The Stakes in Japan's Vote

Monday, August 15, 2005

JAPAN'S POLITICAL system often generates colorless figureheads who prefer consensus to unpalatable change. Prime Minister Junichiro Koizumi has veered between stretches of torpor and surprisingly feisty interludes. Last Monday, after the upper chamber of Japan's parliament rejected the central plank of his economic reform program, Mr. Koizumi called an early election and in the process split his Liberal Democratic Party. "I will smash the old LDP and forge ahead with a new LDP," he said bracingly. If Japan had seen more of this kind of leadership since its financial system cratered 15 years ago, it might not have spent the interim in an economic funk.

We hope that Mr. Koizumi wins his political gamble and holds on to a parliamentary majority in the election on Sept. 11. The vote will be a referendum on his plan to privatize Japan's postal savings system, which has amassed an astonishing $3 trillion in deposits by offering above-market interest rates to savers; a good chunk of this capital gets used to finance pork-barrel infrastructure projects. Privatizing this system so that capital is allocated according to market criteria would boost Japan's economic efficiency. It would also deprive the ruling LDP of a vote-buying slush fund, which is why reform is at once urgent and difficult.

If Mr. Koizumi gets a mandate to push through postal reform, other structural changes will become politically easier. That will increase the chances that Japan's current recovery -- the economy is expected to grow this year, albeit by just 2 percent or so -- will be sustained. Japan's stagnation over the past 15 years has been healthy for no one. It has meant that the world has relied precariously on growth in the United States to keep its economy running. A more dynamic Japan would buy more imports, both from the United States and from its Asian trading partners, which in turn would trim the unsustainable U.S. trade deficit. It would also allow the world economy to survive a U.S. slowdown that might come, for example, if home prices level off and mortgage refinancing slows.

The polls since Monday have been encouraging for Mr. Koizumi, but there is no guarantee that the election will go his way. A defeat would be awkward for the United States: Not only is the main opposition party in Japan muddled on economics, but it is critical of the prime minister's pro-U.S. foreign policy and promises to withdraw Japanese troops from Iraq. An election that endorsed those policies would be troubling, as would one that allowed a weakened LDP to remain in office in exchange for ditching Mr. Koizumi. With luck, Mr. Koizumi will convince the voters that his stand on reform is worth backing. He has a month to make his case.


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