While Prime Minister Naoto Kan’s Cabinet reshuffle was not radical, it sent out clear messages on some of the major economic and fiscal issues the new administration faces, including the promotion of a trans-Pacific free-trade pact and a hike in the consumption tax, economists said Friday.
“In terms of fiscal reconstruction, the appointments show the new Cabinet is more focused on the issue,” said Hideki Matsumura, senior economist at The Japan Research Institute. More specifically, the new Cabinet will seek to push for a hike in the sales tax, Matsumura said.
Such a view is backed up by Kan’s selection of two former finance ministers known as advocates of fiscal reconstruction — Kaoru Yosano, who has been appointed economic and fiscal policy minister, and Hirohisa Fujii, who was tapped for deputy chief Cabinet secretary.
Drastic tax reform is a pressing issue for the Democratic Party of Japan-led government, which has experienced difficulties drafting budgets amid tough fiscal restraints.
The fiscal situation is likely to remain dire in the near term, and the issuance of new bonds to finance the fiscal 2011 budget will top state revenue for the second straight year, providing the budget drafted last month by the government and related bills successfully clear the Diet.
“I think this situation is unusual, and fiscal management under these circumstances is really difficult. We must extract ourselves from this situation as soon as possible and take fiscal reconstruction steps,” said Finance Minister Yoshihiko Noda at the time the fiscal 2011 budget was disclosed. Noda retained his portfolio in the reshuffled Cabinet.
Government debt is projected to grow to ¥891 trillion by the end of March, representing about 184 percent of gross domestic product.
Mitsuru Saito, chief economist at Tokai Tokyo Securities Co., said Yosano will probably be tasked with the overall fiscal reconstruction project, while Fujii, a former Finance Ministry bureaucrat, is likely to work closely with the ministry to expedite policy goals.
But by relying to such an extent on the Finance Ministry, Kan appears to be concentrating considerable power in the hands of its bureaucrats, recalling Liberal Democratic Party-led administrations that were criticized for allowing mandarins to drive government policies, Saito pointed out.
Another key task for the new Cabinet is thought to be promotion of the U.S.-backed Trans-Pacific Partnership Agreement, a regional free-trade pact currently being negotiated by nine countries, including the U.S., Australia, Chile and Singapore.
Kan, who has said he wants to make 2011 the start of an era of Japanese free trade, intends to reach a decision on entering the TPP by June.
Kan appointed Banri Kaieda as his new trade minister, a firm believer in the benefits of Japan joining the TPP, replacing Akihiro Ohata, who adopted a more cautious stance toward the trade pact.
Matsumura of The Japan Research Institute said the new Cabinet’s economic and fiscal policy initiatives appear headed in the right direction, and Kan has made a wise decision to distance himself from the DPJ’s campaign pledges in the 2009 general election.
“The campaign manifesto was a hotchpotch of various policies lacking clear direction. But the DPJ won the election, so it was put in a position where it had to realize the pledges, which many party members now realize require review,” said Matsumura.
“I think the policy direction is correct,” he said. “The economic situation has changed, so priorities need to be re-evaluated.”
Meanwhile, Saito from Tokai Tokyo Securities said he has been deeply disappointed so far with the DPJ-led government, which has proved unable to cut wasteful spending as much as it promised, and does not have high hopes for the new Cabinet.
While promoting the TPP and fiscal reconstruction are the right steps, the DPJ is divided over these policies as many in the party claim there was no mention of a sales tax hike in the campaign platform and fear the TPP risks devastating the agriculture industry, Saito said.
“The move to promote these policies may be right, but it could prove a source of political instability,” he said.