Rough Ride for Hatoyama After Landslide Election

December 23, 2009

By HIROKO TABUCHI

TOKYO — 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, Mr. 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 Mr. Hatoyama over government spending plans and debt levels.

“Mr. 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.”

Mr. 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 $32.8 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 II.

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 limit of $480 billion, it has set for next year.

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

But tight finances forced Mr. Hatoyama to renege this week on a pledge to abolish a tax on gasoline. 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,” Mr. Hatoyama told reporters Tuesday, after apologizing 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 Mr. Hatoyama, his popularity has started to slide. Approval ratings for his government skidded to 48 percent from a post-election high of 71 percent in a weekend survey by the Asahi Shimbun newspaper.

Mr. 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 $4 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 money, which Japanese newspapers said may have been contributions from his wealthy family disguised as donations.

At the heart of Mr. Hatoyama’s troubles, however, is Japan’s faltering economy. Although the country technically emerged from recession earlier this year, it 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 to spur the economy, but with limited results.

As the economy has floundered, tax revenue has dried up. Mr. Fujii has said he expected tax receipts for the year ending in March to come to a 25-year low of just over $400 billion, or $100 billion less than an initial estimate. That is also less than the government’s deficit for the current fiscal year — almost $590 billion.

The shortfall is sending the government scrambling to secure resources any way it can to keep from adding to its debt. Keeping the gasoline surcharge will bring in about $27 billion, economists say. The Hatoyama administration also decided Tuesday to raise Japan’s tobacco tax by a few cents 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, Mr. Kamei fought successfully for a much-larger-than-planned $78 billion supplementary budget for the current fiscal year.

A former Liberal Democrat with strong ties to the construction industry, Mr. 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 programs approved to highlight their profile.”

Moreover, Mr. Kamei has led the charge to freeze the privatization 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.

Mr. Hatoyama’s government is eager to show progress on Japan’s economy as his government faces its first test at the polls in mid-2010, when voters will choose members of the upper house of Parliament.

“Mr. Hatoyama is trying to bring about change, yet he faces resistance from within his own camp,” Professor Hama of Doshisha said. “If Mr. Hatoyama isn’t careful, Japan will find itself back in the dark old days.”

Copyright 2009 The New York Times Company