On September 17 Prime Minister Kan Naoto, having fended off a challenge to his leadership of the ruling Democratic Party of Japan, announced a new cabinet lineup. Two months later, we look back to analyze the DPJ election and its outcome and assess some of the policy issues confronting the prime minister and his newly reshuffled cabinet, particularly on the domestic front.

Of course, the government also faces major challenges in the international arena. Relations with China have been tense ever since Japan’s detention of a Chinese fishing crew whose trawler had entered territorial waters around the Senkaku Islands. Similarly, Russian President Dmitry Medvedev’s November 1 visit to the island of Kunashiri in the disputed Northern Territories has complicated relations with Moscow. The conflict over relocation of US Marine Corps Futenma Air Station also awaits a timely resolution. But any detailed discussion of foreign policy will have to await another occasion. Here I will limit myself to a general observation regarding the aforementioned issues.

There is no doubt that China and Russia are flexing their muscles in Japan’s direction in part because they believe the Futenma Marine base issue has weakened Japan-US ties. Accordingly, the Japanese government needs to move quickly to solve the base issue and stabilize ties with Washington in order to steer relations with Beijing and Moscow in a more favorable direction.

Kan vs. Ozawa–Public Opinion Prevails
The election for DPJ president, held on September 14, came down to a duel between Prime Minister Kan and strongman Ozawa Ichirō. Although Kan had been elected party president just three months earlier, the June ballot was a special election held in the wake of Prime Minister Hatoyama Yukio’s unexpected resignation, with the purpose of filling the position until the end of Hatoyama’s original term of office.

Had everything gone smoothly in the subsequent months, Kan probably would have gone unchallenged in September, his reelection a given. But in the House of Councillors election held in July, the DPJ suffered a crushing defeat, winning only 44 of the 121 seats up for grabs and losing its upper house majority. One factor contributing to the party’s setback was the public backlash against Kan’s unexpected comment, made in the thick of the election campaign, that he would consider raising the consumption tax to 10%. The result was that, instead of rallying around Kan in the aftermath of the election, the DPJ broke ranks as an increasingly vocal element called on Kan to take responsibility for the party’s defeat. Ozawa Ichirō announced his candidacy, and the election was scheduled for September 14.

Ozawa had been obliged to resign as secretary general only the previous June, at the same time that Hatoyama stepped down, to take responsibility for a political funding scandal involving falsified financial reports. His decision to run notwithstanding may have been motivated by a sense of urgency. Since assuming the top spot, Kan had tended to hold Ozawa and his allies at arm’s length, while placing some of Ozawa’s critics in key posts. Ozawa may have concluded that, unless he took matters into his own hands, he was in danger of losing his influence within the party.

Despite the cloud hanging over him, Ozawa was initially given good odds, not only because of his powerful influence over many of the DPJ’s Diet members but also because of Kan’s plummeting public approval ratings. In August, according to the results of an Asahi Shimbun poll, 43% disapproved of the Kan cabinet’s performance, while only 37% approved. Nonetheless, the prime minister trounced Ozawa, 721 points to 491. [1. The DPJ uses a point system in its elections that gives more weight to the votes of Diet members than to regional politicians or rank-and-file members.–Ed.]

Two major reasons can be adduced for Kan’s victory. The first was the strength of the public backlash against Ozawa following the revelations of financial irregularities. The other was the nation’s revulsion against the prospect of another change in prime minister after so short a time. Since Prime Minister Koizumi Jun’ichirō stepped down in 2006, turnover in the top spot has brought a new face to the prime minister’s office each year. If Kan had lost the party election, it would have meant the second change in leadership in 2010 alone. In the same opinion poll cited above, respondents who wanted Kan to continue as prime minister outnumbered those who wanted a change by 56% to 27%. For these reasons, rank-and-file DPJ members and supporters cast their ballots overwhelmingly against Ozawa, giving Kan 249 points to Ozawa’s 51.

Moreover, despite early predictions giving Ozawa the advantage among DPJ Diet members, Kan won narrowly there as well, by a margin of 412 points to 400 (2 points per member). This outcome bespeaks the impact of Japan’s switch to a system of single-seat lower house constituencies, under which the popularity of a party leader, as the “face” of the party, can profoundly affect the outcome of elections around the nation. Cognizant of this, many Diet members appear to have bowed to public opinion and cast their votes for Kan. Kan also received 60 points to Ozawa’s 40 from local assembly members.

From the standpoint of policymaking, the weeks between the July upper house election and the September DPJ presidential election were essentially a vacuum. Had former Secretary General Ozawa taken over as party head and prime minister, his cabinet would doubtless have drawn up a number of policies from scratch, costing the nation several more precious months. By contrast, because Kan served as minister of state for national policy and minister of finance under Hatoyama, his reelection as DPJ president guarantees continuity in such DPJ policies as the New Growth Strategy and averts a time-consuming transition.

