Dispatch Japan

Sengoku sends message to Beijing, and Washington

Japan’s Chief Cabinet Secretary Yoshito Sengoku took steps on Tuesday to deescalate tensions with China stemming from a territorial dispute in the East China Sea that has resulted in the arrest and detention of a Chinese fishing boat captain after a collision between his vessel and Japanese Coast Guard ships.

 

Sengoku warned against “narrow-minded extreme” nationalism in either Japan or China possibly hijacking the issue, which could result he said in the kind of tension that could threaten regional economic development.

 

 

China quickly dismissed Sengoku’s statements, which included the suggestion that Prime Minister Naoto Kan and Chinese Premier Wen Jiabao meet in New York later this week while both are attending the UN General Assembly. Beijing had earlier ruled out a Kan-Wen meeting, a stance Wen himself repeated in New York today while speaking to an audience of ethnic Chinese.

 

Leaving aside Japan-China relations for a moment, Sengoku’s comments tell a lot about the current policy making process in Tokyo.

 

While nothing Sengoku said runs counter to statements made by Japan’s new foreign minister, Seiji Maehara, and there is no evidence of a rift between the two, Sengoku’s comments do make clear that decision-making over this issue firmly rests in the prime minister’s office, not with Maehara or the Foreign Ministry.

 

Kan, speaking in New York, backed up Sengoku, saying “I’d like to see people in each position act calmly.”

 

Maehara is known to harbor considerable concerns about the ongoing buildup of Chinese military power, and his appointment is often popularly portrayed as indicative of a “maturing” of strategic views on the part of the ruling Democratic Party of Japan (DPJ).

 

Indeed, many foreign policy “realists” in Washington have welcomed Maehara’s appointment, seeing a shift in Tokyo that would bring Japan closer to a strong if not prevailing view in US foreign policy circles that a Cold War-style confrontation with China may not be avoidable.

 

Sengoku, while not dismissive of the Chinese military buildup, is of the view that the jury is still out as to China’s long-term intentions. In that context, he favors giving the Chinese leadership some benefit of the doubt.

 

When calling for a meeting of Chinese and Japanese leaders over the current flap, for example, Sengoku said he has “yet to confirm the nuance” of statements by Chinese Premier Wen that some analysts have seen as inflexibly confrontational.

 

“We also need to consider how we can build strategic, mutually beneficial relations with the country with enormous economic and other kinds of power,” Sengoku said. “From the standpoint of a broader strategic perspective, I think (the governments) should hold a high-level meeting, if possible, urgently.”

 

None of this implies that Japan is prepared to be pushed around by China on territorial disputes. Indeed, Japan was an enthusiastic supporter when Secretary of State Hillary Clinton announced at a meeting of the ASEAN Regional Forum in Hanoi last July that the US would be strongly promoting the principle of peaceful resolution of territorial disputes in the region. President Obama will reinforce that policy in a meeting with ASEAN leaders in New York on Friday.

 

There are strong, legitimate reasons to dispute China’s territorial claims in the area, and to counter any Chinese elbow-thrusting designed to unilaterally press its claims.

 

Sengoku just wants to make sure that cool heads are given every chance to prevail. His immediate audience was potential hot-heads in both Tokyo and Beijing. Implicit in Sengoku's comments is a warning to the Chinese leadership that an unreasonably confrontational stance would threaten to undermine politically those in Tokyo endeavoring to find a way out of the immediate problem and to place long-term Japan-China relations on a stable path.

 

 

But his comments are relevant to those in Washington who have reached firm conclusions about Chinese intentions, and have already begun plugging a “newly-matured” DPJ into plans to “contain” China.

 

Seiji Maehara and unrealistic expectations in Washington

Japan’s new foreign minister, Seiji Maehara, is a nice guy, unfailingly polite, and overall a pleasure to work with. He’s also very smart, well-informed about strategy and foreign policy, and deeply committed to enhancing the US-Japan relationship.

So it comes as no surprise that his appointment as Japan’s chief diplomat was welcomed in Washington.

But there’s a problem. Many in Washington assume that Maehara will carry with him a magic solution to the lingering problem of whether and how to replace the US Marine Air Station Futenma, on Okinawa. The Futenma issue is holding the US-Japan bilateral alliance as virtual hostage.

Maehara has no magic solution; there is none. Indeed, political momentum is decidedly against current plans to construct a Futenma replacement facility in the Henoko Bay area of Okinawa, north of the Futenma base, which has long been scheduled to close. On September 12, residents of Nago City, in which the Henoko area is located, elected a municipal assembly with a large majority opposed to the Futenma replacement project. Nago City’s mayor, elected earlier this year, is a firm opponent.

Many in Tokyo were reportedly stunned by the vote, but that simply reinforced the impression that an enormous gulf exists between Tokyo and Okinawans. There was never any serious doubt which way the assembly elections would go.

And there is no realistic reason to doubt the outcome of the gubernatorial election for Okinawa Prefecture, scheduled for November 28. The challenger, Yoichi Iha, is a fierce opponent of the Henoko project. The incumbent, Hirokazu Nakaima, is growing exceedingly weary of straddling a ”maybe” position, and won’t even have the leeway to approve the project should he win reelection and still harbor any inclination to do so.

Seiji Maehara knows this. For the past year, he has doubled as State Minister for Okinawa, along with his main cabinet role as transportation minister. Maehara quietly spent a lot of time trying to influence the outcome of the Nago elections in favor of pro-base candidates, and came up woefully short.

The only way the Henoko project could proceed is for Prime Minister Kan to order police forces to dislodge the many protesters almost sure to line the perimeter should efforts be made to shun local opinion and forcibly begin construction. Kan, a former civic organizer, is not about to do that. Any attempt to do so would hold dire political consequences for his government, and could conceivably spark ugly demonstrations against the US military presence in Okinawa, and perhaps across Japan.

It is hard to believe that the US-Japan security alliance, which is absolutely critical to peace and stability in East Asia and beyond, is threatened with disruption over what many analysts agree is a base of minor importance. (Former US ambassador to Japan, Mike Armacost, has called the current US policy “stupid.”) But that is exactly the situation.

The top two US negotiators, Assistant Secretary of  State Kurt Campbell and Assistant Secretary of Defense Chip Gregson, know that the current US plan to build a replacement base in Henoko is unworkable. But they have been unable to convince Secretary of State Hillary Clinton, Secretary of Defense Bob Gates, or the upper echelons of the National Security Council staff to change course. None of them want to go through the laborious, politically-arduous task of convincing the Marines to develop new basing options, and to coordinate new plans with Congress and Guam, which is scheduled to eventually be home to 8,600 Marines now based on Okinawa.

