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Japan's New 'Old Guard'

Author: Lee Hudson Teslik
September 24, 2007

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Nearly two weeks of speculation ended September 23 as Japan’s Liberal Democratic Party (LDP) elected Yasuo Fukuda, a moderate party elder, as the country’s next prime minister. Commanding a decisive 63 percent of the vote (Yomiuri), Fukuda will replace Shinzo Abe, the embattled Japanese prime minister who resigned recently in the face of scandal, public unpopularity, and health problems. On the primary international question facing Japan—the continuation of Japanese support for the war in Afghanistan—Fukuda may keep much the same tack as Abe, who supported involvement. CFR’s Sheila Smith, in a new interview, says Fukuda will soon present a bill aimed at extending the law that allows Japan to support international war ships in the Indian Ocean.

Fukuda’s accession raises as many questions as it answers. For all Japan’s discontent with Abe, his rapid fall from grace could pose serious problems for the country, particularly if Fukuda’s rise curtails an ambitious economic program launched by Abe and his predecessor, Junichiro Koizumi. The two LDP reformists set forth a series of economic goals including deregulation of government-owned industries and passage of free-trade agreements, as Abe described to the Washington Post earlier this year. Some analysts went so far as to predict that the measures would finally lift the Japanese economy from years of crippling deflation.

Abe’s fall spooked the bulls. In late July, when the LDP met sweeping losses in upper-house elections, Japanese investors faced “paralysis” amid worries reforms would wither (Bloomberg). Global market turmoil over the past month also sucked wind from Japan’s sails. Economist.com says “there seemed a measure of injustice to how Japan’s publicly traded financial funds were hit by credit troubles in the United States and Europe.” But hit they were—Japan’s benchmark Nikkei index dropped over 16 percent between mid-July and mid-August, and the country’s real-estate investment trusts, long considered a safe haven, also took a beating. As a result, the Bank of Japan is reconsidering the country’s economic prospects. The idea that the bank would raise its main interest rate, which economists both predicted and interpreted as a sign of confidence, now seems far from certain (Reuters). A recent paper by the Washington-based National Bureau of Economic Research adds that Japan’s consumer price index may be overstated and that the country might still be experiencing deflation even if some metrics suggest otherwise.

Fukuda’s succession has analysts worried reforms will stall. A news analysis in the Yomiuri Shimbun says the new leader needs to “clarify” his positions. A Wall Street Journal editorial notes that a return to Japan’s “old guard” leadership could spell the undoing of some of the reforms targeted by Abe and Koizumi. A Financial Times article also registers concern, and more broadly—it says if Japan’s economy isn’t quickly set right, the LDP “faces the real danger of being thrown from power at the next general election.”

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