The LDP Presidential Election held on September 22, 1995 attracted much public attention. The race pitted International Trade and Industry Minister Ryutaro Hashimoto, whose slogan was "Cheer up, Japan! - A Declaration of Renewed Confidence," against Junichiro Koizumi, whose platform included a novel plan to privatize three key Posts and Telecommunications services (postal services, postal savings, and postal insurance). When votes from both Party members and LDP Diet members were combined, Hashimoto received 304 to 87 for Koizumi and became the 17th President of the Liberal Democratic Party. Former LDP President Kono had withdrawn from the race in late August.

Since the end of the LDP's dominance of politics as the sole ruling party, the Japanese economy had fallen into a prolonged slump. President Hashimoto advocated policies that were designed to reinvigorate Japanese society in the midst of these difficult circumstances. As a result, the Japanese public held high hopes for the success of his tenure. Determination among members of the Party to respond effectively to these popular expectations was strengthening as well. However, since Prime Minister Murayama's coalition government (LDP-SDP-New Party Sakigake) had shuffled its cabinet as recently as the beginning of August, the new LDP President did not immediately become the new Prime Minister or form a cabinet as had been the case in the past when the LDP had been the only party in power. The top three Party posts went to Koichi Kato, who replaced Hiroshi Mitsuzuka as Secretary-General, Masajuro Shiokawa, who became Chairman of the General Council, and Taku Yamasaki, who took over as the Chairman of the Policy Research Council.

During the fall and winter of 1995, debate concerning the possible reduction of U.S. military bases in Okinawa intensified in the wake of an incident in September in which American soldiers sexually assaulted a young Japanese girl. This situation was exacerbated by the conflict that had developed between the central government and Okinawa Prefecture concerning the use of land by the American military as outlined in the "Law for Special Measures Regarding Expropriation of Land Provided for U.S. Forces in Japan" (Churyugun Yochi Tokubetsu Sochi-ho). In addition, the government also faced the difficult task of managing bad loans accumulated by housing loan companies (jusen) whose dire financial straits were threatening the health of the entire Japanese economy. Approximately three months after Hashimoto became LDP President, Prime Minister Murayama decided to "follow the normal course of constitutional politics" and hand control of the government over to the largest party in the Diet, the Liberal Democratic Party. He did so in order to revitalize the country's politics, economy, and society and to enable the government to respond more effectively to a number of difficult problems it was facing in foreign affairs.

At a news conference held at the Prime Minister's official residence on January 5, 1996, Murayama formally announced his resignation. Immediately after, leaders from the LDP, SDP, and New Party Sakigake met to reaffirm their commitment to the coalition government framework and coordinate policies. They further agreed to support Hashimoto as the coalition's candidate for Prime Minister. In voting held in both Upper and Lower Houses of the Diet on January 11, 1996, Hashimoto was elected to this post and got his administration off to a running start by completing the formation of a new cabinet on the same day. Hashimoto's election marked the first time in two and a half years that the President of the LDP had been chosen to serve as Prime Minister. Ichiro Ozawa, who had become leader of the Shinshin-to at the end of the previous year, lost to Hashimoto by a wide margin. Immediately following the election, members of the Social Democratic Party formally changed this party's name from "Shakaito" (Socialist Party) to "Shakai Minshuto" which more closely matched the English name they had been using for some time.

The new cabinet included Wataru Kubo (SDP) as Deputy Prime Minister and Finance Minister, Seiroku Kajiyama (LDP) as Chief Cabinet Secretary, Yukihiko Ikeda (LDP) as Foreign Minister, Shunpei Tsukahara (LDP) as International Trade and Industry Minister, and Naoto Kan (Sakigake) as Health and Welfare Minister. Prime Minister Hashimoto was acutely aware of the fact that the structure of Japan's economy and society was in need of fundamental reform. With this in mind, he chose "Reform and Creativity" (henkaku / sozo) as the principal themes of his new cabinet. Building upon these basic themes, Hashimoto also proposed six reforms (Muttsu No Kaikaku) designed to bring about concrete and revolutionary change to Japan's postwar political administrative system. Central to these efforts were plans to consolidate the central government's administrative organs into thirteen ministries and agencies and a campaign to decentralize governmental power and authority.

The Hashimoto Cabinet's most pressing task was to compile the new budget as quickly as possible and clear the way for a full economic recovery. In addition, work was urgently required to rebuild relations with the United States (concerning issues in Okinawa and other areas) and to revitalize a national administration that had stagnated considerably while under the control of other political parties.

