The 18th House of Councillors election was held in July of 1998. Although the Party managed to increase the total number of votes it received in the election by a considerable amount, the number of seats it controlled in the Upper House actually fell. In light of this unfortunate outcome, Prime Minister Ryutaro Hashimoto decided to resign as Prime Minister and LDP President. An election held on July 24 to select the Party's 18th President was contested by three individuals - Minister of Foreign Affairs Keizo Obuchi, Minister of Health and Welfare Junichiro Koizumi, and former Chief Cabinet Secretary Seiroku Kajiyama. Obuchi won in the first round after receiving a total of 225 votes, more than a majority, from LDP members in both houses of the Diet and individuals representing each of the prefectures. Kajiyama finished second, followed by Koizumi. Keen interest among the public in this contest greatly energized the process.

On July 30, the members of the Hashimoto Cabinet formally resigned. At an extraordinary session of the Diet convened on the same day, the Lower House assembled and chose LDP President Obuchi to be Japan's 84th Prime Minister. This in turn prompted Obuchi to form a new cabinet. In the Upper House, however, the defection from the coalition government of the SDP and the New Party Sakigake shortly before the election in July had left the LDP without a majority. As a result, this body selected Naoto Kan of the Democratic Party, instead of Obuchi, as its nominee for Prime Minister. When discussions in the Conference Committee of Both Houses failed to produce an agreement on this issue, Obuchi became Prime Minister in accordance with Article 67, Section 2 of the Japanese Constitution. As these events clearly demonstrated, the Obuchi administration was inaugurated in the midst of a tremendously turbulent environment.

The new administration's most urgent task was to revitalize the economy. In particular, growing concerns at home and abroad about the possible development of a "deflationary spiral" necessitated that the government do its utmost to stave off financial crisis. A serious global financial crisis had already caused considerable damage to the economies of other countries in Asia, including Hong Kong, Thailand, Indonesia, and South Korea. It also prompted Russia to default on its foreign debt in August of 1998 and pushed Brazil to the point of economic ruin. As worries among investors in North America and Europe about the possibility of hedgefund failures intensified, the collapse of one of the major players in this field, Long Term Capital Management (LTCM), sent shock waves crashing through Wall Street. Moreover, if the events of the previous year were repeated and more major financial institutions in Japan collapsed in quick succession, the effect on the global economy would likely be catastrophic. The challenges the Obuchi administration faced were indeed daunting.

In a rather unusual move, Prime Minister Obuchi laid the groundwork for a shift in economic policies by asking former Prime Minister Kiichi Miyazawa to serve in the new cabinet as Minister of Finance and appointing Taichi Sakaiya, a critic from the private sector, as the Secretary General of the Economic Planning Agency. The Prime Minister also chose Acting Secretary-General Hiromu Nonaka to serve as the Chief Cabinet Secretary amidst expectations that Nonaka's considerable political acumen would prove invaluable in negotiations with opposition parties.

In his first policy address on July 7, Prime Minister Obuchi announced that his cabinet would be dedicated to "economic revitalization. He also pledged to "put the economy back on track within two years." As part of this effort, Obuchi created an Economic Strategy Council (Keizai Senryaku Kaigi) and charged it with the task of formulating concrete policies to facilitate a rapid recovery. Making a clear break with the policies of the Hashimoto administration, the Obuchi administration shifted the government's focus from structural reforms to aggressive fiscal stimulus measures. Structural reforms were vitally important to the nation's future. At the same time, however, the Obuchi administration pragmatically maintained that efforts to achieve them would be wasted if the economy were allowed to collapse in the meantime.

Fierce attacks by opposition parties in the Diet and an economy whose prospects for recovery in the near future remained unclear led to predictions in the media that the Obuchi Cabinet would meet with disaster immediately after its inauguration. In spite of expectations that it would soon encounter difficulties in managing Diet affairs and be extremely short-lived, however, the new administration was able to successfully ride out the financial crisis. In 1999, it gathered steam and began to establish itself as a truly resilient political force.

