Out of tune
Nov 12th 2009 | TOKYO
From The Economist print edition
Translated on 17th November, 2009
The Democrats’ debut has been worryingly unharmonious—and the “bond vigilantes” are starting to make groaning noises, too
*bond vigilantes: Those who sell out government bond when worried about the government’s financial and monetary policies.
Illustration by David SimondsYUKIO HATOYAMA, Japan’s prime minister, likens his role to that of a conductor trying to achieve “harmony”—one of his favourite words—from a pickup orchestra (for which read, novice cabinet).
So far the result has been cacophony.
Ministers have waged war in public and have floated ideas that, in some cases, are downright ludicrous.
At times they have even challenged Mr Hatoyama’s authority.
To his supporters, this reflects a refreshingly open debate in a new ruling party after decades of cloistered dealmaking.
When Mr Hatoyama’s Democratic Party of Japan (DPJ) swept to power in September, it was largely because of voters’ frustration at half a century of rule by the “iron triangle” of Liberal Democratic politicians, bureaucrats and big business.
Mr Hatoyama promised a more open and genuinely democratic style of government.
But discord in the cabinet, and a woeful absence of discussion about the budget next year and beyond, have left many worried.
Foreign allies are wondering what the new government stands for.
Investors are beginning to vote with their feet, driving up Japanese government-bond yields.
The most glaring problem is a diplomatic one: a dispute in relations with America over an American air base in Okinawa, a southern island, which is the subject of a bilateral treaty that the Hatoyama administration wants to review (see Banyan).
America has done itself few favours with the new government.
In the run up to Barack Obama’s visit to Japan on November 13th, the administration has at times treated its strongest ally in the region with the sort of bossiness that the DPJ came to power vowing to stand up to.
But disagreement within the Hatoyama government over whether the air base should be moved within the island, off it, or even out of Japan altogether has made matters worse.
The foreign ministry’s insistence on reviewing the treaty so soon after taking office has also distracted both sides from a more important topic: the need to recalibrate their alliance, which next year turns 50, in a way that better reflects post-cold-war realities.
Mr Hatoyama’s difficulties come, in part, from the DPJ’s coalition partners.
To build an upper-house majority before elections next summer, he joined forces with two small parties, the Social Democrats and the People’s New Party, offering both their leaders cabinet positions.
The pacifist Social Democrats oppose all American military bases in Japan, a view the DPJ does not share.
The leader of the People’s New Party is even more of a problem.
An anti-capitalist maverick, Shizuka Kamei, who is banking and postal-reform minister, seems to be running an alternative government.
His plan to force banks to offer a loan moratorium to small firms has irked Hirohisa Fujii, the finance minister, and rattled markets.
Inflammatory comments claiming big business is responsible for a spate of suicides and murders in Japan have embarrassed the rest of the cabinet.
Yet Mr Kamei has been able to challenge Mr Hatoyama with impunity.
“If Prime Minister Hatoyama wants to fire me, go ahead. But he can’t,” he declares.
When he drafted in a former civil servant to reverse the privatisation of the postal service, he got away with it, even though one of Mr Hatoyama’s most popular campaign promises was to keep former mandarins out of plush jobs.
Those who know Mr Hatoyama say it is not his style to be dictatorial.
He may also be sweating it out, hoping that success in the upper-house elections will enable him to eject his awkward bedfellows.
But if Mr Hatoyama does not turn more assertive soon, says Gerald Curtis, a veteran Japan watcher at Columbia University in New York, “the image of a government in disarray, pulling in different directions and spending time back-pedalling from half-baked or unbaked policy ideas, will grow stronger and undermine…support.”
And as if the cabinet is not causing enough headaches, Ichiro Ozawa, head of the DPJ and the man considered the “shadow shogun” in Japanese politics, is also throwing his weight around.
*shogun: A chief military commander existed in Japanese history.
On November 10th he attacked Christianity, calling it an “exclusive and self-righteous religion”.
Not a message likely to endear him to the visiting Americans.
It may not feel like it while Mr Obama is in town, but Mr Hatoyama has an even more powerful constituency demanding reassurance: the bond market.
Since he took office, analysts say derivatives markets have suggested there are growing fears among “bond vigilantes” of rising government-funding costs in a few years’ time.
Gross debt already stands at a staggering 180% of GDP.
In a recent report, JPMorgan, an American bank, gave warning that the costs of coping with a shrinking and ageing population could push that ratio to 300% in a decade, and send debt-service costs soaring.
With the deficit in the current fiscal year expected to hit 10% of GDP, there are concerns that next year the government will be forced to raise its borrowing target above the current 44 trillion yen ($489 billion).
This week Fitch Ratings said it may review Japan’s debt rating if the government issues substantially more debt.
The concerns have flourished partly because there is so little clarity about future budgets.
The DPJ promised to set up a new body, the National Strategy Bureau, to set medium-term fiscal goals, to be headed by the deputy prime minister, Naoto Kan.
But nothing has been done about implementing this promise in parliament, though it was considered a priority on taking office.
Markets were somewhat reassured this week when Mr Fujii, the finance minister, acknowledged that rising bond yields were indeed a worry.
But he has recently appeared to pin his hopes on a rebounding economy to raise tax revenues and on eliminating waste to cut the deficit.
Neither can be counted on.
An economic rebound would anyway be a cyclical benefit, whereas there is pressure from many parts of the DPJ for a structural increase in spending in order to provide European-style welfare protection.
Their voices may grow louder even as Mr Fujii tries to hold down borrowing.
Mr Hatoyama will have the final say.
Perhaps he needs to remember, amid cacophony, that some of the best conductors are despots.