Crunch Time

If you are going to take to the global stage at a critical time in history, you had better be on your game. Japanese Finance Minister Shoichi Nakagawa certainly wasn’t at his best at a recent meeting of the G-7 group of industrialized nations in Rome. During a Feb. 14 news conference, Nakagawa went before the press in what appeared to be an inebriated state. While the cameras rolled, Nakagawa slurred out halting answers to questions, yawned and seemed on the verge of dozing off. He later said he wasn’t drunk, blaming his bleary, wobbly performance on jet lag, cold medication and a sip of wine. But the damage was done. Beset by international ridicule and an outraged Japanese public, Nakagawa was forced to resign from his Cabinet post.

The self-destruction of Japan’s Finance Minister provided YouTube-quality evidence of what most Japanese already suspect: its current leaders are looking increasingly unprepared to deal with what may be the country’s greatest challenge since the end of World War II. Japan’s economy, the world’s second largest, is contracting at the fastest rate among all developed nations. GDP growth in the last quarter shrank at an alarming annualized rate of 12.7%, Japan’s worst showing since the 1974 oil shock. But instead of taking vigorous steps to counteract a worsening recession, Prime Minister Taro Aso is lurching from one embarrassing gaffe to the next, and seems in imminent danger of losing control of his Liberal Democratic Party (LDP) — and control of the government.

Indeed, the only thing falling faster than Japanese industrial output is Aso’s popularity, which according to a recent Nippon Television survey has sunk to a 9.7% approval rate, the worst for a Japanese Prime Minister since 2001. Even fellow LDP stalwart Junichiro Koizumi, the influential former Prime Minister, has publicly criticized Aso’s blunders, calling them “appalling” and “laughable.” Nakagawa’s Yeltsin-like meltdown “is one more nail in Aso’s coffin,” says Robert Dujarric, director at Temple University’s Institute of Contemporary Japanese Studies. “It shows that he’s incompetent and so is his administration.”

Aso did what he could to quickly mop up the mess by naming current Minister of the Economy Kaoru Yosano, 70, as Nakagawa’s replacement. A fiscal conservative, Yosano will now wear three hats in Aso’s government: running the ministries of economy and finance and the Financial Services Agency, which oversees banking. If things get much worse for the Prime Minister and he is forced to resign, there is even talk that Yosano, who was runner-up to Aso in the LDP elections in September, could replace him as the new head of the party and lead it in upcoming general elections against Japan’s resurgent opposition party, the Democratic Party of Japan (DPJ).

It’s doubtful that Yosano will be able to turn things around. Yosano claims he taught Ichiro Ozawa, the leader of the DPJ, the chess-like game of go. But the last time that Yosano and Ozawa played a match, Ozawa won. With the LDP reeling, it appears Ozawa now holds the political advantage as well — and this will affect whether the government is able to take more decisive action to combat the economic downturn. While Aso’s Cabinet in December approved $811.9 billion in stimulus spending, little of that money has been put into action. Other measures are seen as piecemeal and ineffective, leading to the perception that Aso has failed to deliver the fiscal and monetary steroids Japan needs to avert a deep recession.

The latest economic indicators are dire: exports were down nearly 14% in the fourth quarter, a record three-month drop; with U.S. consumers shutting their wallets, the big guns of corporate Japan — among them Toyota and Sony — are forecasting historic losses and firing thousands of workers; Japan’s unemployment rate has spiked to 4.4%, a level not seen in more than five decades. “We have a once-in-a-hundred-year crisis and the policy response is not even average,” says Jesper Koll, president and CEO of Tantallon Research Japan. “The people running the show are not politicians, not independent or accountable political leaders. The policies are run by bureaucrats.”

The fear is that additional recession-fighting measures planned by the Aso government will be sidetracked by Japan’s chronic legislative infighting and revolving political leadership (the country is now on its fifth finance chief and third Prime Minister in two years). Japan’s parliament, the Diet, has for the past several weeks been debating legislation surrounding a supplementary budget package that includes a controversial $21.7 billion handout to the Japanese public aimed at boosting consumer spending. But DPJ politicians — smelling blood in anticipation of general elections, which must be held by September but could come before then — might choose to take advantage of Aso’s weakness by blocking passage of additional stimulus measures, no matter how pressing the need, says Credit Suisse chief economist Hiromichi Shirakawa. DPJ politicians “can now argue that the government has already lost their ability to get back on a path to recovery,” Shirakawa says. “I think the messy situation could get messier.”

Absent an economic miracle, it’s possible Japan’s political landscape will change dramatically in the next several months. The LDP has been Japan’s ruling party for most of the past 50 years. But if deteriorating conditions force Aso to dissolve the Diet’s lower house soon, an exasperated Japanese electorate could hand the DPJ enough seats in a general election to take control of the Diet and choose a new Prime Minister. Aso may not survive as the nation’s chief long enough to suffer that humiliation, though. “There’s no optimistic short-term scenario for Japan,” says Gerald Curtis, professor of political science at Columbia University. Aso “is going to have to quit.”

The embattled PM may yet have one last hurrah. As the Nakagawa fiasco was playing out in Rome, Hillary Clinton was visiting Tokyo on her first overseas tour as U.S. Secretary of State. Clinton announced that Aso on Feb. 24 will visit Washington to meet with U.S. President Barack Obama. That Aso was selected as the first foreign leader to visit Obama’s White House offers a ray of hope that the world’s two largest economies are cooperating to solve the economic crisis. But the honor was hardly an unvarnished vote of confidence. During her Japan stopover, Clinton took an unusual side trip by also meeting with Ozawa, the DPJ chief. Is Washington expecting a sea change in Japanese politics? During a period of unprecedented economic turmoil, it’s wise to hedge your bets.