Will Abe lead on the consumption tax?

On Friday, Prime Minister Abe Shinzō headed off (jp) to the mountains in Yamanashi prefecture for an eleven-day summer holiday. He leaves behind a growing debate in Tokyo about the wisdom of proceeding as planned with the consumption tax hike scheduled to be phased in from 2014-2015 (5% to 8% in April 2014, 8% to 10% in October 2015). Abe has said he will make his decision about the tax sometime over the next two months, leaving proponents and opponents of the hike to make their cases once again.

Arguably the supporters of the tax hike won several victories this week.

First, at the start of the week the IMF advised the Japanese government to stick to the plan as concluded in 2012, arguing that the tax hike will signal the government's commitment to fiscal restructuring and will therefore bolster investor confidence. The IMF has been saying that the consumption tax rate should rise to 15% for years now, so its advice for Japan is not new. But the fund's intervention gives proponents an important international backer as they make their case to the prime minister.

The next victory for proponents of the hike came on Thursday. Bank of Japan President Kuroda Haruhiko, speaking to the press after the BOJ policy board's regular meeting, voiced his support for raising the consumption tax and said (jp) that the BOJ's radical monetary policies and the planned hike were not incompatible. Like the IMF, Kuroda stressed the importance of reassuring investors that the Japanese government is serious about getting its financial house in order.

Finally, on Friday the Nikkei Shimbun ran a major article (jp; registration required) — basically an editorial — addressed to senior government officials who are "nervous" about the consumption tax increase that sought to reassure them that raising the consumption tax next year would not be like raising the consumption tax from 3% to 5% in 1997. The article opens by explaining that the 1997 hike came in the midst of a regional financial crisis and at a time when the balance sheets of Japanese banks and corporations were loaded with bad debts. Having established that 1997 was a particularly bad time to raise the consumption tax, Nikkei pivots to say that since banks and businesses have more "stamina" today, it's appropriate to take on the challenge of the national debt in order to reassure global financial markets, which, Nikkei reminds us, are roughly three times larger than they were in 1995. With that in mind, the article warns that at the first sign that the government is not serious about raising the tax, investors will short Japan in a heartbeat.

As arguments on behalf of austerity go, there is nothing earth shattering in the Nikkei article, in fact it contains pretty much the same arguments that Paul Krugman has critiqued for years, including in this 2010 column: the "confidence fairy" and the "bond vigilantes." But the arguments are less important than the reality that Japan's powers that be are lined up behind raising on the consumption tax on schedule in April 2014. The tax hike not only has the support of the BOJ president and Japan's leading business daily, but also the head of Keidanren (jp) its most powerful business lobby; Amari Akira, Abe's own minister for economic and fiscal policy; and leading members of the LDP, which has, after all, campaigned on raising the consumption tax for the last several elections. Of course, it almost goes without saying that the ministry of finance wants to see the tax hike proceed as scheduled.

The forces arrayed against the tax, at least at the elite level, are thinner. Hamada Kōichi and Honda Etsuro, Abe's leading economic advisers, have both voiced skepticism about the current tax hike plan, with Professor Honda's arguing (jp) that the tax should be phased in at 1% a year rather than in two phases. Saitō Tetsuo, the chair of LDP coalition partner Komeitō's taxation committee, has stressed the need to take economic conditions into consideration when deciding whether to go forward with the hike. Beyond elite circles, perhaps most significant fact is that the public is overwhelmingly opposed to the tax hike: Asahi's post-election opinion poll found (jp) 58% opposed and only 30% in favor.

Given that sustainable, robust growth is still far from assured — and that wages have yet to rise, suggesting that consumers would really feel the sting of the tax hike — the facts are probably on the side of the skeptics. The proponents still have to explain (1) why the confidence of global markets is so important when, as Michael Cucek reminds us, Japan is largely invulnerable to "bond vigilantes" and (2) why confidence would evaporate now as opposed to anytime over the past decade of swollen deficits. If anything, delaying the consumption tax hike should signal to financial markets that the Japanese government is serious about reviving Japan's economy.

But this week shows that the facts have an uphill battle against a good portion of the Japanese establishment (with the support of international actors like the IMF). After finally securing a plan in 2012 to raise the consumption tax, they are not about to let the Abe government back out of its commitment. With the final decision resting on Abe's shoulders, this issue is as good a chance as any for Abe to show that he can be the strong, decisive leader he claims to be.

Fiscal policy in the eyes of the Japanese public

It increasingly seems that if Abe Shinzō is going to remain in office, he will need to retain the approval of the Japanese public, and that if he is going to retain the approval of the Japanese public, the Japanese public will need to reap some of the benefits from the purported revival of economic activity. But beyond the basic question of whether or not Japan is growing and whether the benefits of growth there are larger questions about the future of Japanese capitalism. Will Japanese companies focus more on shareholder value and profit maximization instead of protecting jobs, preserving relationships with contractors, and prioritizing bank financing over equity financing? Will individuals embrace unconventional career paths, less on-the-job training, more mid-career job changes, more control over pensions and personal investments, with the risks that all of these changes entail? Does the Japanese public believe that the pillars of Japanese capitalism should change?

