Impact of Upper House Election Results on Japan’s Political Future

The ruling Democratic Party of Japan (DPJ) faced a stinging setback in the Upper House election held on July 11, 2010. The Japanese voters were disappointed with the party’s apparent inability to deliver on promises to revamp Japan’s “sclerotic postwar order”.1 This will negate the efforts that Prime Minister Kan Naoto has to put the economy in shape. In a strong rebuke to the Kan Government, the voters deprived the DPJ and its tiny ally of a majority less than a year after the DPJ swept to power with a lot of promise and hope. The DPJ won just 44 of the 121 contested seats, or half of the 242 seats in the Upper House, far short of previous total 54 and much less than the 60 seats needed to claim a majority in the Upper House. With this defeat, Kan “faces the fight of his life” to stay in office and his tenure can just be shortened dramatically. Kan is the sixth Prime Minister in four years and the fifth Prime Minister in three years in Japan.

There were a total of 437 candidates fighting for the 121 seats. This time, the voter turnout was 58.09 per cent, down slightly from the 2007 Upper House election. This poll was the first major test for Kan after succeeding Hatoyama Yukio. Kan has been Japan’s first leader in 14 years who was not born into a blue-blooded political family but the Japanese people did not forgive him for his gaffe on tax proposals and delivered a beating to the party he heads. It may be noted that since 1989, no single party has gained control of both the chambers.2

A new star emerged in Japan’s political firmament. It was not the DPJ, not even the LDP but the “Voter”. After tolerating the LDP for decades and now having seen the dismal performance by the DPJ, the Japanese voter was not hesitant in punishing the politician and the political parties swiftly for their policy misdeeds. So now Japan has a “twisted Diet”, in which the Opposition controls the Upper House and the ruling parties maintain control of the Lower House.3

Its partner, the People’s New Party (PNP), drew a blank. The main Opposition party, the Liberal Democratic Party (LDP) won 51 seats. Though the DPJ controls the powerful Lower House, it would need the cooperation of other parties to pass bills in the Upper House as Prime Minister Kan is too keen to revive the country’s flagging economy and cut Japan’s massive public debt.4 The pressure will surely mount on the DPJ as it lacks the magic two-thirds majority in the Lower House that would have allowed it to bypass the Upper House. Under Article 59 of the Constitution, a bill which is passed by the Lower House but rejected by the Upper House becomes a law when passed a second time by the Lower House by a majority of at least two-thirds of the members present.

After winning a historic election victory in August 2009, the DPJ got mired in money scandals and a dispute over the Futenma air base relocation. Even as the DPJ was getting over the shocks, Hatoyama’s sudden resignation following criticism over his indecisive leadership in June 2010 was another blow to the party. Now, its failure to control the Upper House could lead to a split Parliament. The DPJ may find it more difficult to implement its promises to strengthen social welfare and assert control over the powerful bureaucracy.

The DPJ may be forced to seek a coalition partner if it wants to pass bills to reform the nation’s economy. If it fails to arrive at a coalition, the country may see a renewed political paralysis, leading to the possible dissolution of Parliament and call for new elections. LDP President Sadakazu Tanigaki seems determined to force the ruling coalition to dissolve the Lower House and call for general elections. One possibility seems to be approaching the Opposition parties to cooperate on a policy-by-policy basis. The other possibility could be inviting the Your Party, a new party formed a year ago by disgruntled LDP and DPJ types and advocating small-government policies and which emerged as a distant third but with 10 vital seats. If Yoshimi Watanabe, its President, sticks to his position not to enter into a coalition with the DPJ, its role as a “gatekeeper”5 in the Diet would add a unique dimension to Japanese politics. Among other parties, the New Komeito won nine seats, Japanese Communist Party (JCP) three and Social Democratic Party two seats. In contrast to the Your Party’s advance (10), the newly launched Sunrise Party of Japan and New Renaissance Party each gained one seat.

Watanabe’s plan mandating the Bank of Japan (BOJ) to play an active role in boosting the economy is also being interpreted as challenging the BOJ’s independence. The Your Party feels that the central bank’s concern for deflation has remained insufficient. Watanabe’s Your Party will be willing to join hands with the ruling party on individual policies where there is agreement. Hoping that its pro-growth agenda would be reflected in the Kan Government’s policies, Your Party has already planned bills to be submitted to the Diet, which include the proposal to revise the law setting the BOJ’s role and an administrative-reform bill featuring sharp cuts in pays for civil servants.6 Watanabe feels that if the BOJ fails to achieve the desired price stability, it should be accountable and the Diet should have the authority to replace the BOJ Governor.

