Congressional Research Service: Report for Congress, 95-390 F March 15, 1995 -ti- Japan's New Era of Coalition Governance By Richard P. Cronin, Specialist in Asian Affairs Foreign Affairs and National Defense Division JAPAN'S NEW ERA OF COALITION GOVERNANCE: IMPLICATIONS FOR U.S. INTERESTS AND POLICY SUMMARY Recent Japanese political instability has complicated U.S.-Japan relations and posed new challenges to the achievement of important American economic, foreign policy and security objectives. Since July 1993 Japan has been governed by coalitions under three different prime ministers. The first coalition, under Prime Minister Morihiro Hosokawa, pushed through electoral and campaign finance reform legislation of potentially long-term significance, but failed to overcome political, bureaucratic and interest group resistance to its economic and administrative reform agenda. Its successor's have appeared to have progressively less power and will to carry out promised reforms or assume international leadership commensurate with Japan's global economic weight. A political stalemate that some view as a crisis of governance has made it more difficult than previously for the United States and Japan to cooperate to redress the bilateral trade imbalance, lower regional trade and investment barriers, and act collectively on shared regional security objectives such as containing North Korea's nuclear capabilities. The political imperatives of the current left-right coalition also have called into question Tokyo's willingness to continue to increase its financial support of U.S. forces in Japan and its determination to maintain Japanese military readiness. The inability to follow through on deregulation and administrative reform has been the area of greatest failure of recent governments. Despite widespread calls for deregulation and some limited steps in that direction, Japan's bureaucrats continue to administer over 11,000 regulations -- about twice as many as a decade ago -- with little immediate prospect of a significant reduction. Overall U.S.-Japan relations remain fundamentally sound, but U.S. policy increasingly appears based on declining expectations regarding the ability of the Japanese government to make hard decisions. Many analysts judge that Japan will not achieve political stability until two or three elections under the new electoral system, a process that could take up to a decade. Ongoing political uncertainty in Japan suggests two broad U.S. policy options. One approach would be to place more emphasis than recently on consolidating the overall U.S.-Japan relationship, recognizing that Japan's current era of coalition politics makes it impossible for Tokyo to accommodate U.S. objectives that lack a solid domestic consensus. This approach would shun confrontation on trade and other politically sensitive issues that could fuel public resentment of the United States or compromise other important American political and security goals. Another approach would be to downgrade attention to Japan while shifting the primary focus of U.S. policy to the rest of the Asia-Pacific region. Under this approach the United States would be free to pursue a hard line with Japan on trade issues while relying on pragmatic mutual interest considerations to underpin bilateral cooperation on international political and regional security issues. ---------- TABLE OF CONTENTS INTRODUCTION: JAPAN'S PROLONGED POLITICAL VACUUM 1 INTERPLAY BETWEEN DEMOCRACY AND BUREAUCRACY 4 IMPACT OF COALITION POLITICS 5 EXPECTATIONS RAISED BY POLITICAL CHANGE IN JAPAN 7 OUTCOMES TO DATE 8 COALITION POLITICS ERODES THE POWER OF THE PRIME MINISTER AND CABINET 8 EARLY FAILURE OF DEREGULATION 10 U.S. Stake and Interest 10 Status of Deregulation 11 Political Dynamics of Deregulation 12 Cross-Cutting Political and Bureaucratic Imperatives 13 Who Do the Bureaucrats Represent? 14 LIKELIHOOD OF CONTINUING POLITICAL INSTABILITY 15 IMPLICATIONS FOR U.S. INTERESTS 17 DIMINISHED EXPECTATIONS OF REDUCING THE U.S.-JAPAN TRADE DEFICIT 17 Effects of Continued Slow Economic Growth in Japan 19 LIMITS ON COOPERATION ON THE PROBLEM OF NORTH KOREA 20 BUDGETARY AND POLITICAL PRESSURES RAISE QUESTIONS ABOUT SUPPORT FOR U.S. FORCES BASED IN JAPAN 21 PROSPECTS AND U.S. POLICY IMPLICATIONS 22 THREE INDICATORS OF FUTURE CHANGE 22 Outcome of Deregulation Proposals 23 Timing of New Lower House Elections 24 Proposals for Strengthening the Office of the Prime Minister and Cabinet 24 U.S. POLICY IMPLICATIONS 25 __________ JAPAN'S NEW ERA OF COALITION GOVERNANCE: IMPLICATIONS FOR U.S. INTERESTS AND POLICY[1] l. The findings of this report are based in part on an extensive series of meetings and interviews with Japanese politicians, political staff and ministry officials during Nov. 1220, 1994, when the author participated in a bipartisan congressional staff delegation visit to Japan. The visit was supported by the Tokyo office of the Asia Foundation, a private, U.S. Government-funded grant making organization, with headquarters in San Francisco. INTRODUCTION: JAPAN'S PROLONGED POLITICAL VACUUM Recent Japanese political instability has complicated U.S.-Japan relations and posed new challenges to the achievement of important American trade, foreign policy and security objectives. Since July 1993 lower house elections, when the Liberal Democratic Party (LDP) lost its 38-year grip on power, Japan has been governed by coalitions under three different prime ministers. The first coalition, under Prime Minister Morihiro Hosokawa, pushed through electoral and campaign finance reform legislation of potentially long-term significance, but failed to overcome political, bureaucratic and interest group resistance to its economic and administrative reform agenda. Its successor's have appeared to have progressively less power and will to carry out promised economic reforms or assume international leadership commensurate with Japan's global economic weight.[2] 2. Craig Forman and Michael Williams, Japan's Premier Accused of Backsliding on Reforms as He Pushes Deregulation. Wall Street Journal, Jan. 10, 1995:A17. The LDP was brought down as a result of a series of political finance scandals and internal divisions over a popular electoral and campaign finance reform plan. A multi-party, non-LDP coalition that came to power after July 1993 elections succeeded in pushing through landmark political reform legislation, but then steadily lost support. The non-LDP coalition eventually gave way to the current three-party coalition consisting of the LDP, with more than 200 seats in the lower house, the Social Democratic Party of Japan (SDPJ), with 74 seats, and the center-right Sakigake ("Harbinger Party"), with 21 seats. [See box for current party structure (PLEASE CONTACT GATEWAY JAPAN FOR THIS BOX)] The government is headed by Prime Minister Tomiichi Murayama, Japan's first Socialist premier since the early post-World War II era, although the LDP claims the lion's share of Cabinet posts.[3] 3. After the end of the Cold War the former Japan Socialist Party changed its English name to the Social Democratic Party of Japan but kept its Japanese name. For convenience, many English language publications still refer to the SDPJ informally as the "Socialists." ---------- page 2 From the outset, the Murayama coalition labored under the burden of being labeled an unprincipled "marriage of convenience," since it combined two long standing ideological adversaries. Prime Minister Murayama initially enjoyed a favorable public opinion rating due to personal qualities that reminded many Japanese of a kindly uncle. After a few months his approval rating and that of the Cabinet began to fall, as his government seemed racked by three-way struggles over important domestic and foreign policy issues. By late 1994 a sharp split in the ranks of the Socialists over collaboration with the LDP underscored the inherent instability of the coalition. The devastating earthquake centered near Kobe city created additional severe pressures on Murayama government and may work to further undermine its credibility. The earthquake revealed major flaws in Japan's preparedness plans, underscored the limitations of a highly centralized and bureaucratic system of government, and found the political leadership slow to take decisive action. Not all problems in U.S.-Japan relations can be attributed to political disarray in Tokyo. The Clinton Administration has come under strong criticism from some quarters for an overemphasis on the trade and economic side of the relationship, and in particular for a dogged commitment to negotiating "results-oriented" trade agreements. In the view of critics here and in Japan, the Administration has made demands on Japan that, if conceded, would amount to "managed trade." The Japanese resisted these demands to the point of allowing an historic "failed" February summit between President Clinton and Prime Minister Hosokawa in February 1994.[4] 4. For background on issues in the trade policy debate and the Clinton Administration's strategy towards Japan, see A "Managed Trade Policy Toward Japan? CRS Report for Congress, No. 94-524 E, June 14, 1994 [by Wayne M. Morrison, Coordinator; William H. Cooper, and Dick K. Nanto]; and Japan-U.S. Trade Negotiations: Will the Deadlock be Broken? CRS Report for Congress, No. 94-724 F, Sept. 13, 1994 [by Raymond J. Ahearn]. Nonetheless, looking at the Japanese side of the equation, it seems clear that the leadership uncertainty in Tokyo has had a generally negative effect on the U.S.-Japan relations. Cabinet instability and the dynamics of coalition politics in Japan have raised questions about the ability of the two governments to cooperate to redress the bilateral trade imbalance, lower regional trade and investment barriers, and act collectively on shared regional security objectives such as containing North Korea's nuclear capabilities. The political imperatives of the current left-right coalition also have called into question Tokyo's willingness to continue to increase host-nation support of U.S. forces in Japan and its determination to maintain Japanese military readiness. While some have theorized that a weak Japanese government would be preferable to a strong one that was determined in its opposition to U.S. goals, Japan's recent political power vacuum generally has loomed larger as an adverse factor in U.S.