Of course, opinion polls can only reveal so much and suffer from flaws that undermine their validity — and public officials are free to ignore the preferences of the Japanese public in pursuit of their goals. But polls can provide hints as to how the Japanese public will respond to government policies or market developments.

In a series of posts over the coming days, I will review public opinion polls dating as far back as 1993 to assess Japanese attitudes to government spending, deficits, and fiscal retrenchment; structural reform; the social security system; and saving, investment, and the financial sector.

Fiscal stimulus, fiscal retrenchment, and the state: If there is one fundamental fact concerning Japanese public opinion about economic policy during the "lost decades," it's that, while recognizing the need for fiscal stimulus the Japanese people are ambivalent when it comes to how the government should pay for it. For example, in September 1993, early in the first lost decade, 80% of respondents in an Asahi poll said they wanted the government to cut income taxes as soon as possible, with only 11% in disagreement. However, when asked whether the government should issue deficit bonds to pay for tax cuts, only 23% agreed, with 55% opposed.

The same ambivalence has appeared repeatedly over the past twenty years.

• In March 2000, an Asahi poll asked whether issuing new bonds to pay for economic stimulus was “unavoidable” or whether the time was coming to reduce borrowing and fix the country’s finances: only 17% of respondents supported the former proposition, while 77% supported the latter.





• The percentages were roughly the same in response to that question in December 2000 and February 2001 — despite a July poll finding that 47% felt the Mori government should focus first on economic stimulus, compared to only 18% who felt it should put fiscal reconstruction first. 
• The public was often dubious about structural reform under the Koizumi government (more on this in a bit), but was overwhelmingly supportive of structural reform when it came in the form of public spending cuts or restructuring (or privatizing) public corporations. For example, the public favored a 10% cut in public works spending in the 2002 budget, with 52% in support and only 37% opposed. When asked in December 2002 whether the government should build more roads, 64% opposed the notion with only 24% in favor. The public also went from neatly divided on postal reform to decidedly in favor of the reform that was Koizumi’s pet project.
• As the Aso government coped with the global financial crisis in 2008-2009, the public signalled that it favored focusing on economic growth instead of fiscal reconstruction. However, as before, the public was overwhelmingly opposed to financing stimulus through deficit bonds. An October 2008 Asahi poll found only 24% of respondents in favor of paying for stimulus with deficit bonds, compared to 56% opposed.
• The DPJ encountered the same ambivalence. The public once again wanted the government to focus on stimulus, but when asked in January 2010 whether they approved of the Hatoyama government's having to undertake the largest deficit bond issuance to date to cover its budget, 69% of respondents were largely or completely opposed, with only 1% giving their full approval and 35% giving partial approval.
• While commentators usually attribute the persistent campaign for a consumption tax increase to the ministry of finance, the public has at various times signalled its willingness to support a higher tax rate, perhaps because of long-term uneasiness about the state of the government's finances. The Japanese public may be open to the idea, but whether it supports a particular plan depends entirely on the details (the timing, the size of the increase, the state of the economy, how new revenue will be used, etc.). There is, of course, a lesson for the Abe government as it decides whether to proceed with the plan to raise the consumption tax to 8% next April and 10% in October 2015.





• The Japanese people remain ambivalent about government finances. In August 2012, Asahi found that 62% of respondents felt that Japan's fiscal situation is very serious, with another 32% who said it is somewhat serious. At the same time, however, 90% of respondents said that growth and jobs would be very important (53%) or somewhat important (37%) for deciding how to vote in the next general election, making it the most important issue for voters.
• Abe has not been exempt from the public's ambivalence. A poll in January found 49% approval for fiscal stimulus based on public works projects, but when asked whether they thought it was good that stimulus spending would be funded by deficit bonds, only 22% agreed while 65% did not.

As the above data suggest, the Japanese people have indicated that they want the Japanese government to focus on economic growth and jobs, but they have consistently opposed the use of deficit spending to pay for economic stimulus. The Japanese public is not, however, opposed to the state's providing social security, economic stimulus, or support for business using public funds. Public support for the former policies is consistently strong, and regarding the last point, during Abe's first government, Asahi found 49% support for Abe's emphasis on support for businesses as part of his growth policies, with only 33% opposed. In theory, the public may also be willing to support higher taxes. A March 2010 Asahi poll asked respondents about the kind of society they wanted Japan to be. Most preferred a high tax, high welfare society: only 10% were absolutely in favor, but 55% opted for "if I had to say, high tax, high welfare." Only 23% said "if I had to say, low tax, low welfare" and only 6% were absolutely in favor of low taxes and low welfare. Similarly, when asked whether it was better to strengthen or weaken progressive taxation, 38% said it should be strengthened, with another 45% opting for "if I had to say, strengthen it." Only 13% said it should be weakened.

Given that Japan's central government has consistently been at or near the bottom of the G7 countries in terms of tax revenues, there's certainly room for the government to collect more, but as with the consumption tax, whether the public will support higher taxes depends entirely on the details: which taxes are being raised, how much they're being raised by, and, most importantly, how the new revenue will be used. Perhaps the public's opposition to public works for most of the 2000s and its longstanding opposition to deficit bonds ultimately stem from skepticism about what the government promises to do resulting from seeing government after government fail to end Japan's economic stagnation. In that sense, the public's enthusiasm for Abenomics looks that much more remarkable.

