Japan's election may spell more debt

By Linda Sieg

TOKYO (Reuters): Japanese ruling politicians, faced with the certainty of a general election in the next 12 months, are scurrying to woo voters with economic policies -- and risking a bigger government debt burden into the bargain.

The result, analysts say, will spell more political pressure on the Bank of Japan to ease its already hyper-loose monetary policy to help foot the electioneering bill.

Japan's tripartite ruling coalition agreed on Monday to go ahead with the launch of a planned public insurance scheme for nursing care for the elderly, but said it would consider suspending plans to collect premiums from the public to help pay for the scheme.

Policy-makers were meeting again on Tuesday to figure out how long the suspension would last, domestic media said.

"The only thing in ruling politicians' heads at the moment is the election," said Muneyuki Shindo, a political science professor at Rikkyo University in Tokyo.

Prime Minister Keizo Obuchi's ruling Liberal Democratic Party (LDP) holds a majority in parliament's Lower House and his new three-party mega-coalition has a lock on the Upper House as well.

But a Lower House poll must be held by October 2000 at the latest, and with many voters believed wary of the new ruling bloc due to the presence of the Buddhist-backed New Komeito, the LDP will be hard pressed to hold on to a majority by itself.

"Few analysts are expecting the LDP to win a majority on its own and if it gets fewer than the 240 seats it won in the 1996 election, Obuchi will be in trouble," Shindo said.

In a clear sign of election priorities, the LDP is pushing to scuttle a ban on corporate donations to individual politicians that was supposed to take effect from January 2000, although coalition partner New Komeito wants the ban to begin as planned.

Foremost in voters' minds are likely to be the twin questions of whether the nation's long-sought economic recovery stays on track and how much pain they will be forced to suffer as firms cut payrolls and investment to boost profitability.

In an effort to soothe such worries, ruling politicians are wrapping up details for a stimulus package worth over 10 trillion yen (US$95 billion), to be funded partly by an extra budget for the fiscal year to next March, to be enacted in a parliament session which starts on Friday.

Policy-makers are juggling the political pressure to beef up public spending in the budget to lure votes with concerns about an over-supply of government bonds which could push up long-term interest rates and thus deal the recovery a blow.

Finance Minister Kiichi Miyazawa on Tuesday declined comment on the budget's size but added it seemed to be growing apace.

Politicians may also be tempted to inflate the initial budget for 2000/2001, starting next April, but could wait and see if another extra budget is needed next autumn, just before going to the polls.

Budget bulge aside, ruling politicians have long admitted that forcing voters to pay for the elderly nursing care scheme -- although a must for Japan's rapidly aging society -- would throw cold water on their election prospects if implemented as planned.

Worries about extra government bond issuance to fund the premium gap -- estimated at around 1.6 trillion yen if the suspension lasted a full year -- pushed up Japanese government bond yields on Tuesday morning. The yield on the 217th 10-year JGB at 1.945 percent at midday, up from 1.895 percent on Monday.

Smaller firms and their workers, which form the backbone of Japan's economy and its electorate, clearly top the list of political priorities.

Officials have hinted that about two trillion yen will be allotted for small and medium-sized firms in the extra budget in addition to a minimum 3.5 trillion to be spent on infrastructure.

The government has also pledged to expand an existing loan guarantee for small and medium-sized firms by 10 trillion yen, allow more firms to be eligible, and extend the program for another year to March 2001.

Optimists hope politicians will forge ahead with structural changes to foster new growth ventures and labour mobility while bailing out existing firms and soothing restructuring pain.

Others are less sanguine.

"They're focusing on money -- how to support existing small and medium-sized businesses rather than on creating an environment for new ones to grow," said Ron Bevacqua, chief economist at Commerz Securities.

All of which means that if the public spending bill mounts, Japan's central bank, already committed to a zero-interest rate policy, is likely to be back in the hot seat if long-term interest rates start to climb.

Some politicians and economists have already loudly urged the Bank of Japan to adopt a quantitative monetary policy, which would target an increase in money supply and inflation, as the only way left for a further credit easing.

"As supply goes up, we do expect bond yields to go up to 2.5 to three percent over the next six to 12 months, and over that period the pressure will increase on the BOJ," Bevacqua said.