-Japan relations than any specific bilateral differences. U.S. and __________ page 3 Japanese interests often clashed during the era of LDP dominance. From a U.S.-interest point of view, however, an important difference between then and now is that the LDP governments usually were better able to reach internal consensus on strategic bargains with the United States, and carry out these policies despite the objections of recalcitrant ministries or domestic critics. At present, the ability to make hard decisions -- either on domestic issues or on U.S.-Japan relations -- seems largely absent in Tokyo. Thus whatever criticisms may be made of recent U.S. policies, there is a broad consensus among U.S. and Japanese analysts that a series of weak coalition governments in Japan has made the job of resolving disputes and maintaining global partnership measurably more difficult. PARTY STRENGTH IN THE JAPANESE DIET As of Jan. 19, 1995 (PLEASE CONTACT GATEWAY JAPAN FOR THIS TABLE) Note: The Prime Minister is selected by the Lower House. The Shinshinto includes about a half-dozen former constituent parties of the previous anti-LDP coalition, including the Shinseito ("Renaissance Party"), the Japan New Party, and the Komeito ("Clean Government Party.") Source: Kyodo News Service. _________ page 4 INTERPLAY BETWEEN DEMOCRACY AND BUREAUCRACY Democratic politics in Japan is largely a phenomenon of the post-World War II era. Japan began to adopt parliamentary institutions in the late 19th century as part of its forced modernization, but a brief blossoming of western-style democracy in the 1920s gave way to militarism in the 1930s and 1940s. Japan's modern democratic institutions have been grafted onto a framework of a strong and highly centralized civil service bureaucracy.[5] Perhaps even more than in European parliamentary systems, Japan's elected leaders rely on civil servants to formulate policy recommendations, draft legislation and operate an extensive system of regulation and information-gathering that reaches from Tokyo down to the prefectures and municipalities. When most Japanese think of the government, they are likely to think first of the non-elected "bureaucrats,"[6] and secondarily of the elected politicians. 5. The creation in 1885 of a modernized civil service employing the country's educated elite was one of the most important reforms that followed from the "Meiji Restoration" of 1868, an historical turning point. Tokyo University, Japan's premier institution of higher learning, was founded in 1887 primarily to train civil servants. A degree from its School of Law remains the ticket to the higher ranks of the civil service, politics and industry. Edwin O. Reischauer, Japan: The Story of A Nation. New York: Alfred A Knopf, 1970: 136, 140. 6. Frequent reference in this report to civil servants as "bureaucrats" follows the common practice of the Japanese press and of political analysts treating Japan. Although contemporary references to the bureaucrats in the Japanese media are often negative in tone, the word itself does not have the same pejorative connotations that it has in the United States. It simply stands for the large class of non-elected officials who have more authority and considerably more prestige than their American counterparts. Unlike the executive branch of the United States Government, which has thousands of political appointees occupying senior policy positions in every department and agency, Japanese ministries and agencies are staffed by career bureaucrats up through the rank of vice-minister, with only the minister coming from the political world. The Prime Minister's office and the Cabinet Secretariat have only a handful of officials that serve them exclusively, and rely heavily on civil servants sent on deputation from relevant ministries. In Japan, as in the case of most countries with parliamentary systems, there is not a sharp, U.S.-style separation of the executive and legislative branches of government. The Prime Minister and Cabinet are also Members of Parliament, and they preside over ministries composed of career civil servants. The Diet, or parliament, has nothing like the independent power of the U.S. Congress to conduct oversight, determine budget and appropriation levels, or develop legislation, nor its breadth and depth of independent sources of information and analysis. Legislation is drafted by relevant ministries under general authority and direction of the Prime Minister and Cabinet, but the __________ page 5 elected leadership depends heavily on the advice of the ministries.[7] Once bills are accepted by the Cabinet, they generally receive a straight up or down vote in the Diet, and are not subject to extensive amendments. Except for minor measures that are the equivalent of private bills in the U.S. Congress, individual members of the Diet cannot initiate legislation. 7. Sometimes this deference can be politically costly. In the case of an unpopular 1987 consumption tax levy, the Finance Ministry forced a measure on the LDP government that subsequently cost it its majority in the upper house. In Japan, elected politicians and bureaucrats thus coexist in a situation of mutual dependency. The Cabinet and Diet cannot function without extensive support from the ministries. The ministries, on the other hand, need the elected officials to give legal sanction to their proposals and must work with what ever government is in power to promote their agenda. Ultimately, their plans are constrained by what is politically marketable. In addition to this functional interdependency, there is also a significant degree of political overlap. Elected leaders often find it necessary to have a base of support within powerful ministries, such as the Ministries of Finance, Construction, or International Trade and Industry. Members with internationalist leanings often seek Ministry of Foreign Affairs support. At the same time, it is also important to ministries that the politicians selected as their head bring to the job a strong political base of support from important interest groups, and carry clout within the Cabinet. The Japanese people value their postwar democratic system and the check that the electoral process imposes on traditional authoritarian tendencies in their society. At the same time, due to the prevalence of political corruption and repeated financial scandals involving payoffs and illegal campaign contributions, they tend to view politics as an unsavory business. The voters hold elected leaders in relatively low esteem, often contrasting them unfavorably with the non-elected officials as regards personal character and ability.[8] 8. Among other results, a December 1994 public opinion survey by the Yomiuri Shimbun, a major national daily, found that for the eighth month in a row more than 40 percent of those responding said that they "do not support any of the parties." FBIS Daily Report, East Asia, Dec. 23, 1994 [FBIS-EAS-94-247]: l0-11. IMPACT OF COALITION POLITICS Recent political change in Japan has exacerbated certain long-standing weaknesses of Japanese democracy. The requirements of managing a disparate coalition have imposed new demands on the machinery of the office of the Prime Minister and the Cabinet that those institutions are unprepared to handle. As a result, Japan's political current leadership has less capability than before to formulate overall policies, reconcile competing ministry interests, and present a credible Program for public consideration. __________ page 6 Since final passage last year of major electoral and campaign financing reforms, Japan's political leaders have devoted most of their attention to positioning themselves for the next national elections under a revised lower house constituency system. The new system will replace 511 seats chosen in multiple-member constituencies with 300 chosen in single member constituencies and another 200 selected by proportional representation, based on the number of votes garnered by each party.[9] The complexity of the changes, including campaign financing provisions, makes it difficult for politicians and analysts alike to forecast the impact of the reforms. Generally, however, the new system is thought to favor larger parties. Apart from the effects of the new constituency system and the introduction of proportional representation, the system for distributing some $300 million in government matching funds reportedly is skewed towards the larger parties. As a consequence, smaller parties have sought to coalesce into larger units to seek to insure their survival.[10] 9. The voters will actually cast two ballots: one for the constituency candidate and one expressing a party preference. 10. Hidenka Kato, Reform Passage Will Sharpen Party Lines. Nikkei Weekly, Aug. 15, 1994: 1,4; Hidenka Kato, Opposition Unifies to Set Stage for 2-party system, Nikkei Weekly, Oct. 3, 1994: 1, 19; Ichiro Uchida, Politics in Japan: Change? Paralysis? The Truth May Be in Between. Asia Foundation, Center for Asian Pacific Affairs, CAPA Report no. 20, January 1995. The new system presents especially acute problems for the Socialists, who already lost nearly half of their lower house strength in the July 1993 election. The left-wing of the party attached to Prime Minister Murayama is thought by analysts to want to remain in the coalition and postpone elections for as long as possible, thus giving the party more time to decide how to position itself for the eventual poll. This strategy also suits the LDP, which wants more time to build up its own strength. The SDPJ's right wing is more eager to reposition the party by forming a "third force" of Socialists and other "progressive" politicians, or even a renewed alliance with the anti-LDP Shinshinto coalition. Under law the elections must be held by mid-1997, but they could well take place this year due to the split in the ranks of the Socialists, and other factors. In parliamentary systems like Japan's, the government usually either schedules elections at what it calculates as the moment of maximum advantage, or has elections forced on it by the loss of a governing majority through defections or defeat on a key vote. Since late 1994, the conventional wisdom has been that the Murayama coalition is likely to collapse soon after passage of the FY1995 budget (fiscal year begins April 1), leading to lower house elections under the new system. __________ page 7 EXPECTATIONS RAISED BY POLITICAL CHANGE IN JAPAN [11] 11. For background on the collapse of the last LDP government see Japan's Political Crisis of June 1993: Implications for Congress and U.S.