Japanese voters decisively rejected fiscal stimulus on Sunday’s elections.
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They threw out Taro Aso and his old-line Liberal Democrat Party policies of heavy infrastructure public spending. The victorious Democratic Party of Japan led by Yukio Hatoyama, which has an absolute majority of seats in the lower house, has promised a shift of 3% of GDP from infrastructure to tax transfers. That may produce faster growth, but deficits and debt loom as threats.
Japan’s voters were presented with a clear choice. Aso, the incumbent prime minister, had rejected the free market, budget-balancing policies favoured by the reformist Junichiro Koizumi and his two successors and reverted to the LDP’s traditional policy of heavy public spending on infrastructure. The downturn that began in September reinforced his approach, so after several episodes of stimulus Japan’s budget deficit was estimated at 8.9% of GDP in 2009. That’s lower than in Britain or the US, but Japan has less room for manoeuvre, since its government debt is forecast to total 217% of GDP by year-end.
Japan’s voters have rejected Aso’s approach. Aside from the LDP’s stunning defeat, several of Aso’s associates have lost their seats, while Koizumi’s son Shinjiro Koizumi won his father’s seat and Koizumi’s like-minded successor Shinzo Abe retained his. Aso has resigned as party leader; his likely successor, health minister Yoichi Masuzoe, is a reformist.
The DPJ has promised to ban senior bureaucrats from transferring to major corporations and promises to shift 3% of GDP in government spending from infrastructure to social programs, such as income transfers of US$3,000 per child to families. He will also emphasise economic development through small business and the domestic market, rather than favouring the big exporters. This approach should rebalance Japan’s economy and may produce better growth. The principal danger is the budget deficit and resulting public debt. These could quickly spiral out of control if the DPJ’s favoured constituencies of environmentalists and public sector unions are excessively rewarded.
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By GlobalDataStill even a bounce in the Japanese economy could make Hatoyama’s budgetary arithmetic much easier. After almost two decades of near-recession, that is not much to ask.
