Aso Risks Deeper Japan Recession by Delaying Vote He May Lose

By Toru Fujioka

Feb. 2 (Bloomberg) -- Prime Minister Taro Aso risks deepening Japan’s recession in order to delay an election he’s likely to lose.

Aso, whose approval rating has sunk below 20 percent after less than five months in office, refuses to bow to pressure from the opposition to call the election ahead of the legally required Sept. 10 date. The resulting political paralysis is stalling the 10 trillion-yen ($110 billion) stimulus plan he has promised to restore economic growth.

Delayed recovery may hasten the nation’s decline as a regional and global economic power. Already, Japan is being eclipsed in east Asia by the ascent of China, whose economy overtook Germany’s to become the world’s third largest in 2007, according to revised official figures published last month.

“A tsunami is coming and we need effective economic stimulus from the government,” says Tsuneo Watanabe, a Tokyo- based adjunct fellow with the Center for Strategic and International Studies in Washington. “By clinging to power,” Aso, 68, and his Liberal Democratic Party are “making it harder for ordinary people to cope with this severe downturn.”

With its key interest rate already close to zero, the Bank of Japan can’t offer much help, leaving the world’s second- largest economy with little defense against the recession, which the central bank predicts will be the worst since World War II.

Political Gridlock

Gridlock in Japan contrasts with the urgency of politicians in the U.S., China and Germany. President Barack Obama’s pledge of “bold and swift” action to help the U.S. economy was followed a week later by the passage of an $819 billion package by the House of Representatives. China proposes 4 trillion yuan ($585 billion) of economic-stimulus expenditures, and Germany plans to fund spending and tax cuts with record borrowing.

“Japan’s fiscal policy is not just going to lag everywhere else in Asia, it’s going to lag behind everywhere in the world,” says Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. “In the absence of a general election, the ability of Japan to put in a timely, significant, effective policy response is clearly very low.”

Forecasts last week from the International Monetary Fund suggest Japan is sinking faster than most of the other major industrialized nations. The IMF’s latest World Economic Outlook estimates Japan’s economy will shrink 2.6 percent this year, compared with the 0.2 percent contraction forecast in November. Only the United Kingdom, projected to decline 2.8 percent, has a worse outlook for 2009.

Fired Workers

Statistics published Jan. 30 showed Japan’s decline steepened. Industrial production fell by a record 9.6 percent in December from November, unemployment rose the most in 41 years and household spending slid 4.6 percent.

NEC Corp., Japan’s largest personal computer maker, said Jan. 30 it will cut more than 20,000 workers; Hitachi Ltd., a maker of DVD recorders and industrial machinery, predicted a record 700 billion-yen loss; and Honda Motor Co. cut its full- year profit forecast 57 percent.

“Japan is a rich and powerful country but risks stagnating because it may fail to take the necessary steps to help itself,” says Nouriel Roubini, economics professor at New York University’s Stern School of Business, who was among the first to predict the global financial crisis.

Measured by wealth per person, Japan slid to 18th among the 30 members of the Organization for Economic Cooperation and Development in 2006, according to the government’s Cabinet Office. The nation ranked last among Group of Seven economies as a destination for foreign direct investment in 2007, according to an OECD study.

Nothing for G-20

Japan’s lackluster response to the recession may leave it with nothing to offer at the Group of 20 leadership summit in London in April, Economic and Fiscal Policy Minister Kaoru Yosano said Jan. 29.

“We have to ask ourselves whether we’ll be able to push our chests out and explain what we’ve done,” Yosano said in an interview with Nippon BS Broadcasting Corp.

On Sept. 22, a week after the bankruptcy of Lehman Brothers Holdings Inc. sparked a worldwide credit shortage and stock- market slump, Aso became the third leader in two years of the ruling LDP, which has dominated Japanese politics for half a century.

Candidates rented campaign offices at the same time, expecting Aso to call an early election to capitalize on a honeymoon period with voters. But the new leader’s popularity proved short-lived after a series of gaffes, including remarks that doctors lack common sense and mothers need to be disciplined more than their children. Hints of elections were soon replaced by Aso’s declarations that saving the economy was his No. 1 priority.

People’s Mandate

Aso told the parliament on Jan. 29 that he “will seek the people’s mandate at the appropriate time.” At the World Economic Forum in Davos, Switzerland, on Jan. 31, he said he intends “to work in collaboration with these leaders in order to make this year the year of the world economic revival.”

On Oct. 30, Aso unveiled a stimulus package with cash handouts of 12,000 yen ($134) for each resident. The proposal failed to impress voters and riled lawmakers, including some from his own party. Former Cabinet minister Yoshimi Watanabe quit the LDP on Jan. 13, saying the cash would be better spent helping local governments support the needy.

“The policy response remains badly focused and inadequate to deal with the scale of the demand shock hitting the economy,” says Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo.

Some 74 percent of respondents in a Mainichi newspaper survey published Jan. 26 oppose the handouts. The same survey showed the premier’s public-approval rating fell to 19 percent from 45 percent when he became leader.

Biggest Obstacle

Investors are also losing faith. They see Aso’s administration as the biggest obstacle to a stock-market recovery this year, according to a Nomura Securities Co. survey published Jan. 6. The Nikkei 225 Stock Average lost a record 42 percent in 2008 and is down 9.8 percent this year.

“Investors didn’t expect much from Aso and were still disappointed,” says Yoshinori Nagano, a senior strategist at Daiwa Asset Management Co. in Tokyo. “They’re sick of the political games.”

Some analysts say it’s unfair to blame Aso for the stalemate or for economic woes that stem from the financial crisis in the U.S. Japan’s ability to spend its way out of the recession is also constrained by its public debt. The OECD estimates the burden stands at more than 170 percent of gross domestic product, the biggest in the industrial world.

“We aren’t seeing a lot of cooperative action on the part of the two largest parties,” says Robert Feldman, head of economic research at Morgan Stanley in Tokyo. “It’s far too simplistic to blame any single individual for the troubles of the economy.”

Voters may be less forgiving.

“Aso just doesn’t get how tough it is for us right now,” says Shunichi Takimoto, a taxi driver in Tokyo. “The LDP should lose the next election and it should happen as soon as possible.”

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net