Tuesday, September 13, 2011

New Japanese Prime Minister Faces Daunting Task Taking on Japan's Financial Recovery


In August, Japan elected Yoshihiko Noda as its sixth different prime minister in five years. Noda faces the difficult task of lowering the value of the nation’s currency, the yen, and addressing a host of other issues, such as political unrest and earthquake recovery. The yen has appreciated four percent in the last three months. Noda, a former finance minister, must intervene to reduce the value of the yen to prevent it from having a negative effect on Japan’s export. An overly strong currency makes Japanese goods more expensive for other countries to buy. Those other countries are, therefore, likely to find cheaper suppliers of the same goods elsewhere, which leads to a decrease in the total goods Japan exports. Because Japan’s economy depends heavily on revenues from exports, any decrease in exports has a large, negative effect on the country’s entire economy.

For Prime Minister Noda, controlling the value of the yen will not be easy. During his time as finance minister, Noda unsuccessfully attempted to prevent the yen from appreciating by selling the yen on international markets. Leaders from around the world are anxiously waiting to see if Noda can solve Japan’s problems, as Japan’s economy, the third largest economy globally, affects regional and global economic networks.

The yen’s value is not Japan’s only economic problem. Japan’s economy has suffered in the aftermath of the massive earthquake and tsunami that hit this past March. Noda, therefore, must also continue reconstruction efforts, while at the same time attempting to reduce Japan’s already large public debt. Japan’s debt is currently 200% of its gross domestic product, the highest percentage of any country. This means that simply making interest payments on the debt consumes a large portion of Japan’s budget. Japan’s aging population will also put a growing strain on the country’s debt. In the coming years, more and more Japanese citizens will retire and, therefore, will stop contributing as much to the government in taxes, while drawing more money from the government in the form of retirement and healthcare benefits.

Noda must address all of these problems while operating in a political system that is in disarray. Previous prime ministers have not lasted long in the post, as they failed to deliver the changes the electorate demands. In spite of the electorate’s agreement that the country needs to change course, the two political parties have been unable to compromise as infighting within each party has grown. Such infighting may greatly inhibit Noda’s effectiveness. Nevertheless, Noda can be sure that his own tenure will be short if he fails to offer effective solutions to Japan’s problems.

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