The Economic Implications of Koizumi's Election Victory

The resounding victory of Japan’s Liberal Democratic Party (LDP), led by incumbent Prime Minister Junichiro Koizumi, in Sunday’s Lower House election is very good news for the Japanese economy. It promises not only continuation of Koizumi’s constructive policies in financial and fiscal affairs (not least avoiding mistakes), and of his backing of the Bank of Japan’s antideflation commitment, but also raises hopes for the passage of a new agenda of reforms. Given Heizo Takenaka’s successful clean-up (with Koizumi’s backing) of the banking-system problems in Japan, there is no reason to hesitate pursuing an aggressive agenda. Once implemented, such reforms are likely to add a couple of tenths of a percent to the average annual rate of Japanese growth for the next few years.

Koizumi’s victory is historic in three senses. First, by winning 296 of the total 480 seats, while purging and defeating those old-line LDP members who opposed his postal savings proposal, he has command of an effective majority larger than seen in decades. Second, by having a combined 327 seats in his coalition (with Komeito party’s 31), he has control of more than two-thirds of the Lower House seats, which means that the coalition will have sufficient votes to overrule the Upper House, if that body were to vote against a proposal. Third, by attracting not only a high turnout but also many younger and urban voters to the LDP for the first time, he has set the groundwork for a truly new LDP. The main opposition Democratic Party of Japan (DPJ), which ran mostly on a foreign policy platform (to withdraw Japanese troops from Iraq, among other things), has become a nonfactor.