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Prime Minister Shinzo Abe’s two-month-old administration stands at the crossroads of how to implement the reform agenda inherited from the previous government of Junichiro Koizumi.

There are two problems: return to the ruling Liberal Democratic Party of lawmakers who were expelled from the party for voting against Koizumi’s postal liberalization bills, and resistance in the ruling coalition to Abe’s plan to make road-specific tax revenues available for general purposes.

LDP executives decided Dec. 4 to reinstate 11 Lower House members who were forced to leave the party for opposing postal privatization.

LDP Secretary General Hidenao Nakagawa decided to let the rebels return if they pledged to abide by the party’s manifesto, including postal privatization. Abe said he endorsed the decision as LDP president. But newly elected pro-postal reform lawmakers who fought the newly “independent” rebels in the 2005 Lower House election have fiercely opposed the reinstatement, stirring new intraparty discord.

The LDP leadership in the Upper House, fearing the possible loss of the ruling coalition majority in next summer’s Upper House election, had demanded that Abe restore the rebels. In an Upper House election, single-seat constituencies in outlying areas are considered crucial in determining overall election results.

Many of the Lower House rebels have a strong voter base in their own constituencies as well as in proportional-representation districts. The LDP lacks a majority in the Upper House, although the ruling coalition, including Komeito, barely holds a majority.

To maintain that majority, the LDP leadership in the Upper House desperately needs cooperation from the rebels. Still, most voters surveyed have opposed the LDP executives’ decision to reinstate the rebels as it appears to negate the voters’ will in the landslide victory for the LDP and postal liberalization, in the 2005 Lower House election.

The widespread perception exists among the public that the rebels — whom Koizumi branded as “resistance forces” — are “old guards” irreconcilable with the reform agenda. The LDP landslide stemmed from unaffiliated voters’ support of Koizumi’s reforms.

According to a recent Kyodo News poll, 67.8 percent of respondents were against reinstating the rebels, while 22.8 percent supported the idea. The public approval rating for the Abe Cabinet has fallen to 48.6 percent, down 16.4 points from the time of its inauguration.

Abe says he “will not revive old-style LDP politics.” He is likely to have allowed the return of the rebels to expand the LDP’s Diet strength to implement medium- and long-range policy challenges, especially constitutional amendments. To most voters, though, his unprincipled decision in disregard of the results of a policy-oriented election is a setback for the reform agenda.

His decision is likely to accelerate the alienation from the LDP of unaffiliated voters who had supported reform and to hinder LDP efforts for the Upper House election, whose results the party leadership regards as “decisive.”

Road-specific tax revenues, set aside for road construction, derive from taxes that motorists pay. Abe wants to make these revenues available for general purposes as his first policy challenge. The plan, which Koizumi has failed to implement during his five-year rule, will be a test of the reform agenda Abe inherited.

National tax revenues amounting to 3.5 trillion yen come from road-specific taxes. The focal issue is how to allocate the gasoline tax, which accounts for 83 percent of all revenue from such taxes. The special law designating revenues from the gasoline tax as road-specific is scheduled to expire in March 2008.

In late November, Abe ordered Chief Cabinet Secretary Yasuhisa Shiozaki to come up with a plan by yearend to make all road-specific tax revenues available for general purposes.

In his first policy speech as prime minister in September, Abe announced a basic plan to make road-specific tax revenues available for general purposes, but faced pockets of resistance in the LDP, Komeito and the government.

Among the opponents of the plan were lawmakers representing special interests, bureaucrats, automobile and oil industries, and local governments.

Can the government make road-specific tax revenues available for general purposes beginning in April 2008 as planned?

The government and the ruling parties have agreed to do this, but they’ve also been forced to compromise in the face of strong resistance within the ruling coalition. Under the compromise, they have agreed on a middle-range plan to build needed highways and expressways, and only the amount of road-specific tax revenues that exceed these road construction costs is to be used for general purposes. Thus the ruling coalition’s reform agenda has already suffered a setback.

The Koizumi administration, taking advantage of the expanded prime minister’s power under the 2001 revision of the Cabinet law, implemented top-down policies under the Cabinet’s leadership. It controlled personnel appointments in the Cabinet and the LDP and limited the party’s power. The Cabinet’s council on economic and fiscal policy led the administration’s policy management.

For his part, Abe aims to push both growth-oriented economic policies and fiscal health but does not seem intent on exploiting the power of the advisory council to lead the ruling coalition.

If the Abe Cabinet’s influence on the LDP lessens compared with that of the Koizumi years and leads to a reversal in the balance of power, dark clouds could appear on the horizon for the Cabinet. The compilation of the fiscal 2007 budget toward yearend will be crucial indicators of the Cabinet’s fortunes.

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