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Racing Ahead: Japan's GDP Upswing Bodes Well for Obuchi's Re-Election

TOKYO -- Japan's surprisingly robust second-quarter GDP growth was just what the doctor ordered for Prime Minister Keizo Obuchi, who's in the midst of an election campaign to defend his position as leader of the ruling Liberal Democratic Party.

GDP grew at an annualized 0.9% in the second quarter, significantly stronger than consensus forecasts of a contraction. The data, released last Thursday, increase Obuchi's chances of winning big in the leadership race. It also suggests that after the Sept. 21 poll, the prime minister will be able to get down to the business of passing a supplementary budget that includes public-works spending meant to keep a fire under this economy.

Obuchi's victory has never been in doubt. He's already secured backing from two-thirds of the lawmakers in his party. The prospective margin of his expected win, however, has slipped in recent weeks.

That's because LDP lawmakers are not the only ones voting in the race. The LDP's 2.9 million rank-and-file party members will account for about one-third of the votes cast. By party rules, 10,000 of these votes equal one LDP lawmaker vote. The votes of half of the rank-and-file members are equivalent to approximately 150 votes. The LDP's 371 lawmakers account for the remaining votes.

Obuchi's problem is that the general public -- LDP rank-and-file included -- is decidedly uneasy with his decision to bring Japan's second-largest opposition force, the Komeito , into the ruling coalition. Although the pending tie-up with the Komeito will give Obuchi control of Japan's upper house (he already controls the powerful lower house), public suspicion of the party runs deep because of its close links to this country's largest lay Buddhist organization, the Soka Gakkai.

Obuchi's opponents in the leadership race have seized on the controversial issue with a vengeance. They're not so concerned with LDP allying itself with the Komeito, but they aren't as comfortable with Obuchi's intention to include at least one of the party's lawmakers in his next cabinet, which will be assembled after the election. The Komeito, of course, is not at all pleased with the prospect of becoming a non-cabinet coalition ally.

Moreover, the LDP's current junior coalition partner, the Liberal Party, has been trying to scuttle the Komeito deal by demanding that Obuchi stick to an earlier pledge to reduce the number of seats in parliament. The reduction would severely hobble the Komeito.

So, Obuchi is campaigning hard to win a decisive share of the rank-and-file votes in the party election. This should give him the mandate he wants to proceed with plans to make the Komeito a full-fledged coalition partner. If he achieves this, he can form his second cabinet, open an extraordinary session of parliament in October and continue passing legislation to keep the economy on track.

While the LDP's rank-and-file voters may have trouble stomaching the Komeito, Obuchi is hoping the state of the economy -- and his perceived ability to revive it -- will be their paramount concerns as ballots are cast in the coming days.

Unsurprisingly, the prime minister has made the economy the centerpiece of his re-election bid. Along with an extra budget this fall, Obuchi is promising 2% growth within two years and a possible lowering of the top rate of Japan's inheritance tax. More important, to the party faithful, he's stated he will focus on legislation to assist small and midsized companies, which employ roughly three-quarters of the Japanese workforce.

Meanwhile, his contenders have failed to outline particularly exciting economic agendas. Former LDP Secretary General Koichi Kato wants to stop issuing deficit-covering bonds by 2008. That's a noble cause given Japan's fiscal stance is the most rapidly deteriorating of the Group of Seven nations, but a bit too far over the horizon for this election. The other challenger, LDP Policy Affairs Council head Taku Yamasaki, is spending much of his campaigning on the relatively arcane topic of revising Japan's Constitution.

Last week's positive GDP number means Obuchi will likely ice the leadership race. That figure, by coincidence, was released the same day the LDP's card-carrying members began to vote by mail.

The GDP uptick, however, doesn't suggest the prime minister intends to take his foot off the fiscal-stimulus accelerator. Economic Planning Agency head Taichi Sakaiya said last week that he still believes this fall's supplementary budget should include 4 trillion to 5 trillion yen in direct fiscal spending. The logic is simple. Why change a policy direction that's working? For most LDP lawmakers, the budget deficit is tomorrow's problem.

Of course, the next lower house election, which must be held by October 2000, is on their minds. Obuchi has targeted 0.5% growth for fiscal year 1999, which ends on March 31 of next year. If he keeps priming the pump with public works, the economy could very well exceed that target. So rest assured. Another budget remains in the cards, probably sooner than later. Electoral politics wouldn't have it any other way.

Pass the pork, honey.

John Neuffer, a longtime observer of Japanese politics, is an analyst at Mitsui Marine Research Institute (MMR). He writes regular commentary for TSC and publishes an in-depth roundup of Japanese politics on his Web site, behindthescreen.com. The views expressed above are those of Neuffer and not necessarily those of MMR. This column is exclusive to TheStreet.com.

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