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Fukuda’s new cabinet under economic fire from all sides

With a brand-spanking new Cabinet that is supposed to take economic issues by the horns, it’s not a good sign that the Cabinet Office seems set to drop the word ‘recovery’ from its upcoming August economic report, though that move has been anticipated. Has the economy peaked? According to the Nikkei, “Even if Japan has fallen into a recession, the Cabinet Office would need at least a year or so to collect enough data to officially determine when the economy peaked.” Still, some optimism is seen in the fact that inventories are low and demand from developing nations could hopefully lessen the damage caused by a serious downturn in US import spending.

As Prime Minister Yasuo Fukuda has directed new Economic and Fiscal Policy Minister Kaoru Yosano to come up with new ideas to boost the economy, the government itself still faces the stiff challenge of winning over public sentiment to any plan involving a hike in consumption taxes - a path which Yosano clearly favors. Back in October of last year, we reported that the Ministry of Finance had hired its first employee ever through a public appointment process. Yoshio Masuda, a 48 year-old who served with Dentsu for about ten years, was hired for a two year stint as the ministry’s Director of Public Relations Planning and Coordination, a position believed to be involved with helping the ministry communicate its decisions better to the public.

In an early good public relations move, new finance minister Ibuki Bunmei told reporters in Tokyo today that the government should no longer issue bonds to cover its deficit. While pump-priming public works spending back in the 90s left Japan with a towering level of debt, Ibuki also told reporters he didn’t believe Fukuda was asking Yosano to come up with further pump priming ideas such as public works (yay) or income tax cuts (boo).

The consequence of all this? As we reported late last month, the government seems to have all but abandoned its plans to have the national budget balanced, another symbolic step away from the goals of the Koizumi administration (not to mention the comeback of Seiko Noda to the Cabinet). The Nikkei put the government’s fiscal dilemma like this:

With high oil prices placing inflationary pressure on the economy, Liberal Democratic Party Secretary-General Taro Aso and members of the LDP’s coalition partner, the New Komeito, are insisting that an excessive focus on fiscal reconstruction will make it impossible for the government to make prompt spending decisions at a time when the economy is slowing.

How could this affect the LDP in a political sense? More on that:

Fukuda and his deputies are reluctant to abandon the target date of fiscal 2011, a number that has come to symbolize the government’s efforts toward fiscal reconstruction. On top of the inevitable criticism from opposition parties of pork-barreling in the run-up to elections…to be painted as backpedaling on reform would be a blow to the Fukuda government, whose disapproval rating remains high despite the cabinet reshuffling last week.

So will the LDP cling to an empty target while trying to use government funds to spend its way out of recession? Certainly, holding to any publicly stated hope of balancing the budget would require the LDP to raise consumption taxes, yet another move that looks like political suicide.

Will the public accept a tax hike while bureaucrats continue to cling to special accounts and other sources of pork?

Speaking of pork, new agriculture minister Seiichi Ota also spoke to reporters on Monday, saying that Japan needs to achieve a level of food security. Can Ota put policies in place to help Japan boost its current 39% self-sufficiency rate on a calorie basis. Enough of that, we have more faith in the LDP pulling off a consumption tax hike and winning the next lower house election.

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