by Nobuyoshi Sakajiri
Originally published in the Far Eastern Economic Review, November 20, 2008
After the G-20 Summit in Washington last week, Japanese Prime Minister Taro Aso declared with confidence that Japan will take a large role in helping resolve the international financial crisis and that it will work to implement the measures included in the Summit’s declaration. The prime minister seemed intent on asserting Japan’s place in global finance, even leading efforts to recapitalize the International Monetary Fund.
As the world’s second largest economy, Japan should and must play an important role in stabilizing the global financial markets. However, before the prime minister starts looking overseas, he must first fix Japan’s economy, which has officially slipped into recession for the first time since 2001.
So far, Prime Minister Aso’s five trillion yen ($52 billion) economic stimulus package has been met with lukewarm support by the Japanese public. Part of the plan includes a two trillion yen cash handout program, where every citizen will receive 12,000 yen ($124) by the end of the fiscal year in March. An additional 8,000 yen will be given to households for each child 18 years old or younger, and for each elderly person 65 years or older. The plan is aimed at encouraging Japan’s avid savers to spend money and jumpstart domestic consumption.
But critics doubt how effective the cash handouts would be, some say it’s like throwing away money without a strategic focus. In 1999, amid Japan’s last recession, the government issued 700 billion yen worth of coupons for the same reason. That policy was severely repudiated as a failure and a waste of taxpayers’ money. It boosted the individual consumption portion of Japan’s gross domestic product by only 0.1%, according to a government survey. Japanese households largely kept on saving and avoided spending.
Even government economists are unimpressed. Kaoru Yosano, economic and fiscal policy minister, said the Cabinet Office estimates that the cash handouts will have the same 0.1% impact on GDP this time. His position has increasingly won the support of the ruling coalition of the Liberal Democratic Party and New Komeito Party.
The plan is also unpopular among the local governments because it leaves local officials with the burden of deciding whether to put an income cap on applicants and disqualify the rich. Governors and mayors also worry about chaos at their municipal offices as thousands of people are expected to rush to the counters to apply for the handout in a short period of time. To make matters worse, March is a busy time for workers at municipal offices as the fiscal year ends.
Even the voters Mr. Aso is trying to win over are unconvinced. According to recent survey by Asahi Shimbun, 63% of voters think the plan is an “unnecessary” policy. Only 26% think the policy is needed.
The handouts are as unlikely as the 1999 coupons to spark a consumption boom because people won’t spend much money amid the global financial crisis. What Japanese consumers want are not a couple of 10,000-yen bills but confidence in the capability of the government to maintain Japan’s standing as the economic giant in Asia.
Nonetheless, Mr. Aso appears firmly behind the plan. “If some people say they don’t need [the money], or won’t bother to pick it up, that’s fine,” he said. But his insistence may be a reflection of his misreading of ordinary Japanese people’s way of life and their way of thinking. Asked in Parliament in September how much a package of Cup Noodles costs, Mr. Aso answered: "I think it was very cheap before, but now it costs around 400 yen [$4.2], doesn't it?” The actual cost is around 170 yen. Since he came to the office, the wealthy politician has been criticized for being out of touch with the Japanese public because he frequents bars in Tokyo’s expensive hotels. He insists that hotel bars are “safe and inexpensive.”
Mr. Aso was elected as president of the LDP in September after Yasuo Fukuda’s abrupt resignation—the third prime minister within a little more than two years. Mr. Aso, a dapper dresser and big fan of manga (Japanese comics), was expected to become the LDP standard bearer in the next election because of his popularity. But now his approval rating has fallen to less than 40% and recently he had to rule out calling the general election that could potentially toss him out of power.
Originally, the government wanted a flat-rate tax cut but instead adopted a cash handout, reportedly because of Mr. Aso’s concerns over his flagging popularity. Now that Japan’s economy has fallen into another recession, the government does not have the luxury to experiment with populist policies that have failed in the past. Moreover, if Japan does not take decisive and meaningful steps in dealing with its economy, Japan cannot play a “leading” role in tackling the international financial crisis.
It’s obvious that in choosing the handout plan Mr. Aso believes he can boost his popularity and buy votes. He is dead wrong. The economy in the real world is not as simple as in the world of manga.
Nobuyoshi Sakajiri is Asia Society’s Bernard Schwartz Fellow based in Washington, D.C. He was the Beijing correspondent of the Japanese newspaper, Asahi Shimbun, from 2005 to August 2008.