TOKYO (Reuters) - Japanese ruling party candidates lost two weekend local elections, boding ill for embattled Prime Minister Naoto Kan as he struggles to enact budget bills and press ahead with tax reforms to rein in a huge public debt.
Below are scenarios for how Kan, who faces a divided parliament and a fractious ruling party, will fare and the implications for policies.
SMALL PARTIES HELP OUT - WITH OR WITHOUT PM KAN
To pass bills needed to implement a $1 trillion budget for the year from April, Kan must either cobble together a simple majority in the upper house with opposition help or build a two-thirds majority in the lower house — also with opposition votes — to override the upper chamber.
But the No.2 opposition party, the New Komeito, until recently seen as Kan’s best bet for help in the upper house, said last week it could not agree to laws for tax changes or to issue deficit-covering bonds, used to fund non-infrastructure spending.
That means Kan may have to bargain with a tiny former coalition partner, the Social Democratic Party (SDP), which wants changes in some key components of the budget bills.
The party opposes a cut in corporate taxes that firms say is vital to boost global competitiveness, and is against a rise in the sales tax that Kan now argues is needed to fund bulging social welfare costs in an aging society as well as curb debt.
A string of nationwide local elections set for April 10 and April 24, however, means opposition parties are likely to opt for confrontation at least until the polls are over. And if, as seems likely, Kan’s Democratic Party of Japan (DPJ) is thrashed at the local polls, incentives to cooperate will be minimal.
Kan probably hopes to hang tough and bet that public opinion will turn against an obstructive opposition, forcing them to compromise. But opposition parties may insist on him stepping down in return for support on budget-related bills.
The government can draw on tax and non-tax revenues as well as planned construction bond issuance to keep the government running until around early summer. But without a deal, policy paralysis will drag on and Kan’s efforts to get opposition parties to talk about tax and pension reforms needed to curb a public debt now twice the $5 trillion economy will stagnate.
Foreign Minister Seiji Maehara, 48, is most often cited as a possible successor to Kan, already Japan’s fifth premier since 2006. The DPJ leader is known as a security hawk who favors tight ties with the United States and advocates joining the U.S.-led TransPacific Partnership free trade initiative.
Any new prime minister would face intense pressure from the opposition and media to call a lower house election to try to win a mandate, since they would be Japan’s third leader since the 2009 election that swept the DPJ to power for the first time.
Analysts say, however, that chances of a snap election are less than 50 percent given the grim outlook for the DPJ.
With voters appearing fed up with both the DPJ and the main opposition Liberal Democratic Party (LDP), the outcome of any poll is hard to predict. Even if the LDP and its former coalition ally, the New Komeito, managed to win a lower house majority, they would still not control the upper house on their own so parliament would remain divided and policy implementation tough.
Also possible is that neither side wins a majority. A tug-of-war for support from small group such as the Your Party, which opposes an early sales tax hike and wants aggressive central bank monetary easing, would ensue, further complicating policymaking. No upper house election is scheduled until 2013.
Analysts say Kan would hardly want to risk an election in which his party would lose heavily, so this scenario seems unlikely. Still, stalemate might in the end make a snap poll his only option. Unless Kan has magically repaired his sagging ratings before the vote, an LDP-New Komeito coalition might return to power, but again without control of the upper house.
Speculation that a large number of DPJ lawmakers might leave the party if powerbroker Ichiro Ozawa is booted out over his indictment in a funding scandal has receded in the face of Ozawa’s waning clout, although veteran analysts say ruling out surprise moves by Ozawa entirely can be risky.
Local politicians have set up regional parties to woo votes from a disaffected public but doubts run deep as to whether they could parlay popularity into change at the national level.
“Political realignment requires energy and I don’t think politicians have that sort of energy now,” said Katsuhiko Nakamura, executive director at think tank Asian Forum Japan.
Editing by Miral Fahmy