By LIU JUNHONG (China Daily)
Updated: 2007-11-01 07:21

The political situation in Japan has been rather dizzying recently with one unexpected twist after another. Amid all this are three phrases frequently mentioned in political discussions - the Democratic Party (DP), pension fund and social gaps.

The DP is now challenging the Liberal Democratic Party's (LDP) political monopoly as its strength rises after this year's Parliament Upper House (Senate) election.

A face-off between two political parties rarely seen in the post-war era has emerged in Japanese politics. Dig deeper, however, and it will not be too difficult to find out this situation reflects the fact that Japan's "political pattern" is now in a period of painful choices after its economy reached maturity.

Today, the Japanese economy is characterized by an exhausted political system, blunted innovation mechanism, flagging international competitiveness, the potential economic growth rate merely gliding, economic development lumbering in persistent low-growth mode, the widening gap between rich and poor, and the emergence of previously latent social issues.

But, Japan's economic maturity has its own unique style as well. First, as its birth rate keeps dropping, the aging of its demographic structure is gathering pace, its human resources showing signs of "getting older and less qualified" and its innovative capabilities on the way down.

This situation has resulted in a structural imbalance in employment with "unemployment and talent shortage existing side by side". It means the unemployed cannot find the jobs that suit them, while employers cannot find the high-caliber talents they desperately need.

Second, the social security system that Japan began building in the 1960s is now showing a hereditary defect as financial resources become scarce and has to be thoroughly overhauled because it cannot adapt to the era of dramatic changes in demographic structure.

Unfortunately, this social security system reform is intertwined with economic development and political reform, which keep getting into one another's way and threaten to cause social instability as well as political turbulence.

Third, since the 1990s, Japan has not been able to break free of the "vested interest" bondage after more than a decade of reform or accomplish the system of innovation that would enable it to compete globally.

The "half-done reform" has forced Japanese businesses to seek roomier development spaces overseas, leading to large-scale outflow of productivity, the weakening of Japan's domestic support structure, struggling potential economic growth rate and relatively low international competitiveness.

Fourth, in terms of economic layout, central cities such as Tokyo, Osaka and Nagoya are on a path toward monopolizing development as human, financial and material resources are poured into them, leaving other regions' economic vitality withering away as the gap between regions and between the rich and poor grow wider by the day.

The problem is, after Japan reached "mid-life crisis", the LDP-led political consolidation style administrative system and financial system have not changed accordingly, leaving the political system straining to cope with the new situation and unable to alleviate, control and overcome the "economic mid-life crisis complex". This has offered the DP an ideal political excuse to challenge the LDP.

The structural change of Japan's economy is closely associated with the global situation. Against the backdrop of US-Soviet rivalry during the Cold War, the global market was divided into two by ideology. Japan, as a lesser capitalist power, gained the status as a "relative buffer" under the US-Soviet rivalry and was able to conduct trade with both political blocs.

Japanese entrepreneurs also enjoyed a relatively relaxed condition to do business then. At least in Asia, Japan played the role of a bona fide "door" and the centre of business exchanges in Asia, which helped it onto the regional throne.

After the Cold War ended, however, the world market was reunified as the ideological confrontation lost its relevance. The constraint on relatively free movement across the world of human, financial and material sources was largely gone.

In East Asia in particular, as China's embarked on the path toward a market economy, the region as a whole also carried out market reform. The region's economies became inter-connected and so did business networks, greatly boosting regional economic vitality. The East Asian economy thereof has been regarded as a miracle of global proportion.

The Chinese market became a key trans-shipment hub for Asian exports to the rest of the world, while the Chinese economy began playing the role of a new engine driving the world economy forward. Meanwhile, Japan's status as "doorway to Asia" became less significant and its regional influence less felt than before.

The structural change in foreign trade caused Japan's industrial structure and economic structure to undergo a complete overhaul of their own.

At the same time, they have kept their high-end services such as research and development (R&D), design, consultation and finance as well as high-tech industries at home to achieve dynamic upgrade of the industries.

It could be said that the enterprises helped Japan regain the status as the technology supplier, capital source and receiver of processed goods in Asia. That has been the fundamental driving force behind Japan's all-round economic recovery since 2002.

There is, however, a catch in all this: amid globalization, structural changes in trade, industry and the economy require corresponding system reforms of the domestic economy, politics and society, particularly a thorough transformation of the social security system. Otherwise, there is no way to achieve sustainable development.

But, because of opposition from vested interest groups and the society's habitual reliance on institutional protection, Japan's socio-economic reform has lagged seriously behind that of industries and been hard to gain depth despite its awareness of the born interconnection between the two.

During Junichiro Koizumi's five and a half years in power, his government hardly made any tangible achievement in this respect except the "postal service reform" after unveiling the slogan of "no economic growth without reform."

As for Shinzo Abe's cabinet, it made political headlines only for its "efforts to repair negative effects of Koizumi's reform".

While Japanese political parties all tried to be the champion of narrowing social gaps and resolving the pension fund issue, the country's political circle has found a new fad in debating whether the "Scandinavian format" or "American format" should be the way to go in the face of a state crisis, making Japan's reform voyage more disoriented after 10 years of aimless struggle.

As a matter of fact, it is the "regional disparity" that tops the so-called social gaps; and the "pension fun scandal", which was considered the worst blunder made by the LDP in its Parliament Upper House election campaign, exposed a fatal defect in Japan's social security system. Fact is, hidden behind the "misplaced pension fund records" scandal was a political duel over Japan's social security system reform.

The Koizumi government decided in 2004 to kick off its "pension fund system reform" in 2009, which is in essence aimed at transferring part of the cost of state spending onto the paying public.

This was to be accomplished through raising the amount of individual pension fund premium payment and the starting age to claim it from 60 to 65. It was an attempt to circumvent the problem of insufficient financial resources under the disguise of copying the "small government" formula of the US.

If the way most other developed countries have followed is any yardstick, it should be acceptable for Japan to adopt the practice of designated use of sales tax revenue to make up for the shortage of pension fund sources.

Problem is, currently Japan keeps an across-the-board income tax rate of 40 percent regardless of the taxpayers' economic status. If sales tax is raised any further, it will undoubtedly add to the financial burden of low-income households, which will not only push the economy downhill but also anger the public and drive votes away.

That is why Abe refused to even touch the income tax issue during his term in office in order to keep his administration stable for long-term functioning. But that is how he locked himself in a political safe he could not get out of.

Under Japan's current election system, it seems neither the LDP nor the DP dare to ignore "regional constituencies" or go all out in reforms and all they do is make more promises for better protection.

For example, the DP promised in its Parliament Upper House election campaign to subsidize all farming households and give children of "appropriate age" pocket money in a bid to woo voters.

And the fact that some voters bought it shows just how much the Japanese society is used to institutional protection.

Commenting on the current political mess, Keio University Professor Heizo Takenaka, who was finance minister and chief designer of reforms under Koizumi, wrote in an analysis for a recent issue of Nihon Keizai Shimbun: "Regional disparity originates from the delay of regional reforms and I dare say only by abandoning 'retrospective politics' and pushing reforms on can Japan's politics find its future."

The author is an associate researcher with the China Institutes of Contemporary International Relations

(China Daily 11/01/2007 page11)