Social Security and Government Finances

On September 16 Kan tapped former Minister for Foreign Affairs Okada Katsuya as DPJ secretary general, and on September 17 he announced his new cabinet lineup. He retained Sengoku Yoshito as chief cabinet secretary, Noda Yoshihiko as finance minister, and Genba Kōichirō as minister of state for national policy. Former Minister of Transport Maehara Seiji was reassigned to fill the post of foreign minister vacated by Okada.

What, then, are the domestic policy issues facing the new cabinet? Two economic challenges overshadow all else.

The first is reducing Japan’s huge budget deficit. In the fiscal 2010 budget, ¥37.3 trillion of the ¥92.2 trillion in expenditures is covered by tax revenues; the rest is covered by ¥10.6 trillion in non-tax revenues and a full ¥44.3 trillion in government bonds. When receipts from government borrowing exceed those from taxes, something is seriously out of kilter. Kan’s first task will be to draw up the 2011 budget, and he will have his work cut out. The Kan cabinet has adopted a policy of limiting bond issues to the same amount as this year’s. It cannot hope for non-tax receipts at the 2010 level or for a substantial increase in tax revenues. Meanwhile, social-security-related expenditures are expected to swell by ¥1.3 trillion as the population continues to age.

Over the medium term, a tax hike appears unavoidable. When campaigning for reelection as DPJ president, Kan pledged to tackle social security reform and government finances in an integrated manner and to consider a complete overhaul of the tax system, including the consumption tax. On October 13 the DPJ took a step toward fulfilling this pledge with the creation of a panel on tax and social security reform, which has begun deliberating various changes to both systems, including an increase in the consumption tax.

It is to be hoped that some of the opposition will lend their support to these reforms. Inasmuch as the Liberal Democratic Party publicly pledged to raise the consumption tax to 10% during the July upper house election campaign, it should not be difficult for the DPJ and the LDP to come to terms on that issue. But thus far the LDP has given no indication that it is willing to work with the ruling party. Tax increases are always a tough sell politically, and pushing one through promises to be one of Kan’s biggest challenges.

Promoting Growth Through Free Trade

The other major task is reviving Japan’s moribund economy.

The New Growth Strategy is the name given to the economic revitalization plan that the government has been hammering out ever since Hatoyama took office. The Hatoyama cabinet adopted the basic policy on December 30, 2009, and the Kan cabinet approved a more detailed plan on June 18 this year, soon after its installation.

The New Growth Strategy aims to revitalize the Japanese economy by expanding infrastructure-related exports, lowering effective corporate tax rates, and boosting tourism, among other measures. Critics of the plan have charged that it is no more than a bundle of policies cooked up independently in various ministries and agencies. Still, if the policies laid out in the strategy are carried out in a prompt and conscientious fashion, they are sure to have a salutary effect on the economy.

The New Growth Strategy envisions the creation of an Asia-Pacific free trade area to help stimulate economic growth. An important step in this direction would be Japan’s participation in the Trans-Pacific Partnership agreement, and Kan indicated in his October policy speech before the Diet that his government was considering applying for membership. Japan’s manufacturing industries have much to gain from Japan’s membership in the TPP. At the same time, a precondition of membership will most likely be a commitment to eliminate all tariffs without exception. As a result, quite a few DPJ politicians have expressed opposition to Kan’s initiative on the grounds that it would threaten Japanese farmers. This will be an early test of Kan’s ability to implement the New Growth Strategy.

But in addition to implementing policies already in place, the Kan cabinet needs to get busy adopting new ones. To do so, it will need to meet three major challenges. The first is clarifying and refining the policymaking process. The second is preserving unity within the DPJ. And the third is getting legislation through the Diet now that the DPJ has lost its majority in the House of Councillors.

The Ruling Party’s Place in Policymaking

The government’s basic policymaking apparatus has been in a state of flux ever since the DPJ took over in September 2009. In its election manifesto, the DPJ promised to improve government by unifying the policymaking process under the cabinet (in contrast to the LDP’s parallel process, in which every policy was deliberated simultaneously by the cabinet and committees within the ruling party) and by strengthening the prime minister’s leadership role within the cabinet.

In keeping with this pledge, Hatoyama dissolved the DPJ’s Policy Research Committee when he took office as prime minister. The Hatoyama cabinet limited the avenues for party interference in the policymaking process and denied party politicians the opportunity to deliberate legislation or budgets in advance (as the LDP had routinely done). But the difficulty of sustaining such a policy became vividly apparent during the 2010 budget process. In the final stages of drafting, then DPJ Secretary General Ozawa Ichirō intervened on the contentious question of whether to keep or rescind a controversial gasoline surtax, and the tax remained in place.

With this lesson in mind, Kan revived the DPJ Policy Research Committee when he became prime minister and gave its subcommittees–each corresponding to a major government ministry or agency–the opportunity to make policy recommendations. In addition, he installed the chair of the Policy Research Committee as minister of state for national policy to create a mechanism for party input in the cabinet’s policymaking decisions. Having the chair of the ruling party’s Policy Research Committee double as minister for national policy ensures party involvement in policymaking without violating the pledge of a unified policymaking process under the cabinet. If the system takes hold, it should go a long way toward addressing a major flaw that marred the policymaking process during the long years of LDP rule, namely, the lack of transparency that resulted when the cabinet shared its authority with the ruling party.

