Doubts grow over Japan PM's remedy for economy

Mon Sep 22, 2008 7:41am EDT
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By Yoko Nishikawa - Analysis

TOKYO (Reuters) - Japan's next prime minister, Taro Aso, has vowed to revive the flagging economy but his immediate plans are unlikely to give the economy anything more a short-term boost.

Japan's economy is skirting recession due to high energy and raw material prices amid global economic gloom, while its sky high public debt, already 1- times GDP, faces fresh pressure as a wave of baby boomer retirements boost welfare spending.

"As I traveled around the regions, I became even more convinced that the economy was in a recession," Aso told a news conference on Monday after being picked to lead the ruling Liberal Democratic Party, and thus become prime minister.

"People are worried about their post-retirement life and the economy, and they are frustrated with the politics that have been unable to give a solution.... So, solving those problems is the key mandate for me."

He reiterated that Japan's economy should return to nominal growth of around 2-3 percent before the government can focus on fiscal reform. The economy shrank an annualized 3.3 percent in nominal terms in the second quarter.

Economists say Aso's priority on spending and tax cuts could provide a short-term boost to the sluggish economy but they said more important were longer term plans to make Japan more competitive, revamp its fragile social welfare system and raise consumption tax to fund growing costs of the ageing population.

The majority view of economists is that Japan faces only a mild contraction, because firms cleaned up their balance sheets and cut costs after the collapse of an asset bubble in the 1990s.

"I wonder if Japan's economy is really in crisis as he suggests. I think it is only in a cyclical downturn," said Takahide Kiuchi, chief economist at Nomura Securities.   Continued...

<p>Former foreign minister Taro Aso speaks during his first news conference after being elected president of the Liberal Democratic Party (LDP), at the headquarters in Tokyo September 22, 2008. Japan's main ruling party chose outspoken nationalist Taro Aso, an advocate of more government spending to boost the economy, to be next prime minister and woo voters ahead of an election expected as early as next month. REUTERS/Toru Hanai</p>