Sunday, October 01, 2006

Japan's Abe Outlines New Economic Policies

Sources: BBC, Financial Times, BusinessWeek, JapanTimes, Australian Broadcast Corporation

Shinzo Abe, Japan’s newly elected prime minister has broadly outlined plans to implement fiscal reform while continuing to promote Japan’s economic recovery.

Abe’s plan, released in his first policy address, stated that more emphasis would be placed on cutting expenditures rather than raising taxes. He is likely to continue the previous economic reform policies, while attempting to cut “wasteful” spending. He has already begun by implementing a 30% salary cut for himself, and 10% salary cut for all of his ministers. Moreover, he pledged to keep borrowing below 30,000 billion yen (253 billion USD) in order to balance the budget by the year 2011. However, he did not rule out a tax-hike altogether. Furthermore, his plan includes the revival of local economies outside the main cities such as Tokyo.

These economic reforms are important despite strong Japanese growth (approximately 2.5% for this year), because of the heavy government borrowing. However, despite Abe’s plans, fiscal restructuring may prove difficult because of local party politics. He leads a conservative Japanese party, and rose to power under a “no growth, no fiscal consolidation” policy. There are both global and local economic factors, such as rising oil prices and a general slowdown in the world economy, that may slow down growth, thus possibly leading Abe to slow fiscal reform. Fiscal reform, even if undertaken, may also prove difficult, if not insurmountable. Reducing government deficit would require an annual cut of 16.5 trillion yen of savings (139 billion USD) per year, and with rising concerns about an aging Japanese population’s needs in regards the pension, a massive budget cut may be difficult, if not impossible.

What type of political ramifications may Abe experience if a global economic downturn slow growth prevents the implementation of budget cuts and fiscal reform? What type of long term economic consequences may Japan suffer if the budget remains unbalanced and national debt remains high?

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