Global Economics

No Honeymoon for Japan's New Leader


Yasuo Fukuda is a shoo-in for prime minister, but his Liberal Democratic Party is unpopular after predecessor Shinzo Abe's disastrous year

Just 12 days after Shinzo Abe announced he would step down as Japanese prime minister (BusinessWeek.com, 9/12/07), Yasuo Fukuda will be named Japan's new leader on Sept. 25 after winning the presidency of the ruling Liberal Democratic Party on Sept. 23. The LDP's majority in Japan's Lower House means it's a shoo-in that Fukuda, as the party's candidate for prime minister, will receive parliamentary approval.

Yet while Fukuda won his party's endorsement with relative ease, beating his only challenger, Chief Cabinet Secretary Taro Aso, by 330 votes to 197, a long stay as prime minister looks an unlikely proposition. At 71, Fukuda doesn't have time on his side. More important, after a disastrous year for the LDP during Abe's term as leader, his party's approval rating remains in the doldrums.

Here's a rundown of the new prime minister's challenges.

Overcoming Abe's Legacy

Without a doubt, Fukuda takes over Japan's top job with his party at a low ebb. After getting hammered in a July 29 Upper House election (BusinessWeek.com, 7/30/07), Fukuda will be Japan's first prime minister in nine years without the support of both houses. Without the backing of opposition parties, it will be tough for him to easily pass policy.

In particular, the renewal of a Japan's anti-terrorism law, which permits a controversial refueling mission for U.S-led antiterrorism operations in and around Afghanistan, will immediately test Fukuda's political wits. The extension of the law is something Abe staked his reputation on and, after failing to get support from opposition parties, gave as one reason for his resignation. Now Fukuda has indicated his intent to extend the current law before it expires on Nov. 1, despite opposition so far by rival parties led by the Democratic Party of Japan.

No Charisma

While many Japanese will be relieved at Abe's resignation, the LDP remains unpopular. A poll by the Yomiuri Shimbun on Sept. 17 found just 31.9% of voters supporting the LDP, only marginally higher than before Abe's resignation, and a sign that neither Fukuda nor rival leadership challenger Aso, 67, were making a favorable impression on the public.

Fukuda's ascent to prime minister is unlikely to change those opinions. For one, his rise is a victory for the factional politics that dominate the LDP but irritate voters. After most of the power blocs in the LDP said they were backing Fukuda, his appointment was never in doubt despite moderate performances in public. "Fukuda is not a popular person but people [inside the LDP] would rather choose him than Aso," says Jiro Yamaguchi, a politics professor at Hokkaido University. Notably, in return for their support during his run-off with Aso, Fukuda today appointed current and former faction leaders Bummei Ibuki, Sadakazu Tanigaki, and Toshihiro Nikai to key positions in his new team.

Fukuda's lack of charisma may also play against him. Abe suffered in comparison with the flamboyant former Prime Minister Junichiro Koizumi, and Fukuda (a classic LDP dealmaker) faces a similar problem. His strength is the stability he brings to his party, not his public persona. Son of Takeo Fukuda, Japan's prime minister from 1976 to 1978, Fukuda is noted for his skills at coordinating policy and his dovish stance on international issues, particularly relations with East Asian neighbors. But whereas Koizumi could work a crowd with ease, Fukuda, who worked for a Japanese oil company before entering the Lower House in 1990, looks more salaryman than showman.

Sliding LDP Popularity

Faced with sliding LDP popularity in its countryside strongholds, a key factor in the Upper House election defeat, Fukuda is under pressure to backslide on reforms initiated under Koizumi and continued under Abe. Indeed, while the LDP has won praise for cutting the huge spending on public infrastructure projects by about half since 2001, many of Fukuda's backers in the LDP are opposed to further fiscal and economic reforms. Following his victory on Sept. 23, the Nihon Keizai, a business daily, noted that "in light of his low-key personality and cautious political style, the structural reforms pursued since the Koizumi government will be subjected to a more leisurely pace."

Others are more sanguine, noting that the change of prime minister will only have a marginal impact on business. Speaking after Abe resigned, Richard Jerram, chief economist at Macquarie Securities (MQBKY) in Tokyo, noted that whoever takes over, in the short term, the status quo is likely to be maintained. "It's hard to see how this could be bad news. It probably does not make much difference to policymaking," saidJerram.

Koizumi Return?

What is clear, though, is that few Tokyo watchers expect Fukuda's reign to be long-lasting. Under the terms of his victory for the presidency of the LDP, Fukuda can stay on as chief until September, 2009. But given the LDP's perilous position in the polls, an early election is more likely.

Masaaki Kanno, chief economist at JPMorgan (JPM) in Tokyo, predicts a general election could take place in summer, 2008, either shortly before or after the G7 summit to be held in Toyako, Hokkaido, Japan's northern island. "The new government needs to be tested by the general election to show their credibility," he says.

That's left some betting that a poor showing by the LDP could lead to a surprise return for Koizumi, 65. Speaking in Hong Kong on Sept. 19, CLSA analyst Stefan Rheinwald predicted that Koizumi will return next year, noting that the charismatic former prime minister "is one of the few politicians with the vision and creativity to push the country forward."

One scenario would be for the LDP, after a weak election showing, and the DPJ to eventually split into new pro-reform and anti-reform parties with Koizumi becoming leader of the former. Of course, that would all depend on Koizumi's willingness to return. "At any event, the next cabinet will be an interim administration," says Hokkaido University's Yamaguchi.


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