Japan needs fresh blood to stay out of zombie territory

When even the vaunted Toyota Motor Corp is in trouble, you know things are bad in Japan.

Things just got worse with this week's resignation by opposition leader Ichiro Ozawa. It may have cost his Democratic Party of Japan its shot at power and delayed the arrival of a genuine two-party political system in a nation that really needs it. That's bad news for Japan's long-term growth prospects.

It's hard not to have mixed feelings. Many criticize Ozawa's stubbornness in waiting two months to resign over a campaign-funding scandal. Then again, the whole thing reeks of dirty politics. The timing of the March indictment of Ozawa's top campaign official seems too perfect for the ruling party.

We don't know whether the Liberal Democratic Party, which has governed Japan for all but ten months since 1955, orchestrated Ozawa's downfall. It's worth noting that two of the most outspoken critics of "Japan Inc" in recent years - Internet entrepreneur Takafumi Horie and shareholder activist Yoshiaki Murakami - ended up in jail.

Is Ozawa, who threatened to shake up the status quo, part of this pattern? Only a few bigwigs in the halls of power can say. You have to admit, though, it's all an amazing coincidence.

Not that many Japanese were ecstatic about Ozawa running their fragile economy. His charisma deficit was well known. On many of Japan's big policy issues, it was hard to know where Prime Minister Taro Aso's LDP ended and Ozawa's ideas began.

Yet that's not the main point. Japan is more of a nanny state than is often recognized outside its borders. For many, the LDP means, for better or worse, stability. The key for Ozawa's DPJ has been to wrest control, govern responsibly to win public trust and then put Japan on a more progressive path.

At the moment, it's all about avoiding the big issues. The largest public debt among developed nations? Demographic trends that threaten to devastate the economy in the decades ahead? The need for tax changes that encourage entrepreneurship? One of the lowest worker-productivity rates among industrialized nations? None of these is being seriously discussed before September's lower-house elections.

A key subplot of the "Lost Decade" was the proliferation of corporate zombies. The walking dead were kept out of the grave by public bailouts, giving the 1990s a Return of the Living Dead quality.

The reference reflected the 1985 film's mixed genre of horror and comedy, a duality then shared by Japan's corporate sector.

It's time to worry about the sequel. The risk is that we are seeing the "zombification" of the whole economy. Politicians are too busy clinging to power to think about where Japan needs to be 20 years from now. That's imperiling the outlook of corporate jewels such as Sony Corp and Toyota.

Japan's biggest carmaker surprised many this week by cutting its annual dividend for the first time and predicting a loss for a second year in a row. Ten years ago, the concern was about zombie companies weighing on the economy.

Toyota is anything but a zombie, yet its woes show how a moribund political environment jeopardises even strong corporate ties.

What needs to done is summed up in a recent book called Japan's Open Future. Authors John Haffner, Tomas Casas i Klett and Jean-Pierre Lehmann make a spirited case for a more flexible and globally engaged Japan. They also focus on the real problem: an absence of creative thinking in Tokyo.

The global crisis and Japan's recession are sucking up all the attention. It's also vital to take steps to preserve the hard-won gains in living standards since World War II. That was easier before China, India and Southeast Asia began competing with the region's biggest economy.

Only a leadership shakeup will put the spotlight on the future. The key now is for Ozawa's party to come up with what political observers call a 'clean leader" to push the entrenched LDP from power. The scandal that forced out Ozawa made voters wonder if his party is as corrupt as the ruling one.

New leadership would serve Japan's 127 million people well. Some opposition party bigwigs want to ban corporate donations, which could help sever incestuous ties between the public and private spheres. There have been calls to stop family members from inheriting parliamentary seats, a tradition in the LDP. There also is talk of a more independent foreign policy less tied to US interests.

Some pundits say Ozawa's resignation will reinvigorate his party. Ozawa's dismal approval ratings of late did the unthinkable by making the even more unpopular Aso look better.

Perhaps a more charismatic and creative leader will give the opposition the upper hand.

Yet Ozawa's demise has opened the crypt door for Aso. The risk is that he will lead the LDP toward the election, Return-of-the-Living-Dead-style, and keep his party in lifeless power.

It's time for some fresh blood. Otherwise, the Japanese economy and companies such as Toyota will find themselves squarely in zombie territory.