Seeds of Discontent Being Sown in Abe’s Own LDP

According to a recent issue of Sentaku, a Japanese language magazine providing analysis of Japan’s politics and senior management,

Powerful politicians within Abe’s own LDP party have had enough and are pushing back at what they see as an “arrogant and self-centered” attitude of Abe’s inner circle, in addition to being increasingly uncomfortable with the “total collapse” of Abe’s diplomatcy, particularly vis-à-vis China and South Korea, and of his attitude toward changing Article 9 of Japan’s pacifist constitution, i.e., in indicating that it is his ultimate responsibility, as opposed to the historical evolution of Japan’s current stance toward Article 9.

(1)   Yasuo Fukuda is an elder statesman who stepped down as prime minister in 2008 and was chief cabinet secretary under the Junichiro Koizumi cabinet between 2001 and 2004. In March of this year, a leading figure in the LDP reportedly asked Fukuda to join the sub-group forming to improve relations with China and South Korea, which have noticeably soured over the past few years. Fukuda is now the facilitator for an anti-Abe LDP group that includes, (1) Lower House Budget Committee chairman Toshihiro Nikai, (2) former PM Yoshiro Mori, (3) former LDP secretary general Mikio Aoki, (4) former LDP secretary general Makoto Koga, (5) LDP General Council chairwoman Seiko Noda, (6) head of a special intra-party panel reviewing national security-related legal matters Shigeru Ishiba, (7) chairwoman of the party’s Policy Affairs Ressearch Council Sanae Takaichi,(8) secretary general of the LDP Upper House caucus Masashi Waki,

In Fukuda’s view, a) visits by a PM to Yasukuni Shring are a serious impediment to relations with neighboring countries in Asia, and he went so far as to write a report urging construction of a national, non-religious facility where Japan could honor its war dead without also honoring so-called Class A war criminals and antagonizing victims and adversaries of Japan during its wars, b) Japan’s diplomacy toward North Korea’s past abductions of Japanese citizens, which was a major reason for his resignation from his cabinet post in May 2004, c) urges much more tact regarding the Comfort Women issue, and c) is against Abe’s stance on collective self-defense and his having the “ultimate responsibility” over what are constitutional matters (i.e., changing Article 9 of Japan’s pacifist constitution).  Further, “careless” comments from the Abe Administration about these issues have infuriated some in this group.

Also checking Abe’s agenda on several fronts is junior LDP coalition partner, New Komeito. Yoshio Urushibara, chairman of New Komeito’s Diet Policy Committee, sees Abe’s attitude as turning a deaf ear to ordinary citizens’ voices.

This “anti-Abe” group ironically was instrumental in clearing the way for the first meeting between Abe and i South Korean president Park Geun-bye, under the strong urging of US president Barak Obama. But whatever hope there was for progress in this meeting was undermined by special advisor and close associate Koichi Haguida’s controversial remarks on the comfort women issue, which of course is a hot button item between Japan and South Korea. Haguida had also scolded the US for expressing “disappointment” over Abe’s visit to Yasukuni.

Further, the lack of coordination among Abe’s inner circle is also dragging Abe down.Those in the LDP are now more organized, active and critical of Abe than those in the Cabinet and the Prime Minister’s Office. Thus domestically at least, the growing view is that Abe is up against the wall regarding his stance on diplomacy and security, two areas where Mr. Abe likes to think he excels.

Japan PM Noda Says "Running Out of Time" To Address VAT Hikes, Restart Nuclear Reactors

Japan’s embattled Prime Minister Yoshiko Noda said last week rightly pointed out that Japan can no longer afford to delay decisions with political gridlock about its most divisive issues, including the consumption tax hike legislation and the restarting of some nuclear reactors. Unfortunately, Japan’s voters are losing faith with Nagatacho’s fractious political system, which also is a source of tension for the Obama administration, and there is little prospect that PM Noda has the clout to break the political gridlock.

In an interview with The Washington Post, Noda portrayed himself as a pragmatist who would appeal directly to the public, presenting a detailed case for his policies. Problem is, those who voted for him and the Democratic Party of Japan (DPJ) are rapidly losing faith that the DPJ can make any significant progress on such pressing issues, given the Noda Administrations failing popularity and the constant bickering and political gridlock. Even PM Noda said it remains an open question whether Japanese politicians on both sides of the aisle can “stand firm for the national interest–particularly as there is such a wide gap between Nagatacho and the voting public.

