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Obuchi Porks Out on a Stimulus Package

TOKYO -- Like someone suffering from oniomania, the disorder more commonly known as compulsive shopping, Japanese Prime Minister Keizo Obuchi announced a bulky spending package last week worth 18 trillion yen ($171.5 billion) intended to ensure this economy's fragile recovery stays on track. The extra spending package, the ninth this decade, included few surprises. True, the "headline" figure came in higher than expected. But direct fiscal outlays of 6.5 trillion yen were pretty much in line with what economists in Tokyo were projecting.

The politics involved in the crafting of, and the political fallout from, this stimulus package, however, involve mixed risks for the markets.

For starters, Obuchi exhibited a touch of desperation with the size of the headline figure. For the past couple of months, he has been in a political funk, devoting much of his attention to putting out fires and fretting over his sharp fall in the polls. This is no small concern for the leader who must call a lower-house election by October of next year.

The Obuchi government badly fumbled its handling of Japan's worst nuclear accident in history this fall. The prime minister was also forced to sack a newly appointed vice minister in the Defense Agency last month who suggested Japan should discuss arming itself with nuclear weapons. And, in the face of intense public criticism, his party tried to renege on a promise to prohibit corporations from making donations directly to politicians.

Unsurprisingly, the results of a public opinion survey released early last week by a large daily newspaper, The Mainichi Shimbun, showed that Obuchi's support rate plunged to 32% from 48% in just one month.

So what does Obuchi do? Pander to the construction companies and small firms in Japan by shamelessly inflating the headline figure for the stimulus package. These traditional supporters of Obuchi's ruling Liberal Democratic Party, or LDP, will be the primary beneficiaries of the package, which is loaded with pork-barrel spending and government-loan guarantees.

The most salient feature of the debate over the package was that it exposed wide chinks in the coalition's armor. With Japan's second-largest opposition party, the Komeito, now formally on board, Obuchi commands impressive numerical control of the Japanese parliament. But coalition stability is more problematic than ever. The Liberal Party, the LDP's other junior partner, feels threatened by the larger Komeito's presence and has grown increasingly combative.

In fact, coalition negotiations over the new spending package were dominated by a vicious battle between the LDP and Liberal Party over how to fund a new home-nursing-care scheme scheduled for implementation in April 2000. Leaving the funding issue unresolved, Obuchi plowed ahead and announced his spending measures anyway. Angered by the snub, Liberal Party President Ichiro Ozawa is now widely rumored to be challenging Obuchi to fish or cut bait. Ozawa has apparently demanded that if the prime minister doesn't let his party merge with the LDP, he's going to take his business elsewhere.

By pumping up the stimulus package, Obuchi also aggravated rivalries within his own party. Policy affairs chief Shizuka Kamei is from the spend-til-you-drop school of fiscal policy. For months, he's been making noise about passing a hefty supplementary budget this fall to fund the stimulus package. By giving Kamei his big budget, Obuchi has further alienated former LDP Secretary General Koichi Kato, who controls the second-largest faction in the party and is generally considered a fiscal hawk.

The bottom line: With his popularity ebbing, Obuchi may be tempted to fall back on fixes that protect traditional supporters and slow the process of structural reform. And because his coalition is unstable and his party is riven with infighting, achieving consensus on important economic policies will be no cakewalk for the prime minister.

That's the bad news. The good news for markets, which traditionally are roiled by change, is that Obuchi will likely delay elections until after he gets the budget for fiscal 2000 approved in parliament because of these problems.

Just weeks ago, speculation was growing that the prime minister would call a snap poll at the end of the current session of parliament set to adjourn on Dec. 5. If he were to do this, he'd gum up the compilation process for next year's budget, which occurs during the last two weeks of December.

Another more likely election scenario was a poll in February. Again, this timing would almost certainly delay the budget, since Japan's lawmakers usually use February and March to pass the annual spending packages.

An early election no longer seems in the cards. Obuchi must first impose a greater degree of harmony on his bickering coalition and stop making the stupid political mistakes that have been the hallmark of his premiership this fall.

In the meantime, don't expect the prime minister to seek treatment any time soon for his fiscal oniomania at Debtors Anonymous. Tokyo economists are beginning to debate the wisdom of these massive spending packages now that Japan seems headed toward recovery. Such discussions are irrelevant to the prime minister. To disastrous effect, the LDP raised the consumption tax in 1997 and embarked on a program of fiscal austerity. Obuchi's not about to make that mistake again, especially with an election on the horizon.

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

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