Clamouring for a change
For once, the outcome of a Japanese election may actually matter. The country’s politicians have proved largely powerless to reverse two decades of economic stagnation. Now voters, dismayed by the centre-left, may hand power back to the conservative Liberal Democratic Party. But patience with cosmetic change is running thin.
What will a conservative win mean for Japan’s politics?
The LDP, given up for dead just three years ago, has found a new lease of life. Opinion polls suggest it will emerge from the Dec. 16 elections as the largest party – though a fifth of the electorate have yet to make up their minds. The emergence of the nationalist Japan Restoration Party as a potent third force alongside the incumbent Democratic Party of Japan suggests that politics is becoming more, not less, competitive.
Voters are tired of what Stanford University political scientist Phillip Lipscy describes as Japan’s paradox: political change doesn’t lead to changes in policy. LDP leader Shinzo Abe and former Tokyo governor Shintaro Ishihara, who leads the Restoration Party, have responded by promising more muscular policies. Ishihara’s party wants to scrap the upper house of parliament, the culprit for much of Japan’s policy paralysis. Abe’s plan for ending deflation is a lot bolder than expected from a conservative politician.
Can the new government end deflation?
Fifteen years of falling prices have shrunk the economic pie by 10 percent and entrenched deflation in the consumer psyche. The financial crisis and the March 2011 earthquake and tsunami haven’t helped. Safe-haven demand for the yen is choking exports. The economy slipped into a technical recession in the third quarter, its third since 2008. Meanwhile, spooked by Japan’s public debt, which is approaching 237 percent of GDP, Prime Minister Yoshihiko Noda has pushed through a law to double the country’s 5 percent sales tax by 2015. A squeeze on stagnant incomes could undermine private consumption, further adding to deflationary pressures.
Government spending is the obvious remedy. For all the criticism of Japanese governments building bullet trains to nowhere, the share of public expenditure in GDP was falling before 2008. Government spending has temporarily risen because of shocks from the financial crisis and the earthquake, but needs a sustained boost to beat deflation. Yet welfare policies, such as a universal child-care allowance proposed by the DPJ, have been diluted. With yields on 10-year government bonds below 0.7 percent, Tokyo can afford to expand debt-financed spending.
Where does the Bank of Japan fit in?
With interest rates stuck near zero, it’s crucial that the government and the central bank coordinate their responses. Supported by creation of new money, 100 yen in deficit spending could boost GDP by 380 yen, Gauti Eggertsson, an economist at Federal Reserve Bank of New York, has estimated. Without such monetary-fiscal coordination, extra spending will be a waste.
Abe, who has been prime minister once before, gets this. He wants to deficit-finance a construction-spending binge, while pushing the BOJ’s inflation target to 3 per cent – three times the monetary authority’s own goal of 1 percent, and higher even than the 2 percent target set out in his own party’s manifesto. That may sound reckless. But five years of 3 percent inflation would only return prices to where they were in 1998.
What have the other parties got in mind?
The DPJ’s manifesto merely says the government and the BOJ will join forces to defeat deflation. And while the party promises “decisive action” against excessive yen appreciation, it is Abe’s call for unlimited monetary easing that has weakened the yen in recent weeks.
The Restoration party rejects the LDP prescription of public works spending, and wants the sales tax to rise to 11 percent. That may be risky. Over time, Japan must raise its revenue-to-GDP and expenditure-to-GDP ratios, both of which are among the lowest in OECD. Higher levies, though, must wait, while the increase in spending must occur now. Getting the sequence wrong would hurt the economy.
Restoration’s call for Japan to amend its pacifist constitution and increase defence spending could be a growth-booster, although those gains may be lost if rising regional tensions weaken trade and investment ties with China.
How long will the new government last?
The omens are poor: Japan has had 14 prime ministers in the last 20 years. But one of them – Junichiro Koizumi, who preceded Abe’s first stint – served for five years and left a large imprint on policy-making. It will be up to the new prime minister to show that strong and stable political leadership in Japan doesn’t have to be a rarity.