Since Prime Minister Shinzo Abe’s Liberal Democratic Party suffered a crushing defeat in the Upper House election, it is all the more important for the government to work out a credible economic policy. As Japan’s population grays and decreases at the same time, it will be essential to enhance efficiency in administration and finance and to set policy priorities.

Mr. Abe has made clear that his basic approach in compiling the fiscal 2008 budget is to pursue sustained economic growth and spending cuts. Yet the 2007 basic policy for economic and financial reform, adopted in June, includes one measure after another that would increase spending, including those to accelerate economic growth, aid local economies and small- to medium-size enterprises, and improve the environment.

Implementation of these measures will lead to further deterioration of the nation’s financial situation and make it difficult to achieve the 2006 basic policy goal for economic and financial reform adopted last year, which calls for putting the primary balance of the national budget in the black in fiscal 2011.

Mr. Abe’s election platform called for drastic reform of the tax structure, including consumption tax, by the end of fiscal 2007. This means a possible raise in the consumption tax. He faces an important test in deciding whether to carry out tax reform.

The opposition Democratic Party of Japan emphasizes rectifying the gaps between the rich and the poor, and between the urban and rural areas. It proposes a ¥26,000 monthly allowance for each child from birth through their graduation from middle school and subsidies to farmers that make up the difference between production costs of main crops and their market prices, among other things. It is aimed at securing the necessary ¥15.3 trillion through such means as administrative and financial reform and the abolition of corporations with a semi-governmental status.

Increased spending for pension and social welfare such as health and nursing care is inevitable. Both the ruling and opposition camps must consider how to obtain sources of revenue to cover costs and must avoid wishful thinking.

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