Soon after becoming Prime Minister, Hashimoto traveled to the city of Santa Monica in the United States for his first meeting with President Clinton on February 23. His dedicated efforts during this visit to resolve issues related to the American military presence in Okinawa resulted in an agreement with the United States that the Futenma Air Station would be returned to Japan. This decision was formally announced by Hashimoto and U.S. Ambassador Walter Mondale at a joint news conference held on April 12. The reduction of U.S. military bases in Okinawa was truly a remarkable event. Hashimoto's work went one important step beyond that of the late Prime Minister Eisaku Sato whom Hashimoto revered as the "master of politics" (seiji no shisho) and who had earlier orchestrated "the return to Japan of a nuclear-free Okinawa" (Kaku Nuki Hondo Nami Henkan). It also demonstrated the responsiveness of the LDP administration to the will of the Okinawan people and proved indispensable to the reconstruction of close security cooperation between Japan and the United States.

During a meeting of the Security Consultative Committee (2+2) held on April 15, the Japanese and American governments approved an interim report on the reorganization and reduction of U.S. military bases compiled by the Special Action Committee on Okinawa (SACO). Following this, President Clinton met with Prime Minister Hashimoto in Japan on April 17 and announced that the two sides had also reached agreement on a "Japan-U.S. Joint Declaration on Security" (Nichibei Anpo Kyodo Sengen). The Hashimoto administration's diplomacy was designed to strengthen Japan's security in the Far East where North Korea, long suspected of trying to develop its nuclear capabilities, continued to conduct ballistic missile tests and relations between China and Taiwan remained tense. Eventually, these efforts resulted in the adoption of a set of new "Japan-U.S. Guidelines for Defense Cooperation" (Arata-na Nichibei Boei Kyoryoku no tame no Shishin) in September of 1997.

In domestic politics, the ruling and opposition parties clashed over measures that would be incorporated in the 1996 fiscal budget concerning the government's handling of bad debts accumulated by housing loan companies (jusen). This problem was a serious one as a string of bankruptcies in this sector would likely cause a panic in the financial system and have a tremendously deleterious effect on an economy that was still mired in recession. In order to avoid further disruption of people's lives, the government and ruling parties developed a plan to clarify responsibility among the housing loan companies and provide them with 685 billion yen in public funds. Opposition parties rejected this plan and set out to block its passage in the Diet. The Shinshin-to demonstrated its opposition by refusing to participate in deliberations on the plan in the Lower House Budget Committee. This party went one step further on March 4 when its members began a sit-in protest in the Diet and employed picketing strategies in an effort to obstruct proceedings there.

When this picketing dragged on for over two weeks, public criticism of Shinshin-to's behavior intensified. Then on March 24, the ruling parties received a boost when their candidate won the by-election for an Upper House seat in Gifu Prefecture by a large margin. Taking this turn of events into careful consideration, Prime Minister Hashimoto met with Shinshin-to leader Ichiro Ozawa and secured an agreement to resume debate in the Budget Committee. This then cleared the way for the passage of the budget for the new fiscal year on April 11 in the Lower House and on May 10 in the Upper House. During this ordinary session of the Diet, the separation of religion and politics as it related to the Shinshin-to and one of its principal support groups, Soka Gakkai, was widely discussed among LDP members. The consumption tax and the decision to raise it to 5 percent (effective on April 1, 1997) were also at the center of intense debate within the Party.

In addition to struggling to manage affairs in the Diet, Prime Minister Hashimoto was also actively engaged in international diplomacy. At the first Asia-Europe Meeting (ASEM) held in Bangkok beginning on March 1, 1996, he met with South Korean President Kim Yong-sam. Talks between the two produced agreements to establish exclusive economic zones (EEZ) apart from their countries' ongoing territorial dispute over Takeshima Island and to begin negotiations concerning fishing at an early date. Prime Minister Hashimoto then traveled to Russia on April 18 to meet with President Yeltsin. Discussions there resulted in an agreement to continue diplomatic efforts to resolve a bilateral dispute over the Northern Territories and to conclude a peace treaty between Japan and Russia as soon as possible. In addition, Hashimoto represented Asia at the G-7 Summit held in Lyon, France on June 27, 28, and 29.

On September 17, Prime Minister Hashimoto dissolved the Lower House at the beginning of an extraordinary session of the Diet. Immediately prior to this, New Party Sakigake Secretary Yukio Hatoyama, Naoto Kan from the SDP, and Kunio Hatoyama from the Shinshin-to had established the Democratic Party of Japan. In light of the fact that every political party in Japan, with the exception of the LDP and the JCP, had fallen into such disarray, Prime Minister Hashimoto decided that the time was right for the public to pass judgement on them through elections held under a new system of single-member and proportional representation districts.

