Inheriting a mountain of problems from his predecessor’s administration, newly elected Prime Minister Naoto Kan appears to be clear about one thing: something must be done about the snowballing government debt and moribund economy.

“Japan’s economy will grow again if (policies follow) the right direction,” Kan told reporters Thursday at the Democratic Party of Japan headquarters to announce his bid for the party presidency. Kan was elected DPJ president and prime minister Friday.

“As for fiscal reconstruction, this is a very difficult issue. I won’t say it can be solved in a short time,” Kan said. “But at least I think I can change the previous system, that is, the quagmire where the government debts kept increasing endlessly.”

As deputy prime minister and finance minister in the Cabinet of his predecessor, Yukio Hatoyama, Kan stressed the importance of fiscal discipline to stem a government debt amounting to some 180 percent of the gross domestic product.

He has even hinted at a consumption tax hike, an option that has been anathema to previous prime ministers.

Speaking at the Foreign Correspondents’ Club of Japan on April 12, Kan said raising the consumption tax has been a taboo topic for every politician, even Junichiro Koizumi, one of the most popular prime ministers ever.

“It is not just the case in Japan. But politicians, whether they are in the ruling or opposition camps, (face the) trauma (of losing) an election if they speak about a tax hike,” Kan said.

But if the government spends the money wisely, he insisted, it should be possible to raise the tax without interrupting economic growth, and he ordered a team in the Finance Ministry to examine the possibility.

Kan has also said new Japanese government bond issues for the fiscal 2011 budget should be kept below this year’s ¥44.3 trillion.

Although the details are still unclear, he said Thursday a national economic growth strategy and fiscal discipline plan would be unveiled later this month.

Yet Kan has said he thinks it would be better to stimulate the demand side rather than the supply, citing the importance of job creation in such areas as nursing care for the elderly.

While stressing the need for fiscal discipline, Kan challenges the policies of Koizumi and his guru, Heizo Takenaka, saying their Western-style free competition and deregulation approach did not work.

Kan is also expected to go after deflation. As deputy prime minister, he was the one who declared last November that Japan was in a state of deflation, and the main culprit was a lack of liquidity.

“People and companies want to save money instead of purchasing and investing” in Japan, Kan said at a press conference on May 28.

He has pressured the Bank of Japan to adopt more aggressive monetary policies, and financial markets are watching to see if he will seek further monetary easing by the central bank.

The market is also focused on Kan’s currency stance, as he is known to favor a weaker yen.

During his inaugural press conference as finance minister, he made clear he did not favor an excessively strong yen. Since then, he has made similar remarks several times, saying he is echoing the voices of the Japanese business community.

While uncertainties remain regarding the new government’s economic and fiscal policies — a new finance minister has yet to be named — some economists say Kan so far seems to be on the right track.

Hideki Matsumura, senior economist at Japan Research Institute Ltd., said Kan will probably confront fiscal reconstruction and deflation issues harder than Hatoyama.

He said the Hatoyama Cabinet was persistent in trying to realize the party’s Lower House election campaign pledges, which resulted in drafting the massive 2010 fiscal budget with huge government debts.

“Rather than strictly following the election campaign pledges, Kan seems to be making remarks based on the realities. I don’t think his basic direction is wrong,” Matsumura said.

He added Kan’s vision remains unclear, but he is determined to fight deflation, which is the most pressing economic issue facing the nation.

“It’s like Japan’s economy has a huge hole, and if the hole is not fixed, (the economy) will be stuck no matter how much domestic demand is stimulated,” he said.

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