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Emerging Markets

Change of heart

Japan’s new government aims at nothing less than a transformation of the country’s post-war economic order. Big business is up in arms, but policy-makers say the answer lies in regional integration

Japan has suffered its worst recession in half a century. And for the first time in 54 years, voters have snubbed the governing political party at the polls. The question now is whether the new Democratic Party of Japan-led (DPJ) government under prime minister Yukio Hatoyama can pull the world’s second-largest economy out of a decline that has dragged on for over two decades.

Hatoyama’s DPJ rode a wave of popular support to win the August Lower House election, ousting the Liberal Democratic Party (LDP), which had governed Japan during what was in effect a single-party democracy for half a century. A mixture of ex-LDP politicians, former bureaucrats, socialists and right wingers and with a strong trades-union base, the DPJ is a new kind of political animal in Japan.

Yet the new DPJ-led coalition (with two small parties) could surprise. It aims at nothing less than altering Japan’s post-war diplomatic and economic orientation by reducing dependence on the trans-Pacific alliance with the US in favour of greater integration with Asia. The party also seeks to curb Japan’s over-dependence on exports by boosting domestic demand.

“We need to adopt structural changes,” Eisuke Sakakibara, a key adviser who helped craft DPJ policies, told Emerging Markets in an interview shortly before the election. With control over both Lower and Upper Houses, the DPJ coalition has one of the strongest legislative positions of any Japanese post-war government.

The DPJ wants to convert Japan from an export-led economy – set to trail China’s in size by 2010 – into a consumer society. “When wages are going down and consumption is weak you need direct subsidies to households,” says Sakakibara, a former vice finance minister for international affairs (more widely known as Mr Yen).

The big spend

The DPJ plans to pay allowances of 26,000 yen ($283) a month for every child under 15, a measure that (once phased in) will cost the state 5 trillion yen a year. The party also wants to improve health care, boost unemployment and minimum pension payments, abolish public (high) school tuition fees, cut gasoline taxes and phase out highways tolls. Such policies are a repudiation of Japan’s post-war tradition under the LDP of directing government spending towards infrastructure development to support the Japanese export industry – with goods shipped primarily to the US and Europe.

By cultivating the consumer, the DPJ is also rejecting the so-called “Koizumi reforms” (named after former LDP prime minister Junichiro Koizumi), which were introduced during 2001–06 and sought to turn Japan into a more western-style laisser-faire capitalist society, one that emphasized business efficiency and increasing rewards to capital rather than to labour.

Koizumi’s philosophies have since fallen sharply out of favour. Social inequities have risen sharply, and the post-war system of lifetime employment has been supplanted by one dominated by armies of contract workers, with minimum job security and declining pay levels.

Hatoyama caused uproar shortly before the election by attacking the excesses of “western-style market fundamentalism”, calling instead for a Japanese society where “fraternalism” is the guiding principle.

Industrial injuries

Not surprisingly, the DPJ’s aim to put more money into the pockets of consumers and to spend less on supporting big business has brought a barrage of criticism from industry. Backed by business lobbies, LDP members have pushed for a rise in Japan’s national consumption tax and are scornful of the DPJ pledge not to raise the tax for four years and to ‘subsidise’ consumption instead. “If we implement these plans, Japan will go bankrupt,’ says LDP secretary-general Hiroyuki Hosada.

DPJ members reject such charges. There is huge waste in Japan’s national budget at present, they say, as well as numerous special accounts or “hidden treasures” that can be tapped to fund the party’s spending plans. The DPJ may even cut missile spending because, says DPJ defence specialist Tsuyoshi Yamaguchi, “missile defence is almost totally useless.”

Critics of the new government have also argued that its “big spender” tendencies could push Japan into a fiscal crisis with outstanding gross government debt already close to 170% of GDP and likely to reach 200% before long, according to the Organization of Economic Cooperation and Development (OECD). They also predict a sharp upsurge in yields in the Japanese government bond market at some point.

“I’m not worried about it,” says Sakakibara. “Japanese accumulated saving is now 1,500 trillion yen as compared to 800 trillion yen of debt, so we don’t have a debt problem at the moment. The US has because it has to depend upon foreign financing, but it is all domestic savings financing the government in Japan.”

Business response

Some Japanese businessmen have shown outright hostility to the new government policies, especially the DPJ plans to ban, in principle, the use of temporary workers in Japan and to reduce Japan’s emissions of greenhouse gases by 25% in 2020 from their 1990 levels (provided other advanced economies agree to do the same). These policies could drive business out of Japan claims Mitsuo Ohashi, an official of Nippon Keidanren, Japan’s most influential business lobby. “Companies have to assess if they make and maintain a healthy level of profit in Japan. And if they decide they cannot, it would not be surprising to see some companies make an escape overseas,” he says.

Keidanren chairman Fujio Mitarai (who also heads Japanese electronics group Cannon) has been more balanced in his public reaction to the DPJ’s policy platform. ‘’It is important to expand domestic demand by the redistribution of income,” he says, “but there are limits to boosting the size of the economy through those measures alone.’’

‘’It is also necessary to manage the economy in view of external demand by promoting the integration of Asian economies,’’ he adds.This chimes well with the DPJ’s intention to strengthen Japan’s ties with Asia while lessening dependence upon the US. Hatoyama is due to attend a summit with Chinese premier Wen Jiabao and Korean president Lee Myung-bak in October.

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