The Tuesday arrest of Democratic Party of Japan leader Ichiro Ozawa’s chief secretary was an unexpected blow for the largest opposition party but observers say the damage can still be contained ahead of a general election later this year — if Ozawa quits his post.

During a news conference Wednesday morning, Ozawa vowed to stay on as party president after stressing that both he and his secretary, Takanori Okubo, were innocent of allegations that his political funds management body knowingly accepted illegal donations from scandal-tainted Nishimatsu Construction Co.

Jiro Yamaguchi, a political science professor at Hokkaido University and a close observer of the DPJ, said that although he realizes Ozawa’s dilemma, the DPJ leader should step aside before further damage is inflicted on the party.

“It is natural for Ozawa to stress his innocence, but considering what is best for the party, I think the most sensible thing to do is to step down,” Yamaguchi said. “The DPJ’s priority is to seize power in the next general election, and I have to question whether Ozawa’s refusal to step down is the wisest choice.”

The DPJ under Ozawa has made great gains with a public increasingly disillusioned with Prime Minister Taro Aso.

Political analysts have repeatedly placed their bets on a victory by the DPJ-led opposition camp against the current Liberal Democratic Party-New Komeito ruling bloc in a Lower House general poll that must be held by autumn.

After taking over the DPJ helm in spring 2006, Ozawa has rebuilt the party, leading it to a landslide victory in the July 2007 Upper House election, which resulted in the current divided Diet. The party has since been gearing up for the next Lower House election to determine which side will govern Japan.

The scandal wounds the DPJ, but not fatally, as long as the party moves quickly to elect a new leader, Yamaguchi said.

“A legal argument and a political decision are two different things,” Yamaguchi said. “As hard as it may be for Ozawa, I think he needs to step down for the party’s sake.”

Somewhat shielding the DPJ from the fallout of this scandal is the fact that key LDP lawmakers also appear tied to Nishimatsu, Yamaguchi said.

Ozawa’s political funds management body, Rikuzankai, is alleged to have illicitly accepted donations from Nishimatsu, which funneled the money through two political organizations headed by ex-Nishimatsu officials. Corporations are forbidden by law from making donations to individual lawmakers.

Tomoaki Iwai, a political science professor at Nihon University and an expert on political funds issues, said Nishimatsu tried to work around the law to make contributions. Iwai drew a connection to the political action committees in the U.S., which were created to make donations to political campaigns.

“It’s a loophole in the law,” Iwai said. “A company can’t directly make a donation to a lawmaker . . . so in order to donate a large amount of money anonymously, you can establish a political group and make a personal contribution through the organization.”

The prosecutors, however, claimed that the money in question was illegal corporate donations prohibited by the Political Funds Control Law.

They claimed Nishimatsu paid the members of the groups bonuses that were then offered to the Ozawa camp as individual donations.

The contractor’s two political groups also donated money to LDP heavyweights.

Iwai said that the prosecutors went after Ozawa first for some reason, but it’s unlikely they would arrest someone if they were not confident, especially when a general election could be called at any time.

“I think that the prosecutors must be extremely confident — otherwise they could be accused of a (politically motivated) investigation,” Iwai said, noting it’s possible veteran LDP lawmakers will be next.

“Prosecutors are considering the balance, so the next arrest or indictment might be someone (close to) an LDP heavyweight,” Iwai said, adding that big names like former Prime Minister Yoshiro Mori and Toshihiro Nikai, minister of economy, trade and industry, have surfaced as recipients of Nishimatsu funds. “The scandal may inevitably spread to the LDP.”

Observers agree the arrest of a political funds secretary is a rarity. But Iwai dismissed the idea of a government conspiracy, as DPJ lawmakers allege.

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