Six-Fold Jump in Priority Spending Will Not Change the Narrative for Fukuda Administration

The media reported today that Finance Minister Fukushiro Nukaga has indicated that the Fukuda administration will expand the Budgetary Provision to Promote Prioritization (BPPP) (Juutennka Sokushin Kasan Waku) for the FY 2009 General Budget to 300 billion Yen, up from 50 billion yen in FY 2008. Sounds impressive? But the real significance of this message is that the Fukuda administration will not be conducting a serious overhaul of government expenditures, and therefore will be unable to make a strong case that a consumption tax hike is justified as part of a thoroughgoing tax reform package. I believe that this more or less reinforces my 4 June assessment of the prospects for the Fukuda administration and the ruling coalition. Let me explain.

First, a few facts about the General Budget. Of the 83.1 trillion yen in total expenditures for FY 2008, 20.1 trillion yen go to servicing the government debt while 15.6 trillion yen cover mandatory transfers to local governments. Of the remaining 47.3 trillion yen—called general expenditures—21.8 trillion yen fill the gap between social security (public pension, healthcare/medical insurance) premiums and expenditures. Further subtract civil servant salaries and other overhead, and the Japanese government is left with about 15 trillion yen that are considered discretionary.

Every year, usually in August*, the administration imposes by Cabinet decision overall and ministry/agency-specific ceilings on the following year’s General Budget expenditures. Each ministry/agency gets more or less the same share each year, after accounting for 1% reductions in defense and education expenditures respectively and the annual 3% reduction in public works and other discretionary expenditures. The Koizumi administration initiated this mandatory reduction process. The Fukuda administration persists despite grumbling from the party rank-and-file.

The ceiling-cum-pro-rata-reductions are an effective way to reduce government borrowing. But the rigidity of the system makes it difficult for any administration to implement policy initiatives of its own. The BPPP is an attempt to overcome this defect by setting aside funds to allocate to priority issues over and beyond the individual ceilings.

For FY 2009, if all goes well, the Ministry of Finance will be allocating 300 billion yen to the Fukuda administration’s priority issues—eliminating the doctor shortage, combating climate change, developing next-generation technology—over and above the budgetary ceilings imposed on each ministry and agency by Cabinet agreement on 29 July. That sounds like a lot of spending money for Prime Minister Fukuda, until you remember that it’s only one five-hundredth of the 83 trillion yen FY 2008 General Budget. And how will the Fukuda administration come up with the 300 billion yen? According to reports, Mr. Nukaga intends to impose an across-the-board 2% cut on the entire 15 trillion yen in discretionary expenditures, including the up-till-now untouchable R&D expenditures.

So, the Fukuda administration will be able to reduce discretionary expenditures by a little less than 300 billion yen, and reshuffle 300 billion more between ministries/agencies, if all goes according to plan,. So, this is the expenditures overhaul that will serve as the backdrop to the “thoroughgoing tax reform” that Prime Minister Fukuda has promised for this autumn. “Thoroughgoing tax reform”, of course, is a euphemism for “raising the consumption tax” to cover a legally mandated two and a half trillion yen hike in the General Budget subsidy to the national pension system starting in FY2009. Do you see the Japanese public buying this? I don’t.

On the other side of the political aisle, the DPJ has been talking down expectations in the face of the 18 trillion yen price tag on its policy manifest and subsequent on-the-fly promises. Ozawa’s kagemusha Kenji Yamaoka and dissident Seiji Maehara were both on message today, as they appeared together to talk about the time it will take to implement the DPJ manifest and its future incarnations, as they root out the multi-trillion excesses accumulated over the years under the LDP-Komeito regime. Translation? Don’t hold us to any timetable.

Flip-flopping? Sort of. But I suspect that the emergent realism in the DPJ will be reassuring to the independent voter and will compare favorably to a ruling coalition that is unable to change its ways.

The DPJ Is Not Going to Summon Naoki Akiyama

Sunday Project, the Old Faithful of political talk shows, produced the Diet affairs committee chairmen from each of the parties*. Most of the talk revolved around the botched attempt at summoning Finance Minister Fukushirō Nukaga to testify under oath. The DPJ chairman gave the following reasons for giving up:

1) Takemasa Moriya, the disgraced MOD ex-Administrative Vice-Minister**, was arrested, making a joint appearance of the two in front of the Upper House Financial Affairs Committee impossible. The DPJ Chairman strongly and repeatedly suggested that the arrest was a plot to avoid the summons.

