Hatoyama's winter of deficits and discontent

One hundred days after assuming office, Prime Minister Yukio Hatoyama finds himself backtracking on election promises and embroiled in a campaign finance scandal. The source of Hatoyama’s troubles is Japan’s faltering economy.

A GROWING deficit, a spat with Washington, a campaign finance investigation and broken promises: Prime Minister Yukio Hatoyama's first 100 days in office in Japan have been anything but smooth.

Four months after a landslide election swept aside a half-century of virtual one-party rule, Hatoyama's agenda for a new Japan is under threat amid policy missteps and the harsh realities facing Japan, which has the world's second-largest economy.

Further complicating his work is a vocal fringe party in his coalition that is at odds with Hatoyama over government spending plans and debt levels.

"Hatoyama needs to regain control. He is letting the tail wag the dog," said Noriko Hama, professor of economics at the Doshisha Graduate School of Business in Kyoto. "Japan's economy could backslide."

Hatoyama's Democratic Party rode to power on a promise to end pork-barrel spending on public works projects championed by the long-ruling Liberal Democrats and divert the money to tax cuts and handouts that would bolster household incomes.
In recent weeks, a government task force has staged a public review of proposed government spending for the next fiscal year, cutting budgets and demanding that projects that are not urgent be postponed or abolished.

But those cuts came to less than a fourth of the government's target of three trillion yen (RM114 billion) -- too little to make a dent in a burgeoning budget packed with stimulus measures to drive spending and bolster employment after the country's worst recession since World War 2.

The lack of progress on budget-cutting has fed jitters over the sustainability of Japan's public debt, which is approaching twice its gross domestic product. Analysts say the government is likely to go well beyond a 44 trillion yen limit it has set for next year.

Finance Minister Hirohisa Fujii reiterated on Tuesday that the government would stick to that target. "The 44 trillion yen is a promise Prime Minister Hatoyama made to the public," he said.

But tight finances forced Hatoyama to renege this week on a pledge to abolish a tax on petrol. The government has also backtracked on a promise to eliminate highway tolls, though it vows to keep other parts of its campaign manifesto, like offering cash handouts to families raising children.

"The public understands that finances are tight," Hatoyama said on Tuesday, after apologising for going back on his word. "I am sure the public wishes for the money to be put to work to help stimulate the economy."

Though the public has been largely patient with Hatoyama, his popularity has started to slide. Approval ratings for his government skidded to 48 per cent from a post-election high of 71 per cent in a weekend survey by the Asahi Shimbun newspaper.

Hatoyama's approval ratings began to drop after he waffled on whether to renegotiate a 2006 deal to relocate a United States air base on the island of Okinawa.

The leader has also become embroiled in a campaign finance scandal involving US$4 million (RM14 million) in donations that prosecutors say were improperly reported.

He told prosecutors this week in a written statement that he had no knowledge of the funds, which Japanese newspapers said may have been family contributions disguised as donations.

At the heart of Hatoyama's troubles, however, is Japan's faltering economy. Although Japan technically emerged from recession earlier this year, the country remains mired in a deflationary cycle of falling prices, profits, wages and spending. A sustained rise in the value of the yen has also hurt the export-dependent economy.

The government has pressed Japan's central bank to flood financial markets with money to get funds flowing again through the economy, with limited results.

As the economy has floundered, tax revenue has dried up. Fujii has said he expected tax receipts for the year ending in March to come to a 25-year low of 36.9 trillion yen, or 9.2 trillion yen less than an initial estimate. That is also less than the government's deficit for the current fiscal year -- almost 54 trillion yen.

The shortfall is sending the government scrambling to secure resources any way it can to keep from adding to its debt. Keeping the petrol surcharge of about 25 yen a litre in place will bring in about 2.5 trillion yen, economists say. The Hatoyama administration also decided on Tuesday to raise Japan's tobacco tax by 3.5 yen per cigarette beginning Oct 1, Bloomberg News reported.

In the meantime, an uneasy alliance with a fringe party is threatening to send budgets even higher. At the heart of the matter is Shizuka Kamei, banking minister and head of the tiny but strategically important People's New Party.

Last month, Kamei fought successfully for a much-larger-than-planned 7.2 trillion yen supplementary budget for the current fiscal year.

A former Liberal Democrat with strong ties to the construction industry, Kamei has been vocal in calling for a return to public works, raising fears in some circles that Japan could unleash projects on a country already chock-full of dams and roads.

"Coalition governments are prone to running up budget deficits," Ryutaro Kono, a Tokyo-based economist at BNP Paribas, warned in a recent note. "There is an incentive for each coalition member to get their pet programmes approved to highlight their profile."

Moreover, Kamei has led the charge to freeze the privatisation of the state-run postal savings bank, which has long been accused of squandering domestic savings. That would undo years of reforms introduced by the Liberal Democrats themselves to resuscitate Japan's long-stagnant economy.

Hatoyama's government is eager to show progress on Japan's economy as his government faces its first test at the polls in the middle of next year, when voters will choose members of the upper house of Parliament. – NYT by HIROKO TABUCHI