TOKYO (Dow Jones)--Japanese Prime Minister Taro Aso and his ruling coalition Monday agreed to hold a general election on Aug. 30, a few weeks later than Aso initially intended, to buy time to try to boost the coalition's popularity after a disastrous Tokyo local assembly election loss Sunday.
But analysts said the move by Aso's government likely won't prevent a big defeat for the ruling Liberal Democratic Party that would in all probability cause it to cede power to the Democratic Party of Japan, ending more than half a century of nearly uninterrupted LDP rule.
Some Ministry of Finance officials told Dow Jones Newswires that the ministry is already worried about delays in putting together the national budget for the year starting April 2010, because if the DPJ takes power, its more fiscally prudent policy stance means it would probably question many of the current government's spending plans.
Sunday's Tokyo elections underlined how little public support the ruling coalition has after years of policy missteps and repeated scandals: The LDP lost 10 seats in the 127-member assembly, bringing its total to a record-low 38 seats.
Its rival DPJ, meanwhile, increased its seats by 20 to 58, becoming the largest party in the assembly. The Democrats' victory marked the fifth local government elections where the opposition group beat the ruling party.
This bigger-than-expected LDP loss has forced Aso to abandon his plan to call elections early on Aug. 8 or 9 so that he could assert his leadership by moving quickly into an election campaign. Instead, faced with a growing number of LDP lawmakers calling for Aso to resign, executives in the ruling party forced the prime minister to compromise by delaying the election schedule, an LDP politician familiar with the situation said. Aso now plans to dissolve the Lower House on July 21 at the earliest.
"Had Aso stuck to his original plan, the anti-Aso moves could have gotten out of hand, exposing further LDP internal rifts to the public," he said. "In exchange for keeping the right to call snap elections himself, the prime minister had to give them a late election date."
But analysts say that the three-week election delay likely won't mean much for the LDP and its junior coalition partner New Komeito, which still look set for a major defeat. Their forecasts center on the LDP's Lower House seats decreasing to around 180 from the current 303 seats in the 480-member Lower House. The DPJ's membership could more than double to 240 from 112, making it the chamber's largest party, some analysts predict.
"The major trend (in favor of the DPJ) has already been set for this election. It's hard to imagine that this trend will change," said political analyst Minoru Morita.
Econ Policy Changes On Horizon
If the DPJ emerges victorious as expected in the Lower House polls, that would likely change Japan's economic policy stance, including fiscal spending plans and possibly the way it manages Japan's foreign exchange reserves, which totaled $1.019 trillion at the end of June.
At the Ministry of Finance, for example, with the prospect of a DPJ victory growing, a sense of caution may emerge among bureaucrats that they "should limit the number of projects (in budgetary requests) that the DPJ may dislike," a ministry official told Dow Jones Newswires.
For now, the ministry is likely to go ahead with its usual plan to ask government agencies and ministries for their budget requests by the end of August and to start discussing those requests with them, the official said.
But the start of a DPJ government could disrupt the ministry's normal budget-making schedule.
That's because there's speculation that the DPJ may call for spending cuts in the government's budget plans for next fiscal year. Earlier this month, Aso's Cabinet set the upper limit of general expenditure at a record high of Y52.67 trillion, allowing increases in social security payments, while cutting public works project spending by 3% and defense by 1%.
"If the DPJ demands bigger cuts than already determined (in some budget areas), things could get complicated," resulting in a delay in budget-making, another finance ministry official said.
Indeed, the DPJ's policy platform calls for saving Y9 trillion a year by eliminating what it calls "wasteful" government spending to fund about half of its promised measures worth Y17 trillion. Among those steps: doing away with highway tolls, giving farmers subsidies, and paying Y26,000 a month to parents with children in junior high school or younger.
Moreover, the party has pledged not to raise Japan's 5% sales tax rate for four years.
But analysts generally think the DPJ's financing plan isn't feasible and that the party would eventually have to sell more government bonds to raise money.
"We're just wondering how the DPJ can do such a thing," the first finance ministry official said, referring to the party's plan to squeeze out Y9 trillion by scrapping existing social programs.
"If there's something you can cut further, all I can think of is expenditures for public works projects. But I don't think it's possible to get several trillions of yen" out of this arena unless a government takes the unusual step of stopping ongoing projects halfway, such as road construction, he said.
Some analysts noted that the DPJ's rise to power could help the yen rise against the dollar.
"As far as Japan's foreign exchange reserves are concerned, I have the impression that the DPJ is determined to avoid the risks of (the country's reserves) suffering from dollar weakness," Yuji Kameoka, currency analyst at Daiwa Institute of Research, said. "If (DPJ legislators) act on their words, the yen could strengthen."
Some DPJ members have advocated the idea of asking the U.S. government to issue yen-denominated debt to replace dollar-denominated Treasury bonds held in Japan's reserves. If Tokyo ever formally made such a request, that could sour market sentiment toward the dollar.