Japanese finance minister Sadakazu Tanigaki is widely reckoned to be the most affable of the three candidates vying to succeed Junichiro Koizumi as Japan’s next prime minister. But while he is undoubtedly less hawkish than his rivals on the critical issue of Japan’s relations with its neighbours, he is tough in insisting that he will not “dodge” any difficult issue if he wins the leadership contest later this month – including raising taxes in Japan.
In an interview with Emerging Markets at his Tokyo office – a stone’s throw from the prime minister’s official residence, which he could soon be occupying – the still-young (by Japanese standards) 61-year-old lawyer turned politician demonstrates his “transparent” approach.
He is blunt in his analysis of issues ranging from Japan’s formidable fiscal problems to the strained relations that he says still exist between east Asia and the IMF.
He showed similar frankness at the Foreign Correspondents Club of Japan when he said outright that Koizumi’s visits to Tokyo’s controversial Yasukuni Shrine, where the names of “Class A” war criminals from World War 11 are enshrined along with those of other Japanese war dead, are a major stumbling block to Japan’s relations with China and South Korea. His rivals have meanwhile been highly equivocal on this very sensitive issue.
When Tanigaki spoke to Emerging Markets at the end of August, he was still trailing chief cabinet secretary Shinzo Abe, the front-runner in the race to secure election as president of the ruling Liberal Democratic Party of Japan on September 30, and thus to become prime minister. But Tanigaki had moved into second place, ahead of foreign minister Taro Aso, in the leadership bid, and the gap with Abe appeared to be closing.
Honesty pays
Tanigaki does not have the charisma that Koizumi possesses and which the so-called blue-blooded Abe also has – something that makes them both popular with women voters in particular. But he is an elite graduate of Tokyo University’s legal faculty, who has wider and longer political experience than Abe, in areas ranging from science and technology minister to finance minister. And he seems to be scoring points with his “honest” approach.
Youthful almost to the point of being boyish in appearance, Tanigaki has a studious look, which belies an ability honed during 23 years as a member of Japan’s lower house of parliament to be forthright in his delivery. When asked whether he is confident that Japan’s recovery can be maintained, and how the government can walk the delicate line of cutting its own spending, in order to get its recession-ravaged finances back into order, without risking yet another slowdown, the minister does not mince his words: “National and local government debt combined is now over 150% of GDP, which is huge,” he says. “This means that we are vulnerable to the rising interest rate environment, because that would push up the debt service cost for Japan. So we need to be vigilant.”
How does he see the balance between the rising tax yields that recovery is bringing and the damage that interest rate rises could do to government finances? “Given that Japan is very vulnerable to interest rate hikes, we need to preserve confidence in Japanese government bonds,” he says.
The Koizumi cabinet recently decided its Big Bone policy of priority issues “where the direction was set for regaining primary balance (on the budget) by 2011,” Tanigaki says. “By the mid 2010s, our debt to GDP ratio should be lowered in a stable way. These are targets towards which we need to work very hard. In order to achieve this, the amount which needs to be adjusted is 16.5 trillion yen, of which 70-90% should come from spending cuts.”
Grim truth
True to his word about not dodging issues, Tanigaki says, “I must remind you that the target set for the expenditure cuts is very harsh and demanding.” But even that “will not be enough to achieve the target” for restoring primary balance of the budget (where revenues less borrowing match expenditures less debt service). “On top of this, there is the ongoing ageing of the population, which will boost the social security related expenses.
“We need to depend on tax increases, going forward,” he says – something he has pointed out before, which some say may have cost him the LDP presidential election before a single one of the party’s 700-odd members has cast a single vote. “This is as much as I can say as finance minister within the Koizumi cabinet. But, of course, the challenges remain for the people who will succeed.”
Tanigaki has said that Japan’s national consumption tax needs to be doubled “at least” from its current level of 5%, if the government is to get its fiscal house back in order. The people have to be told, whether they like it or not, is his approach, and Tanigaki rejects the idea that a rise in the consumption tax could plunge Japan back into recession, as it did in 1997 when the rate was raised from 3% to 5% under then prime minister Ryutaro Hashimoto. Japan’s economic and financial position has improved greatly since 1997, when it was on the brink of a deflationary spiral and faced the danger of a systemic financial crisis, the minister suggested to Emerging Markets.
“So I think nowadays we are able to manage the changes needed.” Japanese people are more concerned now about the risk of interest rates rising (after six years of near zero short-term rates) than they are about taxes, he says.
Is he worried the Bank of Japan (BoJ) might raise rates faster than the government wishes? And does he share the OECD view that, if it hikes rates too fast, it could tip Japan back into the deflation it is only now emerging from after nearly a decade of falling prices? “Of course, the effect upon the Japanese economy would be damaging if the interest rises happen too quickly,” he says. The BoJ has to be “vigilant” about changes in its monetary course.
Japan’s rate of real economic growth plunged from 0.8% in the first quarter of 2006 to just 0.2% in the second quarter. Does that worry him? “The economy slowed down owing to declining government consumption and public investment,” he notes. So, the contribution from the public sector is going down, as well as that coming from net exports. However, the economy continues to recover, underpinned by domestic private demand.
Concerns
“Of course, there are certain concerns that we have over the future, such as the prospect of [a dip in] the US economy and in the Chinese economy, but basically we are of the view that the Japanese economy is continuing to recover – mainly supported by domestic private-sector demand. So, I’m not that worried about the situation.” The government is sticking to its forecast that real growth will be 1.9% in fiscal 2007, he adds.
Where does he stand in the debate about whether structural reform needs to continue in Japan, or does he believe like some that Japan should “take a breather” from reform? “The Japanese system needs to continue to make changes so that it can adapt to the changes taking place in the global economy,” so that it does not fall behind traditional and new competitors, he says.
But at the same time, widening income gaps between individuals and regions need to be addressed. Japan should not become an economy for the “survival of the fittest”.