It's getting colder out there

By Henry Hilton

Prime Minister Yasuo Fukuda has just reshuffled his cabinet and talks of putting the public’s mind at rest. Kick-starting the economy, though, is a far harder task than simply reassuring folks that all is well on the home front.

Words are cheap in any democracy. All politicians debase their common currency but Japan’s present coalition cabinet is hardly doing the nation a favor by avoiding the evidence in front of its nose.

Key to the coming slump is the news that household consumption continues to be on the drift. Japan’s no-nonsense consumers are clearly refusing to go out there and spend. Faced with the prospect of a recession, plus highly limited wage hikes and the beginnings of a serious bout of inflation after years and years of deflation, this is hardly surprising. Yet it leaves the state with huge problems and seemingly few options over the next 12 months.

The massive national debt will inevitably increase if growth keeps slowing and tax revenues inevitably follow suit. Deficits must therefore expand unless the government is prepared to accept the politically poisonous remedy of slimming spending programs and begins to reckon with the likelihood of tax increases.

No Liberal Democratic-Komeito cabinet will want to bite these bullets in the run-up to a general election, though, and it has to be assumed that the raising of the much-hated sales tax will be postponed yet again. Since not even former Prime Minister Junichiro Koizumi at the height of his extraordinary popularity was willing to increase what is a low value added tax by international standards, this remedy is off the table for now.

With exports appearing to take a dip, domestic demand on the skids and energy costs soaring, Japan is in for harder times. Faced with twin slowdowns in the United States and Europe, Japan is surely joining the ranks of those other G-8 member states who know that stagflation is about to hit them. Since Tokyo’s projected growth rate for next year may be only a fraction over 1%, it is a bit rich for Fukuda to promise so confidently that he can take care of a rapidly ailing patient.

While the government keeps on banging the drum on how the Japanese economy has had its longest ever period of expansion in the postwar era, the public’s view is decidedly different. No doubt the years from 2002 to the present have been sweet for some, but the homeless still camped out beside the Tama river, the reserve armies of part-time workers on 900 yen an hour and all those now paying much more for medical costs can only think the bureaucrats are dreaming.

Under these circumstances, Fukuda has the unenviable task of going to the country shortly with precious little to boast about. If he does not hand out subsidies to fishermen and small businesses, he risks alienating his supporters. Yet if the budget deficit rises further, the calls for tax increases will be harder to avoid.

Since he is damned if he does and damned if he does not, perhaps he might try a bit of boldness for once. Fukuda should disregard the calls for caution and announce a one-off tax cut. Not all of this would not immediately get spent - Japan’s housewives are guaranteed to see to that - but it might help inject some much needed liquidity into the economy, stop the dismal stock market indices, raise public morale and even improve his party’s dismal prospects.

The prime minister should throw caution to the wind and give it a try. As things stand at the moment, he has not got much to lose.

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11 Comments

buggerlugs at 08:18 AM JST - 11th August

there won't be a one off tax cut. If there was the polititians might have to take a pay cut... Goodness forgive that. as usual, in line with the world stupity, they will raise taxes and then complain when revenues drop because no one spends. the people who should be running countries are those who are actually doing daily jobs cutting hair, tending bar etc. No high level expensive education makes them better qualified I think. anyone who wants to be the primeminister/ president should be automatically disqualified on those grounds.
tkoind2 at 08:58 AM JST - 11th August

Buggerlugs. Agreed. The ruling classes in nearly every country are too invested in the objectives of the corporate world and too interested in their own careers to truly see or care about the needs of the ordinary worker. Sadly political movements to shift power to worker's have always been usurped by the next would be ruling class.

What we need is a political process that levels the playing field so that Joe worker has as much opportunity to gain a seat as Joe son of politician does.

Sadly in Japan not even this will work. As an American I can be embarrased that we elected Bush twice. But look at Tokyo and how many times Ishihara has remained in power. And this is a person who is quite openly an enemy of ordinary people.
ReaganLegend at 09:07 AM JST - 11th August

tkoind2; I hope you comments about Bush are a joke. Japan politics do not care about the average guy, staying in power is the priority.

Does a party like LDP really have to care anyway when it has been in power for 60 years without any credible opposition?

I hope these LDP old fogeys are kicked out at the next election, but i expect the populous to carry on with the Status Quo.

Why can`t they have a healthy democracy like the US. We picked President Bush for 2 terms, and he has looked after us all from unemployed to millionaire.
thepro at 10:16 AM JST - 11th August

ReaganLegend: I hope your comments about Bush are a joke.
WMD at 10:18 AM JST - 11th August

The economy goes south, crime and violence on the streets go north. Inevitable and happening now in "safety" japan.
pathat at 10:26 AM JST - 11th August

ReaganLegend: Taking the liberty to speak for the majority at JT, we hope that your comments about Bush are a joke.

"The massive national debt will inevitably increase if growth keeps slowing and tax revenues inevitably follow suit. Deficits must therefore expand unless the government is prepared to accept the politically poisonous remedy of slimming spending programs and begins to reckon with the likelihood of tax increases."

The public has heard about the proposed tax increase for so long that they now believe it to be inevitable, regardless if the majority even truly understand the rationale for it. Just end all the dilly-dallying and announce a firm timetable for tackling the nations worsening fiscal situation. The uncertainty is making things worse.

By not doing anything, the public can say, "See, they only care about keeping power in the next election."

The LDP will probably get away with it, though, because the DPJ is so inept.
ReaganLegend at 10:32 AM JST - 11th August

pathat; bush has steered the Us through 8 years of economic growth.

In Japan the LDP has been in control of a recession lasting almost 2 decades.

You can be sure if the LDP make laws to benefit anyone, it will be either the construction industry or farmers.
pathat at 11:42 AM JST - 11th August

"pathat; bush has steered the Us through 8 years of economic growth."

You sure about this?

"In Japan the LDP has been in control of a recession lasting almost 2 decades."

Man alive, you tell some whoppers! Japan has been in a recession for almost 20 years? Really? Japan`s economic performance since the economic bubble burst has been generally poor, and at times in a recession by any terms, but what you are saying makes no sense.

Yes, the LDP has historically looked to the construction industry and farmers as some of its most loyal supporters through the pork-barrel spending it has done. So what? This is not news.

The hammer would have fallen on the LDP long ago if the public thought there was a palatable alternative. The DPJ is too much for them to stomach.
ReaganLegend at 11:46 AM JST - 11th August

pathat; The US economyn has grown nyear on year for the past 8 years.

The Japanese public do not know about an alternative to the LDP.

They believe their leaders are doing what is best for them, so ignorant. Haha.
helloklitty at 06:12 AM JST - 12th August

they will raise taxes and then complain when revenues drop because no one spends

I agree that spending could decline marginally, but this tax is unavoidable, unlike the income tax. I think they'll find themselves with more cash than they expected.
DeepAir65 at 09:21 AM JST - 12th August

I'm no economist but coke alert!!

bush has steered the Us through 8 years of economic growth.

Having just retruned from China where probably 19 out of 20 buildings had hot water solar systems at least they are trying to kurb their power consumption. Even my friend in the UK says that her hot water solar panels probably save her 40% of her energy bills in the winter - in the winter!!

And what really ticks me off is that Japan keeps going on about being green - they have got so far to go!!! So governement if you want to hand out subsidies please give to households to encourage them to make their houses more efficient then we need to import less oil etc...