Takenaka Says Hatoyama Pushing Economy ‘Backward’

By Toru Fujioka and Tatsuo Ito

Oct. 27 (Bloomberg) -- Heizo Takenaka, the architect of policy changes credited with securing Japan’s longest postwar economic expansion, blasted the government that took office last month for undermining prospects for the nation’s recovery.

“The government is taking a small step forward and a big step backward,” Takenaka, who served in cabinet posts including economy minister from 2001 to 2005, said in an interview in Tokyo last week. “My biggest concern is that they don’t have any overarching economic policies to bolster growth.”

Takenaka’s criticism reflects concern among some economists that Prime Minister Yukio Hatoyama’s plans to support households may do little to spur the recovery while swelling the world’s largest public debt. Japanese stocks have lagged behind a global rally because the ruling Democratic Party of Japan hasn’t said how it will tackle fiscal woes and sustain growth, Takenaka said.

“Their policies are like a construction project for a fabulous kitchen and living room that don’t take the rest of the house into account,” said Takenaka, 58, who is now a professor at the Tokyo-based Keio University. The government may be forced to backtrack on its policies in a year to contain the swelling debt burden, he said.

Growth Gap

The world’s second-largest economy could expand around 2.5 percent annually if the government pursued an agenda that includes deregulation and lowering corporate taxes, Takenaka said, adding that growth would be slower than 1 percent under the DPJ-led initiatives.

Earlier this decade, Takenaka pushed Japan’s debt-laden banks to write off 19 trillion yen ($207 billion) in bad loans when he served as financial services minister under former premier Junichiro Koizumi.

He also held the economic and fiscal policy portfolio and oversaw plans to sell the Post Office, the holder of Japan’s largest pool of bank deposits, in an effort to spur competition in the financial industry and reduce what he regarded as wasteful public spending.

The Hatoyama administration’s decision to scrap plans to sell shares of Japan Post Holdings Co., together with a lack of policies to revive the economy and cut debt are “the biggest factors for a slower recovery in Japanese stocks,” Takenaka said.

Lagging Behind

The Nikkei 225 Stock Average has dropped 2.8 percent since the DPJ won the election on Aug. 30, while the Dow Jones EURO STOXX 50 Index gained 1.1 percent and the Dow Jones Industrial Average rose 3.4 percent. The yield on Japan’s benchmark 10-year bond has risen 8 basis points to 1.395 percent.

Deputy Prime Minister Naoto Kan said this month that he doesn’t intend to set a goal for balancing the budget now because the government’s focus is on lowering the jobless rate, an indication that fiscal discipline isn’t a priority.

“Some fiscal spending is needed now to avoid a recession,” Takenaka said. “But if you don’t cut spending, that will create a fiscal deficit problem, so it’s important that they toe the right line between these two things.”

Hatoyama, 62, said yesterday in a parliamentary address that his government’s “most important agenda” will be to help regional economies and aid businesses to support the economic recovery.

Budget Requests

Ministries this month asked to spend a record 95 trillion yen next fiscal year. Public debt is approaching twice the size of gross domestic product, according to the Organization for Economic Cooperation and Development.

“The problem with the DPJ’s election manifesto was that they lacked a growth strategy,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo and a former Bank of Japan official. “Pursuing economic growth would allow them to also help restore fiscal health.”

Takenaka acknowledged that some of the government’s policies, including Transport Minister Seiji Maehara’s plans to make Tokyo’s Haneda Airport an international hub, may bolster growth.

Other plans to abolish highway tolls, reduce tuition fees and cut the gasoline tax may exacerbate deflation by lowering consumer prices about 1 percentage point, he said. The Bank of Japan will forecast this week that price declines will extend into fiscal 2011, damping the recovery, according to the median estimate of 15 economists surveyed by Bloomberg.

Takenaka said he was “stunned” by Financial Services Minister Shizuka Kamei’s decision to scrap the sale of Japan Post and appoint former top Finance Ministry official Jiro Saito to head the company.

The DPJ had opposed so-called amakudari, or the practice of former government officials taking positions at state-run entities. Last year it blocked the government’s nomination of Toshiro Muto, who held the same post as Saito at the ministry, as central bank governor.

Saito’s selection “is the biggest parachuting in history, with one of the most famous bureaucrats,” Takenaka said. “Even worse, he accepted the appointment without knowing what he’ll need to do with company.”

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net; Tatsuo Ito in Tokyo at Tito2@bloomberg.net