When Noda’s cabinet submitted the tax bill last month, several members resigned in protest, clearly indicating that there is no consensus on key issues such as the consumption tax even within the Cabinet. The LDP opposition, meanwhile, senses a political opportunity to force Noda from office over the issue and then begin the debate anew, bringing the issue back to square one.

Washington Post

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How a Book Supposed to be Named "Rebirth of a Nation" Became "The Rhetoric of Crisis"

“So far it seems there was more talk of change than change itself. It is all still being sorted out,” said Samuels, director of the Center for International Studies at Massachusetts Institute of Technology. Mainstream political parties, torn by conflicting group loyalties, proved incapable of setting aside their differences and providing the leadership for which the public longs. Japan’s mammoth government debt keeps piling up while critical decisions get pushed back, referred to various panels, lodged in elaborate rituals of “consensus-building” or political horse-trading in a gridlocked parliament.
Reuters

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Political Buffoonery Is Hindering Japan Reconstruction

The Kan Administration managed to pass a modest first supplementary budget of JPY4 trillion, but only 20%~30% of the funds allocated to victims of the disaster has actually been used, while the government is still debating a bigger package of reconstruction measures. Further, only 27%, 30% and 52% of the wreckage from the disaster in Fukushima, Miyagi and Iwate prefectures has so far been cleaned up. Part of the problem is that local government functions the worst affected areas were also destroyed, but the rest of the blame lies solely with the politicians in Nagatacho and the Kan Administration.

After the disaster, private sector economists were estimating that full-fledged reconstruction demand would pick up in the July~September 2011 quarter and produce positive growth for Japan this year. However, a structural power shortage exacerbated by Kan Administration intervention to block the use of existing nuclear power plants still in service, the lack of an ability to get relief funds to where they are needed most, and the ongoing wrangling between the Kan Administration and opponents within and without his own political party mean that an initially expected second supplementary budget of JPY10 trillion-plus won’t be forthcoming anytime soon.

As a result, companies that were expected to benefit from reconstruction demand aren’t,and if anything are seeing a deterioration in business conditions. Shin Nippon Steel is seeing falling, not rising, prices for H-shaped steel bars used in building construction and rising inventories. Inventories continue to build for cement and other domestic,reconstruction-related sectors as well. In the BOJ’s Tankan, small and medium-size construction company sentiment took the biggest hit, and demand for general machinery including excavating equipment slowed significantly from July.

Consequently, business leaders are starting to get the idea that the Kan Administration is not only slow in responding, but is a downright hinderance to Japan’s economy, and thus the pressure for his early retirement as prime minister.

Tokyo Takes provides free commentary on global investments from a Japan perspective. To contact the author, please email darrel@japaninvestor.com

If You Want to See Naoto Kan Go, Hurry Up and Pass Key Legislation Already!

Japanese voters have become thoroughly disgusted with a) the incompetence of the Kan Administration and TEPCO (9501) handling of the Fukushima Daiichi nuclear power disaster, but were almost equally disgusted by the opposition parties and those within Kan’s own DPJ (Democratic Party of Japan) moves to first, a) depose him with a no-confidence vote and b) force him to resign after he hinted at such to avoid a majority no-confidence vote.

Mr. Kan is not the most popular guy in Japan’s Nagatacho (political circles) these days, and is even less popular among voters. A recent poll by the Nikkei and TV Tokyo show 65% of voters surveyed not supporting the Prime Minister, and 42% believing he should resign as soon a possible because his presence is impeding passage of bond issuance legislation needed to fund the FY2011 budget deficit and a more substantiative aid package for the disaster stricken Tohoku region.

Politicians on both sides of the aisle blame Mr. Kan for the gridlock blocking passage of key bills to deliver more aid to the stricken region but if they really wanted to see Mr. Kan go in a hurry, they should pass all the bills–i.e., a) the larger (JPY10 trillion-plus) reconstruction spending bill, b) legislation to promote renewable energy and c) the bill to allow deficit-covering bond issuance to fund the FY2011 budget as soon as possible instead of raising already heatwave-stricken Tokyo’s temperature another couple of degrees with all that hot air and no action that has come to epitomize Japanese politics. Further, there is no guarantee that the next prime minister will be any more effective than Mr. Kan, given the constant revolving door to the PM’s post over the last several years.

