« 三大都市圏(東京圏、名古屋圏、関西圏)の人口が、現行調査方法を用いた平成4年以来はじめて全国人口の半数を上回る | Main | Dani Rodrik on ISI »

Robert Alan Feldman on Japanese Politics, especially on DPJ

Japan
Scrutiny Starts on the DPJ
August 01, 2007

By Robert Alan Feldman | Tokyo

Media scrutiny of the Democratic Party of Japan (DPJ), which won a huge victory in Sunday’s election, has begun to increase. During the election campaign, DPJ policies were hardly noticed by a press more interested in attacking PM Abe than in looking at his opponents. Now, the scrutiny of the DPJ is starting.

The top Japanese financial newspaper, the Nikkei, recently asked in a headline, ‘Is DPJ Moving Away from Reformist Path?’ The title assumes that the DPJ was on the reformist path in the first place. Many years ago, it was. In the late 1990s, when Japan faced a banking crisis, the DPJ was far more aggressive on banking reform than the ruling Liberal Democratic Party. However, the DPJ moved to the left on economic issues over the years, and was crushed in the September 2005 Lower House election for its lukewarm approach to Postal Reform. Despite some very progressive, market-oriented members, the DPJ’s main emphasis in economic policy is income redistribution. In the most recent campaign, DPJ leader Ichiro Ozawa pushed this line further, by touting more subsidies for farmers and more subsidies for small business.

Has Abe Been a Reformer?

There is a widespread belief that PM Abe has not been effective in getting the reforms going, even though he has talked about and tried to initiate reforms. It is true that PM Abe’s record could have been better, as a reading of the minutes of the Council on Economic and Fiscal Policy shows. When faced with opposition to reform plans by his own ministers (who were taking cues from the bureaucrats below them), PM Abe often referred the issue at hand to further study. That said, some of his actions were very reform-oriented. For example, the civil servant reform that he rammed through the Diet was actually quite radical, e.g., pay for performance in the private sector, ending direct deals between bureaucrats and companies on cushy, post-retirement jobs.

The problem now is that the Diet faces gridlock. Will markets care? Since investors overlooked motion, gridlock may not be much of a downside surprise. The question is how long investors will be patient with gridlock before realizing that gridlock will constrain earnings growth and fiscal reform.

Does Top-Down Matter?

Yet another common view is that top-down reforms really did not matter much. This view attributes Japan’s recovery to private sector initiatives. For example, a friend recently wrote to me, “the biggest driver of Japan’s economic recovery has been micro- and firm-level reforms, not top-down headline-grabbing reforms engineered by Koizumi”. I could not disagree more.

PM Koizumi’s major reforms were (a) banking sector, (b) road reform, (c) postal reform, (d) corporation law, (e) public works shrinkage, (f) regional government reform, (g) anti-trust reform, (h) labor market reforms. All of these were top-down, headline-grabbing actions. And all were quite important in spurring micro-level recovery. To be fair, other reforms had already started in the 1990s, such as holding-company reforms. And the creation of the Council on Economic and Fiscal Policy, which PM Koizumi used so effectively, was enacted in 1998 — although the Council itself did not start functioning until 2000 (under PM Mori, who seldom used it).

The consensus is pro-growth

In Japan, there is a very broad consensus that this agenda must continue. For example, on a Sunday morning political debate show two weeks ago, the seven top party policy representatives sat around the table, and ALL agreed that growth policy was crucial to maintaining living standards. Even the Communists agreed! What the parties DO NOT agree on are subsidies and civil service reform. The left wants more subsidies and no civil service reform (the left’s main backers are civil service unions). The right wants fewer subsidies and big civil service reform. The problem is that both main parties contain both left-wing AND right-wing elements. PM Koizumi ejected part of the left from the LDP, but not all of it. DPJ President Ozawa’s election tactics are pushing the right out of the DPJ, even though he himself historically was right-wing on these issues (his past writings and actions make this clear).

