SCENARIOS-Close Japan leadership race clouds policy outlook

(For more stories on Japanese politics: click on [ID:nPOLJP])

By Linda Sieg

TOKYO, Sept 8 (BestGrowthStock) – Japanese Prime Minister Naoto Kan
and powerbroker Ichiro Ozawa appear neck-and-neck in a
leadership race that could spell a shift in fiscal policy
priorities as the country struggles with a strong yen, weak
economy and divided parliament.

The Democratic Party of Japan (DPJ), which swept to power
last year, is already floundering after the DPJ and a tiny
partner lost their upper house majority in a July election.

Below are scenarios for the outcome and their policy
impact.

PM KAN WINS PARTY VOTE, REMAINS PM

Kan, 63, has a shot at victory even though Ozawa heads the
biggest DPJ group, because his opponent faces possible
indictment in a funding scandal and is plagued by an image as
an old-style wheeler-dealer that undercuts his ratings among
ordinary voters.

The key question is whether Kan can defeat Ozawa decisively
enough to bolster his clout and unify the party.

— In the best scenario for Kan, Ozawa loses by a hefty
margin and bolts the DPJ with only 20-30 of the party’s 411
lawmakers, spelling the potential end of his four-decade
career.

That would allow Kan to consolidate control over the party
and concentrate on his efforts to engineer growth while cutting
public debt now twice the size of Japan’s $5 trillion economy.
The Japanese government bond yield curve might flatten a bit.

— A key aide to Kan, however, told Reuters that any
victory would likely be by a small margin. [ID:nTOE68606H]
Ozawa would then have the option of remaining in the DPJ to
exercise clout over personnel and policies, or bolting the
party with followers.

— Ozawa would have to persuade almost 70 DPJ lower house
lawmakers to leave the party to deprive the Democrats of their
majority in the powerful chamber and put at risk Kan’s grip on
power. Analysts doubt whether that many would be willing to
join the opposition ranks. But if Ozawa took a large bloc of
members with him, that could trigger moves towards a
realignment of party allegiances, spelling prolonged political
and policy chaos.

— If Ozawa remains inside the party after a robust
showing in the party vote, the result looks likely to be more
bickering, a possible weakening of any drive to curb the public
debt by reducing spending, and delay in debating a rise in the
5 percent sales tax. Kan would likely reshuffle his cabinet and
might give posts to Ozawa backers, further complicating policy
decisions. He would still face the problem of how to win
opposition support to enact laws, including bills to implement
the 2010/11 budget.

OZAWA WINS

— Ozawa, 68, would probably become prime minister because
Kan, as the defeated party chief, would resign and a vote would
be held in parliament to pick a new leader.

Ozawa has rejected the notion of splitting the party post
from the premiership because of the scandal hanging over his
head. A judicial panel of ordinary citizens is to decide in
coming months whether he must be indicted over a funding
scandal.

Still, Ozawa could in theory choose to let the leader of
another political party become premier in order to forge a
coalition to break the impasse in the upper house.

— Ozawa’s backers say he can use his contacts with
opposition parties and skills honed over 40 years in politics
to do deals with the opposition and smooth policy
implementation, including spending to boost the economy.

An Ozawa win might cause the yen to ease against the
dollar, since he has spoken of intervening to stem its rise. It
could also make the JGB yield curve steepen in response to his
propensity to spend while putting off debate on raising the
sales tax to fund the rising social welfare costs of a
fast-ageing population.

— Both Ozawa and Kan have stressed the party won’t implode
whatever the outcome of the vote. But lawmakers put off by what
critics see as Ozawa’s authoritarian style and his reluctance
to address Japan’s fiscal woes might refuse to back him in the
parliamentary vote, setting off a battle that splits the party.

There may also be moves towards political realignment, seen
by some analysts as Ozawa’s real goal. Whether this would lead
to policy consistency within the two major parties, the DPJ and
the business-friendly Liberal Democrats, is questionable.

— Even if the DPJ hangs together, opposition parties could
boycott parliamentary debate or hammer Ozawa with questions
related to his funding scandal, with no progress made on the
budget for the fiscal year from next April.

Ozawa might have to step down as PM, or even call a snap
lower house election that neither main party could win, setting
the stage for more political confusion.

SCENARIOS-Close Japan leadership race clouds policy outlook