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Biodun@bbcnews.com

Wednesday, 2 June 2010

Bowing out
Topic: xian wan, japan

By Biodun Iginla and Xian Wan, BBC News and the Economist's Senior News Analysts

Jun 2nd 2010, 9:46 by TOKYO

FOR months Yukio Hatoyama’s tenure as prime minister has looked in doubt. But his decision on June 2nd to resign and take down Ichiro Ozawa, his equally powerful sidekick, with him has shocked Japan’s political establishment. It throws the country’s politics into disarray just when it is in the midst of a democratic upheaval and faces pressing economic problems that cry out for strong leadership.

It was not immediately clear who would replace Mr Hatoyama. Naoto Kan, deputy prime-minister and finance minister, was considered the most likely candidate, though an internal election of the ruling Democratic Party of Japan (DPJ) was called on June 4th and other cabinet members may stand against him, political analysts said. None of the potential candidates openly canvassed for the removal of Mr Hatoyama and Mr Ozawa, so it is hard to identify anyone in the party’s leadership who looks exceptionally courageous or politically astute.

It was also unclear how significant Mr Ozawa’s resignation as the DPJ’s secretary-general is. The party is split between those who support him, and those who fear him as an unprincipled schemer who has built and destroyed parties in a lonely thirst for power. His supporters credit him for orchestrating the DPJ’s election triumph last August that drove the Liberal Democratic Party (LDP) from power for only the second time in 54 years. He may continue to lurk in the wings of the DPJ and run the campaign for election to the upper house, which takes place this summer, not least because he controls the party’s purse strings.

His opponents, however, increasingly regarded him as a liability who meddled with cabinet-level policy decisions by whispering, Svengali-like, into Mr Hatoyama’s ear. Embroiled in money scandals, they argued that he and Mr Hatoyama left the impression that the DPJ was no different from the discredited LDP, with its history of corruption scandals, that the voters had rejected last year. Some senior cabinet members plotted behind the scenes against the two men. However, when the end came it was more of Mr Hatoyama’s own doing than anyone else’s.

In his resignation speech to his party’s lawmakers, Mr Hatoyama admitted that his mishandling of a row with America over an American marine base in the island of Okinawa cost him his job, coupled with lavish political-funding scandals that have led to indictments of former members of his and of Mr Ozawa’s staff. Though he once again denied his responsibility for the funding disaster, the two resignations would help the DPJ become “new and cleaner,” Mr Hatoyama said.

The immediate catalyst for his downfall was Mr Hatoyama’s decision last Friday to support a plan with America to relocate a United States marine base, called Futenma, within the island of Okinawa, rather than removing it elsewhere. Besides breaking a personal promise to Okinawans to get rid of the base, Mr Hatoyama was also forced to sack Mizuho Fukushima, the head of one of the DPJ’s two coalition parties, from his cabinet because she opposed the Futenma plan. This set off a damaging chain of events.

On May 30th her party, the Social Democrats, abandoned the coalition and the following day indicated it might support a censure motion in the Diet against Mr Hatoyama. It was not clear whether his party held enough seats to block such a motion in the upper house, nor that it would enjoy the support of its own lawmakers from Okinawa.

Opinion polls taken after the Futenma decision also showed a slump in Mr Hatoyama’s support, down from 71% nine months ago to as low as 17%. This lengthened the DPJ’s odds in the upper-house election. Some of the party’s lawmakers up for re-election were told by their constituents that Mr Hatoyama’s indecisiveness over Futenma and his financial scandals might cost them their re-election, which led them to openly discuss removing him.

To make things worse for the DPJ, support for the LDP, which voters dealt a long-overdue thrashing to last year, edged ahead for the first time
in the polls this week. When Mr Ozawa began to publicly distance himself from Mr Hatoyama, it became clear that the prime minister’s days were numbered. What wasn’t clear was whether Mr Ozawa would be caught in Mr Hatoyama’s downward spiral. He was.

Mr Ozawa’s departure leaves the DPJ deeply divided. Through a combination of carrot and stick he had managed to keep his supporters and opponents bound together. Some of the latter have admitted to being wary of upsetting him lest he abandon the DPJ and drag his loyalists with him. “He’s a loose cannon and you want to tie him down,” says Jeff Kingston of Temple University in Tokyo.

Neither Mr Hatoyama nor Mr Ozawa appeared keen to grapple with Japan’s serious fiscal problems, including a debt-to-GDP ratio that is the highest in the world and only gets worse because of entrenched deflation. Mr Kan, the potential replacement as prime minister, discovered to his surprise when he took over as finance minister this year how vulnerable the country’s skewed public finances were. After seeing the thrashing private investors were giving Greece, he began to talk about tax reform.