-Japan Relations. CRS Report for Congress, No. 93-607 F, June 24, 1993. 6 pages. [by Richard P. Cronin.] Many in the United States and in Japan had hoped that the collapse of LDP rule would be followed by domestic reforms that would open up the Japanese economy and by foreign policy changes favoring a more active international role. Major electoral shifts are rarely unmixed in effect, however, and many analysts in both countries correctly forecast that the fall of the LDP would usher in a period of political instability. Nonetheless, many American analysts judged that on balance, political change in Japan would benefit U.S. interests. The multiparty coalition that took power after the July 1993 elections constituted a disparate group, but the general outlook of the principal coalition figures favored economic liberalization at home and a more ambitious leadership role for Japan in the international arena. The coalition was led by the young (for a Japanese leader), urbane and aristocratic Prime Minister, Morihiro Hosokawa, leader of the Japan New Party, and Ichiro Ozawa, the co-leader of the Shinseito ("Renaissance Party"). Hosokawa had resigned from the LDP a year earlier in protest over financial scandals and the ruling party's opposition to electoral reforms. His speeches stressed the need for economic deregulation and administrative reform. Ozawa -- behind-the-scenes strategist of the non-LDP forces -- was a vocal advocate of opening up the Japanese economy and making Japan a more "normal" country internationally, free of the restraints of its post-World War II pacifism.[12] 12. During the 1990 Iraq war Ozawa braved a storm of public criticism to press unsuccessfully for sending Japanese troops to support Operation Desert Storm. His book, Blueprint for Building a New Japan, published in mid-1993, sold 500,000 copies in the first three months. Jocelyn Ford, Ozawa's Best-Seller Takes Nation by Storm. Japan Times Weekly International Edition, Sept. 6-12, 1993. In addition to bringing reform-minded leaders to power, the fall of the LDP government had other consequences that initially fueled reformist optimism. In effect, the end of LDP dominance gravely weakened one component of the "iron triangle" of LDP politicians, bureaucrats and big business that was long seen as the essence of "Japan, Inc." Many assumed that this development would facilitate a budding movement towards internal economic and administrative deregulation and help to reduce an array of formal and informal barriers to imports and foreign investment. Political change also appeared to strengthen an existing trend towards shedding constraints that had kept Japan a one-dimensional power. In June 1992, the government headed by Kiichi Miyazawa, the last LDP prime minister, pushed a landmark UN Peace Cooperation Bill through the Diet that eventually allowed Japan to send military engineers and police to Cambodia and __________ page 8 Mozambique. The new policy, largely a reaction to Japan's loss of international credibility during the Gulf War, enjoyed strong support from Ozawa and other breakaway LDP leaders. Both the Hosokawa coalition and its short-lived successor under Prime Minister Tsutomo Hata also made clear Japan's desire to become a member of the UN Security Council. OUTCOMES TO DATE To date, political change in Japan has not led to broader domestic reforms or a larger Japanese international role. The structure of Japanese politics has been altered, but not the basic alignment of forces and interest groups that have long dominated policy-making in Tokyo. Currently all of the parties, and most Diet Members, are scrambling to position themselves for impending elections under the new system. In the process, action on pressing national issues generally has taken a back seat to political maneuvering. With the exception of late 1994 measures to cut income taxes and boost infrastructure spending,[13] each of Prime Minister Hosokawa's successors has seemed to have progressively less power and will to give domestic policy direction, while Japan also has appeared increasingly deadlocked internally over important foreign and security issues. The current ruling LDP-SDPJ-Sakigake government has continued to push for deregulation, but its internal cohesion depends on not adopting policies that upset the coalition's delicate political balance. 13. Due to extraordinary bookkeeping steps by the Ministry of Finance to minimize the need to resort to deficit bonds, the real degree of stimulus resulting from a series of income tax cuts is difficult to judge. Tax cuts are being partially offset by spending cuts and temporary expedients such as borrowing from various special accounts and postponing bond redemptions. "Ministry on Record High 'Invisible' Debts," Kyodo News Service in English, Jan. 20, 1995, transcribed in FBIS Daily Report, East Asia, Jan. 25, 1995 [FBIS-EAS-95-016]: 10. COALITION POLITICS ERODES THE POWER OF THE PRIME MINISTER AND CABINET The political stalemate has exacerbated long standing institutional weaknesses of the office of the Prime Minister and the Cabinet vis-a-vis the permanent bureaucracy. Until the onset of coalition rule these weaknesses were masked to a certain extent by some unique attributes of LDP rule. LDP politicians, operating in zoku ("policy tribes") functioned as power brokers between the non-elected officials in the ministries, business and other interest groups, and the electorate. They formulated broader policy within the LDP Policy Research Committee and other councils, rather than in the Cabinet. __________ page 9 With the collapse of single party rule, the institutional weakness of the office of the Prime Minister and the Cabinet stood exposed for all to see. Day-to-day power has flowed more than ever to the non-elected officials, most notably to those of the traditionally dominant Ministry of Finance, which controls the budgets of the parliamentary bodies and the other ministries and agencies. To the extent that competing ministry positions must be reconciled at a central level, the power to carry out that task has devolved largely to a senior bureaucrat, Deputy Chief Cabinet Secretary, Nobuo Ishihara, who the Japanese press calls the "Shadow Premier."[14] 14. Ishihara has now served seven prime ministers, but his power is said to have increased considerably following the formation of the first coalition government in July 1993. According to an in-depth article on Ishihara, the Deputy Cabinet Secretary said that "During the era of one-party rule by the LDP, LDP subdivisions played a major role in adjusting the interests of each ministry. However, since the inauguration of the Hosokawa government, such adjustments have been made rather by the cabinet secretariat [i.e., by himself]." Unattributed article, "Deputy Chief Cabinet Secretary Nobuo Ishihara, the 'Shadow Prime Minister,' in Tokyo Shimbun, July 22, 1994, morning ed., p.10, 15, translated in Foreign Broadcast Information Service (FBIS) Daily Report, East Asia Aug. 9, 1994 [FBIS-EAS-94-153]: 13. The formation of the Murayama government brought a number of experienced LDP politicians back into prominent cabinet positions, and led to a partial reactivation of the zoku, notably in support of agricultural interests.[15] The revival has been incomplete, however. To function effectively the zoku networks require expectation by both the bureaucrats and special interests that the politicians will retain office long enough to be reliable collaborators. 15. Following approval of the Uruguay Round GATT agreement, and in the face of overall budget cutbacks, agricultural interests succeeded in gaining Diet approval of a long-term $60 billion package of aid to rural areas to overcome the effects of a partial opening of the formerly closed rice market. The weakening of the elected officials power has not been an unmixed gain for the non-elected officials. Cabinet instability requires that the officials spend more time than ever providing information and guidance to a constantly shifting cast of political leaders. More critically, there is no one with the authority to resolve intra-ministerial turf battles or give overall direction on important national issues. Regardless of party or ideological affiliation, Japanese politicians acknowledge acute awareness and dissatisfaction with their dependance on the non-elected officials, and almost universally profess that their number one goal is to find ways to bolster their policymaking influence vis-a-vis the bureaucrats. It has become almost a matter of faith in the Japanese political and bureaucratic world that the new electoral system will tend over time to promote a coalescence of the current multiparty mix into two or two and one-half rival party aggregations, with more clear issue identification than at present, and stronger __________ page 10 incentives to wrest the dominance over policymaking from the ministry officials.[16] To date, however, pre-election trends lend little support for an issue-based realignment, since the political leadership remains preoccupied with seemingly opportunistic maneuvering to insure their personal political survival and that of their parties. 16. During a week of interviews in Japan in November 1994 politicians of every political leaning repeated this same prediction. EARLY FAILURE OF DEREGULATION The inability thus far to achieve significant deregulation has been the area of greatest failure of the reformers, and a major source of disappointment, both in the United States and in Japan.[17] Despite widespread calls for deregulation and some limited steps in that direction, Japan's bureaucrats continue to administer over 11,000 regulations -- about twice as many as a decade ago, covering more than 40% of Japan's economic activity.