Tokyo Takes provides free commentary on global investments from a Japan perspective. To contact the author, please email darrel@japaninvestor.com

Japan’s Policy Vacum: Eveyone’s Waiting for PM Naoto Kan to Resign

In the U.S., the Democrats’ agenda has been sidelined by Rep. Anothony Weiner’s refusal to resign over a “sexting” scandal, despite pressure from his democrat colleagues and a suggestion from President Obama.

In a similar manner, prime minister Naoto Kan’s failure to resign after he indicated such has created a policy vacuum in Japan’s government at the very worst time. More than a month after the March 11 earthquake/tsunami disaster, the government has managed to pass only a modest JPY4.2 trillion 1st supplementary budget aimed at providing relief to the stricken Tohoku area.

Everyone was aware that more supplementary budgets would be needed because the scope of the damages, and Prime Minister Naoto Kan said on April 8, 2011 he believed the size of the second special budget to finance reconstruction would be ”considerably big,’ and the general expectation was for a 2nd supplementary budget of around JPY10 trillion.

But in attempting to avert a no-confidence vote on June 2, Prime Minister Naoto Kan basically declared himself a lame duck by indicating his intention to resign once the nation had gotten past the worst of the Great East Japan Earthquake. In doing so, he created a serious policy vacuum in the government that is a) preventing passage of key legislation to allow for FY2011 deficit-covering bond issuance and b) passage of a significant 2nd supplementary budget.

With his colleagues in the DPJ (Democratic Party of Japan) now jostling for a post-Kan power structure and the LDP (Liberal Democratic Party) smelling blood, PM Kan’s recent call for early passage of a 2nd supplementary budget has his DPJ colleagues, the LDP and Japan’s ministry bureaucrats shaking their heads in puzzlement and consternation, as everyone had assumed a 2nd supplementary budget would not be in the cards until after Kan resigned–which everyone except Naoto Kan seems to agree should be as soon as possible.

Thus PM Kan’s call for a modest JPY2 trillion 2nd supplementary budget for ostensible passage in July has confounded the Kasumigaseki bureaucrats. Senior ministry officials had expected work on a second supplementary budget to begin after Kan steps down. When the prime minister mentioned moving up the process last week, many only half believed him. The proposed 2nd supplementary budget is so small because that is about all Kan can get done at this point, as funding for the supplementary budget is basically coming from funds left over from last year’s fiscal budget, i.e., about JPY1.5 trillion. Without new legislation, however, even half of this amount cannot be used.

Thus there is growing frustration within the DPJ, the LDP, Kasumigaseki and business leaders over PM Kan’s failure to step aside so even key financing bills can be passed, let alone other important matters such as reform of the social security system, and no one believes a second supplementary budget this small would even represent a drop in the bucket as regards getting the reconstruction effort going.

Leaders within the DPJ are already talking about a third supplementary budget ostensibly for passage after Kan steps aside–some five months after the March 11 disaster.

At the pace the Japanese government is currently moving, any real help for Tohoku reconstruction is more likely to come from “boot strap” projects organized by local residents and businesses with cooperation from other regions. The good news is that personal consumption is rebounding in the stricken region, with sales of furniture, home appliances, clothes, used cars and daily necessities seeing sharp rebounds from May. Major chains in the Tohoku region are reporting sales increases of 10%~50% YoY

Tokyo Takes provides free commentary on global investments from a Japan perspective. To contact the author, please email darrel@japaninvestor.com

In the Midst of Crisis, Japan’s Politicians Go AWOL

In an effort to fend off a mutiny within his own DPJ party and a no-confidence vote in the Diet, prime minister Naoto Kan stated he intended to resign once the government had a rescue package in place for the Tohoku disaster. While a last-ditch effort to avoid the embarrassment of being kicked out of office, Mr. Kan has effectively declared himself a lame duck, thereby erasing any legitimacy his wounded cabinet may have had left.

In the three months since the March 11 disaster, the Diet has only managed to pass one modest supplementary budget, but the organizational foundations for reconstruction remain in limbo, and the Diet has even been able to pass the legislation needed for funding the FY2011 budget.

