Japan - Japan faces many challenges in 2012

The world is in a nearly continuous state of crisis.

In Europe, a sovereign debt crisis has ballooned into a financial crisis that is shaking the world economy. The United States is beset by huge budget deficits. These problems have slowed down the economies of China and India.

Despite warnings from economists that the value of government bonds could nosedive unless state finances are put on a surer footing, politicians have been unable to persuade their constituents to shoulder additional burdens. Flagging markets and leaders at the mercy of the popular will are stuck in a dangerous embrace that is only serving to amplify the crisis.

The debt problems of a few European countries are at the bottom of the crisis, and urgently need to be solved. The governments of these states must act by any means possible to reduce their fiscal deficits and prevent their bonds from losing value.

Revitalise economy

Today marks the first New Year's Day since the Great East Japan Earthquake struck on March 11, 2011.

The unprecedented natural disaster left deep scars on the national psyche and on society. Cleaning up the debris left behind by the earthquake and tsunami has not proceeded smoothly, and the reconstruction of disaster-hit communities is just beginning. The catastrophe at the Fukushima No 1 nuclear power plant has not been settled completely, and people who fled their homes to escape the nuclear crisis are scattered around the country.

Our nation's economy is suffering from the dual blows of a super-strong yen and low stock prices caused by the financial confusion in the United States and Europe. Furthermore, the transfer of manufacturing facilities overseas is accelerating--exacerbating the hollowing-out of the nation's industrial base. We hope the economy can return to a growth track through full-fledged reconstruction of the areas devastated by the earthquake and tsunami.

To realise this, the nation's political world must recover from its state of dysfunction. The people are questioning the capability of the Democratic Party of Japan-led government to govern the country. We call on Prime Minister Yoshihiko Noda to set a course toward raising the consumption tax rate so social security programmes can be adequately funded. Noda also must promote free trade, a key to economic growth, and establish a realistic energy policy.

The only way political progress can be made in the divided Diet, with the opposition controlling the House of Councillors, is through agreements among the DPJ, the Liberal Democratic Party and New Komeito. To ensure the government runs smoothly, the DPJ must talk with the other parties and build consensus on issues.

Fiscal collapse looms

There is no magic wand that will move politics forward.

The next House of Representatives election could be held this year, but this should not stop the DPJ, LDP and Komeito from transcending party interests to find common ground. In today's political world, a leader needs unflagging resolve, the ability to build consensus and enough persuasiveness to convince the public to bear the necessary pain.

The European financial crisis, triggered by Greece's sovereign debt crisis, is not "a fire on the other side of the river." Our own nation is in the worst fiscal shape among developed countries, with nearly 900 trillion yen in combined national and local government debt--twice the gross domestic product.

Japanese government bonds have so far been seen as less risky than those of European countries, which depend heavily on foreign investment. On the contrary, the Japanese people have personal financial assets worth nearly 1.5 yen quadrillion, and more than 90 per cent of government bonds are owned by domestic institutional and individual investors.

However, in real terms the value of the nation's personal financial assets is only 1.1 yen quadrillion after subtracting personal debts such as housing loans. This is only 200 trillion yen more than the amount of public debt. If the issuance of government bonds continues to increase at the current pace, and the aging population begins withdrawing their savings to live on, the financial assets of the Japanese public will no longer be able to cover government bonds.

Despite the fiscal problems and the damage to the economy by the Great East Japan Earthquake, the Japanese yen still enjoys strong international confidence. Many believe Japan has room to raise its consumption tax rate into the 15 per cent to 25 per cent range, similar to the rates in many countries in Europe.

However, if investors begin fleeing Japanese bonds, their interest rates will rise and the increased debt-servicing costs would further bloat the government's debt. If Japan were to fall into a vicious cycle of economic doldrums and reduced tax revenue, such as a drop in corporate capital spending caused by consumers tightening their purse strings, the nightmare scenario--fiscal collapse of the government--could become reality.

This is why the government must quickly return to fiscal health by increasing the consumption tax rate.

Noda has pledged the consumption tax rate would be "raised to 8 per cent in April 2014 and to 10 per cent in October 2015." He plans to submit bills related to this purpose to the Diet at the end of March.

We expect the prime minister to seek the understanding of the public by explaining to them carefully that a consumption tax hike is the only way to achieve a sustainable social security system, which includes public pensions, as well as medical and nursing care programmes.

Regional tensions

Integrated reform of the social security and tax systems is a significant policy issue that can only be carried out with cooperation between the ruling and opposition parties, no matter what party is running the government. The LDP and Komeito should cooperate to pass the reforms through the Diet, locking their sights on taking back control of the government afterward.

To overcome the crisis, lawmakers must make a clean break from populism, no longer bowing to the public's wishes for reduced burdens and increased benefits.