On August 31, North Korea conducted a test launch of a new type of long-range missile, the "Taepodong," that posed a considerable threat to Japan. The missile, whose development followed that of the earlier "Rodong" class, flew over the Japanese archipelago and landed in the Pacific Ocean off northern Japan's Sanriku Coast. In response, the Upper and Lower Houses of the Diet immediately passed a resolution condemning North Korea's actions. In addition, the Japanese government decided to impose sanctions, including a freeze on the country's contributions to the Korean Energy Development Organization (KEDO). This new threat from North Korea added to the worries of a Japan that was already struggling in the midst of a serious domestic recession. While in New York to attend the United Nations General Assembly from September 20 through September 23, Prime Minister Obuchi met for talks with U.S. President Clinton. The two leaders affirmed their policy of working in close cooperation with each other and South Korea (in addition to China and Russia) to obstruct North Korea's efforts to develop its nuclear and missile capabilities.

The extraordinary session of the Diet, referred to as the "Financial Session" (Kinyu Kokkai), was thrown into turmoil when debate on bills related to revitalization of the financial sector strayed into discussions of the government's bailout of the Long Term Credit Bank of Japan. Although this caused considerable concern among the ruling parties, the LDP remained united with the government and began talks on the issue with the Democratic Party, SDP, Liberal Party, and New Peace Party (that later joined with the Upper House parliamentary group Komeito establish the "New Komei" party in November). In the series of grueling marathon negotiations that followed, a conspicuous role was played by a group of junior Diet members whose knowledge of financial matters had earned them a reputation as "the new generation of policy experts." The discussions focused on the pros and cons of providing public money to financial institutions that were on the point of collapse.

On October 5, the Nikkei average fell below 13,000 yen on the Tokyo Stock Exchange. On the previous day, a meeting of G-7 finance ministers and central bank governors had issued an unusual statement calling on Japan to use public funds to rescue failing financial institutions. In response to these events, Prime Minister Obuchi decided to engage in direct talks with opposition party leaders in the hopes of breaking the deadlock. At the conclusion of separate negotiations with each of these parties, the administration successfully passed the "Emergency Measures Law on Revitalization of Financial Functions" (Kinyu Saisei-ho) on October 12. This was followed by the passage of the "Law for the Early Stabilization of Financial Functions" (Kinyu Kino Soki Kenzenka-ho) on October 16, just before the close of the extraordinary Diet session.

These pathbreaking laws included provisions for financial institutions facing imminent collapse to be placed under government control (de facto nationalization) and established a framework for 60 trillion yen in public funds to be employed in financial rescue operations. Based on these laws, the Long-Term Credit Bank of Japan applied for special government control on October 23, just one week after the end of the Diet session. This system was also used to place the Nippon Credit Bank under government control at the end of the same year. These laws ensured that the effective collapse of major financial institutions in Japan did not have the same disastrous impact on the economy as did Yamaichi Security's decision to voluntarily suspend its operations in the previous year. Although this outcome did not completely eliminate concerns about the future, it was greeted with considerable relief by actors in both international and domestic financial markets.

After the Obuchi administration had managed to bring the financial crisis temporarily under control, Finance Minister Miyazawa announced on October 30 the compilation of a 30 billion dollar aid package for Asia known as the "New Miyazawa Plan." On November 16, the government approved an emergency fiscal package worth 17.9 trillion yen in a determined effort to stimulate the country's struggling economy. Then at the end of the year, the Obuchi administration demonstrated its firm commitment to Japan's economic recovery by compiling an 81 trillion yen budget for 1999 designed to boost domestic demand.

In the meantime, a scandal involving allegations of breach of trust and destruction of evidence on the part of individuals in the Defense Agency's Central Procurement Office (Chotatsu Jisshi Honbu) had widened in scope. This prompted the Agency's Director General Fukushiro Nukaga to take responsibility for the affair by resigning from office. Despite this unexpected turn of events and the challenges it was facing in the "Financial Session" of the Diet, the Obuchi administration remained actively engaged in foreign diplomacy.

