As Prime Minister Yoshiro Mori struggles through his term in office, it is tempting to say that Japan’s political leadership doesn’t matter. After all, authority over the country’s most important economic policies has traditionally rested in the hands of bureaucrats. The markets hardly registered former Prime Minister Keizo Obuchi’s illness and the announcement of his replacement. Perhaps the world can safely ignore Japan’s upcoming lower-house elections, scheduled for June 25.

But today, it does matter who takes office in Japan. Power has shifted dramatically in the past few years. In 1994, politicians wrote only 18 of the 75 bills submitted during the ordinary Diet session (24% of the bills). Last year, politicians wrote 60 of 124 bills (48%). This year, the right of politicians to call on bureaucrats for help in answering difficult policy questions on the floor of the Diet was abolished. The government also introduced regular parliamentary debates between the prime minister and opposition leaders, modeled on “Question Time” in the British parliament. Both symbolically and in fact, Japan’s politicians are gaining authority over policymaking.

These changes are desirable, because they increase the democratic accountability of Japan’s policymakers. But the timing is unfortunate. The shifts in authority have hobbled the country’s macroeconomic policymaking at a time when decisive action is most needed. Now that Japan’s politicians are gaining control of economic policy, the question is: Are they up to the job?

The extent of bureaucratic domination of Japan’s economic policymaking gradually diminished during the decades following World War II. Politicians from the long-ruling Liberal Democratic Party asserted themselves by becoming specialists in certain policy issues. In the 1990s, this gradual process suddenly accelerated. A series of corruption scandals led to the resignations of both the governor of the Bank of Japan and the Ministry of Finance’s top bureaucrat during the same week.

In February 1994 the Ministry of Finance sealed its own fate when it pushed Prime Minister Morihiro Hosokawa into raising the consumption tax from 3% to 7%. This tremendously unpopular move choked off economic recovery and fed a rising popular backlash. Partially as a result, the LDP was forced briefly into opposition. This further unhinged the process by which policy traditionally had been made. The power of the bureaucrats was drastically curtailed.

During the banking crisis in the fall of 1998, politicians finally stepped into the limelight. As bad loans in Japan’s banking system swelled, the traditional policymaking establishment belatedly swung into action. The Ministry of Finance wrote up a “bridge bank” banking sector reform plan, and the government of Keizo Obuchi formally presented this plan to the legislature.

But at this point the system unraveled. The opposition Democratic Party of Japan cobbled together a coalition with enough votes to block the LDP’s plan. More amazingly, this coalition came up with a counter-plan (which many pundits favored). Suddenly, the markets began paying attention to politicians. Naoto Kan, the leader of the DPJ, had to reschedule his press conferences to take place after the close of the markets, because every statement he made would move the Nikkei.

In the end, politicians and bureaucrats struck a compromise. The Liberal Party defected from the opposition coalition to join the LDP. The compromise plan passed the legislature; the bureaucrats had not been sidelined completely. But the damage had been done. For perhaps the first time, politicians had taken center stage in writing a major piece of economic policy legislation.

With the bureaucracy increasingly stepping out of its traditional role, who will take responsibility for policymaking? The ruling LDP has thus far made little attempt to do so. An Asahi Shimbun survey found that legislators from the LDP submitted an average of less than one bill per person in the most recent Diet session (by contrast, New Komeito Party legislators each submitted 3.6 bills on average, Communists 3.7 bills, and Democrats 4.1 bills).

Unaccustomed to taking responsibility for policy, LDP politicians have attempted to take the machinery of policymaking back behind closed doors. After the banking reform debacle, former Prime Minister Obuchi built a coalition controlling 70% of the lower house of the Diet, meaning that if the coalition partners could agree amongst themselves, they did not need to debate legislation in public. (The opposition boycotted the parliament for two weeks in protest of this fact.)

Now, as a general election approaches, the LDP again has little to say about policy. The party has focused its electoral strategy on maximizing the expected “sympathy vote” for Obuchi (hoping for a repeat of the 1980 elections, in which the LDP swept both houses of parliament in a vote held 10 days after the prime minister died). Party leaders have scheduled the poll to take place on Obuchi’s birthday, and in Obuchi’s home precinct of Gunma, the LDP has convinced the former premier’s daughter to run for office. Indeed, policy issues have so far been largely absent from the campaign. By making repeated “slips of the tongue” invoking Japan’s militarist past, Prime Minister Mori has managed — intentionally or otherwise — to completely distract public attention from economic policy.

At a more fundamental level, Japan’s changing political institutions may be unable to produce competent economic policy. The LDP, which has governed Japan almost continuously since World War II, evolved as a catch-all party dependent on coalitions of special interests. It started out serving agricultural interests (an astute electoral strategy, since at the end of World War II, 50% of the population depended on farming). As the agricultural sector shrunk, the party added small-scale retail stores and the construction industry to its support base. These special-interest groups are among the most protected and uncompetitive sectors in the economy. Subsidies and price supports make up roughly 75% of all farm income, and public works spending accounts for about 8% of Japan’s GDP (compared with 2% in the U.S. and between 2% and 4% in Western Europe).

This mattered relatively little when bureaucrats wrote critical policies. To be sure, over-regulation of the retail sector and protection of farmers fostered economic inefficiencies. But the bureaucrats who dominated policymaking kept the LDP’s pork-barrel habits in check. For decades Japan’s basic fiscal and monetary policies were quite competent (Japan’s average inflation rates and budget deficits from 1970 to 1990 were roughly equivalent to those of the U.S.).

Over the past decade, this restraint has vanished. The politicians are in charge. Politicians whose core supporters work in agriculture, construction, real estate and small-scale retail have their hands on the tiller of Japan’s three-trillion-dollar economy. The LDP remains firmly beholden to its special-interest supporters: In the last upper-house election, the LDP won not a single seat in urban areas such as Tokyo and Osaka.

In this context, the government’s recent backsliding on pension, tax and banking reforms is worrying. So is the trend of excessive deficit spending (the national debt is nearing 130% of GDP). Japan’s economy has tremendous potential, waiting to be unleashed by restructuring. But the country’s political leadership is a wildcard for any optimistic scenario. It is as yet unclear whether Japan’s political institutions — which developed when policymaking was the bureaucrats’ job — are up to the task of producing competent economic policy.

This article was originally published in the Wall Street Journal (Asia) on June 14, 2000.