Japanese Prime Minister Naoto Kan has a slight edge over powerbroker Ichiro Ozawa ahead of a party leadership vote next week, NHK public TV said yesterday, but with many party lawmakers undecided the outcome is too close to call.
Whoever wins the Tuesday vote faces the mammoth task of trying to keep a deeply split Democratic Party of Japan (DPJ) from unraveling while struggling with a strong yen, a fragile economic recovery, huge public debt and a divided parliament that threatens more policy deadlock.
Markets are bracing for a shift towards a more stimulative fiscal policy if Ozawa wins the vote. However, whether the 68-year-old political strategist, his future clouded by a funding scandal, could survive an opposition attack is unclear.
“Strong-arm policies may be welcomed by the markets short-term but in the longer term the preservation of the old economic and political set-up may only serve to strengthen the sense of hopelessness,” said Masamichi Adachi, a senior economist at JP Morgan Securities Japan.
NHK said Kan, who took office just three months ago as Japan’s fifth prime minister in three years, was neck and neck with Ozawa among the DPJ’s 411 members of parliament with about 50 still undecided. The prime minister was leading among local lawmakers and party rank-and-file, whose votes carry less weight.
The winner is expected to become prime minister by virtue of the DPJ’s majority in parliament’s powerful lower house, the legacy of a huge election victory that swept the party to power for the first time last year.
Kan has vowed to cap new bond issuance for the fiscal year from next April at this year’s level of about ¥44 trillion (US$524.7 billion) to rein in public debt, already about twice the size of the US$5 trillion economy.
Ozawa, once a protege of Kakuei Tanaka — a former prime minister and the architect of Japan’s political regime of pork-barrel and party factions — has said he would consider issuing new debt to fund stimulus steps if the economy worsens.
A win by Ozawa would likely give a short-term boost to stocks while weakening Japanese government bonds and the yen, a Reuters poll showed yesterday.
Many market participants fear that Ozawa’s old-style policies could leave Japan no better off once any initial boost wears off.
More than two-thirds of respondents said Ozawa would be neutral or negative for the economy over the long haul, while roughly half of all respondents said Kan keeping his job would be neutral for stocks, bonds and the yen.
Revised data showed Japan’s economic growth slipped in April-June to 0.4 percent, a third of the pace seen in January-March, as economic recovery lost momentum.
The revision was upward, but was cold comfort for a government grappling with deflation and a yen that hit a 15-year high this week against the US dollar despite easier monetary policy and threats of currency intervention by policymakers.
The yen’s rise has heightened concerns among lawmakers that its strength will hit exports and undermine the economic recovery further at a time when world growth is cooling too.
Kan’s government, eager to look proactive on the economy, unveiled a package of measures yesterday, but analysts doubted it would have much impact.
The DPJ swept to power for the first time last year, promising to change the way the country is governed after more than 50 years of dominance by the conservative Liberal Democratic Party (LDP). However, the DPJ have since floundered, suffering a thrashing in a July upper house election.
Even if Kan wins the party vote, a robust showing by Ozawa would cloud the outlook for efforts to rein in debt while engineering growth despite Japan’s ageing, shrinking population.
“How to handle the Ozawa camp would be the first challenge for Kan after the election,” said Sophia University professor Koichi Nakano, suggesting that some Ozawa backers could get Cabinet posts in an attempt to keep the party together.
An Ozawa victory would also leave big unanswered questions. Admirers say his political skills would help win opposition backing to get bills through parliament, but his scandal-tainted image could make rival parties wary of joining hands.
A judicial panel of ordinary citizens is expected to decide next month whether Ozawa must face indictment over a funding scandal in which three of his aides have already been charged.
“The opposition would harshly attack Ozawa over ‘money and politics,’” Koichi Kato, a former LDP executive, told reporters. “Parliament would grind to a halt.”
Nor, Kato said, would many LDP lawmakers respond to overtures from Ozawa to create a new party if he bolted the DPJ in the wake of a defeat.
“Ozawa doesn’t have many fans in the LDP,” he said.
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