Japan: Taro Aso faces Critical Challenges

Taro Aso, a Roman Catholic, a “manga†-loving conservative with a wry smile and a sharp tongue, a colourful nationalist with a knack for offensive gaffes, was chosen by Japan’s beleaguered ruling party, the Liberal Democratic Party (LDP), battling recession, demographic crisis, financial turmoil and a general election, to be Japan’s 92th Prime Minister on September 24, 2008. The LDP must now wait to see if Aso’s ascendance will be enough for the party to regain the five-decade legislative stranglehold it lost in 2007 in the Diet. Aso’s election came after a joint panel, consisting of 20 members with 10 from either Chamber, failed to reach a consensus on the nomination of the new Prime Minister. Earlier in his campaign trail, Aso easily beat the other four LDP candidates, including Yuriko Koike, the party’s first female presidential candidate, who was backed by former Prime Minister Junichiro Koizumi. In the voting of the two-Chamber Parliament, the House of Representatives picked Aso, who garnered 337 or 71 per cent of the total of 478 valid ballots at the 480-seat Lower House, while the House of Councillors chose Ichiro Ozawa, who failed to obtain a majority of the 121 votes required to be elected in the voting but won 125 out of a total of 240 valid ballots in the second round of polling at the 242-seat Upper House. As the two chambers produced different outcomes and the joint panel was not able to come to an agreement, the Lower House’s decision prevailed and became the final resolution of the Diet as stipulated by the Constitution.

A conservative, a businessman, a nationalist and a populist, resolute as a samurai, careless and impulsive in his statements, it is Taro Aso who will govern Japan from now on. Since the LDP holds a majority in the Lower House, with his election with the support of its Centrist ally, the New Komeito Party or Clean Government Party, the post of Prime Minister was already in Aso’s pocket. But given the recent twists in Japan’s politics he is unlikely to set a life-time record, being the third Prime Minister in two years or the fourth Prime Minister in three years. Since September 2006, Aso is the third Japanese Prime Minister to take the place of his predecessor, Yasuo Fukuda, who resigned after about a year in office.

Interestingly, those were the Prime Ministers who had no popular mandate and were not elected after their parties’ triumphs in general elections. According to Japan’s political tradition and legal practices, parliament can elect the Prime Minister in the interim period between elections. Both Aso’s predecessor Yasuo Fukuda and Fukuda’s predecessor Shinzo Abe got their posts this way. They both resigned virtually bent by an unbelievable rating plunge on a wave generated by the anti-corruption drive and the government’s inability to resolve national economic problems.

From the viewpoint of most experts, the fact that government reshuffles of that kind have become typical of the Land of the Rising Sun in recent years is evidence of the following: first, the mighty political machine of the LDP has started malfunctioning (with short breaks, the party has been presiding over the country since the end of World War II), and second, Japan’s political system has become obsolete and does not work at all. The system can hardly be called a two-party one; all minor parties do not really count. In truth, there are few differences, both ideological and political, between the LDP and its main rival, the Democratic Party of Japan (DPJ) and it is very difficult to find what they differ in.

Incidentally, the DPJ’s current President, Ichiro Ozawa, was Secretary-General of the LDP not long ago. There are staunch conservatives and ardent liberal hawks and doves in both parties. The difference between them lies in that the LDP has been losing voters’ confidence in recent years and the DPJ failed to gain that confidence no matter how hard it tried. In other words, the typical political phenomenon in Japanese politics in recent years has been that the number of those, who used to be loyal to the LDP but have not “fallen in love†with the DPJ, has grown.

Junichiro Koizumi was Japan’s latest Prime Minister who was elected to the office with a landslide victory and it was he who saved the party from “melting away†totally. He left in 2006 but now Aso can give it a try to resuscitate the party fortune. Asahi Shimbun, Japan’s most influential and informative paper, assessed that Aso might dissolve the parliament scheduling early elections, ahead of the scheduled deadline. The party strategists and Aso might consider taking advantage of the “honeymoon†and the voters’ belief that “new broom will sweep clean†at least a part of Japan’s economic and political misfortunes.

