Policy challenges to haunt Japans next govt

Written by Reuters | Updated: Aug 31 2009, 05:43am hrs
The winner of Japans election will face a raft of challenges including growing social welfare costs in a fast-ageing society and tattered public finances.

Polls have shown the opposition Democratic Party could win the national election by a landslide, taking some 300 seats in Parliaments powerful 480-seat lower house, although analysts say the victory may be less overwhelming than forecast.

An opposition victory would end more than 50 years of almost unbroken rule by prime minister Taro Asos conservative Liberal Democratic Party (LDP) and improve the chances of resolving a policy deadlock caused by a divided Parliament, where the opposition controls the upper house and can delay bills.

Following are major challenges for a new government; Japans economy returned to growth in the April-June quarter, pulling out of its longest recession since World War-II. But the nascent recovery was due to short-term stimulus efforts and economists say it could lose momentum late this year.

Asos government has planned 27 trillion yen ($287 billion) in stimulus spending since the global financial crisis erupted last year. The Democrats have said the government is spending money on the wrong things, such as a museum of Japanese pop culture, adding that it would cut wasteful spending from an extra budget for the year to next March if the party takes power.

Stimulus efforts from past economic problems have left a mountain of public debt equivalent to around 170% of GDP, the highest among advanced nations, worrying financial markets about further debt issuance.

The Bank of Japan, with its key policy rate near 0%, last month extended by three months the September deadline for its unconventional measures aimed at easing corporate funding strains. The focus now is on when the central bank will exit from those emergency measures.

One of Japans biggest challenges is to revamp and pay for soaring health, social welfare and pension bills as a wave of post-war baby boomers retire.

Economists say funding these will mean raising the nations 5% consumption tax, but the topic is politically touchy.

The Democrats say they will not raise the tax at least for four years, while Aso has said it should be raised from 2011 but only if the economy recovers.

Critics say five years of pro-market reforms under Junichiro Koizumi, prime minister from 2001 to 2006, have widened social, income and regional gaps, and both the LDP and the Democrats have sought to distance themselves from those changes, which included postal privatisation, deregulation of the job market, and repairing the nations tattered finances.

The global recession intensified such criticism and has given some impetus to calls for a return to stronger regulation. Companies worry that trend would be stronger under a Democratic Party government, given the partys support among labour unions.

Japans leader must address the challenge of Chinas rising regional clout, while keeping ties with its huge Asian neighbour and biggest trading partner on an even keel.

Sino-Japanese relations have improved recently after years of friction over Japans military aggression in Asia before and during World War-II, but territorial and maritime disputes still simmer along with mutual mistrust over military ambitions.