In the Asia-Pacific region, the seas are only getting rougher.

China has been continuing its military expansion and has deployed ballistic missiles able to strike Japan and other countries, and is hurrying to develop a next-generation fighter jet. In the South China Sea and the East China Sea, China has repeatedly tangled with Japan, the United States and Association of Southeast Asian Nations member states.

Added to this, North Korea is in the middle of a transfer of power, raising the possibility of political turbulence.

Japan must choose the path of deepening its alliance with the United States, which has shifted its foreign policy focus to Asia, and improve defense capabilities in the Nansei Islands, which include the Okinawa Islands.

Thus, it is vital for the government to solve problems related to Okinawa Prefecture.

Japan and the United States have agreed to transfer the functions of the US Marine Corps' Futenma Air Station to the Henoko district of Nago in the prefecture. To realize the agreement, the government must regain the trust of the prefecture by lessening its burden in hosting US military bases through noise reduction and other measures, as well as adopting regional development programmes.

Cabinet ministers concerned, and of course Noda himself, must fly to the prefecture to persuade governor Hirokazu Nakaima and others to agree to the transfer.

Revive farm sector

Promoting economic partnership relations will also greatly contribute to reinforcing the Japan-US alliance.

Noda has already announced his intention to enter into discussions with other countries concerned toward participation in negotiations over the Trans-Pacific Partnership multinational trade agreement. This framework would harness the economic vitality of Asia, and is indispensable for Japan's growth strategy.

If it is approved to participate in the negotiations, Japan will be able to commit itself to the formulation of new trade rules. The government will need to take a strategic approach to the negotiations so the new rules will strengthen Japan's national interests.

Farmers and other people related to the agricultural industry have opposed Japan's participation in the TPP talks. The basic principle of the framework is the abolition of tariffs without exceptions, and opponents say such a situation would leave the nation's agriculture sector unprotected.

However, the nation's farm industry will deteriorate for certain if the situation is left untouched. Participation in the TPP talks raises the possibility of agricultural reforms such as farmland integration and providing aid to people who wish to take part in the industry. If Japan strengthens its international agricultural competitiveness, not only will the rice market expand, but growth will occur in the markets for other high-quality farm products.

We must see the TPP not as a "pinch," but rather a "chance" for revival.

The nation's energy policy, including power generation, will play a central role in Japan's reconstruction and economic growth.

Amid the crisis at the Fukushima No. 1 nuclear power plant, other nuclear reactors around the country have been unable to restart even after finishing regularly scheduled inspections. This has caused serious power shortages, and it is now feared that all of the nation's 54 nuclear reactors will be idled by May.

Such a situation--the loss of 30 per cent of the nation's electricity generation capacity--should be avoided at all costs.

Ensure nuclear safety

Power companies have been managing to cope with the situation through expanding thermal power generation, but rising prices of fuel, such as natural gas, have influenced power generation costs. The generation of electricity through renewable energy sources such as solar and wind only account for 1 per cent of total supply, and it will take years until these industries become mature enough to replace nuclear power.

It is necessary for nuclear reactors to be restarted quickly after they have been confirmed safe. To achieve this, the government must make efforts to win the cooperation of local governments that host nuclear plants. Delaying the resumption of reactor operations will prompt businesses to move production bases overseas to avoid risks such as blackouts and power shortages, thereby spurring the hollowing-out of the industrial sector.

In contrast to former Prime Minister Naoto Kan's irresponsible attempt to break with nuclear power, Noda has encouraged practical energy policies such as promoting exports of nuclear power plants and technology. This is an appropriate course of action.

China and other emerging economies have not abandoned plans to build new nuclear power plants. If Japanese firms can develop new and safer reactors and export them in packages bundled with technology and expertise in the form of specialised training programmes, some of the confidence Japan lost in the aftermath of the nuclear crisis can be regained.

However, if Japan pursues a policy of eliminating its domestic nuclear plants, its ability to export nuclear technology will be harmed, which could lead to a brain drain in engineers.

The crisis at the crippled Fukushima nuclear plant was declared under control in December, but it will take 30 to 40 years to fully decommission the reactors. Along with this challenging work, personnel need to be fostered who can preserve and build on Japan's nuclear technology and expertise.

Even if sun and wind power play larger roles, the option of replacing obsolete nuclear plants with safer and higher-performing models should not be ruled out.

The optimal combination of power sources should be decided based on an overall judgment concerning supply stability, costs, environmental impact and other factors. Such efforts will help avoid future power crises.

Japan must not allow any of the above issues--the consumption tax, Okinawa, TPP and nuclear power--to remain undealt with. The world is watching to see whether Japan will move forward toward peace and prosperity after overcoming the scars left by the March 11 disaster.

Editorial Desk

The Yomiuri Shimbun

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