View from Tokyo: Business is ready to be weaned from the LDP

The general elections in Japan last Sunday, in which the Liberal Democratic Party lost its majority for the first time in 38 years, passed with barely a stir in the business world.

The stock market cruised on at the same level, the yen remained strong, and businessmen seemed strangely unperturbed by the calamity overtaking the party that had supported their interests for so long.

This showed two things. First, of the three corners of the 'steel triangle' that has run Japan - businessmen, bureaucrats and politicians - the politicians had clearly become the least powerful as they grew increasingly tied up in corrupt deals, scandals and factional infighting within the LDP.

So although the political world is paralysed as the LDP and the smaller parties jostle to form a coalition government, business and the bureaucracy can continue as before.

Secondly, it showed that many businessmen in today's Japan no longer see the need for a one-party system that relentlessly protects and promotes big business interests over the rights of consumers and individuals.

While Japanese corporations were rebuilding after the Second World War and working hard to catch up with the West, the LDP's cosseting was very welcome; now that Japanese business has come of age, they are ready to be weaned off their reliance on the party.

'Japanese corporations today are cash-rich and internationally competitive,' says Kent Calder, director of the Japan-US Institute at Princeton University.

'They have declining incentives to support single-party dominance. Business was held hostage under the 1955 system (the year the LDP was established), because the only alternative was the Socialists, and they were not viable.'

But now there has been a profusion of new, conservative parties, giving voters, and business, a real alternative. And the conservative share of the vote has increased from the 51 per cent won by the LDP in the last elections in 1990, when it was the only conservative party, to 60.2 per cent in Sunday's elections, when three new conservative parties were also running.

Stage set for reform

This rise of the neo-conservatives will accelerate the shift of political power from the countryside to the towns and cities, says Kenneth Courtis, senior economist with Deutsche Bank in Tokyo. The demographics will mean power continuing to shift from the LDP's traditional supporters to urban Japan over the medium term, he believes. 'That will set the stage for important economic reform: tax reform, land reform and deregulation on a broad front.'

Big business in Japan has been getting increasingly impatient with the LDP's outdated ties with special interest groups, such as the nation's ageing farming population, whose votes are disproportionately influential because of constituency disparities. The farm lobby has kept the complete ban on rice imports, even though this endangers the General Agreement on Tariffs and Trade negotiations on free trade on which Japan depends so crucially for many other sectors of its economy.

Even before the LDP's election loss, the big business associations, including the powerful Keidanren (Federation of Economic Organisations), indicated they were changing their policy of supporting only the LDP with political donations. They would consider giving funds to other conservative parties as well.

After the elections, Gaishi Hiraiwa, chairman of Keidanren, made a point of saying he was 'not surprised' at the result. And one Keidanren member said the regular breakfast meetings between the representatives of the four main economic organisations and the LDP's leaders, once a symbol of the cosy relationship between business and the ruling party, would no longer be worthwhile in the new political system.

But although business is not crying itself to sleep over the LDP's loss of a parliamentary majority, there are some short-term worries over the shape of the economy, and the extent to which political uncertainty might prolong the recession.

Japan is clearly still in recession, even though the Economic Planning Agency has dredged up all manner of euphemisms to describe the downturn as a 'generally sluggish recovery' that is 'still in an adjustment phase'.

In its monthly report released this week, the EPA said there were signs of recovery - but at the same time admitted there were weak spots in personal consumption, corporate capital investment, industrial output and manufacturing in general. It was hard to see what was meant to be going well.

But most crucially, an EPA official, commenting on the report, told journalists that the economy 'is not strong enough to pick up without political support'. The concern is that, with politicians engaged in their own little dogfights over who is to hold power, no one will be strong enough to make tough decisions on the economy.

Tax cut favoured

Before the elections, economists had begun to agree that yet another supplementary budget would not be enough to boost the country out of recession: most of the previous supplementary spending has gone into public works, which helps primarily the building industry, and has little overall effect on consumer spending. The measure favoured by most economists was a reduction in income tax.

Up to now the Ministry of Finance has been radically opposed to reducing income tax revenue. In 1992 declining corporate tax payments meant there was an overall revenue shortfall, and to correct this the MoF pledged a more austere budget this year, since the ministry has a deep- seated aversion to public sector borrowing to cover budget deficits.

Reducing income tax would only increase the revenue shortfall, meaning money would have to be raised from somewhere else, it said.

A tentative way out of this deadlock was suggested: while income taxes would be reduced, the consumption tax on goods and services, currently 3 per cent, would be increased to compensate.

However, the original introduction of the consumption tax in 1989 was so unpopular that it caused the LDP to lose its majority in the upper house of Japan's parliament. In the current political flux, no political party will want to be associated with a further increase of the unpopular tax.

This could lead to a confrontation between MoF officials and politicians. One of the new political parties, the Japan New Party, which currently holds the balance of power in the hung parliament, has said it wants to reduce the power of the MoF to compile the budget. Up to now, the ministry has drawn up the budget and given it to politicians to vote on. But in the new political climate the JNP says the budget should be decided on by the Prime Minister's office, and then given to the MoF to implement.

However, the Japanese economy will ultimately recover from the recession, even if the recovery is delayed by political uncertainty. And in the medium to long term, corporations will welcome fresh air and a younger, more flexible generation of politicians to guide Japan into the 21st century.