Author: Curzon

The Nikkei Business Magazine is a weekly print publication that is perhaps the Japanese equivalent of the Economist. In a recent article, they produced the following chart in their cover article to explain one context of the two parties in Japan — instead of the banal left v.s. right, liberal v.s. conservative, salaryman v.s. farmer dynamic, the article looks at the dynamic between the party promoting economic equality and the party promoting structural reform.

Click image for a larger version of the scan.

To ensure that everyone can understand this post and participate in the discussion in the comments, I’ve translated the chart:

The Nikkei narrative goes something like this: following the bubble bursting in the early 90s, the LDP advocated economic stability and maintaining economic equality instead of structural reforms. Many reformers inside the LDP left the party to form a number of smaller parties. (For more context, see my recent post on the graphical timeline of the DPJ.)

However, several years later it was Koizumi who transformed the LDP in a party that advocated structural reform. In some ways this undermined the DPJ’s core platform and brought the pro-Koizumi members of the LDP to overwhelming victories. But after the Koizumi era, the DPJ effectively turned itself into the party that would correct the inequities of the Koizumi structural reforms, and the LDP old guard, never comfortable with being the party of reform in the first place, waffled on the issue of economic equality v.s. structural reforms until it abandoned the reform platform before the election — but too late to benefit from the shift in the public’s concern.

This type of fluctuation in the policies and philosophies between competing political parties isn’t new — it’s a natural development in party politics that political scientists call realignment. (To note one clear example for US readers, the Democrats were the dominant political party in the conservative South for a century from the 19th century until the 1960s, after during which time there was a slow reversal that resulted in the region becoming a stronghold of the Republican Party — the names of the parties didn’t change, but their constituents did.) That being said, it’s depressing to read an analysis that ultimately concludes that with the exception of the charismatic Koizumi, the party advocating the status quo and rejecting structural reforms is the party that wins.

DPJ supporters want to believe that the DPJ is still the party of reform. I wish this was the case — but as I see it, the DPJ is getting the little things right and the big things wrong. Minor improvements such as ending the kisha club system that grants preferences to big media and allowing married couples to keep separate names are welcome reforms. But as of this morning, the leadership appears to agree with Kamei Shizuka that borrowers should be able to skip repayments on loans, which will spread the “zombie company” phenomenon to Romero-esque levels. That’s definitely a policy heavily favoring so-called economic equality and not structural reform.

Adamu from last week:

Shizuka Kamei has been appointed minister of postal issues and financial services. The man is a fierce, fierce fighter who likes to dredge up personal scandals using his ties as a former police official. That’s probably how he got the job. Now he’s going to make sure Japan Post remains the world’s biggest and possibly worst-managed bank and he’s going to crush regional banks by allowing all the people they lended money to stop paying for three years. Great.

Adamu didn’t elaborate at the time, this is what he was talking about: Kamei is pushing for a moratorium on loan repayments for small and medium-sized companies, and says this moratorium should last for three years. This would mean that small businesses with loans or credit lines from banks which cannot be repaid can avoid being pushed into bankruptcy by their creditors and basically demand a stay as a right. And -if- when banks have problems because they can’t collect the money that they loaned, Kamei thinks the government should step in with capital infusions to the banks. And on it goes, this thing of ours.

Let’s be clear that this is not the US cash infusion into/takeover of major institutions such as Citibank, AIG, and GM. The US directly acted on the belief that these companies were vital spokes to the superstructure of the economy, and their failure would be a disaster. (Exhibit A: “Lehman Shock.”) And Washington gained an enormous level of control in these takeovers that, while controversial, do give it a major say in how macro-management operates.

Kamei’s efforts to keep small companies afloat may look noble from the little guy’s perspective. But it’s woefully short-sighted. Small companies across Japan’s countryside that are having trouble making repayments should either restructure themselves, or fail and be restructured by creditors or new management. Many have antiquated management with regards to accounting, employment rosters, operational efficiency, supply chains, etc. Companies that can’t adapt to changed economic environments are supposed to fail. Yes, some good companies caught in unlucky times are destined to be caught in the current credit crunch as they are unable to repay loans and go bankrupt. But bankruptcy is a good thing! It is the engine of economic development that allows bad companies to fail, stifled talent to move elsewhere, assets to be sold at whatever price the market will bear, and bad management to be replaced. Yes, it sucks that people lose jobs and shareholders forfeit their investments, but that’s life! Letting this happen is a necessity for economic growth.

And on top of this, the poor local banks, only barely functioning after 15 years of treading water with the bad loan crisis, will now inevitably reduce their limited lending activities to nothing. There will be no money to lend, thus no local business growth or economic development, and thus no entrepreneurial activity. A short-term benefit for stabilized employment rates means the countryside gets screwed in the long term.

