No. 9 — March 5, 1999


Feature Article



The mid-January union of the ruling Liberal Democratic Party and the right-wing opposition Liberal Party seems to have given the government of Prime Minister Keizo Obuchi a new lease on life. By the end of 1998, Mr. Obuchi, who struggled during his first 100 days in office with an emboldened political opposition, had seen his public approval ratings skid into the low 20 percent range. Barely six weeks into the new year, however, the embattled premier's ratings jumped to nearly 40 percent — the highest since his July 1998 election.

Most experts attribute this turnaround to the political stability brought about by the decision of the two conservative parties to join forces. The reconfigured Obuchi administration's success in shepherding the FY 1999 general account budget through the Diet's lower house in record time further boosted the effectiveness of this governing arrangement in Japanese eyes, as did some signs that the long-stalled economy might be on the move. In fact, the consensus among longtime Japan watchers is that the tie-up may deliver other positive benefits in the near term — namely, timely Diet approval of legislation to implement new guidelines for U.S.-Japan defense cooperation.

In the longer term, too, the LDP-Liberal Party coalition could pave the way for a major restructuring of the policymaking process. As a precondition for its alliance with the LDP, the Liberal Party pushed for bureaucratic and electoral reforms that generally would enhance the role of elected officials in determining national policy issues and diminish the influence of mandarins. The presence of the pro-defense Liberals in the government also could provide momentum for an initiative backed by the LDP's hawkish wing to establish Diet panels to discuss possible revisions to Japan's "peace constitution."

So far, though, it is unclear how far the reform proposals will go. The LDP leadership seems to have quickly lost interest in these changes, focusing instead on courting the New Komeito. The governing coalition, which is 11 seats shy of controlling the Diet's upper house, needs the support of the second-largest opposition party to ensure passage of the guidelines bills and other nonbudgetary measures. However, the LDP's preoccupation with lining up votes at the expense of deliberating reforms has caused Liberal Party members to grumble about being marginalized and to complain that the new governing arrangement is meaningless.

That the glow of the LDP-Liberal Party union would fade so quickly comes as no surprise to political insiders. Although described as a conservative alliance, the governing agreement was designed from the LDP's viewpoint to achieve two short-term political objectives: strengthening the Liberal Democrats' standing in the Diet and defusing opposition party efforts to mount a no-confidence vote. Judging by recent intraparty and interparty jockeying related to the mid-April Tokyo gubernatorial race as well as by LDP factional maneuvering, ruling party lawmakers, first and foremost, want to stay in control. They will cut whatever deal is required to retain their power.

Rather than a reflection of changes at work in the political order, the LDP-Liberal Party coalition is better viewed as a by-product of pressures for maintaining the status quo. If Japan's recession becomes a depression or if a crisis erupts in Northeast Asia, the body politic would be forced to make tough policy choices. A party system based more on ideology could result. Until such a calamity befalls Japan, however, political expediency will continue to be the name of the game.

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Weekly Review


A Liberal Democratic Party research council, charged with finding ways to reinvigorate the financial system, has floated a plan to address two problems worrying Japan's business community. The first issue is that many corporate pension plans are severely underfunded. The second concern is how to help companies unwind their huge portfolios of cross-held shares without depressing an already fragile stock market. The LDP panel has suggested that companies be allowed to pledge cross-held shares to their pension plans, thus killing two birds with one stone. Adding urgency to a resolution of the two-part problem are impending changes in accounting rules that will make it hard, if not impossible, for corporate Japan to disguise pension plan funding shortfalls. The new standards will be phased in starting in FY 1999 but will be mandatory for all companies by FY 2001.



Japan's external imbalance not only surged last year, but its changing composition highlighted some important trends. In the short term, the surplus actually may shrink, with both positive and negative consequences for foreign economies. That outcome could result in different interpretations of developments in Washington and on Wall Street. These are some of the conclusions to be drawn from the Bank of Japan's release of 1998 data covering the broadest measure of any nation's trade imbalance, the current account. For Japan, this indicator jumped 38.7 percent last year to a record-breaking surplus of ¥15.9 trillion ($132.5 billion at ¥120=$1.00).



Japanese and Russian officials put a positive spin on Foreign Minister Igor Ivanov's February 20-23 meetings in Tokyo with Prime Minister Keizo Obuchi, Foreign Minister Masahiko Komura and others, saying that both sides had conveyed a strong desire to resolve their long-standing territorial dispute and formalize a peace treaty by the end of 2000. They also pointed to agreements on several new aid projects for Russia as well as Tokyo's offer of more medical assistance for residents of the four disputed Kuril islands northeast of Hokkaido as creating a positive environment for improved bilateral relations.



The Consultative Group on Cambodia, a World Bank-led consortium of multilateral organizations and donor countries set up to coordinate aid for the war-torn country, met in Tokyo February 25 and February 26 to discuss prospects for 1999. Ultimately, the participants committed approximately $470 million in new assistance. Japan pledged to contribute up to $100 million — more than any other country or organization represented. Prime Minister Hun Sen had asked the international community for $1.3 billion over three years, or roughly $450 million annually, to implement basic reforms.



The Ministry of Agriculture, Forestry and Fisheries' variety-by- variety quarantine testing regime for apples, cherries, nectarines and walnuts lacks scientific validity, a World Trade Organization appellate body has determined. The ruling, made public February 22, not only upheld the central finding of a dispute-settlement panel report issued last October (see JEI Report No. 41B, October 30, 1998) but also extended this conclusion to apricots, pears, plums and quince. Imports of these fruits currently are banned because they, like apples, cherries, nectarines and walnuts, are considered potential hosts to the codling moth, a pest not indigenous to Japan. However, once American and Japanese plant quarantine experts agree on a treatment for a single variety of each of the four additional fruits, the procedure automatically will apply to all other varieties.

NEC Corp. is down but not out — at least for now — in its long-running, two-ring fight to overturn the controversial September 1997 dumping verdict on high-performance computers, which resulted in a 454 percent penalty on its systems and an equally market-excluding 173.08 percent duty on vector supercomputers built by rival Fujitsu, Ltd. (see JEI Report No. 43B, November 14, 1997). In a little more than a week, the company was dealt twin setbacks, one fatal and the other nearly so.

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