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Opposition-Led Government Would Be Mixed For Japan Inc.

Posted by: Kenji Hall on July 13, 2009

Prime Minister Taro Aso’s Liberal Democratic Party has ruled Japan for nearly the entire post-World World 2 era. But the LDP may soon find itself out of power. On July 13, Aso and top officials of the LDP decided to call a national election on Aug. 30. Given the Cabinet’s low support ratings and the LDP’s resounding defeat in a Tokyo assembly election over the weekend, the opposition Democratic Party could be in for a big win. The Democrats are widely expected to grab control of both houses of Parliament; more importantly, they’ll likely pick Japan’s next prime minister from their own ranks.

Voters seem ready forseiken kotai (change in power, in Japanese). But for business, a Democrat-led government could be more of a mixed bag, say analysts and economists. In the near term, the Democrats will probably stick with the LDP’s policy of trying to revive the recession-hit economy.

Democratic Party lawmakers have said they favor doling out public funds to parents with young children to help with living and education expenses. They also want to leave the consumption tax unchanged for the next four years, get rid of a gasoline tax, and lower corporate tax rates from around 40% to 30%—a move that would put Japan on par with most other wealthy nations. Barclays Capital has forecast 1.5% growth for Japan’s economy next fiscal year through March 2011. The extra public outlays could boost consumer spending by some $20 billion and add 0.4% to growth, according to Barclays.

A switch in leadership wouldn’t be welcomed by all executives, though. One worry: more government spending would add to Japan’s ballooning debt. The country already has a public debt-to-GDP ratio that’s closing in on 200%, higher than almost every other industrialized nation.

The Democrats are considering policies that would more than double policy spending over the next four years to $184 billion. This fiscal year alone, the Finance Ministry has predicted that bond issuance will rise by 15% to $1.4 trillion. That explains why, within hours of the day’s news, Japanese interest rates rose, with yields on the benchmark 10-year government bond edging up to 1.3%, from 1.295%. (The Nikkei stock index fell 2.6%.) The problem with higher interest rates is that it could make businesses less willing to invest in factories and consumers to spend money on new homes—and weigh on the economy.

Business leaders are also wary of the Democrats’ labor policies. The Democrats say they want to raise the minimum wage and tighten rules that control how companies hire and fire temp and contract workers. “This could be an opportunity to reform Japan’s labor market,” said one business group official, who declined to be identified. “But if you sharply raise the minimum wage, companies might decide to lay off more workers. And if there are too many labor restrictions companies may stop manufacturing here altogether.”

And while the government is investing in renewable energy technologies such as solar and wind power, the Democrats have suggested they will take it a step further. Last month, Aso unveiled an LDP plan to cut Japan’s greenhouse gas emissions 15% by 2020, compared to 2005 levels. (A U.S. congressional panel recently approved a climate bill calling for a 17% cut in emissions between 2005 and 2020.) The LDP target is equivalent to an 8% reduction from 1990 emissions levels. The Democrats want emissions curbs of 25% from 1990 levels, which would set the bar higher ahead of talks in Copenhagen later this year to set emissions-reduction goals from 2013. Critics of the Democrats’ target say that a recession isn’t the right time to ask businesses to agree to more commitments.

For now few executives are willing to take sides. “For business, stability is of course important but big change is required for major progress,” says Takanobu Ito, Honda’s president told reporters today at a meeting at the company’s Tokyo headquarters. “The most important thing is that people have promise of a bright future. Then people will feel better, spend more money and products will sell better.”

—With Ian Rowley

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