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TheStreet Open House

Obuchi's Deficit-Spending Program Faces Growing Protest

TOKYO -- When Japan's Economic Planning Agency last month reported a worse-than-expected 1% contraction of third-quarter GDP, it seemed Prime Minister Keizo Obuchi had all the ammunition he needed to keep pumping up this sputtering economy with deficit spending. Of course, this is exactly what he intends to do. Just last week he promised to give the economy "one more push" with a whopping 85 trillion yen ($807 billion) fiscal 2000 budget -- the biggest in Japanese history.

Parliament convened for a 150-day session last Thursday, and the passage of that spending package, with its serious ramifications for Japan's huge bond market, is becoming more complicated than Obuchi had planned.

For starters, fiscal consolidation has returned to the mainstream political debate in Japan. After Ryutaro Hashimoto lost his job as prime minister in 1998 for taking too long to abandon his belt-tightening policies, no sensible lawmaker in the Liberal Democratic Party (the dominant force in the ruling coalition) dared publicly challenge Obuchi's return to massive public works outlays as the best fix for the economy.

At least not until earlier this month, when former LDP Secretary General Koichi Kato began questioning Obuchi's expansionary polices and criticizing him for failing to rapidly implement measures to encourage restructuring. Speaking in his home prefecture on Jan. 8, Kato said that "Throwing money around will not do. I hope Prime Minister Obuchi and the LDP executives will say clearly that they will return to the road of reform even if it might be difficult."

He has a point. In the 1990s, the government threw roughly 100 trillion yen at the economy in stimulus packages, which has elevated Japan to the unenviable status of most debt-ridden country in the industrialized world.

Kato, leader of the second-largest faction in the LDP, is still smarting from the vindictive way Obuchi treated him after losing to the prime minister in the party's presidential race last September. He's also angry with Obuchi for bringing the Komei Party into the ruling alliance three months ago. More importantly, Kato wants Obuchi's job and senses there's enough public concern over Japan's ballooning budget deficit to use fiscal consolidation as a weapon to attack the prime minister.

Kato is not alone. Seiroku Kajiyama, another LDP heavyweight who ran against Obuchi in the party's presidential race in the summer of 1998, has also been blasting the prime minister for Japan's spendthrift ways.

On top of this, the opposition parties are threatening to boycott the budget deliberations, which could begin in parliament at the end of this week. In a familiar refrain, the opposition is charging that the budget is packed full of wasteful spending projects targeted to help sectors, such as the construction industry, which provide key voter support to the LDP. It's an assertion that has plenty of merit.

But the real point of the boycott would be to protest Obuchi's plans to ram through in the early days of this parliamentary session a bill to reduce by 20 the number of seats in the 500-member lower house. Under pressure from the Liberal Party, the other junior member in the ruling coalition, Obuchi agreed to do this at the end of the last session of parliament in December. If Obuchi doesn't get this legislation passed promptly, the Liberals would at best raise a huge, destabilizing stink. At worst, they'd bolt from the coalition and possibly precipitate a snap poll.

Does all this mean that Obuchi's budget is in trouble or that Japan will soon begin turning off the public spigot? Not likely.

With the future of this economy still uncertain, neither budget hawks in the LDP nor the opposition would seriously try to derail the spending package. Furthermore, the opposition doesn't have the votes to block the budget (or the seat-reduction bill), as the ruling coalition enjoys comfortable majorities in both houses of parliament.

It also doesn't hurt Obuchi that the Clinton administration and other Group of Seven governments are still calling on Japan to "use all available means" to put some life back into its economy.

As for long-term fiscal policy, Kato and Kajiyama are in the minority in the LDP, which must contest a lower election by Oct. 20 and an upper-house election in the summer of next year. Unless we see a dramatic surge in domestic demand, there's no way Obuchi will start weaning this economy from pork-barrel spending and put the hurt to important voter blocs that support his party. Obuchi is asserting that this year's budget is the final push. Let's just see about that!

In fact, Kato and Kajiyama may be doing Obuchi a big favor. With all their divisive talk of fiscal austerity, they give the impression that there are internal brakes in the LDP that prevent it from getting too carried away with massive spending packages. This might dampen fears in the bond market over Japan's debt problems and help keep interest-rate hikes in check.

One very important factor: Obuchi's fall in public opinion surveys in recent months has more to do with his political decisions, such as including the unpopular Komei Party in the coalition, than anything else. There may be growing concern within the electorate over the budget deficit, but not enough to compel Obuchi to do anything about it -- at least not yet.

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 Web site, 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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