Leo Lewis, Asia Business Correspondent August 29, 2009
The Japanese economy has plunged into the double nightmare of runaway deflation and soaring joblessness, dealing probably a decisive, fatal blow to the ruling Liberal Democratic Party (LDP) as it fights its most desperate battle for political survival in 50 years.
The unemployment rate hit a record 5.7 per cent in July, although many analysts believe that the official number could gravely understate the true extent of Japanese joblessness. Sources within the Government believe that its calculation methods, which exclude millions of men and women not looking for work from the unemployment register, may disguise a figure twice the official size.
Analysts at Nomura have warned of Japan’s huge hidden jobless problem and of the likelihood that the true extent of the crisis may yet emerge more clearly. In one scenario, unemployment in Japan could reach 12.2 per cent as companies shed armies of surplus labour, Takehide Kiuchi, the bank’s economist, said.
The two reports published on Friday — July unemployment numbers were accompanied by the latest figures for the consumer price index — paint a particularly dismal picture of the world’s second-biggest economy, only days after official GDP numbers had showed Japan crawling out of technical recession.
One of the LDP’s few credible campaigning points has been that, as the party in charge during Japan’s phase of mega-growth in the 1970s and 1980s, it has the knowhow to guide the country back to prosperity: that claim, voters on the streets of Tokyo said last night, has crumbled to dust.
“I don’t know what the [main opposition] DPJ is going to do to stop my customers deserting my shop,” Asuka Sato, a 25-year-old nail salon beautician, said. “All I know is that nobody could ever be as bad for the economy as the LDP has.”
Consumer prices nosedived 2.2 per cent year-on-year in July, the most acute fall that they have logged, surpassing even the drops endured during the country’s five-year struggle with deflation that began in the late 1990s.
Indeed, it is hard to see any positive signals, Naomi Fink, a strategist at the Bank of Tokyo Mitsubishi UFJ, said: “The rising rate of unemployment evidences the glaring inadequacies of the Japanese stimulus package, which has clearly created an insufficient number of jobs to combat the effects of the crisis and thus had insufficient effect on consumption,” she said.
Takuji Aida, an economist at UBS, said that although the price declines were largely the product of falling energy prices, the core figures were a reflection of weak demand in the service sector and the trend would have a big impact on employment figures.
Fear of yet more rounds of job cuts have crept across the Japanese economy. Toyota’s announcement this week that it would close permanently one of its domestic car production lines confirmed for many that those worries were justified. Thus households have made abrupt cuts in their spending: cheap clothing stores and discount food wholesalers have been doing well, while the retail mainstream has suffered.
Although Japan broke free of its long cycle of economic contraction in the most recent quarter, few believed that it was time to start celebrating a recovery. The stock market may have continued a long rally, but many economists warned that trading floor euphoria was not a reflection of Japan’s true prospects and that falling prices would exact the same heavy toll that they did during Japan’s last phase of deflation.
Taro Aso, the prime minister and leader of the ruling Liberal Democratic Party, at a campaign event in Isahaya, Japan, on Friday. Toru Hanai/Reuters
Yukio Hatoyama, the leader of the opposition Democrats, at a campaign rally in Matsuyama City, Japan, on Friday. Yuzuru Yoshikawa/Bloomberg News
By MARTIN FACKLER Published: August 28, 2009
TOKYO — While Japanese voters seem poised to end the Liberal Democratic Party’s long hold on power on Sunday, the momentous election has focused surprisingly little attention on the pressing problems that threaten the world’s second largest economy.
Japan’s challenges are enormous, and growing in severity. The nation is still in search of a new recipe for growth almost two decades after its export-driven model hit the skids. And now it must also find a way to pay for a rapidly aging population, despite a crushing government debt that will soon grow to twice as large as its $5 trillion economy.
Japan’s weakness was exposed during the current financial crisis, when its economy fell harder than other major economies — shrinking an annualized 11.7 percent in the first quarter. The government of Prime Minister Taro Aso responded with a $270 billion dose of old-style public-works spending that has so far produced only a small rebound, economists say.
The main opposition Democratic Party, which polls indicate will end half a century of nearly uninterrupted rule by the Liberal Democrats, has not offered much more than piecemeal remedies to Japan’s biggest problems. Neither party has proposed politically difficult solutions, like allowing in more immigrants — a no-no in racially homogenous Japan — or raising taxes to help reduce the big public debt burden.
“Both parties are ducking the hard issues,” said Takatoshi Ito, a professor of economic policy at the University of Tokyo. “What they do present is a Band-Aid for these problems, not the real surgery that Japan needs.”
Of course, it is hard for politicians in any country to advocate painful measures, particularly during an election. But with the house election on Sunday offering Japanese their first real choice in memory between competing parties, the level of debate on pressing issues has been disappointingly low, say political analysts and many regular voters.
