Market Economics | Interest Rate Strategy - BNP PARIBAS ...

Komeito will maintain its resistance to the
government, including opposition to the budget itself.
Nonetheless, we expect New Komeito to eventually
back the budget-related bills in order to avoid
adverse consequences for the public. It is even
conceivable that New Komeito cooperation at this
juncture could open the door to some kind of alliance
with the DPJ, once the local elections are over.
Some observers believe the Kan government could
be shaken by a “June crisis”, in the event junior
partner the People’s New Party pulls out of the ruling
coalition, due to the failure to enact that party’s pet
project (reversing postal privatisation). However, we
think that, after April, the Kan government will find
ways of working with the LDP and New Komeito so
that key legislation can be enacted.
If the LDP and New Komeito can change and
cooperate with the DPJ, the anti-reformist bent of the
People’s New Party will also have to change to some
degree. It is our view that, once the April elections
are over, all political parties will modify their
approach to parliamentary affairs.
Could Kan’s tenure be long-lived?
Looking further ahead, there is a possibility,
depending on the policies pursued, that Kan’s tenure
as prime minister could be long by Japanese
standards. One reason is that the political schedule
is free of nationwide elections until 2013 (Upper
House in July, Lower House in August).
While Kan’s tenure as DPJ president (hence prime
minister) is due to expire in September 2012, we
expect he will be re-elected as replacing him at that
juncture would likely mean a quick general election.
Otherwise, the DPJ would again be slammed by the
public and opposition for elevating its leader to the
prime minister without the legitimacy of a Lower
House election victory.
Given the lengthy period without national elections, it
would be hard for the opposition to fight the
government on each and every issue. Accordingly, it
is likely that some opposition parties will seek to link
up with the Kan government on specific policies
issues. This would allow them to build a record of
achievement that could bolster their election
prospects.
Policy-wise, affinity is especially strong with New
Komeito (one concern with a DPJ-New Kometo
linkup is the fact that both tend to favour increased
spending on social welfare etc). If Kan manages to
survive the April local elections, his tenure as prime
minister could prove long-lived provided supra-party
cooperation is achieved on key policies.
Non-partisan policies stand best change of
enactment
What kind of policies are likely to be enacted? The
reality of a divided parliament means the DPJ’s wish
list of programmes enshrined in its 2009 election
manifesto must be revised, in the face of some
internal resistance.
Thus, the policies most likely to be enacted by a
divided Diet are those that are truly nonpartisan in
nature, such as: (1) comprehensive social
security/tax reform including hiking the consumption
tax; and (2) opening up Japan, including participation
in the Trans-Pacific Partnership (TPP).
These two issues were singled out by Prime Minister
Kan in his press conference on 4 January.
Comprehensive social security/tax reform is widely
deemed to be the most pressing issue facing Japan
today. In fact, the LDP and New Komeito have put
forward similar proposals in this regard.
The appointment of Kaoru Yosano as the minister for
economic and fiscal policy in the new Kan
government may be aimed at luring the LDP and
New Komeito into cooperating on social security/tax
reform. Yosano is an ex-LDP lawmaker who once
served as finance minister. In that capacity, he
helped draft plans for social welfare reform that were
promoted by the former LDP-New Komeito coalition
government.
With Yosano as the point man on social security/tax
reform, it should be easier to reconcile the ideas of
the opposition and ruling camps. After all, if your
ideas are accepted, continued opposition for
opposition’s sake is absurd. Thus, if the obstacles to
supra-party discussions can be overcome, perhaps
real progress can be made on social security/tax
reform. Unfortunately, at this juncture, this is
probably still wishful thinking.
Political realignment on TPP?
As for the opening of Japan, the desirability of joining
the TPP is not shared by all lawmakers. In fact, there
is strong opposition to the TPP within both the DPJ
and LDP, though opposition in the former case has
more to do with Kan’s abrupt announcement than
policy particulars.
Given the strength of the farm lobby in Japan,
discussions on the TPP probably won’t make much
headway, even though “opening Japan” would be a
good way to realise economic rejuvenation, as
pointed out in Japan: PM Sets Out Two Key
Challenges, Market Mover, 13 January 2011. On the
other hand, progress in the TPP talks could lead to a
realignment of the political landscape.
Ryutaro Kono/ Azusa Kato 20 January 2011
Market Mover
28
www.GlobalMarkets.bnpparibas.com