Watanabe and Your Party Secretary-General Kenji Eda hope to pursue their campaign pledge to cut 100,000 civil servants and salaries of those who remain by 20 per cent. The party also aims to achieve four per cent annual economic growth in nominal terms and uncover the “hidden treasure” of 30 trillion yen from the government’s special accounts, independent administrative institutions and other sources.7

Kan needs the cooperation of the Opposition to pass the bills aimed at reforming the country’s economy. New Komeito leader Natsuo Yamaguchi has announced that his party will not join hands with the DPJ.

Public perception over the DPJ’s performance seems to be divided. According to Professor Naoko Taniguchi of Tokyo Institute of Technology, the voters see a “leadership crisis” in Japan. There were some who were willing to give a reprieve to the party. There were still others who did not expect the DPJ to do wonders in just only nine months’ time. Some Japanese analysts charac-terised the current Japanese political situation as “creative destruction” and that it was still in the “destructive phase”.8 Professor Shinichi Nishikawa of the Meiji University observed that “the tax hike debate is the cause of the defeat” and Japan will find it difficult to “create a strong political leadership”.9

This was for the first time since the mid-1950s that a party other than the LDP had been an incumbent party going into a national election. With Hatoyama’s fate in mind, Kan tactfully avoided foreign policy issues (particularly the Futenma base issue), which proved to be Hatoyama’s bête noire, and focused on economic issues, a strategy chosen to regain the party’s credibility with the voters.

Issue of Consumption Tax Hike

AFTER taking over the reins from Hatoyama, Kan’s priority has been to address Japan’s shocking finances. Warning that Japan was in the danger of a financial collapse, he proposed for a five per cent hike of the consumption tax. Though this was a bold move just before elections to the Upper House, the poll was seen something of a referendum on the nine-month-old leadership of the Democrats. Such an audacious tax proposal before an election—a political no-no in almost any country—and then vacillating when people expressed displeasure put a question-mark on his leadership skills. The impression that spread around was whether the Democrats, which are in fact an alliance of LDP defectors and former socialists, can “mould themselves into an effective governing party”.

Opinion polls had predicted a tough race for the Democrats, particularly after Hatoyama’s popularity had plummeted. Though the party chose Kan to succeed Hatoyama, his approval ratings too fell after he proposed to increase the consumption tax.10 In fact, the issue of consumption tax, or “shohizei”, has been haunting the Japanese Government for over three decades and no government has dared increase beyond five per cent because of political reasons. Whether Kan would be able to build a stable political base to tackle the massive national debt remains to be seen.

Curiously, though the LDP too pledged in its manifesto to raise the consumption tax to 10 per cent,11 it accused Kan for not specifying how revenue generated from the tax increase would be spent. The LDP fears that the money raised from the tax increase would only be diverted to the DPJ’s handout policies.12

After the poll results, the issue of a possible consumption tax hike is likely to be put on the back-burner. Even if Kan goes ahead with raising the consumption tax from the current five to 10 per cent, it would be inadequate to repair the country’s finances. The country’s fiscal condition is such that even with tax hike, tax revenue would remain less than the amount of new government bonds. Yet, discussion on the issue cannot be put off any longer. In order to resuscitate the country’s economy, the Opposition parties must accept Kan’s offer of discussion on the issue of tax reform, including consumption, corporate and income taxes.13 Building up intra-party consensus ought to be Kan’s priority. As a possible increase in the consumption tax would put extra burden on low-income earners, the Kan Government needs to explain why such a measure would be necessary.

One possibility is to refund consumption tax to the low-income group. But how to draw the line on household income and how to calculate accurately individual household income would be tricky and may not be feasible. The editorial of The Yomiuri Shimbun on this is interesting. It said: “A reduced tax rate system, under which tax rates are set lower for daily necessities and other items, might be one possibility. Given that reduced tax rates are applied to newspapers, books and food in some European countries, such a system is certainly worth consideration.”14

Though it was widely reported that Kan’s consumption tax hike proposal just before the election caught the public by surprise and led to its subsequent defeat, curiously a survey by Yomiuri Shimbun after the election results were out showed that more than 61 per cent of the public felt a consumption tax hike will be necessary. Only 23 per cent of the respondents said it is not needed. The same percentage of people had endorsed such an idea even before the polls. It can be deduced that people disapproved the way Kan was inconsistent in his remarks, rather than expressing displeasure on the tax hike proposal.

