Is the government running out of options — or out of options already?

The political system is gearing up for a debate over the government's 15 trillion yen stimulus package that could decide the timing and the outcome of the next general election.

Kan Naoto has indicated that if the government is open to revising the plan, the DPJ will cooperate to smooth its passage. What choice does the DPJ have? Now that the LDP and the DPJ have swapped preferences regarding election timing — after years of demanding an immediate election, the DPJ has backed down due largely to Ozawa Ichiro's struggles, and the prime minister, enjoying what could be a temporary shift in his favor, is contemplating an election sooner rather than later — the DPJ has every reason to cooperate if it means depriving the government of an issue which it can use as justification for a snap election. Although there is some debate within the party about the right course of action, it seems likely that the DPJ will opt for this strategy, forcing Aso to decide whether he will live up to his oft-repeated commitment to putting policy and the resolution of the economic crisis before politics or whether he will opt to exploit what looks like a window of opportunity for a general election.

At the same time, the DPJ ought to engage in good-faith debate for reasons having nothing to do with its political standing. Given the amount of money the government is pledging to throw at Japan's crumbling economy, the leading opposition party and master of the upper house ought to be thoroughly reviewing the government's plan and questioning whether its components are intended to stimulate domestic demand or buy the votes of straying LDP constituencies (or throw money at the prime minister's hobby). The press coverage of the government's plan makes the mistake of treating it as wholly dedicated to fiscal countermeasures. As Ikeda Nobuo notes, emergency measures comprise 4.9 trillion yen, compared with 6.2 trillion yen for the government's "growth strategy." Ikeda, a libertarian economist, says that the growth strategy measures could be conceived as old-fashioned LDP pork-barrel spending, but they should also be understood as an effort to revive old-style MITI targeting — and which Ikeda rejects as inconsistent with the latest economics research and likely to do more harm than good. The DPJ ought to be raising questions about whether the government's spending plans have the slightest chance of nurturing new industries and reorganizing the Japanese economy. Hatoyama Yukio has already started on this line of argument, but the DPJ may have a hard time continuing in this vein given its own spending plans.

Nevertheless, there are plenty of questions about the government's proposal that can and should be asked. Looking at Prime Minister Aso's statement, about the stimulus package, a number of questions came to mind.

The prime minister himself said, the goal of the government's proposal is "to prevent the bottom from falling out of the economy," meaning that the government's emergency measures have less to do with stimulating consumption than with minimizing the hardship suffered by laborers and small- and medium-sized businesses. To that end, the government has pledged more subsidies for businesses that have retained employees and greater support for retraining for laidoff employees, and greater access to credit from public financial organizations for small- and medium-sized businesses. (Jun Okumura notes the importance of this measure here.) Additionally, Aso pledged greater support for working single mothers, higher child allowances, scholarships and tuition reductions for private school students, and some 310 billion yen in subsidies for rural medical institutions.

The third part is the portion criticized by Ikeda, the government's medium-term growth strategy. Central to this plan is environmental technology, and thus Aso called for spending to promote greater use of solar panels in schools, homes, and businesses and the development of electric cars. The government will also ease the burden on local authorities for public works projects (i.e., greater central government spending), will promote the construction of a Tokyo ring road, and raise the level of subsidies to localities. He also alluded to medium-term tax reform that includes a consumption tax increase, prompting Nakagawa Hidenao to criticize the prime minister sharply for speaking of a tax increase as the economic outlook worsens. (Yosano Kaoru acknowledged in a TV appearance Saturday that as the government debates fundamental tax reform it needs to set a new target for balancing the budget now that 2011 is out of the question.)

The first thing that stands out is just how much Aso has lowered his sights since January. Recall that in January Aso insisted that he would make Japan the first country to escape the crisis. No longer. Now his government is merely trying to stave off complete collapse. Aso appears to have lost much of the optimism that characterized his response to the crisis earlier this year.

The question is whether this will be too much, too late, whether the fate of the economy rests in non-Japanese hands, making the government's plan a gambit to buy time in the hope of economic recovery elsewhere. It's an expensive gambit, and the DPJ should be concerned. If the government's salesmanship works, the massive stimulus package might be enough to convince the public that the LDP is steady and reliable in troubled times and deserves to be returned to office. And if the latest stimulus package fails, it will have the unintended consequence of leaving a new DPJ government facing an economy in freefall with its options even more limited on account of the additional debt the government will issue to pay for the stimulus package (which suggests that despite Yosano's desire for progress in the direction of tax reform, the LDP has every reason to wait until after an election to commit to a course of action — why should the LDP commit itself to a politically fraught policy when it could be the DPJ's problem in a matter of months?).

The uncomfortable question raised by this debate is whether the Japanese government is wholly powerless in the face of the worsening economy. Monetary tools? Limited. Fiscal policy? How many more stimulus packages can the government pass while waiting for recovery, ensuring that future generations of Japanese will bear an ever greater burden of paying for the current government's restless impotence?


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