Unfortunately, a severe attitude of impatience bordering on derision toward Japan has taken hold in parts of the Obama Administration. This year marks the 50^th anniversary of the US-Japan Security Treaty, but the White House has blocked the holding of any significant events to celebrate the occasion. The ministers of defense and foreign affairs of the two countries routinely gather each year in New York at the time of the UN General Assembly, for a bilateral security dialogue known as the 2+2. Not this year, because the Futenma issue remains unresolved. (There is talk now in Tokyo of trying to convene a 2+2 meeting in December, but that is based on hope in Tokyo that Washington will finally accept the Kan government’s inability to move forward on Henoko.)

All of this comes in the midst of close cooperation between the US and Japan on a range of critical security issues that belies the notion of a relationship in disarray. Japan has naval forces in the Arabian Sea, for example, working with US and other naval forces against piracy. Japanese ground forces were dispatched to Pakistan recently to assist relief efforts in the wake of devastating floods. Japan worked closely with the US and South Korea in the wake of North Korea’s apparent sinking of a South Korean naval vessel earlier this year. The major naval exercises held by the United States in the vicinity of China recently, held as a not-so-subtle message to China to act with restraint in the region, took place with Japanese military observers on board. The USS George Washington aircraft carrier embarked for the exercises from recently-upgraded facilities at its home port in Yokosuka, Japan. The George Washington’s air wing is now operating from a new $2 billion runway built with Japanese assistance at the US Marine Air Station Iwakuni.

In short, the US-Japan alliance is functioning well, and could be functioning better, if not for the insistence from Washington that the Futenma replacement project is some kind of litmus test of Japan’s commitment.

Maehara will not be able to solve that problem. Only a policy change in Washington will do, and there are still precious few signs that the White House yet understands that diplomatic temper tantrums or political stiff arms won’t alter this entrenched reality of domestic Japanese affairs.

 

Big Kan win could boost DPJ unity, political stability… maybe

With the haze of battle already lifting, it’s clear now that Ichiro Ozawa never had a very good chance of winning his bid to oust Democratic Party (DPJ) leader Naoto Kan and become prime minister. There were simply too many factors working against him, especially an unshakeable belief among the public that his “money politics” are simply too murky to qualify him as the nation’s leader. The final DPJ presidential vote made this clear. Under the “point” system utilized by the DPJ, Ozawa split with Kan the vote among elected Diet members (412-400 in Kan’s favor), while losing badly among voters closer to the ground of public opinion. (Kan won 60-40 among DPJ local assembly members around the country, and won 249-51 among common DPJ supporters and members). The final tally: 721-491 for Kan.

 

Having said that, Ozawa put on quite a show, raising important issues, revitalizing legitimate policy debate within the party, and helping reestablish the DPJ as the leading political force in the country driving the national agenda.

 

The big question: Will the Kan and Ozawa forces come together, at least for a while, to discipline the “twisted” Diet and provide sufficient political stability to allow the country to seriously address some very pressing issues? There is no definitive answer yet, but the chances seem better than many analysts believed leading up to the vote.

 

The makeup of Kan’s new cabinet and the new DPJ executive team will tell a lot.

 

Kan said at press conference after the DPJ vote that he will take a day to think things over. More revealing, he held a one hour meeting with DPJ secretary general Yukio Edano, who is the Kan associate most identified as “anti-Ozawa”. Look for Edano to step aside for a while, though he will retain very close relations with Kan, and with Yoshito Sengoku – the real power in Kan’s regime.

 

The early word is that Edano will be replaced by either Foreign Minister Okada or Transportation Minister Maehara. Both are established party leaders and often touted as future prime ministers. Maehara is more associated with opposition to Ozawa than is Okada. Both are also associated closely with the unpopular effort to move the US Marine Air Station Futenma to Henoko Bay in Okinawa.

 

Ozawa, for his part, read a short statement after the vote, saying that he will carry on as “a single soldier” within the DPJ. He holds no official party title, but that of course belies his real power.

 

One close Ozawa associate, Diet member Takeshi Hidaka told reporters that “Ozawa will never die.” Hidaka, an Ozawa secretary, had strongly urged his boss to run, and had a sad tone of resignation in his voice.

 

But while Ozawa’s options are limited right now, he is far from dead. Having won half of the DPJ Diet delegation behind his bid, he can not simply be ignored or shunted aside.

 

Ozawa is very unlikely to split the DPJ by departing along with his supporters. It is very unclear how many Diet members would follow him into what would most likely be a political wilderness. Which other party or bloc of politicians would want to ally with a “defeated shogun?”

 

On the other hand, the nationally-televised crisscrossing of the country by Ozawa and Kan served to make clear that much of the public and Nagatacho (Japan’s Capitol Hill) have a strong, if grudging, respect for Ozawa’s political prowess and at least some of his policy ideas, if not all of his methods.

 

It would seem to be in Ozawa’s interest to remain inside the DPJ, try to influence the government’s policies, and be there to challenge again should Kan badly stumble.

 

A potential big loser

One big loser, at least in the short-term, could be Yoshimi Watanabe and his Your Party. The YP was a big winner in the July 11 Upper House elections, benefiting from DPJ mistakes and continued voter reluctance to return to the Liberal Democratic Party.

 

Over the past month, including during the 2-week Kan-Ozawa contest, generic support for the DPJ rose, as did support for the Kan cabinet. Voters apparently saw a DPJ that seriously debated in the open a host of tough, pressing issues, and seem prepared to give the DPJ (and Kan) a second chance. In parallel, support for the YP has dropped. The LDP, for its part, is making some efforts to stay relevant by putting its leadership in the hands of its younger generation.

 

But it’s the DPJ that has momentum, and suddenly the “twisted” Diet does not loom as quite the huge obstacle to legislative action that it appeared to be not long ago. Obstructionism by opposition parties would likely steer toward them the frustration of a public anxious for action.

 

United DPJ?

Just as Ozawa would seem to benefit from DPJ unity at this point, so would Kan. But that will require Kan and Ozawa reaching a workable political accord. As usual, even assuming the will is there, the devil will be in the details.

 

Chief Cabinet Secretary Sengoku, who was chiefly responsible for trying to squeeze Ozawa’s influence out of the DPJ, is likely to stay. (It was Sengoku’s initiation of an internal audit of DPJ finances under Ozawa’s tutelage that pushed Ozawa into the race against Kan, despite his reluctance to run.) For the time being, Sengoku’s trusted friend Edano will likely be the one to step aside.

 

Kan and Sengoku will then have to carefully bring some Ozawa lieutenants, and/or some younger DPJ Diet members who allied with Ozawa this time around, into some positions of influence. It seems doubtful Ozawa himself will take a position, though no one has ruled that out.

 

Policy agreement

There seems ample ground for party unity on a broad policy agenda. The Kan-Ozawa debates made clear that the DPJ is united around decentralization of power from Tokyo to the prefectures, a shift in power from the bureaucracy to politicians, and a shift away from “pork barrel” public works economic policies.

