Given the lukewarm to frigid response from the experts, the handout may not have been a political panacea under the best of circumstances. But it’s not as if the Japanese public sat down, looked at the proposal and ran it through an economic model and 70% of them decided that it was an unsound idea either. It was the miasma generated by a waffling Prime Minister amidst all the political posturing and leaks that encouraged the negativity and made the public so receptive to it, while putting a decisive stamp of incompetence on the Aso administration.
So where do things go from here? The supplementary budget authorizing the handout and other expenditures passed the Lower House on 13 January and went to the Upper House. The Japanese Constitution all but guarantees that the budget will become effective within 30 days, so that part is a done deal. But budgets typically need legislation to secure the funds required to meet the expenditures; this supplementary budget is no exception*. On 19 January, the Aso Cabinet submitted a legislative bill that would authorize the government to a) issue long-term bonds and b) dig up buried treasures—transfer reserves from the Fiscal Investment and Loan Program Special Account to the General Account—in order to finance the handout and other expenditures. This bill requires a Lower House supermajority revote, after the Upper House opposition votes it down or refuses to vote for 60 days after receiving the bill from the Lower House. But dissatisfaction and fear is so strong among the LDP rank-and-file that there is talk of enough members—16 or more— breaking ranks to vote against the legislative bill to deny the Aso administration a supermajority.
Several scenarios are possible if such a thing comes to pass, but I do not see any plausible sequence that would not lead to an early snap election. In every case, the Aso administration would come to an end with the legislative failure. However, it is still highly unlikely that such a thing will come to pass. I noted before that the LDP had closed ranks after it resumed in the new year, and gave my take on the reasons why. In any case, the moment for a Lower House rebellion over the handout passed with the 19 January vote. Even Yoshimi Watanabe, who subsequently left the LDP of his own accord, merely abstained from the budget bill vote. He was joined by Kenta Matsunami, who got off with a mild scolding, a fact which may encourage a few other Lower House members to follow suit in the revote, but it is unlikely that they will breech the 50-abstention threshold required to deny a supermajority**.
Another potential tipping point arrived in the form of the internecine battle over Prime Minister Aso’s insistence on putting FY2011 as the target year for raising the consumption tax rate in drafting the FY 2009 tax bill, which, like any other legislative bill, would almost certainly require a Lower House supermajority. There was a dancing-on-the-head-of-a-pin quality to the argument, since no one in the LDP is willing to do so until the Japanese economy is out of the woods as far as the current recession is concerned. In the event, they came up with compromise language that tied a consumption tax hike to economic recovery as well as radical administrative and fiscal reform, a piece of rhetorical artistry that even the DPJ would find hard to reject on principle. In any case, the wording doesn’t matter; the important thing is that potential dissenters are on board, including, apparently, Hidenao Nakagawa. I now believe that this takes the issue out of play as far as splitting the LDP before the Lower House election is concerned, although, as in the case of the handout, I would not rule out a smattering of abstentions.
* Supplementary budget bills are more often than not accompanied by taxation bills. This second supplementary budget bill is not, because the original tax rebate proposal was altered to a cash handout independent of the tax system.
** 1 nay=3 abstentions—if my arithmetic is any better than Fareed Zakaria’s.
Since we’re talking about fiscal matters…
…Someone at a seminar asked why the Japanese government couldn’t its foreign currency reserves to prop up the Japanese economy. The speaker didn’t address the point directly, and I know that some of you reading this were there. Here’s my answer:
Japan finances its foreign currency reserves with short-term (1year and under) yen bonds. Think of our foreign currency reserves as a huge carry-trade operation. Using the short-term money to finance infrastructure investments would be risky; spending it on handouts for instance would be disastrous. In contrast, the reserves in petro-states can be used as political slush funds because they consist mainly of excess oil revenue.