Responding to the criticism that the Hatoyama Cabinet lacks a growth strategy, the government on Dec. 30 unveiled the basic policy of its new strategy for economic growth titled “For a Shining Japan.”

The government intends to achieve “economic growth driven by demand expansion” based on the idea of “the economy for people,” overcoming heavy reliance on public works projects and market fundamentalism as pursued in the era of the Liberal Democratic Party administration.

The new strategy aims to attain annual growth rates of 3 percent in nominal terms and 2 percent in real terms respectively through fiscal 2020, raise nominal gross domestic product from an estimated ¥473 trillion in fiscal 2009 to about ¥650 trillion in fiscal 2020 and bring the unemployment rate down to around 3 percent.

The government focuses on reinforcement of the environment- and energy-related industries and the enhancement of the health care sector, including medical and nursing services, as key strategic areas in which Japan can exert strength, and sets its eyes on the expansion of the Asian economy and regional vitalization embracing tourism, agriculture and forestry as frontier development areas.

As the platform for backing up the envisioned growth, it attaches significance to the promotion of science and technology, the expansion of employment and the utilization of human resources.

The government plans to finalize its new growth strategy by around June. After a glance through the unveiled content of the new strategy, questions arise now about the following six points: (1) It is necessary to ensure sustainable growth by balancing the public and private sectors. There is no objection to the administration of the Democratic Party of Japan aspiring to encourage household-oriented growth. But the vitalization of the corporate sector is indispensable for achieving that objective. Households’ urge to save money stems from their worries about future employment, income and living. Trying to increase household spending without resolving these problems would cause the government to bear too heavy a burden.

The basic strategy policy expects the green revolution to play a leading role in achieving the envisioned growth, but a sea change in the industrial system is needed and policy support on a considerable scale is indispensable for that purpose. It pins hopes on the participation of private enterprise in such fields as medical services, nursing care and health services, but a lot of efforts will be needed to enable these fields to stand on their own and achieve adequate income effect.

The promotion of tourism, the raising of food self-sufficiency, the expansion of farm exports and the upgrading of wood self-sufficiency would be difficult to realize without financial support. (2) It is necessary to make clear the government’s vision of its welfare policy measures. As the decline and aging of the country’s population go on, the success of the growth strategy will depend on what kind of welfare policies are worked out and how they are executed.

For the time being, the welfare policies of the DPJ are generally taken as oriented toward high benefits and low costs, but such policies are unsustainable. (3) The importance of the exports sector needs to be given due consideration. The Japanese economy has changed its course recently in the direction of positive growth, and the principal contributing factor has been the increase of exports to countries such as China. Given the supply-demand gap amounting to ¥40 trillion, the importance of exports cannot be underestimated. Japan’s reliance on exports was 17.4 percent in 2008, which is lower than the world’s overall rate of 31.9 percent. So there is further room for expansion of exports.

The announced basic policy calls for doubling the flows of people, goods and money by helping the other Asian economies double their income. Consequently, the government should clearly state the significance of exports. In view of the recent intensifying international competition for export orders, it is necessary to step up cooperation between the public and private sectors. (4) The government needs to present measures to vitalize business enterprises. The corporate sector contributes to expansion of demand through consumption and investment. Enterprises help expand the market by providing new products and have the power to realize productivity growth that can make up for the decline of the workforce population. If the aim is to achieve growth led by consumption demand, it is necessary to raise household income and it is essential for business enterprises to have adequate capacity to pay wages.

However, there are concerns that the environment for business enterprises is being addressed in a disadvantageous way under the policy of the DPJ administration. Its policy regarding the utilization of market functions is unclear, and the reform of the corporate tax system cannot be expected. The manufacturing industry will likely be treated unfavorably in the revision of the controversial temporary dispatched worker system, and the government’s greenhouse gas emission reduction target is set at a level more severe than in other countries. If this situation persists, enterprises will accelerate moving overseas in anticipation of a worsening investment environment. (5) It is necessary for the government to unveil clear prospects for the nation’s financial rehabilitation. In the government’s national budget plan for fiscal 2010, the bond issuance amounts to ¥44 trillion, far exceeding tax revenue. The balance of outstanding central and local government debts at the end of 2009 was estimated at 189 percent of GDP, which is worse than the corresponding rates in Greece, now said to be in a financial crisis, as well as in other advanced countries.

So, the rating of Japanese national bonds tends to be lowered.

Prime Minister Yukio Hatoyama has clearly stated that the government will not raise the consumption tax for the time being, but other countries’ confidence in the Japanese economy may weaken unless a clear financial reconstruction plan is shown. (6) The government should make clear specific steps regarding other major specific policies. The basic policy plans to create by 2020 new markets in the environment- and energy-related fields worth more than ¥50 trillion and new employment of 1.4 million people and new markets in the health sector, including medical and nursing care services, worth around ¥45 trillion and new jobs for about 2.8 million people.

Furthermore, it expects to reduce part-time job hoppers by half and eliminate the disproportionate female workforce composition called the M Curve in Japan, where working women in their late-20s tend to quit jobs to raise children, and then choose to work again in their late-30s and mid-40s, mostly as part-timers.

To sum up, the basic policy is short on the systematization of total optimization and the specifics of policy enforcement. While political and economic environs are severe at home and abroad, the scope for policy choices is narrow.

The question is whether the Hatoyama Cabinet can put the Japanese economy on the right path for growth. For this reason, its governing ability and policy capacity are being seriously tested.

Shinji Fukukawa, formerly vice minister of the Ministry of International Trade and Industry (now the Ministry of Economy, Trade and Industry) and president of Dentsu Research Institute, is currently chairman of the Machine Industry Memorial Foundation.

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