[18] In recent years some steps have been taken towards reducing the regulatory burden and increasing the transparency of administrative guidance, including a partial relaxation of restrictions on the establishment of large scale retail stores, but major business and consumer groups, and opposition members, argue that not nearly enough progress has been made.[19] 17. For a description of recent deregulation efforts and their relationship to U.S. trade concerns, see Dick K. Nanto, Deregulation as Market Opening in Japan. CRS Report for Congress, No. 95-224 E, Feb. 1, 1995. 6 pages. 18. Emily Thornton, Deregulation Dawdle. Far Eastern Economic Review, Sept. 29, 1994: 58-59; Nikkei Weekly, Nov. 21, 1994: 1, 23; Asahi Shimbun, Feb. 22, 1995, Morning Edition, p. 5, translated in FBIS Daily Report, East Asia, Feb. 27, 1995 [FBIS-EAS-95-038]: 5-6. 19. See William Dawkins, [Deregulation] Progress will be Painfully Slow, Financial Times Survey of Japanese Industry, Dec. 6, 1994, p. VI. U.S. Stake and Interest Japanese deregulation currently is the subject of a working group under the U.S.-Japan Economic Framework discussions and a matter of increasing concern on the part of Congress. Japan's regulatory environment is by no means the predominant factor in the large and long-standing U.S.-Japan trade deficit, but significant deregulation undoubtedly would lead to increased U.S. exports and reduced causes for trade friction.[20] Some recent estimates of the benefits of __________ page 11 Japanese deregulation for U.S. exports range from $10 to $20 billion annually, out of about $50 billion in increased global exports to Japan.[21] 20. Economists usually give pride of place to broader macroeconomic factors, such as Japan's high savings and investment rates, one the one hand, and large U.S. budget deficits and low savings rates, on the other, as the most important causes of the trade deficit. Apart from any argument about the causes of the deficit, however, it is likely that American administrations would still seek to lower formal and informal trade barriers even if overall trade were more in balance, due to the importance of the Japanese market to a range of economically and politically-sensitive U.S. trade sectors, including automobiles and auto parts, telecommunications and agriculture. 21. Deregulation as Market Opening in Japan. CRS Report for Congress, No. 95-224 E, Feb. 1, 1995 [by Dick K. Nanto], p. 6. Last year the Japanese government invited foreign governments and business groups to submit suggestions to a working group that has been preparing recommendations for a five-year deregulation plan, due to be released at the end of March 1995. The U.S. government offered a 231 point proposal, including suggestions for removing regulations governing agricultural products, automobiles and automobile parts, and construction materials, that create unreasonable barriers to imports, deregulating the telecommunications industry, opening up Japan's future "information highway" to foreign participation, increasing the transparency of regulatory actions and providing new mechanisms to appeal administrative decisions.[22] The American Chamber of Commerce in Japan and the European Union also have submitted deregulation suggestions. 22. Submission by the Government of the United States to the Government of Japan Regarding Deregulation and Administrative Reform in Japan, Nov. 15, 1994. 32 pages. On Feb. 28, 1995, 28 Republican Members of Congress, including members of the leadership, wrote to U.S. Trade Representative Mickey Kantor to stress the importance of deregulation both to Japan and to American exporters and workers. The letter characterized Japan's regulatory environment as a direct obstacle to imports and foreign investment, and urged Kantor "to insist on sweeping, substantive deregulation of the Japanese economy in your discussions with the Japanese government." The letter implicitly linked a favorable outcome of the deregulation process to the future of the U.S.-Japan alliance, which it saw as "vital for maintaining peace and security in Asia." The letter warned that the failure of deregulation and continued tension over the trade deficit "may have negative effects on other aspects of this critical bilateral relationship." Status of Deregulation As of March 1995 the Murayama government was pursuing two complementary deregulation initiatives. One would privatize, eliminate or consolidate a small fraction of Japan's 92 special government corporations that operate under the aegis of several major ministries. These quasi-government corporations include railway companies, Japan Tobacco, Inc., regional development corporations, the Japan National Oil Corporation and financial institutions of various kinds. They not only play a significant role in influencing economic resource allocations and regulating the economy, but also provide numerous berths for retiring senior civil servants. In addition, the Murayama administration also has pledged to reveal by the end of March 1995, __________ page 12 its aforementioned five-year package program to reduce regulations and decrease and make more transparent the informal "administrative guidance" that government ministries provide to businesses. In response to Prime Minister Murayama's request that a special multiministry panel consider the elimination, privatization, or restructuring of Japan's 92 special government corporations, the parent ministries initially did not name a single corporation for action. Prime Minister Murayama's plea that the ministries cooperate "because our administration's leadership is being questioned on the [deregulation] issue," largely went unheeded.[23] By early 1995 the Murayama government succeed in producing a modest draft plan to consolidate 14 of the special government corporations, privatize three and eliminate one, an outcome that prompted widespread scorn in the Japanese press.[24] 23. Hiroshi Nakamae, Government Corporations Backed. Nikkei Weekly, Nov. 28, 1994: 3. 24. Typical of recent comment, a leading daily, the Asahi Shimbun, editorialized that "It is now clear that reform has no beef." Japan Digest, Feb. 13, 1995: 1. Even that plan faltered due to dissention within the coalition, as a result of which the government failed to meet its self-imposed deadline of February 10 for completing the consolidation package. The list of mergers dropped to eleven when the most important part of the package -- a plan to merge three government financial institutions -- came under fire from the Ministry of Finance (MOF) officials, backed by the Finance Minister Masayoshi Takemura, leader of the Sakigake party. Press reports speculated that Takemura was seeking to shore up his support from the powerful MOF in a bid to succeed Prime Minister Murayama. As a consequence, the government has postponed a final decision on a key part of the plan until the summer, after passage of the FY1995 budget.[25] 25. Takemura Changes Stand on Administrative Reform, Asahi Shimbun, Feb. 14, 1995, morning edition, p. 2, translated in FBIS Daily Report, East Asia, Feb. 16, 1995 [FBIS-EAS-95-032]: 8-9; Barbara Wanner, Reform Agenda Cracks Coalition Unity. JEI Report, No. 6B, Feb. 17, 1995: 1-2. Political Dynamics of Deregulation Superficially, the deregulation battle in Japan bears some similarities to a contemporary debate in the United States. Critics of regulatory activities in both countries cite a heavy burden on the economy and on the freedom of private citizens. Generally, however, the adverse effects of regulatory actions in the United States tend to be the unintended consequence of efforts to promote other social objectives such as environmental protection, health and safety. While these same rationales often underpin regulation in Japan, regulations and administrative guidance by economic ministries tend to be aimed more consciously at maintaining stability by controlling competition, supporting __________ page 13 prices and deterring new market entry in established industries. Many regulations are legacies of the early postwar era, when Japan was struggling to rebuild its industries by fostering exports, discouraging imports and otherwise limiting foreign participation in the Japanese economy. Cross-Cutting Political and Bureaucratic Imperatives No one expected that deregulation would be easy to achieve, but few if any proposed policy changes in recent years have enjoyed as much broad support. At one time, the elaborate system of regulation and administrative guidance was seen as a boon to domestic industry and an important contributor to Japan's postwar "economic miracle." A significant part of the population clings strongly to an stable and predictable economic and social order, especially since Japan's prosperity has been broadly shared and acute poverty is relatively uncommon. More recently, however, many in Japan have become persuaded that overregulation is creating economic arteriosclerosis, and prompting a flight of investment capital abroad that jeopardizes future prosperity.[26] This view is shared not only by Japanese economists, business leaders and consumer advocates, but even by some officials in the economic ministries. Such sentiments greatly intensified after the collapse of Japan's late 1980's "economic bubble" and the onset of a multi-year recession. This perspective constituted a major theme of the reformist politicians who brought down the Miyazawa government in mid-1993. 