The next post will shift from thinking about how the Japanese public wants the government to tax and spend to thinking about what the public wants the Japanese private sector to look like, how they think companies should act, and what they think of structural reforms to change the face of Japanese capitalism. 

Is Ozawa back?

If there is one lesson that this upper house campaign has taught us, it is a lesson that we all should have already learned: there is no stopping Ozawa Ichirō. Despite what looked like a marvelous coup by Hatoyama Yukio in getting Ozawa to step down as DPJ secretary-general, Ozawa has been a public critic of the Kan government throughout the campaign.

However, is Ozawa's criticism of the government — he's been particularly harsh about the Kan government's comments about raising the consumption tax to 10%, which he argues with plenty of justification that the government has made life more difficult for DPJ candidates — the prelude to Ozawa's being a thorn in Kan's side after the election (as Yuka Hayashi suggests in this post at the Wall Street Journal's Japan Realtime)?

It is tempting to see Ozawa's remarks as the beginning of an Ozawa-led anti-mainstream within the DPJ that will force the Kan government to make further concessions to party backbenchers when it comes to policymaking, particular if the DPJ falls short of a majority on Sunday.

Working in Kan's favor, however, is that he has government and party leadership united behind him. United in their opposition to Ozawa's influence, Kan's leadership team already looks more effective than the Hatoyama-Ozawa team, missteps regarding the consumption tax notwithstanding. More importantly, Kan has already made concessions to the party's backbenchers, giving them a vehicle for having their voices heard by the cabinet. Ozawa's concerns about the government's abandoning last year's manifesto would carry more weight if the Kan government had not already begun working on a mechanism for incorporating the concerns of backbenchers into government decision making. Furthermore, there are few signs that Ozawa is any less unpopular now than he was before resigning as secretary-general — or that MPs are keen on preserving every piece of the 2009 manifesto. While there are still concerns that Ozawa stands at the head of a proto-faction that could number more than 100 members, I wonder how many members Ozawa can actually count on to back him. How many backbenchers would be willing to buck the new party regime to stand with Ozawa? It is worth noting that few senior party members have echoed Ozawa's critique of the Kan government.

That's not to say that party members are happy with how the government has handled the consumption tax issue over the past month. The understandable desire to give the voters a chance to render judgment on the Kan government's new approach to the consumption tax likely forced the government to roll out the proposal before properly vetting it with party members, which in turn led the government to back away from its initial position, ironically damaging the position of the government and the DPJ even further.

But backbencher dissatisfaction does not automatically translate into support for Ozawa. Far from signaling the beginning of an Ozawa-led anti-mainstream, Ozawa's behavior during the campaign could signal a new role for Ozawa as an internal critic, concerned less with vying for control of the party than with keeping the party on what he sees as the right path. It seems to me that the Kan government could live with Ozawa's moving into this role.

Open government

Amidst all the changes introduced by the Hatoyama government since it took office in September, it is easy to forget what may be the most revolutionary change of all: transparent government.

The most visible example thus far is the Government Revitalization Unit's comprehensive review of government spending programs, ably chronicled by Michael Cucek here and here. As Cucek notes, for the first time bureaucrats are being forced to account for programs for which they are responsible — and in Cucek's opinion, the bureaucrats' responses have been notable mostly for their lack of enthusiasm. He concludes that "the GRU proceedings have reinforced the DPJ's image as the party that cares about how tax revenues get spent."

He may be understating the significance of what the Hatoyama government is doing.

One of the major themes of the DPJ's 2009 election manifesto and earlier party documents was the importance of transparency and accountability for democracy. Simply put, Japanese democracy was rotten precisely because the authorities in Tokyo did not see fit to trust the public with information about how tax revenue was being spent and who was making national policy. Protected by a press that did not venture beyond press clubs in search of stories, stories that might reveal how policy emerged from opaque negotiations among bureaucrats and LDP fixers, LDP rule was shrouded in a cloud. As a result, public confidence eroded not just in the LDP but in Japan's government more generally. It is little surprise that public opinion polls during the months leading up to the general election showed that voters were skeptical about the DPJ even if they were willing to vote for the party: after years of LDP rule, during which the only thing that was clear was that the government was failing the public, what reason did voters have to be confident that any group of politicians could follow through on its promises? After the devastation wrought by the LDP, skepticism (to the say the least) towards the political system was and is a healthy response.

But little by little the DPJ is chipping away at the years of much-merited cynicism and disgust that have emerged among the Japanese people. Publicizing the GRU's hearings was an important first step. Opening up the press clubs could be another important step. The finance ministry's decision to publicize the budget compilation process piece by piece should help too.

The savings secured by the GRU have thus far been small, totaling just over 1 trillion yen. But the GRU hearings could prove much more consequential for the government if they restore the public's trust in the government, especially when it comes to spending taxpayer money. A Sankei/FNN poll found that the public is nearly unanimous in its support for the hearings. 88.7% of respondents said that the hearings have been useful for eliminating administrative waste. 85.2% said that the hearings should be held annually. Nearly 80% said that they were interested in the contents of the hearings. Most extraordinarily, 77.5% of self-declared LDP supporters said that they saw the hearings as useful.

