Japan’s Sputtering Economic Recovery Amid Heightened Political Turmoil

Abstract

The purpose of this paper is to provide an overview of the current state of the Japanese economy, and to consider some of the major challenges it faces during these tumultuous political times. It begins with an economic policy proposal focused on Japan’s muddling recovery amidst the difficult political climate presently inhibiting growth. I then discuss several domestic and global issues likely to impact recovery of the Japanese economy. Regarding macroeconomic policy, Japan should pursue growth—focusing on unemployment, overcoming a sluggish recovery, and generating revenues—until stable full employment is achieved, and then implement effective fiscal consolidation with a high priority on tax and other reforms, deregulation, and liberalization. This policy should be implemented by a strong but temporary macroeconomic package of further monetary easing and additional fiscal stimulus until deflation has ended and good growth achieved, then followed by gradual but significant tax increases as a share of GDP and an end to monetary easing. Japan currently faces several challenges to economic growth. Although government infrastructure investments in Tohoku and the quick repair of supply chain ruptures led to impressive 5.5 percent growth in the first quarter of 2012, that growth slowed sharply in the second quarter to an estimated 0.7 percent rate. Furthermore, within the Japanese government, petty political gamesmanship is peaking, economic policymaking is gridlocked, and the government faces numerous structural issues including inadequate domestic demand, fiscal consolidation, deflation, and weak labor markets. The DPJ will surely lose the upcoming election and control of the government after three years in office. In addition to Japan’s still-unresolved long-run structural issues, the new government will also have to address energy policy, the role of nuclear power, trade liberalization, and financial market reforms, along with growth and the ongoing recovery effort in Tohoku. The Fukushima Daiichi plant disaster has had significant economic, political, and societal effects. Energizing an increasingly large antinuclear movement, the disaster has forced the government to examine the fate of existing nuclear plants, decide how far and how quickly nuclear power downsizing should proceed, and aggressively promote conservation and the development of renewable resources. Japan must also now confront two models for Asia-Pacific trade liberalization: the comprehensive Trans-Pacific Partnership (TPP) of 11 nations, led by the United States; and an “Asian track,” exemplified by Japan’s trilateral trade negotiations with China and Korea. Though it is in Japan’s best interest to proceed vigorously on the TPP track, the Japanese government