The DPFP and Ishin with respectively 28 and 38 seats in the Japanese Parliament hold the cards for making either the previous ruling coalition led by Prime Minister Shigeru Ishiba or the Opposition led by Mr Yoshihiko Noda as the next PM.
Tokyo: The Japanese House of Representatives (Lower House) Parliamentary election on 27 October 2024 resulted in two smaller political parties becoming king-makers in the new Parliament (The Diet) as the ruling Liberal Democratic Party (LDP) and its partner Komeito lost majority in the 465-member House of Representatives. The Democratic Party for the People (DPFP) and Japan Innovation Party (Ishin) with respectively 28 and 38 seats in the Japanese Parliament hold the cards for making either the previous ruling coalition led by Prime Minister Shigeru Ishiba or the Opposition led by Mr Yoshihiko Noda as the next PM.
The two smaller parties could make either of them PM as the difference in number of seats is not large between the two sides. Such a scenario has rarely happened in Japan and signals a period of instability or a maturing of Japanese democracy or even a mix of the two perspectives. What is refreshing is that perhaps the era of business-as-usual is over.
DPFP President Mr Tamaki opined that joining with Mr Noda and his Constitutional Democratic Party of Japan (CDPJ) might weaken national security—thereby signalling the likely plan of DPFP to provide policy-based support to PM Shigeru Ishiba from outside the government, at present. There is speculation that DPFP may formally join the ruling coalition at some point in the future. DPFP is seeking to monetize its priorities in the supplementary budget for this fiscal year and the fiscal 2025 annual budget.
PM Ishiba has long been in the political wilderness especially in the era of the late PM Shinzo Abe, but commands a significantly large support base. However, the haste with which he called a general election (reportedly on the advice of LDP Secretary General Hiroshi Moriyama) before dealing with or even explaining a funds scandal that has plagued the LDP, caused much confusion. While no government funds were involved, the manner in which funds were raised and accounted for (or not) in the financial statements of Party factions (essentially policy research and training groups) created a great deal of consternation in the Japanese public leading to dramatic loss of the ruling coalition’s seats.
Leading lights of DPFP, Party President Yuichiro Tamaki and Parliament Affairs Chief Motohisa Furukawa (a batch-mate of mine at Columbia University), are alumni of Japan’s Ministry of Finance and the University of Tokyo and they have picked up the financial concerns of especially younger Japanese including the need to increase post-tax income and reducing the monthly social insurance premiums that all residents in Japan have to pay. These are important issues especially for younger voters because they rarely use healthcare but see the rising sums being allocated from the national budget to healthcare and pensions. It is said that a certain percentage of the elderly spend much of their daytime going from hospital to hospital and doctor to doctor. Many younger voters have expressed doubts whether some of the elderly, who as Japanese live among the longest in the world, are actually ill or are indeed spending time with vague symptoms in hospitals as they have little else to do! No significant attempt has been made to control healthcare and other elderly care costs by enhancing efficiency without sacrificing quality.
Other issues that parties like DPFP and some in Ishin and CDPJ raised include household financial support like gas/utility subsidies, reduction of the consumption tax to 5%, income tax rate cut, enhancement of income tax-free limits, and promotion of safe nuclear energy usage. On the LDP’s funds scandal, DPFP advocates full documented disclosure of uses and sources of funds. The party also insists on the revision of the Political Funds Control Law. By its good election results quadrupling its seats in Parliament, DPFP bolstered its support from the private-sector industrial unions affiliated with the Japanese Trade Union Confederation (Rengo), a power base of the party.
Ishin, as well, is likely to offer outside support to PM Ishiba in exchange for financial support to Expo 2025 in Osaka, the area being the foundation of its political power. Naturally, multiple other issues such as free education and enhancing defence spending will also be on the table since both DPFP and Ishin know that PM Ishiba will not last long without their support.
DEBT VERSUS EQUITY AND CONTRACTING ISSUES
The rise of Japan from the ashes of World War II astonished the world and gave rise to worries about the dominance of the Japanese economy in the 1980s. However, following the bursting of the Japanese real estate and stock market bubble in December 1989, things have never been the same. The period since then has coincided with the demographic transition and actual decline of the Japanese population fuelled by many opting to remain unmarried or having few or no children.
A central factor in the sluggish economy appears to be the inability to go beyond the real estate collateral-based lending that Japanese banks engage in, once among the largest in the world but increasingly commonly consolidating or downsizing these days. Real estate, beyond the major cities such as Tokyo and Osaka, has been declining in value. During the Covid pandemic, Japan accelerated lending to small and medium businesses (SMEs). Once the crisis phase of Covid passed, a percentage of businesses reopened but footfalls and revenue did not reach pre-pandemic levels. The debt load resulted in thousands of business failures and closures. Particularly for SMEs, this is yet another reason to shift to an equity culture where interest payments don’t start immediately after taking a bank loan and before revenue and revenue growth materialize.
Examples of SMEs that can benefit from innovations in finance include dairy farmers in Awaji Island hard hit by rising feed prices following the Russian invasion of Ukraine; agricultural farms in Kagawa serving Japanese food security needs amidst an aging workforce & need for technological upgradation; and innovative automotive, aerospace and robotics sector manufacturing companies in Aichi. The next generation of legislators such as Yasutoshi Nishimura, Yuichiro Tamaki, Motohisa Furukawa and Takayuki Kobayashi should take the lead in innovations on finance including debt-equity swaps, government-guaranteed bonds, etc. This is equally applicable for capital-starved SMEs in India and other emerging economies.
The inability of Japanese financial institutions to shift to equity investments from solely debt has been a real drag on SMEs. It is particularly striking that Japanese financial entities are comfortable in their historical lending practices in innocence of the dramatic changes taking place in higher growth economies that have perfected the art and science of equity investments and related due diligence. Much of the tech industry in the US is driven by equity investments, especially from private capital or encouraged by government funds.
Contracting practices are yet another shortcoming—wherein only large companies can be directly contracted by government in Japan, in general, whereas in the US SMEs with competent managers and talented technical staff can get government contracts that strengthen their financials and make them attractive for private investments, ironically even from Japanese large companies. Several Indian-American companies have received significantly large investments from Japanese mega-corporations that are reluctant to do the same within Japan.
All of the above are urgent needs for change that only a profoundly different set of leaders can address. Mr Ishiba, with his focus on the neglected regions and sectors of Japan (he himself can be regarded as having experienced neglect from the dominant political system), is one leader who might well understand those harsh realities most acutely, and perhaps his new likely partner DPFP’s top brass may have similar insights.
Japan can ill afford complacency, instability, uncertainty or indeed business-as-usual. The election results, surprising as they seem at first glance, may indeed turn out to be a blessing in disguise.
Dr Sunil Chacko holds degrees in medicine (Kerala), public health (Harvard) and an MBA (Columbia). He was Assistant Director of Harvard University’s Intl. Commission on Health Research, served in the Executive Office of the World Bank Group, and has been a faculty member in the US, Canada, Japan and India.