As widely predicted by the Japanese media, the Democratic Party of Japan trashed the Liberal Democratic Party of Japan by single-handedly winning an absolute majority of over 300 seats in the upper house elections of Japan's Diet over the weekend.
According to the Asahi newspaper count as of early Monday August 31, the party/coalition strengths in both houses of Japan's Diet were as follows.
Japanese voters have clearly voted for change, and have given the DPJ a comfortable enough majority to actually effect policy in their image. Without Japan's proportional representation system where representatives are elected from multi-seat districts in proportion to the number of votes received even if they lose the majority vote that gave a second life to a number of LDP candidates, the landslide victory for the DPJ would have been even more impressive.
With expectations running high, the new Hatoyama Administration, which is expected to be formed by mid-September, needs to hit the ground running in much the same way that the Obama Administration did in the US. To really be effective, however, the new ruling party will have to engage Japan's bureaucrats, who have held the power to effect LDP policy for the last several decades. During the LDP rule, politicians ostensibly in charge of key Japanese ministries relied heavily on bureaucrats for policy ideas and drafting legislation, particularly regarding the national budget.
To gain control of the policy creation and implementation process, the DPJ plans to,
a) Put at least 100 lawmakers in top ministry posts.
b) Create a National Strategy Bureau reporting to the Prime Minister. The new Bureau will be comprised of public and private sector members.
c) Ban the practice of "amakudari", where retired ministry bureaucrats continued to heavily influence policy with key posts in quasi-public ogranizations/companies.
d) Introduce a performance-based evaluation system for key bureaucrat posts.
To be effective, the DPJ will have to successfully engage the bureaucracies (especially the MOF) while gaining control over them. Leading up the the elections, the bureaucrats for their part were busily wooing key DPJ politicians.
Everyone is aware of the policy challenges of the new Japanese government, which include,
1) Revitalizing Japan's economy. Fiscal spending under the Aso Administration's JPY15 trillion-plus stimulus plan was partially responsible for the 3.7% Q-Q pop in Japan's latest quarterly GDP, while the DPJ says they will can a lot of what they consider wasteful in this plan not already implemented. The programs already announced through the party's manifesto however approximate a similar level of expenditures, but substantially re-allocate where the money will be spent. In terms of scale, economists say the DPJ expenditures could boost Japan's GDP by 1% point over the next two years.
2) Putting talk of a hike in VAT (sales taxes) on hold until they can effect significant administrative reforms to pay for promised expenditures.
On the other hand, as many of the leaders of the LDP's infamous factions were voted out of office, the LDP faces the real possibility of disintegrating. As the only reason for the factions' existence was to distribute power within the LDP, they no longer have a reason for existence, and without the balance and censensus they provided for these factions, there is a possibilty the LDP will simply collapse.
Many key LDP politicians have already switched horses, beginning with Ichiro Ozawa and Yukio Hatoyama, the core of the current DPJ leadership, in the early 1990s, followed by pre-election defections like Makiko Tanaka, the daughter of Kakuei Tanaka, who was arguably the main architect for the factional system as well as the old "iron triangle" between the LDP, the bureaucracy and big business.
For Japan to have a true two-party system that offers a real choice to voters, we believe a properly chastized LDP needs to survive as a viable opposition party, if nothing else to keep the new leading party honest.
Running a simple excel correlation calculation on the Shanghai Composite's the correlation of weekly closes compared to the S&P 500, the Nikkei 225, FTSE 100, WTI crude oil, the BDI shipping index and the S&P 500 VIX volatility index shows the highest correlation between the Shanghai Composite and the BDI shipping index (0.56), followed by the Nikkei 225 (0.43), while the correlation with S&P 500 is the lowest (0.15). However, a falling Shanghai Composite does increase the fear factor among S&P 500 investors, as the correlation between the Shanghai Composite and the S&P 500 VIX volatility indicator is -0.75.