2) The Japan Communist Party changed its mind***, the People’s New Party also insisted on unanimity, and the DPJ wanted to avoid the public impression that it was conducting a one-party vendetta.****

All the opposition parties claimed that they still wanted the two to testify once Mr. Moriya got out, though short of corroborating evidence, it was hard to see how they would be able to justify this inconsequential “poking at the corners of the multi-tiered meal box” at the tax payers’ expense. It appeared that they intended to blame the second blow-off on the LDP and New Kōmeitō.

The Communist Party chairman managed to throw in some fresh meat by way of allegations of mass corruption, which it hoped to verify by going after Naoki Akiyama, the obscure but reputedly powerful executive director of the Japan-U.S. Center for Peace and Cultural Exchange*****, an institution that brings together on its board of directors many defense tribe Diet members, mainly LDP, but also a couple of independents (thrown out of the LDP for playing Post Office), and one each from the New Kōmeitō, the DPJ, and the People’s New Party. The Communist Party chairman raised allegations in the Asahi and Yomiuri of a 60 million yen slush fund transfer****** from Yamada Yōkō’s U.S. subsidiary******* to the U.S.-Japan Center. The DPJ chairman bravely criticized the Center, but curtly dismissed any prospects for summoning Mr. Akiyama for questioning, given presumed LDP intransigence. He also stated his view that the fix was in and that this whole affair would end with Mr. Moriya and Mr. Moriya only taking a fall********.

I’m not yet sure what to make of all this; all I can say is that the shakaibu(society********* section) reporters are still giving the politics section reporters a good run for the money, which I think means that the public prosecutors are feeding this constituency of theirs. However, I still don’t see a convincing reason to change my call on the refueling bill and its aftereffects, given the DPJ’s apparent reluctance to go after the angle taken up by the Communist Party.

* New Party Nippon was missing, but it only has one Diet seat (in the Upper House) and has formed an official party group jointly with the DPJ and one other nano-party. The individual chairmen’s names have been omitted on this blog because they are irrelevant.

** Allow me to take note of the unintended pun in “vice-minister”.

*** Party HQ reminded its field officers that the Communist Party had been on the short end of this stick before.

**** The Social Democrats, now reduced to near-micro party status, are not represented on the Financial Affairs Committee; and the New Party Nippon is a one-seat nano-party that is part of an official Upper House party grouping.

***** The information on the website is almost exclusively in Japanese only. My guess is that the web site is there mainly to satisfy disclosure requirements as a recipient of public funds.

****** 100 million according to the Yomiuri. The Asahi report, which has 40 million going to Mr. Miyazaki, the ex-Yamada Yōkō executive who broke off in a business dispute to set up Nihon Mirise, appears to be more reliable.

******* This allegation brings the case under the reach of the U.S. Foreign Corrupt Practices Act, without prejudice to the ultimate outcome. According to the Yomiuri report, Mr. Akiyama denied receiving such funds.

******** At this point, the oldest host of a Japanese news show Sōichirō Tawara was not seen to put his chin in his hands, smile winsomely and say, “Do tell”.

********* No, not that kind of “society”.

DPJ Hopes Finance Minister Nukaga Comes Through for Them

Prime Minister wannabe Fukushirō Nukaga is a former Defense Minister (when MOD was still the Self-Defense Agency) and member in good standing of the Japanese defense community. He is now Minister of Finance, a diminished but still powerful portfolio, in the Fukuda Cabinet. He also plays golf, and eats out. All this has brought him – merely allegedly in one case – into the company of Yamada Yōkō and the people embroiled in the MOD scandals. The thinking of the DPJ is that if they can bring this Cabinet member down, they will be able to sink the refueling bill, the Fukuda Cabinet, and the LDP in a snap election forced by an Upper House censure vote.

