax commission has recommended boosting the sales tax to sustain the pension system, cutting the corporate tax to boost the economy and raising the estate tax to raise revenue.

Beyond the immediate and pressing financial issues, the government is eager to turn attention to the country's faltering agricultural sector in such a way as to neutralize their traditional opposition to allowing Japan joining free trade zones. Japan is falling far behind regional competitors in this arena, especially South Korea.

Virtually all top-level diplomacy has come to a halt. Kan has postponed his planned trip to Washington to meet with Obama (just as well, as he may be a lame duck in a couple months) while a projected visit by Korea's president Lee Myung-bak keeps getting set back while Kan focuses entirely on passing the budget.

Kan's need to get the tiny Social Democratic Party back on his side might require him to change his party's support for implementing the planned relocation of American bases on Okinawa, which would annoy Washington. The SDP left the governing coalition over this issue.

The next few weeks will test Kan's skills as a politician and leader to the limit. It is not impossible that he might pull something out of the hat. Party bigwig Yoshito Sengoku hinted as much recently when he told people close to him, later reported in the Japanese press, "Late February will see an electrifying development." He did not elaborate.

A kind of grand coalition with the LDP cannot be ruled out. Kan indeed first made a name for himself as a hard-charging health minister in a previous all-party coalition under the socialist prime minister Tomiichi Murayama, 1994-96. Ironic if he would end his career in another such coalition. Asia Sentinel

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  1. Japan’s fiscal woes unsustainable – IMF

    TOKYO: Japan’s outstanding debt and fiscal deficit “are not sustainable”, the IMF warned on Wednesday, adding that Tokyo must tackle the issues if it wants to avoid future trouble.

    The comments by IMF deputy managing director Naoyuki Shinohara come after Standard & Poor’s last month lowered the country’s credit rating and accused the government of not having a clear plan to reduce the debt mountain.

    “If you look at Japan’s outstanding debts and fiscal deficits, I think they are not sustainable over the medium- and long-term,” Shinohara told reporters on the sidelines of a seminar in Tokyo.

    “If [Japan] leaves the fiscal situation as it is, it could leave the source of trouble for the future,” he said.

    “It is important to make a national consensus at the earliest possible time and form a concrete agreement on how to achieve fiscal rehabilitation.”

    He added, however, that “we don’t think serious problems will occur imminently,” citing Japan’s huge pool of savings.

    Last month Standard & Poor’s cut Japan’s credit rating one notch to “AA-” from “AA,” saying the government lacked a “coherent strategy” to reduce the highest debt proportional to GDP of any developed nation.

    A rapidly ageing population, entrenched deflation and a feeble economy have made it hard for lawmakers to curb borrowing, with years of pump priming creating a debt load that is on course to exceed 200 percent of GDP.

    Nearly a third of government spending is being swallowed by a social security system catering to a rapidly greying society, Standard & Poor’s warned, with that ratio set to rise as Japan continues to age, unless reforms are implemented.

    Prime Minister Naoto Kan’s center-left government has prioritized social security reform and an overhaul of the tax system, but the opposition has refused to begin talks over the issue.

    The government has been able to fund its growing fiscal gap by raising money in the domestic market and its ability to do so is seen as sustainable for now, with banks and pension schemes holding around 95 percent of the debt.

    But analysts say pressures will increase as the population ages and dips into savings in retirement.

    An analyst at Moody’s Investor Services warned Wednesday that any failure to get proposed tax reforms through the country’s parliament this year may fuel downgrade concerns.

    If Tokyo fails to pass the reform bills, “we would view that as a credit negative development,” Thomas Byrne, credit officer for Asia and the Middle East in Moody’s sovereign risk unit, told reporters, according to Dow Jones Newswires.

    Moody’s Investor Services has a Aa2 rating and stable outlook on Japan’s sovereign debt.

    Shinohara also warned that Japanese banks may need to further increase capital buffers against a possible economic slowdown.