EAI Issue Briefing No. MASI 2012-04 ssue riefing DPJ’s Broken Promise and the End of I the Anti-Koizumi Era in Japan B August 30, 2012 Junghwan Lee The Democratic Party of Japan (hereafter DPJ) has with a doctrine for “more universal welfare without a ruled Japan since 2009 but is now at risk with Ozawa tax hike” under the leadership of Ozawa. The DPJ’s Ichiro’s departure from the DPJ only after three years. differentiation from Koizumi’s Liberal Democratic On July 2, 2012, Ozawa, former DPJ president and Party (hereafter LDP) was successful in the 2007 Up- influential figure in DPJ intraparty dynamics, an- per House election and the 2009 Lower House election. nounced his departure from the DPJ with 49 fellow However, Kan Naoto and Noda have tried to deviate Diet members. He and his fellows have criticized the from an Ozawa-led manifesto of no tax hike since DPJ’s election manifesto and fundamental identity as 2010 because they found that a stable universal welfare being broken with Prime Minister Noda Yoshihiko’s system demands sound fiscal conditions and that a effort to raise the consumption tax. A split of Ozawa’s consumption tax increase is the only way of relieving group from the DPJ seemed inescapable when Ozawa the huge fiscal deficit problem. When the anti- and 56 fellows voted against a bill for a consumption Koizumi was exhausted as a core driving force of DPJ tax hike in the Lower House on June 26, 2012. Noda’s solidarity, the DPJ had become stuck in diverging poli- continued support for the consumption tax hike and cy orientations between fiscal soundness and no tax Ozawa’s reactive choice to break away have increased hike—and finally split. The divided DPJ symbolizes political uncertainty in Japan. Japan may undergo Diet the end of the anti-Koizumi era in Japanese politics. dissolution and a general election this fall due to the Koizumi’s structural reform has dominated the dis- divided DPJ. How can we understand the DPJ’s endog- course of Japanese politics in the last decade. However, enous collapse and what will be the impact of this po- the end of the anti-Koizumi era never means the rise litical upheaval on Japan’s political future? of new discourse of Japanese politics. Since the DPJ I argue that DPJ solidarity did not have a strong and the LDP lost their differences on policy orienta- foundation beyond an anti-Koizumi framework and As an Asia Security Initiative core institution, the East Asia Insti- that there was no intraparty consensus on some DPJ tute acknowledges the grant support from the MacArthur Foundation that made this research possible. leaders’ new policy agenda, which is not related to the anti-Koizumi framework. When Koizumi Junichiro The East Asia Institute 909 Sampoong B/D, Eulji-ro 158, Jung-gu, aggressively enhanced neoliberal structural reforms in Seoul 100-786, Republic of Korea Phone 82 2 2277 1683 Fax 82 2 2277 1697 the early 2000s, DPJ politicians were at first perplexed Email [email protected] Website www.eai.or.kr because Koizumi’s key agendas were well matched with The East Asia Institute takes no institutional position on policy their “small government” orientation. However, they issues and has no affiliation with the Korean government. All statements of fact and expressions of opinion contained in its soon found a solution for the anti-Koizumi framework publications are the sole responsibility of the author or authors. © 2012 by the East Asia Institute 1 EAI Issue Briefing tions, the stable two-party competition structure is expenditures, and the increase of welfare expenditures. dwindling in Japan. The more crucial point is that Jap- However, Japan already held notorious fame for its anese political leaders do not have new visions for Ja- huge government deficit. Japan’s ratio of national debt pan’s future political economic model beyond Koizu- to gross domestic product (GDP) was already over 100 mi’s structural reform and the anti-Koizumi frame- percent in the late 1990s and, according to the Interna- work’s emphasis on welfare. tional Monetary Fund (IMF), will reach 236 percent, twice larger than the United States, in 2012.1 As Fig- ure 1 shows, the Japanese government’s dependency Fiscal Deficit, Global Financial Crisis, and Consumption on bond issues has been over 30 percent since 1998. If Tax Hike Japan’s urgent state goal is to shrink the fiscal deficit, Japan should decrease governmental expenditures or Among DPJ politicians, the first proposer of a con- increase tax revenues. The