Can Japan’s Economy and Politics Withstand a Heavier Burden?

Politics Economy

Japan’s mountains of public debt cannot be resolved without increasing the burden on ordinary taxpayers. But how? Finding a way to do this without upsetting the electorate is the major political and economic challenge for Japan in the first half of 2012. The road ahead will not be easy.

The fiscal crisis engulfing the world’s leading economies, sparked by the crisis in the euro zone, is threatening to reach Japan. Prime Minister Noda Yoshihiko has proposed increasing the rate of the consumption tax. He needs to submit a bill to the Diet as soon as possible and come up with a clear timetable for making that proposal a reality. On top of a possible tax increase, consumers will be hit by higher electricity bills this spring, after the Tokyo Electric Power Company (TEPCO) announced that it will increase its charges in April as a result of the nuclear disaster in Fukushima.

How will individuals and businesses cope with this increased burden? And what are the prospects for the Noda government itself? The Japanese economy will have to somehow traverse a narrow and treacherous pass.

At the Democratic Party of Japan’s annual convention on January 16, Noda spoke with conviction, warning party members that Japan’s very future is at risk unless the government carries out an integrated reform of the social security and taxation system, including an increase in the consumption tax. But the way ahead is fraught with difficulties. Noda’s proposal calls for the consumption tax to be raised to 8% by April 2014 (from its current level of 5%), and then to 10% by October 2015. The first hurdle will be to iron out the details in the draft for this tax-increase bill. The prime minister hopes to do this before the current fiscal year ends on March 31.

For the bill to have a good chance of success in the Diet, the DPJ-led government needs to reach a consensus with the two main opposition parties (the Liberal Democratic Party and New Kōmeitō) before the bill is submitted. To judge from its increasingly confrontational stance, however, the LDP seems unlikely to go along with the DPJ on this issue. If the Noda government decides to go it alone, the bill will surely not get through the opposition-controlled Upper House. This raises the possibility that the Diet will grind to a standstill by the end of its ordinary session in June, leading the prime minister to dissolve the Diet and call a general election.

Ripple Effect of Political Disarray on the Economy

Politics and the economy are inseparable. Japan’s level of government debt is among the worst of any of the major industrialized nations. Even though the bulk of Japan’s government bonds are held by domestic investors, the markets will soon start to respond unless the government undertakes fiscal reforms to address its debt. If this happens, Japan will be uncomfortably close to the sort of fiscal conflagration that has erupted in the euro zone. Japan’s political disarray threatens to spill over into economic chaos.

Even if the government manages to reach some sort of political compromise and the consumption tax hike is approved, it will not be immediately clear whether the impact on the Japanese economy is positive, since the increase will not come into force until two years later. One hopes that the economy will have broken out of its deflationary spiral by then. If it has not, a tax increase in the middle of a recession could have a fatal impact on the economy.

The problems are not limited to the fiscal debate. A “comprehensive special business plan” for TEPCO is due to be drafted by the end of March, including proposals to fundamentally restructure the way the company is managed. One focus of the plan will be whether to nationalize TEPCO on a temporary basis. Whatever the outcome of that debate, if TEPCO decides to increase electricity bills to cover costs resulting from the shut-down of its nuclear power plants, there will be an immediate increase in the burden on people’s lives and corporate activities. Other power companies, struggling to restart their own nuclear power plants in the face of massive public opposition, would be likely to follow suit, resulting in costlier electricity across Japan.

Increasing the burden on the Japanese people is not a welcome prospect. But it is unavoidable. There are still no prospects for a solid economic recovery in sight, and Japan continues to experience a prolonged deflationary period that is unique among the major industrialized countries.

This is the year of the dragon. But the chances that the Japanese economy will soar like that mythical creature in 2012 are slight indeed. (January 25, 2012)

(Originally written in Japanese.)

tax increase consumption tax nuclear accident TEPCO Yasui Takayuki increased burden Noda government electricity costs Diet dissolution general election deflation utility rates comprehensive business plan Asahi Shimbun