By Keiko Ujikane
Aug. 31 (Bloomberg) -- Democratic Party of Japan leader Yukio Hatoyama, fresh from a sweeping election victory, may have limited options to address record unemployment and deflation that threaten the nation’s economic recovery.
The DPJ won power for the first time yesterday on a pledge to support households battered by two decades of economic stagnation. Hatoyama has also said he’ll avoid more bond sales, so new spending will depend on his success in shrinking the bureaucracy and public works programs, which formed the core of the former Liberal Democratic Party government’s stimulus effort.
The expansion that began last quarter may already be in danger: the jobless rate rose to a record 5.7 percent in July, household spending dropped the most in five months and a report today showed factory output growth slowed. That leaves Japan “more dependent on exports that it’s ever been,” said Hugh Patrick, a professor at Columbia University in New York.
“Japan’s economy is emerging from the deep woods but will be in the shallow woods for some time,” putting pressure on a party with factions that differ on policies including deficit reduction, said Patrick, who heads Columbia’s Center on Japanese Economy and Business and wrote 15 books on Japan. “Politically, the next nine to 10 months will be very exciting.”
Job Creation
Naoki Iizuka, a senior economist in Tokyo at Mizuho Securities Co., predicted the DPJ will draw up a job-creation package as soon as October. “The most urgent priority for the new government is stopping the rising jobless rate,” he said.
Hatoyama, 62, led the DPJ to win 308 seats yesterday in the 480-seat lower house, ousting the party that ruled Japan for all but 10 months since 1955. The DPJ gained control of the upper house two years ago.
The yen rose, driving stocks lower. Japan’s currency strengthened to 92.77 per dollar at 3:30 p.m. in Tokyo from 93.60 late Aug. 28. The Nikkei 225 Stock Average slid 0.4 percent at the close after climbing as much as 2.2 percent. The yield on the benchmark 10-year bond fell half a basis point to 1.305 percent.
The DPJ assumes power as outgoing Prime Minister Taro Aso’s 25 trillion yen ($269 billion) in stimulus may already be wearing off.
Consumer prices fell an unprecedented 2.2 percent in July, threatening to erode corporate profits in the aftermath of the nation’s worst postwar recession. Companies such as Aeon Co., Japan’s second-largest retailer, have been forced to offer discounts to attract consumers.
Support for Households
The DPJ plans to increase spending on child care and tuition aid, cut gasoline taxes and eliminate highway tolls. It also promises 100,000 yen a month for job seekers enrolled in training, a minimum wage boost and higher employment insurance.
It may be hard to fulfill the pledges without worsening a public debt already nearing 200 percent of gross domestic product. Hatoyama said on TV Asahi Aug. 23 he won’t let new bond sales for the next fiscal year exceed this year’s record 44.1 trillion yen. In a sign of differences in the party, DPJ policy chief Masayuki Naoshima last month said higher bond sales may be unavoidable should there be a need for additional stimulus.
“The DPJ has promised far more than it can possibly deliver,” said Edward Lincoln, director of the Center for Japan-U.S. Business and Economic Studies at New York University’s Stern School of Business, who advised Walter Mondale, the former U.S. ambassador to Japan. “If they don’t do much on the things they promised and if the economy remains sluggish, then the honeymoon will be very short.”
Slower Production
Manufacturers increased production 1.9 percent in July from a month earlier, the slowest pace since March, as effects of the global stimulus and inventory restocking began to fade, a Trade Ministry report showed today. Retail sales slumped 2.5 percent, an 11th monthly drop, extending the longest losing streak since 2003.
“The DPJ must realize that public frustration with the LDP is going to turn into high expectations,” said Hiroshi Miyazaki, chief economist in Tokyo at Shinkin Asset Management Co. “The DPJ may try to appease voters and that would only worsen the economy and debt.”
Hatoyama’s choice of finance minister may be key to assuring investors the DPJ will restrain debt issuance, analysts said.
Need ‘Steady Hand’
The new government will need to show “it has a competent and steady hand on the tiller at the Finance Ministry,” said Tobias Harris, author of the “Observing Japan” political blog and a former aide to ex-DPJ lawmaker Keiichiro Asao.
Hatoyama may pick Hirohisa Fujii, 77, Kyodo News reported on Aug. 26, without citing anyone. Fujii, a former finance ministry official, served in the post in the coalition government that ousted the LDP for 10 months in 1993-94.
That experience might make Fujii best suited to work with ministry staff, economists said. The DPJ has committed to shift power from the bureaucracy to elected politicians, setting the stage for potential clashes with government officials.
Other candidates include DPJ Secretary-General Katsuya Okada, 56, and Vice President Naoto Kan, 62, economists said.
The party has said it will pay for its promises by cutting what it terms wasteful spending, shrinking the public service, tapping money from special accounts managed by bureaucrats and abolishing some tax deductions. Economists and investors have questioned whether that’s realistic, given tax revenue is falling and welfare costs are swelling as the population ages.
“These are deep-rooted structural problems that the Japanese economy faces,” said Michael Taylor, a senior economist at Lombard Street Research Ltd. in London. Fixing the pension system and reducing people’s anxiety about retirement, for example, will take time, he said on Bloomberg Television. The next prime minister “has got an awfully big job on his hands to try and sort things out.”
To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net
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