The two parties seem to be competing to distance themselves from the small-government policies of former Prime Minister Junichiro Koizumi, perhaps the most dynamic leader Japan has had in recent years. His approach is now blamed for hurting job security and worsening social inequalities. The two parties say they favor steps to shore up Japan’s social safety net, and they have offered generous new spending to woo voters.
“It is not clear that either party has an economic philosophy, besides let’s spend more money,” said Robert Feldman, an economist in Tokyo for Morgan Stanley.
The Democrats have led the charge with a glossy 23-page manifesto promising giveaways as varied as toll-free highways and income subsides for farmers. One of their spending proposals, to give families cash allowances of $270 per month per child, has been received favorably by economists. It is aimed at encouraging more births in a country that has a shrinking population and an aging work force.
The incumbent Liberal Democrats have attacked the opposition’s promises as irresponsible, though their own manifesto offers much of the same. The Democrats insist that they can pay for the new spending, expected to cost $177 billion a year, by slashing pork-barrel projects and other waste.
Still, the ballooning national debt remains a major constraint on growth and spending that neither party seems willing to face. So far, the country has financed its growing debt, which is several times higher than American public debt as a percentage of gross domestic product, by tapping its $15 trillion pool of personal savings, the product of years of high savings rates and hefty trade surpluses.
But when it finally burns through that pile of domestic cash, Japan may find that overseas investors demand sky-high interest rates, or balk altogether at buying Japanese debt.
“This could be financial Armageddon,” said Naoki Iizuka, a senior economist at Mizuho Securities in Tokyo. “Foreign investors could see Japanese government bonds as worthless paper.”
Mr. Iizuka says Japan has at most five more years to get its fiscal house in order before facing the prospect of serious capital flight.
Japan must do this while confronting one of the world’s worst demographic problems. The low birthrate means that there will be fewer working-age taxpayers to support a growing numbers of retirees. In 2005, there were 3 working people per pensioner; that ratio will drop to 1.8 per pensioner by 2040, according to the Health Ministry.
Solutions exist, but they are politically unpopular, say economists and political analysts. Besides immigration, Japan could let its enviably long-lived citizens work beyond the current retirement age, which is still 60 at many large companies. Another approach would be to increase productivity, allowing the smaller number of workers to produce more wealth.
This latter step would probably require opening up Japan’s still orderly economy to greater competition, something neither party wants to talk about in the current anti-Koizumi climate. Economists say powerful bureaucrats and industry groups suppress the sort of youthful entrepreneurship needed to create new businesses.
Economists blame this sclerotic system for 12 years of lost growth: statistics from the Cabinet Office show that Japan’s economy was the same size last year as it was in 1996. During that same period, the United States economy grew more than 50 percent.
But the current election may offer one big economic benefit, if it brings a change of Japan’s political guard. The ouster of the Liberal Democrats would rob Japan’s entrenched interests of their biggest defender, and open the door to newcomers.
“This would be the end of the old system,” Mr. Iizuka said. “It could make possible the changes we all know Japan needs.”
After enduring two decades of economic stagnation, Japanese voters seem to think change is worth a shot.
By Martin Hutchinson, Breakingviews.com Published: 2:21PM BST 27 Aug 2009
Opinion polls suggest a landslide win for the opposition Democratic Party of Japan (DPJ) on August 30. It wants to shift priorities by shifting 3pc of Japan's GDP from public works to social spending.
The DPJ thinks two policies of the Liberal Democrat Party, in power for all but a year since 1955, are counterproductive. The first is the easy transition senior bureaucrats make after retirement to top positions in major private companies. The result is an easy consensus between government and industry. The second is the substantial share of government spending - 6.5pc of GDP at its 2001 peak - dedicated to rural infrastructure.
Those policies worked superbly until 1990. But they have been much less successful since the Japanese financial bubble burst. A partial reversal of them under Junichiro Koizumi in 2001-06 produced the only signs so far of sustained economic revival.
The DPJ now wants to go further than Koizumi. It plans to prohibit senior bureaucrats from moving to private employers on retirement, sharply cut infrastructure spending and redeploy the savings to transfer payments for families with children and pensioners. Japan's voters seem to think the DPJ's alternative worth trying.
The electorate is probably right. A reorientation of Japan's economy towards domestic consumption and away from infrastructure and exports might well stimulate higher growth and a better economic balance. Interest rates high enough to give Japan's savers a decent return on their money would also help.
The problem is Japan's government debt, which the International Monetary Fund expects to reach 217pc of GDP by the end of 2009. That's a level close to the highest ever successfully handled - Britain's debts in 1815 and 1945. It is made more manageable by Japan's low interest rates and high savings rates, but urgently needs to be put on a downward trajectory.
Total debt, not the composition of public spending, is the central question of Japan's economy. It's not yet clear whether the DPJ has the answer.
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