I do not think that it is mere coincidence that a recent Yomiuri poll found that 61% of respondents said that they view a consumption tax increase to raise revenue for social security as unavoidable. This is just a theory, but I wonder whether the Japanese public had a problem not with consumption tax increases but rather with consumption tax increases carried out by a ruling party with such a dismal record when it came to using the public's money wisely. Why should the public have supported paying for money into coffers controlled by the spendthrift LDP? By taking its duties as the duly elected government of the people seriously in reviewing how public money is spent, it is conceivable that voters will be more understanding if and when a DPJ government seeks public approval for a tax increase, especially if it is explicit about how it will use the additional revenue.

Transparency is inextricably linked with accountability. By being open about how public money is spent, the DPJ will enable voters to assess how the government has performed come election time. This is central to the new policymaking system the DPJ is building today. The 1955 system was effectively premised on the idea that the LDP and therefore the government could take the time to craft a consensus, often working in secret and making various side payments to make it stick. Getting the distribution of benefits right was more important to the LDP than provide a full accounting of its activities to voters. The DPJ's nascent system, on the other hand, is based on Westminster and implicitly recognizes that since the ruling party could lose in competitive elections, transparency is on average is preferable as it enables the government to promote its achievements (while trying to spin away the failings). Without transparency, the ruling party cannot be held accountable by the public for its achievements. I recognize that the LDP did not build the 1955 system with these principles in mind — although I think that the DPJ's leaders are thinking along these lines — but I think this stylized story is useful for thinking about how LDP rule functioned.

So while the DPJ may be conducting a sort of fiscal truth and reconciliation commission through the GRU — a useful political maneuver as the DPJ consolidates its power — the hearings as much about the future as they are about the past.

And openness has as much to do with foreign policy as with fiscal policy. With Foreign Minister Okada Katsuya announcing that the government will proceed with unveiling the "secret" agreement between the US and Japan that permitted the "introduction" of US nuclear weapons into Japan despite the three non-nuclear principles prohibiting such actions, the push for open government also includes an indictment of how the LDP conducted the US-Japan alliance for decades. It could not be otherwise. For too long the US was happy to manage the alliance in the shadows and work with a host of unsavory characters if doing so served the interests of the alliance. While the end of the cold war likely meant the end of the more sordid dimensions of US-Japan cooperation, the US government nevertheless continued to enjoy deep ties with an LDP that essentially governed behind a veil of secrecy. Just as the DPJ is seeking to air the truth of LDP rule at home, so too will it air the secrets of LDP rule in foreign policy, starting with the nuclear pact that has been an open secret for decades. The DPJ's approach to the Indian Ocean refueling mission and the 2006 Okinawa agreement on realignment similarly cannot be understood without reference to the DPJ's emphasis on transparency.

Make no mistake: the DPJ is conducting a revolution in Japanese politics. It may not look like a revolution, because there are few guarantees that the DPJ will deliver sweeping policy changes, but it is important to recognize that a procedural revolution is still a revolution. And for the first time in decades the Japanese people may be able to trust their government to work on behalf of the public interest in full view of the public, so that they may be able to judge the government's progress.

Tax rebellion averted?

The LDP appears to have forged a truce in the incipient war over writing the timing of a consumption tax increase into law.

In the best LDP tradition, the LDP leadership has decided to muddle the message of the bill. The LDP has produced a draft with language that calls for implementing "essential legislative measures by 2011" for fundamental tax reform including the consumption tax, but also adds that the precise timing of said measures will depend on "the state of the process of economic recovery and an examination of trends in the global economy." The draft also calls for a two-stage increase of the consumption tax. Finally, it included language designed to appease the potential rebels by calling for appropriate measures to promote administrative reform and eliminate wasteful spending.

The LDP leadership hopes to secure a cabinet decision on the draft by Friday.

Amazingly, these minor edits appear to be sufficient to quell the discontent among the LDP's reformists. Said Nakagawa Hidenao in response to the additions: "The supplementary provisions cannot be said to be a tax increase bill; they are nothing more than instructional provisions." His fellow malcontent, Yamamoto Ichita, is less impressed with the compromise.

"Anywhere you look in the world," he writes, "there are no governments saying things like, 'Depending on the situation we will raise taxes after three years.'" He believes that far from being "merely instructional," the plan will appear to the public as a solid commitment to a tax increase, a tax increase that Mr. Yamamoto does not deny may one day be necessary but argues that for now is political and economic folly to discuss.

The compromise may be a way for the tax hikers to create a foothold; if the LDP somehow survives this year's general election and if the reformists are diminished by the returns, they now have a basis for going forward with a firmer commitment. Instructions now, substance later.

For the same reason, I wonder whether the Japanese press is declaring a truce in the tax rebellion prematurely. Mr. Yamamoto's response does not sound like someone who is content with the party's compromise — and I'm sure he's not alone. It may be that the rest of the reformists do not share Mr. Nakagawa's desire to accommodate the party.

Meanwhile, I think I am with Kono Taro on this debate. At his blog, Mr. Kono muses on the growing severity of the downturn and wonders why the LDP is wasting its time on whether to hike the consumption tax in 2011 — a time at which, he notes, the LDP may not even be the ruling party — when sales are falling, company debt is growing, credit is freezing, and manufacturing is shrieking to a halt. He assumes that another stimulus package will be unavoidable, and that the LDP should be doing all it can to stop the bleeding instead of debating whether to raise taxes once the economy recovers.