Aso is not new to politics. He served as a Member of parliament, Minister of Education, Culture and Sports Economic Planning, Economy and Finance, and Foreign Affairs. His grandfather Shigeru Yoshida and father-in-law Zenko Suzuki were Prime Ministers as well. His sister is married into the imperial family. The other personality of Aso is that he is more of a businessman than a politician. Aso is the richest man in the current Cabinet. Since 1966, he has been involved in a family business heading the Aso Cement Company, which succeeded to the Aso Mining Company. Aso has to be careful of the possible controversy that might harm his political interests because this mining company was accused of exploiting 10,000 Korean convicts and the Allies’ POWs during the War. Though Aso might have been young enough to be responsible for such mistreatment, he now does not deny the facts while not acknowledging them openly. But his association with the company might threaten his public image.

Aso is a shrewd politician in the sense that he can evoke patriotism by his clear observations on issues on which the Japanese are so passionate. For example, in 2006 he caused a real headache with the Foreign Affairs Ministry with his statement over the means to “deal harshly†with the Russians in the matter of the Kuriles. He said that the government should have put an end to all that nonsense long ago by simply dividing the islands 50/50 between Russia and Japan. In his concept, Iturufu Kunashiri Shikotan and the Habomai rocks would be smoothly divided: Russia would get 75 per cent of Iturufu (the range’s largest island), and Japan—the island’s remaining 25 per cent, plus the three smaller islands. It took the Japanese Foreign Ministry a great deal of effort to convince its chief that the Kurile Islands were no bag of cement and the problem was not that easy to resolve.

Economic Challenges

Aso faces challenges ranging from an economy heading towards recession and a ballooning public debt to sensitive ties with neighbouring China. The most pressing issue on the list is how to stimulate the faltering economy within the constraints of Japan’s tattered public finances. For the first time since former Prime Minister Junichiro Koizumi left office two years ago, Japan now has a “can do†leader who believes the country can become a domestic-demand-led economic powerhouse and Aso is not afraid to make use of the full spectrum of policy options available to realise this vision, including fiscal, credit and regulatory levers.

Japan’s export-driven economy is hurt by high prices of energy and raw materials and a global economic recession led by the United States. Past stimulus packages have left a mountain of public debt equal to about 150 per cent of the GDP, the highest among advanced nations. Many economists say a rise in Japan’s five per cent consumption tax is vital to cover rising welfare costs as Japan’s population ages, but raising tax is a politically sensitive issue.

Aso aims to achieve the bold target of spurring the economy within three years through a proactive fiscal policy and would prefer to be flexible about balancing the budget in 2011. He has revealed enthusiasm about increasing government spending. Other measures that Aso aims to pursue to stimulate the economy are temporary flat income tax cuts, other targeted tax cuts, government spending and deregulation. Doubling the consumption tax to finance pension is an option, but he is unlikely to raise the tax until the economy improves, probably for three years. However, Aso is yet to roll out a concrete plan on how to bail out the Japanese economy amid a world economic slowdown and how to deal with the embarrassment of a relatively insufficient young work force, who pay most of the tax.

Former Prime Minister Yasuo Fukuda streamlined local taxes from three brackets to a single 10 per cent rate. While tax simplification is sorely needed in Japan, the authorities bungled the move, as almost 80 per cent of households had been in a tax bracket lower than the new 10 per cent rate. So at a time when growth was slowing, Japan’s consumers were hit with a tax hike equivalent to almost 1.5 per cent of disposable income. No wonder consumer spending has slowed sharply since last summer. Aso wants to push through a tax cut to help reverse the loss of this purchasing power. Previous governments neglected the upkeep of Japan’s infrastructure. Aso might address this issue as well. He might also reverse the unprecedented crackdown on the domestic consumer finance industry put into place by Shinzo Abe. Between 2006 and 2007, the Abe Government dramatically tightened rules and regulations on the industry, cut the maximum lending and tried to limit non-mortgage consumer loans and credit card debt to a maximum of one-third of annual income. Households responded by cutting non-mortgage debt by as much as two per cent of the GDP over the past two years, which meant less money available for spending. Many small and medium consumer finance companies to fund short-term working capital needs went bankrupt. Aso is strongly committed to easing these credit constraints. Where credit flows, growth will follow.

