JAPAN FINANCE MINISTER RESIGNED

What is going on again with Japan politicians? Once again one of Japan Top Minister resigned from his position. It has been another of many incidents the Japanese government faced over the past two years. Last weekend, at the G7 meeting, Japan Finance Minister Shoichi Nakagawa behaved unethically during a press conference. He later apologized and explained that his sleepy demeanour was due to a mix of wine and medicine. He, then, resigned after Prime Minister Aso asked him to do so.

Before I try to explain why Japan needs to reform its politic, it might be interesting to look back in recent history. Japan is a democratic country with an Emperor who is the head of the state but who does not have much political power. The Prime Minister is the decision-maker of the government but it was not always the case in the past and until the late 1990s the Minister of Finance had more power than the Prime Minister in term of economic reform and decision. It changed when Koizumi took over as Prime Minister; he gave more power to the position of Prime Minister in 2001.

Every law in Japan must be voted by the Diet (Upper House and Lower House). Since 1955 the Liberal Democratic Party (LDP) has had a majority in both Houses, except in 1993 and 2008. You can see in the chart below the historical change in Japanese political scene. Also at the bottom of the article is a chart explaining the influence of LDP in Japan, best known as the Iron Triangle.

In the 2007 Upper House election, the Democratic Party of Japan stole many seats from the LDP and it now has a majority in the Upper House. However, any laws voted by the Upper House needs to be accepted by the Lower House that is still ruled by the LDP. So why is it so important to understand what is going in the Houses? Like I said previously, the Prime Minister is the head of the government but the particularity of Japan compared any other developed countries is the fact that the political party is more powerful than the Prime Minister. In France, for example, the President Sarkozy decides what new reforms need to be enacted and then requires his party to vote favourably. In Japan, the political party decides which reforms needs to be adopted and then asks the Prime Minister to push favourably for the reform. The Prime Minister has his hands tied and is in a sense only a puppet.

The LDP has been in power since 1955 and, until the asset bubble of the late 1980’s, it was seen as the main reason Japan grew rapidly since World War II. Japan political stability as well as social democracy appeared to be an example for many other countries. However, when looking closer, Japan politics were very much corrupted but as long as the economy was growing, the population did not care. When the bubble burst in 1990, dissatisfaction grew strongly in the population and in the Upper House election of 1993 the DPJ finally succeeded in getting a majority of seats. In the end it did not change anything and in 1995 the LDP was ruling the Upper House again.

Today, many economists are and investors are trying to compare the Japan of the 1990’s and the US of 2008. The reality is that you cannot compare them because even though financial markets’ environment looks similar, the two governments are very different. Japan has never been able to implement new reform to counter its slowing economy, definitely the LDP’s fault since politicians were too concerns with their own political agenda and could not think of Japan as a whole country. Only Prime Minister Koizumi had enough popularity among Japanese population after its 2005 election to dress against the LDP and enact important reforms like the one of the Japan Post. The US President will definitely have more power than any Japanese Prime Minister in the 1990’s and he will be able to do anything he can to boost the US Economy again.

Since Koizumi’s departure in 2006, Japan has been in search of a leader. However, the LDP learnt from its previous mistake and made sure to accept a less strong minded Prime Minister. As a result, Japan has fallen again in the dark path of laissez-faire attitude. Since 2006, Koizumi’s successors as Prime Minister like Abe, Fukuda and Aso have enjoyed very low popularity in Japan and have been enable to restore confidence. If you add the couple Minister’s resignations over the past two years where Finance Minister Nakagawa is the last on the list, questions remain about the Japan’s ability to recover from its worst economic downturn since 1974.

An election for the Lower House is going to take place at the latest in October 2009. Right now Mr Aso cannot call for an early election since its popularity (19%) and the LDP popularity is very low. Aso hopes to regain some ground and momentum until October 2009 but the recession as well as the lack of much needed reform will not change his faith in the next couple months. Japan is in great need of reforms. Its domestic economy has been non-existant for almost two decades and the fear of deflation is growing stronger. The next election could give more power to the DPJ and force the implementation of reforms. The LDP has been historically very reluctant to economic reforms that could hurt their long relationship with the big Japanese companies. Any new reform in Japan would probably have an important impact on Japan big companies’ profits and market shares but it is the price Japan has to pay if it wants to compete against the US, China, India and Europe.