2005: Japan’s Miserable Year

Japan has had one miserable year. First they get beaten up by their neighbors, Korea and China, over controversial school textbooks, territorial disputes, and shrine visits. Then they get told to get stuffed over whale hunting. Now they get rebuked at the UN —analysts say that a permanent seat is now practically impossible without the African Union’s support. And yesterday afternoon, PM Koizumi’s pet project, privatization of the national post office, failed to pass the uppper house. Unexpectedly large numbers of the Prime Minister’s own party, the Liberal Democrats (LDP), voted against the bill, forcing Prime Minister Koizumi to come through on a threat to disolve the house and call an election. Perhaps he will finally come through on his initial election promise in 2001: “I will destroy the LDP.”*

I’m a big supporter of Koizumi and Japan’s perpetual majority party, the Liberal Democrats (LDP). The party is a center-right frankenstein consisting of everything from free market reformists to old-school conservatives, with my support firmly with the former. I hope, and think, that Koizumi is pulling a gamble that will pay off. But many of his supporters have called the move practically suicidal.

Analysts at Morgan Stanley, who have been pretty bullish on Japan for the past few months, issued this gloomy report:

What’s New
The Upper House rejected PM Koizumi’s postal reform bills by a large margin. This result was contrary to my expectations, and a surprise to political pundits, relative to their opinions as recently as last Friday.

Conclusion
Rejection of the bills implies a long period of policy gridlock. This gridlock will occur regardless of who wins any Lower House election.

Market Implications
Gridlock will be bad for bond, stocks, and the yen.

Risks
Politics are inherently uncertain. However, the fragmentation of the political world (particularly the Upper House) makes positive scenarios harder to achieve.

Oh yeah, want to know when that new election is? September 11th.

*= Softened to “Change the LDP, Change Japan” on campaign posters.