The Iraq issue, more specifically Japanese involvement in helping Americans to tackle the problems in Iraq, has been in the focus of attention of the Japanese media since late last year when two foreign ministry officials were gunned down near Tikrit. In January the government officially announced the decision of troops deployment in Iraq and the first team of an advance group of Japanese soldiers are already in the south of the country to make the necessary preparation for the arrival of the main contingent. As the security situation in Iraq remains unstable, any unwanted outcome in that hostile territory might intensify the debate over the rationale of getting involved in a situation that many in Japan see as nothing more than naked invasion by outside forces in matters of a sovereign state.

Political parties in Japan remain sharply divided over the issue with the ruling coalition supporting Japanese involvement while the opposition camp voicing dissent. With the approach of the next upper house election in summer the debate is bound to intensify in coming days, as both camps are to stress on their respective positions to convince the voters of its importance.

But the Iraq issue has already taken its toll in Japan in a different manner as the debate surrounding Japanese involvement in Iraq has completely overshadowed other important matters that are in need of urgent attention. The economy, despite signs in recent days of partial recovery, is still in a bad shape, as the unemployment figure remains high with no sign of easing the deflationary trend. Moreover, the strong yen is posing a serious threat by giving signals that the gains in recent days might turn out only to be a false signal as country's export capability is going to be weakened by the falling dollar rate.

For the first time in three years, the government in its monthly economic assessment for January described the economy as "recovering steadily." The cabinet office attributed the optimistic appraisal to improved capital expenditure and exports. Although the government expects the recovery to continue over the short term, further appreciation of the yen could seriously undermine the export-led recovery. Moreover, there are also indications that the recent sign of economic recovery is mainly helping the large-scale manufacturers, while many non-manufacturing business and smaller firms are still going through utmost difficulties.

The Koizumi administration is also faltering in its pledge to initiate structural reform that would help the economy to overcome the crisis in the long run. The government has failed to come up with convincing plans for initiating radical changes to pave the way for privatisation of the four heavily indebted public corporations and to overhaul the troubled state pension system. Tax and budget reform proposals are also moving nowhere.

The current state of economy and the uncertainty surrounding the prospect of reform is having its impact on Japan's job market. According to the Ministry of Health, Labour and Welfare, the ratio of job offers to jobseekers in late 2003 stood at seasonally adjusted 0.74. While the figure means there are 74 job openings for every 100 job seekers, the reality is much more complex. Gone are the jobs for life. Companies have increasingly slashed regular payrolls, ditched older staff, and are hiring part time and temporary staff to cut costs. The number of regular full time employees in Japan has been decreasing since its peak in 1997, and in five years until the end of 2001, the number shrank by 1.72 million.

In the diplomatic front, stalemate over the North Korean issue continues with no sign of any possible breakthrough in coming days. The six-way talks on North Korea's nuclear development are most likely to resume in February without accommodating the Japanese request to include the issue of abduction of Japanese nationals on the agenda. The failure to include the matter in multilateral discussions has prompted Japan to propose that the matter should be handled through official channels. But North Korean response to the proposal was ambiguous as in a counter proposal Pyongyang recently told a visiting US delegation that all family members of the five abducted Japanese who have returned to Japan last year could leave the country on certain conditions. Tokyo's response to the proposal was cool, but getting North Korea to the negotiation table is proving a tough task.

Policymakers in Japan are now working on a revision of the foreign exchange law, which would make it possible to impose economic sanctions on North Korea. The Diet is likely to pass the revision in February and Japanese officials are hoping the new law could convince Pyongyang that resolving the abduction issue in government-level talks is the best way to obtain much needed aid. But the revised law could have a negative effect too, as Pyongyang could view the potential sanctions as a hostile act.

All these domestic and external factors are definitely going to influence the outcome of the upper house election in July. As resignation by the prime minister in the face of a setback in the House of Councilors election has become a set practice in Japanese politics, Prime Minister Junichiro Koizumi will confront one of the toughest political challenges of his career in the upcoming upper house election. If LDP does well, he looks set to become the longest serving prime minister since Yasuhiro Nakasone. But if his ambitious step in Iraq results in Japanese casualty, or the economy once again plunges into uncertainty with serious consequences on the job market, the upper house election might put an end not only to Koizumi's own political career, but may also derail the LDP from its lengthy hold on power.