In early October, South Korean President Kim Dae Jung visited Japan and signed a joint declaration with Prime Minister Obuchi that emphasized the two countries' intentions to create a "partnership for the 21st Century." Until recently, the relationship between Japan and Korea had been characterized by a narrow, backward-looking focus on the language of an "apology" concerning events in the past. However, the meeting between President Kim and Prime Minister Obuchi enabled both countries to lay such issues to rest and shift the development pathway of their relationship in a more positive, forward-looking direction. The Prime Minister's visit to South Korea in March of 1999 further strengthened this new relationship.

In early November of 1998, Prime Minister Obuchi traveled to Russia to continue the work that the then Prime Minister Hashimoto and Obuchi himself, as Foreign Minister at the time, had begun to facilitate bilateral negotiations on the "Northern Territories" dispute. Efforts to resolve this issue have also included the creation of a "National Borders Demarcation Committee" (Kokkyo Kakutei Iinkai) and the signing of a "Moscow Declaration" by Prime Minister Obuchi and President Yeltsin in which both countries pledge to make every possible effort to conclude a bilateral peace treaty by the year 2000. It is indeed unfortunate that President Yeltsin's ill health and the instability of Russian politics have prevented further progress from being made in this area.

In late November, U.S. President Clinton visited Japan for in-depth talks with Prime Minister Obuchi on topics ranging from North Korea to American military bases in Okinawa. On the 15th of this month, Keiichi Inamine was elected to serve as the governor of Okinawa after receiving the endorsement of the LDP's chapter there. This precipitated a shift in the prefectural administration's position on the Japan-U.S. Security Treaty from an uncooperative to a more accommodating one that greatly improved the chances that solutions could be found to problems associated with the bases. In turn, this change contributed to the Japanese government's bold decision in April of 1999 to hold the next summit of G8 industrialized nations scheduled for 2000 in Kyushu and Okinawa. Previous to this, no summit meeting had been hosted by Japan at any site other than Tokyo.

Chinese President Jiang Zemin visited Japan on November 26. In meetings and speeches throughout his stay, Jiang repeatedly emphasized China's historic view of "Japan's past aggressions" and stressed the need for a "settling of accounts." These remarks eventually prompted Prime Minister Obuchi to express Japan's hope that this rather counterproductive theme in the two countries' bilateral relations could be changed. Fortunately, by the time that Obuchi made a trip to China in July of the following year, the attitude of the Chinese leadership, including President Ziang, had changed significantly. Their renewed commitment to promoting friendly relations was evidenced in part by China's gift of an adult crested ibis, a bird no longer found in Japan, to Sadogashima Island. Although Japan's diplomacy with China was not as problematic as that with Russia, it still proved remarkably challenging for the Obuchi administration.

During his first year in office, Prime Minister Obuchi also engaged in a number of other important diplomatic initiatives and activities including a visit to Vietnam in December of 1998 to attend the ASEAN summit, a tour of France, Germany, and Italy in January of 1999, a trip to the funeral of King Hussein of Jordan in February, and participation in the G8 Cologne Summit hosted by Germany in June.

Immediately after becoming Prime Minister, Obuchi began work with Chief Cabinet Secretary Nonaka and other LDP leaders to explore strategies with which to strengthen his administration at a time when the Party did not enjoy a majority in the House of Councillors. After four months, these efforts finally began to bear fruit when Prime Minister Obuchi met with Liberal Party leader Ichiro Ozawa on November 19 to discuss a future alliance. On January 14, 1999, the two parties officially formed a coalition cabinet just prior to the start of the year's ordinary session of the Diet. When forming his new cabinet, Obuchi chose Takeshi Noda of the Liberal Party to serve as the Minister of Home Affairs.

During the 1999 Ordinary Session of the Diet, the coalition government headed by Prime Minister Obuchi recorded a string of historic accomplishments. This can be attributed in large part to the alliance between the LDP and the Liberal Party and the cooperative relationship that had been formed between these two parties and the Komeito.

