Japan faces the very strong possibility of a dramatic change of government after struggling Prime Minister, Taro Aso, returned from the G-8 meeting in Italy on Saturday and then yesterday called a general election for August 30.
His move followed a defeat for his Liberal Democratic Party (LDP) in Sunday’s elections for the Tokyo assembly where the LDP and its ally, the New Komeito Party lost their majority and the opposition Democratic Party of Japan (DJP) became the largest political group in the city’s parliament.
A loss in the poll would end 50 years of LDP rule in Japan and be one of the most momentous events in the country for decades.
The news saw the Tokyo share market lose more than 2% and it has now officially corrected from its peak last month. It was down more than 10% at the close last night.
Some reports from Tokyo say that Mr Aso might be deposed by the LDP before the poll, so fearful are its Diet members of being defeated by the DJP, which contains many former members of the ruling party.
The failure of the LDP and the New Komeito Party to retain their majority in Tokyo triggered widespread speculation that the Japanese Prime Minister was facing a challenge to his leadership that could come at any moment.
The lower house election must be held within 30 days of the end of the lower house of the Diet’s 5 year term.
That’s around October 10. Mr Aso will dissolve parliament a week today for the poll on August 30.
The DPJ’s showing in Tokyo has provided momentum to the party as it aims to bring about a change of government in the general election following victories in recent major local elections elsewhere in Japan.
In the Tokyo poll, of 221 candidates who contested the 127 seats, the DPJ won 54 seats compared with 38 seats for the LDP, which matched its worst result recorded in 1965, while all of New Komeito’s 23 candidates won seats.
The Japanese Communist Party won eight seats, and Tokyo Seikatsusha Network and independents won two each.
Before the election, 48 assembly members were in the LDP, 34 to the DPJ, 22 to New Komeito, 13 to the JCP and four to Tokyo Seikatsusha Network.
LDP candidates have lost to DPJ-supported candidates four straight times in major local elections—mayoral polls in Nagoya, Saitama and Chiba, and a Governor’s race in Shizuoka Prefecture.
The Opposition DJP hasn’t a solid reputation for good policies and ideas. Former leader Ichiro Ozawa quit in early May after corruption allegations were raised against him and others in the party.
He is now advising the Opposition leader DJP president Yukio Hatoyama, who has is own funding scandal now in the public arena.
Some of the policy ideas are odd and not well thought out.
For example the DJP’s shadow Finance Minister yesterday was reported as saying Japan should shift some of its huge foreign reserves from US dollars to the IMF.
The comments were made before the poll was called: now that it has, this statement will make financial markets a bit more nervous about the dollar.
“In the medium to long term, we need to do what we can to avoid the risk of currency losses or economic turbulence that could result if the dollar were to swing,” Masaharu Nakagawa, the shadow finance minister in the Democratic Party of Japan, said in an interview in Tokyo with Bloomberg that was conducted on July 9. “Many countries are starting to diversify their reserves,” he added.
Japanese investors and the government are the biggest foreign holders of US Treasury securities after China with $686 billion of the securities held in April.
The poll comes as there are signs emerging that Japan’s economy has stopped plunging, but deflation, rising unemployment and indifferent demand are casting a shadow over the durability of the recovery now widely said to be underway.
There are in fact some analysts who see the economy easing again later in the year as the stock rebuilding phase ebbs and is not replaced by rising demand from Japanese and foreign consumers and companies. Business investment and corporate profits are projected to fall.
The Aso Government has introduced several stimulus measures totalling over $US165 billion by some estimates.
It seems to have helped steady the economy, but that is about all.
Producer prices are falling at a record rate, as are consumer prices and that is making business and consumers increasingly wary about making purchases.
The stockmarket had bounced, but has gone off the boil. It is still up around 25% from the lows of March, but is now at levels last seen two to three months ago.
Banks and property companies have weakened and corporate collapses are frequent.
The economy has contracted sharply as exports have fallen, dragging industrial production and investment with them.
The Japanese economy will this year be smaller than it was four years ago, according to some estimates and unemployment, at 5.4%, is projected to hit record levels above 6% later this year.
Giants like Toyota, Honda and Sony have cut jobs, hours, closed factories and sliced costs to try and battle the recession.
Toyota could lose the best part of $US8 billion over the two years to March 2010.
Figures out yesterday showed that a record-high 38 companies were delisted from the Tokyo Stock Exchange in the six months to the end of June.
That was the highest six monthly figure since records first started in 1955.
Bankruptcies as well as mergers and acquisitions were to blame.
In the same six-months, 13 companies went public, down from 32 a year earlier, bring
