Japan: a struggling superpower

As Japan warms to its fifth Prime Minister in just three years, the economic power house faces serious problems.

These include rising unemployment, deflation and the biggest national debt in the industrialised world – all against a worrying backdrop of an aging and declining population.

New Prime Minister Naoto Kan has warned that Japan faces financial ‘collapse’ similar to that of Greece if the government continues to run at a loss (deficit) and borrow to make up the difference.

For decades Japan has borrowed from its own people via the sale of low interest government bonds (effectively deposits). But as people age, these bonds may soon be cashed in en-masse for retirement purposes.

If this happens (and because young people don’t save as much to invest in bonds) Japan’s government may be forced to fund its deficit internationally at far more expensive interest rates.

Some believe this could prove financially disastrous for the government and the country.

Japan has a very high standard of living. Based on GDP (the country’s gross domestic product, or total economic output) it has the second largest economy in the world (behind the US and ahead of China and Germany).

But Japan’s government debt is now a whopping 200% of its GDP (the global average is about 50%; Greece is 125%).

This is setting alarm bells off in Japan’s government, especially considering they made things worse last year by activating massive economic stimulus packages for households and businesses as part of a global attempt to fuel growth.

Now this stimulus idea has turned less fashionable in favour of cutting debt.

An agreement at the recent G20 Summit in Canada was for member countries – including Japan – to move towards reducing government debt and deficits whilst still promoting economic growth through government spending – a very difficult balancing act.

The Japanese government has already capped its spending and borrowing, and has set the ambitious goal of bringing their budget back into surplus by 2020.

So far Prime Minister Naoto Kan has provided few details on how he intends to do this. Some say he is setting the country up for a raise in consumption (GST) tax – something that could be politically unpopular but financially necessary.

Kan has also indicated he will slash corporate tax and tackle deflation to achieve economic growth of 2% a year.

Deflation is when the general price of goods and services goes down due to a lack of demand. Although this sounds great from a consumer point of view, deflation means shoppers hold off on spending because prices will be cheaper in the future.

This lack of demand and intense price competition means less revenue for businesses. They’re forced to lay off staff, which further decreases overall demand. In the end, the economy shrinks and the population suffers.

Like the budget deficit, Kan is yet to announce details on how he’s going to tackle deflation and ensure it doesn’t spiral out of control.

Nevertheless, although unemployment figures continue to nudge over the 5% mark – which is very high for Japan – its economy is still growing. This is largely driven by the country's very healthy export sector and huge trade surplus (more exports than imports).

Some say it is Japan’s trade surplus that will save it but others point to difficulties within this sector also.

Perhaps what Japan needs most is some stable leadership so people can regain confidence in both their government and country.

New Prime Minister Naoto Kan was recently given the position following the shock resignation of his former leader Yukio Hatoyama.

It was only nine months ago that Hatoyama led the Democratic Party of Japan (DPJ) to a historic landslide victory to end 50 years of right-wing rule in Japan.

Hatoyama had campaigned to shift the extremely unpopular American military base off Okinawa Island. But this proved to be an election promise he couldn’t keep with negotiations reportedly causing tension between the US and Japan.

Failure to meet the Okinawa election promise combined with questionable campaign donations from his millionaire heiress mother meant Hatoyama quickly became yet another Japanese Prime Ministerial statistic.

Naoto Kan – who is noted for being the son of a ‘salaryman’ and not a direct relative of an ex-prime minister like his four predecessors – faces a difficult task in leading the very traditional and bureaucratic Japan out of extreme debt.

And now that task has become slightly more difficult thanks to Sunday’s elections. Kan’s DPJ party lost their majority in Japans upper (less powerful) house of parliament – partly because of their tax increase proposals.

Debt, politics and an aging population are all contributing to a worrying situation for one of the world’s struggling superpowers.

By Lenska Papich

Photo – Japanese Prime Minister Naoto Kan