Japan Economy Ends Year on Low Note

Reviewed by Hitoshi URABE

Article:
Japan Economy Ends Year on Low Note
- weak consumer spending might spoil 2007
(Hans Greimel, AP) CanadaEast
http://www.canadaeast.com/ce2/docroot/article.php?articleID=82350

Comments:

The keyword in Mr Abe's policy speech upon acceding to the position of the Prime Minister was "a beautiful country, Japan." And to explain this in more practical terms, he first referred to economy by saying, "sustained and stable economic growth is indispensable for Japan to prosper as a beautiful country." Indeed, initial comments by government watchers said Mr Abe is placing more emphasis on strong economy compared to the policies of the previous Prime Minister, Mr Koizumi, whose keyword had always been the "reform."

Mr Abe has been lucky so far in leading the country in the environment where Japan is experiencing an unprecedented length of continued economic growth. This, combined with Mr Abe's youth, had seemed to create a bright mood among the people. In a more realistic note, it made it easier for the Cabinet to draw up next year's budget starting in April. This was possible because tax revenue was expected to increase, which allowed for increased spending to satisfy many (politically) powerful sectors.

Critics, however, are not necessarily satisfied with the budget plan. They say it has not cast off the tradition of make-everyone-happy policy, a method of attempting to answer every demand, then shave them universally to fit the total, by thus avoiding to create strong oppositions but unfulfilling the real needs. Some go so far as to say this is (another) sign of Mr Abe's lack of leadership.

Others say that while it is expanding, the economy is still fragile. They focus on the fact that consumer demand is still low, and until the household spending picks up, lax economic policy should be maintained.

The fact that the policy board of the Bank of Japan decided at its meeting on December 19 to leave interest rates unchanged at 0.25% is another indication that there are still concerns looming among the professionals. Mr Abe apparently shares the concern. He has often cited his wishes - to the extent not to be accused of infringing the independence of the central bank - for the interest rate to be kept low.

While governments always tend to opt for lower interest rates in the aim to boost up the economy, critics point to two realistic factors Mr Abe is considering.

One is the election of the Upper House coming up in summer. Half of the seats , occupied by members who will have served the six-year term, are to be assigned at the election. Because of the surge of popularity for Mr Koizumi six years ago, the ruling LDP enjoyed an astounding level of victory then, which, many feel, would not recur next year. Mr Abe, as the leader of the LDP, is already destined to fight a steep uphill battle. He would obviously want to confine the damage, if unavoidable, to the minimum so that he himself would not be blamed responsible for the loss. One of the tactics he chose, as some point out, was to sustain popularity by revving up the economy.

Another is related to the level of public debt. Merely "related" because there seems to be not much of argument in Japan against the still increasing level of public debt itself already at 767 trillion yen ($6.55 trillion) or well over 170% of GDP. In fact, contrary to the general assessment by the international community such as the OECD, there are quite a number of economists in Japan who claim the level of debt is fundamentally of no concern.

That said, Mr Abe's worry is that if the rates were to be raised, it would make the cost of borrowing more expensive, i.e. more money is necessary to pay the interest on the debt, squeezing the budget allocable to more constructive causes.

In other words, while sustained economic growth is desirable, a real boom - leading to an interest rate hike - is not welcome. Besides, no one wants to go through that rough bubble and the collapse of it in the 90s again. Managing Japan's economy in 2007, among a horde of other things, shall be a true challenge for Mr Abe and his team.