Sayonara “Japan, bastion of political stability”

The last time the LDP lost the majority of lower house seats in 2009, Japan was cheering. There was a real winner - the opposition leader turned Prime Minister, Hatoyama Yukio, started with the highest initial approval rating ever. This time around, the LDP’s loss delivers no real winner. There is no cheering, no sense of victory. Instead, within the LDP rivalries and infighting will intensify; and amongst the ‘winning’ opposition parties the chances of overcoming divisions and differences remain minuscule. Nobody wins, Japan loses.

In the world of money and investment, a key pillar to the “bullish japan” thesis has been “Japan is a bastion of political and policy stability”. After today’s election, this will be become more difficult to argue. Yes, the weaker the politicians, the stronger the elite technocrats become. But this is primarily because weak politicians will pressure responsible bureaucrats to commit to populist policies, tax cuts or, in Ishiba’s case, pork-barrel vote buying in the name of regional economic revival. Technocrats become strong because they do what they do best, play defensive and preserve the status-quo.

In contrast, the long overdue pro-growth structural reform agenda — social security, rural agricultural land-use regulations, reform / consolidation of the secondary banking system, or inheritance- and gift taxation, to name but a few — will now be pushed to the back-burner. Weak politics breeds weak support from the all-important bureaucracy. No elite technocrat will want to invest his/her political capital in supporting a Prime Minister who is poised to be voted out before long. Any law or regulatory change of consequence takes at least two years to prepare and turn into law.

Clear-speak: political infighting within the LDP and across parties is only just starting; the fight between politicians desperate to push populist economic policies and the bureaucracy trying to impose fiscal discipline will intensify; and confused political pressure on the BoJ will intensify — I say confused because populist politicians will call on BoJ to do something against “bad inflation” forced by Yen depreciation.

From here, I doubt the current LDP leadership has what it takes to correct its ways. It is clear that the LDP’s money politics and utter failure to credibly reform political funding laws and regulations was the most powerful force driving the backlash against the LDP this election. Reforming the money-politics dynamics will not be easy. It may well take another LDP loss in next year’s upper house election before the sense of crisis turns into concrete action.

For now, it is “Sayonara Japan bastion of stability”. Nobody is cheering, least of all the Japan Optimist. Gambarimasho….;-j