This time, Kan must not miss the opportunity in explaining to the people that the primary purpose of raising the consumption tax rate would be to fund the social security costs in pension, medical care and nursing services, which are already ballooning. As Japan’s birth rate continues to plummet and the society grays, the government will be under increasing pressure to mobilise funds to meet the costs of social welfare of the elderly population. Hiking the consumption tax may be inescapable for any government, whether led by the LDP or the DPJ, as this is the only stable source of tax revenue compared to revenues accruing from income and corporate tax which fluctuate greatly as they are linked to the state of the country’s economy. Allocation of more tax money to social welfare costs will also stimulate consumer spending, as the people’s anxieties for the future will be less.

As regards the JCP and SDP, both these parties were against increase in the consumption tax rate.

Economic Issues and Comparison with Greece Crisis

KAN warned the people that what happened to Greece could happen to Japan as well if timely corrections to the debt situation were not made. The Japanese public could not miss reading the underlying factors behind Greece’s debt crisis and its repercussions in the Eurozone and beyond; and they were worried of the political consequences of the debt problem. Kan warned: “Japan’s economy is 20 to 30 times bigger than that of Greece and its public debt is huge, so no country in the world could rescue Japan.”15

Japan has “the highest proportion of out-standing debt in relation to GDP among major economies”. According to the Ministry of Finance, Japan’s gross national debt in 2010 was 181 per cent of the GDP, far in excess of the Eurostat figure of Greek national debt of 115 per cent the preceding year. Kan is aware that Japan needs to issue 44.3 trillion yen worth of new government bonds to pay for a 92.3 trillion yen budget of 2010. Tax revenue for the year can only fetch the exchequer 37.4 trillion yen. “Servicing the national debt now uses 22.4 per cent of that budget, well in excess of spending on public works, education, science and defence spending combined.”16 Experts agree that it is inevitable the public will be subjected to a tax raise.17 The Kan Government faces a real predicament to see how Japan can escape from the imminent danger of a financial meltdown, a fate that Athens could not escape.

Comparison with the Greece crisis may be flawed, however. Unlike Greece which is a member of the Eurozone, Japan has the advantage of an independent monetary policy. While half of the Greek debt is held by foreigners, Japan is entirely self-financing.18 Japan’s personal financial assets are estimated at 1450 trillion yen and government bonds are mostly purchased by domestic buyers. Japan has also a deep pocket. This implies that at least on paper, Japan has the potential to pay off a lot of the outstanding debt and this realisation itself cannot fuel a crisis in confidence. If Japan can use its plentiful financial assets judiciously, the crisis may not be as serious as feared. Indeed, if one goes by the OECD or IMF’s definition, Japan’s net general government debt could be slightly less than 100 per cent and is therefore not alarming.

Kan is criticised for going overboard for his warning of an impending crisis as, it is argued, 95 per cent of government bonds are held by Japanese savers and institutions. Others fear that Japan is failing to tackle problems caused by its aging society. As Japan’s population continues to age, the savings rate is likely to decline further. This will force Japan to borrow more from abroad. “The higher interest rates demanded could make serving the debt unsustainable, tipping the country into the abyss. … What is not in doubt is if the crunch comes it would dwarf the problems posed by Greece.”19

Other Tax Reforms

MAINTAINING Japan’s economic vitality is another challenge for Kan. How Kan is going to address the issues of corporate and personal income tax remains to be seen. It may be noted that Japan already has one of the highest corporate tax rates of 40 per cent in the world. This works out to be much higher than the average of 26 per cent in the 30-member OECD countries. Lowering the corporate tax threshold will strengthen international competitiveness of the Japanese companies. One possibility to consider is to introduce the progressive taxation system, under which high-income earners bear heavier tax burdens.

As regards a personal income tax rate, Japan maintains it at a maximum of 40 per cent, which is quite high by any international standards. Since the percentage of people who come under the 40 per cent bracket is few, increasing the rate further would not have fetched much additional revenue. Therefore, Kan had in mind to hike the consumption tax rate to distribute the burden on all the people. It was also feared that going beyond 40 per cent would have discouraged people from working hard and undermined the country’s businesses.

