Reading a newspaper while walking is rarely a luxury afforded in crowded Tokyo. You can imagine the chaos at Shinjuku Station on Sunday as many of the three million or so commuters cascading through it did just that.
Practicality was out the window; Japan had just named a new Prime Minister, and an army of newspaper representatives was out distributing extra editions. The festive atmosphere reflected hope Yasuo Fukuda will offer steadier leadership than Shinzo Abe, who abruptly resigned on 12 September. Yet there’s already reason to doubt Fukuda will be the Japanese leader voters and investors expected. It rests in a statement that may seem innocuous, but is drenched with significance.
“Right now, the LDP is facing a big difficulty,” Fukuda said on 23 September, right after defeating Taro Aso to become president of the ruling Liberal Democratic Party (LDP). “First of all, I’d like to revive the LDP. And by regaining the public trust, I’d like it to be reborn to become a political party that firmly implements policies.”
What Fukuda should do “first of all” is articulate how he plans to spread the benefits of economic growth, reduce Japan’s massive debt load, increase productivity, halt the decline in the population and fix a scandal-ridden pension system. There’s also a little matter of maintaining living standards for Japan’s 127 million people amid China’s rise.
Instead, Fukuda’s priority is to help his political party. Now, for the son of a former LDP prime minister, Fukuda may think that’s best for Japan’s future. Yet, herein lies one of the biggest inhibitors to Japan raising its economic performance: one-party rule.
Pundits have focused on how the old guard is returning to power following Abe’s dismal year as leader. The first prime minister born after World War II, Abe was thought to symbolize a new generation of Japanese leaders. His sudden resignation quashed any such notion. Fukuda is 71 and the man he defeated on the weekend was 67.
The real problem is bigger—the party that has ruled Japan virtually non-stop since 1955 and the lack of a strong opposition. Debt tells the story. Japan already has the largest public debt among developed nations. Now, the world’s second biggest economy is heading into a period of what Morgan Stanley Japan chief economist Robert Feldman calls “fiscal risk”.
“Unseen by markets, a fiscal monster is starting to rear its ugly head in Japan,” Feldman says. “Political competition has started a race to spend, and to rescind even scheduled revenue measures.
Once markets notice the backward turn in fiscal policy direction, JGB (Japanese government bond) yields could feel upward pressure, due to a rising fiscal risk premium.” JGB yields have risen since the beginning of September; 10-year yields are 1.67% versus 1.52% in late August. Politics may accelerate the move.
In July, the upper house fell to the opposition Democratic Party of Japan. That means politicians on both sides of the aisle will be offering financial support for rural areas, farmers, small businesses, regional economies. They also may put on hold any politically unpopular proposals such as a consumption-tax increase.
The blame for Japan’s massive debt goes to the LDP. Its hubris paved the way for the bubble years of the 1980s and Japan having a debt-to-gross-domestic-product ratio of about 170%. Rather than encourage banks to dispose of bad loans and rejuvenate the economy, the LDP issued debt. It used the Bank of Japan as an ATM to disguise its own failings.
Voters, fed up with the LDP’s fiddling, tossed the party out in 1993. Nine months later, the LDP was back with its army of construction companies ready to build unnecessary roads, bridges and dams to support the economy—all financed with debt. It stuck with cement-and-asphalt economics throughout the 1990s, making little effort to deregulate Japan’s rigid economy.
Things changed a bit when Junichiro Koizumi took the reins in 2001. He trimmed public works projects and sold shares in the Japan Post, which was home to the nation’s biggest savings bank. While China’s boom gets much of the credit for Japan’s recovery, Koizumi put the need for economic change on centre stage.
Yet there’s a dark side to the Koizumi years: the resurrection of the LDP. Koizumi’s campaign slogan was “Change the LDP, change Japan.” The plan really should have been “Destroy the LDP, save Japan.”
“Fukuda’s determination to address the fiscal imperative in a timely manner will be tested by the political imperative to keep the LDP in power,” says Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York.
The former chief cabinet secretary is by nature an arbiter between conflicting political interests, not a bold decision maker. It’s doubtful he will be able to stand in the way of the LDP rolling back Koizumi-era reforms. In that sense, he could be seen as a caretaker prime minister while the LDP finds a leader more to its liking. It doesn’t help that Fukuda relied on support from the party’s powerful but finicky and publicly unpopular factions. If life really is a party in Japan these days, it’s for the wrong reasons.
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