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Mainstream, Vol XLVIII, No 20, May 8, 2010

Japan - Will Hatoyama’s $ 1 trillion Budget Resuscitate the Economy?

Monday 10 May 2010, by Rajaram Panda

On March 24, 2010, the Japanese Diet passed a record 92.3 trillion yen ($1 trillion) Budget, seeking to underpin a fragile recovery in the world’s second largest economy. The record Budget reflected Prime Minister Hatoyama’s promise to cut wasteful spending on public works and boost funding for social welfare. As a result, spending on public works projects will drop by a record 18.3 per cent to 5.8 trillion yen, which is the lowest in 32 years.

Though Hatoyama’s aim is to kick-start growth in the long-stagnant economy, another round of spending threatens to add to Tokyo’s already burgeoning public debt. The Budget raised concern over Japan’s already tattered finances as the government will issue a record 44 trillion yen in bonds to fund the Budget. Among the industrialised nations, Japan shoulders the biggest public debt.

The Organisation for Economic Cooperation and Development (OECD) had warned that the public debt, bloated by repeat bouts of stimulus spending, will soar to 200 per cent of the country’s GDP by 2011. But according to the International Monetary Fund, its debt already stood at 218.6 per cent of the GDP in 2009. In 2009, Japan’s economy began to emerge from its worst recession since World War II but remains threatened by prolonged deflation, weak domestic demand and a strong yen, which hurts exports.

The recovery process is painfully slow. The tax revenue in fiscal 2010 is likely to fall by 18.9 per cent from the initial Budget of fiscal 2009 to 37.4 trillion yen. Spending on social welfare, which includes expenditures of monthly child allowances, will jump by 10 per cent from the initial 2009 Budget to 27.3 trillion yen. Beginning from April 2010, as a part of the DPJ’s key pledges, families will start getting 13,000 yen a month per child to help ease child rearing costs and encourage women to have more babies. The demographic shift is worrying the government. Japan has the lowest percentage of children among 31 major countries, trailing Germany and Italy. At the same time, the percentage of elderly population continues to swell, adding pressure on the social welfare costs and increasing the tax burden on the salaried persons.

The DPJ Government reversed the privati-sation efforts of the previous administrations and vowed to retain a significant stake in the country’s mammoth postal banking system. The country’s Japan Post has been the biggest beneficiary of the Japanese Government bonds. A de facto government guarantee on deposits, made at the postal bank, has attracted a huge fund of about 300 trillion yen, which is more than the annual gross domestic output of France. Those funds, in turn, made their way to public works projects across the country, like dams on virtually every major river in Japan and moun-tainous roads to nowhere. During his term, Koizumi Junichiro tried to remedy the unhealthy flow of finances by privatising the postal banking system. Koizumi’s plan aimed at freeing Japan Post’s financial units from government control by 2017. This structural change was designed to strengthen Japan’s market-economy base. The global economic crisis and political instability rendered Koizumi’s privatisation agenda unsuccessful.

The Hatoyama Government has begun to review the postal privatisation process. A new draft postal bill aims to give the state more than one-third of its share in Japan Post. This stake will give the state the right to veto any changes to the company’s management. The government also proposes to double the limit on postal savings to 20 million yen per customer from 10 million yen. This will result in driving out business at private banks as state-affiliated entities will corner the bulk of the deposits. Hatoyama runs the huge risk distorting the Japanese economy as the state will be in a position to offload bonds to Japan Post, thereby encouraging reckless government spending. Private banks will suffer from unfair competition as a result. However, the DPJ feels that as Japan Post runs a network of 24,000 offices across the country supported by an army of 430,000 full and part-time staff, the government involvement is necessary to provide universal services.

The government wanted to keep a tight grip over a financial conglomerate that has been blamed for many of the inefficiencies and distortions in the world’s second largest economy. The record Budget aims to pay for Hatoyama’s ambitious stimulus agenda, including cash handouts to households with young children, free education at public high schools and income support for farmers.

One significant development took place during the Diet deliberations after the democratic transition of power from the LDP to the DPJ: more talks and deliberations on party manifestoes and promises rather than time wasted on scandals involving politics and money that characterised the previous LDP governments. It transpired that politicians will not be allowed to waste time in the Diet debates by putting partisan interests before policies and this is a significant step forward for Japanese democracy.

