Japan:Like all good political races, Japan’s ruling party is engaged in a popularity contest. The Democratic Party of Japan’s leading candidates to succeed Naoto Kan as the prime minister are competing to avoid the unpopular policies of tax increases to fund reconstruction and draconian spending cuts. But with debt at over 200 per cent of GDP and another Moody’s downgrade, what’s popular isn’t what’s needed.
Japan’s public spending has been out of control since its real estate and stock bubble burst in 1990. Premier Junichiro Koizumi cut the deficit somewhat during his tenure from 2001-06. But his five successors of both parties have been so insecure in their jobs, and so keen to court short-term popularity through “stimulus” spending, that deficits have tended to increase and debt has spiralled to twice the size of the economy.
Since over 90 per cent of that debt is owned by domestic investors, the government can continue to fund deficits while domestic confidence remains unimpaired. At some point, that confidence must inevitably crack; meanwhile the massive diversion of resources to the public sector — including a new $100 billion package of corporate credit lines — risks restricting private small business credit in particular and preventing healthy growth.
A new DPJ leader will struggle to reverse these trends. He will also only have a year to make his mark as the biennial leadership election is scheduled for September 2012. The next prime minister will also need to deal with the party’s big-spending populist boss Ichiro Ozawa, who controls about 120 of this contest’s 398 potential voters.
As a result, the chances for finance minister Yoshihiko Noda, a fiscal hawk and Ozawa opponent, have slimmed at the expense of former foreign minister Seiji Maehara, who is trimming his policies to gain Ozawa’s support. That’s too bad.
Noda has promised to raise the consumption tax from 5 per cent to 10 per cent to pay for reconstruction from March’s Tohoku region earthquake and tsunami, and has also called for a 10 per cent cut in non-reconstruction public spending. Those are the policies Japan needs. Their unpopularity may doom his candidacy.