26. Typical of current thinking, the Chairman of the Administrative Reform Promotion Committee of the Japan Federation of Economic Organizations (Keidanren) asserted in a January 1995 press interview that "unless we increase our competitiveness now by easing regulations, the vigor of the Japanese economy will fade." The business executive argued that Japan could not expect future wage growth due to international competitive pressures, and that only by reducing prices through deregulation and thorough restructuring could living standards be raised. Nihon Keizai Shimbun, Jan. 13, 1995. (Translated by the U.S. Embassy in Tokyo and circulated in a news summary.) Although the non-LDP coalition governments talked about the need for administrative reform and deregulation, they did not succeed in overcoming resistance of the main economic ministries and other interest group opposition. A highly touted regulatory reform commission established under Keidanren [Japan Federation of Economic Organizations] Chairman Gaishi Hiraiwa failed to come up with significant recommendations, reportedly due to the dominance on the working committees by bureaucrats detailed from the same ministries that oversee the regulations. The Cabinet lacked the personnel or expertise to make recommendations of its own. The jury is still out on the follow-on efforts of the Murayama government. In early March the Prime Minister stepped up pressure on the ministries to formulate a credible package of reforms, but current Japanese media analysis tends to be pessimistic in tone. __________ page 14 Who Do the Bureaucrats Represent? The officials opposed sweeping deregulation see themselves as the time-tested best judges of the national interest and legitimate defenders of specific industries and sectors, but they also are motivated partly by self-interest, since the power and privileges of officials are directly threatened by economic and administrative liberalization. While able, notoriously hard-working, and dedicated to their ministries, they have also generated criticism for maintaining mutually beneficial relationships with the industries that they oversee. These ties are facilitated by the system of amakudari ("descent from heaven") in which bureaucrats retire to senior positions in the businesses that they have been regulating. Those that reach the top of the bureaucratic ladder often gain a comfortable and lucrative second career, while the industries gain an insider pipeline to their overseers.[27] 27. In the financial sector, for instance, which has long been the object of U.S. market opening pressure, the Ministry of Finance (MOF) and the Bank of Japan (BOJ) control two rival "fiefdoms" in which their former senior officials together account for 51 of the chairmanships or presidencies of the Japan's 150 banking institutions, not to mention numerous second-echelon posts. Each ministry reportedly competes to expand its "occupied territories," the better to expand its influence and provide second careers for its retiring officials. Tokyo Economisuto, Nov. 29, 1994, p. 70-71, and 74-76, translated in FBIS Daily Report, East Asia, Dec. 23, 1994 [FBIS-EAS-94-27]: 13-16. Unlike the American "revolving door" system, where individual officials or military officers may position themselves for future employment as lobbyists or senior corporate officials, amakudari postings for retiring Japanese bureaucrats are arranged between their ministries and the receiving industry. As a result, the executives retain a sense of obligation to their ministry even after they have left it. (This point was called to the attention of the author by a knowledgeable Japanese official.) As in the United States, support for general goals like deregulation often erodes when it comes down to specifics. Modern Japan remains a more group-oriented society than the United States and other western countries. More than in the United States, consumers in Japan are conscious that they also are producers, and that their personal income gains over the past several decades could be threatened by moves to rationalize the distribution system, expose the services sector to more efficient foreign companies, or facilitate more foreign participation in the economy. The Japanese tend to place a high value on their stable social order, with all its inefficiencies. Especially in a period of recession, more traditionalist groups such as farmers, shopkeepers, small businesses, and unions look to their Diet-Members to intervene with the Ministries to protect their interests and shield them from the winds of economic change.[28] 28. Reportedly, the President of the Finance Ministry's influential Institute of Fiscal and Monetary Policy wrote a series of articles in late 1994 that warned that excessive deregulation risked destroying Japan's thousand-year old civilization and ushering in an era of crime and societal breakdown that he equated with American-style capitalism. James Sterngold, In Japan, the Clamor for Change Runs Headlong Into Old Groove. New York Times, Jan. 3, 1995: A1,A6. __________ page 15 Within various sectors of the economy, the strongest support for deregulation comes from large, technology-oriented industries that operate internationally. Although firms in advanced industries such as the electronics and telecommunications industries gained prominence through government nurturing and protectionism, they no longer feel as much need for protectionism. Many judge that excessive regulations hamper their ability to maintain global competitiveness and may provoke foreign retaliation. These industries are strongly represented in the Keidanren, which has been a vocal proponent of deregulation and the reduction of pervasive administrative guidance from the economic ministries. Other bodies critical of the government's inadequate deregulation efforts include the Japan Association of Corporate Executives (Keizai Doyukai), the Japan Chamber of Commerce and Industry, and the Japan Federation of Employers' Associations (Nikkeiren.) Counterpoised with these groups are more domestically oriented industries such as construction, sheet glass, paper, and agriculture, which tend to cling closely to regulation and protectionist practices. Some industries, such as financial services, appear divided between those who see their long-term viability as best insured by exposure to foreign competition, and those who wish to perpetuate their insulation from foreign competition. LIKELIHOOD OF CONTINUING POLITICAL INSTABILITY [29] 29. For background on the current coalition see Japan's Ongoing Political Instability: Implications for U.S. Interests. CRS Report for Congress, No. 94-550 F, July 8, 1994. 6 pages. [by Richard P. Cronin], and Japan's Politics and Government in Transition, CRS Issue Brief IB93100 [by Rinn-Sup Shinn]. Periodically updated. Currently, the Japanese political world is divided between two large constellations of disparate forces. They are led from behind-the-scenes, respectively, by former Prime Minister Noboru Takeshita of the LDP, and his ex-factional colleague, Ichiro Ozawa. The latter has been the driving force behind the non-LDP coalition, and is the architect of the opposition Shinshinto ("New Frontier Party,") launched with great fanfare on Dec. 10, 1994. Both Takeshita and Ozawa bear a burden of past financial scandals and accumulated political enemies that prevent them from personally assuming the mantle of the prime ministership, but each reportedly aspires to be an invisible "Shogun," ruling from behind-the-screen. Takeshita reportedly played a pivotal role in putting Murayama into the prime ministership, while Ozawa has put his new party under the nominal leadership of former Prime Minister Toshiki Kaifu.[30] 30. Robert Thompson, The Art of a Political Warrior. Financial Times, May 4, 1993: 30; Emiko Terazono, Ozawa: the Shogun Confined to Shadows. Financial Times, April 18, 1994: 3; Hidenori Itagaki, Rivalry of LDP's Kono, Hashimoto Intensifies. Tokyo Seikai Orai in Japanese, Nov. 94, pp. 10-15, translated in FBIS Daily Report, East Asia, Dec. 6, 1994 [FBIS-EAS-94-234]: 27-32; Ichiro Uchida, Politics in Japan: Change? Paralysis? The Truth May Be in Between. The Asia Foundation's Center for Asian Pacific Affairs, CAPA Report No. 20, Jan. 1995. __________ page 16 At the most simplistic level, Takeshita represents the now resurgent conservative-nationalist old guard of the LDP, while Ozawa champions political and economic reform at home, including deregulation and decentralization, and a more ambitious international role. Takeshita acknowledges the need for reform, but puts greater emphasis on maintaining the party's traditional small business and farmer support base. The LDP has also created friction in the coalition by resisting efforts by Murayama and the Socialists to apologize for Japan's past aggression against its Asian neighbors. Notwithstanding his identification with change, many Japanese regard Ozawa as an authoritarian personality and a reckless political gambler. Given the nature of the current alignment of forces, few analysts see an end to political instability until after two or three national elections under the new lower house electoral system. The conventional wisdom is that under the new redistricting and campaign financing reforms, each succeeding election will cause like minded surviving parties to move into closer association. Doubters, however, suggest the possibility of prolonged multiparty instability, such as in the Italian experience. The current coalition lineups offer little reassurance of an early end to instability. The LDP has some chance of gaining an outright majority on its own, but few political analysts are betting their reputations on such a decisive outcome at this juncture. The two smaller parties in the ruling coalition face a bleak future unless they can negotiate a seat sharing-formula with the LDP or successfully form a balance-tipping third party of "progressive forces," as is proposed by the right wing of the Socialists. Continued accommodation with the LDP may be difficult due to growing policy differences and personal rivalries. As with the ruling coalition, the inherent contradictions within the opposition Shinshinto coalition raise fundamental questions about its credibility and cohesiveness. Skeptics were not reassured by the selection of former Prime Minister Kaifu as the coalition leader, due to his past performance, and many see him only as a tool of Ozawa. As a result, the coalition has been struggling to maintain a solid front. Several public opinion surveys conducted since mid-December 1994, after the Shinshinto was launched, suggested the possibility of prolonged deadlock. A recent survey by the Asahi Shimbun, a major daily newspaper with a national readership, showed public support for the LDP at 39%, Shinshinto support at 16%, and the Socialists with 14%. Compared to previous months the LDP share was up, while the Shinshinto's had dropped and support for the Socialists was unchanged. Support for Prime Minister Murayama had dropped from 41% in December to 38% in the most recent poll, with an equal number saying they did not support him.