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Japan's economic recovery may depend on politics

  • Les Carpenter

This should be an interesting week for Japanese worried about the country's economy and burdened by the weight of a strong yen that some believe is holding back an export led economic recovery. And that, according to some analysts, may be the problem. They believe Japan's economy is in trouble because of a lack of domestic demand. The analysts say weakening the currency to boost exports is just seeking an easy way out. Trying to boost domestic demand may be the goal of the government's plan for another stimulus package, but Japan strategist at Bank of Tokyo-Mitsubishi UFJ, Naomi Fink told Bloomberg News, that it isn't likely to work. She says it's a small stimulus package, under one trillion yen, and there's no good reason it will succeed when an earlier 23 trillion yen package didn't. She adds that what's needed is a "larger collaboration between the government and the bureaucracy to think of ways to revitalize Japan's economy."

This smaller stimulus and other efforts to boost the economy and weaken the yen comes amid a political battle for leadership of the ruling Democratic Party of Japan. The current Prime Minister Naoto Kan is being challenged for party leadership by Ichiro Ozawa, who heads the largest faction in the party. Public opinion polls in Japan show Mr. Kan favored to continue to lead the party, but political analysts point out that Mr. Ozawa has a slight advantage because of his large following within the party. It could be a tight race with the winner getting the nod as Prime Minister. It also could be another quick change in leadership that analyst Naomi Fink says is not a good thing. She says if there is a change in leadership, then the government "may have to start from square one" in forming a plan to get the economy back on track. She says "perhaps these frequent changes in leadership are really what are preventing a semblance of reform." She adds that political stability is probably needed for someone to lead and champion any reform.

The Bank of Japan-Mitsubishi-UFJ strategist points out that the last time there was any reform was when Junichiro Koizumi was prime minister for more than five years. Since he stepped down in 2006, no prime minister has stayed in office more than one year. So, the party vote on September 14th will be watched closely for just where Japan's efforts to boost its economy will be headed and what path it may take.