By David PillingPublished: September 23 2007 16:29
When Yasuo Fukuda emerged last week as the would-be saviour of the Liberal Democratic party, he told one interviewer that he “had drawn the short straw”. Indeed, he takes over a party that has lost control of the upper house to the Democratic party of Japan amid a voter backlash over the effects of free-market reforms that are said to be leaving large swathes of Japanese society behind.
If the LDP cannot provide voters with hope that five years of economic growth can eventually improve their living standards, the party faces the real danger of being thrown from power at the next general election – which must be held by 2009 – according to some political analysts.
In spite of enjoying the longest uninterrupted recovery since the second world war, many Japanese people have yet to feel much benefit. Wages have barely risen, while unemployment in some cities, towns and villages has been stuck well above the national average. Because of a change in tax transfers, introduced under the previous administration of Junichiro Koizumi, some municipalities face the threat of bankruptcy. Yubari, a city in Hokkaido, has already gone bust.
This all adds up to the worst crisis for the LDP since it lost power – briefly and for the only time – in 1993. Yet neither Mr Fukuda, nor Taro Aso, his combative opponent, ran on a platform of undoing the Koizumi policies that are now proving such an electoral liability.
Mr Fukuda, like Mr Aso, has spoken of the need to address social inequalities and to rein in what he calls the excesses of the free market. But on the basic tenets of current policy, he was clear there was no going back.
“We have to promote reforms,” he said in one of many debates last week.
“The world is changing, and if we don’t change we will be left behind.”
The fact that the LDP did not come up with a candidate campaigning for a return to pre-Koizumi days suggests there is no real political momentum behind such a movement.
The present course – associated with, but not begun by, Mr Koizumi – has several planks: to recover fiscal probity; to reduce subsidies to sparsely populated rural areas in the form of public works and tax transfers; and to increase, where possible, the role of the private sector.
Mr Fukuda told foreign journalists last week: “Japan is at a turning point. The population is shrinking and greying and the social structure is changing. We have to raise labour productivity to meet these challenges.”
Hiroshi Shiraishi, economist at Lehman Brothers, argues it will be difficult to loosen the nation’s purse strings, even if politicians wanted to.
“Fiscal policy under the heavy hand of the Ministry of Finance is unlikely to change much. Given the size of the outstanding public debt [now about 150 per cent of gross domestic product], a return to pork-barrel politics looks highly unlikely.”
The official goal of reaching primary fiscal balance, before interest payments, by 2011 is unlikely to be abandoned, say analysts.
True, Mr Fukuda has advocated certain measures to ameliorate social hardship. He has, for example, raised the possibility of freezing out-of-pocket co-payments for medical treatment for the elderly at 10 per cent. Under changes initiated by Mr Koizumi, the current plan is to raise these to 20 per cent from next April.
There are also discussions about slowing some changes to the tax system designed to force local governments to raise more tax locally and to pay for more of their own services.
But neither the finance ministry nor Mr Fukuda – who, as chief cabinet secretary, was closely associated with Mr Koizumi’s original policies – is likely to allow a return to the fiscal laxity that marked much of the 1990s.
Then, the emphasis was on reviving a moribund and deflationary economy through spending whatever it took.Now the aim will be to tweak spending so that voters back the LDP in sufficient numbers to keep it in office. But the financial resources to achieve that are likely to remain strictly circumscribed.
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