[31] 31. Japan Digest, March 7, 1995: 2-3. __________ page 17 IMPLICATIONS FOR U.S. INTERESTS [32] 32. For an overview of a range of U.S. interests vis-a-vis Japan see "Japan-U.S. Relations: Issues for Congress in the 1990s" CRS Issue Brief IB94009 [Robert G. Sutter, Coordinator]. (Periodically updated.) While political change in Japan may eventually bring long term gains for American interests, the immediate consequences generally have been negative. U.S. officials and non-official analysts assert that the overall relationship remains fundamentally sound, a judgment that their Japanese counterparts do not dispute. During late 1994 and early 1995, Washington and Tokyo achieved a partial resolution of trade issues under the economic framework negotiations and cooperated closely on dealing with North Korea's nuclear program and other mutual concerns. Still, as evidenced by Prime Minister Murayama's exceptionally low-key summit meeting with President Clinton on Jan. 11, 1995, U.S. policy appears based primarily on declining expectations. Stability may not come easily or soon. The LDP could, as noted above, stage a comeback, but the position that it enjoyed in the past now appears to be a victim of the end of the Cold War and changing domestic circumstances. The division of the old LDP into two irreconcilable camps based on extreme personal animosities appears to be permanent.[33] At the same time, the non-LDP components of the political spectrum continue to be united more by their opposition to the LDP than by any shared positive vision. 33. Another, more unorthodox, way of looking at the recent past is that with the growing marginalization of the Socialists, the LDP -- whose factions were the functional equivalent of power based mini-parties," has actually expanded. From this perspective the non-LDP coalition can be viewed as a parallel LDP. Robert M. Orr, So Far, Deregulation All Talk, No Action. Nikkei Weekly, Jan. 9, 1995: 6. Until a political realignment is completed, the United States may continue to find it more difficult than in the past to engage the Japanese government on contentious policy issues. For its part, Japan may remain unable to reach internal political consensus on critical national issues, and may see a diminishment of its international political influence, whether or not it regains a growth path and sustains its technological prowess. DIMINISHED EXPECTATIONS OF REDUCING THE U.S.-JAPAN TRADE DEFICIT [34] 34. See Japanese-U.S. Trade Relations: Cooperation or Confrontation? CRS Issue Brief IB92057 [by William H. Cooper]. (Updated periodically) Although many American and Japanese critics have faulted the Clinton Administration's strategy in the economic framework talks that began in the fall of 1993, few would dispute that weak Japanese political leadership contributed to a prolonged impasse in the negotiations. From the outset, Japan's stance was __________ page 18 dictated by economic ministry officials who adopted an adamant position against U.S. proposals for numerical targets. They successfully built up public support for their position by portraying the American position as a demand for "managed trade." Eleventh hour efforts to break the impasse before Prime Minister Hosokawa's February 1994 summit with President Clinton foundered on the perception of both governments that compromise would undercut their domestic political standings. Saying"no" to America earned Hosokawa some domestic accolades, but failed to prevent his fall from power in the face of embarrassing questions about his personal finances. Subsequent agreements on sheet glass, access to the insurance market, and government procurement of telecommunications and medical equipment and technology, were reached only after U.S. negotiators substantially compromised on their demands for numerical goals. The resultant agreements may produce concrete gains if they are fully carried out, but the accords represent only a shadow of what the Administration originally sought. Moreover, no substantial progress yet has been achieved in the talks on autos and auto parts, which constitute the single largest component of the U.S.-Japan trade deficit. Japan failure to offer constructive alternatives to reduce trade barriers or increase imports of U.S. goods has eroded Tokyo's standing in the United States, even among those who may have questioned the Administration's goals and tactics. One result has been a rise in negative feeling towards Japan among the American public as measured by recent polls.[35] Symbolic of this change, a principal Japanese objective in the Clinton-Murayama summit reportedly was to discuss the 50th anniversary of the end of World War II and consider means to prevent celebrations of that event from giving rise to more anti-Japanese feeling in the United States, and vice-versa. 35. A late 1994 joint public opinion survey conducted by the Japanese Yomiuri Shimbun and the American Gallup organization found that 52% of the American public regarded Japan as a "rival," while only 19% saw it as a "friend." Moreover, 37% said that during the past ten years their feelings had become more negative. Japanese responses showed considerably more favorable feelings towards the United States, but only 28% said that they thought the relationship would grow stronger in the next century. Japan Digest, Nov. 27, 1994: 1. Congress is restive at the still growing trade deficit with Japan, but thus far appears disinclined to consider retaliatory legislation due to the likely negative impact on U.S. business and consumer interests. Among other factors, large scale Japanese investment in the United States, along with considerable U.S. investment in Japan, has made trade retaliation a two-edged sword. American frustration is so evident, however, that the Japanese have started to worry that the United States has given up on efforts to redress the imbalance __________ page 19 in the costs and benefits of the relationship, and now chooses to focus on expanding markets elsewhere in Asia.[36] 36. Yukio Okamoto, a former senior Foreign Ministry official, now deputy editor of the influential business daily, Nihon Keizai Shimbun, wrote in a recent Op Ed article that "conversations with lots of people in the U.S. have left me with a sense of gloom that Japan and the U.S. are quietly and gradually drifting apart. Okamoto concluded that "Basically, the American public is becoming apathetic about Japan." Nikkei Weekly, Nov. 28, 1994: 7. More recently, Japanese business analysts judged that the small turnout of American CEO's at an annual executive meeting in Tokyo of the U.S.-Japan and Japan-U.S. Business Councils gave substance to reports that American business was losing interest in the Japanese market and turning its attention to the rest of Asia. Nihon Keizai Shimbun story cited in Japan Digest, Feb. 14, 1995: 4. Effects of Continued Slow Economic Growth in Japan Bureaucratic power also has been deployed in opposition to anti-recessionary tax and spending proposals, presumably prolonging sluggish consumer demand, and restraining imports. Japan's four-year recession has contributed more to its soaring trade surplus with the United States (and the world) than its formal and informal trade barriers. Between 1987 and 1990, the bilateral U.S. trade deficit with Japan fell from $56.8 billion to $41.1 billion. It rose again to $59.3 billion in 1993 after Japan fell into recession, and is estimated at nearly $66 billion for 1994. Apart from other factors driving the trade deficit, U.S. imports of Japanese goods have risen with the revival of U.S. economic growth since 1991, while exports have stagnated due to Japan's prolonged economic slump. Until very recently, U.S. efforts to get Japan to stimulate its economy by bolstering consumption largely had been in vain.[37] The Finance Ministry had been burned by the effects of its loose monetary policy during the mid-to-late 1980s, which had caused a sharp rise in the value of land and stock prices and the subsequent collapse of prices at the end of the decade, from which the economy is still struggling to recover. 37. William R. Farrell, Deregulation: A Subject on Which Hope May Exceed Reality. Forum, The Japan Digest, Feb. 28, 1994: 5; and Yasushi Kudo and Shigeki Kakinuma, Bureaucrats Ready to Do Battle. Tokyo Business Today, Apr. 1994: 20-23. From all appearances, the MOF regards the prolonged recession as the necessary price of purging the economy of the inflated asset values of the late 1980s. MOF officials dug in their heels against pressure from business and politicians for anti-recessionary deficit spending, and only recently began to relent.[38] During the past year the coalition government overcame MOF 38. Indicative of the Ministry's attitude, a mid-1994 article quoted a bureau chief in the MOF as saying: "It's thanks to us that Japan has not ended up like the U.S. Imagine what would happen if everyone in government obeyed the politician's every whim and there was no group capable of standing up to them!" Quoted in William R. Farrell, Problem Isn't Just a Strong Bureaucracy. Nikkei Weekly, June 6, 1994: 7. __________ page 20 resistance and initiated a succession of income tax cuts and increases in spending on construction, but the overall effect has been mildly stimulative, at best. The proposed FY1995 budget, which cuts spending in response to falling revenues, has raised concern both in Japan and the United States that the current slow economic recovery will be set back by fiscal retrenchment.[39] 39. Jon Choy, Cabinet Approves Less Government Spending in FY 1995. JEI Report, No. 1B, Jan. 13, 1995: 1-2. For background information on Japan's budget process and the role of the MOF see Japan's Budget: Role in Economic Policymaking. CRS Report No. 94-278 Mar. 8 1994. 