It is hard to say which is the greater challenge: maintaining growth in the Japanese economy or maintaining popularity as a Japanese prime minister. New opinion polls and economic forecasts suggest that Yasuo Fukuda, premier for only three months, will struggle to do either. His only hope is to take a bolder, more reformist path.
Mr Fukuda’s poll ratings reflect an ongoing scandal over the loss of public pension records. Unlike Junichiro Koizumi, his charismatic predecessor-but-one, Mr Fukuda has been unable to detach himself from the day-to-day blunders and missteps of his Liberal Democratic party. Downgrades to growth forecasts do not help, even though 1.3 per cent this year and 2 per cent in 2008 is not especially bad. With the working age population in decline, Japan’s trend growth rate may not be much above 1.5 per cent.
That said, growth might have been higher without a number of policy changes. New building regulations caused a slump in residential construction. New laws on money-lending are restricting access to credit for some poorer consumers and their full effect is yet to be felt.
Rather than reform that restricts the supply side of the economy, no matter how well intentioned, Mr Fukuda needs to follow Mr Koizumi by pushing through reforms that improve microeconomic efficiency. Since Mr Koizumi’s great achievement of postal privatisation little progress has been made.
Japan’s greatest economic challenge, however, is to rely less on exports and capital investment, and more on domestic consumption as a source of growth. Given the ongoing shift to less secure, temporary jobs, and stagnant growth in wages, that will be hard to achieve.
The government can help through basic competence: people will be less willing to spend if they are fearful about the health of their pension. Mr Fukuda’s willingness to allow some appreciation in the yen is also welcome. A weak yen boosts exports and helps to keep the economy ticking over, but a stronger currency and cheaper imports may strengthen consumption over time.
Perhaps the most helpful thing the government could do, however, is discourage the tendency of private companies to hoard cash. Two areas for reform are the tax code, which still encourages corporations to retain their profits, and the scarcity of takeovers, which means inefficient balance sheets are not penalised. Such reforms would be hard for Mr Fukuda to push through even without opposition control of the upper house of parliament. LDP politics as usual, however, is not going to revive his government.
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