The commentary in The Yomiuri Shimbun after the poll result is worth quoting. It said: “Japanese financial institutions possess about 40 per cent of government bonds. If bond prices fell, the value of these institutions’ assets would nose-dive and the financial system could plunge into turmoil. This would push up interest rates, making fiscal rehabilitation all the more difficult. … If the government wants to avoid fiscal collapse, a tax hike will be unavoidable. Japan’s society has been graying remarkably quickly compared with other advanced countries. Social security programmes need to be supported with a stable revenue source—consumption tax. The tax can be levied lightly on a broad range of people whether they are working or not.”20

Kan’s Political Stance

REGARDLESS of the poll outcome, Kan said that he will stay on and is not expected to quit without a fight. While accepting the poll verdict with grace, Kan sees the result as “a new startline”21 of his “responsible policies”. The DPJ and PNP will seek swift Diet passage of a bill to overhaul the privatisation of postal services during the extraordinary Diet session, likely to be convened soon. The postal reform bill was able to scrape through in the Diet session in June 2010. The LDP, Your Party and other parties are likely to create impediments in the bill’s passage. In particular, the bill to revise the National Civil Service Law that would demote senior national government employees is likely to face a roadblock.

A bill that aims at granting suffrage to permanent foreign residents and another that aims to allow married women to keep their maiden names may be opposed by the LDP. Though many DPJ members champion these two bills, the LDP had already spelled out its opposition to these in the election manifesto itself. The DPJ’s desire to upgrade the National Policy Unit from an “office” to a “bureau” may also face opposition from the LDP. The issue of hiking the consumption tax rate is unlikely to be raised again.

Fissures within the DPJ must be worrying for Kan. Some DPJ members said the party lost because Kan spoke of hiking the consumption tax without discussing the issue within the party. This group expressed their dissatisfaction on Kan’s “dictatorial remarks”.22 A growing number of LDP legislators are urging the party leadership to assume responsibility for the election defeat.23 But neither Kan nor Yukio Edano, the LDP Secretary-General, is going to step down.

Azuma Koshiishi, the head of the DPJ’s Upper House caucus, however, felt that all the party lawmakers ought to take the blame for the defeat, not just Kan.

LDP’s Stand

THE LDP’s old political machine came to play for its strong showing at the polls. Shinjiro Koizumi, the telegenic son of a telegenic former Prime Minister, Junichiro Koizumi, campaigned assiduously for the party’s individual candidates and this may have contributed to the LDP’s performance.

Though the largest Opposition party, the LDP, managed to put the brakes on its sinking popularity and performed better in the Upper House election, the younger LDP legislators expressed displeasure with LDP President Sadakazu Tanigaki over his failure to get a majority in the Upper House. Though segments of the younger lot within the LDP want both Tanigaki and the Secretary-General Tadamori Oshima to go, this is unlikely to happen. This is because the party has lost the public’s support in the past as a result of frequent changes in its leadership. Since 2006, the party leadership has changed every year when Prime Minister Abe Shinzo assumed office. Under the circumstances, Tanigaki can expect to stay in his present post till September 2012 when his term expires.

The LDP must be itching to regain power that it had regained once earlier by teaming up with the SDP and the now defunct New Party Sakigake, after losing in 1993. If it expects a similar situation this time, that is unlikely to happen too soon as the LDP has only 116 seats in the 480-seat Lower House. One also reads rumours that the LDP is toying with the idea of forming an alliance with some influential coalition leaders, such as former DPJ Secretary-General Ozawa Ichiro and PNP leader Kamei Shizuka (sacked by Hatoyama).24 Tanigaki will fight hard to prevent the emergence of a grand coalition with some breakaway DPJ members so that he can remain at the helm till September 2012. But if a split develops within the LDP, politics in Japan will see a different ball game.

Likely Future

JAPAN seems headed for more political instability. A possible internal revolt within the DPJ could be a distinct possibility. Kan could find it increasingly difficult in inducing more compatible partners into the coalition framework that could stabilize his administration. The SDP is unlikely to come to the DPJ’s rescue in removing legislative gridlock as it has always parted ways in May 2010. Kan has to prove his political mettle as he will face re-election as the DPJ President in September 2012. The best scenario for the DPJ may be to get the Your Party on board the coalition but with Watanabe’s already stated position, it would be a tough job for Kan to change that. Yet, that is still worth pursuing. Since Watanabe has opted for a noncommittal position, and has promised cooperation on a policy-by-policy basis, Kan can still have some hope to get the Your Party on board.