Although the Party failed to capture a simple majority in the House of Representatives election on October 20, it did manage to increase its representation in this body from 211 to 239 seats. This clearly demonstrated that the LDP remained the party most trusted by the public to lead the government. On November 7, the Prime Minister formed the Second Hashimoto Cabinet. Hashimoto was able to maintain cooperative relations with the SDP and the New Party Sakigake even though these parties were not represented in the new cabinet. The government then immediately began an ambitious program of reform on November 28 by opening a Conference on Administrative Reform (Gyosei Kaikaku Kaigi) to formulate policies for the restructuring of the central bureaucracy and the decentralization of government authority. The work of this body was complemented by a Conference on Fiscal Structural Reform (Zaisei Kozo Kaikaku Kaigi) that produced recommendations for the rebuilding of Japan's public finances.

At the end of the year, Tupac Amaru Revolutionary Movement (MRTA) rebels entered and took control of the Japanese Ambassador's official residence in Lima, Peru. The Japanese government and the LDP remained deeply concerned for the safety of those held hostage by the rebels until a rescue operation carried out by the Peruvian military brought the crisis to an end on April 23, 1997.

In a policy speech he gave at the Ordinary Session of the Diet convened in January of 1997, Prime Minister Hashimoto expressed his intention to carry out reforms in six principal areas - (1) public administration, (2) public finance, (3) social security, (4) the economic system, (5) the financial sector, and (6) education. He stressed that "we cannot allow for the severity of the current crisis to be forgotten such that reforms are slowed or postponed." With the exception of plans for public finance that had to be temporarily modified in light of the worsening state of the economy, the LDP's diligent efforts resulted in significant progress being made on reforms in these fields.

In contrast to the previous year, the proceedings of the 1997 Ordinary Session of the Diet went smoothly. The new budget was passed on March 28 just in time to be implemented at the beginning of the fiscal year in April. In addition, opposition parties could not justify attempts to hinder the work of the Hashimoto administration to enact popular legislation for "social security system reform" that was designed to help the country cope with the aging of its population and falling birthrates. The same was true of important legislation for "educational reform" that was necessary to create a system that would more effectively develop individual talents, foster creativity, and cultivate ambition among the Japanese people.

During this period, Prime Minister Hashimoto was also busy meeting with various foreign leaders who visited Japan including Mexican President Zedillo, U.S. Vice President Gore, Malaysian Prime Minister Mahatir, and German President Herzog. His dedicated efforts to improve Japan's foreign relations also included trips to the United States in June to attend the Denver Summit, to New York to deliver a speech on global environmental protection at the United Nations, and to the Netherlands to participate in the regular Japan-EC Summit.

On July 27, Prime Minister Hashimoto announced that summit talks with Russian President Boris Yeltsin had resulted in a decision to build Japan's foreign policy vis _ vis this country around core principles of "trust, mutual understanding, and long-term vision." This basic philosophy undergirded subsequent initiatives to improve Japan-Russian relations including an agreement to "conclude a peace treaty by the end of the century" (November, 1997 - Krasnoyarsk, East Siberia) and Prime Minister Hashimoto's "new proposal for national borders" (April, 1998 - Kawana, Shizuoka Prefecture).

At the conclusion of his two-year term as LDP President, Hashimoto was chosen without a formal vote on September 8 to serve a second term. Three days later on September 11, he formed the Second Hashimoto Cabinet. It was also during this period that the operations of Japanese financial institutions, including those of many leading companies, were encountering severe difficulties. As the seriousness of this situation intensified, so did pressures on the Hashimoto administration to take remedial action. In speeches he made both at an informal summit meeting of APEC held in Canada at the end of November and at an ASEAN summit meeting held in Malaysia in mid-December, Prime Minister Hashimoto spoke at length on the challenges that Japan and other countries in Asia faced in the midst of this crisis.

On November 3, the middle-ranked brokerage firm Sanyo Securities effectively went bankrupt after applying to the Tokyo District Court for protection under the Corporate Rehabilitation Law (Kaisha Kosei-ho). The collapse of the Hokkaido Takushoku Bank, a low-ranked city bank that had nonetheless been a pillar of Hokkaido's economy, followed soon after when massive non-performing loans forced it to transfer its operations to the Hokuyo Bank and other institutions on November 17. Yet another failure occurred just three days later when one of Japan's four largest brokerage houses, Yamaichi Securities Co., Ltd. (with 7,500 employees and over 20 trillion yen in investments), voluntarily ceased operations. This dramatic event shocked people not only in financial circles, but throughout the entire country. It fueled concerns about Japan's financial system and eroded international confidence in Japan's economy as a whole.

