- The Washington Times - Thursday, April 29, 2010

ANALYSIS/OPINION:

Just as the Japanese economy is exhibiting signs of a recovery - the central bank says demand for loans is increasing, and exports are up four months in a row - its left-leaning government is putting the finishing touches on economic legislation that will turn back the reform clock, increase operating costs for business, and make it more difficult to hire and fire workers. It’s not just the current business environment the Democratic Party of Japan (DPJ) is compromising.

Breaking an important campaign promise, the DPJ trimmed this year’s budget for science and technology in favor of a plan to pour billions of dollars into programs the party says are intended to redistribute wealth and address a growing poverty problem. In October, the Labor Ministry disclosed that 20 million Japanese are living in poverty. The plan includes a child allowance, income subsidies to farmers, and reversing privatization of Japan’s sprawling postal system, which provides banking and insurance services in competition with the private sector.

While these programs address short-term issues with big political implications, they fail to address Japan’s long-term need to build a more competitive economy that creates value. Business has its own ideas on how best to approach that problem. They begin with addressing the country’s massive deficit, which has grown to 200 percent of GDP. Failure to meaningfully address the deficit limits government’s options for supporting recovery efforts with the result that the economy has underperformed for more than two decades.

Business leaders argue that raising the consumption tax sharply is the obviously meaningful way to address the deficit, a proposal supported by most economists. Unfortunately, that would require Prime Minister Yukio Hatoyama to break another campaign promise. So instead, it appears increasingly likely that his government will increase income-tax rates to late-1990s levels - up to 65 percent for income and local taxes combined - an obvious ploy to increase the responsibility of Japan’s most productive individuals to subsidize the one in six of their countrymen living in poverty.

Like its predecessor - the long-serving but stuffy Liberal Democratic Party (LDP), which the DPJ embarrassed in an historic landslide election just half a year ago - the DPJ has lost its appetite for bold decisions as its popularity has plummeted. A recent Asahi Shimbun poll showed support for Mr. Hatoyama’s Cabinet at just 25 percent, a drop of seven percentage points from last month, and an almost 50 percentage point drop since his government was inaugurated last September.

As a result, Mr. Hatoyama and his party mates are preoccupied with keeping their loose coalition of populist partners happy in the lead-up to upper-house elections in July. That effort is complicated by public grumbling within the coalition and the DPJ itself. A member of Mr. Hatoyama’s Cabinet - National Policy Minister Yoshito Sengoku - shocked the prime minister a week ago when he suggested that the government could call for elections in both houses in July if the prime minister steps down.

Mr. Hatoyama’s dwindling support is not just a result of his government’s reluctance to meaningfully address Japan’s chronic economic malaise. His inability to resolve a dispute over a new location for a U.S. Marine base - another campaign promise supported by coalition members - makes him appear weak and indecisive, a perspective enhanced during the nuclear summit in Washington two weeks ago when President Obama spent less than 10 minutes with Mr. Hatoyama.

In the Asahi Shimbun survey, 51 percent of respondents said the prime minister should step down if he doesn’t resolve the issue by a self-imposed May 31 deadline. He has already missed two earlier self-imposed deadlines. Mr. Hatoyama and his party have also been tarnished by purported campaign-finance violations. With the powerful financial sector incensed that his government is competing for deposits and borrowers, and business worried about global competitiveness as regulatory measures increase costs, the political heat on the prime minister will only intensify.

Instead of creating jobs, Mr. Hatoyama appears to be encouraging businesses to ship them offshore, and highly paid executives intent on avoiding hideously high taxes are likely to move with them. In the meantime, Japan’s whacked economy will continue to muddle along, the deficit will grow and poverty will expand. For a government that promised big change, the big - but not surprising - news is that there is none.

And soon Mr. Hatoyama will be gone as a result, along with Japan’s latest wobbly recovery.

Michael Alan Hamlin is managing director of TeamAsia, a Manila, Philippines-based business consultancy, and author of numerous books.

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