Reform falters with return of the familiar

13 December 1996

FUNDAMENTAL reform of the post-war economic and social system has slipped off the agenda in Japan. In late October, an apathetic electorate put an end to three years of cumbersome coalition government, and gave the conservative Liberal Democratic Party (LDP) enough seats to rule alone for the next four years. But the party which dominated Japanese post-war politics until its downfall in 1993, is likely to enjoy only a brief honeymoon with the public. The economy may have climbed out of recession this year, but there is little prospect of a return to the growth rates which were the envy of the world in the 1970s and 1980s.

Japan's three-year experiment with coalition government has left the public with little appetite for politics. Only 59 per cent of the electorate bothered to vote on 20 October, reflecting public weariness with Japan's faction-ridden politics. When the votes were counted, the LDP had won 239 seats in the 500-member lower house of the diet (parliament), up from 211, and had trounced the opposition.

The most coherent challenge to the LDP in the election had come from the New Frontier Party (NFP) led by Ichiro Ozawa. Running on a reformist platform of tax cuts, downsizing government and political openness, Ozawa had hoped to increase his party's 163 seats and break forever the LDP's stranglehold on power. 'We Japanese no longer enjoy the luxury of staying with the status quo,' Ozawa told the Wall Street Journal at the end of September. 'Our cosy consensual society must open its doors and its markets and free the individual to be self-reliant and creative instead of losing himself in the anonymity of the group.'

But his call for reforms cut little ice with the voters, who remember Ozawa as a former LPD stalwart and party fixer, and are wary about dismantling a system which has served them so well. The NFP fell back to 156 seats and other opposition parties fared far worse. The Social Democratic Party (SDP) paid a high price for entering a coalition with the LDP, its former arch enemy, in 1994 and now has only 15 seats in the diet, down from 63.

Prime Minister Ryutaro Hashimoto, who had headed an LDP-dominated coalition government since the start of the year, had his election chances boosted by strong signs that the economy has at last pulled out of the recession of the past five years. Gross domestic product (GDP) grew at a staggering annual rate of 12.7 per cent in the first three months of this year - the best quarterly performance since the 1970s. This impressive figure was a one-off, but most analysts believe growth will hit 4 per cent this year. Japanese corporations are also enjoying their strongest results since the late 1980s and wages and salaries are expected to rise by 1.6 per cent this year, after five years of stagnation.

Improving economy

The improved economy worked against the reformist parties during the election, but the economic upturn is likely to prove short lived. There are few signs of the dynamism of the past and there is pessimism about the medium and long-term prospects for the economy unless there is structural reform. Growth is expected to fall back to 2-2.5 per cent next year and stay at that level for the foreseeable future. Growth this year is almost entirely due to the Y14.2 million million public spending package, worth about 1.5 per cent of GDP in new money, authorised by the government in September 1995 in a last ditch attempt to kick start the economy and shake off the recession.

Higher government spending has had the desired effect in stimulating growth, but the impact of the last spending package will tail off at the end of the year. Consumer demand will also be hit from next April by the sales tax which is to rise from 3 per cent to 5 per cent.

Long term economic issues are brewing in the form of a rapidly ageing population and a sharp fall in labour productivity. The proportion of over 65s is expected to rise from 18 per cent to 27 per cent of the population by 2010, the fastest growth rate in the industrialised world. One consequence of the lavish public spending during the recession is that there are inadequate provisions to pay for pensions. To meet its obligations the government will have to borrow heavily in the future, which will have a knock-on effect in higher interest rates, higher taxes or both. The OECD warns that unless the government raises taxes further or slashes pension payments, Japan's debt could rise from the current 10 per cent of GDP, to almost three times national income by 2030.

Another worrying trend for Japan's long-term economic prospects is the marked drop in labour productivity. Manufacturing output per head, once without parallel in the industrialised world, is now about 70 per cent of the level in the US. This is accelerating the trend for Japanese firms to move production abroad, prompting fears of mounting unemployment at home. According to the Japan External Trade Organisation (JETRO), 18 per cent of total production was offshore in 1995, up from 3 per cent 10 years earlier. The figure is expected to rise to 27 per cent by 2000. This may help keep Japanese industry competitive on world markets, but fewer of the benefits will be felt at home.

Hashimoto has promised to deregulate the economy and tackle bureaucratic inertia. 'We must begin reform immediately,' the prime minister said after announcing his cabinet on 8 November. He also announced the formation of a committee to oversee the reform process. But the rhetoric aside, there are strong doubts that he has the ability or the political will to reshape the social and economic structures that his predecessors in the LDP crafted so carefully in the post-war period.

The Japanese press was without exception critical of his new cabinet, which is dominated by LDP stalwarts. 'The ugly jockeying for posts among LDP factions that preceded the cabinet appointments is reminiscent of the arrogance that characterised the party until it first lost power three years ago,' the daily Mainichi Shimbun said on 8 November. 'Contrary to Hashimoto's earlier boast that he would overrule factional interests and stress 'the right man in the right place' in the selection, the new line- up reflects nothing but the balance of power among the factions'.

In the field of foreign relations, as in domestic affairs, there is unlikely to be any serious rethinking of past policy. Relations with the US, often strained by trade issues, will remain top of the agenda. Since the rape of a schoolgirl by three US servicemen in Okinawa in the autumn of 1995 provoked an unprecedented wave of anti-American feeling, attention has focussed on the continuing presence of 47,000 US troops at an annual cost to Japan of more than $5,000 million.

But the wave of anti-US feeling did not last long. Chinese missile tests close to Taiwan reminded Japan of its vulnerability and in April President Clinton and Hashimoto renewed the defence arrangements to allow for a US-troop presence for the foreseeable future. However, Washington has agreed to close the US air base at Futenma within the next five-seven years as a gesture to Japanese sensitivities.

Trade relations between the two countries have been unexpectedly cordial for the past 18 months, but this mood is now likely to change. US industry is pressing for a reversal in the recent decline of the yen against the dollar and is clamouring once again for greater access to Japanese markets.

US pressure

In the Middle East, Japan continues to adhere very closely to the US line. Despite reservations over Washington's hostility to Iran, Tokyo has bowed to US pressure. The government has not renewed aid to Tehran and gives little official support to companies wanting to do business there. In Iraq, Japanese companies, like their US counterparts, have shied away from joining the throng of French, Russian and Chinese oil companies hoping to secure production sharing agreements with Baghdad when sanctions are lifted.

Tokyo continues to voice its strong support for the Middle East peace process and the principle of land for peace which was placed at its heart at the Madrid conference in 1991. After the right-wing Likud victory in Israel's May election, Foreign Affairs Minister Yukihiko Ikeda embarked on a tour of Syria, Israel, Egypt, Gaza and Jordan in August to express Japan's support for continued dialogue. 'Since the election of the new government in Israel the peace process has not been in a good state,' says one Foreign Affairs Ministry official. 'The visit was designed to convey our support for the peace process.' Tokyo also received Palestinian leader Yasser Arafat in September. 'Arafat met the Emperor and the prime minister during his visit. He was almost treated like a head of state,' says Isamu Nakashima from The Middle East Institute of Japan.

Japan's policy towards the Middle East is likely to remain unchanged over the next year as foreign policy is relegated to secondary importance by the new government. As Japan comes to grips with its transition to a mature economy, the main challenge will be to adapt to change without destroying the consensus-based system that has served the country, and the LDP, so well in the past.

Exchange rate: $1=Y113.8 (Dec '96)

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