FROM THE EDITOR

ECONOMY ON THE MEND The Japanese economy seems finally to have hit bottom and started to rebound. In the monthly report on the economy that it released on June 17, the government upgraded its assessment of overall economic conditions for the second month in a row. At a press conference that day, Economic and Fiscal Policy Minister Yosano Kaoru declared, "We can strongly surmise that the economy has hit bottom," though he cautioned, "Naturally downside risks exist; we must always manage economic and fiscal affairs with care."

The principal evidence for judging the economy to be on the mend is the improvement in production figures. The industrial production index for April jumped by 5.9% from March, the biggest monthly increase in 56 years. Consumer spending, which is the mainstay of domestic demand, has also been on an upswing since April, thanks in part to tax breaks for purchases of environment-friendly eco cars. Fujifilm has announced it will begin operating its new liquid crystal display film factory in Shizuoka Prefecture in early July, and Asahi Kasei’s domestic plant manufacturing ethylene, a basic material for plastics, has been operating at 90% of capacity since May, up from around 80% in April. Both these developments are in response to growing demand for consumer electronics in China. Meanwhile, Toyota has reported receiving more than 180,000 orders for its new model Prius hybrid car since its launch in May, and it has been unable to keep up with demand even after ramping production back up almost to full capacity.

The overall level of production, however, is still relatively low. At Toyota, for example, domestic production has been averaging about 11,000 vehicles a day since the start of June, up 30% from the March figure of 8,500 vehicles a day, but this is still only about 60% of the automaker’s production level in June last year. Manufacturers have a strong sense of excess capacity and are hesitant to invest in new plant and equipment. The pace of the contraction in machinery orders, which are a leading indicator of capital investment, actually accelerated in April. Many private-sector economists believe that over the near future production levels will probably recover only to about 80% of their earlier figures and that a full-fledged recovery will not get underway until the second half of 2010.

FAREWELL TO THE KOIZUMI REFORM DRIVE On June 23 the government’s Council on Economic and Fiscal Policy officially adopted this year’s basic policies on economic and fiscal reform. With this new set of policy guidelines the CEFP effectively declared an end to the reform drive initiated by Prime Minister Koizumi Jun’ichirô (2001–6). Under Koizumi the government adopted the target of achieving a surplus in the primary balance of both the central and local governments by fiscal 2011 (April 2011 to March 2012), a commitment that his successors’ administrations had maintained. (The primary balance is the general account balance excluding debt service and new borrowing.) But this year the CEFP adopted a revised set of targets. Japan’s total public debt has reached 168% of the country’s gross domestic product; the new goal is to stabilize this percentage by the middle of the 2010s and start lowering it steadily in the early 2020s. The fiscal 2011 primary balance target was abandoned.

The relaxation of the deficit-reduction goals is understandable as a response to the increase in government bond issues to fund emergency stimulus measures and the decrease in tax revenues resulting from the economic downturn. But the CEFP also caved in to pressure from ruling coalition legislators and abandoned the earlier policy of holding down social security expenditures, one of the key planks of the spending reform program the government had been pursuing since Koizumi’s time. During the latter part of the 1990s the government ran up huge deficits as it tried to deal with the prolonged economic slump. After Koizumi took office in 2001, he moved to rein in the deficits by having the newly established CEFP draw up what were nicknamed honebuto, or "thick-boned," guidelines for reform, which served as the framework for formulation of the budget, thereby bringing the budget process under the control of the prime minister’s executive office. But with this year’s honebuto policies, the CEFP has shown that it has lost its own backbone and can no longer play the role of fiscal disciplinarian.

ASÔ’S FADING STAR The main reason for the weakening of fiscal resolve is that a general election for the House of Representatives is approaching. Meanwhile, though, support for Prime Minister Asô Tarô started slipping again in May. On May 11 Ozawa Ichirô announced his resignation as president of the opposition Democratic Party of Japan, and on May 16 DPJ Secretary General Hatoyama Yukio was elected as his successor. In a nationwide survey conducted by the publishers of the daily Yomiuri Shimbun on May 16–17, just after Hatoyama’s election, support for the Asô cabinet stood at 30.0%, with 60.4% against it. But when the same paper conducted a similar survey four weeks later (June 13–14), the positive rating had slipped to 22.9%, while the negative figure rose to 67.8%. This represented a reversal of the trend that had prevailed since late March, when the indictment of a senior aide to Ozawa on charges of political funding irregularities cast a cloud over the DPJ, resulting in a gradual increase in support for Asô and his Liberal Democratic Party.

Asô’s ratings took a sharp downward turn after he accepted the resignation of Internal Affairs and Communications Minister Hatoyama Kunio on June 12. Hatoyama (who is the DPJ president’s younger brother) resigned in protest over the prime minister’s decision to accept the reappointment of Nishikawa Yoshifumi as president of Japan Post Holdings. (Hatoyama took issue with a number of decisions made by the postal entity, which is wholly owned by the government but has been turned into a business-style corporation as a step toward eventual privatization.) The June 13–14 Yomiuri poll showed some 65% of the respondents thought Asô’s dismissal of Hatoyama was needless, and 67% disagreed with the decision to keep Nishikawa at the helm of Japan Post. Also, as many as 70% expressed the view that the recent confusion in the government and ruling coalition on various matters (such as the sudden suggestion from the prime minister that the Ministry of Health, Labor, and Welfare should be split up and backtracking by the LDP on the move to stop nominating legislators’ offspring to succeed to their seats in the National Diet) reflected a lack of leadership by Asô.

The June 13–14 survey found 46% of respondents picking the DPJ’s Hatoyama over Asô as their favored candidate for prime minister (when asked to choose between the two) and just 26% picking Asô, compared to 44% for Hatoyama and 33% for Asô a week earlier. When asked which political party they supported, 29% named the DPJ and 25% the LDP, but when asked which party they intended to pick in the proportional-representation voting for the House of Representatives in the next election, 42% went for the DPJ, a considerably higher figure than the party’s share of supporters, while the LDP’s figure, at 25%, was no more than its share of declared supporters.

The trend away from the LDP toward the DPJ can also be seen in the results of recent local votes. DPJ-backed candidates have won mayoral elections in a string of major cities: Nagoya on April 26, Saitama on May 24, and Chiba on June 14 (where 31-year-old Kumagai Toshihito became Japan’s youngest city mayor). The DPJ’s candidate also came out ahead in the gubernatorial election in Shizuoka Prefecture on July 5. And the opposition now looks likely to win in the election for the Tokyo Metropolitan Assembly on July 12. Though we obviously do not yet know what the results will be, if the LDP loses again in this key contest, Asô’s hold on power is likely to become even shakier.

By the time this issue of Japan Echo reaches readers’ hands, the timing of the next general election will probably already have been decided. If current trends continue, there is a real possibility that the election will lead to a change of government.

One of the articles we have translated for this issue is a piece by Matsuzawa Shigefumi, governor of Kanagawa Prefecture, about the US military presence in Japan. I should note for the record that the governor does not speak for the government of Japan. (Shiraishi Takashi)

© 2009 Japan Echo Inc.