Attacking the Roots of Japan’s Slush Fund Scandal: A Call for Transparency in Political Finance

Japan’s ruling Liberal Democratic Party is embroiled in the biggest political finance scandal in decades. At issue is the failure of leading LDP factions to report millions of yen in revenue from fundraising parties. In the following, I take a closer look at the scandal and identify its structural causes before considering the reforms needed to restore public trust in the system.

Fundraising Proceeds Siphoned

The scandal broke in November 2023, and on December 18, investigators from the Tokyo District Public Prosecutors Office searched the offices of factions formerly headed by Prime Minister Abe Shinzō and former LDP Secretary General Nikai Toshihiro. On January 19, the treasurers of both factions were indicted without arrest on charges of filing false income and expenditure reports in violation of the Political Funds Control Act.

According to the indictments, in the five years between 2018 and 2022, the Abe and Nikai factions underreported income from fundraising parties by about ¥670 million and ¥265 million, respectively. The former accounting chief for the faction led until recently by Prime Minister Kishida Fumio was issued a summary indictment for failing to report more than ¥30 million in fundraising revenues between 2018 and 2020.

The unreported revenues consisted mainly of proceeds from ticket sales exceeding the quotas assigned to faction members. The “surplus” funds were quietly transferred to the Diet members who had sold the tickets, to do with as they saw fit. So far, three LDP lawmakers and seven accountants for the factions (though no faction executives thus far) have been indicted or issued summary indictments in connection with the scandal, and an internal LDP investigation has found that dozens more received kickbacks that they failed to report.

Under the law, politicians and political entities are required to submit periodic income and expenditure reports detailing the sums, sources, and use of the political contributions they receive, including proceeds from fundraising parties (see below). The Abe and Nikai factions routinely concealed a portion of those proceeds, and since the kickbacks may well have been appropriated for personal or other improper uses, it is small wonder that the practice has been characterized as a slush-fund scheme.

The scandal has unleashed a new wave of public outrage over the role of money in Japanese politics, with most of the blame targeting the LDP’s factions. Japan’s perennial ruling party has always been divided into rival factions that function almost as parties in their own right. Diet members rely on their respective factions to help fund their campaigns and recommend them for party and cabinet positions, and the factions vie with one another for numbers and influence. This system has come under renewed criticism since the latest scandal broke. Under intense public pressure, four of the LDP’s six factions have announced their decision to dissolve, auguring a major upheaval within the ruling party.

But to address the root causes of this scandal, we must look deeper than the behavior of specific politicians or factions. At the heart of the problem is the inadequacy and bewildering complexity of the laws and regulations currently governing political finance in Japan. Above all, we need to identify the structural flaws that allow Japanese political finance to operate in a legal gray zone.

Merits of the 1994 Reforms

In the late 1980s and early 1990s, a string of influence-buying scandals—including the Recruit scandal of 1988 and the Tokyo Sagawa Kyūbin affair of 1992—fueled public outcry over the reign of “money politics.” In 1993, the LDP, which had resisted calls for reform, lost control of the government for the first time since its founding in 1955. In 1994, under the coalition cabinet of Prime Minister Hosokawa Morihiro, the Diet passed political reform legislation overhauling the electoral system, amending the Political Funds Control Act, and establishing public subsidies for political parties.

The electoral reform eliminated the system of multiseat (medium-sized) constituencies in the House of Representatives, under which rival LDP factions had frequently fielded candidates in the same electoral district. The new system featured a combination of single-member districts and proportional representation. Public subsidies for qualified political parties were instituted. The revised Political Funds Control Act tightened reporting requirements and limits on corporate contributions and banned donations by companies and labor unions to individual politicians. The aim was to place the parties, rather than individual politicians or factions, at the center of the process.

Together, these reforms did help to limit and regulate the role of private money in Japanese politics. According to figures compiled by the Ministry of Internal Affairs and Communications, total political spending peaked around 1990 at ¥170 billion to ¥180 billion and then gradually declined, falling to ¥106 billion in 2022. The number of arrests for lower house campaign violations has also dropped significantly since 1994. Although these statistics should be taken with a grain of salt, it seems clear that Japan has made significant progress in cleaning up its elections and reining in the money politics that ran rampant in the pre-1993 era.

Failings of the Current Regime

That said, the two laws currently governing political and campaign finance impose complex and confusing regulations on political contributions and reporting while leaving a vast legal gray zone in which to maneuver.