 

There’s no doubt that Kan and Ozawa have had a major, very significant disagreement over how to balance the goals of reconstructing Japan’s beleaguered fiscal condition with the need to boost domestic demand and consumer spending in a flagging economy.

 

But Kan has agreed to shelve until at least 2013 any potential rise in the nation’s consumption tax, and Ozawa has never denied the need to pay heed to fiscal responsibility.

 

There seems to be grounds for the two sides to come together around an agenda that emphasizes short term boosts in government spending with a firm commitment to address the country’s fiscal straits once the economy starts growing again.

 

Understanding Ozawa’s political-economy

In this context, Ozawa has often been mischaracterized as simply having tried to bring failed LDP “bridges to nowhere” public works policies into the DPJ. And Kan has been wrongly cast as the tin eared politician with the right approach to fiscal policy. Both are partly true, but ultimately inaccurate.

 

Ozawa was among the first in the DPJ to realize that, however popular the LDP’s former prime minister Junichiro Koizumi seemed to be, there was a huge backlash in the country against the economic reforms he championed during his five years at the helm.

 

Koizumi left the political scene in 2006, and his three successors were all unable to deal with popular anger directed at the LDP. Indeed, it is interesting to ponder whether the public would have turned against Koizumi had he decided to stay on.

 

In any case, the DPJ greatly capitalized on the backlash against Koizumi’s “market fundamentalism,” winning big in both the 2007 Upper House election and the 2009 Lower House election. Ozawa was the architect of both victories.

 

Koizumi’s reforms revealed the extent to which middle class status in Japan depended on a seemingly-impenetrable web of economic restrictions and regulations that, while socially beneficial in many ways, were terribly inefficient. Once some serious regulatory reform began to take hold, in parallel with changes in private sector employment norms, income inequality zoomed in Japan, along with unemployment that is often semi-hidden amongst the growing army of part-time workers.

 

The reforms also hit rural areas very hard.

 

Ozawa has not changed his fundamental belief in a market-oriented economy for Japan. But he has come to champion the need to ease the burden on people who find themselves temporarily dislocated as reforms proceed. And he has criticized the logic of raising the consumption tax in the midst of a recession, especially when efforts to cut wasteful government spending have yet to be exhausted.

 

Kan, who remains a social democrat at heart, is reminiscent of Bill Clinton, Tony Blair, and other social democrats who have tried to find a “third way” between capitalism and socialism.

 

In Kan’s case, however, he has demonstrated a tin ear with the clumsy way he went about raising the consumption tax increase issue during July’s Upper House election campaign, and he has raised concerns among many economists that his otherwise legitimate and gutsy willingness to raise the consumption tax issue has emerged at a most inopportune – recessionary – time.

 

It is also inaccurate to portray Ozawa’s politics as hopelessly money-centered, rural-oriented, and always backroom-based.

 

The DPJ greatly benefited in 2009, for example, from Ozawa’s energy and enthusiasm in recruiting a small army of female, urban candidates to run in the Lower House election. Many were already accomplished, even if new to politics, and Ozawa spent countless hours tutoring them in the arduous task of retail, hand-to-hand campaigning. Many have the skills to survive in politics without Ozawa.

 

One in particular is noteworthy. Ai Aoki, a Tokyo-based Lower House member, had experience in the Upper House when Ozawa recruited her to run against the chief of Komeito, the coalition partner of the LDP. Ozawa himself had considered running for that seat, but decided that the thoughtful Aoki would be better, and she handily won, delivering a very embarrassing blow to Komeito in a decidedly urban district that attracts young, often unaffiliated floating voters who covet a more modern politics in Japan. No hint of “LDP politics” there.

 

Aoki has been the subject recently of tawdry innuendo in some weekly magazines implying an illicit relationship with a DPJ bigwig, perhaps even Ozawa. Apparently there were few holds barred in the Kan-Ozawa fight.

 

There’s no doubt that Ozawa, in pursuit of political gain for the DPJ, over-promised economic largesse to some blocs of voters. But it amounts to analytical throwing the baby out with the bathwater to say that a cynical, power hungry Ozawa, with reckless disregard for the economic implications, threatened to destroy the DPJ by reinventing the party as a hybrid of the LDP.

 

For Ozawa, it is good politics and good economics to spend now, and fix the fiscal books later. Kan, meanwhile, is benefiting from Ozawa’s politics – it is doubtful the DPJ would have won the Lower House in 2009 without Ozawa -- while raising legitimate long-term concerns about Japan’s national finances.

 

There is plenty of policy room for the two sides to come together. But sufficient animosity between the two camps could linger to make that process very difficult, it not impossible.

 

 

 

 

 

 

 

 

 

Nago vote dims prospects for Futenma replacement facility on Okinawa

The already-slim prospects for construction in Okinawa of a replacement for the US Marine Air Station Futenma grew significantly dimmer on Sunday, when voters in Nago City elected a majority of candidates to its municipal assembly opposed to the project.

 

Nago has jurisdiction over Henoko Bay, where the planned facility would be built.

 

The vote means that after 15 years of wrangling and negotiations, the US and Japan remain no closer than when they started on finding a replacement for the Futenma base, which virtually everyone involved believes should be closed. Unless the US and Japan agree to shelve the issue for a while to give time for more quiet consideration, or unless top leaders from the two sides become directly involved, Washington and Tokyo could be looking at another round of very severe bilateral tension over what many argue is a relatively small issue in a very important alliance.

 

A total of 37 candidates vied for spots in the 27-seat Nago assembly, which previously had been deadlocked between pro- and anti-base members. Heavy lobbying by the Ministry of Defense, and State Minister for Okinawa Seiji Maehara, dangling the promise of local development projects, had previously convinced some incumbent assembly members to back the base project, resulting in the current assembly split. But the lobbying proved insufficient at voting time, as 16 anti-base candidates won seats. Two others, according to PanOrient News, lean toward opposition, which would give opponents a convincing 18-9 majority.

 

Sunday’s vote followed the election last January of anti-base Susumu Inamine as Nago City mayor.

 

With both the city’s mayor and assembly opposed to the project, it becomes quite difficult for base proponents to argue that the area’s true sentiments remain unknown.

 

It seems even more likely now that opposition to construction of a Futenma replacement at Henoko will prevail in Okinawa prefecture’s November 28 vote for governor. One candidate, Yoichi Iha, has been mayor of Ginowan, location of the US Marine Futenma air station. Iha is a firm opponent of the Henoko project, while insisting that the current plan to close Futenma remain. Running against Iha will be the incumbent, Hirokazu Nakaima, who has been forced by public opinion to shift his pro-base stance toward a “maybe” position. The Nago vote will likely push him more toward opposition.

 

In any case, the November 28 gubernatorial race will not have a candidate who strongly favors building at Henoko a replacement for the Futenma base.

