Don't let manifesto vows trigger economic slump
If the government led by the Democratic Party of Japan sticks doggedly to fulfilling the pledges it made ahead of the latest House of Representatives election, and these efforts force the economy into a slowdown, the government will have put the cart before the horse.
The nation's economy has just recorded positive growth, but in our opinion this is a result of economic measures taken by the previous administration and the recovery of external demand, and the economy has been only temporarily boosted. The deflationary trend, in which falling prices cause economic stagnation, has become serious.
Nevertheless, the Cabinet led by Prime Minister Yukio Hatoyama has frozen projects worth about 3 trillion yen in the supplementary budget for fiscal 2009 and also plans to cut in the fiscal 2010 budget public works and other projects that could be expected to have an immediate effect as economic stimulus measures.
Scrap nonurgent policies
The government's approach is aimed at securing financial resources for eye-catching policies in the DPJ's manifesto for the general election, but we fear the government's stance could accelerate the cooling down of regional economies.
To avoid a manifesto-induced economic downturn, the government needs to change the principle governing its policy choices from keeping the promises it made in its manifesto to coming up with measures to improve the economy. This entails a drastic review of its stated policies.
The biggest problem is that the Hatoyama Cabinet is going ahead with the dole-out policies pledged in its manifesto without having formulated a growth strategy to realize a full-scale recovery of the nation's economy.
A huge drop in tax revenue is unavoidable due to the rapid worsening of the economy that began last year. We urge the government to make the tough policy decisions necessary to bring the economy back on a recovery track, by using its limited financial resources effectively, and at the same time prevent the nation's finances from further worsening.
However, in ministries' budget requests for fiscal 2010, the government included key policies pledged in the DPJ manifesto and left their budgets almost untouched.
These marquee policies include 2.3 trillion yen for a child-rearing allowance, 600 billion yen for making expressways toll-free and 500 billion yen for making public high school education free. If the 2.5 trillion yen revenue shortfall that will result from the scrapping of the provisionally higher gasoline tax rate is added to these figures, it is clear that a huge amount of financial resources--about 7 trillion yen--will be needed to implement the pillars of the DPJ's manifesto.
If the government insists on implementing these policies, it will be impossible for it to keep a ceiling on the fiscal 2010 budget. Hatoyama has said he will try not to issue more than 44 trillion yen worth of government bonds next fiscal year, but it seems that his administration will be unable to avoid issuing a huge amount of government bonds.
When a nation's finances are in dire straits, the prices of government bonds tumble and long-term interest rates jump, which has a negative influence to the economy and aggravates the financial situation because of the increase in the cost of debt servicing. To avoid such a situation, the government should drop nonessential election pledges.
We hope the government and the Bank of Japan will take concerted actions, such as an effort by the central bank to increase its purchases of government bonds and hold down interest rates.
Of course, to restore market trust in the nation's finances, it is indispensable for the government to show its determination to pursue fiscal reconstruction, such as by raising the consumption tax after the economy recovers to secure a stable financial resource.
Growth could easily stall
The political task to which the government must give top priority is realizing a full-scale economic recovery.
The Cabinet Office announced Monday that the nation's gross domestic product for the July-September quarter rose 1.2 percent from the previous quarter, marking an expansion for two straight quarters. Consumer spending and exports grew, while capital investment finally turned upward.
Though the economic downturn appears to have come to a halt, it may be too early to judge that the recent growth will be self-sustaining, and that the economy is on a full-fledged expansion track.
First of all, the economic recovery is mainly a result of the government's economic stimulus package and lacks a broad base. In the area of consumer spending, sales of vehicles and flat-screen TVs have certainly been brisk, thanks to government subsidies for eco-friendly cars and the so-called eco-point system designed to boost the purchase of electrical appliances. But sales of other products are slumping.
Winter bonuses are certain to be significantly reduced, and there are fears that deteriorating employment conditions may once again hit consumption.
The latest GDP figure, which shows significant economic growth, may not appear quite right to many people. GDP measured in nominal terms, which more accurately reflects household and corporate sentiment, is experiencing negative growth due to declining consumer prices. Deflation is chilling household and corporate sentiment. Not a few observers believe, therefore, that the nation's economic growth will slow down in the first half of next year and will probably show negative growth under certain circumstances.
Economy must come first
Under these conditions, what bothers us is the fact that public works projects, which have supported an economy that has been deteriorating since last year, declined in the July-September quarter from the previous quarter for the first time in five quarters.
According to the Cabinet Office's October "economy watchers survey," which polls those working in industries that are highly sensitive to economic conditions, respondents in construction-related businesses in rural areas said the number of public works projects had dwindled significantly.
Under the principle of spending more taxpayers' money on projects closely related to people's lives, rather than on building concrete structures, touted in the DPJ's election slogan of "From concrete to people," the Hatoyama administration is slashing public works projects and shifting its political focus to the direct provision of public funds to the people in the field of welfare, among others.
It is certainly necessary for the government to review the practice of building unnecessary public facilities and relying on public works projects to prop up regional economies. But if the government fails to pay consideration to regional economies hard hit by the recession, they may be dealt a fatal blow.
Given the current serious employment situation, some argued that the child benefits likely will be saved rather than spent if it is distributed across the board, with no relation to household income. If the program is funded by cutting other programs' budgets, the political effects will cancel each other out.
Rather than spending more than 2 trillion yen on the child allowance program, extending the government subsidy program for eco-friendly cars and others, which had a measurable effect in the GDP statistics, might be able to more effectively stimulate consumption using less budget funds. The government must not waste a large amount of budget on projects that have limited economic effects.
(From The Yomiuri Shimbun, Nov. 17, 2009)