Not the Right Man to Lead Japan
To some, Yoshihiko Noda is turning out to be that rarest of things in Japan: a prime minister who makes the hard decisions.
Since assuming the job in September, Noda has taken aim at two big goals. One, restarting the nuclear reactors shut after last year’s deadly earthquake and tsunami. Two, doubling the consumption tax to 10 percent to pay down some of Japan’s mountainous debt, the highest among developed nations.
Japanese revere “gaman,” or fighting spirit. For years, they have been clamoring for a leader who would do what’s needed, never mind the political costs. Some pundits seem to think Noda is such a leader and are rallying around him. Yet that august status only applies when a leader does what’s right. To me, Noda’s policies do more to show how little Japan has changed.
Take Noda’s drive to end Japan’s nuclear freeze. When more than two-thirds of the people in a democracy of 126 million are against something, a leader might bother to listen. That’s how many Japanese want the reactors to remain offline. Noda ignored that increasingly vocal majority and cleared two reactors at Kansai Electric Power Co.’s Ohi nuclear plant to reopen.
What many observers see as bold leadership, I see as the handiwork of a leader beholden to Japan’s powerful utilities and bereft of fresh ideas. This judgment also applies to Noda’s push to raise taxes. It’s the easy and obvious thing to do, not something to inspire trust that Japan’s leaders are considering new and creative ways to manage the economy.
There is no doubt Japan needs to gain control over its fiscal policies. Its demographic trajectory is as ugly as they come, with the population aging rapidly and young couples having fewer babies. But raising the consumption tax is little more than a generational wealth transfer, from young to old. Japanese longevity is straining pension plans and the health-care system, increasing the risk of credit downgrades that would raise the cost of financing the nation’s deficit spending.
What if it turns out that higher taxes end up exacerbating the country’s debt burden, not helping to fix it? Japan, remember, tried this before. In the late 1990s, a similar measure short-circuited Japan’s post-bubble recovery. Fifteen years later, deflation is eating away at living standards while companies are moving more jobs to cheaper locales overseas.
A bigger tax bite is the last thing the Japanese economy needs right now, says Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG. “Growth-wise, it will have a downward impact,” he says.
Those considering a new car or home, an Okinawa vacation, or a mobile-phone upgrade might think twice, or not buy at all. Even if the economic hit were modest, Noda’s government has focused every waking moment on a step that will do nothing to restore Japan’s dynamism.
To his credit, Noda has had his moments of creativity. His government wisely plans to sell shares of Japan Tobacco Inc., Asia’s largest cigarette maker. The proceeds will be used to help pay for reconstruction in the part of northeast Japan that was devastated by the tsunami and a partial meltdown of a nuclear plant in Fukushima.
But raising taxes seems to be the centerpiece of Noda’s plan to take on a national debt equal to a staggering 208 percent of gross domestic product. He’s dreaming.
As Japan’s power vacuum masquerades as reform, the ranks of the fiscal bears are growing. Takeshi Fujimaki, former adviser to billionaire George Soros, thinks Japan may default by 2017. Fujimaki isn’t alone in worrying that the yen and the government bond market are enormous bubbles. Such concerns typically come from New York or London, not a major figure in Japanese finance. “With the gigantic debt Japan has accumulated, a thin needle, or even a gentle breeze may pop this,” he told Bloomberg News last week.
The demographic trajectory that led Noda to push for higher taxes worries investors, too. Japan’s debt will balloon to 246 percent of GDP by 2014, according to an International Monetary Fund forecast. Yet Japan’s 10-year bond yields are an impossibly low 0.81 percent.
With yields like that, it is pretty clear that investors holding Japanese bonds see a default as unthinkable. Surely, a nation in which more than 90 percent of public debt is held domestically can avoid going the route of Argentina and, potentially, Greece. But is this complacence justified?
Faith in those in power enabled Japan’s nuclear lobby to convince residents of one of the most seismically active nations anywhere that they needed 54 reactors. It is a remarkable paradox: The only nation attacked with atomic weapons, where the shadow of that holocaust still lingers, has made nuclear power the core of its energy grid.
The trust is ebbing and has been for years. The public doesn’t believe that Japan’s reactors are any safer today than they were before last year’s quake. If the day ever comes when they don’t believe Japan’s debt is safe, the fiscal damage might be irreparable. It’s hard to see how Noda is the man with the fighting spirit to make a difference.
(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)
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