Japan’s Politics in Game of Brinkmanship Over Budget

Prime Minister Yoshihiko Noda is counting on the opposition to avoid a fiscal cliff.

Japanese prime minister Yoshihiko Noda and the main opposition parties, the Liberal Democratic Party and New Komeito, are locked in a game of brinkmanship over legislation to close Japan’s budget deficit of ¥38.3 trillion ($474 billion) for the rest of the year.

Unless a funding bill is agreed upon, the government will run out of money and default on its debt obligations by the end of November. At issue is the timing of elections in the lower house of parliament that Noda pledged to call after his tax bill was passed in August when the opposition provided crucial support.

In a policy speech on Monday, during a special 33 day session of the Diet called to pass the critical deficit financing bill, Noda made it clear that he is not near calling an election because he wants to avoid creating a “policy vacuum” that would stall further economic reform.

The prime minister is also keen to put off calling elections because his Democratic Party is expected to lose control of the lower house. The ruling party currently has just a six-seat majority in the chamber after two more lawmakers resigned on Monday.

With his justice minister, Keishu Tanaka, resigning last week due to health concerns, which also came after accusations of his association with organized crime, Noda’s approval ratings continue to plummet, with the latest poll showing just 20 percent of support from the Japanese public.

Noda indicated that he will support the Bank of Japan taking additional steps to ease monetary policy. Specifically, he wants the central bank to increase its asset purchases program in order to weaken the yen and break deflation. The Bank of Japan is slated to meet on Tuesday with speculation of an increase of ¥10 trillion ($125 billion) being approved.

Japan’s export dependent economy is being negatively affected by tenser relations between Japan and its neighbors and biggest trading partners. The country has been locked in a standoff that is hurting exports to China over the Senkaku Islands, known as the Diaoyu Islands in China, which both countries claim. In addition, Japan is in a spat with South Korea over the Takeshima Islands, known as Dokdo in Korea.

Noda’s reiteration to protect Japanese interests and “achieve relationships with surrounding countries such as China, South Korea and Russia that strengthens the foundation on which Japan and the region enjoy peace” will not lessen tensions anytime soon.

However, it is the dispute over the timing of elections that threatens Japan with a fiscal cliff should it be forced to enact drastic budget cuts that many fear will result in Japan falling back into recession.

In the end, Noda is betting that the opposition will blink and pass the spending bill. If they should hold firm and Japan is forced to go off a fiscal cliff, he could try to blame the opposition for putting the attainment of personal electoral gains ahead of supporting his economic reforms and the welfare of the state.

The opposition senses an opportunity with a prime minister seemingly weakening by the day. If elections are called, Noda’s government will undoubtedly collapse, with the Liberal Democrats winning and Japan getting its eighth prime minister in as many years.

In the meantime, it falls on the Bank of Japan, like most other central banks around the developed world currently, to take measures that will stimulate the economy which the legislature has avoided.