The LDP's tax revolt

The upper house has begun debating the Aso government's second stimulus package and its controversial proposal to distribute roughly two trillion yen to Japanese citizens, 12,000 yen (US$132) per person in the hope of restarting the Japanese economy.

At the same time, the LDP is in the midst what could be the climactic battle in a long civil war over whether to raise the consumption tax.

The two policies are linked, the product of a bargain between the government and the finance ministry whereby the finance ministry agreed to release the stimulus funds in exchange for a commitment from the government to raise the consumption tax at the earliest possible date. Accordingly, the battle raging around these policies involves the same protagonists: on one side, bureaucrat bashers Nakagawa Hidenao, Yamamoto Ichita, and other Koizumian reformists (with Watanabe Yoshimi now sniping from the sidelines), and on the other, Aso Taro, Nakagawa Shoichi, his finance minister, Yosano Kaoru, the economy minister and longtime advocate of consumption tax increase as indispensable for sound public finance, and the Japanese bureaucracy.

The debate is over whether the government should include a commitment to phase in a consumption tax increase from 5% to 10% starting 2011 in the government's mid-term tax program. In making the case for the increase, it appears that Mr. Aso and his ministers will emphasize the importance of the tax for providing economic security for all citizens. Asked about the planned increase in Diet proceedings Monday, Mr. Aso stressed the importance of restoring the country's finances for providing pensions, health care, and welfare for Japanese citizens and insisted that Japan must wait no longer than the time it takes for the economy to recover to set about fixing its fiscal situation. In a sop to the reformers, Mr. Aso has also promised that any tax increase will be accompanied by efforts to cut waste and reform the bureaucracy.

Mr. Aso will likely spell out his thinking on the consumption tax question in his policy speech, which will not be delivered before January 26. Yomiuri reports that his address will spell out his economic philosophy and emphasize the need to put social security on surer footing — and also suggests that Mr. Aso will join in the capitalism bashing, criticizing "market fundamentalism" and distancing the LDP ever further from Koizumi Junichiro's structural reform agenda.

Despite indications to the contrary, the government does not appear to be backing down from its commitment to either half of the stimulus package/consumption tax increase program, despite opposition from within the party, opposition parties, business leaders, and an overwhelming majority of the public. If anything, the government is doubling down on its commitment, despite taking a beating in the court of public opinion — and the prime minister is convinced he will get his way. Asked Monday evening whether he expects rebellion within the party over the bill to revise the tax system for the 2009 fiscal year, which will contain the promised consumption tax increase, Mr. Aso dismissed the idea. His finance minister rejected an appeal from a ministry shingikai to withdraw the stimulus package with an outright "no." Jun Okumura thinks there might be more to it, but it seems possible that the Aso government is so far gone down this path that to abandon this course of action could mean the end of the government, the final push that brings the government's approval rating into the single digits and results in a vote of no confidence.

In any case, in Monday's deliberations Mr. Aso reiterated his government's decision to push forward with the stimulus package

Of course, pushing ahead with the scheme could mean the end of the government as well. While Mr. Aso dismissed the chances of a rebellion should the government need a supermajority to reapprove its bills in the Diet during the current session, the possibility is all too real. The Koizumians, having become the LDP's anti-mainstream since Mr. Koizumi left office in 2006, may finally have been pushed too far. As the Tokyo Shimbun reminds us, it will take only sixteen rebels to defeat the bill should the lower house have to pass it again over upper house opposition. Will sixteen emerge? Even without considering the Koizumians, the Aso government could be in trouble. Even Tsushima Yuji, head of the LDP's tax commission and head of the Tsushima faction, has voiced his opposition to explicitly setting a date for the introduction of a consumption tax increase. One does not need to be a Koizumian to wonder whether it is politically sensible to commit to a consumption tax increase when it appears that Japan still has not reached bottom in the current economic crisis.

But should Mr. Aso get his way in party deliberations and succeeds at introducing a consumption tax commitment into Diet deliberations, the LDP's reformists may finally stand up and say no to the government after two years of being pushed to the side, with Nakagawa Hidenao and Yamamoto Ichita the two leading figures in the campaign against both sides of the government's bargain with the finance ministry. Mr. Nakagawa's fight is as much against the bureaucracy as it is with Mr. Aso. In this post at his blog, for example, Mr. Nakagawa argues that the bureaucrats are insensitive to the lives of the Japanese people, that their planning on the consumption tax question is based solely on economic statistics instead of on the reality of daily life. Mr. Yamamoto writes at greater length on the reasoning behind the opposition of the reformists. Mr. Yamamoto, like Mr. Nakagawa, claims to not be opposed to the consumption tax increase in principle but believes that other steps must be taken first before introducing the tax: steps to eliminate waste, cut the number of Diet members (an intriguing idea, seeing as how Japan has nearly two hundred more national legislators than the United States for a country with just over a third the population), and combat amakudari. He also rejects the arguments floated to defend the idea that a consumption tax increase is political suicide for the LDP — Mr. Yamamoto finds the notions that the public will praise Mr. Aso for tackling the consumption tax issue and for showing how the LDP will pay for its proposals (unlike the DPJ) laughable.

