JPRI Critique, Vol. IX, No. 4, May 2002
Ishihara and the Politics of His Bank Tax
By Andrew DeWit and Masaru Kaneko
 
Shintaro Ishihara, Tokyo’s fervently nationalistic governor, was a regular feature in the Japanese and international media long before he ran in and won the gubernatorial race in early 1999. He has of late toned down his extremist rhetoric on immigrants and their “criminal DNA” and positioned himself as a staunch but very competent conservative concerned with quality of life, education, the economy, and Japan’s apparent inability to assert its own interests in a rapidly shifting global order. In contrast to the political intrigues and policy immobilism of the national government, Ishihara has earned widespread praise—and even grudging respect from many on the political left—for getting the metropolitan finances in order, moving to restrict diesel emissions, expanding daycare facilities, enhancing the local tax base, and proposing a large-scale financial intermediary to alleviate the credit crunch confronting small and medium-sized businesses.
 
A good part of current media coverage also centers on Ishihara’s potential to become prime minister. For example, in late February 2002, newsstands featured the first edition of the Monthly Ishihara Shintaro (“Gekkan Ishihara Shintaro”), a 56-page glossy magazine full of pictures of Ishihara looking presidential and flush with talk of an “Ishihara New Party.” Also, the March 12 edition of Zaikai, a business-oriented journal, ran a twenty-page special on why there is so much keen anticipation for his new party. The special highlighted Ishihara’s strategic activism, and drew a sharp contrast between it and the ineffectiveness of the current regime of prime minister Junichiro Koizumi.
 
Ishihara again moved to the center of the media spotlight on March 26, 2002, with the long-awaited Tokyo District Court ruling on his Bank Tax. As many observers had expected, the court ruled against it, bringing a swift retort from Ishihara and a quick decision in the Metropolitan Legislative Assembly to appeal the judgment.
 
In February 1999, less than a year after taking office in the midst of a protracted fiscal crisis, Ishihara first announced his intention to tax the banks in Tokyo, which had received a controversial, no-strings-attached 7.5 trillion yen bailout from the national government. Ishihara skillfully blended tax reform and populist issues by declaring that the banks were using metropolitan services while paying little or no taxes and failing to deal effectively with their non-performing loans and other problems.
 
At one level, Ishihara’s claims had considerable merit. Indeed, they helped put momentum back into a politically difficult reform that has stymied Japanese tax policymakers for decades. The vast majority of Japanese firms operate—on paper—in the red. They can do this as a result of generous exemptions and lax rules rooted in Japanese tax culture and the LDP’s electoral needs.
 
The Japanese tax authorities have long sought to deal with this problem by taxing on the basis of “external standards” (gaikei hyoujun kazei). Put simply, the tax collectors tax on the basis of something more objective than reported income, such as payrolls. With the Bank Tax, Ishihara and the Tokyo tax bureaucrats put a startling new twist on the reform by shifting the target of taxation from Japan’s millions of small outfits to the citadel of its financial system. He opted to use the big banks’ gross profits as the measure of taxability. The tax was to be levied at the rate of 3 percent of the gross profits of Japanese banks operating within the metropolitan area with over 5 trillion yen in assets.It came into effect at the start of FY 2001, for a five-year period, and in its first year generated about one trillion yen, or a tenth of Tokyo’s Business Tax revenues.
 
The bankers were, of course, incensed at Ishihara’s plans and launched a counterattack through the media and political backers. However, Ishihara’s proposal had garnered a massive groundswell of support from a public fed up with the banks’ unpunished role in the bubble and its aftermath. Burdened with their own problems, LDP lawmakers pulled back and left the bankers to fend for themselves. At the metropolitan level, the measure soon received support from all parties, including the local LDP, and passed into legislation in record time. The bankers then determined to take their case to court, something Ishihara confidently derided as being as useful as spitting in the wind.
 
On the face of it, the bankers would appear to have won. Ishihara’s tax was deemed illegal by the District Court because it violates equity provisions written into the local tax laws. The ruling seems substantially correct in terms of the law since it is dangerous populism rather than good tax policy to extend a measure to a single group. Nor is the measure generalizable across the broad sphere of Japanese local governments. Although the bank tax was swiftly copied by Osaka, it is only an option for big urban centers where business considerations compel major banks to maintain offices. Moreover, whatever one may think of Japanese banks and their part in the non-performing loan crisis, their managerial shortcomings are not a legitimate basis for taxation. If being a badly managed bank is a fit reason to be taxed, as Ishihara repeatedly suggested, then there would be little to stop the state from levying burdens on the basis of other extraneous factors.

The Positive Politics of Losing
 
But even having lost this round in court, Ishihara could very well emerge as the winner. For one thing, Metropolitan Tokyo’s appeal stands a fair chance of success in a sociopolitical context that favors the expansion of local tax powers. And in the event that the appeal loses, Ishihara will still have enjoyed ample opportunities to represent himself as the champion of the public interest against the LDP and its allied interest groups. It hardly helps the banks’ image that, pending the outcome of Tokyo’s appeal, they won the return of 72.4 billion yen in already collected taxes at a whopping (in Japan) 4 percent rate of interest. By contrast, the banks pay ordinary depositors a rate of return that is literally a razor’s edge from zero. Small wonder that Ishihara’s office has apparently received a flood of supportive messages in the wake of the court ruling.
 
