September 22, 2008 / 11:43 AM / 10 years ago

Doubts grow over Japan PM's remedy for economy

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.

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

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.

“He does not have to necessarily stick to the current goal of getting the primary balance into the black by 2012, but if he wants to put that off, he should have a new fiscal reform goal. Even if a rise in the consumption tax is not an imminent step, the issue should be discussed fully,” he added.

Economists also said boosting domestic demand through more fiscal spending was not the way to go, noting that the economy was running near full capacity, unlike the last recession in the early 2000s when demand was much weaker than supply.

Over the last decade, Japan has compiled nine major packages of economic measures, totaling more than 30 trillion yen ($279 billion) in additional spending.

But after traditional pork-barrel spending measures were discredited, the government switched to structural reform, especially under former Prime Minister Junichiro Koizumi in 2001.

Some economists worry Aso may divert from that trend, given a looming election for parliament’s powerful lower house, which pundits say could take place as early as late October.


Under a slogan that Japan’s economic problems require three years to heal, Aso has said he was willing to sacrifice Japan’s goal of balancing its budget by 2012, although he added he wanted to avoid massive debt issuance to finance stimulus.

“That target is sort of a symbol for Japan’s fiscal reform efforts. Putting it off could send a signal to foreign investors that Japan cannot change much,” said Kyohei Morita, chief economist at Barclays Capital Japan Limited.

But others said it Aso was unlikely to return Japan to spendthrift pork-barrel politics.

The key question, they say, is who will hold key posts such as economics or finance minister in Aso’s new cabinet.

If Economics Minister Kaoru Yosano, a fiscal conservative, stays, Japan is seen holding to its course of fiscal reform.

Aso’s economic policy is still vague. He has proposed tax breaks for stock investors or tax cuts for businesses to promote research and investment, which economists generally welcomed.

But he also vowed to push forward planned income tax cuts, which critics say were aimed at winning votes but would not push up consumption unless the government eases worries about how it will fund rising pension payments and social welfare.

But whatever Aso does, he may have little time left if he calls an early election.

“Restoring fiscal balance will need a stable government. And perhaps we won’t get one in the next three years,” said Hideo Kumano, chief economist, at Dai-ichi Life Research Institute.

($1=107.42 Yen)

Editing by Rodney Joyce

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