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Japan launches national fiscal strategy to tackle huge national debt

Tuesday 13 July 2010 - by Andrew Naylor

Could Japan be the new Greece? Andrew Naylor analyses what the land of the rising sun is doing to reduce its debt burden.

New Japanese Prime Minister Naoto Kan has launched an ambitious national fiscal strategy to avoid a Greek-style debt crisis in the world’s second largest economy.

The roadmap promises to reform welfare provision, reign in public spending and reduce Japan’s traditional reliance on the sovereign bond market.
Japan’s fiscal crisis has occupied successive governments, who, like democracies the world over, find it difficult to cut public spending and raise taxes at the same time as maintaining electoral support.

In the 22nd elections to the House of Councillors on 11 July, the ruling Democratic Party of Japan lost 16 seats as it battled to implement a rise in the rate of consumption tax to help rebalance the books. Most of these seats were gained by the main opposition party, the Liberal Democratic Party, which won more seats than in the last election in 2007.

The fiscal crisis has had a profound effect on Japanese politics and was one of the factors leading to the resignation of the flamboyant Prime Minister, Yukio Hatoyama. His administration took office in September 2009 but has been beset with controversy about the state of public finances, the location of a US military base, and political party funding.


Politics in Japan got personal, with attention turning to Hatoyama’s choice of outlandish shirts and his wife’s claim to have been abducted by aliens.
Hatoyama was forced to resign at the beginning of June and it is the public finances debate which looks set to dominate his successor’s term in office.

On taking office, Kan told the National Diet of Japan: “Owing to a large number of expensive public works projects and tax cuts, chiefly in the 1990s, as well as the steep increase in social security costs as a result of our rapidly ageing society, the state of Japan’s public finances is now dire, being the worst of any developed country.”

He went on to describe the scale of Japan’s outstanding debt as “enormous”, warning it “will not vanish overnight”.


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