July 30, 2009 / 11:35 AM / 10 years ago

Japan opposition remedy not enough to cure economy

TOKYO (Reuters) - Plans by Japan’s opposition party to expand domestic demand by raising household income will not be enough to yield sustainable growth in the world’s No. 2 economy, but will give a short-term boost to the recession-hit country.

The Democratic Party of Japan (DPJ), which has a good shot at winning an August 30 election, wants to put more spending money in the hands of consumers by providing child allowances, eliminating highway tolls and making fuel cheaper — marking a shift away from the long-ruling party’s stress on steps to help companies.

“As they plan to basically throw money at households, there is no doubt that consumption will be supported in the near term,” said Takuji Aida, senior economist at UBS Securities.

“But I cannot see how their plans can boost Japan’s long-term potential growth,” he added. “The more important thing is to implement growth strategies, which should also include how to revitalize corporate activity.”

Bolder plans for deregulation in sectors such as health care and agriculture and steps to help venture capital and environmental technology businesses were needed to supplement the party’s consumer-focused strategy, analysts said.

The Democrats also need to deliver a more credible plan to finance their policy proposals to convince wary consumers that benefits from payouts and tax cuts will last, they added.

Polls show the Democratic Party has its best ever chance of ending more than half a century of almost unbroken rule by Prime Minister Taro Aso’s Liberal Democratic Party (LDP).

In its campaign platform, the opposition party vowed to pay 26,000 yen ($275) per month per child to families, scrap expensive highway tolls and abolish a surcharge on gasoline and other car-related taxes to achieve 2.5 trillion yen in tax cuts.

The Democrats’ steps will likely boost consumption and underpin a recovery from Japan’s worst recession in 60 years.

Hiromichi Shirakawa, chief economist at Credit Suisse, said in a report the Democrats’ economic steps could push up Japan’s growth rate by 0.5-0.6 percentage points in the fiscal year from April 2010. A recent Reuters poll showed economists expected Japan’s economy to grow 0.7 percent in fiscal 2010/11.

SUCCESS ELUSIVE

Japan has struggled since the mid-1980s to shift its growth model to one based on stronger consumption at home to lessen the impact of global economic swings, but success has proved elusive.

Even when Japan enjoyed its longest post-war economic growth period between 2002 and 2007, firms were busy boosting profits and paying dividends rather than increasing employee wages, vital to raise spending power.

The Democrats want to address that failure, but economists say they are too fuzzy about how to spur new growth sectors and boost corporate productivity with tax breaks and deregulation.

Average disposable household income has fallen nearly 20 percent in the past decade and stood at 4.43 million yen ($46,940) in 2008.

Economists say the Democrats’ steps will boost consumption since many beneficiaries would be lower income households, which have a higher propensity to spend in a country where saving rates have dropped in recent years.

Goldman Sachs expects Japan’s savings rate to be 1.4 percent next year, down sharply from around 20 percent in the early 1990s.

Hideo Kumano, chief economist at Dai-ichi Life Research Institute, said he was skeptical about the effectiveness of payouts and de facto tax cuts for households, saying boosting corporate profits and productivity was a more sustainable path to raising disposable income as long as wages also rose.

Whether the ruling LDP can do any better is unclear.

Although it has criticized the opposition platform as spendthrift, the LDP is set to imitate the DPJ’s idea of boosting disposal household income to spur growth in plans to be unveiled on Friday, Japanese media said.

To support business activity, the opposition manifesto promises to lower the corporate tax rate for smaller firms to 11 percent from 18 percent.

The party has also advocated plans to promote new industries and green technology as well as deregulation in a 49-page policy document, but left most details out of its formal campaign pledges, causing some economists to wonder how serious they are.

The Democrats also want to raise the minimum wage, now 700 yen on average, to 800 yen in the short term and 1,000 yen eventually, reflecting their emphasis on workers over companies.

Analysts also say the Democrats need to deliver a more credible plan to finance their policies to convince consumers that future tax hikes won’t rob them of present benefits.

Democratic Party policy makers argue the LDP can hardly point fingers after inflating public debt to nearly 170 percent of GDP and backtracking on government fiscal reform targets.

While the ruling party admits the sales tax must be raised from five percent, it says the step will be taken after 2011 — if the economy recovers. The Democrats have pledged not to raise the sales tax for the next four years.

But many analysts are skeptical of the Democrats pledges to fund their policies through such steps as cutting waste.

Consumers also need assurances the party’s pension and social welfare plans will address worries about a fast-aging society.

“The most important thing is whether the Democrats can paint a vision that will ease worries about Japan’s uncertain future,” said Hisashi Yamada, head of Japan Research Institute’s business strategy research center.

($1=94.38 Yen)

Editing by Dean Yates

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