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The question is: is the effort enough to resuscitate the economy? One would tend to take a pessimistic view. In the manifesto, the DPJ planned to save 9.1 trillion yen ($ 99 billion) by cutting wasteful spending. Now, as per the new Budget, it was able to trim only roughly one trillion yen by screening unwarranted govern-ment projects. It did not abolish the provisional surcharge on gasoline tax, either. The Opposition accused the DPJ of breaking its election pledges. Democracy may have flourished in some new dimension, but a sharp dichotomy between policy-making and manifesto-oriented politics continued to exist.

Having promised to deliver much to the people in the manifesto that catapulted the DPJ to power in September 2009, now the debate would arise on the extent and level of changes in promises made in the manifesto that should be tolerated as elections to the Upper House will be held in July 2010. If the DPJ falters in honouring the pledges made in the manifesto, it will only lead to aggravating public distrust of politics. The DPJ supremo, Ozawa Ichiro, is on record saying that the DPJ’s manifesto for the Upper House election “cannot differ significantly” from the one for the Lower House ballot in 2009.

Going by Ozawa’s argument, Hatoyama will be in a quandary as insufficient revenue to finance all the DPJ’s proposed policies will limit his options. In his battle for one-upmanship over the LDP, the DPJ came out with lofty promises without realising where the money will come from. A realistic appraisal of the policy choices seems to be the desirable course. While enacting some change to make the policy choices realistic, Hatoyama needs to explain the situation to the public and make appropriate revision, if he is to win the understanding of the voters.

In this sense, the style and process of making manifestoes ought to change. So far, manifestoes are drafted and finalised by a handful of executives in closed-door meetings. This should change and open discussions among party members and outsiders should be made to arrive at a consensus. Even the LDP has to be making its style and approach transparent and set the targets which are more realistic and achievable. Hiking the consumption tax from the present five per cent is one option that is talked about but deferred for fear of a public backlash. But the DPJ wants to raise the child support allowance from 13,000 yen a month to 26,000 yen a month in fiscal 2011 and beyond as promised during the election in August 2009. If the government is sincere in its promise, it has to secure necessary financial resources and raising the consumption tax might become inescapable. Doubling the allowance would mean mobilising an additional 5.3 trillion yen.

The conservative LDP slammed the Budget as a massive handout ahead of elections to the Upper House in July 2010. Because of enormous state stimulus schemes introduced in 2009 to fight the global downturn, the country’s unemploy-ment rate had fallen below five per cent in January 2010 from a high of 5.2 per cent the preceding month. This threatened to dent the rebound following the global recall crisis at Toyota, the country’s biggest company and one of its most iconic brands. It may be recalled that Toyota recalled more than eight million vehicles for accelerator and brake system defects, severely impacting the employment situation in Japan.

Economists in Japan were not upbeat about the Budget providing a boost to the nation’s economy. A leading economist from Dai-ichi Life Research Institute predicted that households would spend only one-third of child allowance and save the rest for the future. Others at NLI Research Institute felt that slashing appro-priations for public works projects by 18.3 per cent would deal a significant blow to the local economies. As consumer spending is cooling down mainly due to wage cuts, fiscal conditions are deteriorating because of declining corporate tax revenues. The government may be sincere in its efforts to step up efforts to halt deflation but implementing growth strategies while maintain-ing fiscal discipline is a tough call for the DPJ Government.

The coming months are likely to see some turbulence in Japanese politics. The Opposition is expected to intensify its “politics and money” campaign against Hatoyama and Ozawa, particularly over the funding scandals. Resolving the Futenma relocation issue is ammunition in the hands of the LDP to browbeat the DPJ. The Japan Times aptly editorialised: “Economically, the government has a dual challenge: pull the Japanese economy out of deflation and work out a long-term plan for financial reconstruction. Drafting an effective programme to nurture new industries that will contribute to economic growth and employment is very important.” The immediate challenge, however, is to improve the public image of the party that has been sullied by the effects of funds scandals, before Hatoyama works out his strategy to retain power in the Upper House in July 2010. Unless Hatoyama succeeds in arresting the monumental slide in popularity that the party has suffered, the party will come under increasing scrutiny from the public.

Dr Rajaram Panda is a Senior Fellow at the Institute for Defence Studies and Analyses, New Delhi. He can be contacted at e-mail: rajaram_panda@yahoo.co.in

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