Desperate Times for Fukuda and LDP

There won't be a honeymoon for Yasuo Fukuda. The new prime minister already calls his government the "back-to-the-wall cabinet" four-plus weeks after Shinzo Abe resigned and checked himself into a hospital. The ruling Liberal Democratic Party is facing a crisis of such proportions that even insiders now wonder how much longer its 50-year rule will last. LDP legislator Kotaro Tamura warns that if Fukuda's government fumbles on the policy front, "we could be thrown out of office and the LDP could fall apart."

Known for gray suits and colorless language, Fukuda was chosen as a bland presence who would restore calm after Abe's flameout. The danger, however, is that Fukuda, too, will fail to address urgent voter concerns about rising income inequality, troubled pensions and economic uncertainty, opening the door to the opposition Democratic Party of Japan in the upcoming general election. Many pundits are now wondering aloud if, after 50 years of almost continuous LDP rule, "regime change" is imminent, meaning a shift to a true two- or even three-party system, with a new party formed by young reformists. "I think it's possible that Fukuda could be the LDP's last prime minister," says Yasuhiro Tase, a leading commentator.

The LDP's vulnerability is unprecedented in recent Japanese history. The party got hammered so badly in this summer's upper-house elections that the DPJ could easily retain control of the chamber for the next decade or so. The LDP will be hard-pressed to pass laws without concessions to the DPJ, a first step toward regime change. Moreover, the LDP owes its two-thirds majority in the lower house largely to its last truly popular leader, Junichiro Koizumi. But many of "Koizumi's children," young lawmakers who rode into office with his electoral landslide in 2005, may not survive the coming election with the gray Fukuda in charge. If the DPJ doesn't implode, it could take over the lower house, ushering in a new Japan.

A surprising number of experts are predicting the rise of a third party—some even call it "inevitable." In this scenario, Koizumi's children and other pro-reform members of the LDP would bolt to form a new party, perhaps with like-minded refugees from the DPJ. Its core would be young, mainly urban politicians who supported Koizumi's reform plans, want Japan to push free-market reform further and are fed up with the traditional LDP backroom way of doing things. Some of them could also be hawkish in terms of foreign policy—quite skeptical of China, generally pro-American.

All this is still probably a long way off, and the fall of the LDP has been forecast, wrongly, many times before. But the mere fact that so many are talking about it is intriguing. And the reason they are is that Fukuda has signaled in so many ways that he's planning to take Japan backward.

Traditional LDP mechanisms weakened by Koizumi are now reasserting themselves. While Koizumi's direct appeals to voters sidelined the party's powerful internal factions, Fukuda was elected precisely because of his status as a leader of the biggest faction in the party. The faction system is how the LDP has traditionally doled out public-works contracts. And the man named by Fukuda to head the LDP's campaign in the general election is Makoto Koga, a leading member of the "roads tribe," the faction that funneled public-works contracts to the construction industry in return for donations in the old days. The LDP is already talking about stopping some painful cuts in medical benefits planned by Koizumi as part of his campaign to reduce the budget deficit. "Fukuda was not selected by public opinion, but on the basis of internal party logic," says Aiji Tanaka, professor at Waseda University. "His support may begin to fall if voters begin to see he's doing too much pandering [to vested interests]."

Such moves risk alienating young urban voters who are demanding less old-boy networking and the modernization of the country's sclerotic political establishment. They also risk undermining the revival ignited by Koizumi-era reforms, and at a precarious moment. Public debt has continued to grow, and tax revenues—which remained buoyant under Abe—are beginning to drop, a serious problem with social spending rising as the country ages. One sharp shock—such as a drop in demand from the United States caused by a recession there—could undercut Japan's recovery and send it into a tailspin. And that would make the end of LDP rule even more likely.