There is a growing sense that Japan’s political leaders, who should have risen to the occasion of Japan’s greatest postwar disaster, have been AWOL and completely out of touch with what the voters think needs to be done. Japan’s Shukan Shi magazines, where arguably the best investigative journalism is done in Japan be it in a sensationalist manner, are having a field day describing how PM Kan basically lost it during the crisis, and how Japan’s infamous bureaucracy–from the national to the local level–was caught like a deer in the headlights.

Basically, Diet members on both sides of the aisle have been bickering and fighting amongst themselves while Japan’s economy is burning, and this is what bothers the foreign credit rating agencies that have recently lined up to downgrade Japan’s sovereign debt rating.

Politicians Need to Straighten Up and Fly Right

Tokyo Takes provides free commentary on global investments from a Japan perspective. To contact the author, please email darrel@japaninvestor.com

OECD Downgrades Japan 2011 Forecast to Minus Growth

The OECD slashed its forecast for Japan’s gross domestic product for a second time this year, to minus 0.9% growth in 2011 from a prior forecast of 0.8% growth in April and a forecast of 1.7% growth in November 2010.

This compares to a world GDP forecast of 4.2% growth in 2011 and 4.6% growth in 2012. Withing the OECD developed nations, GDP is projected to rise 2.3% in 2011 and 2.8% in 2012, unchanged from the previous forecasts of November 2010. Globally, the recovery is becoming self-sustained, with trade and investment gradually replacing fiscal and monetary stimulus as the prinicipal drivers of economic growth. Confidence is increasing, which could add further buoyancy to private sector activity.

Not so in Japan, even though the OECD does expect Japan’s economy to eventually bounce back to 2.2% growth in 2012, or slightly lower then their previous forecast of 2.3%. Further, the OECD continues to harp about Japan’s so-far contained fiscal crisis, as 18 consecutive years of government budget deficits have left net debt/GDP over 115% of GDP, while the government’s current Fiscal Management Strategy (created in June 2010) is insufficient to stabilize debt. The OECD believes Japan must reform its Social Security System as well as its Pension System, introduce a 20% VAT and more environmental taxes–and avoid resorting to big JGB issues to fund reconstruction.

Regarding the need to address growing debt, Japan’s government can’t even agree to pass the necessary legislation to fund this year’s budget, or agree on a 2nd supplementary budget for reconstruction of the stricken Tohoku region, let alone begin to address pressing medium-term structural problems. Three months after the triple earthquake/tsunami/nuclear disaster, its back to the old gridlock politics in Nagata-cho with both sides using the disaster as talking points, but with little real action.

There is one optimist, however, at that is Charles Collins, US Deputy Treasury Secretary for Global Economy Affairs. Collins was surprised by the speed at which Japan was able to restore Shinkansen (bullet train) service in the area, and sees industry coping with the electric power supply issues, leading to his conclusion that Japan’s economy will show a “V-shaped” recovery from the summer.

Regarding the forecasts, the OECD may have a credibilty problem. The UK’s BBC has dubbed the OECD “The Organization of Entirely Consistent Disappointment”. The takeaway from the BBC is that OECD’s forecasts are as fallible as every other economic forecaster, possibly more.

However, the too have erred on the side of optimism, and it is important to note that the “bears” who said 2011 was going to be the most dangerous year for not only Japan’s economy but the global economic recovery are now looking more right.

OECD Slashes Japan GDP Forecast

Tokyo Takes provides free commentary on global investments from a Japan perspective. To contact the author, please email darrel@japaninvestor.com

Some Sobering Scenarios for Japan’s Debt Problem

In a January 2011 BOJ working paper, Selahattin Imrohoroglu, and Nao Sudo do some econometric number crunching scenarios to model what could be done to reduce Japan’s ballooning government debt, as Japan’s net debt in 2010 reached 104.6%.

Prime Minister Naoto Kan has recently reshuffled his cabinet and brought in consumption tax hawk Kaoru Yosano as Economic and Fiscal Policy Minister and is taking the politically unpopular consumption tax hike issue straight on. On the table is a substantial consumption tax hike, ostensibly by three-fold to 15% from the current 5%.