Adamu said that he hopes Kamei “simply collapses under his own weight. He may well overreach in a position that gives him barely any authority at all.” Indeed — Minister of Finance Fujii opposes the moratorium plan, saying that now is not the right time, to which Kamei responded “The Minister of Finance should stick to his own job.” And while the official party line is that the moratorium is an item of discussion, Kamei has said that the “three party union” is agreed on this issue. Also, legal jurisdiction over postal privatization resides with Minister of Internal Affairs Haraguchi, who said at a press conference on the 18th “I want to work together with Minister Kamei [on the postal privatization issue].” Kamei said in an interview afterwards, “I will handle post office privatization on my responsibility as we discuss going forward. I have no intention of including Minister Haraguchi on this.”

(Oh, and an endnote to point out how much of an idiot Kamei is, in waffling over his opposition to foreigners voting in local elections, he had this to say: “The ratio of resident foreigners differs by region. It would be unacceptable if worry and dissatisfaction arose in certain areas where Japanese are the minority and their personal will is not reflected in local politics.” The town with the largest percentage of foreign residents is Oizumi-machi in Gunma prefecture, with a 10% population of foreign nationals. If I reverse engineer his point to its logical conclusion, we should implement voting for foreigners in local elections immediately and reconsider it in a few decades when there is finally a town large enough to put Japanese people in the minority.)

Adamu is totally pumped about the new DPJ cabinet. You won’t be surprised to hear that I’m underwhelmed by Hatoyama’s sausage fest of a government, full of elected politicians with precious little experience in government, and incorporating no experience from the private sector.

That being said, we agree on the basics. PM Hatoyama should be applauded for appointing Messrs. Fujii and Okada, respectively as Ministers of Finance and Foreign Affairs, making sure that adults are heading the most important positions. The appointment of social policy progressive Keiko Chiba as Minister of Justice is interesting and probably a positive move. I look forward to seeing how she fares in promoting her liberal policies noted in Adamu’s post, which would probably be for the better of the country, although realistically, I have low expectations on her accomplishing anything. Kamei Shizuka is just awful in the position of the Financial Services Agency, and we can only hope that he has some sort of Makiko Tanaka-esque failure.

But then let’s get to what we disagree on. Kan Naoto has fortunately been placed in a senior position where is only role is waffling about policy. The DPJ and Kan have tried to polish his reputation by endlessly unearthing the fact that he on breaking open the AIDS blood transfusion scandal. But a more objective view would note that he was at the helm of the Ministry of Welfare and Labor when the pension fiasco began, he tried to target LDP politicians for not paying into the national pension program with Gingrich-esque hubris when he himself wasn’t paying into the pension program himself.

Seiji Maehara, a hawkish DPJ faction leader who in some ways is philosophically closer to the LDP reform wing, has been appointed to lead the Ministry of Land, Infrastructure and Transport (and Tourism!) and has started out be reasserting the DPJ’s promise to cancel all dam projects, including the Yamba Dam project that has already gone through more than 300 billion yen of its 400 billion budget. The DPJ’s rejection of new projects is understandable; it’s refusal to approval the completion of projects that are done is just barmy — especially as the governors of Tokyo and Gunma, which have paid for part of the budget, are preparing litigation against the government to get back the money invested from their prefectural budgets, which they seem very likely to win.

Then there’s pension policy wonk Akira “Mister Nenkin” Nagatsuma (actually his real nickname) appointed as Minister of Health and Welfare. He was expected to be a vice minister for just pensions and yet has been appointed to run the whole ministry. The scene yesterday at his appointment was fascinating — outgoing LDP Minister Yoichiro Masuzoe gave his farewell address and was greeted by applause by the bureaucrats. Nagatsuma’s entrance was met with stony silence and shallow bows, which he answered by saying in his address that he was going to “purge the ministry of grime and pus.”

Nagatsuma’s post will probably be the ongoing test ground for the DPJ’s anti-bureaucrat stance: how can a minister who has spent the past years eviscerating the bureaucrats now effectively manage them? At least Tommy Carcetti understood the importance of co-opting people inside the institutions he had to change. The DPJ is going to need the help of the bureaucrats to effect the reforms they want to carry out.

The rest of the cabinet is hard to gauge because few have previous experience or much of a public reputation. The one other startling fact is the lack of private sector expertise. The Constitution of Japan only requires that a simply majority of the cabinet ministers be an elected member of either the upper or lower house. Koizumi was especially noticeable for bringing in private sector know-how to the cabinet. That is noticeably absent in the “mock-Westminster system” that the DPJ is advocating, for indiscernible reasons.

Hatoyama enters office with 75% approval ratings, numbers that are matched only by Koizumi in 2001. I would wager that they are at around 30% a year from now.