Only ten months ago, Japan’s Democratic Party (DPJ) ousted the Democrats (LDP), who had ruled for half a century. But last weekend the government suffered a heavy defeat in elections for the upper chamber of parliament. It fell far short of a majority and slipped behind the LDP. The DPJ will now have to rely on other parties to pass legislation.
What the commentators said
Japan needs “strong leadership” to tackle its economic problems and especially to restore fiscal sustainability, as The Economist pointed out. It has public debt of around 200% of GDP, the highest among developed countries, and while it can service the debt “comfortably” for now, it needs to be dealt with. Instead, Japan has had six prime ministers in four years and now “more political paralysis beckons”.
Prime minister Kan made fiscal consolidation a key theme of his campaign, noted Lex in the FT. This result “is not curtains for fiscal reform”, but getting anywhere will be difficult. The gridlock means he may have to improvise “oil-and water partnerships” with small parties, most of which “are focused on growth rather than austerity”. That’s if Kan survives a party leadership vote in September.
It’s starting to look as though “genuine policy reform will not occur until the bond vigilantes visit Japan”, said RBS’s Greg Gibbs. So far long-term interest rates have stayed low. Domestic investors continue to hold the lion’s share of the debt so there is scant danger of foreigners ditching it and driving up interest rates. Nonetheless, said Gibbs, “surely a day of reckoning” will eventually come in Japan.