Needed: Prime Ministerial Leadership

But if Kan has met the challenge of unitary policymaking under the cabinet, he has yet to solidify a system for strengthening the prime minister’s leadership role in this process.

In the run-up to the 2009 general election, the DPJ promised to strengthen the prime minister’s policymaking role by creating a new National Policy Bureau that would be responsible for drawing up key national policies and establishing budget priorities and guidelines. When Hatoyama formed his cabinet, he established the National Policy Unit pending the passage of legislation needed to create a full-fledged bureau. Contrary to expectations, though, the National Policy Unit played virtually no role in budget planning, and the only major national policy it was responsible for drafting was the New Growth Strategy. Meanwhile, action on legislation the cabinet submitted to the Diet to upgrade the National Policy Unit to bureau status, which would have legally defined the organ’s powers within the cabinet, was delayed in the wake of Hatoyama’s sudden decision to resign.

The role of this national policy organ has shifted several times since the Kan cabinet took over. In July, Kan indicated that he wanted it to function as an advisory organ to assist the prime minister on long-term policy questions. When Kan reshuffled his cabinet and appointed Genba Kōichirō minister of state for national policy, Genba announced that the National Policy Unit would function as originally envisioned. Then, in October, Kan indicated that the unit would take on both functions, that is, formulating major national policies and setting guidelines for the budget, as originally envisioned, as well as advising the prime minister on long-term policy. With this in mind, the unit was expanded in late October. But whether it can function effectively in accordance with this blueprint has yet to be seen.

The biggest unresolved issue surrounding the National Policy Unit is how to apportion responsibility between the minister of state for national policy and the chief cabinet secretary. Organizationally, the National Policy Unit is under the Cabinet Secretariat, which is headed by the chief cabinet secretary. Yet the minister of state for national policy is appointed independently, and his or her relationship with the chief cabinet secretary remains unclear.

Since the development of key national policies usually involves more than one ministry or agency, inter-agency liaison and coordination is needed to prevent and reconcile conflicts. This has traditionally been the role of the chief cabinet secretary. But if the National Policy Unit is in charge of drafting major policies, it follows that the minister of state for national policy is responsible for inter-agency coordination and reconciliation as part of that process. As long as the division of labor between the two remains vague, and the center of the policymaking process is unclear, the prime minister will find it difficult to exercise strong political leadership in national policy.

Maintaining Unity, Averting Gridlock

The second major challenge confronting Kan as he tackles domestic policy is that of holding his party together. Although the public indicated an overwhelming preference for Kan at the time of the DPJ election, Ozawa was still able to line up support from 200 DPJ Diet members–close to half. Depending on the circumstances, these politicians could band together to block Kan’s initiatives and prevent him from governing effectively. In fact, more than 100 Diet members have already signaled their opposition to one of Kan’s major goals, Japan’s participation in the TPP, and most of the nay-sayers are Ozawa allies.

That said, Ozawa’s days as DPJ strongman may be numbered. Ozawa now faces mandatory indictment on charges of falsely reporting political funds under a decision by the Tokyo No. 5 Committee for the Inquest of Prosecution, released on October 4. The result of political reforms carried out in recent years has been to give the prime minister greater authority over the ruling party than ever before. It is important that Kan exercise that authority and consolidate leadership of his own party.

Kan’s third policymaking challenge will be finding a way of securing the support of the upper house for his legislative agenda. With only 106 seats in the House of Councillors, the DPJ falls far short of a majority (121) even if one adds in the 3 seats of its coalition partner, the People’s New Party. This means that Kan will need to bring such opposition parties as the LDP and the New Kōmeitō into the policy process and incorporate their opinions, since he will not be able to pass legislation without their cooperation. Thus far, Kan has signaled his intention to form alliances one bill at a time, working with the party or parties that are closest to the DPJ on any given issue.

Whether Kan can smooth the way for his legislative agenda in this manner is doubtful. When the government and the opposition are sharply at odds on certain issues, cooperation on other matters becomes difficult as well. In the current extraordinary session of the Diet, lawmakers have yet to deliberate any particularly contentious legislation. But in the regular session scheduled to begin early next year, the Kan cabinet will face fierce opposition from the LDP over extension of the child allowance, instituted under Hatoyama in accordance with the DPJ manifesto. Then the big challenge will be finding common ground with the opposition. At some point the Kan cabinet will probably face the necessity of expanding the ruling coalition.

But there is a further challenge Kan must face, and it is probably the most important of all–securing and maintaining the support of the public. For this reason, the prime minister must not only listen to the people and take account of their expectations when charting the nation’s course but also work tirelessly to persuade them of the importance of the policies he wishes to pursue. Kan will have to surmount all of these obstacles if he hopes to remain in office significantly longer than his predecessors did.

Translated from an original article in Japanese written for Japan Echo Web. [November 2010]