Prime Minister Naoto Kan’s weakened political clout has further deepened widespread concern over the country’s apparent inability to contain its swelling national debt and deliver urgently needed funding to the disaster-hit areas, economists said Thursday.
Earlier in the day, a no-confidence motion against Kan was rejected following his announcement that he will step down once the government has firmly established postquake reconstruction efforts and an end to the Fukushima nuclear crisis is in sight.
But Kan has lost significant sway within his own party, as many followers of Democratic Party of Japan heavyweight Ichiro Ozawa, Kan’s foe, supported the opposition attempt to oust him.
“The economic outlook is totally unclear,” said Yasuhide Yajima, senior economist at NLI Research Institute.
One of the challenges the country faces is its crushing national debt. Thursday’s political power struggle coincided with a key government committee’s release of a drastic tax and social welfare reform plan.
The plan calls for raising the consumption tax to 10 percent by fiscal 2015 to finance growing social welfare spending. The plan stands as Kan’s road map to recovering the country’s fiscal health.
Kan is one of the few fiscal hawks among the executives in the ruling DPJ. In contrast, Ozawa and his followers appear reluctant to raise the sales tax and have called for more government spending to prop up the economy.
Economists said credit ratings agencies are bound to slash Japan’s sovereign debt rating, given Kan’s plan to resign.
“It’s important to review taxes and social welfare to prevent the national deficit from going out of control,” said Hideo Kumano, senior economist at Dai-ichi Life Research Institute Inc.
But with the administration’s demise in sight, the plan drawn up by the committee is virtually meaningless, economists said.
Moody’s Investors Service said Tuesday it may downgrade Japan’s sovereign debt rating due to heightened concerns about faltering growth prospects and a weak policy response to the country’s mounting public debt.
In February, Moody’s cut its outlook for Japan’s Aa2 sovereign rating to negative from stable on fears that political gridlock would prevent the government from reducing the debt, which has already grown to about twice the size of the economy.
Standard & Poor’s downgraded its outlook on April 27 after cutting Japan’s long-term sovereign debt rating in January, also saying the government lacked a coherent plan to tackle its mounting debt.
Economists say the ongoing power struggle within the DPJ will hamper government efforts to reconstruct the disaster-hit Tohoku region.
The struggle within the DPJ may stall any deliberations on the second supplementary budget bill at the Diet, NLI’s Yajima noted.
“Politics is standing in the way when the country has to move forward with reconstruction (in the northeast), the country’s industrial recovery and fiscal debt problems.”
The lack of leadership could undermine the country’s business competitiveness when they have to manage a 15 percent power cut during the summer peak demand and go forward with the TPP.
Biz chiefs relieved
Japanese business leaders Thursday welcomed Prime Minister Naoto Kan’s weathering of a no-confidence motion, while urging the ruling and opposition parties to join hands in helping those affected by the March 11 calamity.
“A political vacuum has been avoided at a time when (the government) faces a host of issues, such as rehabilitation and reconstruction of quake-affected victims and areas, revising its growth strategy, and mapping out social security and tax reforms,” said Tadashi Okamura, chairman of the Japan Chamber of Commerce and Industry. “We strongly urge the ruling and opposition parties to deepen discussions with sincerity and act in concert to make utmost efforts to seek rehabilitation and reconstruction,” he said.
The no-confidence motion against Kan was voted down after Kan signaled his intention to quit once he makes tangible progress in bringing the nuclear crisis under control and in postdisaster rebuilding.