Buyside Magazine reaches active institutional investors monthly with news and analysis of the equities markets. Buyside takes readers beyond news of the current business climate to report industry and market trends that are crucial for investors to understand -- not simply the latest business trends or product releases. Buyside and BuysideCanada are available in print, and online at www.buyside.com. Subscriber information is available on Buyside's home page.

Japan – Another Election on the Horizon

By Scott B. MacDonald

In July Japan will go the polls to re-elect half of the 242 seats in the upper house of the Diet. We do not expect any major changes. Although the Democratic Party of Japan (DPJ) is seeking to capture more seats than the LDP (which now holds 50 seats), Koizumi remains a skillful player in the political game. The DPJ’s battle plan is to convince the public that Prime Minister Koizumi’s economic reforms have failed and that the sending of Self Defense Force troops to Iraq is a mistake. Although the success of Koizumi’s reforms is indeed questionable, the Japanese economy is on the upswing and Nikkei is trading well above the lows of recent years. Unemployment is down to 5% from a high of 5.5%. In addition, Koizumi’s attention to raising Japan’s standing in international affairs has been one of the more significant areas of success.

The decision to send troops to Iraq was a well-calculated decision on the part of Koizumi. On one hand it signaled to the rest of the world that Japan was ready and willing to assume a more active international role. On the other hand, Tokyo’s engagement in Iraq had a payoff with the United States, which Japan wants to be fully engaged in regard to North Korea. After all, it was North Korea that fired a test missile over the Home Islands in 1998. It was a North Korean spy ship that exchanged gunfire with and was sunk by Japanese patrol boats in 2001 (inside Japanese waters) and it was the regime of Kim Il-jong that acknowledged that North Korea had in the past kidnapped Japanese citizens. North Korea is Japan’s most immediate security concern. Considering the need to keep North Korea engaged, Tokyo wants to make certain that Washington maintains the pressure on Kim’s government to eventually disarm its nuclear weapons program.

Tokyo also needs to keep Washington involved in East Asia as an important balancing power to China. China and Japan are already competing for scarce energy resources around the world and in the future this is likely to extend to markets. There are also disputes over various pieces of real estate in the waters intersecting the two countries.

However, the sending of troops and other personnel to Iraq is not without risks. The taking of five Japanese nationals as hostages heightened public worries about their country’s Middle Eastern involvement.

Although Koizumi refused to deal with the hostage takers (who released their prisoners), the Middle Eastern exposure has also opened Japan to the possibility of terrorist attacks. There is a danger that Japan’s upcoming July election could attract a similar attack as occurred in Madrid, with the strategic objective of punishing the LDP-led coalition government for its support of the United States in Iraq. A major terrorist incident in Japan would also hurt Koizumi in the one area where he has been very successful – foreign affairs. For al-Qaeda hitting hard against the LDP in July could bring big dividends. Japan’s next lower house election is not set until 2007. A major loss in the upper house election could force an earlier electoral contest. In such an environment, Koizumi could be forced to retreat from his Iraq policy (due to considerable opposition within his own party) or be forced to resign due to a loss of public confidence. In addition, the DJP has already stated that it would withdraw Japanese troops from Iraq. Short of a major terrorist attack, Koizumi’s major opposition, the DJP, should be manageable. The situation will decidedly test the Prime Minister’s skills.



Editor: Dr. Scott B. MacDonald, Sr. Consultant

Deputy Editors: Dr. Jonathan Lemco, Director and Sr. Consultant and Robert Windorf, Senior Consultant

Associate Editor: Darin Feldman

Publisher: Keith W. Rabin, President

Web Design: Michael Feldman, Sr. Consultant

Contributing Writers to this Edition: Scott B. MacDonald, Keith W. Rabin, Russell Smith, Michael Preiss, Darrel Whitten, T.W. Kang and Michael Feldman



To obtain your free subscription to the KWR International Advisor, please click here to register for the KWR Advisor mailing list

For information concerning advertising, please contact: Advertising@kwrintl.com

Please forward all feedback, comments and submission and reproduction requests to: KWR.Advisor@kwrintl.com

© 2003 KWR International, Inc.