 

To make matters more ominous for the pro-base advocates, November 28 will also see elections for a replacement of Iha as mayor of Ginowan. The early leader is current vice mayor Takeshi Asato, who is pledged not only to push for closure of Futenma, but to oppose construction of a replacement at Henoko, and even to push for abrogation of the US-Japan security treaty.

 

Looking ahead to November 28, Okinawa will have a governor moderately or strongly opposed to the Henoko project, a mayor and city assembly in Nago City opposed to the planned Henoko facility, and most-likely a mayor in Ginowan pushing hard for closure of Futenma.

 

Virtually across the board, analysts agree that no government in Tokyo could forge ahead with the Henoko project in the face of such intense local opposition on Okinawa.

 

As typified by Ginowan’s Asato, the real danger facing Washington and Tokyo is that the completely-avoidable inflaming of passions by the Futenma-Henoko controversy could escalate into broader antipathy to the presence of US bases overall. Already, activists in the vicinity of the US Marine Station Iwakuni are agitating against construction of new housing for the US military personnel recently shifted there for the manning of the air wing attached to the USS George Washington air craft carrier.

 

The US naval base at Yokosuka, and the US air base at Kadena, are the keys to the US military presence in East Asia, dwarfing the Futenma air base in importance. Before the Futenma-Henoko controversy, the prospects seemed remote that Yokosuka and Kadena would face any kind of serious opposition. The more the Futenma-Henoko dispute carries on, the more that danger rises.

 

Upon taking office in January 2009, the Obama administration chose to stick with the policy approach toward Okinawa forged largely by the Bush administration. This meant pushing ahead for construction of the Futenma replacement at Henoko, despite the looming prospect that the Democratic Party of Japan (DPJ), which openly opposed the Futenma-Henoko plan, would soon win national elections and take over the government. In the process, the administration ignored suggestions to shelve the Futenma-Henoko plan, and instead focus on eliciting from the DPJ firm support for the US military presence at Yokosuka and Kadena, and DPJ cooperation on shared broader security concerns.

 

Is Ozawa really running?

Years of watching Ichiro Ozawa traverse and reshape the landscape of Japanese politics should have taught every political reporter two lessons by now: It is perilous to try to read Ozawa’s mind, and it is unwise to ever count him out.

 

Still, so many factors weigh heavily against Ozawa becoming president of the Democratic Party of Japan and thus the country’s next prime minister that a basic question begs for an answer: Is Ozawa really running to win those posts, or does his apparent candidacy mask some other intended outcome?

 

It’s no secret that Ozawa has been fuming since early last June, when Naoto Kan took over as DPJ president and prime minister and promptly admonished the supremely proud Ozawa in public to “keep quiet” for a while. Kan named a Cabinet and DPJ executive group that deliberately circumscribed Ozawa’s influence. Ozawa’s fury took on more than the tone of personal vendetta when Kan bungled badly in July’s Upper House elections, leading the DPJ to a stunning setback.

 

Ozawa wants Kan out.

 

Only a few days ago, Ozawa seemed willing to settle for a public cutting down of Kan to size, in the form of the ouster of Kan’s closest allies, Chief Cabinet Secretary Yoshito Sengoku and DPJ Secretary General Yukio Edano. Those were Ozawa’s terms as he spoke with former prime minister Yukio Hatoyama, who had become the self-appointed mediator in search of party unity. Naturally, Kan declined Ozawa’s “offer.”

 

So Ozawa threw his hat into the ring of the DPJ presidential race. But has he really?

 

It is far more likely that Ozawa hopes to propel a third, “unity” candidate into the race to replace Kan, than it is that he intends on winning himself.

 

For much of this month, Ozawa supporters, and other elements of the DPJ unhappy with Kan, made a concerted effort to find a suitable candidate to run against the prime minister. It all came to naught. One by one, the possible candidates ruled themselves out, or were judged lacking in one way or another. The DPJ’s Diet Affairs Committee Chairman, Shinji Tarutoko, declined to run. He ran against Kan in June, with less-than-stellar results. Also declining to run were Kazuhiro Haraguchi, the current Internal Affairs and Communications Ministers, and Lower House Financial Affairs Committee Chairman Banri Kaieda. (See Twisting Flowers for details.)

 

Key senior DPJ leaders, including Foreign Minister Katsuya Okada, Transportation Minister Seiji Maehara, and Finance Minister Yoshihiko Noda have all backed Kan. Each is considered a possible future prime minister.

 

All of these potential challengers to Kan could feel the public mood, which overwhelmingly favors Kan remaining as prime minister. Kan is not particularly popular. To the contrary, polls show that those who disapprove of his Cabinet’s performance outnumber those who approve. But the public is weary of the revolving door in the prime minister’s office, and longs for some kind of stability. Japan has already had six prime ministers in the last four years, and is ready to settle for Kan a while longer.

 

It is a sign of Ozawa’s weak hand inside the party, and a sign of the DPJ’s overall reticence to defy public opinion by dumping Kan, that Ozawa has been forced to put himself forward.

 

Ozawa’s last hope is that the DPJ’s fear of severe internal strife, perhaps even a party split that his candidacy could provoke, will compel the party to turn to a “unity” figure to replace his nemesis, Kan. Ozawa would have the personal satisfaction of having ousted Kan, while assuring himself of more influence within the DPJ. He could also claim that he achieved his goal of setting the DPJ back on a steady policy course, after Kan’s poor performance had hurt the party’s effectiveness.

 

 

Assume Ozawa is running

Until a third candidate emerges, however, the assumption has to be that Ozawa is actually running. Most scenarios involving an Ozawa candidacy spell big trouble for the DPJ.

 

All things being equal, Ozawa could very possibly win in a head-to-head contest with Kan. Ozawa has a following among DPJ Diet members, many of whom he mentored and helped to win election. He also has a considerable following within DPJ local chapters, where he has spent countless hours campaigning and building up organizational capabilities.

 

But all things are not equal. Ozawa remains a decidedly unpopular political figure, and polls consistently show a large majority of voters oppose him exercising an out-sized influence over the DPJ. The public has a grudging respect for Ozawa’s political toughness, and his vision to end a calcified post-war political system long-dominated by the Liberal Democratic Party. But that has long been surpassed by the public’s rejection of Ozawa’s penchant for backroom political deal making, including shady financial maneuverings.

 

Moreover, Ozawa faces the very real possibility, even likelihood, of indictment for questionable bookkeeping by his political fundraising organization. A citizen’s judicial panel that functions something like a grand jury is set to render its judgment later this year.

 

The DPJ would be widely ridiculed and rebuked by the public and the media for choosing as its leader a figure with such a dark cloud hovering above. DPJ Diet members, and local chapters -- loyalty to Ozawa notwithstanding -- will think long and hard before casting a vote for Ozawa.

