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Japan's shrinking economy
New prime minister outlines plan to revive the world's second largest economy.
Last Modified: 22 Jun 2010 09:33 GMT
Japan was once the world's rising economic star, but it has descended into recession [EPA]

There is a certain efficiency in Japan that few countries in the world can boast. Everything works - vending machines, ATMs, traffic signals, telephone systems, internet providers. And anything that does break down is fixed very quickly.

The same cannot be said for its economy. Japan has been struggling for more than two decades since its miracle economic bubble burst.

The country was once seen as Asia's, if not the world's, rising star - perhaps in the same way that China is regarded now. But its astronomical ascent to become the world's second biggest economy is now only comparable to its spectacular descent into recession.

Many prime ministers later - there have been 14 of them since 1990 - the economy is still casting a gloomy pall over Tokyo's impressive skyline.

Inheriting economic woes

in depth

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  In video: Japan's giant economy in peril

The latest to inherit Japan's financial woes is Naoto Kan. He is the former finance minister and has made it his top priority to revive the economy.

Analysts say he has little choice. The country has public debt at around $9.5 trillion - twice the size of its GDP. That means that its deficit is double the economy. The only other country with a less palatable ratio is Zimbabwe.

Couple that with deflation and shrinking wages and the Japanese find themselves in a rather surreal situation. While their wages have dropped, so have the prices of goods and services. So it may not mean the immediate tightening of belts, but the result is a shrinking of the economy.

According to Horomichi Shirakawa, the chief Japan strategist for Credit Suisse, this should be of great concern to the government as a smaller economy will mean that Japan gets pushed further back on the world stage.

It is in imminent danger of losing its position as the world's second biggest economy to China.

Staving off crisis

Japan's new prime minister is the latest to inherit the country's economic woes [GETTY]

So just two weeks into his term, Kan has outlined his plans to revive Japan's economy.

They mainly consist of fiscal restructuring. He stunned listeners last week when he proposed doubling the five per cent consumer sales tax as an option to stave off a Greek-style financial crisis.

It was received with mixed feelings in Japan's upmarket Ginza shopping district. Reaction ranged from a gentleman in his mid-50s agreeing that it was the only way the government could start paring its mushrooming debt, to a 20-something woman saying that she would buy all her household appliances before the tax comes into effect.

Japan's consumer tax is lower than most developed nations but the debate over raising it has been a touchy one.

It was an idea floated by the previous Liberal Democrat government but never implemented.

The last time the consumer tax was raised was in 1997, back then it was bumped up from three to five per cent. A few months after that, the country plunged even deeper into recession, with some analysts suggesting it was triggered by the tax rise.

Conversely Kan's administration has signalled that the corporate tax rate could drop sharply. At 40 per cent it is among the highest among major economies.

Political courage?

Tomohiko Taniguchi is a political commentator and a professor at Keio University. He believes Kan is more strategic than his predecessor, Yukio Hatoyama, whose tenure in office only lasted eight months.

Taniguchi says Kan is aware that the current system is unsustainable without drastic spending cuts and tax adjustments and has shown political courage in making decisions that are likely to be unpopular.

There are concerns though that the latest fiscal offerings are nothing new and are just an extension of the ideas bandied around by previous governments.

According to Shirakawa, Japan's economy needs more than a shot in the arm, it needs a complete makeover - and one that will include aggressive industrial and social security reform.

Shirakawa says in the short term the changes may result in a spike in unemployment as companies in oversupply are gradually shut down and that old economy firms where demand is weak, like construction, will have to make way for new industries, like those related to medicine or tourism. But he does not think Kan and his government can stomach swallowing a bitter pill for the sake of long-term growth.

Kan will face his first political test in the July 11 parliamentary elections. In the long run, he will survive as prime minister only if he makes the public believe he can succeed where his predecessors have failed and fix Japan's broken economy.

Source:
Al Jazeera
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