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

Hatoyama is thinking big on climate change and upending the bureaucracy, but offering little bold direction for ending Japan's extended economic slump. The new PM takes office Wednesday.

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.

Reaction was positive to the expected appointment of fiscal conservative Hirohisa Fujii as finance minister, a position he held in 1993-94. But Mr. Hatoyama's appointment Tuesday of Shizuka Kamei as minister in charge of financial services and the postal service system has not signaled a major push for change. Mr. Kamei, who will oversee banking, financial, and postal services, opposed the controversial privatization of the postal service under former Prime Minister Junichiro Koizumi.

And Hatoyama's appointment of former party leader Ichiro Ozawa as DPJ secretary general has raised concerns of a dual power structure within the party.

The DPJ has agreed to form a ruling coalition with two small parties, the Social Democratic Party (SDP) and the People's New Party, to which Kamei belongs, despite disagreements with the left-leaning SDP over issues such as the US military presence in Okinawa.

Eisuke Sakakibara, a former vice-finance minister, and key adviser to the DPJ, expressed his concerns about the DPJ's handling of the economy at a news conference Sept. 9. He urged the new government to spend more than $105 billion to stimulate economic growth.

Some experts point to the need for more fundamental structural change – spurring job creation and overhauling the pension system, which misplaced 50 million pensioners' records, a major scandal in 2007.

"That could finally make more people feel secure and spend more money," says Masaru Kaneko, an economics professor at Keio University in Tokyo.

More Japanese have struggled to make ends meet amid deep pay cuts or abruptly job termination. Insecurity has risen more broadly in recent years as Japanese companies have turned to more part-time, contingent, or temporary workers. Those now constitute one-third of Japan's workforce.

Political stakes could be high

While many voters have indicated that they don't expect huge change from the DPJ, the party still could suffer if it is perceived as offering little different than the LDP.

"The DPJ has to deal with the three challenges at the same time: changing the old government framework; creating new industries and new framework; and taking economic measures," says Mr. Kaneko. "It will be a difficult feat to do the three all together, and it will take at least two to three years to get the first two done."

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