Former Japanese Prime Minister Junichiro Koizumi must be wondering whether to be glad or sorry. On the one hand, his vow to 'smash' his own party, the Liberal Democratic Party (LDP), looks as if it could be accomplished in the lower house election, set to take place in 40 days. On the other hand, his economic policies, which favoured Japan's largest and most international exporting companies, could be slowed or reversed.
That's not a bad thing. The widening wealth gap and decreasing portion of GDP going to the labour force in Japan has crimped consumption and made the country more dependent on exports. (These have fallen 50% in the first half of this year, with disastrous implications for GDP growth.) Yale academic Robert Shiller describes in his writing how a large wealth gap is not conducive to consumption, because there is a limit on how much a single individual can realistically consume. Thus, even a billionaire will rarely have more than 10 cars. But 1,000 people with a million dollars each will buy at least 100 times that number of cars.
The Democratic Party of Japan (DPJ), which constitutes the main opposition, is in favour of abolishing tolls on the highways, terminating the surcharge on petrol, increasing pension provisions, increasing child care, and raising the minimum wage.
All this could be at least a partial solution to several major problems Japan is facing: dependence on exports as the marginal factor to achieve growth, low standards of living, and increasingly low incomes for the bulk of its population.
That combination has had a negative effect on consumption, which accounts for roughly 60% of GDP. In other words, even a slight decline in consumer spending has a big impact overall. Conversely, a slight improvement could push up GDP growth, and help soak up some of today's excess export capacity. The hope is that a virtuous cycle of higher incomes, higher consumption, and greater optimism could feed into gently rising asset prices and GDP growth.
If they do come to power, the DPJ will have to thank Koizumi for at least part of their success. His ambiguous influence on the LDP is still present: the lower house of the Japanese parliament (the Diet) is dominated by the LDP as a result of the landslide victory he obtained in 2005. But the public clearly voted for him personally, rather than for the LDP, when he called a snap election on the issue of postal privatisation (which many LDP members opposed).
Having stepped down in 2006, Koizumi's true political legacy is emerging. Pork barrel politics, which permitted the LDP to stay in power by bribing key constituents for votes, are becoming harder to carry out.
That's due to a host of changes, which admittedly did not necessarily all start with Koizumi. Increased public pressure (often involving emerging NGOs) for information in the 1990s forced bureaucrats and politicians to reveal how they were benefiting from the system at the taxpayer's expense. In the case of the bureaucrats it was lavish expense accounts and lucrative post-retirement careers either in the private sector or in publicly-owned corporations. For the politicians, it was using the fiscal investment and loan plan (FILP) to bypass the official budget via the issuance of bonds by government-owned agencies and using the proceeds to finance politically useful projects. The sums generated from such bond sales are large, rivalling the official budget that is generated from taxes. The number of issuers is also large, ranging from Narita Airport to the Government Pension Investment fund, the Development Bank of Japan, the Japan Green Resources Agency and the Okinawa Development Finance Corporation.
FILP was partly funded by Post Office savings, a favourite retail destination for surplus funds. The privatisation of the Post Office, although slated to be finalised only in 2016, is putting hundreds of billions of dollars beyond the reach of the political-bureaucratic nexus. Since the Koizumi administration launched its reforms, FILP financing has dropped by about 50% from its peak in 1996 to $130 billion in 2008 (it has since risen again due to the financial crisis).
Special taxes financed road building programmes, which are frequently highly indebted despite the high tolls they charge motorists. (Traffic volumes are too low). The taxes, such as the petrol tax, are ring-fenced for road construction—meaning that parliament rarely exercises control or oversight over the process, which is in the hands of the Ministry for Land, Infrastructure, Tourism and Transport. Koizumi tried to privatise the government-owned companies which build the roads, but opposition is fierce and progress has been slow.
Koizumi capitalised on the public's discomfort with the gigantic government deficits to intensify his attack on wasteful government spending. His solution was to apply "supply side" theories to the government. He believed this would have the dual advantage of keeping the government out of the economy (thus making the government less corrupt) and increasing private sector efficiency (thus galvanising economic growth).
However, on the economic side his legacy has been mixed. Although it worked for a while—his moves to free up the labour market were especially profitable for the corporate sector—the outcome since the financial crisis hit Japan's most important trading partners has been terrible. Japan's exports have collapsed, along with earnings from the country's elite exporter companies. GDP is contracting at a rate Standard and Poor's estimates to be 6.5% for calendar year 2009, and no other growth drivers have emerged.
It's clear that Japan needs to tweak its growth model and the DPJ, despite its lack of experience and the colourful background of many of its leaders, may have found the solution.
The problem for the DPJ is that although its policies may be economically right, they could be politically wrong. Polls show Japanese voters believe the DPJ is trying to buy them off with such policies. Similarly, current LDP Prime Minister Taro Aso's cash handouts to citizens earlier this year were treated with suspicion. As mentioned, the Japanese find increased expenditure hard to reconcile with the country's increasingly large government debt.
That goes back to an unfortunate and long-standing public distrust of politics. Even right after the Meiji Restoration in the 19th century, the establishment tried to discredit the very democratic system it had just introduced. Politicians were described as corrupt and selfish by state propaganda—in contrast to the upstanding bureaucrats and honourable soldiers. Citizens were encouraged to stay away from politics.
The results of that policy are well known. Democrats were discredited and in the 1930s the Japanese military moved into the vacuum. What needs to happen in today's Japan is for clean, intellectually vigorous and democratic politics to be acknowledged as the country's best hope. That, rather than economics, could be the DPJ's greatest challenge.
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