 

Even the big business federation Nippon Keidanren has publicly endorsed Kan, saying that “a long-term government is necessary,” and that “it is irresponsible for three different prime ministers to take office in one year.”

 

 

Scenarios for the DPJ

As Tobias Harris has outlined, the best-case scenario for the DPJ in the event of a resolute Ozawa candidacy would be for Ozawa to go down to a substantial defeat. That would, temporarily at least, solidify Kan’s position within the DPJ, and limit the extent of possible defections from the DPJ among Ozawa loyalists.

 

It would also deprive the DPJ of Ozawa’s recognized brilliance as a political organizer, but might compel other DPJ leaders to finally hone their own skills in that area.

 

An Ozawa victory, however unlikely, would force Kan and his allies into the role of bitter enemies of the DPJ leadership, crippling the party’s effectiveness. Or, Kan et al could defect.

 

By contrast, a narrow Kan victory could ignite an Ozawa departure from the DPJ, though it is decidedly unclear where he and his forces would go.

 

In the meantime, the public is already shaking its collective head at the scene of former prime minister Hatoyama functioning as a cheerleader for Ozawa’s candidacy.

 

In May, when indecisiveness forced an over-his-head, humiliated Hatoyama from office, he wound up showing one instance of leadership by publicly insisting that Ozawa resign as DPJ secretary general along with him. Hatoyama then endorsed Kan as his successor.

 

Just two days ago, Hatoyama again endorsed Kan, only to reverse himself when Ozawa explained his intention to run. Hatoyama’s indecisiveness has returned to the fore.

 

The prospect of the Ozawa-Hatoyama team returning to power will not exactly instill confidence among the public, which is why Ozawa’s apparent candidacy is probably not designed to bring him personally into office.

 

Limping Kan gets needed boost

Signs continue to strengthen that a limping Prime Minister Naoto Kan, severely wounded in the July 11 Upper House elections, will manage to win reelection as president of the ruling Democratic Party (DPJ), and hang on for at least a while longer as premier.

 

The DPJ presidential vote is scheduled for September 14, which must seem to the beleaguered Kan an eternity to wait.

 

But Kan is feeling pretty good about his prospects, or at least is trying hard to appear that way. He started a five-day vacation on Tuesday (the 10^th) in Nagano Prefecture, becoming the first premier to holiday outside of Tokyo since Junichiro Koizumi in 2001.

 

The holiday location was likely no accident. Kan and the DPJ received a much-needed boost from Nagano Prefecture voters on Sunday, when they chose the DPJ-backed Shuichi Abe as the next governor.

 

The election was the first significant test of voter sentiment since the July Upper House contest. It’s always tempting to read too much national significance into local elections. But there was no mistaking that the DPJ needed the win, and pulled out all stops to get it. DPJ Secretary General Yukio Edano campaigned hard for Abe, so a loss would have blackened an already dark cloud hanging over Kan.

 

The win, on the other hand, allowed some sun to finally shine on the DPJ. And recent polls have bolstered the emotional relief provided by the Nagano win. Yomiuri found in its August 6-8 survey that 57% of those polled want Kan to remain as prime minister. An Asahi poll found that 56% want him to stay. Yomiuri found that support for the Kan Cabinet had risen to 44%, up from 38% on July 12-13. The paper concluded: “The public’s impression of the DPJ’s crushing defeat in the [Upper House] election seems to have weakened somewhat.”

 

This is by no means a vote of big public confidence in Kan. Disapproval of his Cabinet continues to outpace approval, and support for the DPJ is only 7-8 points higher than that for the  disfavored Liberal Democrats (LDP).

 

Kan continues to benefit from a public dismayed by the revolving door in the prime minister’s office. Kan is the sixth premier since 2006. The public also has sympathy for some DPJ initiatives, including efforts to cut wasteful government spending.

 

There is plenty of unhappiness with Kan inside the DPJ, and no shortage of political maneuverings against him. (See Twisting Flowers here, and Global Talk 21 here.) But the DPJ as a whole, which bills itself as a vehicle of popular sentiment, will likely prove very reticent to buck the public by dumping Kan next month.

Simmering Okinawa problem could boil over

It’s now about as “unofficially official” as it can get that the August and November deadlines concerning a Futenma replacement facility on Okinawa will not be met. Indeed, the political underpinnings of the 2006 bilateral “roadmap” for realignment of US forces in Japan, of which the relocation of some 8,500 US Marines from Okinawa to Guam and the construction of a Futenma replacement facility are cornerstones, are coming undone in both countries.

 

The confluence of three events on July 27 made this abundantly clear – as if additional clarity were needed. (See earlier accounts over at Observing Japan and Sigma One.)

 

On Tuesday, Assistant Secretary of State Kurt Campbell testified on US-Japan security ties before the House Armed Services Committee, and hinted at a schedule slip by failing to mention in his prepared remarks the August deadline for reaching agreement on the exact location, design, and construction method for the Futenma replacement facility. An August agreement would supposedly then set the stage for a final political decision in the Fall.

 

Also yesterday, the US government’s Joint Guam Program Office (JGPO) released its much-anticipated Final Environmental Impact Statement concerning the on-going military buildup on Guam, and officials made clear that vital infrastructure and other critical preparations will not be anywhere near complete by the 2014 deadline for moving the 8,500 US Marines and their 9,000 dependents to Guam. Publicly, the JGPO says 2014 is still the goal, but with huge cost overruns already apparent, and a skeptical Congress slowing funding, the Marine redeployment faces significant delays.

 

Meanwhile in Tokyo, Prime Minister Naoto Kan gathered for the first time since taking office the four members of his Cabinet deeply enmeshed in the Futenma issue. Present were Chief Cabinet Secretary Yoshito Sengoku, who will function as the Cabinet’s Futenma coordinator; Foreign Minister Katsuya Okada, who is the principal liaison to the US; Defense Minister Toshimi Kitazawa; and, State Minister for Okinawa Seiji Maehara.  The participants let it be known not-so-privately that they will defer decisions until after the Okinawa gubernatorial election, scheduled for late November. This continued a pattern of leaks with the same message, as outlined at Twisting Flowers.

 

The Okinawa election is likely to institutionalize widespread opposition to construction of the Futenma replacement facility. Prime Minister Kan has already said he will not forcibly begin construction. To do so could easily spark broader opposition to US bases in Japan, which neither Washington nor Tokyo wants to see happen. So the stage is increasingly set for Tokyo, while ceaselessly voicing support for the replacement facility, to shrug its post-election shoulders and say it needs more (undefined) time to bring Okinawan opinion along.

 

September test

The big question now is how the Obama administration will respond to a situation over which it is rapidly losing even the pretense of control. An early test could come in September. Japanese officials make no secret of the fact that Prime Minister Kan would like to visit the US for a meeting with President Obama. The sense inside the Administration is that Obama, assuming Kan is reelected DPJ president and remains prime minister, would like to hit the “reset” button with the DPJ, and would welcome a meeting with Kan, probably around the time of the UN General Assembly in late September.

