Waking up to reality
From The Economist print edition
The new government begins to get to grips with the ailing economy
IN ITS few months in office there have been doubts about the seriousness of the new team running the world’s second-largest economy. Yukio Hatoyama, the prime minister, airily talks of healing Japan’s fiscal crisis with fraternal politics. He has appointed a blathering anti-capitalist to oversee the banks. And businessmen complain that they rarely have a chance to meet him or his ministers.
In the past fortnight, however, Japan’s economic stewards appear to have woken up to the depth of the country’s malaise, and to the need for them to do something about it. Their focus has been deflation—consumer prices started falling in April. The concerns have been exacerbated by a surging yen, which on November 27th reached its strongest level against the dollar in 14 years.
On December 1st, under strong pressure from the government, the Bank of Japan (BoJ) announced it would launch a 10 trillion yen ($115 billion) short-term lending facility, with a fixed 0.1% interest rate, to boost liquidity and attempt to reverse deflation. The measure, worth just 2% of GDP, disappointed those in the financial markets who had hoped the BoJ would buy more government bonds as part of a concerted effort with the government to weaken the currency.
It also raised worries about central-bank independence. Masaaki Shirakawa, the only candidate for BoJ governor last year to be supported by Mr Hatoyama’s Democratic Party of Japan, won immediate praise from the prime minister for his efforts—even though the markets were underwhelmed. For days the BoJ had been badgered by the government to resort to quantitative easing (a form of stimulus in which a defined sum of money is injected into the economy). Mr Shirakawa described the new lending facility as “quantitative easing in a broad sense”.
For all the concerns about the BoJ, however, many observers welcomed signs that the administration was beginning to take a lead on the matter. At last it is beginning to resemble a government endeavouring to wield power. On December 2nd Mr Hatoyama promised trade-union leaders that the government would step up its own pump-priming measures by introducing a supplementary budget in the new year. News reports suggested it would be worth at least 4 trillion yen, which is much more than had been expected.
Encouragingly, the deputy prime minister, Naoto Kan, who had been selected by Mr Hatoyama to work out a medium-term fiscal strategy for Japan, has at last emerged from the shadows to lead the anti-deflation brigade. His strong voice on the issue has helped unify the cabinet. It is not yet clear, however, that he has the courage to orchestrate the structural reforms Japan so badly needs.
Japan’s economic problems are deeply entrenched and Asia’s economic recovery is still fragile. Moreover, some of the plans hatched by the Hatoyama administration to revive the economy look disturbingly anti-business. But identifying deflation as a big problem is a hopeful sign. Even if the authorities have not launched an effective joint effort to weaken the yen this week, they have at least served notice that they could eventually do so.