On November 18, the Hashimoto administration approved an emergency economic package totaling 10 trillion yen to stabilize Japan's financial system. Later at a news conference held on December 17, the Prime Minister announced plans to introduce additional measures in the form of special tax cuts worth another 2 trillion yen. Finally, Hashimoto took the lead in encouraging the Ministry of Finance, as the government's principle supervisory organ for the financial industry, to contribute more actively to his administration's efforts to support an economic recovery.

In a policy address he delivered at an ordinary session of the Diet in January of 1998, Prime Minister Hashimoto stressed his commitment to "stabilization polices for the financial system and economic management." Despite his attempts to change the public's mood, however, anxieties did not dissipate quickly. During the same period, public confidence in the integrity of the Finance Ministry was damaged when an investigation conducted by the Tokyo District Public Prosecutors Office into allegations that senior financial inspectors there had been excessively entertained by several financial institutions resulted in the arrest of two individuals on suspicion of accepting bribes. To take responsibility for the affair, Finance Minister Mitsuzuka later decided to resign from his post. These unfortunate incidents made economic recovery even more difficult.

Nonetheless, steady progress was being made on the six reforms advocated by Prime Minister Hashimoto. As part of efforts to reform Japan's public finances, a "Fiscal Structure Reform Law" (Zaisei Kozo Kaikaku-ho) stipulating that the amount of government bonds issued to cover deficit spending be reduced to zero by 2003 was passed in late November of 1997. Then on December 3, the Conference on Administrative Reform issued its final report on the reorganization of the central government's functions into one Office of the Prime Minister and 12 ministries and agencies. These plans later took the form of the "Basic Law on the Administrative Reform of the Central Government" (Chuo Shocho Kaikaku Kihon-ho) that passed through the Diet in June of 1998.

Without fiscal reforms, many feared that future generations would be unfairly burdened with the task of dealing with the nation's public debt. The austere budget for 1998 that the government passed on April 8 of that year reflected these concerns. In consideration of the many people who were suffering because of the recession, however, Prime Minister Hashimoto decided to temporarily modify the direction of his administration's policies. The day after the 1998 budget was passed, he announced the introduction of special tax cuts totaling 4 trillion yen. Then on April 24, the Hashimoto administration approved revisions of the Fiscal Structure Reform Law to extend the deadlines for making improvements to the nation's public finances. The government also compiled a general economic stimulus package worth 16.65 trillion yen. Finally, many of the Finance Ministry's regulatory responsibilities in the banking sector were transferred to a newly created Financial Supervisory Agency (Kinyu-cho) on June 9.

In April of 1998, regional competitors India and Pakistan conducted a tit-for-tat series of underground nuclear tests. As concerns about this tense situation spread throughout the entire international community, Japan held an election for the Upper House on July 12. Unfortunately, LDP candidates did not perform as well as had been expected. They won in less than half of the contests and managed to secure only 44 seats for the Party. The LDP membership accepted this outcome as inevitable given the negative effects that the recession and concerns about the financial system had had on the election. Nonetheless, Hashimoto believe it was necessary for him "to take full personal responsibility" for the defeat by announcing his decision on July 13 to resign as both Prime Minister and President of the LDP.

On May 30, just a few weeks before the Upper House election, the SDP and the New Party Sakigake left the ruling coalition. At the end of 1997, the Shinshin-to had broken apart into several groups. Some of its members joined with the Democratic Party while others formed the Liberal Party, New Peace Party, and the Komei.

The four years during which the coalition formed by the LDP, SDP, and Sakigake governed Japan constituted an important period of the nation's political history. Through open and democratic means, the three parties were able to achieve a consensus on fundamental national issues concerning the Japanese Self-Defense Forces, the Japan-U.S Security Treaty, the national flag, and the national anthem. In addition, they were able to find solutions for other long-standing postwar problems by bringing matters related to the Minamata mercury poisoning disaster to a close and creating an "Atomic Bomb Survivors Support Law" (Genbaku Hibakusha Engo-ho). Finally, the coalition's success in handling the housing loan company crisis, adopting new guidelines for Japan-U.S. defense cooperation, and enacting the NPO Cooperation Law - all goals that would likely have been unattainable within the context of the former "1955 System" - enabled the country to make considerable progress forward.