William Pesek: Political status quo holding back Japanese economy

Japan's election this month may produce an unexpected winner: investors. The more obvious victor will be the Opposition Democratic Party of Japan, which is widely expected to nudge the Liberal Democratic Party from its almost 55-year grip on power.

It would be some of the best news investors have had in many a year.

As a taxpayer in Japan, I can say there is nothing "liberal" or "democratic" about the LDP. It exists for itself, believing its survival is more important than the livelihoods of Japan's 126 million people.

It's devoid of energy and star power and deserves a good thrashing on August 30. Sometimes, though, it's hard to discern where the LDP ends and the DPJ begins or find clear daylight between their ideas.

They both, for example, like naming leaders who descend from political dynasties. Prime Minister Taro Aso and DPJ leader Yukio Hatoyama are grandsons of former prime ministers.

Yet here are five reasons why a changing of the political guard will be good news for Asia's biggest economy.

One, more of the same is untenable. With a debt-to-gross-domestic-product ratio approaching 200 per cent, the LDP has taken its pork-barrel ways as far as finances will allow.

It can no longer keep out the forces of globalisation chipping away at Japan's competitiveness. It can no longer pave roads that don't need it and build bridges to nowhere to create jobs.

It certainly will try. Aso plans to build an 11.7 billion ($186 million) hall showcasing "manga" comic books. Oh sure, that would help an economy sliding back into deflation. While a drop in the bucket for a US$4.4 trillion economy, such projects are endemic of why Japan is the world's most-indebted industrialised nation.

Credit where it's due, Japan is a prosperous, safe, well-educated, reasonably egalitarian and environmentally stable country. The LDP has held the reins for all but 10 months since 1955, and some of its policies got Japan here. It's time for a new direction, though. The status quo is holding Japan back.

Two, freeing the Bank of Japan. A key reason the yen might strengthen after a DPJ victory is the belief that the central bank will get out from under the Government's thumb. If the BOJ were truly independent, it would have raised short-term interest rates from zero to more than 1 per cent or 2 per cent in recent years.

DPJ leaders pledge to allow the BOJ to do its thing. That might lead to higher interest rates, greater credibility and a stronger yen. That may not seem like a good thing, given that the yen's 23 per cent advance last year restricted exports. A stronger yen would be a sign of confidence and attract more of the foreign investment that Japan seeks.

Three, taking on bureaucrats. It's hard to exaggerate the importance of the DPJ's plan to limit the power of the largely nameless, faceless people who run the country. The aim is for government ministries to be run by elected officials - like Diet members - and not unelected administrators.

It would mean more accountability to the people, greater efficiency and less corruption. The DPJ plans to ban the ridiculous practice of "amakudari", which means "descent from heaven". It's the main gravy train for public servants; when they retire, they get cushy jobs in industries they oversaw while in government. The incentive is to look out for your future employer, not our tax yen.

Four, greater focus on global warming. It's not just that the DPJ aims to lower greenhouse-gas emissions by 25 per cent before 2020 compared with 1990 levels. The party also seems to realise that Japan's prowess in creating green technologies can create jobs and wealth.

Scattered across the nation are scientists developing better recycling methods, new power sources, stronger batteries and ways to reverse environmental degradation. Given demand from China and India alone, Japan is sitting on a growth industry.

Five, investing in Japan's future. The LDP's modus operandi is doling out largesse to vested interest groups such as farmers. The DPJ plans to hand money to households, increasing spending on child care and tuition. The DPJ also wants to cut the corporate tax for small and medium-sized companies to 11 per cent from 18 per cent, while providing 100,000 a month for job-seekers who are enrolled in a training programme.

If implemented well, such policies could make Japan more globally competitive, increase productivity, boost the birth rate, stimulate domestic demand, narrow the rich-poor divide and create jobs in an economy that is still too dependent on large companies at the top of the food chain.

It won't be easy, and the DPJ has yet to prove itself. How to pay for all this is an open question. While lots of funds can be redirected from wasteful public-works projects, Japan's next batch of leaders will need to get creative with the nation's finances.

They must use Japan's wealth more wisely and proactively than ever. Change that investors can believe in may be coming, though, and not a millisecond too soon.

- BLOOMBERG