But the econometric modeling in the working paper shows that even a three-fold increase in the consumption tax would not be enough to make a permanent dent in Japan’s public debt. Further, it is unlikely that Japan can simply grow itself out of debt, as a “growth miracle” of 6% per annum total factor productivity (TFP)/GDP growth would be needed for the next decades to meaningfully reduce Japan’s debt over the next 40 years.

What Japan realistically needs is a combination of a) a three-fold hike in consumption taxes to 15%, b) cuts in government expenditures/entitlements of at least 10%, and c) TFP/GDP growth of 3%~4% over the next decade, versus historical and expected growth of more like 1% per annum. Moreover, it is likely that bond yields/interest rates would rise significantly given substantially higher GDP growth rates, which would only raise the debt reduction bar even higher because of the increased interest rate/debt servicing burden.

Thus Naoto Kan and anyone who replaces him in the next decade, is facing some sobering, politically difficult choices in getting Japan back on the road to fiscal stability.

Will a Growth Miracle Reduce Debt in Japan?

Tokyo Takes provides free commentary on global investments from a Japan perspective. To contact the author, please email darrel@japaninvestor.com

Update on China’s Rare Earth (REE) Exports

The New York Times on October 28, 2010 reported that China abruptly ended its unofficial ban on rare earth elements (REE). Having blocked shipments of raw rare earth minerals to Japan since mid-September, and to the United States and Europe since the second week of October, Chinese customs agents on Thursday morning allowed shipments to resume to all three destinations, the NYT reported.

Shipments to Japan, however, still face additional scrutiny and some delays. China’s shipping embargo has caused much more distress in Japan than in the United States or Europe, because Japan tends to be affected more than other industrial nations by the way China sets its rare earth export quotas. While the United States and Europe mainly buy highly processed rare earth powders from China, Japan is the biggest importer of raw rare earths and tends to process them into industrial materials. So Japan is more dependent on the materials affected by China’s tightening quotas.

Japanese companies had been able to weather the embargo without any significant factory shutdowns because many Japanese companies had accumulated rare earth stockpiles in the last few years. However, the interruption of shipments follows a tiff between Japan and China over what Japan calls the Senkaku islands, and other actions designed to hurt Japan trade with China, including anti-Japanese demonstrations in several Chinese cities, the arrest of several Japanese construction executives, cancellations of Chinese tours to Japan, etc.

While China currently supplies some 97% of REE, they only account for some 36% of global reserves, meaning the harder they press their advantage now, the sooner alternative sources and replacements for REE will be found–but not day after tommorrow. China’s action on REE has galvanized Japan to find non-REE alternatives and to strike deals with Viet Nam, Mongolia and other potential supply sources.

The REE issue only underscores the fact that relations with China represent not only political but also economic risk for Japan. It is increasingly evident that China considers Japan and its politicians light-weights with little real negotiating power. In the eyes of Yoichi Funabashi, Asahi Shimbun editor-in-chief, relations between “Japan and China now stand at ground zero, and the landscape is a bleak, vast nothingness”. Considering that China is now far and away Japan’s biggest trading partner, the Japanese government urgently needs to forge a new working relationship with China.

This is because, while Japan believes its is being victimized, the Chinese have a much different take. According to Asia Times Online columnist Peter Lee,
Japan’s accusation that China is appears to be little more than a cynical repackaging for political gain of its unsuccessful year-long campaign to persuade China to loosen its publicly announced quotas on rare earth exports. The Chinese feeling is that the current policy is a necessary reaction to foreign exploitation of China’s disorganized and mismanaged rare earth policy of a decade ago. When prices crashed, Japanese companies swooped in to take advantage of this once-in-a-lifetime opportunity and began amassing rare earth stockpiles at bargain-basement prices.

Further, the DPJ administration’s foreign minister Maehara is widely known to be a ”China hawk”, which makes his position as the face of the Naoto Kan administration’s foreign policy rather problematic. A view reportedly spread among Chinese officials after the Diaoyutai/Senkaku incident was that “Maehara started attacks on China.” This after the Chinese media warned when Maehara took office as foreign minister “a hard-liner became a foreign minister.”

Tokyo Takes provides free commentary on global investments from a Japan perspective. To contact the author, please email darrel@japaninvestor.com