Any prospects for a coalition arrangement with its arch-rival LDP are like kite-flying as Tanigaki has already stated the LDP’s position. Non-cooperation from other smaller parties would only lead to a stalemate at the time of the passing of bills. According to Professor Satoru Matsubara of Tokyo University, Kan erred in putting “the issue on the table properly”.25 With Kan’s election strategy that cost the coalition government its majority in the Upper House, the possibility of Edano quitting cannot be ruled out either. The possible role of Ozawa Ichiro in the DPJ’s future remains elusive and he can come out with a surprise anytime. The possible future of Japanese politics will therefore remain in flux for some time to come.

REFERENCES

1. The New York Times, July 11, 2010, http://www.nytimes.com/20210/07/12/world/asia/12japan.html?_r=2&ref=world &pagewant...

2. http://search.japantimes.co.jp/print/nn20100712a1.html

3. http://mdn.mainichi.jp/perspectives/column/news/20100712p2a00m0na014000c.html

4. http://mdn.mainichi.jp/mdnnews/national/news/20100712p2a00m0na004000c.html?inb=rs...

5. “Bad for the DPJ, worse for Japan”, The Economist, July 12, 2010, http://www.economist.com/blogs/banyan/2010/07/japans_upper-house_election_results/print

6. Yuka Hayashi and Takeshi Nakamichi, “Japan’s Your Party Leader Wants Inflation Target”, The Wall Street Journal, July 15, 2010, http://online.wsj.com/article/SB10001424052 74870379270455366292022084292.html

7. Kazuaki Nagata, “Your Party emerges as force to approach”, The Japan Times, July 12, 2010, http://search.japantimes.co.jp/print/nn20100712a6.html

8. Roland Buerk, “Poll blow raises Japanese economy fears”, July 12, 2010, http://news.bbc.co.uk/2/hi/world/asia_pacific/10594674.stm

9. Quoted in Bangkok Post, July 12, 2010. See, http://www.bangkokpost.com/print/185981/

10. http://mdn.mainichi.jp/perspectives/column/news/20100712p2a00m0na014000c.html

11. While the LDP spelled out that it would use the tax money to fund raising social security costs, the DPJ failed to provide a satisfactory explanation of the need to start discussions on a consumption tax hike.

12. http://www.yomiuri.co.jp/dy/national/T100711002565.htm

13. “Get cracking on consumption tax talks”, The Daily Yomiuri, editorial, July

14, 2010, http://www.yomiuri.co.jp/editorial/20100715TDY02T05.htm

14. Ibid.

15. http://news.bbc.co.uk/2/hi/world/asia_pacific/10594186.stm

16. Paul Jackson, “Could Japan Collapse?”, The Diplomatist, July 8, 2010, http://the-diplomat.com/2010/07/08/could-japan-collapse/.

17. Jun Hongo, “Kan now faces gridlock, internal revolt”, The Japan Times, July 12, 2010, http//search.japantimes.co.jp/print/nn20100712a2.html

18. Peter Tasker, “The Perils of Naoto Kan”, Newsweek, July 7, 2010, http://www.newsweek.com/2010/07/07/the-perils-of-naoto-kan.print.html

19. Roland Buerk, “Poll blow raises Japanese economy fears”, http://news.bbc.co.uk/2/hi/world/asia_pacific/10594674.stm

20. Naohisa Ishida, “Economic Forum: Quirky poll result could be watershed”, July 14, 2010, http://www.yomuiri. co.jp/columns/commentary/20100714dy01.htm

21. http://www.aljazeera.net//news/asia-pacific/2010/07/201071111352823990.html

22. http://www/asahi.com/English/TKY201007120136.html

23. http://mdn.mainichi.jp/mdnnews/national/news/20100712p2a00m0na019000.html

24. http://mdn.mainichi.jp/perspectives/column/news/20100712p2a00m0na002000c.html

25. Hongo, n. 17.

Dr Rajaram Panda is a Senior Fellow, Institute for Defence Studies and Analyses, New Delhi. He can be contacted at e-mail rajaram_panda@ yahoo.co.in