Aso can start with tax reform. Japanese corporate taxes are among the highest in the world, at 43 per cent. Yet, barely 30 per cent of companies pay taxes. Income taxes are also among the most progressive in the world; yet one in four households does not pay income tax. The system is riddled with loopholes and exceptions. Thanks to the tax code, a Japanese company is better off wasting money on inefficient projects than trying to actually run a better and higher-performance business. This must be changed. Japan can lower its tax rates and raise tax-collection at the same time, both for corporations and households.

Another area which must attract Aso’s attention is convincing companies, both domestic and foreign, to invest in Japan and create jobs. Between April and September 2008, Japanese companies spent $ 60 billion in overseas investments; yet they cut domestic investment by almost $ 80 billion, or almost 10 per cent of their total domestic investment. Japanese companies think it more profitable to invest overseas than in Japan. And where local companies would not invest, global companies would not either. As a result, foreign investment in Japan has stagnated. Aso must reverse this trend by taking a page out of Koizumi’s book and cutting taxes, slashing red tape and deregulating labour markets.

Political wrangling has left two seats vacant on the Bank of Japan’s nine-member policy board. Government nominees need approval from both Houses of parliament, which appears unlikely to happen soon with the Opposition controlling the Upper House. Market players expect the Bank of Japan to leave interest rates at 0.5 per cent for now as it grapples with financial market mayhem amid rising inflation.

Foreign Policy

Being a Roman Catholic, a member of a religion whose followers make up less than half a per cent of Japan’s population, Aso is a devoted reader and passionate advocate of manga, Japanese comic books and graphic novels that have annual sales in billions of dollars. As a Foreign Minister, Aso helped establish a national manga award for young artists and spoke of “manga diplomacy†as a way of connecting Japan to the world.

Aso is known for his blunt comments on domestic and foreign policies. He had said visiting the Yasukuni Shrine is a domestic issue and must not create diplomatic tension with China and South Korea. As the Foreign Minister in 2006, he annoyed China by suggesting that Japan’s Emperor should visit Yasukuni, the war shrine in Tokyo where convicted war criminals are honoured along with 2.5 million war dead. However, while the LDP Presidential candidate, Yuriko Koike, openly stated that she would pay a visit to the Yasukuni Shrine if elected, Aso refused to commit himself one way or the other. In fact Aso diluted much of his conservatism on foreign policy as his chances of winning the party’s presidency grew. In his most recent publication, An Extraordinary Japan, he says China’s development as a major economic power is “favourable†and bilateral relations must overcome the past with a focus on “reconciliation and cooperation†. Aso must maintain ties with China, its biggest trading partner, which have improved recently after years of friction over Japan’s military aggression in Asia and during World War II. With the reputation of an outspoken nationalist, Aso is likely to act pragmatically to keep ties with its Asian neighbours on an even keel while strengthening relations with the US.

Documents have surfaced in recent years showing that during the war, Aso’s family cement business used thousands of Koreans, Chinese, Australians, British and Dutch prisoners as slave labourers. Aso was young then and of course not directly involved in this issue. Aso has a record of being flexible and pragmatic on major domestic and international issues and therefore he is expected to handle sensitive issues with deft and maturity.

Aso’s experience as a Foreign Minister may have contributed to a mellowing of his outlook. In fact, he is the first former Foreign Minister to become the Prime Minister since Keizo Obuchi, who was in the top slot from 1998 to 2000. During his stint at the Foreign Ministry, which lasted nearly two years (2005-2007), he supported strict economic sanctions against North Korea and played a key role in drafting a UN Security Council resolution in 2006 condemning Pyongyang for testing long-range missiles. But at the same time he refrained from visiting the Yasukuni Shrine.

