Snap Analysis: Voters punish Japan’s DPJ; policy deadlock ahead

By Linda Sieg, Japan political correspondent

TOKYO (BestGrowthStock) – Japan’s Democratic Party suffered a major blow in an upper house election on Sunday, exit polls showed, putting Prime Minister Naoto Kan’s job at risk and threatening to stall efforts to curb the country’s huge debt.

The Democratic Party of Japan (DPJ) and its tiny partner, the People’s New Party were set to lose their combined majority in the upper house, the polls showed.

The Democrats were also expected to win only around 47 seats, far short of Kan’s goal of winning all 54 that the party had up for grabs, leaving him vulnerable to a challenge from inside his own party.

POLICY DEADLOCK

* Without a coalition majority, the Democrats will need to seek new allies, hampering their push for fiscal reform, including a possible doubling of the 5 percent sales tax to curb a public debt that is already twice the size of the economy.

* The Democrats’ current coalition partner opposes raising the 5 percent sales tax any time soon, as do some potential allies. Other opposition parties agree a hike is inevitable but would probably be reluctant to help out the rival DPJ, which has not yet mapped out any detailed tax reform proposals.

* The Democrats’ weak performance means that small opposition parties such as the Your Party will be able to drive a harder bargain for their cooperation, making policy stalemate more likely.

* A tie-up with the Your Party could push the government toward more market-friendly policies, but juggling divergent policy priorities among allies would complicate decisions.

* Market experts say the debate on a sales tax rise is unlikely to disappear. But the Democrats’ weak showing at the polls could embolden DPJ lawmakers who were wary of discussing a sales tax rise.

PM VULNERABLE TO CHALLENGE

* The poor performance by the Democrats, who took power less than a year ago in a landslide election win, leaves Kan vulnerable to a challenge from within his own party ahead of a party leadership vote in September, likely led by powerbroker Ichiro Ozawa, who was sidelined when Kan took office last month.

* Kan — already Japan’s fifth premier in three years — is thought unlikely to give in to pressure to quit without a bitter fight, and could even threaten to call a general election for the powerful lower house to fend off Ozawa, many of whose followers are first-term lawmakers and might well lose.

* A challenge by Ozawa would also complicate any push for fiscal reform, since he and his followers were critical of Kan’s decision to bring up the idea of a sales tax rise.

MARKET WORRIES

* The Japanese government bond market had rallied in part on fiscal reform hopes. The rally has since fizzled on expectations the DPJ could fall well short of its election goal and with confirmation of that scenario, yields will probably rise.

* Stock market investors have grown used to Japan’s political confusion, but a sharp setback for the Democrats will worsen concerns about policy deadlock, a negative for share prices.

MONETARY POLICY

* If the government can’t move ahead with fiscal reform and must boost borrowing further, the government might pressure the Bank of Japan to buy more government bonds in an attempt to tame any bond yield gains.

* Some in the BOJ feel that pressure for monetary easing may increase if the Democrats team up with the small Your Party, whose leader, Yoshimi Watanabe, has said the central bank should do more to overcome deflation.

(Additional reporting by Leika Kihara)

(Editing by John Chalmers)

Snap Analysis: Voters punish Japan’s DPJ; policy deadlock ahead