 

An important sign will be whether the Administration puts aside lingering bad feelings about the Futenma issue and genuinely celebrates the US-Japan alliance in this, the 50^th anniversary of the signing of the bilateral Security Treaty.

 

The Administration has apparently given the go-ahead for Ambassador John Roos to participate in the peace memorial ceremony in Hiroshima on August 6^th. He would be the first US official to do so.

 

Obama is also scheduled to visit Japan in mid-November for the APEC summit.

 

Internal Disconnect

One way or another, the United States eventually will have to show flexibility on the Futenma issue. What’s not clear is whether the Obama administration will accept this reality smoothly, or if another, perhaps more serious episode of bilateral tension will be needed to force cabinet officials to focus on the issue.

 

A major problem inside the administration is a “disconnect” between the assistant secretary level of senior officials – Kurt Campbell at State, and Chip Gregson at the Pentagon – and the Cabinet secretaries they report to. Sources intimately familiar with the thinking of Campbell and Gregson report that the two know that the current plan for Marine basing on Okinawa will not work, but they have been unable to get their respective bosses – Hillary Clinton at State and Robert Gates at Defense – to face that fact.

 

Campbell and Gregson have scrupulously stuck to the “tough love” stance in public, and in talks with Japanese officials. Campbell, for example, has suggested to Japanese officials that Tokyo could adopt a “special measures” law to override Okinawan opposition to construction of a new facility on Okinawa to replace Futenma. And Gregson, in his House testimony yesterday, said he fully expects details of the Futenma replacement facility to be settled by the end of August, and full political agreement to be reached by the Fall.

 

But they both can see the political writing on the Okinawan wall. While they may continue to press Tokyo to abide by the existing accord, both accept the domestic political constraints at work in Japan.

 

By contrast, Gates and Clinton have shown little interest in Japan’s domestic problems, considering them rather minor in comparison to the difficulties they face in dealing with Iraq, Afghanistan, China, and North Korea. Gates and Clinton believe they have delegated the issue to Campbell and Gregson, and want it resolved without requiring cabinet attention.

 

As a result, Gregson and Campbell have not really leveled with Gates and Clinton, failing to inform them in no uncertain terms that the Futenma replacement plan will not work. They know Gates and Clinton do not want to hear that message, and they have chosen for the time being to try to manage an unmanageable situation.

 

Message to Beijing

Another factor influencing the continuing hard line from Gates and Clinton on Okinawa issues is a desire to send a strong message to both China and North Korea. Beijing is testing Washington (and Tokyo) in the South China Sea and other parts of the region, while the regime in Pyongyang, as usual, turns to aggressive means to fight for survival on its own brutal terms. The Gates-Clinton visit recently to the Korean DMZ, and the joint military exercises conducted with South Korea, were designed to make clear to one and all that the US intends to remain as a source of balance and stability in East Asia. The concern of both Gates and Clinton is that any sign of discord between the US and Japan over Okinawa could weaken that message.

 

The irony is that Japan has been fully cooperating with the US in those efforts. Senior officers from Japan’s Self Defense Forces were on hand to observe the US-ROK exercises. As I wrote recently, the nuclear-powered aircraft carrier USS George Washington, the key to the US force projection capability in East Asia, is operating from newly-modernized facilities at the Yokosuka naval base. The 5^th Air Wing attached to the George Washington is operating from a just-opened $2 billion facility at the US Marine Air Station Iwakuni, financed in large part by Japan.

 

The unnecessary flap over Futenma has overshadowed this very significant boosting in US-Japan military cooperation, and a flare-up will only hinder future collaboration.

 

Flexibility not easy

Unfortunately, a shift in US policy on Okinawa can only happen through intervention at the Cabinet level. There are simply too many powerful moving parts for a policy shift to be engineered by sub-cabinet officials.

 

As things stand now, the national security interagency process is heavily weighed down by Afghanistan and Iraq, not to mention Iran, China, North Korea, and a host of transnational issues. Forcing Okinawa, and proper deployment of the III Marine Expeditionary Force back on the policy agenda would require both Gates and Clinton doing some very “heavy lifting” politically.

 

Rivalries between the US Marines and the Air Force would have to be tamed. It will be very difficult for the Marines to streamline their presence on Okinawa without significant Air Force cooperation.

 

Meanwhile, a Congress increasingly anxious to trim Pentagon budgets would be an unpredictable factor in any effort to reopen the Marine-Okinawa issue. Congress has already strongly signaled intent to slow down funding for the Guam buildup, not so much because of political jockeying in Japan but because of anger over faulty DOD estimates of infrastructure needs on Guam. Texas Senator Kay Bailey Hutchinson, a member of the Senate Appropriations Committee with considerable say on military construction issues, made some waves in Washington earlier this month when she suggested that money earmarked for the buildup on Guam would be better spent in the continental US.

 

To make matters worse, the administration doesn’t relish the prospect of reopening the Okinawa issue after having spent the better part of a year falsely castigating the DPJ as somehow “pro-China” and “lacking a serious commitment” to security.

 

At this point, the best option might be for the two countries to simply postpone consideration of Okinawa issues for at least a year, providing time for a serious, in-depth dialogue on roles, missions, and basing arrangements to develop.

 

In that context, the prospect of significant construction delays on Guam could provide both countries with a face-saving opportunity to begin that process.

 

No path for Ozawa to challenge Kan

In the wake of the July 11 Upper House election, many pressing issues remain unresolved in Japanese politics, including management of the Diet, makeup of the next Cabinet, and tackling the Okinawa cloud hovering over US-Japan relations.

 

But one thing is clear: Prime Minister Naoto Kan will be at the helm. Ichiro Ozawa, the dethroned former leader of the ruling Democratic Party (DPJ), simply lacks a sufficiently-wide political path to mount an effective challenge. Kan should win reelection fairly easily as DPJ president when the party votes in September, ensuring his continued tenure as premier. How he will choose to exercise that power is a different story.

 

Ozawa’s political opponents, and even many neutral analysts, have a history of misreading his political standing. When he bolted the Liberal Democratic Party in the early 1990s with the aim of transforming Japan’s calcified political system, many wrote him off as alternately quixotic or self-destructively power hungry. Either way, the misinterpretations had him destined for the political wilderness.

 

Alas, after a long and winding journey, Ozawa wound up as DPJ chief, perched by early 2009 to knock the LDP from power. When questions about financial dealings led prosecutors to scrutinize his political machinery, forcing Ozawa to step down a notch from DPJ president to party secretary general, many analysts foresaw the end of his political career. But Ozawa led the DPJ to a smashing victory in last summer’s Lower House election.