Japan has been supplying free fuel to ships in the Indian Ocean to support US-led military operations in Afghanistan since 2001, but faces a battle in parliament to pass legislation enabling it to continue the mission beyond January 2009. The Opposition-controlled Upper House had previously forced a three-month hiatus in the programme and would be able to block for months any extension. Failure to maintain the mission could irritate the US, Japan’s most important ally. Aso has assured Washington that he will resist Opposition efforts to shut down the Japanese naval refueling missions in the Indian Ocean—Japan’s risk-free demonstration of support for American and allied military efforts in Afghanistan.

What the US most needs from Japan is a responsible strategic partner, not a government whose imperial reveries and symbolic muscle-flexing will provoke angry reactions across Asia. Nationalism is enjoying a disturbing political revival because many Japanese fear that their country, once Asia’s clear economic leader, is losing ground to booming neighbours. The answer for that does not lie in the nostalgic fantasies about Japan’s ugly past for which Aso has become well known. Aso not only has to modernise the country’s economy by completing the market reforms begun by Koizumi, he needs to modernise Japan’s foreign policy as well by treating its neighbours as equals. The New Yorks Times observed in an editorial on September 25, 2008 that if Aso can be pragmatic enough to adopt
that agenda, he is likely to be a successful Prime Minister.

Aso’s past remarks on certain sensitive issues would always lurk as he energises his foreign policy. After the conservative Abe and political dove Fukuda, Aso’s position in the hawk-dove scale will be measured by how he implements his foreign policy. In all probability, the self-styled hawk Aso will display a dovish side on foreign policy.

The blunt-spoken Aso has described China as a “growing military threat†and accuses Beijing of politicising the Yasukuni Shrine issue. In October 2006, he backed former LDP Policy Chief Shoichi Nakagawa, who called for a discussion on whether Japan should consider developing a nuclear weapon. But some experts assess that he may not be as extreme a Rightwinger as the media have portrayed him. According to Fukashi Horie, a former Political Science Professor at Keio University, Abe was vocal about his conservatism, but Aso, who ran a family firm before turning to politics, has management capabilities and will likely remain objective and in tune with public opinion.

Aso, generally considered to believe in a conservative foreign policy, has raised eyebrows in the past with his controversial comments. He has favoured a revision of the peace clause in the Constitution to facilitate the development of the Self-Defence Forces overseas and has at times openly shared his revisionist views in public.

However, Aso would in all likelihood have no choice but to put all his effort into domestic issues and prepare for the looming Lower House elections, instead of focusing on foreign policy matters. The report by the Congressional Research Service also states that domestic issues such as pension reforms will be prioritised over foreign policy legislation. Nevertheless, Aso will need to swap nationalism for pragmatism in handling Japan’s foreign relations.

General Elections

The Opposition DPJ, which won a majority in the Upper House in July 2007, is demanding that elections for the Lower House, which has the final say, be held immediately. The Japanese Constitution allows the Prime Minister to call elections any time before next September. But calling elections could be risky for the LDP, which has governed Japan for more than half a century but is losing public trust over the scandal of pension funds and discontent over many other issues. The LDP now takes up two-thirds of the seats in the Lower House and can have the Prime Minister’s decisions forcibly approved in the House even if they are blocked in the Upper House.

The key point in the next Lower House elections is which party, the LDP or the DPJ, would become the largest force in the 480-member Lower House. The LDP and New Komeito aim to grab at least 241 seats to maintain the coalition’s majority. Aso’s party faces a life-or-death situation in the elections that will reveal the people’s hearts towards the party.

Some recent polls suggest that if elections to the Lower House were held tomorrow, the LDP would lose heavily to an increasingly bullish and confident DPJ. That result would effectively wrench from the LDP the control over Japan’s destiny that it has wielded almost without pause for 52 years.

In the meantime, adding to the glamour of democratic elections, a new party has been born when independent Lower House member Shingo Nishimura became the fifth member of Kaikaku Kurabu (Reform Club). A party must have at least five Diet members to be recognised. With its new status, the group can gain access to government subsidies for political parties.

