Japan Goes All In

Last time we reported on Japan’s lingering in economic trouble, we identified decades of government interference as the cause of much of the country’s modern-day hardship. With the Democratic Party in power after years of Liberal Democratic leadership, there was reason to hope that the former would undo part of the Keynesian measures the latter had imposed upon Japan throughout decades of almost uninterrupted rule.

Alas, not only did the Democrats distance themselves from the free-market policies of former Prime Minister Junichiro Koizumi; over Christmas they approved a record trillion dollar budget which, according to The New York Times, “encompasses ambitious welfare outlays to help households cope with the country’s deep economic woes.” The paper warns though that “the scale of new spending could renew investor jitters about the government’s burgeoning debt.”

Prime Minister Yukio Hatoyama is hoping that his generous welfare spending will encourage households to increase consumption, providing the economy with a much needed stimulus. “Together with all of you, I want to build a better Japan, a new Japan,” he said at a news conference. “I have adhered to the principle that people matter more than concrete.” Unfortunately for Mr Hatoyama, Japan’s domestic market simply isn’t strong enough to ensure continued growth should exports fail. And it is exactly the country’s mounting debt that worries foreign investors.

Next year Japan is set to borrow more than half of its entire budget, bringing its public debt up to about $9.4 trillion, or 181 percent of GDP, by the end of March 2011 — by far the highest in the industrialized world.

Because the government is utterly unable to balance its budget, promised cuts on a gasoline tax and highway tolls have been abandoned while cash payments to child rearing households and free high school education are still on the agenda. Put another way: measures that might actually help the economy a bit are put on hold while more money is to be spent on programs that could at the very least be suspended while the country is still struggling to climb out of the recession.

No wonder then that within the span of just a few months, the prime minister lost about one in five of his supporters, bringing his approval rating down from a post-election high of 71 percent to below 50 percent.