Japan’s New Leader Signals Conservative Approach

Yoshihiko Noda is a fiscal conservative who promises to restore Japan’s American alliance.

As Japan changed prime minister this week for the sixth time in as many years, it’s tempting to dismiss the leadership reshuffle as virtually insignificant. Yoshihiko Noda, however, may finally user in the change that his Democratic Party promised to bring to Tokyo when it swept to power two years ago.

In what is interpreted as a sign of the new prime minister’s conservatism, Noda picked a relative lightweight to head his finance department — a key position in his cabinet as Japan copes with a debt twice the size of its $5 trillion economy and an expensive recovery in its northeast which was devastated by an earthquake and tsunami in March.

Without a potential challenger in the Finance Ministry, Noda can be expected to call the shots himself on economy policy where he believes a balance between fiscal consolidation and pro-growth reform is essential. “We can lose no time in reforming public finances,” he told a news conference after being formally appointed on Friday. “But I’m not putting fiscal reform on top of everything else.”

Noda could push for an increase in the nation’s sale tax which has among the lowest rates in the industrialized world. His predecessor failed to act on a promise to consider it. Naoto Kan, who was also finance minister before he headed the government, did enact tax relief for Japanese business last year in an attempt to boost economic growth.

At 40 percent, Japan’s corporate tax rate was the highest among major economies.

Noda replaced Kan who was generally unpopular and had been discredited by the nuclear power plant accident in Fukushima this spring. He inherits not only a divided parliament but warring factions in his Democratic Party as well.

Noda’s election was a setback for the powerful party chief Ichirō Ozawa who challenged Kan in August of last year after maneuvering him into the Finance Ministry in the first place. The first Democratic finance minister insisted on fiscal restraint to reduce Japan’s colossal debt. Kan was supposed to be more “flexible” in facilitating the sort of pork-barrel spending and nepotism which propelled Ozawa to power.

The man who is often called Japan’s “shadow shogun” because of his enormous sway in Democratic Party politics was instrumental in its 2009 election victory which ended decades of Liberal Democratic Party rule. His tactics have since come under scrutiny however and his prestige has dwindled as evidenced by Noda’s win. Ozawa backed his opponent.

The party elder’s first chosen prime minister, Yukio Hatoyama, left office after less than nine months in power amid disappointment over his indecisiveness and incompetence.

Signaling a departure from Liberal Democratic policy, Hatoyama had demanded that the United States move a military base off the island of Okinawa as a demonstration of Japan’s security independence. The Americans, however, stayed put. Hatoyama, who, for all his rhetoric, recognized that Japan was extremely dependent on American protection, resigned in disgrace.

The Okinawa base debacle distracted attention from the real failure of Hatoyama’s cabinet — its unimaginative fiscal policy which offered no change at all from Liberal Democratic orthodoxy.

Before they came to power in 2009, the Democrats vowed to represent “self reliant individuals” and reduce the burdensome scope of Japan’s welfare state in favor of a market driven approach.

Once in government and confronted with a global economic contraction, the party blamed the free-market policies of the past for job losses and a widening income gap. It suddenly championed more of the very Keynesian, demand side stimulus which had been implemented by the Liberal Democrats for close to two decades. A record, $1 trillion dollar budget was enacted, full of measures that were designed to soften the impact which the recession had on working Japanese.

The spending spree hugely increased Japan’s indebtedness while recovering from March’s natural disaster will probably require more borrowing on the short term.

It’s too soon to tell whether Noda has the political capital and the will to truly rein in the Japanese state but he says he wants to.

While finance minister, Noda championed a 10 percent spending cut across all departments of Japan’s government and aimed to cap the issuance of new sovereign bonds at half a trillion dollars. The need for fiscal restraint is clearly present as tax income now covers less than half of Japan’s annual budget.

In terms of foreign policy, the new prime minister signals a return to normalcy. He promised to restore the alliance with the United States as the “very foundation” of Japan’s international relations while Chinese editorials have chastised him for identifying rising nationalism and naval power across the East China Sea as potentially hazardous to regional stability.