curtailment of other gov- sumption tax hike was Kan. When he became prime ernmental expenditures could not match the natural minister after Hatoyama Yukio in June 2010, he sug- growth of the existing social security expenditures, let gested an agenda of a consumption tax increase from alone expenditures for other welfare programs. As the current 5 percent to 10 percent. Since the DPJ won Figure 2 shows, Japan has annually spent 30 trillion the 2007 and 2009 elections with a manifesto of “more yen more than its tax revenues since 1998. Therefore, universal welfare without a tax hike,” there was furious Kan’s suggestion of a tax increase is a logical conclu- reaction from many DPJ politicians. Ozawa, a founder sion from a standpoint of fiscal soundness. of the DPJ manifesto, was infuriated. Ozawa and his In addition, the Hatoyama administration faced fellows continued to argue that the Japanese govern- an economic recession originating from the global ment can find fiscal sources for increasing welfare financial crisis, because Japan’s economic recovery in through the curtailment of wasteful budgets. In addi- the mid-2000s was largely based on the increase of tion, the LDP, the long-lasting supporter of increasing exports. Japan’s dependency on trade for its GDP was the consumption tax, criticized Kan’s suggestion as a 20 percent in 2001 but reached 35 percent in 2008.2 defection from the DPJ’s initial doctrine. In the Upper The global financial crisis has diminished global de- House election held in July 2010, the issue of a con- mand for Japanese manufactures. In 2009, Japan had a sumption tax hike was a main reason of the DPJ’s de- problem of excessive supply. Although the recovery of feat. Ozawa fought with Kan in the DPJ presidential Japanese manufacturers’ global competitiveness had election in September 2010 for defending a manifesto been a positive result of neoliberal structural reforms of no tax hike. Although Kan won that election and during the Koizumi cabinet, their greater dependency could retain the prime minister post, he could not vig- on the global market is an unexpected consequence. orously enhance a consumption tax increase in late The Hatoyama cabinet should take the Keynesian 2010. remedy for overcoming this economic recession. As Kan’s untimely suggestion of a consumption tax Figure 2 shows, tax revenues were sharply decreased hike just one month before the election was politically from 51 trillion yen in 2008 to 44.3 trillion yen in 2009. nonsensical but based on his high awareness of Japan’s However, Japan’s governmental expenditures were severe fiscal deficit problem. Kan had served as finan- highly increased from 84.7 trillion yen in 2008 to 101 cial minister in the Hatoyama cabinet. He had respon- trillion yen in 2009. This means Japan’s fiscal condition sibility for simultaneously achieving three goals: fiscal was worsened. As Figure 1 shows, Japanese govern- soundness, the curtailment of wasteful governmental ment’s dependency on bond issues skyrocketed from © 2012 by the East Asia Institute 2 EAI Issue Briefing 39.2 percent in 2008 to 51.5 percent in 2009. <Figure 1> Changes in Government Bond Issues and Bond Dependency Ratio (Unit: trillion yen) (%) Construction Bonds 60.0 Special Deficit-Financial Bonds 51.5 Public Bond Dependency 47.9 45.8 50 42.1 42.9 50.0 40.3 41.8 41.8 36.9 35.4 36.6 39.2 15.0 40 33.7 6.1 40.0 31.0 7.6 27.6 6.7 30 30.0 13.2 9.1 8.7 7.0 23.5 11.1 7.8 17.0 9.1 6.4 6.0 20.0 20 36.9 36.7 38.2 10.7 28.7 9.9 24.3 25.8 26.8 26.2 10.0 21.9 20.9 23.5 21.1 10 16.9 19.3 11.0 8.5 0.0 0 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 (FY) Source: Ministry of Finance Japan, Debt Management Report 2011 <Figure 2> Changes in Tax Revenues, Total Expenditures, and Japanese Government Bond (JGB) Issues (Unit: trillion yen) 120 101.0 96.7 100 92.4 Total Expenditures 89.0 89.3 84.4 84.8 84.9 85.5 84.7 83.7 82.4 81.4 81.8 78.8 78.5 80 75.1 73.6 75.9 69.3 70.5 70.5 65.9 61.5 60.1 57.7 59.8 54.9 54.4 60 54.1 51.9 52.1 53.9 50.8 51.0 49.4 50.7 49.1 49.1 51.0 52.0 46.8 47.2 47.9 45.6 43.8 43.3 44.3 44.3 44.3 38.7 39.6 40.9 Tax Revenues 37.5 40 34.0 33.0 35.0 35.3 35.5 33.2 JGB Issues 30.0 31.3 27.5 (New Financial Resource Bonds) 25.4 21.2 21.7 16.2 16.5 18.5 20 9.4 9.5 7.2 6.6 7.3 6.7 0 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 (FY) Source: Ministry of Finance Japan, Debt Management Report 2011 Kan suggested a consumption tax hike in this better political environment for promoting a con- context.