Japan's Next Prime Minister: Can He Shed Party Politics?

This week, Japan's next prime minister will send his strongest signal yet on how aggressively he intends to move in reforming his country's economy.

On Thursday, Keizo Obuchi is set to officially announce his Cabinet line-up, following his all-but-certain election as the country's next prime minister. His path to the post was cleared last Friday, when he handily defeated two rivals for the presidency of the ruling Liberal Democratic Party.

At issue is whether Mr. Obuchi will follow a long-standing LDP pattern of using appointments as a reward for supporting his bid for party president, or whether he will appoint people who will aggressively pursue efforts to pull the country out of its worst recession since World War II.

The stakes are high. Not only is Japan's economic recovery seen as crucial to ending the crisis that has permeated Asia, but some political analysts here also say that if the LDP fails this test, it faces a bleak political future.

"Obuchi should put the first priority on how to revive the country's economy" and not on appeasing factions in his party, says Susumu Takahashi, chief economist at the Japan Research Institute Ltd., an affiliate of Sumitomo Bank. If the LDP's new leader gives the impression that he's following past patterns on appointments, "neither the markets nor the public will approve."

The markets already are restless. Late last week, Moody's Investors Service Inc. fired an economic warning shot, saying that it might lower its rating on Japanese government bonds. The government would be forced to pay higher rates to borrow money, steering government funds away from other needs.

Evidence that Obuchi may not be inclined to veer from past party practices came Saturday, when he set aside three of the highest posts for key members of each of the party's major factions.

During his bid for president of the LDP, Obuchi sketched the broad outlines of a tax cut to help stimulate the sagging economy.

The nation's gross domestic product grew only 0.7 percent during fiscal 1997 - the weakest growth rate since the end of World War II. And unemployment has reached a record high of 4.1 percent, the worst showing since the country began tracking joblessness in 1953.

Obuchi spoke of cutting the maximum income-tax rate from 65 percent to 50 percent and the corporate tax rate from 46 percent to 40 percent. The combined tax cuts are worth 6 trillion yen. He also spoke of supplementing this year's budget with a 10 trillion yen spending package.

In addition, the LDP is said to be preparing to use government money to set up "bridge" banks to help liquidate insolvent banks while protecting depositors. The effort was initiated earlier this month by former Prime Minister Ryutaro Hashimoto. The legislation needs to be top priority, says Mr. Takahashi. "Cleaning up the debts by March 2001 sounds too late. The bad-loan problem is an urgent matter."

And while economists say the economic stimulus package is a step forward, it's not clear where the government can find the money. "I don't think it's possible to generate 10 trillion yen in a supplementary budget now," says Yasunari Ueno, chief economist at Fuji Securities in Tokyo.

Beyond the details of the LDP's economic reform efforts lie its prospects for continuing to dominate the political scene. If the public fails to see rapid progress on the economy, the stage could be set for dissolving parliament and holding general elections, perhaps as early as next year.

Obuchi's selection as party leader, in the face of strong public support for one of his rivals who called for tougher reform measures, signals such a large gap between the party and voters that "the future of the LDP is doomed," says political analyst Minoru Morita, who heads the Morita Research Institute, a political think tank here. "Obuchi cannot sit and enjoy the traditional LDP success story like other prime ministers in the past," if for no other reason than he is coming under heavy criticism even before he becomes prime minister.

"To carry out reforms, both the government and the people have to work together," adds Takahashi. The markets will be watching to see if Obuchi "can produce any visible effects in implementing his economic measures and cleaning up nonperforming bank loans. He has a time limit of a month or two. The markets won't be merciful."