Paralysis

Today, the Japanese parliament will formally elect Yoshihito Noda prime minister. The new leader will be the sixth in five years. That fact alone indicates the depth of the malaise afflicting Japanese politics.

Noda was selected leader of the Democratic Party yesterday on the second round of voting after the front-runner won only a plurality in the first. The leader of the ruling Democratic Party assumes the post of prime minister. The Japanese people do not directly choose their leader. Selection is a process happening in smoky backrooms where the various factions composing the ruling party haggle and trade favors.

Naoto Kan resigned last week, acknowledging his failure to lead Japan out of economic stagnation. All the five possible successors considered by the ruling party held portfolios in Kan’s cabinet. None of them are considered as having the stature required to excite and animate Japanese society. All of them, according to analysts, are likely to fall into the same fate as Kan.

Like his predecessor, the new prime minister will preside over a government where the ruling party dominates the lower house but not the upper chamber. He will need to surmount factional differences within his own party and then seek the support of other parties. Then he will need to inspire his people in the wake of natural calamity and financial difficulty.

Japan’s economy is still reeling from the twin tragedies of a massive tsunami and damaged nuclear plants. Supply chains for the country’s major industrial exports have yet to be rebuilt. Reconstruction of devastated cities is still in its earliest stages. The yen appreciated sharply the past few months, undercutting the competitiveness of Japan’s exports. Japan’s workforce continues to age, putting the viability of its social security programs in serious doubt.

For two decades, the Japanese economy has been stagnant. Her industrial and electronic exports, once juggernauts in global trade, are challenged by cheaper and more innovative products from countries like South Korea, Taiwan and China.

For decades, Japan was the second largest economy in the world. China recently surpassed Japan for second place. If stagnation continues, Japan is likely to slide farther down the ladder.

Interest rates in Japan, hovering at close to zero, have been the lowest in the world. Notwithstanding, her domestic economy now suffers deflation. At present interest rate levels, there is no policy instrument in the toolbox to respond to that problem.

Deflation is a lot more painful than inflation. While inflation rewards the first one to spend, deflation rewards the last. Consequently, deflation discourages consumer activity: whatever it will be cheaper to buy it tomorrow instead of today. Deflation constricts domestic demand, deepening the stagnation.

Present levels of indebtedness prevent Tokyo from indulging in stimulus spending to shore up domestic demand. Not even the billions required for post-tsunami reconstruction will achieve a reversal of deflationary trends.

Japanese public indebtedness is the worst in the world. Public debt is now at about twice the country’s GDP. It is much worse than US indebtedness. Last week, reacting to the apparent inability of the Japanese government to deal with the problematic fiscal situation, credit rating agency Moody’s downgraded the country’s sovereign debt.

The only reason the scale and ratio of Japanese sovereign debt had not distressed the global market is that much of this debt is owed Japanese banks. That might be good news to the rest of the world, but not to the Japanese people. Holding so much government debt paper, Japan’s major banks run on doubtful assets. The system could implode and pull the rest of the economy down a financial sinkhole.

As it has been in Washington, every government in Tokyo simply kicked the can down the road, buying time instead of applying any real solution to the problem. Meanwhile, the debt problem goes beyond the realm of the manageable.

Given all these conditions, Japan needs forward-looking and bold leadership. The political system operating there, one controlled by deep-rooted factions and special interests, has not been able to provide the leadership the country needs. This is the reason why we see this revolving door of prime ministers.

What Japan needs is a leader with a clear mandate. What Japan gets, given its political system, is a leader produced by the shifting factional alliances. Every leader Japan got the past few years was one committed to the terms of factional alliances rather than the one who can look at the horizon and devise a comprehensive policy program.

Under these conditions, the new prime minister is doomed to be just like the past ones: a petty politician chosen by party kingpins. He will be good at kicking the can down the road. He will be ill-suited to leading the sort of policy revolution Japan needs desperately at this time.

When a poll was taken last week, asking Japanese citizens who they preferred for prime minister among the five contenders, Yoshihito Noda garnered just nine percent of the vote. The front-runner in the unofficial poll did not even make it to the shortlist when the ruling party began selecting its next leader.

Recall that when S&P downgraded US debt a few weeks ago, the credit rating agency cited the deteriorating capacity of the nation’s political institutions to deal with the fiscal problem. A fairly small band of conservative congressmen, acting entirely on ideological whim, managed to push the world’s largest economy to the brink of default.

When Moody’s downgraded Japan’s debt last week, there is no doubt the failure of the political system to provide the sort of heroic leadership the economy required was a major consideration.

We, too, should now critically examine the capacity of our political system to produce the heroic leadership the country needs.

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