Toshio Matsuda, Commentator & Intl Economist

Straight from the Shoulder

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Reflecting back on the dramas that have led up to the selection of Japanese Prime Ministers over the years, my frank impression is that luck is not something one generates, as much as it is the ability to wait for and seize the moment. This was especially true of the recent meteoric rise of Yasuo Fukuda to become the Japan’s newest Prime Minister.

There were high hopes that Fukuda would declare his candidacy to run for the post of Liberal Democratic Party (LDP) President at the previous election in the fall of last year. Fukuda, however, adamantly refused to throw his hat into the ring.

His decision not to run was most likely because he gauged the timing to be premature. This represents a big difference from the politicians who harshly criticized former Prime Minister Shinzo Abe, urging him to step down, yet who jumped at the ministerial posts offered to them by Abe when he was still Prime Minister.

The good and bad luck of Japanese Prime Ministers tends to depend more heavily upon the global political and economic scene rather than the specific conditions within the party. For example, consider these recent news story themes: .

“Despite the continuation of a prosperous economy that has surpassed the Izanagi boom of the late 1960s, the national income remains in the doldrums.”

“Big companies may be paying employees bonuses worth 50 percent of their annual income, but tiny, small and medium enterprises continue to go bankrupt.”

“The gap between Tokyo and the regional areas continues to widen.”

“The LDP only cares about the rich, big companies and other major constituents.”

With elections held in the context of these national views, it is hardly surprising that the ruling party stands no chance of prevailing. Whether the leader is Abe or whoever, under this scenario defeat is a natural matter of course. Abe’s bad luck commenced when he was nominated to become Prime Minister and assumed that post at such an adverse juncture.

During Abe’s tenure as Prime Minister, major changes occurred in the global economic and political situation. For one thing, the economies of Japan and the United States, just as I predicted from last year, began to undergo major shifts. I have continued to assert that 180-degree changes would emerge in the Japan-U.S. economic booms that have continued since 2002. My contention, in short, has been that while brisk market conditions were being sustained in the U.S. on the strength of domestic demand and similarly sustained in Japan on the back of foreign demand, 2007 would bring a reversal in the relationship of dependence reflected in these booms.

In the U.S., the credit crunch spreading worldwide as a result of defaults on subprime loans and other high risk investment vehicles, This credit crunch heralds the end of the housing boom that has shored up America’s domestic demand for the last two or three years. Housing financial institutions that continued to extend excessive credit are going bankrupt, with red ink spreading to investment banks. Against this backdrop, in order to prevent the U.S. economy from descending into recession, Chairman Ben Bernanke of the Federal Reserve Board (FRB) and Treasury Secretary Henry Paulson are under the gun to enact drastic policy changes. The FRB has reacted by shifting from its conventional “inflation fighting” route of interest rate hikes to interest rate cuts, while the Department of the Treasury is moving to a course of increased government spending and tax relief. As a result of these FRB actions the financial policy characterized by capital from around the world gathering in the U.S. to orchestrate booms in housing and the stock market is coming to an end. The next phase will consist of policy measures in the form of hikes in the federal fund rate and official discount rate aimed at accelerating growth in the manufacturing industries ? notably, the defense sector. The adoption of a weak dollar policy is the natural course of action to bolster the competitive strength of manufacturing. As I have said in the past, these indicators would point to a clear shift in U.S. economic activity to reliance on foreign demand in October. The accuracy of this prediction is coming very evident

Whether the engine of economic prosperity is domestic demand or foreign demand, demand is a factor that exerts a major impact on the national income.

Under the boom dependent on domestic demand, the incomes of the American people saw healthy growth, with the public experiencing a solid sense of prosperity.

In Japan, in contrast, because the boom was dependent on foreign demand, the national income remained in a slump and the Japanese people had no sense of sharing in the prosperity. For this reason, therefore, in the midst of a foreign demand-dependent boom, regardless of how many firm declarations are made of how “this strong economy is the work of the LDP,” the results at the ballot box will be defeat.

For his part, back in 2006 Fukuda showed not a shred of interest in gaining the post of Prime Minister. When September 2007 came, however, with the signs becoming clear that the Japanese economy would shift from a boom dependent on foreign demand to prosperity driven by domestic demand, Fukuda did not hesitate to declare his candidacy for the LDP President post. Fukuda, as we can see, truly “seized the moment” as fortune smiled his way.

The Japanese economy will continue to enjoy good times over the next several years, with the public developing a genuine sense of prosperity.

Under these conditions, the national income will shift to an upturn even in the absence of policy measures designed to correct income disparities.

The people’s reaction to all this will be: “Way to go, Prime Minister Fukuda! Well done, LDP!”

This is what they mean, then, when they talk about “seizing the luck of the moment.”