Japan’s New Prime Minister and Economic Reform

On September 24, Taro Aso, who became the leader of the Liberal Democratic Party (LDP) on September 22, was chosen to be the new Prime Minister of Japan, as expected.  As I argued in my blog on September 15, he is one of the strongest supporters for the expansionary fiscal policy including tax cuts.  He is most likely to roll back the economic reform to win popular support.  Indeed this is probably because Aso won a landslide victory on September 22 ballot for LDP leader.  Many LDP members found Aso’s populist stance gives the best chance for LDP to win the next House of Representatives election.

Aso himself says that his primary job (at least for now) is to win the election.  According to a Nikkei article:

”As I stand here now, I think this is the destiny of Taro Aso…And I think I will only be able to fulfill my destiny by winning the (general) election,” he told a plenary meeting of party lawmakers at LDP headquarters in Tokyo.

To win the election, Aso distances himself from a former Prime Minister Koizumi, who is now criticized for having pushed deregulation so much that the economy has become rather unstable and the income inequality has got worsened.

As I argued in a piece in the Wall Street Journal with Anil Kashyap a couple of weeks ago, this diagnosis that the current economic and social troubles in Japan stem from the Koizumi deregulation that introduced more competition is wrong.  The economic anxiety many Japanese people feel now is more a result of the weakness of the economic recovery in Japan even in the “expansionary” phase of the last several years.  What Japan needs is more reforms, not less.  Our Wall Street Journal points out some important economic reforms that Japan needs to complete to dispel the economic anxiety.

Thus, the new Prime Minister Aso is a bad news for the Japanese economy.  (Aso is also known as a big fan of manga.  Some people argued that his winning the prime minister position would make the manga, animation, and media related stocks to rally, but we have not seen that.)  The economic reforms will stall and the economy will suffer.

Would the Democratic Party of Japan (DPJ), which is the main opposition, do a better job?  If DPJ win the majority in the House of Representative (in addition to the House of Councilors where they already have the majority) and if the DPJ leader Ichiro Ozawa becomes the prime minister, can he lead the Japanese economy to true recovery? Unlikely, because Ozawa is at least as populist as Aso.  He led the DPJ to a victory in the last House of Councilors election by heavily criticizing economic reforms started by the Koizumi government, thereby attracting rural votes that used to constitute an essential support base for the LDP.  The prospect for the Japanese economy is not great.

One Response to "Japan’s New Prime Minister and Economic Reform"

  1. Guest   September 25, 2008 at 7:22 am

    In the PinesFor a perspective of national events from within the forests of central Japan.