The Democratic Party of Japan’s (DPJ) landslide victory in the Lower House election a year ago ushered in euphoric predictions of bold new policies, and even a transformation of the Japanese political system. There were widespread hopes that the DPJ would end the run of short-lived leaders. Instead, Prime Minister Yukio Hatoyama’s tenure proved to be a slow-motion train wreck. Indeed, the DPJ quickly showed itself to be no more competent in governing Japan than its much-derided opponent, the Liberal Democratic Party (LDP).
After shedding its two albatrosses of Hatoyama and general secretary Ichiro Ozawa, and many of its earlier campaign pledges, the DPJ hoped for a respectable showing in the last Upper House election. Instead, the ruling DPJ suffered a stunning defeat, when voters had the opportunity to show whether they were confident in Prime Minister Naoto Kan’s just over 1-month-old administration. The party ended with only 106 seats, far short of the 122 needed for an outright majority. The gap is too large to be filled by creating a coalition, because the most likely potential partners also lost seats.
As a result, the DPJ coalition can no longer ensure approval of its legislative initiatives. A twisted parliament portends even greater legislative stalemate and political gridlock. Gerald Curtis, a professor at Columbia University in New York and a long-time expert on Japanese politics, said the election had returned Japan to the paralysis and gridlock of the past few years. “You cannot pass a budget now in this political environment. You’ll have weak and unstable government. While the world changes fast, the Japanese government will change very slowly”. Trying to put a good face on the results, Kan said he viewed the election as a “starting point” for his push for a more responsible government ... The policy implications of the election outcome do not suggest an aggressive approach to monetary, fiscal or structural policy over the next few months.
Indeed, the attention of the large parties will most likely be focused on internal matters, leaving less time for focus on the economy. Gridlock is bad for the economy and for investor sentiment if policy drift continues for a prolonged period. According to Alan Feldman, managing director at Morgan Stanley in Tokyo, there are so many pressing problems in the Japanese economy that the costs of gridlock could be very high. In particular, pressure on the Bank of Japan for more aggressive monetary policy will likely be minimal, at least until political disarray ends. Without strong political leadership little progress is likely on budget priorities. The same goes for tax decisions.
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ely � c h �#9 ��6 et, like the markets in mainland Europe, will need further support from Wall Street if the recent strength is to be sustained.The Japanese market is lower over the past month. There has been further evidence that the pace of the recovery in the Japanese economy is weakening; andthe poor performance by the ruling Democratic Party in the recent election seems likely to lead to a period of political uncertainty that will make it difficult for action to be taken to reverse the trend.
The earlier decision to introduce measures to reduce the massive fiscal deficit was a major reason for the government’s poor election performance in the election, and may well be reversed; and the Bank of Japan’s action to try to increase the rate of bank lending, especially to smaller companies, also seems unlikely to have much of an effect on the economic situation. The background situation in Japan is therefore very disappointing, and this is reflected in the performance of the equity market. It seems unlikely that there will be any early improvement in the situation, and so the Japanese market weakness looks set to continue.
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