Raising a fallen giant

With six PMs in five years, politics has cost Japan dearly

Anyone who thinks there is no economic price to pay for prolonged political instability has to only look at Japan. The sixth prime minister in five years has just taken charge. Prime Minister Yoshihiko Noda, the latest occupant of the hot seat, will have to contend with a fractious political system, both within and outside his party, which makes his task of reviving a moribund Japanese economy even harder. Mr Noda is described as a “reformer” who favours tax increases to pay for sharply increasing social security costs as Japan’s population ages and also to curb its staggering public debt. His contention that Japan’s population will have to share the financial burden of reconstruction following the tsunami-earthquake combination in March is also unlikely to draw serious opposition. Mr Noda is also a political revivalist of sorts. His comments exonerating convicted Japanese World War II criminals have expectedly drawn loud protests from China. He would do well not to roil the waters.

The task of resurrecting a $5-trillion economy, whose GDP growth rate over the past two decades can charitably be described as “sluggish”, is daunting. Mr Noda took charge days after credit rating agency Moody’s downgraded Japan’s debt rating to Aa3. Japan’s problems are long-standing and there is no quick-fix solution in sight. Its GDP growth rate since 1992 has averaged 1.5 per cent and, barring a brief episode (2003-07) of export-driven growth, has typically been below 2 per cent, making Japan an underperformer compared to its counterparts from the Organisation for Economic Co-operation and Development. Japan’s public debt at $10.6 trillion is equivalent to 225 per cent of GDP, which makes countries like Greece look like poster countries for fiscal rectitude! A sharply rising yen has hobbled Japan’s exports, for long the engine of economic growth in the country, despite recent intervention by the Bank of Japan. An ageing population is not helping either, forcing Japan to relax its traditionally restrictive policies towards foreign labour.

Ironically, the sliver of hope for Japan’s beleaguered economy lies in the reconstruction of the Tohoku region in the north-east devastated by the tsunami. Japan has already budgeted $80 billion for rebuilding the region, with another $100 billion in the pipeline. The impact on the ground has already been visible: Japan’s economy, which was expected to contract by 0.7 per cent during 2011, is expected to actually grow by a little over one per cent! While reconstruction is expected to stimulate demand in the medium term, it is unlikely to be the panacea for Japan’s economic woes. If Japan is to regain the pre-eminence it enjoyed until the late 1980s, tough decisions on reforming the banking sector, liberalising land acquisition and paring the fiscal deficit will have to be taken. Japan is far too important an Asian economy and power to allow itself to go into slumber. Clearly, Japan needs to get its act together for its own sake and that of the global community.