To begin with, while each politician is required to have a “fund-managing organization” for the collection, disbursement, and disclosure of political funds, they can also tap into such funding entities as kōenkai (local support groups) and local party chapters. This makes it extremely difficult to accurately track income and expenditures and get a clear picture of politicians’ financial relationships with various interest groups.

Then there are the taxpayer-funded state subsidies for political parties, which total more than ¥30 billion annually. While parties must file statements reporting their expenditures, a good portion of the public grants they receive is funneled to party executives and others under the general heading of “policy activity expenses.” No one is required to explain how those funds, provided by the Japanese taxpayer, are being spent. Nor are Diet members obliged to disclose how they make use of the ¥1 million monthly “research, public relations, and accommodation allowance“ that they receive in addition to their salaries. We can hardly hope to clean up Japanese politics while our politicians are permitted to operate in such a murky regulatory environment.

Transparency as the Key to Trust

I am scarcely the first person to point out the loopholes and ambiguities in Japan’s political finance regime. But politicians are notoriously slow to impose constraints on their own activities. That is why a major scandal, such as the current controversy, is usually needed to catalyze meaningful political reform. Clearly, Japanese political finance is ripe for another round of reform. But how should such a campaign be approached?

The first step is to outline our basic goals. We can agree that a certain level of funding is needed to support free and full participation in the democratic process. Scholarly surveys reveal that Japan spends a bit more on politics and election campaigns than European countries but far less than the United States. It seems to me that the main problem with political finance in Japan is not the amount of money spent but the lack of transparency in its flow and the failure to preserve a clear distinction between official and personal spending. This is also a big reason for voter cynicism and disaffection. That being the case, the basic goals for political finance reform should be ensuring maximum transparency.

To this end, I would propose three fundamental reforms.

The first is to integrate each politician’s finances under a single “political accounting organization.” This would eliminate the confusing movement of money between funding entities and make it easier to grasp the total picture.

In addition, we should integrate political finance and campaign finance, which are currently subject to separate disclosure and oversight (the latter falling under the Public Office Election Act). The distinction is meaningless, and it adds to the regulatory confusion in which noncompliance and gray-zone behavior flourish. Each political accounting organization should have a single bank account through which all revenues and expenditures flow; cash transactions should be prohibited in principle. The income and expenditure reports should be digitized and made available to the public online.

The second step is to expand the scope of the contributions subject to reporting requirements so as to shed more light on the source of political funds. Under the current law, all individual donations under ¥50,000 are exempt from reporting requirements, as are group purchases of fundraiser tickets totaling less than ¥200,000. This is a deplorably low standard of transparency. Income and expenditure reports should disclose the identity of all donors contributing ¥10,000 or more per year.

Third, an independent commission should be established to audit the income and expenditure reports filed by politicians. The current review process, conducted by officials in the Ministry of Internal Affairs and Communications and local election commissions, is little more than a formal procedure to ensure that all documents are in order. Ideally, the new commission should have permanent authority to review and check a report at any time, order the submission of supporting documents, notify the filer of the need for corrections, and, when necessary, file an administrative lawsuit seeking the invalidation of an election or the suspension of a violator’s civil rights. It should be pointed out that most democratic countries have independent bodies empowered to impose administrative sanctions for violations of political finance laws, limiting criminal penalties.

Balancing Public and Private Funding

Some have called for a blanket prohibition on contributions from corporations, unions, and other organizations, imagining this to be a silver bullet against political corruption. But this supposition is not borne out by international comparative studies. Interest groups play an important role in today’s democratic systems, helping to shape public policy through their involvement in the political process. Of course, there is a need for mechanisms whereby voters can monitor such involvement, particularly the flow of funds, so as to make an informed decision at the ballot box. There should also be some limit on contributions to keep the flow of private funds to a level the public deems acceptable.

But a bigger issue in Japan today is the preponderance of public funds, such as government subsidies for political parties. Japan’s state subsidies are among the most generous in the world, surpassing those of countries like the United States and Germany. A good rule of thumb is that parties should receive no more in state grants than they raise themselves through contributions. In Germany, in fact, the Supreme Court has ruled that parties must obtain at least half of their funding from sources other than the state.

To tackle the challenge of wholesale, integrated reform of political and campaign finance, the government should mobilize the dormant Electoral System Council (an advisory body to the prime minister). Ad hoc band-aid solutions will not suffice to restore public confidence in our political system. What Japanese democracy needs now is a system upgrade based on a comprehensive reform plan crafted by a panel of experts and approved by all the major parties.

(Originally published in Japanese. Banner photo: Executives of the LDP’s Abe faction apologize to members at a January 19 meeting in Tokyo, where the decision was made to dissolve the faction. © Jiji.)