Revolt in Japan ruling party, but government keeps majority

TOKYO Mon Jul 2, 2012 6:08am EDT

Japan's ruling Democratic Party of Japan powerbroker Ichiro Ozawa attends a lower house plenary session at the parliament in Tokyo June 26, 2012. Japan's Prime Minister Yoshihiko Noda looks certain to win parliament's approval for his signature tax hike plan on Tuesday but risks deepening a rift in his party that, in an extreme case, could cost him his majority and lead to an early election. REUTERS/Toru Hanai

Japan's ruling Democratic Party of Japan powerbroker Ichiro Ozawa attends a lower house plenary session at the parliament in Tokyo June 26, 2012. Japan's Prime Minister Yoshihiko Noda looks certain to win parliament's approval for his signature tax hike plan on Tuesday but risks deepening a rift in his party that, in an extreme case, could cost him his majority and lead to an early election.

Credit: Reuters/Toru Hanai

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TOKYO (Reuters) - Japanese political heavyweight Ichiro Ozawa and dozens of other lawmakers quit the ruling party on Monday over a plan to increase the sales tax, but the government will retain its majority in the powerful lower house of parliament.

Ozawa has been described by some as the strategist who orchestrated the rise of the Democratic Party of Japan (DPJ) to power in 2009.

But the departure of him and his followers could put Prime Minister Yoshihiko Noda in a better position to consolidate control on the fractious party and cut deals with the opposition, whose help he needs to pass laws since they control the upper house, which can block bills.

"I'm sure Noda has the champagne on ice. He'll be happy to see the back of Ozawa," said Jeffrey Kingston, director of Asia studies at Temple University's Japan campus.

"Ozawa has a lot of baggage and has just been a headache for the party and Noda in particular."

Ozawa, a 70-year-old veteran whose backroom deals earned him the nickname "Shadow Shogun" in the past, and his backers had opposed the plan to double the sales tax to 10 percent in two stages over three years, saying it violated campaign pledges.

The tax rise proposal, aimed at curbing bulging public debt, was passed by parliament's lower house last week with the help of the opposition. But 57 Democrat lawmakers voted against it, with 15 others abstaining or absent.

Ozawa said 38 lower house members and 12 in the upper chamber - many rookies - would quit the DPJ, bringing down DPJ seats in the 480-member lower house to 251.

"While considering forming a new party, we want to return to the starting point of the change in government and create politics where people can have a choice," Ozawa told reporters, adding opposition to the tax hike and nuclear power policy in the wake of the Fukushima crisis would be two key issues.

Many people are also wary of raising the tax at a time when Japan's recovery from last year's triple blow of a big earthquake, tsunami and nuclear crisis is not yet assured.

But Noda, a former finance minister, has insisted it is vital to get Japan's fiscal house in order and find ways to fund the bulging social welfare costs of a fast-ageing population.

"This is not about giving priority to tax hikes, it is a reform needed to safeguard the livelihoods of the present and future generations," he told reporters.

Analysts said the way now looked clear for the upper house to approve the tax rise. "I think the (main opposition) Liberal Democratic Party (LDP) will cooperate in passing through the sales tax hike bills and other budget-related bills through parliament," said Koichi Haji, chief economist at NLI Research Institute. "This is a positive step forward."

OZAWA'S CLOUT FADING

Japan has suffered a string of credit downgrades in the past two years largely because of its failure to make progress in tackling its debt, already twice its annual economic output and the worst among advanced industrialized countries.

So the tax plan's approval in the lower house marks a milestone for a nation long trapped in a cycle of revolving-door governments and policy gridlock.

Ozawa's defection could well make it easier for Noda to cooperate with the LDP and its one-time partner, the New Komeito party, in getting the legislation through the upper house.

"We can keep the main scenario that tax and social security reform bills will be cleared at the upper house as well," said Kyohei Morita, chief economist at Barclays Securities Japan.

Ozawa has long been a paradox.

Fans have seen him as a reformer for advocating a bigger global role for Japan and the reduction of bureaucrats' control over policies. Critics paint him as an old-style schemer.

Ozawa was a rising star in the LDP before he bolted in 1993, setting off a chain reaction that briefly ousted the conservative party. He then devoted the next two decades to creating a viable alternative.

But he has suffered setbacks recently, including being forced to resign as DPJ leader over a funding scandal before its historic victory in 2009. He lost a party leadership race in 2010 and last year, his favored candidate was defeated by Noda.

Many analysts see his influence now waning, one reason being a generational shift in political circles and voter distaste for the old style politics he came to symbolize.

Ozawa appears to hope his new party could join hands with other emerging groups in challenging the Democrats and the LDP in an election that could come as early as this year, but many potential allies - and voters - are cool.

"Ozawa knows what people want to hear ... (but) it's a popular message by an unpopular man," said Kingston at Temple University.

(Additional reporting by Leika Kihara, Kaori Kaneko, Linda Sieg and Kiyoshi Takenaka; Writing by Linda Sieg; Editing by Raju Gopalakrishnan)

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