Japanese politics is entering a crucial period. On Sept. 30, Prime Minister Junichiro Koizumi reshuffled his Cabinet for the first time since taking office in April 2001. The reshuffle, however, was limited in scale. Moreover, he kept his party’s executive lineup unchanged.

The main feature of the Cabinet reshuffle was the appointment of Economics Minister Heizo Takenaka as financial services minister, the post that had been held by Hakuo Yanagisawa. The double appointment was meant to erase the impression of disunity in economic and fiscal policy. The two men had been seen to hold different views on banking reform.

The reshuffle was taken as a message that Koizumi was shifting his policy paradigm from structural reform to economic recovery. It was a bold, “Koizumi-style” personnel move that defied conventional wisdom.

Former Prime Minister Yasuhiro Nakasone criticized Koizumi for concentrating economic policymaking in the hands of Takenaka, a former economics professor with no parliamentary seat. Finance Minister Masajuro Shiokawa also reacted negatively.

The Koizumi administration will face grilling in an extraordinary Diet session that will last about two months from Oct. 18 to Dec. 13. The major question is how to carry out a policy shift from structural reform to economic recovery.

The government has already decided to postpone ending the full guarantee on demand deposits for another two years. Opinion is divided over how to quicken the disposal of bad bank loans and whether to put together a supplementary spending package.

The Diet by-elections to be held Oct. 27 bear close watching. At stake are seven seats in seven prefectures — two for the Upper House and five for the Lower House. Chief among the campaign issues are the series of political scandals that erupted in the first six months of the year; the deteriorating economic condition; the diplomatic fallout from North Korea’s admission that its agents abducted Japanese nationals in the 1970s and 1980s; and the smoldering divisions within the Democratic Party of Japan, the largest opposition party, which came to a head following the re-election of Yukio Hatoyama as party leader.

How the by-elections will turn out is open to question. Whatever the results, they will likely affect the next Lower House election as well as the next round of regular Upper House elections. In this sense, these polls are as important as full-scale national elections.

The outcome of the by-elections will have considerable impact on both the Liberal Democratic Party and the DPJ. Defeat will spell new trouble for them. Which party will win most of the seven seats and by how much? If the LDP loses by a wide margin, secretary general Taku Yamasaki may have to resign to take responsibility. If the DPJ suffers a similar defeat, Hatoyama and secretary general Kansei Nakano may have to take the blame. The impact on the DPJ may be greater, given the lack of party unity.

The Koizumi administration faces difficulties on the diplomatic front as well. The prime minister’s surprise visit to North Korea last month was hailed here and abroad, but the achievement lost its luster as grim details were disclosed about the kidnappings. The question is how to resolve the issue in the course of normalization talks, which involve economic aid to North Korea. Prospects for a quick solution are becoming increasingly clouded.

By far the most daunting diplomatic challenge for Japan, however, is to seek coherence with a U.S. global strategy that sees North Korea, along with Iraq, as a state that supports terrorist groups.

With the U.S. apparently preparing for a war with Iraq, the Koizumi administration faces a major foreign policy test.

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