The surprising thing about Japanese politics is that there are relatively few surprises. The overriding postwar requirement for consensus has made for a colorless political scene, which has been dominated by the Liberal Democratic Party. There is a strong argument that Japan’s extraordinary economic success was driven by its business leaders working hand in glove with politicians — but in a partnership in which the politicians were very much the juniors.
That big business was so dominant in setting the political agenda has been the key to Japan’s recessionary disaster. When Japanese business finally got it hopelessly wrong, borrowed madly to buy hugely inflated assets and then saw their value collapse, there were no independent-minded wise men in the government to step in and take over.
But now, the Japanese political establishment appears to have surprised itself and certainly the underdog candidate, Junichiro Koizumi, by choosing him as the new LDP leader and thus successor to outgoing premier. It is not simply that Koizumi is unconventional by Japanese standards, but also that the policies on which he campaigned will, if implemented, turn the whole political and economic system on its head. The LDP consists of a number of factions which normally via a process of trade-offs, push forward their candidate for the leadership. Koizumi has bypassed the faction structure by being endorsed by the overwhelming majority of the root and branch membership. It is one of his key proposals that the LDP factions should be abolished and many of the venerable political fixers behind them pushed aside for a new generation of young politicians.
Such a radical change would have been unthinkable ten years ago, but there is a sense now that the old factions are exhausted and demoralized by their inability to get a grip of Japan’s economic mess. With such a loss of heart, they may be swept aside with hardly a whimper of protest.
Koizumi’s victory has been welcomed by the financial community. What Japan’s new prime minister wants to do is effectively put Japan Inc. into receivership. There will be no more papering over of massive non-performing debts. Those banks and companies that are in reality insolvent will be forced into bankruptcy. There will be no back-room fixes. The broke will be made to go out of business.
There will be immense medium-term social cost in lost jobs. The short-term effect on the financial system is likely to be less painful, since asset prices have generally already been discounted to take account of the hidden truths in corporate balance sheets. The long-term prospects of an economy pruned of its huge areas of dead or rotting wood must be good. Once people know that the rot has been cleared out, they will be confident enough to reinvest and willing to spend and the great Japanese economic engine will start to move again.
The question now is whether the old system really is so exhausted and shattered by its litany of failure, that there will be no serious resistance to such a radical new way of managing the economy. Japanese politicians can fight as dirty as any. A concerted campaign by the old system could easily crush the changes before they even get under way.