On March 17, a public that was continuing to suffer in the midst of an economic recession welcomed the passage of a budget for fiscal 1999 that had made its way through the Diet in record time for the postwar period. The Diet then passed the Information Disclosure Act on May 7 and another law on May 24 related to the long-pending issue of new guidelines for defense cooperation between Japan and the United States. This latter law clearly stipulates that Japan is required to provide logistical support for U.S. military forces in the event that they are deployed in "areas surrounding Japan" during an emergency situation that presents a threat to Japanese security. As such, it added important components to the Japan-U.S. Security Treaty that had previously been lacking.

After this session of the Diet had been extended, government plans to implement a thorough reorganization of the country's antiquated public administrative system in 2001 were confirmed with the passage into law on July 8 of bills for "Central Administrative Reform" (Chuo Shocho Kaikaku Kanren Hoan) and "Regional Decentralization" (Chiho Bunken Ikkatsu Hoan). On the 26th of the same month, the Diet also passed a "Law for Activating Deliberation in the Diet" (Kokkai Kasseika-ho) that abolished the practice of bureaucrats responding to questions in the Diet on behalf of cabinet ministers and introduced both a "Vice-Minister and Parliamentary Minister System" and a "Party Leader Debate System." Then on July 29, the Diet Law was revised and Research Commissions on the Constitution (Kenpo Chosa Kai) were established in both houses of the Diet. These measures were designed to bring sweeping change to Diet proceedings where debates were often criticized for lacking substance. Expectations were especially high that the Research Commissions on the Constitution would foster constructive discussions on reforms necessary to keep in step with the changing times.

Also deserving of special mention is the National Flag and National Anthem Law (Kokki / Kokka Ho) that when passed on August 9 officially designated these as the "Hinomaru" and the "Kimigayo" respectively. The suicide of a high school principal in Hiroshima during a dispute over the handling of the national flag and anthem at a graduation ceremony prompted Prime Minister Obuchi and Chief Cabinet Secretary Nonaka to initiate this legislation. This law made it possible for Japanese citizens to proudly hoist the Hinomaru and sing the Kimigayo as other people around the world do with their national flags and anthems.

Prime Minister Obuchi's decision to order the Maritime Self-Defense Force to engage in patrol duties when a North Korean spy ship entered Japan's territorial waters off the Noto Peninsula on March 23, 1999 was also a notable accomplishment. This order, the first of its kind, demonstrated to the Japanese people and the rest of the world that Japan was prepared to respond resolutely to any violation of its territorial waters.

The unified local elections in April demonstrated once again that there are more than a few non-aligned voters living in urban areas. The victory in the Tokyo gubernatorial race of independent Shintaro Ishihara over candidates backed by the LDP, New Komeito, and Liberal Party further illustrates this trend. At the same time, however, the election results also showed that the LDP's base of support in regional Japan remains solid.

The determined efforts of the Obuchi administration to "revitalize the economy" brought about a steady recovery. Although the unemployment rate remained high, GDP figures for the first quarter of 1999 showed an increase of 1.9 percent over the same period of the previous year. By the time that the Obuchi administration celebrated its first year anniversary on July 30, it had already accomplished much more than anyone had ever expected.

As Obuchi had taken over as LDP President from Hashimoto before the end of the latter's full term, the Party held an election on September 9. Obuchi was challenged in the contest by former Secretary-General Koichi Kato and former Policy Research Council Chairman Taku Yamasaki. When the results of the ballot by Party members, fraternal members, and LDP Diet members were announced on September 21, Obuchi was re-elected with 350 votes. Kato and Yamasaki received 113 and 51 votes respectively.

In the election, every 10,000 votes (determined after discarding the last three digits and rounding up from the thousands digit) from Party members and fraternal members were counted as one vote and added to those cast by the LDP's members in the Diet. Of 2,911,519 Party members and fraternity members, 49.32 percent cast ballots.