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Obuchi's Robust Fiscal Policy to Stay Intact With New Alliance

TOKYO -- Japan's ruling Liberal Democratic Party, or LDP, is poised to work its co-option magic again by luring yet another opposition party across the aisle. This move will make it even easier for Prime Minister Keizo Obuchi to get key economic legislation approved in parliament, or Diet, in the coming weeks and months.

Though Obuchi's popularity is soaring to new highs these days, he remains politically vulnerable because he doesn't control a majority of seats in Japan's upper house. To remedy this, the LDP has been probing opposition lines for defectors. In January, it drew the Liberal Party into a ruling alliance. Still a handful of seats shy of an upper house majority, however, the LDP has since been aggressively courting the Komeito party, which is backed by Japan's largest lay Buddhist organization, the Soka Gakkai.

Komeito leaders have been eager to jump into bed with the LDP. They fear their small party will be wiped out in the next general election and want to get close to the LDP so the political juggernaut doesn't run candidates in their districts. Soka Gakkai voters, however, have been less than thrilled with the alliance idea. That's because the Komeito is more dovish than the LDP and prides itself as a protector of Japan's underprivileged, which Soka Gakkai feels the LDP has too often ignored.

Nevertheless, Soka Gakkai big shots met with the Komeito leadership last Tuesday and gave the thumbs-up to the three-party coalition proposal. This all but guarantees the Komeito will approve a formal alliance with the LDP-Liberal bloc when it holds its national convention this Saturday.

Why is this important for the markets? Because it means Obuchi will have complete control of the Diet and it ensures continuity in his fiscally robust economic policies.

When the Komeito comes on board, the prime minister's three-party alliance will not only have a comfortable majority in the upper house, but it will also control a commanding 70% of the lower house seats. No government in Japan has enjoyed such a dominative position in this chamber in over half a century.

Equally important, like the LDP, the Komeito is not afraid of driving the government deeper into the red by using taxpayer money to breathe life back into this anemic economy, although the party prefers to prime the pump under the guise of welfare programs. Remember, the Komeito was the driving force behind this spring's government program to give families with young children and senior citizens 20,000 yen spending coupons. The coupon caper did little or nothing to boost the economy, but the Komeito won plenty of political brownie points with its voters.

More recently, the Komeito convinced Obuchi to load up a small supplementary budget now moving through the Diet with funds for programs to cope with Japan's low birth rate. Originally, the budget was intended to focus entirely on financing projects to create 700,000 jobs and head off rising unemployment, which grew to an historic 4.8% in April but dropped back to 4.6% in May. In addition to the jobs money included in the 520 billion yen budget, Obuchi slipped in a cool 200 billion yen for establishing more day-care centers and other measures to encourage Japanese to have more children.

The quid pro quo is simple. As long as Obuchi keeps pumping money into welfare initiatives, the Komeito won't raise a fuss about LDP plans to use pork-barrel spending to bolster Japan's bloated construction industry -- the biggest single lobby supporting the LDP.

Moreover, lots of Komeito supporters either run or are employed by small- and medium-sized businesses that have benefited from Obuchi's efforts to jolt Japan out of recession with massive public-works spending and a 20 trillion-yen government loan guarantee program.

Both Finance Minister Kiichi Miyazawa and Economic Planning Agency head Taichi Sakaiya have begun hinting that a second supplementary budget will be needed this fall to plug the gap created when spending from the front-loaded fiscal 1999 budget begins to taper off. Officials aren't publicly speculating on the size of that extra budget, but the figure being bandied about is 10 trillion yen, the largest component of which will almost certainly go to public works.

If Obuchi moves to pass this second supplementary budget, you can bet the Komeito won't get in his way. To be sure, because the LDP itself already controls the lower house, which has the final say in all budget bills, Obuchi doesn't technically need Komeito support. But with the party in the ruling alliance, he'll be assured of avoiding the political humiliation of having to ram the second extra budget through the Diet without upper house approval.

For Obuchi, the alliance with the Komeito is not risk-free. First, the Liberal Party and the Komeito don't get along. Second, other religious groups in Japan that back the LDP feel threatened by the Komeito and its Soka Gakkai supporters. And third, a media opinion survey released last Tuesday showed the public is generally against the pending Komeito tie-up. Separation of church and state is not just a concern of Americans.

Nevertheless, Obuchi has calculated that he can overcome these problems and that the benefits of befriending the Komeito are greater than the risks. When he finally inks the alliance, his domination of the Diet will be complete. He can continue his expansionary fiscal policies, which played a huge role in helping Japan achieve 7.9% annualized GDP growth in the first quarter of this year. And he'll be able to do this virtually unopposed. Not bad for a summer's work.

John F. Neuffer, a longtime observer of Japanese politics, is an analyst at Mitsui Marine Research Institute. He writes occasional commentary for TSC. Neuffer publishes an in-depth roundup of Japanese politics at his Web site, behindthescreen.com. This column is exclusive to TheStreet.com.

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