6 p. [by James K. Jackson.] The Finance Ministry and its supporters in the LDP also forced Murayama to accept an increase in the consumption tax three years from now as an offset to making income tax cuts permanent, despite the strong opposition of the SDPJ. The future consumption tax increase is not popular, but its adoption illustrates the importance that Japan's elected leaders attach to maintaining the support of powerful ministries such as the MOF, a tendency for all of the parties to grudgingly accept the need to prevent the income tax cuts from creating a permanent budget deficit. LIMITS ON COOPERATION ON THE PROBLEM OF NORTH KOREA Although Japan generally has been forthcoming regarding U.S. efforts to contain North Korea's nuclear program, the demands of coalition politics in Japan has also imposed limits on American diplomatic freedom of action. The mid-1994 crisis over North Korea's decision to remove fuel rods from its nuclear reactor greatly discomforted the Murayama government. The government maintained close cooperation with the United States, but also made clear that it was extremely reluctant to take action against transfers of remittances to North Korea from Koreans resident in Japan, except as part of economic sanctions under a UN Security Council Resolution. Notwithstanding these concerns, the government had drawn up a series of proposed measures against North Korea by June 1994, and was prepared to act on them. The abatement of the confrontation as a result of the October 1994 U.S.-North Korea agreement only temporarily alleviated a major source of strain within the coalition and in U.S.-Japan relations. Japan tentatively has indicated its willingness to assume a significant share of the estimated $4 billion cost of supplying Pyongyang with Light Water Reactors and interim energy supplies, perhaps as much as 20%, but due to severe internal differences the Murayama government has been careful not to commit to a specific figure.[40] Tokyo also has indicated a desire that other Asia-Pacific and European countries pick up part of the financial cost. 40. Clinton Administration officials anticipate that South Korea will supply the Light Water Reactors and finance up to 80% of the total cost, with Japan and other G-7 countries putting up the rest. __________ page 21 Japan's willingness to support the accord has been hampered by separate, contentious negotiations between Tokyo and Pyongyang about normalizing their relations, notably by North Korean demands for war reparations. The reparations issue has complicated the question of how the Japanese contribution to support the U.S.-North Korea agreement should be characterized.[41] In late January 1995, Prime Minister Murayama had to publicly retract a statement that Japan was partly responsible for the partition of the Korean peninsula due to objections from both the LDP and the Foreign Ministry that the statement lent credence to North Korean demands for reparations.[42] 41. Japan Times Weekly International Edition, Nov. 7-13, 1994: 6. 42. Japan Digest, Jan. 31, 1995, p. 2. The issue is also complicated by a related intra-coalition dispute about whether Japan should mark the 50th anniversary of the end of World War II with an apology to Asians (but not the United States) for Japan's aggression. In February 1995, LDP politicians began backing away from an earlier agreement among the coalition parties to pass a resolution in the Diet offering a formal apology to Asian countries for Japan's World War II aggression. Agreement on the resolution had been one part of the bargain that enticed the Socialists into the coalition, but in formulating their platform for local elections scheduled for April, some three-fourths of the LDP Diet Members pledged to block the resolution, which they deemed a Socialist interpretation of history.[43] 43. LDP Scraps War Condemnation in Its Platform, Fueling Fight with SDP, Japan Digest, Mar. 5, 1995: 2; Nicholas D. Kristof, Many in Japan Oppose Apology to Asians for War. Washington Post, Mar. 6, 1995: A9. Should the U.S.-North Korea accord get off track, cabinet instability in Japan would again arise as a constraint on U.S. policy. Likewise, prolonged Japanese reticence about committing substantial funds to support the accord could reverberate negatively on U.S. congressional support for the accord. Should the accord collapse, a resort to economic sanctions or the onset of a military contingency could divide and bring down the current coalition. Such an outcome could, in turn, undercut public support for the U.S.-Japan alliance in both countries. BUDGETARY AND POLITICAL PRESSURES RAISE QUESTIONS ABOUT SUPPORT FOR U.S. FORCES BASED IN JAPAN Political change and instability has also raised questions about future host-nation financial support of U.S. forces based in Japan. Seeking to maintain some credibility with his pacifist constituency, Prime Minister Murayama extracted a price for his support of the U.S.-Japan Security Alliance in the form of a severe cap on defense spending, which will only be allowed to increase by 0.86% in FY1995 (begins Apr. 1, 1995.) The lowest increase in 35 years __________ page 22 dovetailed closely with the Finance Ministry's efforts to cut general account spending by 2.9%.[44] 44. Barbara Wanner, FY 1995 Budget Curbs Growth in Defense Spending -- Again. JEI (Japan Economic institute) Report, Jan. 13, 1995: 6-7. The presence of the Socialists in the government has also lent new backing to long-standing demands in Okinawa for a reduction of the U.S. military presence there. The southernmost major island hosts a Marine Expeditionary Force and other units. At the Jan. 11, 1995, Clinton-Murayama summit, the Administration reportedly agreed to work towards the reorganization and consolidation of U.S. operations on Okinawa, including the return of Naha Military Port. After some initial uncertainty last fall, it now appears that Japan will fully fund its commitment to pay 100% of the non-personnel costs of basing U.S. forces in Japan in FY1995. Funds coming from the defense budget would total about $1.5 billion out of a total $47 billion defense budget.[45] 45. The U.S. Department of Defense (DOD) values the Japanese contribution at about $4 billion annually, taking into account direct contributions as well as "indirect costs such as waived land use fees, foregone taxes, tolls, customs, and payments to local communities affected by United States bases." In addition, Japan provides construction funds of approximately $1 billion annually under a Facilities Improvement Program. Department of Defense. Office of International Security Affairs, United States Security Strategy for the East Asia-Pacific Region. February 1995, p. 25. For a critical assessment of DOD's calculations of the value of Japan's contribution see Defense Burdensharing: Is Japan's Host Nation Support a Model for Other Allies? CRS Report for Congress, No. 94-515 F, June 20, 1994 [by Stephen Daggett.] Over the longer term, however, due to a budget squeeze affecting Japanese equipment procurement programs, Tokyo's willingness to continue to increase its host-nation support is in question, and Japan's support could even drop. The current agreement expires after 1995, and may well be renegotiated in an environment of severe budgetary stringency. A future competition for resources pitting U.S. forces against the Japanese Self-Defense Forces would represent a highly undesirable situation for U.S. interests and raise serious questions about the future of the alliance. PROSPECTS AND U.S. POLICY IMPLICATIONS THREE INDICATORS OF FUTURE CHANGE Three indicators in particular may provide a measure of what degree and direction of change can be expected in the next one to five years. All of these relate to specific problems within the Japanese body politic upon which there _________ page 23 is broad agreement on the benefits of change, though not necessarily the depth of voter and vested interest support, or the political will to carry them out. Outcome of Deregulation Proposals One critical indicator will be the extent and ultimate disposition of a five-year program of deregulation measures to be unveiled by the Murayama government in late March 1995. Some 150 business groups and foreign governments have contributed extensive and specific deregulation proposals. Keidanren has offered a 456-point proposal that seeks a "numerical target" of cutting regulations by half over the five-year period, which it estimates will add an annual growth increment of 0.9% and generate 740,000 new jobs by the year 2000. The Clinton Administration's 231 point proposal has been noted above. If the proposal suffers the fate of last year's Hiraiwa Commission, the prospect for significant near-term action aimed at opening up of the Japanese economy will be dim.[46] An important factor will be the position of MITI. The main architect of Japan's postwar reindustrialization appears at the top level to have settled on a new mission as an agent of change, not a regulator, but at lower levels it remains wedded to specific industry groups seeking continued protective regulation.[47] As of mid-February 1995, news reports about the scope of the proposed reforms tend to be pessimistic. Among other factors, Japanese industry leaders and economic analysts note that the lists of deregulatory measures do not fundamentally address the practice of informal "administrative guidance" from bureaucrats and unfair competition from state-controlled financial institutions such as the postal savings system.[48] 46. Nobuyuki Oishi, Motley Alliance Builds in Fight to Free Rule-Bound Economy. Nikkei Weekly, Nov. 21, 1994: 1, 23. 47. Ibid., and Nobuyuki Oishi, MITI Seeks Overhaul Beyond Deregulation. Nikkei Weekly, Nov. 21, 1994: 2. 48. Craig Forman and Michael Williams, Japan's Premier Accused of Backsliding on Reforms as He Pushes Deregulation. Wall Street Journal, Jan. 10, 1995: A17. Deputy U.S. Trade Representative Charlene Barshefsky indicated low expectations for the pending deregulation plan in congressional testimony on Feb. 2, 1995, partly due to the limited scope and vagueness of the proposals and a "continuing lack of transparency of the process."[49] Unless Japan moves more quickly to deregulate its economy, the Administration and Congress are likely to remain impatient with Japan and continue to favor more direct remedies, such as market-access negotiations under the threat of trade retaliation. 