Messrs. Nakagawa and Yamamoto have now been joined by the maestro himself, Mr. Koizumi. The former prime minister met with Mr. Nakagawa and Takebe Tsutomu Monday evening and declared that the idea of setting a date for the introduction of a consumption tax increase is mistaken. Mr. Koizumi's guidance might not influence the government, but it may steel the resolve of the LDP's reformists. I wonder too whether Watanabe Yoshimi's now constant presence on television will give courage to his former compatriots, providing a reminder that they have a place to go should they decide to rebel against the government. Mr. Watanabe's decision to act as an advance guard may yet prove to be a wise decision.

In any case, as this debate unfolds it is worth noting that the tax debate captures everything that is wrong with the LDP today and illustrates why prime minister after prime minister has failed to govern.

The tax issue encompasses everything: Kasumigaseki-Nagatacho relations, the size and role of the state, the future of economic governance (neo-liberalism versus something else), control of the LDP and the government, and the LDP's prospects beyond the 2009 general election. It shows that the LDP is several parties traveling under one label, several parties that increasingly see the political system in fundamentally irreconciliable ways. Mr. Aso and his predecessors have failed because the LDP is beyond the command of any one politician. Japan is ungovernable because the LDP is ungovernable, meaning that the loser in all of this is, of course, the Japanese people, who are no closer to having a government capable of fixing the government's finances and providing the protection they desire.

Is such a government waiting in the wings? The DPJ has been sniping on the sidelines of the LDP debate, presenting an argument similar to the LDP's reformists — the DPJ will oppose any bill stating a date for a consumption tax increase because efforts to reform the bureaucracy should precede any increase in the tax burden for the Japanese people. The DPJ, however, should tread carefully. It is easier to bash the bureaucracy than to offer a plan to fix the budget that does not include a consumption tax increase in some form. And if and when the DPJ forms a government, it will need that selfsame bureaucracy in order to govern.

Finally, as an aside, it is worth asking whether the current Diet, nearing the end of its term, should be allowed to vote on such weighty matters as whether to provide a stimulus package of dubious effectiveness or to commit to a consumption tax increase. While in a purely technical sense the current Diet is, of course, legitimate, it is in some sense a lame duck Diet, given the likelihood that the government will call an election as soon as it has the 2009 budget in hand. Why should a collection of parliamentarians, many of whom will no longer hold their seats at year's end, be allowed to decide Japan's fate at this critical turning point? It is clear why Mr. Watanabe wants an election to be held immediately.

Endgame

As 2008 enters its final week, the LDP and Aso Taro, its beleaguered head, are being written off as doomed in the year to come.

No one, it seems, is willing to offer an explanation for how the LDP can save itself in a general election. The LDP may yet win the general election, but its fate is out of its hands.

Some are starting to measure the LDP's coffin, so to speak. AERA, a weekly magazine, notes that Yamada Shinya, an elections forecaster, has predicted that the DPJ will win 230 seats to the LDP's 191 seats. Mr. Yamada foresees sluggish turnout and notes the importance of the change in the Communist Party's election strategy — nothing too different from my own assumptions about the next election. (I have started — and hope to finish — my own analysis and predictions for the 300 single-member districts.)

In the meantime, Mr. Aso's situation continues to worsen. The latest blow to his government is a dispute with Komeito. Last week Koga Makoto, the LDP's chief elections strategist, noted that it was strange that the LDP would tell supporters to vote for the LDP in single-member districts and Komeito for proportional representation seats, a statement interpreted as a hint that the LDP is reconsidering the terms of its electoral partnership with Komeito. Mr. Koga was quick to reassure Komeito that the LDP remains committed to working with Komeito to win a majority for the coalition — the LDP can hardly afford to do otherwise, given the support Komeito is said to provide for LDP candidates. Komeito head Ota Akihiro was dissatisfied enough with Mr. Koga to call for an apology. The question now is whether LDP candidates will receive the support from Komeito that they have received in the past. Will Komeito voters continue to be loyal to their party or will they stay home or vote against LDP candidates in a general election? Along with the JCP question, the Komeito vote is of course an important variable in determining whether the LDP will be returned to power.

Of course, events may render all of these factors irrelevant in a general election. If the bottom continues to fall out of the Japanese economy — Japan Economy Watch and Ken Worsley's Japanese Economy News are essential sources for the bad news — it may simply be impossible for the LDP to reverse itself in time for a general election. The latest news is that in its monthly assessment of the Japanese economy, the government has determined that the economy has worsened (as opposed to weakened) for the first time since February 2002. There appears to be no end to the bad news. Little surprise that the prime minister's approval ratings may be headed into the single digits, having fallen to 16% in a recent Mainichi poll.

The most pressing question now is how long the government will wait before calling an election. Abe Shinzo, quickly becoming a younger version of Mori Yoshiro, has called for the election to be delayed until May at the earliest, until after the passage of the 2009 budget. I expect that Mr. Aso will wait until he has a budget in hand before going to the voters, although I do not expect the budget to make much of a difference. The Aso government and the LDP have simply been overwhelmed by problems: sluggish domestic demand, a shift to reliance on temporary and part-time workers, growing pensions and health care liabilities, an intolerable debt burden, stagnant regions, and so on. The economic crisis is only exacerbating these problems. The result is that the LDP is on the brink of collapse. The party has simply overwhelmed by a cascade of systemic failures. As Thomas Homer-Dixon, a political scientist at the University of Toronto wrote in The Upside of Down, "When a society has to confront a bunch of critical problems at the same time, it can't easily focus its resources on one and then move on to the others."