Mr. Nukaga entered the picture when Takemasa Moriya, the now-disgraced former MOD Administrative Vice-Minister, testified in the Diet under oath that he went to a dinner held for James Auer, a former military intelligence officer, Pentagon official and prominent Japan hand, and that Mr. Nukaga (and the hospitalized ex-MOD Minister Fumio Kyuma) was there as well as Motonobu Miyazaki (CEO of Yamada Yōkō split-off Nihon Mirise), the main character of this saga and now criminal suspect. Mr. Nukaga, Mr. Miyazaki, and, most importantly, Mr. Auer have all denied attending the said dinner*. By his own account, Mr. Nukaga has known Mr. Miyazaki for several years, once received him in his Diet office, and once played golf with him (and paid 20,000 yen out of his own pocket) at a golf club affiliated with Yamada Yōkō.

Between 2002 and 2007, Mr. Nukaga sold 2.2 million yen worth of fund raising party tickets to Yamada Yōkō, all of which he returned after the scandals broke. He has denied receiving any political funds in the form of donations. He also received 200,000 yen as part of the invitation to the wedding of the daughter of the Yamada Yōkō owner – he has not been personally implicated in the scandal – and sent in his stead his wife, who gave the same amount as a wedding gift.

These Yamada Yōkō/Miyazaki related revelations have created considerable embarrassment for Mr. Nukaga. However, all of them, to the extent admitted by Mr. Nukaga, as well as the alleged dinner honoring Mr. Auer, are par for the course for a politician of Mr. Nukaga’s background. It is only with hindsight that they have become a matter of interest for the DPJ and the media. Likewise his links to the Japan-U.S. Center for Peace and Cultural Exchange and its executive director Naoki Akiyama (again, golf). So far, the DPJ has turned up more smoke and mirrors than smoking gun.

More troublesome for the Finance Minister is the latest allegation, this time coming from Nobumasa Ōta, a former JSDA fast-track official. According to Mr. Ōta, in 2003, when he was the head of the Sendai branch of the Defense Facilities Administration Agency, Mr. Nukaga applied pressure through Mr. Moriya to include a Sendai construction company in the list of eligible bidders at the branch. Mr. Ōta’s background lends a measure of instant credibility to his charge. Even if his allegations are true, they would still likely fall short of a criminal indictment** of a sitting Cabinet Minister and defense establishment member, a turn of events that would be as good or better than what I believed to be the minimum necessary for stopping the OEF-MIO refueling resumption bill. However, it will not require a criminal indictment to force Mr. Nukaga’s resignation and discredit the LDP and the Fukuda administration, which, for electoral and internal reasons, is vastly more beneficial to the DPJ than taking down the refueling bill. Influence peddling is something that anyone can understand and rally against.

But what are the chances of Mr. Ōta’s charges sticking? In my view slim, not least because everybody, including the official who allegedly told Mr. Ōta of the pressure through Mr. Moriya, are denying that it ever happened. So, unless Mr. Ōta or the DPJ comes up with independent corroborating information, the matter will remain a case of he hearsays/they say. In which case, Mr. Nukaga and the Fukuda administration will weather this attack – if not without being a little diminished, since there is no way that Mr. Ōta will retract his allegations.***. Still, the issue bears watching, because the DPJ may just have something up its sleeve.

*It is somewhat mystifying to me that the DPJ continues to bark up this particular tree. I see no plausible reason for these people to need to lie about this particular allegation. Is someone leading the DPJ, once again, on a wild goose chase? What does Seji Maehara think?

** You are warned that I’m writing this down without doing the usual fact-checking. Specifically, I’d have to hit the casebooks to be sure that Mr. Nukaga’s alleged action does not constitute an exercise of his authority as Deputy Chief Cabinet Secretary at the time. There are also statute of limitation considerations that turn on the existence of specific quid pro quo for the alleged action, which in turn entails questions of fact that I can only speculate about.

*** Mr. Ōta does have some substantial downside, including, most importantly in the eyes of the public, the fact that he ran for an Upper House seat in 2004 (but not 2007) as a DPJ candidate. The LDP will play on that and other matters around Mr. Ōta. A smear campaign? The pox-on-all-houses tabloid media will do that for them. But this will definitely not hurt Mr. Ōta’s career as a freewheeling talking head and blogger extraordinaire and indefatigable chatroom operator.