49. Testimony before a joint hearing of the Subcommittees on Asia and the Pacific and International Economic Policy and Trade, House Committee on International Relations, February 2, 1995, p. 15. __________ page 24 As of this writing, it appeared that the Murayama government would seek to postpone hard choices on deregulation and only address a few specific American and other foreign complaints. Japan's Kyodo News Service reported on March 8 that an interim government deregulation plan would bring standards on imported construction materials into line with international norms, but would not ease inspection standards on automobiles and foreign car parts, or eliminate in the near term the remaining barriers to the establishment of large scale stores.[50] 50. Kyodo in English, March 8, 1995 [FBIS wire service.] Timing of New Lower House Elections Another important indicator will be the timing of new elections under the new system of single member constituencies and proportional representation. After the Kobe earthquake, dissident members of the SDPJ delayed their efforts to form a new party, and agreed to continue to support the coalition at least until passage of the FY1995 budget this spring. The coalition government has argued that because of local elections scheduled for April, and interim Upper House elections that will take place in August, it is not feasible to hold a national election for the lower house. A number of factors could invalidate this rationale, however, including the loss of a governing majority through SDPJ defections, continued criticisms of the governments handling of earthquake relief, or the outcomes of either of the scheduled elections. From the U.S. interest perspective, the earlier Japan holds elections under the new system the sooner will be the possibility, if not the reality, of the kind of political realignment that might give the country a stronger sense of direction. Notwithstanding the disappointing outcome of reform efforts thus far, most Japanese and foreign analysts judge that the electoral changes adopted last year will eventually create more policy-oriented politics. Others caution, however, that the future might look a lot like the present. Proposals for Strengthening the Office of the Prime Minister and Cabinet A third indicator will be the outcome of what appears to be, at least until very recently, a fairly desultory effort to consider means to strengthen the policy-making capabilities of the office of the Prime Minister and the Cabinet Secretariat, and improve Japan's weak crisis management system. Reportedly, the Murayama government plans to send a team to the UK, Germany, and the United States in April 1995, to study the functions and power of the executive branch in those countries. The mission was planned before the Kobe earthquake, but the government's failings in responding to that disaster have given the issue greater urgency.[51] The Murayama government has also floated proposals for the formation of a policy management body composed of the heads 51. Mihoko Iida, Crisis Shows Danger of Hobbled Premier. Nikkei Weekly, Jan. 30, 1995: 4. _________ page 25 of the most important ministries, along the lines of the U.S. National Security Council. To date, none of several proposals would fundamentally address the extreme dependence of the elected leaders on officials seconded from the main ministries. Any serious effort to increase the ability of the political leadership to formulate and manage policy would require a fundamental restructuring of Japan's system of governance, which is not likely. At best, future government's may acquire a larger staff attached permanently to the office of the Prime Minister and Cabinet and new mechanisms for formulating policy. Until Japan experiences a political realignment and achieves a strengthening of the institutions for bridging ministerial interests and managing crises, it likely will tend to remain status quo-oriented as regards domestic policy and largely reactive as an international player. Deregulation and reform may still proceed, but change likely will take place in a manner and at a pace dictated by the concerned ministries on a ministry-by-ministry basis, not as a coordinated response determined by the political leadership. U.S. POLICY IMPLICATIONS As of early 1995, two distinct schools of thought appear to be emerging regarding U.S. approaches to Japan. Neither approach can be regarded as directly approximating present U.S. policy, but elements of both schools of thought can be discerned in the current policy debate. Both are predicated on declining expectations regarding the ability of the Japanese government to make any hard decisions under present circumstances. One broad approach favored by some U.S. and Japanese policy specialists for would be to place more emphasis on the overall long term U.S.-Japan relationship than in the recent past, recognizing that the Japan's current internal problems make it impossible for Tokyo to accommodate demands that lack a clear domestic constituency. This approach would shun conflict on trade and other politically sensitive issues that could create further adverse public opinion against the United States or compromise other important U.S. political and security relations. This perspective recognizes that the Clinton Administration has succeeded in achieving some nine or so trade agreements with Japan during the past year and one-half, but tends to question the real value of the Japanese commitments and suggests that the prolonged wrangling leading up to the agreements has damaged broader U.S. interests, while also reinforcing the domestic power base of political and bureaucratic hardliners. These bilateral stresses, it is argued, likely will intensify if the Administration follows through on its demands for firm Japanese commitments by March 31 to purchase more U.S. automobiles and auto parts. Those who wish to reduce the level of bilateral trade confrontation with a weak Japanese government argue that the United States now has broader interests in the Asia-Pacific region than pursuing market-opening agreements _________ page 26 with a single country, albeit a very important one, and other interests in Japan that command as much importance as the trade issues. Supporters of this approach argue that the United States has a major stake in maintaining Tokyo's support for multilateral efforts to lower regional trade and investment barriers through organizations like APEC, an interest that could be compromised by pushing Japan into a de facto alliance with other Asia-Pacific nations in opposition to the American market opening agenda. Some see this concern as especially important this year, since Japan is the rotational chair of APEC and is charged with formulating draft proposals to fill in the details of a broad plan for an APEC free trade zone adopted last November at the Bogor, Indonesia, summit. Japan must choose between a group of Asian countries that want to go slow on lowering trade barriers and a group of generally more developed countries including the United States, Canada, Australia, New Zealand and Singapore that favor uniform movement towards free trade with specific timetables for lowering barriers in various industries and sectors. Reportedly, Japan is leaning towards the Asian perspective.[52] 52. APEC Meeting Puts Some Thin Paper Over a Wide Gap on Free Trade. Japan Digest, Feb. 17, 1995. Supporters of both approaches accept that the United States and Japan remain each other's most logical regional political and security partners. However, the first group caution against taking Japan's stance for granted due to rising public frustration with U.S. trade demands, growing resistance to the cost of maintaining American forces in Japan, and increased calls for Japan to reorient its foreign policy away from the United States and towards its Asian neighbors. These analysts note in particular the need to retain Japanese support for carrying out the October 1994 nuclear agreement with North Korea, and for maintaining broad solidarity with Tokyo during an impeding political transition in China. Another approach -- which the Japanese rightly or wrongly appear to be reading into current U.S. policy -- is to continue to seek market opening opportunities, albeit with less stress on controversial quantitative indicators of progress, while shifting the primary focus of U.S. attention away from Japan and towards the rest of the Asia-Pacific region. In effect, this approach mirrors a similar movement in Japan, where the arguments for "re-Asianization" have gained ground in public debate, if not in Japanese policy. The mere fact that it is being proposed gives credence to the concerns of those who see the United States and Japan slowly drifting apart. Supporters of this approach note that U.S. trade with the rest of the region will continue to out-pace that with Japan, based on high populations and rapid rates of economic growth. Because of the existence of these increasingly important alternative markets, some argue, the United States can continue to press Japan for concrete market-opening concessions at comparatively low risk. This approach could include, if necessary, resort to sanctions under Section 301 and other trade law provisions. _________ page 27 Supporters of this approach would not deliberately stoke a U.S.-Japan rivalry, but find it useful to remind Tokyo that the United States has other options. If Tokyo will not accommodate U.S. demands for market opening, these advocates say, the United States should turn its attention to potentially more lucrative markets among Japan's neighbors. Meanwhile, it is argued, the United States can continue to seek Japanese cooperation on international political and security issues on the basis of mutual self-interest. Both countries, they say, continue to have a strong mutual interests vis-a-vis an increasingly assertive and unpredictable China, and in regard to deterring conflict and nonproliferation in the Korean peninsula. Because of these concrete considerations, it is argued, Japan has few options but to rely on continued political and security cooperation with the United States.