Japan: LDP Implements Spending Measures Taking Country Into Deeper Debt Hole

One of the primary goals of the newly elected Liberal Democratic Party (LDP) government is to reverse Japan’s long-standing economic woes. However, given the scale of this problem, its unlikely Prime Minister Abe will be able to affect any long-term improvements prior to the July 2013 elections in the upper house of the Diet.

Therefore, in order to try and wrest control of the House of Councilors from their rival, the Democratic Party of Japan, the LDP is implementing economic measures that may result in some short-term growth. This by itself is not a bad idea since economic growth achieved for whatever reason can only be good for Japan. Unfortunately, the problem with the LDP’s plan is that its success depends on a number of variable and uncertain factors and, if these don’t play out exactly as how the government wants they will push the country down a deeper fiscal hole.

On the other hand, even if everything falls into place, Japan will still be left with a bigger fiscal gap. This is not a good option for a country whose debt is already 24 times its tax revenues as it will have to face these large deficits sometime and the unpleasantness of that meeting will be directly proportional to the size of these debts.

Regardless, the LDP government has announced a $200 billion stimulus package that is composed of infrastructure spending and disaster preparedness funds, and $117 billion in central government spending. Critics of this plan have, however, expressed concern that it won’t succeed since its focused on projects with no real economic value and duplicates previous government efforts.

The LDP’s second measure is to convince the Bank of Japan (BoJ) to implement a 2 percent inflation target, and the bank seems to have agreed to this recommendation. The hope here is that ending the ongoing declines in consumer prices will increase borrowing and boost revenues, but its based on two factors that are far from certain.  The first is that people will have the money to spend i.e. increased wages, while the second is that they will spend and not save that money.

If neither happens then the country will be left with higher prices and lowered consumption, and no growth. Unfortunately, there are already signs pointing to the failure of both policies. Firstly, Japan’s main business lobby has said that it won’t endorse pay raises leaving the government to consider giving tax breaks to companies that raise pay or expand hiring; this will further lower government revenue and increase the deficit. Secondly, increased spending remains uncertain as the BoJ has reported that saving rates among Japanese residents remain high, as of the end of September, 56 percent of household assets were in cash or bank deposits.

Japan’s exports also continue to suffer from the continuing global slowdown and its conflict with China. While other countries are growing (Philippines and Vietnam for example), their export markets aren’t as strong as those of developed countries or China, and this is why China is such an important market for Japan. Unfortunately, as both countries continue to argue over the the East China Sea islands, Japan’s exports to China are declining. This conflict does not look to end anytime soon as Japan recently its defense budget with the express aim of shoring up monitoring and defenses around these islands.

The bottom line is that, regardless of how the LDP fares in the 2013 elections, the future for the Japanese economy does not look bright. Indeed, given the underlying fuid assumptions in Tokyo’s recovery plans, it could be even worse.