Heizo Takenaka's Take on the DPJ's Economic Policies

Japan's finance minister yesterday highlighted growing desperation in the ruling Liberal Democratic party (LDP) by claiming a looming landslide victory for the opposition Democratic party of Japan in Sunday's general election could lead to "one-party dictatorship". Since the Democratic Party of Japan (DPJ) is expected to win the August 30 lower house elections by a wide margin and gain a majority in both the upper and lower houses of Japan's Diet, Japan watchers and investors are taking a much closer look at how a DPJ-run government would affect Japan's economy and financial markets.

One of the biggest concerns about the DPJ is their spending promises versus Japan's serious budgetary constraints going forward. Yukio Hatoyama, leader of the DPJ, says he’ll focus on economic policies to reinvigorate domestic demand should his party win the Aug. 30 lower house parliamentary elections. The DPJ’s platform includes a plan to lower gasoline taxes and cut the corporate tax rate for smaller companies to 11% from 18%, in addition to the promised expensive aid to families with children.

Heizo Takenaka was of course reformist LDP prime minister Junichiro Koizumi's go-to guy for financial and economic policy. Currently professor of economics at Keio University, he also has a web site called Policy Watch and a group of like minds that contribute to it. The site is aimed at providing informed debate about key policy agendas for Japan,

Excerpts from his recent interview with Barron's wannabe Nikkei Veritas are as follows;

- The DPJ's economic policies lack backing by macroeconomic thought. The party's election promises are void of growth strategies or (medium-term) fiscal-reconstruction goals.

- On the DPJ's main policy of creatin a monthly child-rearing allowance program,
he is doubtful that it would be possible to finance such a program, which would require enormous budget spending, or more than JPY5 trillion/year. Meanwhile, Japan's budget deficit on a cash-flow basis is projected to top JPY40 trillion yen for fiscal 2009.

- The DPJ says it will not hike the consumption tax for the next four years, but if a DPJ-led government seeks to reconstruct public finances with no growth strategy in place, it will eventually have no choice but to raise the consumption tax and/or other taxes. If the government were to try and plug the deficit hole only with consumption tax revenue and not reduce government spending, it would have to raise the consumption tax rate from 5% to 17%.

- There is absolutely no way the LDP, DPJ, or the Japanese economy itself, can avoid some kind of fallout if the status quo continues. Japan's politics and its economy are just not sustainable in their current forms.

(i.e., something has to give, be it the ruling party, the yen, the bond market, the stock market or a combination thereof).

According to the FT, "the DPJ is a mishmash of LDP defectors, socialists and technocrats. On the economy, it is promising lots of spending versus not too long ago pushing for fiscal rectitude, without demonstrating convincingly where the cash will come from. It has good instincts on making the bureaucracy more accountable, releasing pent-up consumer spending and addressing problems in the labour market. But some of its proposals smack of old-style LDP intervention and subsidies, aimed more at securing voter loyalty than economic efficiency."