Japan's new prime minister – can he fix the economy?

As it prepares to take the reins this week in a historic shift in power, the Democratic Party of Japan is issuing a flurry of pronouncements on everything from drastic cuts in greenhouse gases to reform of a turgid bureaucracy.

But they're not talking about what many say is the biggest problem facing the world's second-largest economy: its two-decade long economic slump. If they don't take enough measures to stimulate the economy, Japan could sink into a double-dip recession, say analysts – undermining the mandate of the DPJ.

The DPJ, which trounced the long-ruling Liberal Democratic Party in national elections Aug. 30, has highlighted small steps that could help stimulate domestic demand – cash allowances for children, cutting gasoline taxes, lower highway tolls, and the like.

But many experts say that is not enough to reverse the fortunes of a country many thought was on its way to becoming an economic superpower in the 1980s.

In July, the International Monetary Fund said Japan may face deflation through 2011. The unemployment rate rose to a record high of 5.7 percent and the core consumer price index dropped at an unprecedented pace of 2.2 percent, heightening deflation concerns.

"The most serious problem confronting Japan now is the prolonged economic stagnation, and the first thing the government must do is to turn the economy around," says Minoru Morita, an independent political analyst in Tokyo. "The recession has pushed more people out of work and caused more small- and mid-sized businesses go under. Yet, the DPJ has no measures to rebuild corporations and industries, the engine of capitalism."

Thinking big on climate, bureaucracy

In other policy matters, the DPJ cannot be accused thinking small. Yukio Hatoyama, the prime minister-designate who is to take office Sept. 16, has rattled the business establishment by declaring that Japan will seek to reduce CO2 emissions by 25 percent below 1990 levels by 2020. The LDP had previously set a target of 8 percent.

The new government also has vowed to do battle with entrenched bureaucrats and to reduce wasteful spending.

Mr. Hatoyama is reportedly to tap Naoto Kan, a DPJ top official and former health minister, for vice-prime minister and minister in charge of the National Strategy Bureau, a newly created body that aims to reshape government by reducing the influence of powerful bureaucrats. The bureau will be under the direct supervision of the prime minister.

Katsuya Okada – a former party leader known as a policy expert – is expected to become foreign minister. He has already met with the US ambassador to Japan, underscoring the DPJ's commitment to keeping the US-Japan relationship a top priority.

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