 

Today, many analysts are making the opposite mistake, this time overestimating Ozawa’s strength. In this scenario, Ozawa, enraged at being snubbed by Kan, Chief Cabinet Secretary Yoshito Sengoku, and DPJ Secretary General Yukio Edano, is intent on challenging Kan as DPJ president and thus prime minister, either by running for the party presidency himself, or hand-picking a challenger from the ranks of 130 or so DPJ Diet members thought loyal to him.

 

In reality, there are too many obstacles in Ozawa’s path. Opinion polls show that a large majority of voters think Kan should stay on as prime minister, despite the DPJ’s big loss in the Upper House. The DPJ setback is not seen by voters as cause for yet another change in prime ministers, which would be the sixth in five years.

 

Rather than personal popularity, it is the public’s desire for stability, and a willingness to give the DPJ another chance, that is working in Kan’s favor, and against that of Ozawa. Even some Ozawa supporters, sensing the political winds, have urged party unity for the time being.

 

Moreover, polls consistently show a large majority of Japanese frown upon Ozawa exercising an out-sized influence within the DPJ. Even during the recent Upper House election campaign, when voters gave a thumbs-down to Kan’s idea of raising the national consumption tax, they strongly objected to Ozawa voicing similar criticisms. The public has a grudging respect for Ozawa’s political toughness and vision. But that has long been surpassed by dislike of his penchant for backroom political maneuvering.

 

Finally, Ozawa faces serious legal problems that could very well lead to an indictment. Prosecutors have twice refused to bring charges against Ozawa for questionable bookkeeping by his political fundraising organization. Last April, one of Japan’s public judicial review panels, collectively known as Committees for the Inquest of Prosecution, concluded that Ozawa should have been indicted, and that same Committee is set to issue a second opinion later this year. More recently, another of the Inquest committees delved more deeply into the allegations against Ozawa, and also concluded he should have been indicted. The latter advisory increases the chances the earlier Committee will once against recommend indictment, which would compel prosecutors to act.

 

The net result is that even though Ozawa would stand a good chance of personally defeating Kan in a run for the DPJ presidency in September, the party would be very reluctant to even entertain his candidacy with the prospect of an indictment still lingering. And, despite its size, the Ozawa camp within the DPJ lacks a clear number two, making it difficult for the camp to settle on a potential alternative challenger to Kan. Indeed, the Ozawa camp was unable to seriously challenge Kan when he took over from Yukio Hatoyama in June.

 

So, as Michael Cucek has pointed out, Kan is “the prohibitive favorite” to win reelection as DPJ president, and then prime minister, in September.

 

This by no means spells the end of Ozawa’s career. As Tobias Harris has noted, Kan has already made considerable efforts to accommodate the Ozawa camp. Even with an indictment, Ozawa could wield some influence because of the loyalty – though diminished – he commands among many DPJ Diet members. Without an indictment, Ozawa would still be hobbled by his unpopularity with the public, limiting his ability to run an anti-mainstream opposition within the party. And given Ozawa’s poor health, it is only a matter of time before his many protégés and followers step forward to speak for themselves. But should he choose, Ozawa could function alternately as a party elder statesman on policy and election strategy, and as an internal critic seeking to keep the DPJ on a path to truly transform Japanese politics, as he set out to do many years ago.

 

Kan really shaken, but still standing

Prime Minister Kan and his Democrats (DPJ) got knocked around a good deal more than I expected on Sunday, but the essential dynamics at work remain the same as I discussed yesterday.

 

There will be no serious challenge to Kan, either now, or for the DPJ presidency in September. The Wall Street Journal’s speculation on who might replace Kan comes way too early. The DPJ, and Japan, need some stability. The DPJ needs to demonstrate it is competent to govern, and the nation needs continuity and a clear policy agenda. Changing the DPJ leadership, and the prime minister, at this point, would accomplish neither.

 

Inside the DPJ, Kan is deeply wounded, but relatively safe because there is no overriding sense that he has to go. Neither Foreign Minister Katsuya Okada nor Transport Minister Seiji Maehara has demonstrated the kind of spunk that would be required to challenge Kan. As much as the dethroned former DPJ chief Ichiro Ozawa would like to challenge Kan, he lacks the public appeal and a sufficiently large loyal base to make an effective move. Ozawa does not want to split the DPJ and find himself allied with elements of a still-dying Liberal Democratic Party (LDP).

 

And yes, the LDP is still dying, despite its relatively strong showing on Sunday. As Tobias Harris suggests, the election outcome will serve to further postpone a long-overdue shift in LDP leadership to a hungry younger generation. Moreover, as Sigma One points out, the party’s surprisingly good showing in constituency contests was not replicated in the party preference vote on Sunday; voters do not want to identify with the current LDP.

 

In that context, talk of a DPJ-LDP “grand coalition” is equally far-fetched. Such a move would be tantamount to the DPJ declaring that it is incapable of governing, which is very unlikely, though not impossible.

 

So how will the DPJ manage the Upper House? The poor DPJ showing will make this more difficult than I expected. A lot of commentary focuses on Your Party, led by Yoshimi Watanabe, possibly working with the DPJ, if only on an ad hoc basis.

 

That’s possible, as is ad hoc DPJ collaboration with other parties. A subdued but confident Kan alluded to this in his post-election press conference.

 

However, I doubt either the DPJ or the YP will show much interest in an actual coalition. The YP poses a huge threat to the DPJ, since it is the YP that stands the best chance of forging a genuine center-right, pro-business party to challenge the social democratic orientation of the DPJ. Objectively, anything that boosts the YP politically by definition hurts the DPJ. Of course, in trench political warfare, strange bedfellows are not uncommon.

 

The YP’s Watanabe used part of his post-election press conference to make clear that he intends to push for major political realignment, which could conceivably see elements of the LDP and the DPJ joining with the YP.

 

The DPJ will be vulnerable to that kind of political intrigue unless and until it clearly demonstrates the ability to govern.

 

Michael Cucek at Shisaku argues against the prospects of Komeito allying with the DPJ, saying that Komei support to LDP candidates in constituency contests around the country has caused too much friction with the DPJ. But he also rightly points out that Komeito has a long history of allying with the party in power. Komeito may break its pattern and choose to remain on the fringe for a while, but the temptation will certainly be there to gain the perks of influence and prestige that would come from working with the DPJ.

 

Talk of raising the consumption tax should not be a bar to either the YP or the Komeito working with the DPJ. It’s true that both the YP and Komeito opposed raising the tax. But Kan, chastened by public anger over the careless way he raised the topic, has already said the tax would not be raised before the next Lower House election, now scheduled for 2013.

 

It remains very unclear that the idea of raising the consumption tax was the critical issue that led voters to punish the DPJ. The lingering shock among voters over the ineptitude demonstrated by former DPJ leader Yukio Hatoyama can’t be underestimated.

