GN Focus | Japan

Elections crucial to economy

What does the next year hold for the nation? As Japan prepares for new policies, GN Focus looks at what lies ahead

  • Arno Maierbrugger
  • Published: 00:00 December 9, 2012
  • GN Focus

  • Image Credit: Corbis
  • Consumer behaviour: Public spending in the country is expected to plunge once the sales tax goes up

The Japanese government announced a much needed 880.3 billion yen (Dh39.4 billion) economic stimulus package ahead of this month’s election as it seeks to prop up the nation’s faltering economy. It was the second stimulus package in little more than a month from Prime Minister Yoshihiko Noda.

Such measures are vital with the country having been in recession mode since the global economic crisis of 2008. Neither measures of quantitative easing or record low interbank interest rates have helped resolve the problems that led to continued deflation. The economy took a further dive when the tsunami hit the country in 2011 and, in subsequent years, growth is likely to hover at just around 1 per cent, according to research by the International Monetary Fund.

The next Japanese general election will be held on December 16, and the challenges for the new government will be huge. The country needs to stabilise its export market, which has been hit hard by the sluggish US recovery, the economic downturn in the Eurozone and decreasing demand from China. Domestic private consumption is low, while industrial production, especially in the formerly dominant electronics sector, is weakening. The elections will be held in a stagnating to contracting fourth quarter, and policy stimulus, including an extra budget, seems to be the only engine to fuel Japan’s growth for the time being.

In its monthly economic report released in October, the Japanese government said the economic recovery “is in a weak tone recently due to deceleration of the world economy”. It added that it expects movement towards recovery to pause in the short to mid-term and that “a degree of uncertainty about the external economic prospects of the Eurozone and Asia, notably China, remains high”.

More than two decades after Japan’s asset bubble burst in the early 1990s its policymakers have yet to devise an effective strategy to help the economy break out of its deflationary funk. Meanwhile, the Japanese yen remains stubbornly high, discouraging its companies from investing at home and undermining its export competitiveness, especially against rivals Germany, Taiwan, South Korea and the rising Asean nations.

Public expenditure is expected to fall in the first half of the year due to the peaking of reconstruction-related demand after the tsunami disaster in 2011, says Tokyo-based Mizuho Research Institute in its economic forecast for 2012.

Another issue of concern is the planned sales tax rise. Both the government’s lower and upper houses voted in approval to double Japan’s 5 per cent sales tax by 2015 in several steps — half of it is understood to go into effect before the end of 2013. This will lead, according to Mizuho, to a rush of demand prior to a consumption tax hike, but later on will lead to a decline in purchasing power and a backlash in demand from 2014 onwards.

Opposition policymakers have said that in the current situation, the tax increase will put a tight limit on family expenses. Many expect that public spending, while showing slow recovery after last year’s disaster, will take a sudden plunge once the sales tax goes up. Government incentives for households to purchase fuel-efficient cars – measures that have been supporting consumer spending, which accounts for more than half of the economy — are running out this year, dealing another blow to domestic consumption.

But it isn’t all bad news. Japanese companies increased capital spending by 2.4 per cent, the Ministry of Finance said last month, indicating that any contraction in that economy may be short-lived. Economists surveyed by Bloomberg had forecast a 1 per cent gain.

Either way, December’s elections are seen as crucial to steer the country back on the road to recovery.

— Special to GN Focus

Fact Box

Scenario one: Coalition between the Democratic Party of Japan (DPJ) and the Liberal Democratic Party (LDP). This would, however, most likely cause a period of indecisiveness and confusing politics. In this case, it is likely that rating agencies that have already cut the country’s credit status will impose further cuts, citing a lack of political will to deal with the looming crisis.

Scenario two: Liberal Party revival. Three years after the DPJ ended more than half a century of nearly non-stop LDP rule, disappointed voters could hand the LDP back the most seats in the December poll. The LPD would most likely curb public stimulus measures and possibly reverse the consumption tax hike, but it seems to have no strategies of how to deal with the country’s spiralling debt. In any case, the LDP has strong support from the Japan Business Federation, whose members are deeply concerned about the ruling DPJ’s worsening relations with Beijing that impact its members’ production activities and sales opportunities in China.

Scenario three: The DPJ has disappointed many voters with its decision to raise the sales tax, a move that has been criticised by economists who claim it will have an adverse effect on economic recovery in the mid-term. However, there could the DPJ successfully differentiate itself from other parties with a recovery strategy. In that case, it has to prove that its social security and tax system reform plans won’t strike back on the ailing economy, which faces challenges such as the decline of once established industries such as electronics, the rise of China, the role of nuclear power after the Fukushima crisis and the ballooning costs of a quickly ageing population. Besides, under DPJ rule relations with China turned sour and the perception arose among voters that a victory of the LDP could be more useful to restore political and economic relations in Japan’s favour.

— A.M.

GN Focus