NEWSDAY - July 19, 1998

The American Stake in Japan's Crisis

by Steven C. Clemons

News reports last week repeated a litany of names unfamiliar to many Western ears: Obuchi, Kajiyama, Koizumi, Miyazawa and Kono. These are the main rivals vying to become the next prime minister of Japan. The race to succeed Prime Minister Ryutaro Hashimoto after the humiliating defeat of the governing Liberal Democratic Party (LDP) in parliamentary Upper House elections last week has captured a surprising amount of global attention.

As I walked down K Street in Washington, D.C., last week, I eavesdropped on two people - who seemed to be anything but hardcore Japanophiles - arguing aloud about whether Keizo Obuchi, an excessively undramatic but senior Japanese politician, or Junichiro Koizumi, a darling of the media and Japan's more youthful voters, would be a better choice to resolve the country's economic implosion. Even in Washington, this kind of conversation doesn't happen every day.

This sudden surge of interest in Japanese affairs reflects the way the world has been changing. In many ways, this past week's worth of speculation over the Japanese succession is reminiscent of American obsession with the succession crises that followed Soviet Premier Leonid Brezhnev's death.

Clearly, Americans now feel that Japan's next prime minister matters to their lives (and to the American stock market), just as Americans used to feel a sense of consequence about the leader of the Soviet Union. The Soviets could nuke us; Japan can drive down mutual fund returns.

And of course, much of the present political second-guessing stems from economic concerns. The black-and-white contrast between Japan's current economic circumstances and those of the United States is not subtle. This week, NASDAQ and the Dow Jones trading indexes yet again hit all-time highs - while across the Pacific, the Japanese got news that their economy was contracting after seven long years of flat growth and economic stagnation. Meanwhile, the yen has been wallowing at eight-year lows against the dollar, and unemployment levels are hitting highs that most analysts said were impossible.

Americans, who now invest in greater numbers than ever, sense that global growth and economic stability depend upon Japan restoring its economic health. Economic convulsions have rocked Asia and multinational balance sheets over the last year, and most investors understand that Thailand, Indonesia, Korea and Asia as a whole can only slide further if Japan continues to collapse. We resigned ourselves some time ago to financial interdependence with the Japanese. If they go, so do we.

While the foreign financial establishment has been sweating over Japan's resolve to clean up its banks and stimulate its economy, the Japanese themselves - at least those in power - have seemed relatively calm about their predicament. Last week we learned that this placid view from the top was a major misdiagnosis. The high 59 percent turnout for last week's Upper House election - which tossed out more than one-fourth of the incumbent LDP politicians in contested seats - revealed that the Japanese public was in fact extremely concerned about the future.

The trillion-dollar question now is whether the right people in Japanese government got the message. CNN, Goldman Sachs and the amatuer investors on K Street all are making a similar error in their armchair analyses of Japanese politics: They believe that the prime minister matters. At most, Japan's top politician only figures peripherally into the serious business of running the country. This strikes many Americans as odd, since we place a great deal of power into our own executive's hands. Even a scandal-weakened U.S. president whose party controls neither house of Congress has infinitely more power than his Japanese counterpart. The well-trained elite of Japan places most of its interests - and its leaders - within Japan's powerful Ministry of Finance. Lately this office has been distracted by a series of scandals, but it generates the bulk of Japan's economic policy.

In fact, most recent evidence shows that the Ministry's leadership has been able to resist and even defy the Hashimoto government and consolidate its power. It's especially hard to know how closely these state officials will work with the next administration, given the severity of voter resentment of the government.

In truth, Prime Minister Hashimoto and chief aids, LDP Secretary General Koichi Kato and LDP Policy Czar Toru Yamasaki, were probably the best threesome to preside over the political side of financial reform. They had crafted legislation - which has languished in the Japanese Diet - to bail out the banking industry and introduce other reforms to simulate the economy. When it comes to addressing Japan's economic troubles, all of the current contenders for the prime minister's office are less attractive than those whom the Japanese public just rejected.

Keizo Obuchi, the frontrunner, is often characterized as unmemorable and the only man in Japanese political circles who has failed to make an enemy since he entered the National Assembly in 1963. However, he is also the kind of person to whom a million favors are owed, and he may surprise the pundits with his ability to calm the waters and pass the controversial legislation needed to fix Japan's banks and deregulate the economy.

Obuchi's main contender is Seiroku Kajiyama, the outspoken former chief cabinet secretary in the Hashimoto government, who actually belongs to the same political faction as Obuchi. The financial markets prefer him, because he has said he would infuse Japan's banks with fast cash and take steps to inflate the economy. Unfortunately, he is also the country's former justice minister who is no stranger to more unwelcome kinds of controversy. He is still reeling, for example, from his stunningly insensitive and racist remark that Japanese neighborhoods are spoiled by prostitutes just as American neighborhoods are spoiled by African-Americans. In all likelihood, Kajiyama will be destroyed by his party comrades if he challenges Obuchi.

Then there is the dynamic incumbent Health and Welfare Minister Junichiro Koizumi, who actually has some good ideas about reforming Japan, but is about as powerless in the LDP as one can be in what is still a boss-run political machine. Young LDP politicians are fearing a drubbing in the next Lower House election and want a media-savvy leader like Koizumi to do battle with the popular Democratic Party leader Naoto Kan. The last fairly serious option is the dovish Yohei Kono, who led the LDP several years ago but who did not serve as prime minister. Kono would only get the job if the party deadlocked over the other more powerful candidates.

The Japanese are seething at their current government for making so little out of Japan's immense wealth - but they are also eager to make their democracy less of a pretense. Over the past year, there have been three local referenda in which the Japanese public expressed disapproval for current government policy. Alas, Japan's government and central bureaucracy have ignored these votes and steamrolled local governors and their constituents. Okinawa island, which has been struggling to try to offload to the Japanese mainland a portion of the heavy burden of hosting American troops and military installations, has been callously disregarded by the national government.

For the Japanese public to rid itself of LDP rule, which has monopolized Japanese power for all but 10 months of the last 43 years, more elections need to be held. And unfortunately, for these to occur, breakdown and political paralysis will have to increase. The current government's apparent failure to resolve the economic crisis may be what clears the way for a more responsive and representative democracy.

The U.S. markets naively surged upward the day after the election in hopes that Japan would now move swiftly to solve its problems. But fixing Japan over the long term means not only cleaning up the banks and cutting taxes. More important, it means removing the bureaucrats who think they can outperform market forces - and replacing politicians who squander national wealth on vote buying and pork barrel projects. And that, in turn, means that the Japanese need a true multiparty democracy, in which the contenders for political power compete to put the public welfare first.