The LDP Saga

The Financial Times yesterday finally published a graphic previewing the Aug. 30 Japanese general election, in which the mainstay Liberal Democratic Party (LDP) will likely lose power in most convincing fashion since 1955. I did the bulk of the research for the graphic and am happy it came out OK!

You can view it here: http://www.ft.com/cms/s/0/ce4c5268-8745-11de-9280-00144feabdc0.html

Taro Aso's Nightmare

Less than one year after Japanese Prime Minister Taro Aso took the reigns of the hobbling Japanese government and economy, he is faced with a daunting prospect - the end of his term as Japan's leader, and of one-party rule in Japan.

While Aso is well regarded by foreign leaders, his tenure is sure to come to a close now that Tokyo municipal elections delivered a smashing blow to Aso's party, the Liberal Democratic Party (LDP), in favor of the rival Democratic Party of Japan (DPJ).

As various news outlets have reported, Aso has attempted to use pork barrel spending - a time-worn tradition in modern Japanese politics - to assuage voters ahead of the election he has called for Aug. 30. And recent economic data show Japan's slump could be nearing an end. Aso hopes these factors will renew some public trust in the LDP's national leadership in the next month.

The elastic thinker thinks Japan deserves and is ready for political change. The LDP has not necessarily squandered Japan's economic might - but it has certainly allowed back-room politics to become even more entrenched. Whether the DPJ will bring fresh ideas, or serve simply as the "anti-LDP," is a huge question mark, but one that the Japanese people deserve an answer for after years of LDP dominance. The biggest risk from DPJ election gains, of course, is a government that much more politically polarized that solving Japan's myriad economic issues will become even more onerous.

But the Japanese public, who are about to descend in what could be another "lost decade" of economic stagnation, most likely want change. It appears they will get it this time around. This will prove to be a significant development in world politics, and in the world's second largest economy.

Wanted: An Asian Miracle

On her first crack, Secretary of State Hillary Clinton has been making one of the most symbolic American diplomatic tours in recent memory. Indeed, it is a harbinger for the major shift of economic and political power from West to East currently in progress.

As the elastic thinker has previously insisted, any solution to future solution to the economic maelstrom of the day must include Japan, the world's second largest economy, one of the United States' primary trading partners and a key bulwark against nuclear North Korea and rising China. The Obama Administration is making a shrewd, no doubt intentional, move by hosting Japanese Prime Minister Taro Aso as his first visiting foreign head of state.

Clinton's visit also highlights the urgent imperative of engaging Japan in addressing the current global recession. Japan itself is due to experience the worst economic conditions it has ever experienced post-WWII -- mostly riding on the decline of the export-driven manufacturing sector. And unlike other countries that are currently suffering the brunt of recession -- namely the U.S. and United Kingdom -- Japan has the dual misfortune of having a strong/appreciating rather than weak/depreciating currency, exacerbating its poor economic prospects due to an already precarious reliance on exports.

By inviting Mr. Aso to the White House, President Obama is making it clear that not only is Asia the new center of political and economic gravity (even it's not centered in Japan). He will also likely seek advice from Japanese authorities on how to prevent an American version of Japan's "lost decade of growth." Sadly, Japan has its own issues to worry about - and this could indeed be Mr. Aso's first and only visit as prime minister; he is due to call for elections before September, and the Democratic Party of Japan is waiting to seize control.

Time for a New Plaza Accord?

When politicians discussing the current economic situation tell us "it's likely to get worse before it gets better," it seems they weren't kidding.

Yesterday the U.S. Senate failed to come to an agreement on a $14 billion bailout for the U.S. auto industry, and this morning, the Japanese yen hit a 13-year high against the U.S. dollar, a troubling signal for two of the world's largest economies.

Apart from Germany and China, Japan is the world's preeminent export economy, relying on a weak Yen to peddle its goods to primarily the U.S. market. With slumping demand in the U.S., and the rapid depreciation of the dollar versus the yen, Japan stands to lose out significantly. This has helped to reduce Japan's current account surplus significantly, as exports fall. The drop in the oil price might help in relieving the costs of imports, but a country once known for its massive trade surpluses seems to be losing its edge.

I have argued frequently in favor of a larger role for Japan in the world economy. Too infrequently during the current economic crisis have we seen the kind of leadership that Japan is capable of and responsible for. Perhaps it is the ruling Liberal Democratic Party's precarious political prospects that are discouraging it from taking the risky but potentially rewarding policies needed to stabilize the world economy.

It may be time for a new type of "Plaza Accord," in which the U.S. coordinates with Japan a managed exchange rate revaluation. Only this time, it is the U.S. dollar, not the yen, that is increasingly depreciated and needs propping up. Another factor is that the value of the dollar, of course, has been partially supported by the massive stockpiling of U.S. dollar reserves by China, which itself enjoys a massive trade surplus because of an undervalued, but steadily appreciating, currency. But now, the problem is the Chinese also face the prospects of slower economic growth, primarily due to the American recession. And like Japan, China may face a threat of a political reckoning if it cannot help its people absorb the impact of the global recession.