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      With Ratings Companies Circling, Japan Parties Reach Compromise

      Japan's government and the main Liberal Democratic Party opposition in control of the upper house have agreed to a compromise.
      By Amiel Ungar
      First Publish: 8/9/2011, 9:35 PM

      One country that is taking the Standard & Poor's downgrading of US debt to heart is Japan. It is no secret that Japan, with its high government debt-to-GDP ratio, was a prime target for a downgrade.

      Politically, Japan resembles  the United States in terms of political gridlock between the government controlled lower house and an upper house controlled by the opposition. While unlike the American model, the two houses are not equal in power, the opposition control of the upper house made the passage of financial legislation an impossibility.

      Now a new agreement between the ruling Democratic Party of Japan (DPJ) and the Liberal Democratic Party (LDP) and the LDP's traditional ally Komeito has assured passage of a deficit-financing bill via a bond issue.

      The opposition had held up its approval for the bill because it demanded as a price that the government backtrack from major policies that proved popular with the electorate. These included monthly child cash stipends designed to stimulate the country's anemic birthrate, free high school education designed to promote greater equality and farm subsidies in an attempt to crack the LDP's rural electoral stronghold.

      When it was in power, the LDP was far from a paragon of fiscal restraint. Its pork barrel policies helped ramp up Japanese debt. The LDP now hopes that voters who were enticed by the DPJ's promises in the 2009 elections will realize that the DPJ is untrustworthy. It has preferred to take a more long-term view, as despite the government's unpopularity, that unpopularity has not translated into increased support for the LDP.

      Chief Cabinet Secretary Yukio Edano expressed his regret that the government was forced into a U-turn, but since the public had given the opposition control over the upper house, the compromise in a sense reflects the public will.

      It is not certain whether the agreement can save the Japanese credit rating, as all the major ratings companies have projected a negative outlook for Japan. However, it will soften the argument that political divisions in Japan's government nullify the prospects for effective action.