The LDP, trapped by previous decisions that created or exacerbated these problems, is unable to take a definitive step in any direction. This is the essence of the LDP's ongoing debate over tax reform and a consumption tax increase. The government needs more revenue to meet current and future liabilities without increasing the national debt; for a number of LDP members, most notably Yosano Kaoru, the economy minister, a consumption tax increase appears to be the answer to the government's problems. But passing a consumption tax — or even committing to a timeline for phasing in a consumption tax — is a thorny political problem that has involved tortuous negotiations within the LDP and between the LDP and Komeito. Facing an election and an economic crisis, Mr. Aso has been understandably reluctant to make a firm commitment to the timing of a consumption tax increase. A consumption tax increase may solve one problem, but it may exacerbate others (sluggish domestic demand, low growth, and perhaps growing social inequality, as a consumption tax increase would presumably hurt low-income Japanese most). Japan is ensnared in a web from which there is no easy escape.

Not surprisingly, a recent Yomiuri-Waseda poll found that the public more disappointed in the LDP than hopeful about the DPJ. Regime change alone will not cut Japan's Gordian knot. It is entirely plausible that a DPJ-led government will be equally stymied. But the public is at least willing to give the DPJ a chance, an entirely reasonable proposition given the LDP's record.

It may be, however, that Japan's problems are insoluble, and Japan still has a long way to fall. The greatest reason for pessimism may ultimately be that despite having experienced nearly two decades of stagnation, the establishment has yet to come up with any better ideas for organizing Japanese society. As a result, the global financial crisis, rather than providing an opportunity for Japan to take a leadership role, has paralyzed Japan. To return to Thomas Homer-Dixon, he argues that an essential quality for dealing with crises is a "prospective mind."

"We can't possibly flourish," he writes, "in a future filled with sharp nonlinearities and threshold effects — and, somewhat paradoxically, we can't hope to preserve at least some of what we hold dear — unless we're comfortable with change, surprise, and the essential transience of things, and unless we're open to radically new ways of thinking about our world and about the way we should lead our lives. We need to exercise our imaginations so that we can challenge the unchallengeable and conceive the inconceivable. Hunkering down, denying what's happening around us, and refusing to countenance anything more than incremental adjustments to our course are just about the worst things we can do."

Despite the best efforts of Koizumi Junichiro, I fear that this is precisely how the Japanese establishment has responded to the lost decade. Public debates are stale. Even minor change is watered down. Or as Yeats wrote, "The best lack all conviction, while the worst / Are full of passionate intensity." Watching the irresolution of the LDP's reformists, and the strength with which the LDP's old guard resisted any attempt to redirect gasoline tax revenue away from road construction earlier this year, I cannot help but think that Japan simply lacks the ability to adjust, that despite a history of making radical changes in the face of crises, the current crop of leaders is simply not up to the task. Perhaps as bad as things look today, they aren't nearly bad enough to force radical change — the decay of an economic system hardly compares to the threat of colonization and the blow of defeat and occupation. After all, despite the lost decade, Japan remained the world's second-largest economy, its companies respected globally. Perhaps Japan is more capable of responding to short, sharp shocks than to prolonged, barely visible social problems.

Of course, Japan is hardly alone. I was reading Thomas Homer-Dixon Sunday while waiting in Boston's Logan Airport, where the TV was tuned to CNN's Late Edition. Wolf Blitzer was struggling to moderate a discussion between Democratic Congressman Barney Frank and Republican Congressman Eric Cantor on the financial crisis. Congressman Cantor insisted that when apportioning blame for the crisis, Congress must bear much of it for encouraging risky lending, which is to say that it is not necessarily the market but the government that failed.

I can think of no better illustration of what Homer-Dixon calls "hunkering down, denying what's happening around us, and refusing to countenance anything more than incremental adjustments."

Fukuda, a glutton for punishment

On Tuesday, at the same press conference where he complained about the stress of the job, Prime Minister Fukuda made a statement guaranteed to ensure that his stress will increase inexorably.

"Since [the consumption tax rate] is only 5%, we are burdened with a budget deficit. We must decide — this is an extremely important period. If we think about the aging society, the road is narrowing." He compared Japan's consumption tax rate unfavorably with European consumption tax rates, but admitted that he didn't know how the public would respond to a consumption tax hike. [This story was front page news in Asahi.] The idea is that the LDP and the Diet will debate comprehensive tax reform in the fall.

Yamamoto Ichita seems to have a better idea of how the public will respond — and finds it intolerable that some LDP members are willing to proceed with the tax hike even if it means an LDP defeat.

"In my thirteen years in politics, I have never met a politician 'resolved to discard his Diet member's badge at any time."

The prime minister has now opened the flood gates on a debate between tax-hikers (many of whom happen to be zoku giin) and budget-cutters, the latter of which want to government to trim as much waste as possible from the budget before raising taxes. (Nakagawa Hidenao is probably the leading advocate of this school of thought, as in this post in response to the prime minister's remarks.) Naturally the zoku giin don't want to see "wasteful spending" trimmed — because it's not wasteful to them.

