New leader must climb old mountain of debt

Tim Kelly: Prime ministers in Japan rarely survive more than 12 months in office. In which case the clock is ticking for Naoto Kan as he tries to prevent a financial tsunami.

The Japanese prime minister Naoto Kan has promised to tackle debt.
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Naoto Kan, 63, is the latest prime minister to take a turn in the revolving door of Japanese politics after his deeply unpopular predecessor, Yukio Hatoyama, quit the post after less than 10 months in power. The quicker than anticipated handover is a chance for Japan to end a spending spree that is pushing the industrialised world's most indebted nation closer to insolvency.

The scale of Japan's overspending is immense. Dwindling tax revenue and costly election promises resulted in Mr Hatoyama this year committing his administration to borrow about US$500 billion (Dh1.83 trillion) to pay for his plans. The lending is equal in value to one-and-a-half times the Greek economy. Japan's national debt, at near double GDP, amounts to more than $70,000 for every one of its citizens. Measured in ¥10,000 (Dh400.75) notes laid end-to-end, it would stretch to and from the moon at least 20 times.

The tighter stance on debt adopted by Mr Kan, therefore, is a relief. He is promising a timetable to cut borrowing and, unlike the spendthrift Mr Hatoyama, recognises that raising the nation's 5 per cent sales, or value-added, tax is inevitable. He also seems ready to halt plans to double a $140-a-month child benefit implemented by Mr Hatoyama's government at an annual cost of $22bn. Japanese voters seem happy with the change in policy. In a poll published yesterday by the Asahi Shimbun, the nation's second-biggest daily newspaper, 43 per cent of respondents said they would support Mr Kan's Democratic Party of Japan (DPJ) in elections to pick lower house politicians on July 11. That support level compared with only 18 per cent who said they were ready to vote for the ruling party just before Mr Hatoyama quit.

Yet it would be a mistake to confuse Mr Kan for a fiscal conservative. He may seem a belt tightener compared with Mr Hatoyama, but he is not the spending hawk Japan needs. So far, Mr Kan's modest proposal is to keep new borrowing under the record $500bn planned this year. Instead, he should reinstate a $330bn cap on new government bond issues imposed in 2001 by Junichiro Koizumi, the last prime minister to remain in office for more than a year. To do so would probably mean having to cut Mr Hatoyama's child allowance altogether. Neither could Mr Kan be timid about increasing Japan's sales tax. Each percentage point would add an estimated $28bn to state coffers and doubling the rate to 10 per cent or even tripling it to 15 per cent would go a long way in helping Japan to balance its books.

But no matter how bold Mr Kan wants to be, his party may not be as willing to embrace austerity. Mr Hatoyama resigned from government, but remains an influential member of the DPJ, a group he helped found. Mr Kan's choice of ministers, largely unchanged from Mr Hatoyama's cabinet, also suggests continuity rather than change. Mr Kan has been head of the DPJ twice before, which means he is unlikely to bring many new ideas to the leadership post. He last resigned in 2004 over missed state pension contributions, shaved his head, donned Buddhist robes and set out on a pilgrimage to temples in western Japan.

So, Mr Kan may take his time tackling Japan's debt. The Asian economy's $15tn household asset cushion, after all, means most Japanese government debt is absorbed at home, letting it slip longer and deeper in debt than any European nation could. Yet, if Mr Kan does not act now, in five or 10 years the possibility of Japan's sovereign bankruptcy may not seem so far fetched. The crisis that engulfed Greece threw the EU into panic, wiped billions of dollars off stock values and raised a question mark over the global economic recovery. Any crisis of confidence over Japan's ability to pay back its loans would rip through global markets like a tsunami - a legacy Mr Kan or any other Japanese prime minister will want to avoid.