Challenges Await Japan’s New Government Under DPJ
SINGAPORE (ICIS news)--Discontent over economic plight ended more than half-a-century rule of the Liberal Democratic Party (LDP) in Japan, but a new government does not guarantee its problems will be solved immediately, economists said on Monday.
LDP conceded defeat to opposition party – the Democratic Party of Japan (DPJ) - led by Yukio Hatoyama, which won a historic victory in the country’s general elections.
Japanese citizens went out to vote over the weekend following data showing the country had a record unemployment rate in July at 5.7%.
“It certainly is a significant historical event but as far as the economy is concerned, it will face the same constraint, [Japan’s] budget deficit is widening,” said David Cohen, Singapore-based regional economist at consultancy firm Action Economics.
The link between the election outcome and the worst crisis Japan has faced since the Second World War has been “pretty direct”, he said.
Japan, the world’s second biggest economy, has been the worst hit when global demand collapsed. Most analysts expect the Japanese economy to contract by 5.0-6.0% this year.
Economists said DPJ would likely build on the measures implemented by the LDP in stimulating the domestic economy.
“I don’t see a significant change [in policy]. Their first priority is the recovery of the economy,” said Naito Toshihiko, Tokyo-based economist at rating firm Japan Credit Ratings (JCR).
DPJ has the aim to do a structural shift to ensure the domestic economy would fuel growth and not exports going forward.
“[The policies] are clearly well-intentioned. The issue investors are waiting to see now is how these policies will get funded,” said Lim Su Sian, Singapore-based economist at DBS Bank.
Japan has the biggest deficit to GDP ratio estimated to hit 9% in the fiscal year ending March 2010, which would constrain the government’s ability to shell out more funds to pump-prime the economy, analysts said.
The government has had to give up its initial target of achieving fiscal balance, when revenues would match expenses, by 2011.
With hefty government spending needed to continue spurring economic activities, JCR’s Toshihiko said a more realistic target of achieving fiscal balance would be in 2017-2018.
There were also concerns that the change in government would distract Japan from its focus on recuperating from the recession, analysts added.
Economic numbers have so far been encouraging, with manufacturing output on its fifth month of growth in July.
But the story remains the same – Japan’s recovery hinges on recovery of global demand.
Consumer and business spending account for about three-fourths of the Japanese economy but it was exports that had been driving growth, which proved to be the country’s Achilles heel when the global financial and economic meltdown struck in late 2008.
This economic model will have to be recast based on DPJ’s policy but economists said this was more a long-term goal.
The country’s demographics, with its ageing population, also posed a problem in the planned shift of focus on the domestic economy, said Action Economics’ Cohen.
“I don’t want to say they can’t play that game anymore, but part of the consumer side is demographics. That makes it more difficult to light a fire,” he said.
Over the past 10 years, domestic demand in Japan had been very sluggish as strong profits generated by bigger companies due to robust exports failed to translate to higher wages, economists said.
“That has been the biggest problem in Japan. Owing to certain rigidities in the labor market, wages did not rise. [They] have been stagnant for the past decade,” Lim of DBS Bank said.
Analysts are still waiting for DPJ’s full range of policies that it hopes to implement over time.
LDP conceded defeat to opposition party – the Democratic Party of Japan (DPJ) - led by Yukio Hatoyama, which won a historic victory in the country’s general elections.
Japanese citizens went out to vote over the weekend following data showing the country had a record unemployment rate in July at 5.7%.
“It certainly is a significant historical event but as far as the economy is concerned, it will face the same constraint, [Japan’s] budget deficit is widening,” said David Cohen, Singapore-based regional economist at consultancy firm Action Economics.
The link between the election outcome and the worst crisis Japan has faced since the Second World War has been “pretty direct”, he said.
Japan, the world’s second biggest economy, has been the worst hit when global demand collapsed. Most analysts expect the Japanese economy to contract by 5.0-6.0% this year.
Economists said DPJ would likely build on the measures implemented by the LDP in stimulating the domestic economy.
“I don’t see a significant change [in policy]. Their first priority is the recovery of the economy,” said Naito Toshihiko, Tokyo-based economist at rating firm Japan Credit Ratings (JCR).
DPJ has the aim to do a structural shift to ensure the domestic economy would fuel growth and not exports going forward.
“[The policies] are clearly well-intentioned. The issue investors are waiting to see now is how these policies will get funded,” said Lim Su Sian, Singapore-based economist at DBS Bank.
Japan has the biggest deficit to GDP ratio estimated to hit 9% in the fiscal year ending March 2010, which would constrain the government’s ability to shell out more funds to pump-prime the economy, analysts said.
The government has had to give up its initial target of achieving fiscal balance, when revenues would match expenses, by 2011.
With hefty government spending needed to continue spurring economic activities, JCR’s Toshihiko said a more realistic target of achieving fiscal balance would be in 2017-2018.
There were also concerns that the change in government would distract Japan from its focus on recuperating from the recession, analysts added.
Economic numbers have so far been encouraging, with manufacturing output on its fifth month of growth in July.
But the story remains the same – Japan’s recovery hinges on recovery of global demand.
Consumer and business spending account for about three-fourths of the Japanese economy but it was exports that had been driving growth, which proved to be the country’s Achilles heel when the global financial and economic meltdown struck in late 2008.
This economic model will have to be recast based on DPJ’s policy but economists said this was more a long-term goal.
The country’s demographics, with its ageing population, also posed a problem in the planned shift of focus on the domestic economy, said Action Economics’ Cohen.
“I don’t want to say they can’t play that game anymore, but part of the consumer side is demographics. That makes it more difficult to light a fire,” he said.
Over the past 10 years, domestic demand in Japan had been very sluggish as strong profits generated by bigger companies due to robust exports failed to translate to higher wages, economists said.
“That has been the biggest problem in Japan. Owing to certain rigidities in the labor market, wages did not rise. [They] have been stagnant for the past decade,” Lim of DBS Bank said.
Analysts are still waiting for DPJ’s full range of policies that it hopes to implement over time.
quoted from: ICIS.com