Wall Street economists believe that whoever replaces Mr Hatoyama will need to address these problems directly, and might also have to raise the consumption-tax rate. Masaaki Kanno of JPMorgan in Tokyo says any new leader will need to tackle the fiscal problem, slow growth and deflation in short order—though he doubts Mr Kan has a sufficient sense of urgency on the matter. If Mr Ozawa remains lurking in the DPJ’s wings, any chance such serious issues will be aired in an election season will be diminished.

Base drubbing: A deal over a marine base mends a rift between the two allies–but opens a new one within Japan

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Saturday, 10 April 2010

Sleepwalking towards disaster
Topic: xian wan, japan

Japan's debt problem

by Xian Wan and Biodun Iginla, BBC News and the Economist

To prevent a looming economic disaster, Japan urgently needs radical change

Apr 8th 2010 | From The Economist print edition

FOR years foreign observers gave warning that Japan’s combination of economic stagnation and rising public debt was unsustainable. Over the past two decades the country has stumbled in and out of deflation, slipped down the global league tables on many social indicators and amassed the largest gross public debt-to-GDP ratio in the world (a whopping 190%). Yet government-bond yields have remained stubbornly low and living standards, by and large, are high. Visit the country and you will see no outward sign of crisis. Politicians and policymakers have bickered and schemed, but have mostly chosen to leave things as they are.

That cannot go on much longer. The figures are getting worse. Japan urgently needs radical policies to tackle the problems, and new leaders to implement them.

Triple troubles

There are three big reasons why the crisis in Japan’s public finances will eventually come to a head. The first concerns government bonds. The state has for years relied on domestic savers to buy them. But as Japan’s people age and run down their savings, they will have less money to invest in government bonds. An IMF paper calculates that even if the savings rate remains close to where it is now, gross debt may exceed gross household assets by 2015. Japan might then have to rely on foreigners to finance its debt, and they will want much higher returns. That will, at the very least, provide an acute reality check. Goldman Sachs says some foreign investors are already positioning themselves for a “meltdown”.

The second, more immediate problem is deflation. Falling prices may have helped the government by providing its bondholders with invisible gains, but in other ways deflation is a menace. It pushes the debt-to-GDP ratio inexorably higher. As expectations of deflation become entrenched—35% of Japanese expect prices to be the same or lower in five years’ time—they will continue to depress consumption.

Third, despite the recent pick-up in global economic activity, Japan cannot count on foreign demand being strong enough for it to sustain export-led growth, as it did in the past decade. Without a stronger domestic economy, growth will not generate enough tax revenue to reduce the debt. One ominous sign is that in the 2010 budget implemented on April 1st, borrowing, at ¥44 trillion ($468 billion), is for the first time forecast to exceed tax revenues, at ¥37 trillion.

Japan’s efforts to tackle these problems have resembled a big whimper (see article). What is needed is a big bang. That means structural reforms to raise productivity, fiscal reforms to boost growth and a strong monetary stimulus, all at once, to shock the economy back to life. These could range from an overhaul of the tax code to deregulation of farming and the opening up of protected areas of the economy, such as transport and energy, to foreign competition. A sensible short-term aim for the government would be robust nominal GDP growth. That would help stop the debt-to-GDP ratio rising, and would also ensure that the authorities did not prematurely choke off a recovery because of concerns about inflation.

But all this assumes that policymakers want to be bold. The current crop is anything but. Last September, when almost 55 years of one-party rule came to an end, there were faint hopes that the Democratic Party of Japan (DPj) might take a fresh approach. It has not done so. Yukio Hatoyama, the prime minister, and his most influential backer, Ichiro Ozawa, have since been caught up in election-funding scandals that have shredded the government’s credibility. They are clinging to their jobs, more concerned with their own futures than that of the DPj, or indeed Japan.

Enlightened economic policymaking suffers most. Mr Hatoyama prevaricates over fiscal reform, arguing that Japan should wait until the next general election in 2013 before shaking up the tax system. He is wrong. Japan urgently needs cuts in business taxes, perhaps, as well as a gradually higher spending tax. The ousted Liberal Democrats are just as out of touch (see article). When a group of supposed reformers left the splintering party this week to set up a new outfit, it could have grabbed the fiscally conservative, business friendly centre. Instead it moved to the right, as if anti-immigrant nationalism were the tonic Japan needs.

It is time for more fiscally astute members of Mr Hatoyama’s government to set the agenda. The main opposition, too, needs regime change. Japan’s old guard worries that radical steps will precipitate an economic crisis, and so prefers the status quo. It does not realise how inherently dangerous the status quo is.

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