High hurdle to political realignment

So now, it is all about what issues and events could trigger splits of both parties, and a realignment on left-center-right lines.  I think that such splits are highly likely. In fact, in my view, the only question is how long it will take. Unfortunately, I think that the answer is ‘longer’ rather than ‘shorter’. Since the Upper House is fixed in stone for the next three years, ending gridlock requires that 19 members of the DPJ be broken off into a new party. (My colleague Takehiro Sato points out that an alliance of the LDP with a new party might be incompatible with the current membership of the Komeito Party in the coalition. If so, then there would have to be 39 members of the DPJ in the Upper House split off to join the new party, not 19. Note that the DPJ now has a total of 109 Upper House members, so that defection of 39 would mean that a third of the party would be gone. This is a tall order.) This will require the splinters from LDP and DPJ in the Lower House to form a new ‘Radical Party’ (my tentative name for it), and prove themselves attractive in a Lower House election. Getting to that election will take a few months. Only after that will the Upper House DPJ members have a clear incentive to follow. Moreover, they will have to be courted and offered rewards as well, which could take a few more months.

Do investors care about reform?

For investors, the issue is whether reform matters in setting asset prices. A friend recently wrote to me, “For the JPY, the biggest driver is still the higher risk appetite of Japanese retail investors, not the state or the speed of opaque, slow-moving, structural reforms that investors are neither familiar with nor able to track over time.” True, most investors’ eyes glaze over when the word ‘structural’ comes up. However, structural factors do change economic performance and attractiveness of assets. Moreover, there is another big driver of JPY, in my view, the degree to which MoF sells forex reserves. My colleague Stephen Li Jen has estimated that Japan needs at most about US$225 billion in reserves. And let’s not forget politics. US Congressman Joe Knollenberg has introduced a ‘Japan Currency Manipulation Act’. Although motivated chiefly by the troubles of the auto industry in Congressman Knollenberg’s district in Michigan, the bill proposes looking at FX reserve levels as a measure of currency manipulation.

What are the signposts?

So if there are signposts for accelerating reform, coming from either the LDP or the DPJ, what will they be? The following is a short list:

(a) Medical reform bills liberalizing generic drugs, hospital privatizations/management, insurance.

(b) Public works cuts in the next budget, to be formulated over the autumn.

(c) Outsourcing of regional government activities, e.g., bus lines, meter maids, waterworks, welfare, school security guards, etc.

(d) Agricultural policy, e.g., liberalization in the FTA with Australia, and productivity policies (some first steps have been taken already — which was part of why the LDP lost so badly in the regions).

(e) Small business support policy: How much in subsidies, as a result of DPJ pressure during the election?

(f)  Minimum wage policy: Will the impact on small business be offset by subsidies as proposed by the DPJ, or become a spur to higher productivity, as proposed by the LDP?

(g) Interest rate policy: The LDP wants low rates to continue, but the DPJ wants rates hiked, in order to raise consumer income. The DPJ has not said anything about the impact this would have on small business (it is actually good for large business, whom the DPJ made a point of attacking during the election campaign). Presumably, the DPJ will propose a subsidy to offset this too.

(h) Social Insurance Agency reform. The SIA is the agency that lost the 50 million pension records. The LDP wants it abolished, and the functions farmed out to private companies. The DPJ wants it merged into the National Tax Agency (Japan’s IRS). The latter is vehemently opposed to the merger, in light of the poor performance of SIA personnel.

(i)  Political funding reform. Both sides want more disclosure. The DPJ is more radical, and its views will probably prevail.

(j)  Social security number introduction. There is no generalized SS number in Japan, and no taxpayer ID. Lots of people still worry about privacy, but the real issue is the ability to evade taxes. Not clear where this will go. Adoption of a national SS number, used as a taxpayer ID, would be a major step toward reform.

Voters will watch

As the debate on policy heats up during the autumn, both voters and investors will be watching the positions of the two sides carefully. The DPJ will be as much of a target of scrutiny as the LDP. The competition will be exciting, and ultimately constructive. It could also trigger renewed interest of foreign investors in Japanese assets.

|

« 三大都市圏(東京圏、名古屋圏、関西圏)の人口が、現行調査方法を用いた平成4年以来はじめて全国人口の半数を上回る | Main | Dani Rodrik on ISI »

経済・政治・国際」カテゴリの記事

Comments

Post a comment



(Not displayed with comment.)




« 三大都市圏(東京圏、名古屋圏、関西圏)の人口が、現行調査方法を用いた平成4年以来はじめて全国人口の半数を上回る | Main | Dani Rodrik on ISI »