Can a New Prime Minister Revive Japan's Economy?

Liberal Democratic Party leader Aso, expected to be named Prime Minister this week, favors tax cuts and big government spending to fuel growth

by Kenji Hall

With global financial markets still wobbly from Lehman Brothers' collapse, Japan's ruling Liberal Democratic Party finally filled the political vacuum left by ex-Prime Minister Yasuo Fukuda's resignation three weeks earlier. On Sept. 22, the LDP met on the eighth floor of its headquarters and picked party bigwig and former Foreign Minister Taro Aso as its new leader. After the poll results were announced, Aso stood and bowed deeply several times to the gathering.

The LDP ruling bloc's control of the lower house of Parliament means Aso is all but assured of becoming Prime Minister when lawmakers meet for a special session in two days. The LDP is betting that Aso can reverse its flagging ratings. And he won't have much time to do so. In the next two weeks, Aso is widely expected to dissolve Parliament (BusinessWeek.com, 9/2/08), calling a general election and putting his own job on the line.

Aso's first priority: drawing up a plan for preventing the economy from going south. "After traveling around the country, I got the sense that times are tough for many people," he told reporters in a nationally televised news conference. "My mission is to tackle this feeling of uneasiness about the economy…and to get rid of the dissatisfaction with politics."

Brash Policy Wonk

Many economists think Japan is already mired in recession, though the government has yet to officially say so. Aso, who favors tax cuts and big governmental spending, has emphasized the need for an economic stimulus package despite calls from his own party's rank-and-file to balance the budget by 2012. "The lift from economic stimulus measures is unlikely to last more than a year, considering Japan's aging society, fiscal problems, and other challenges," Credit Suisse (CS) analyst Shinichi Ichikawa wrote in a report.

Japanese voters don't elect the Prime Minister. But they will determine whether the ruling bloc keeps its upper hand in the lower house. A win is hardly guaranteed for the LDP. In a national election last July, the opposition Democratic Party took the upper house and has been using its power to thwart the ruling party's agenda ever since. That contributed to the downfall of the country's last two premiers: Unable to break the logjam in Parliament, they quit after less than a year in office.

The 68-year-old Aso would seem to be a different leader. Unlike the bland Fukuda and inexperienced Abe, Aso is a gruff straight-talker and a policy wonk who can rattle off statistics and fields questions from non-Japanese reporters in English. A member of Japan's 1976 Olympic shooting team, he has played up his passion for manga, or Japanese comic books; he claims to read 10 to 15 a week.

But his brash manner has gotten him in trouble before. He was forced to apologize for a derogatory comment about Alzheimer's last year, and stirred anger five years ago for what many saw as praise for Japan's colonization of the Korean peninsula. And his pedigree—his grandfather and father-in-law were Prime Ministers—works against him with some voters.

Revival of Pork-Barrel Politics?

Aso will need to come up with measures to fix an array of problems, ranging from food safety fears to public anger over lost pension records. He will also want to assure voters that Japan is insulated from the U.S.'s financial woes. So far, Japan's banks have emerged relatively unscathed (BusinessWeek.com, 9/16/08) from the implosion of subprime U.S. mortgages. And none has been badly burned by their exposure to Lehman, whose bankruptcy filing last week triggered the market turmoil that led the U.S. government to consider a $700 billion financial-sector bailout. Analysts estimate losses for Japan's publicly listed large and midsize banks from Lehman at a relatively modest $3.7 billion. "For now, Japan doesn't appear to be at risk of a pullback that's as wrenching as in the U.S. and Europe," says Ryutaro Kono, head of economic research at BNP Paribas (BNPP.PA) in Tokyo.

But critics say Aso's ascension could be a setback for fiscal and political reforms and a revival of pork-barrel politics. With Japan's debts estimated at 150% of gross domestic product, the highest of any industrialized nation, more spending could fan the perception that the country's strained finances are closer to the breaking point. "There's a risk that government spending will be wasted, as it has in the past," says BNP Paribas' Kono. "The government needs to show that it's committed to reforms and deregulation."

Hall is BusinessWeek's technology correspondent in Tokyo.