Swift Kick for a Sleepy Japan

Japan has the world’s second-largest economy, but it couldn’t get a decent rate on a mortgage these days. One international credit rating agency has downgraded Japan a notch, and another is reportedly reviewing the country’s credit-worthiness. This is a clear vote of no confidence by investors in the new leadership in Tokyo and its ability to tackle Japan’s economic problems. Pressure from leaders attending the Group of 8 summit of rich countries and Russia in Okinawa July 21-23 would help nudge Japan in the right direction.

Last month’s parliamentary election left the ruling Liberal Democratic Party with a weak mandate to govern. Prime Minister Yoshiro Mori is hugely unpopular. In a poll taken just after the election, two-thirds of those asked said they wanted him out of office. That will not make Mori’s job any easier.

When talking about tackling Japan’s slow-motion economy, Mori promises more of the same thing: pumping more taxpayer money into public projects. The return to pork-barrel spending--benefiting mostly farmers and small construction firms, traditional LDP constituencies--is what worries investors. Japan’s budget deficit is expected to hit 10% of gross domestic product in this fiscal year. Accumulated over the last decade, the combined debt of the central and local governments will exceed $6 trillion, or 130% of gross domestic product. By comparison, U.S. accumulated debt is less than 60% of GDP and shrinking.

A policy agreement between the LDP and its two coalition partners calls for vigorous pursuit of structural reforms to promote growth. Yet Mori himself says this is not the time for radical changes; to underscore this point, he reappointed the same key people to a new Cabinet that he formed last week.

True, Japan today is not the economic basket case it was through much of the 1990s. The GDP grew a small 0.5% last fiscal year and is expected to do better this year. The growth of information technology is giving rise to a new class of entrepreneurs, and start-up companies are beginning to put competitive pressure on corporate Japan. The almighty bureaucrats are losing some of their grip as more companies open to foreign investors and refuse to bow to the powers of government ministries. The electoral success of the opposition Democratic Party of Japan poses a real challenge to the LDP, which has governed for most of the last 45 years.

But the government must restrain its spendthrift stimulus policies if it doesn’t want the economy crushed by public debt. It cannot continue to bail out unprofitable companies. Using $1.9 billion in public money to rescue Sogo, the heavily indebted department store chain, raised objections even within the LDP and clearly shows that popular support for the government’s economic policies is waning. Changes won’t come quickly to Japan, but a prod from key economic partners for greater opening of its sheltered economy to outsiders would help pull the country out of its doldrums.