In short, the prime minister will be attempting a tricky maneuver in the autumn, dealing a blow to the road tribesmen by getting his road construction plan written into law and then wheeling about to use a victory on the road construction (read: budget trimming) front to get a consumption tax hike. He will do all of this while dealing with a party full of backbenchers terrified that they will lose their seats in the next election. In order to execute this pirouette successfully, Mr. Fukuda has quickly assembled a project team on eliminating waste, headed by Sonoda Hiroyuki, to " review [spending] thoroughly with an eye to reducing waste to zero." According to Shukan Bunjun, the project team is staffed with abrasive reformist Diet members like Kono Taro who are bound to use the project team to antagonize bureaucrats and zoku giin alike as they review spending in four areas (public works, social security, energy and agriculture, and culture and technology) in search of savings. (An additional working group will focus on spending in another twelve ministries and agencies, including the ministries of foreign affairs and defense.) I wish Mr. Kono and company success in their endeavor, but I cannot help but wonder whether this project team is too little, too late.

It sounds like a recipe for catastrophic defeat, especially when discontent over North Korea is thrown into the mix. It is becoming less and less likely that Mr. Fukuda will survive the year. Moreover, by introducing the consumption tax question, Mr. Fukuda is poisoning the well for the post-Fukuda era, making it difficult for tax-hiker Yosano Kaoru to win election as his replacement.

Mr. Fukuda has not only triggered a fierce debate within the LDP; he has also given encouragement to the DPJ, which is desperately in need of LDP mistakes (just as the LDP is in desperate need of DPJ mistakes — I leave it to you to determine which needs the other's mistakes more). Ozawa Ichiro jumped on the prime minister's remarks, arguing along lines similar to Mr. Nakagawa's that wasteful spending must be eliminated first before having a debate about tax reform.

No taxation without representation

Asahi published a poll today addressing the consumption tax issue, and found that 72% of respondents want it to be a point of contention in the Upper House election.

This, remember, is the issue that Mr. Abe insisted, early in his cabinet, would not be discussed until autumn 2007, safely after the Upper House elections (safely given the history of consumption tax hikes and LDP election returns — 1989 in particular comes to mind).

The Japanese people are right to demand that the government, when facing the voters, actually discuss a policy that it intends to go ahead and consider anyway once the voters are safely out of the way.

What does it say about the government that it is afraid to put its policies before the people at election time? This tendency to be less than honest with voters especially at election time (due, I think, to assumptions that the people will misunderstand or otherwise misinterpret a policy) is a profoundly undemocratic trait of democratic governments around the world — it is hardly unique to Japan. In some way I think the Bush administration's low opinion of the American people led the administration to hype the WMD angle, instead of pushing the regime change/democratization argument to the front and taking the risk that the American people might be skeptical about an invasion launched primarily for democratization. On a less catastrophic note, this tendency also sparked last year's riots in Hungary.

But the universality of the tendency of democratic governments to mask their policies because they don't trust their peoples does not excuse the Abe Cabinet's pushing this issue back. If the cabinet thinks that raising the consumption tax rate is right, then it should have to explain its reasoning to the people. The Asahi poll suggests, in fact, that the public's opposition to a consumption tax rise may not be nearly as implacable as the government fears. It found 40% of respondents think it necessary, while 51% find it unnecessary. That's certainly not an impossible margin to overcome. Imagine if the government had decided to raise this issue itself earlier in the year — instead of spending an inordinate amount of time on the vanishing constitution issue, for example — and committed significant political capital to explaining why it's necessary (with Yomiuri following right along, of course). Instead of being a political liability, the tax issue could have been an asset, or at least an example of the government's taking its responsibilities seriously.

Just another example of how the Japanese people deserve better — and why the Abe Cabinet and the governing coalition deserve to be dealt a major defeat by the people.

Is the government trying to lose the election?

Facing criticism about his government's decision to postpone discussion about the consumption tax to the autumn, Prime Minister Abe has decided that instead of doing his best George H.W. Bush impersonation — "read my lips" — he has decided to be ambivalent: "I will not say that we will not raise the consumption tax rate."

Meanwhile, Akagi Norihiko, the late Mr. Matsuoka's successor as MAFF minister, is running into his own political funds problem. Mr. Akagi claimed rent expenses for a campaign office in his father's home that his father said was never used, raising the obvious question as to what happened to the money claimed as office expenses. (Anyone wonder what he did to anger his father?) I, for one, am not surprised by this report. As I wrote when Akagi was appointed, when there were already indications of inappropriate ties with supporters, "No cabinet-eligible LDP politician has clean hands." The opposition is already demanding his resignation. And Mr. Abe is already making excuses for him.

This is the government that is going into the elections: a government that learns of lost pensions and then covers it up, is full of corrupt ministers protected by the prime minister until he begins to feel the pain politically, makes excuses for the US atomic bombings (mind you, this is less a problem for me than it is for the Japanese people), has backed away from further structural reform, and has dishonestly put off discussing sensitive policy matters until after the election.

If the opposition cannot secure a large majority in the Upper House facing a government with this record, we might as well resign ourselves to another fifty years of uninterrupted LDP governments.