Cabinet Formation

Aso was quick to choose his Cabinet but his Cabinet line-up looked subdued. He may have valid reasons to do so. He deliberately picked low-profile politicians instead of factional bigwigs so that he can lead them around like a “school teacher†. His approach seems to be to demonstrate his leadership to gain popularity. His stakes are high, as also for the Opposition DPJ when the elections are held. If the LDP loses, the DPJ will seize control of the government. Though it is premature to hazard a guess when elections are to be held, the Prime Minister has the sole authority to dissolve the Lower House and call a snap election.

In forming his Cabinet, Aso chose his favourite ‘students’, the ones he wants to bring up. He was able to pick his Ministers freely and without bowing to the usual LDP factions. He appointed three Ministers from former Finance Minister Bunmei Ibuki’s faction, which has only 28 people, and gave a mere two posts to the largest faction, led by former Chief Cabinet Secretary Nobutaka Machimura, having 88 members.

He warmly welcomed most of his rivals, by either giving them ministerial posts or appointing them as LDP executives. One conspicuous omission, however, was the first female candidate, ex-Defence Minister Yuriko Koike. Aso excluded the high-profile Koike and installed two female Ministers instead: Seiko Noda, resuming her role as Consumer Affairs Minister, and Yuko Obuchi who will tackle the low birth-rate problem. The 34-year-old Yuko is the daughter of the late Prime Minister Keizo Obuchi (died after suffering a stroke at the Prime Minister’s office in April 2000) and is now the youngest Cabinet Minister in postwar history. Noda, 48, now the Consumer Affairs Minister, was the youngest Cabinet member when she was appointed Posts and Telecommunication Minister at the age of 37 in 1998. Now that honour goes to Yuko.

Another surprising appointment seems to be that of former Defence Minister Shigeru Ishiba as the Farm Minister. Ishiba was active in bringing up the income disparity issue between urban and rural areas during the LDP presidential election and voiced loud support for the rural areas. Kaoru Yosano retained the post of Economic and Fiscal Policy. Both Yasano and Ishiba ran against Aso in the LDP election. Former LDP Policy Chief Shoichi Nakagawa, a close ally of Aso and a Right-wing conservative, was named both Finance Minister and Financial Services Minister in a double appointment.

Former Education Minister Hirofumi Nakasone, son of powerful former Prime Minister Yasuhiro Nakasone, was named the Foreign Minister. Critics say that Nakasone lacks experience in handling foreign relations. By choosing Nakasone, the Prime Minister will probably himself lead foreign diplomacy.

Aso’s choices for Finance and Economic Ministers failed to impress economists, who said they are not likely to take bold measures to shore up an economy threatened by the global economic downturn. A lack of reformists in the new Cabinet, as well as its anticipated short life-span, has raised concerns among economists that Aso will only carry out conservative steps with a short-term effect on the economy. Investors, especially in the US and Europe, are worried about Japan’s ballooning fiscal deficit and are concerned over Aso’s intention to raise fiscal spending to jump-start the economy. In particular, it is feared, that the appointment as Finance Minister of 55-year-old Shoichi Nakagawa may indicate a departure from previous Finance Minister Bunmei Ibuki’s balanced budget policy.

Not all Ministers in Aso’s Cabinet share the new Prime Minister’s enthusiasm for fiscal spending. Nakagawa wrote in the Yukan Fuii newspaper that the economy needs fiscal stimuli, including the reintroduction of income tax breaks, lower corporate taxes and other measures that will kick-start the economy. While Aso and Nakagawa advocate fiscal spending to provide a boost, Economic and Fiscal Policy Minister Yasano supports a more austere policy of reducing the budget deficit. Then, the Minister of Economy, Trade and Industry, Toshihiro Nikai, emphasises economic growth to increase tax revenues. Thus, the Cabinet may experience friction over economic policies. The launch of the new government is not likely to have a big impact on financial markets either.

Dr. Rajaram Panda is a Delhi-based specialist on Japanese affairs. He can be contacted at e-mail: panda@yahoo.co.in