The bank tax is thus as much a political instrument as it is fiscal. Ishihara is clearly keen, as Governor, to balance Tokyo’s books, but he is also just as eager to do it in a way that will enhance his prospects of becoming prime minister. He is likely to be aided in this latter objective by the rapidly evolving context of Japanese tax politics. Fiscal equity and who will bear the enormous cost of a decade of failed economic policies are becoming hot-button issues. But the Koizumi regime’s tax proposals are increasingly dominated by the neoliberal Economy and Fiscal Affairs Minister, Heizo Takenaka. He champions an aggressively Reaganite reform that would downplay equity in favor of economic stimulation, and shift the burden away from financial assets and more onto the wage income of the middle and lower income classes. Notwithstanding their own shortcomings, Ishihara’s populist initiatives at the local level (including a new tax on high-priced hotel rooms) provide a salient contrast.
 
Ishihara as PM is, of course, the nightmare scenario for most observers of Japanese politics. His prominence and his nationalistic rhetoric, especially on sensitive foreign policy matters, make him a dangerously loose cannon in an already quite unsteady ship. He has long relished this maverick role in domestic politics and seeks to project it onto the international stage whenever possible. He has already attracted considerable attention with his Mahathir-like pronouncements on the global economy. Becoming prime minister would greatly increase his ability to nudge Japan towards more confrontational domestic politics and a more unilateralist foreign economic and military policy. If former PM Hashimoto could shock the American establishment back in 1997 by raising the possibility of selling off U.S. Treasury bonds, then Ishihara as PM would surely guarantee at least a long run of sleepless nights in Washington.

The Potential Prime Minister
 
The hurdles between Ishihara and his ambitions are high but perhaps not insurmountable. There are a number of scenarios for his becoming PM. All of them rely on a worsening economy and a further erosion of popular support for present PM Junichiro Koizumi. Both of these conditions are strong possibilities if not probabilities.
 
In the first place, the Japanese economy faces a considerable and growing risk of a crisis over the next several months. On March 29, 2002, the stock market ended FY 2001 at 11,024 yen. In political terms, this was perhaps the worst outcome, being too low to keep the entire financial sector out of trouble but too high to permit another contentious bail-out using public funds. In spite of a full-court press by the Japanese financial establishment, including a controversial ban on short-selling, the market failed to clear the all-important 12,500 yen level that would have put a firm floor under all the banks. The next several months therefore seem ripe for a crisis, with a worsening of the bad-loan problem and a strong risk of contagion from failures among the weakest financial institutions. Another round of challenges is likely to come in August and September, when firms in the retail and manufacturing sectors prepare their mid-term balances. In advance of this, their May and June disclosures of losses based on the stock market’s year-end closing are almost certain to inject negative sentiment into the market and thus have a domino effect on their mid-term reports.
 
Further deterioration of the economy can only hurt Koizumi and help Ishihara. The worsening image of the LDP thanks to a recent string of scandals may also playinto Ishihara’s hands. Recent polls show that the Koizumi Cabinet, which enjoyed record support of over 80 percent after taking office a year ago, has now dropped to about half that level (Nihon Keizai Shimbun, March 26, 2002, and Kyodo news agency, March 30, 2002). The latter poll also reveals significant and growing disaffection with the parties in general. This is especially true for the largest parties, the LDP and the Democrats. By contrast, the unaffiliated vote rose from 30.9 to 40.4 percent.
 
With his undeniable charisma and reputation for strong leadership as governor (bolstered by the battle with the banks), Ishihara could find himself drafted from within the LDP as a replacement for a depleted Koizumi. The potential for this scenario is at present admittedly slim, particularly because Ishihara has few friends in the party. On the other hand, the LDP has repeatedly shown itself willing to do virtually anything to stay in power. Moreover, Koizumi may be a poor performer in pursuing his agenda of reform, but he is blessed with much good fortune when it comes to losing potential rivals. The recent departure of Koichi Kato from the LDP and the poor health of former PM Ryutaro Hashimoto have left few alternatives to Ishihara should a replacement for Koizumi become necessary. The scandals that have taken down prominent political figures recently (including Makiko Tanaka, the former foreign minister) have been particularly hard on moderates and peacemakers with connections to China and North Korea. The more the existing conservative forces among the LDP’s factions gain dominance, the more fertile the ground becomes for the rise of Ishihara and his style of politics.
 
A second and much-discussed scenario for Ishihara would see him re-enter the Diet as head of a new party that then goes on to beat the LDP in the next general election (which must be held by the summer of 2004). Given the lackluster and fragmented opposition parties, and the LDP’s heavy reliance on its rural base, there seems ample opportunity for a new party headed by a highly telegenic figure with an attractive combination of populist nationalism and a track record of competent, urban-oriented governance. Unaffiliated voters were key to Ishihara’s election as governor even before he showed himself to be an effective leader. He could probably now find a substantial national base among them.
 
Ishihara has to make up his mind whether he wants to run for reelection as governor a year from now or pursue the new party option. At 72 years of age, he clearly cannot afford to make a poor choice and languish on the political sidelines for a year or two. Becoming governor again poses that risk because suddenly resigning office to run in a general election to the Diet would appear opportunistic. But as he ponders his strategy, Ishihara can certainly count on continued poor economic performance and increasing popular disaffection with mainstream political options. He may even have a full-scale financial and fiscal crisis to help him along. With his fingers on the hot buttons of Japanese politics, Ishihara is emerging as a serious and very sobering contender for the top spot.
 
MASARU KANEKO is Professor of Economics at Keio University, and ANDREW DEWIT is Associate Professor of the Politics of Public Finance at Rikkyo University.

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