 

Polls show that voters remain very aware that Japan’s fiscal house will eventually have to put in order. They are open to at least a discussion of tax increases to pay for desired social programs. But they were quickly left queasy by the impression that Kan had not thought through, a la Hatoyama, the implications of his controversial suggestion. As much as opposition to a consumption tax increase per se, it is equally plausible that voters picked up on an embarrassing fact acknowledged recently by Chief Cabinet Secretary Yoshito Sengoku: the DPJ still doesn’t have a clue as to how to present a consumption tax increase as part of an overall credible, coherent plan for economic growth.

 

That, more than anything, is what Kan will have to concentrate on if he wants to stabilize his administration and remain in office for a while.

 

Geithner dreams, but there is no “G-2” between Washington and Beijing

Much of Washington seemed to never tire over the past year of accusing the ruling Democratic Party of Japan (DPJ) of harboring “pro-China” tendencies. But it’s the Obama administration that is bending over backwards these days to coax Beijing into a far-flung partnership in international affairs, and has precious little to show for its efforts.

 

There is no “G2” between Washington and Beijing. China has a nasty little habit of making its own plans.

 

Engagement with China is a worthy diplomatic endeavor to be sure, but one that requires realistic expectations and frank assessments, both of which seem in short supply in DC. In that context, criticizing Japan for engagement efforts with Beijing rings a little hollow.

 

Consider this confluence of events. Yesterday, the Treasury Department released its long-delayed semiannual report on exchange rate policies, with analysts closely watching to see whether China would be tagged as keeping its currency, the renminbi, artificially low. Treasury Secretary Geithner refused to do so, maintaining his controversial stance that polite diplomatic nudging would best work with Beijing.

 

China wasted no time in making clear it has no intention of allowing the kind of speedy appreciation of the renminbi that economists and businessmen all over the world are looking for.

 

Even the Wall Street Journal warned China yesterday that some of its best friends in Washington are losing patience.

 

Meanwhile, the United Nations Security Council is set to vote today on a resolution that stops short of publicly blaming North Korea for the unprovoked sinking of a South Korean naval vessel last March. China blocked all efforts to pin the blame on Pyongyang, ignoring the extensive evidence developed by an international panel, and special briefings delivered to Chinese leaders by South Korean diplomatic, military, and intelligence officials.

 

Worse, China publicly criticized US and South Korean plans to soon hold military exercises as a show of unity and force toward North Korea. On the contrary, China just finished 6 days of live-fire exercises off its eastern coast, in what appeared to be a deliberate counter to the joint US-South Korean plan. The Chinese exercises followed an early June decision by Beijing to rescind an invitation to Defense Secretary Bob Gates to visit while on a tour of the region.

 

While Treasury’s Geithner continues to soft-pedal criticism of China, and US Ambassador Susan Rice tries hard to spin a diplomatic setback at the UN, Joint Chiefs  Chairman Admiral Mike Mullen has been more frank. He told the Asia Society in early June: “The question is, should China and the U.S. work together, lead together, to promote regional stability? Washington’s answer is and has been an unequivocal yes. Beijing’s answer has been sometimes yes and sometimes no.”

 

It’s time for Secretary Geithner and Admiral Mullen to have a long talk.

 

This situation has been building for quite some time. Here’s a June 29 article I wrote for Weekly Toyo Keizai.

 

US AND CHINA:

NOTHING CLOSE TO A ‘GROUP OF TWO’

 

China skillfully maneuvered through the recent G8 and G20 summits in Canada, once again avoiding international criticism of the ongoing undervaluation of the renminbi.

 

The deft diplomacy prior to and during the summits made three things clear: Beijing has no intention of allowing a rapid correction of the renminbi on global currency markets; most analysts expect no more than a 3% appreciation vis a vis the US dollar over the next 12 months. Second, Beijing has only temporarily quelled intense protectionist sentiment building in the US Congress. Three, Washington and Beijing have nothing close to a “G2”, in which the two capitals would closely coordinate on global economic and strategic issues.

 

The Obama administration is left in an uncomfortable position, trying to claim credit for successfully coaxing China to play a more responsible global role, but having decidedly mixed evidence to prove its case.

 

MANAGED FLOAT: After having run up a $226.9 billion trade surplus with the US in 2009, China for months has been under pressure to allow its currency to appreciate. The renminbi had been pegged at 6.83 per dollar since July 2008, a rate that by many estimates is 25-40% below market value.

 

As part of a calculated soft approach, the Obama administration decided to give Beijing some political space. Treasury Secretary Tim Geithner postponed the scheduled April 15 publication of a Congressionally-mandated report on currency policy so as to avoid publicly tagging China for keeping the renminbi value artificially low.

 

Chinese President Hu Jintao later participated in President Obama’s nuclear security summit, China cooperated to some extent on Security Council pressure on Iran to halt its apparent nuclear weapons program, and Washington dispatched to Beijing in May a delegation that topped 200 for a bilateral “strategic and economic dialogue” with Chinese leaders.

 

In numerous background briefings, Obama officials hailed these steps as indicative of a breakthrough in US-China cooperation on global issues.

 

A skeptical Congress unhappily stepped back, but warned that failure by China to act before the June summits would result in trade penalties.

 

Beijing announced on June 19 a loosening of the peg, correctly calculating the move would have the temporary political effect of casting China at the summits as a problem-solver rather than a problem-maker in efforts to restore balanced growth in the world economy.

 

But market hopes for significant change in the renminbi were quickly dashed. The People’s Bank of China announced on June 20 that there was no basis for “a large-scale appreciation” of the renminbi. In the week that followed, the renminbi appreciated to only 6.79 from 6.83. Key members of Congress, including Charles Schumer of New York, angrily criticized China, and both President Obama and Treasury Secretary Geithner expressed expectations of further Chinese action.

 

With mid-term elections set for November, members of Congress are very worried about lagging economic performance. Influential economist Paul Krugman accuses China of taking advantage of Obama administration restraint, while Fred Bergsten of the Institute for International Economics argues that a 20% appreciation of the renminbi could cut $150 billion from the US trade deficit with China and create as many as 1 million jobs in the US.

 

Senator Debbie Stabenow (D-MI) has suggested legislation that would bar the US government from purchasing any products from China, while a bill pushed by Schumer would impose punitive tariffs on Chinese goods to offset the price advantage China gains because of the undervalued renminbi.

 

The White House will probably be able to stifle the retaliatory legislation, but that task will be all the more difficult without help from Beijing in the form of faster renminbi appreciation. It remains to be seen how much assistance China will provide.

 

Meanwhile, Beijing is proving to be considerably less than a vibrant partner on international security issues. Particularly disturbing the US officials is Beijing’s unwillingness to apply pressure on the Kim Jong Il regime in North Korea, in the wake of Pyongyang’s unprovoked sinking of a South Korean naval vessel last March.