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Where's the beef?
By Darrel Whitten
While instigated
over a serious difference of opinion about the
privatization of Japan's postal system, the
September 11 House of Representative (Lower House)
elections in Japan are widely viewed as a
referendum on the future course of Japan, with
regard to (a) what measures need to be taken to
revitalize the moribund 640 trillion yen (US$5.9
trillion) economy and what role
deregulation/liberalization will play, (b) how to
address ballooning government debt, (c) how to
address the growing burden of Japan's social
security and pension system given a rapidly aging
population and (d) how or whether to change
Japan's pacifist constitution that has remained
essentially unchanged since first drafted by the
American occupation following Japan's defeat in
World War II.
Last week, all of Japan's
major political parties announced their political
manifestoes. Political manifestoes, which are in
effect "official" party platforms released to the
public, were devices first introduced in Japan by
the Democratic Party of Japan (DPJ). As voters
around the world are well aware, politicians have
a penchant for making promises during the heat of
an election that are subsequently conveniently
forgotten once the politician or political party
is voted into office. The manifestoes are not only
a useful device for political parties to
differentiate their views from the other political
parties, they are also a way of keeping score
regarding how a political party keeps its election
promises.
For the September 11 Lower House
elections, the manifestoes of the five major
political parties in Japan cover seven basic
areas: (1) fiscal reform, (2) postal privatization
(which is a subset of fiscal reform), (2) pension
reform (another subset of fiscal reform, (3) child
care and education, (4) constitutional reform and
(5) the role of Japan's "self-defense" military
(also a subset of constitutional reform).
Filtering out the political rhetoric, one
comes to the realization that the LDP (Liberal
Democratic party), the New Komeito and DPJ
basically agree on the need for "small government"
and reform of Japan's pension systems, as well as
its social security system. The reasons are
twofold. First, Japan dug itself into a serious
fiscal hole in avoiding a deflation spiral and a
potential depression during the Heisei Malaise.
According to the Ministry of Finance, total
government debt outstanding (including government
bonds, borrowings, financing bills and
government-guaranteed debts) was 839.7 trillion
yen as of March, or approximately 131% of forecast
nominal gross domestic product (GDP) in fiscal
2005.
Granted, as Japan has a surplus in
its social security system, the gross debt figure
appears more manageable when adjusted for
surpluses in the social welfare system, and debt
held by different parts of the Japanese government
that is in effect owed to other parts of the
government, or held by institutions such as the
Bank of Japan and other government entities. This
notwithstanding, Japan's already large debt burden
is set to continue rising unless Japan can
revitalize its economy. Secondly, Japan's
population is aging at an alarming rate, which
means that the surplus in the social security
system will essentially disappear over the next 20
years. The percentage of Japan's population
currently over 65 years of age is about 20%, but
is expected to rise to nearly 30% by 2025. In
contrast, the proportion of the population aged
between 15 and 65 will fall to 60% from 66%.
Just how fast is Japan's population aging?
In Germany, it will take the next 57 years for the
portion of the population aged 65 and older to
rise from 10% to 20%, while it will take 80 years
in the United Kingdom, whereas it will take only
21 years for those 65 and older to reach 30% of
the population in Japan. Japan's pension and
social security system is currently being
supported by corporate social security payments,
employee social security payments and taxes. If
medical and healthcare costs alone continue to
rise at the current rate, Japan's Ministry of
Health, Labor and Welfare estimates that the share
of taxes and healthcare expenditures not carried
by the users of these services will rise to 28.5%
from 23.5% of gross national income, while the
burden for regular salaried workers for such
services would rise to nearly 16% from 12%.
In addition, the rise in value-added taxes
(VAT) required to fund the additional tax burden
would result in a rise in the VAT tax to about 14%
from the current 5%. Given the undeniable
arithmetic of Japan's ballooning debt and rising
social security burden, it is not surprising that
the LDP, New Komeito and DPJ manifestoes regarding
postal liberalization, fiscal balance and pensions
are all essentially the same. In this regard,
whether the LDP or the DPJ wins the election makes
essentially no difference with regard to the
question of reform. Reforms must and will continue
if Japan is to revitalize its economy and address
the structural burdens of a rapidly aging society.
Where the real differences are apparent in
the manifestoes of each party is in the
international contribution of Japan's self-defense
forces, the role of Japan's military as a whole
and constitutional reform. Thus, in effect, the
real issue of contention in the September 11
election and subsequent elections in Japan will be
about Japan's military and constitutional reform.
Article 9 of Japan's pacifist constitution
reads: "Aspiring sincerely to an international
peace based on justice and order, the Japanese
people forever renounce war as a sovereign right
of the nation and the threat or use of force as
means of settling international disputes. In order
to accomplish the aim of the preceding paragraph,
land, sea and air forces, as well as other war
potential, will never be maintained. The right of
belligerency of the state will not be recognized."
Before the brouhaha about postal reform,
the LDP was mapping a draft of an amendment
proposal to be ready by November, when the party
is to celebrate its 50th anniversary. The main
opposition DPJ will follow suit some time next
year. The most contentious issue within Japan and
internationally of course would be the issue of
changing Article 9, which is interpreted as
limiting military activities exclusively to
self-defense. While reports on the constitution
issue by both the chambers in Japan's diet earlier
this year indicated a need to revise the
constitution, they remained split over the fate of
Article 9. Opinion polls suggest most Japanese
favor changing the constitution but are split over
changing Article 9.
In terms of
constitutional reform, Koizumi has plenty of
support from the West. In the Western hemisphere,
Britain is the US's closest ally, and the US wants
Japan to become the Asian equivalent of Britain in
the Eastern hemisphere. Indeed, many analysts have
pointed out that Japan is becoming a key security
outpost in the US's defense posture in the
Asia-Pacific region. Right-leaning Japanese
politicians, among them Koizumi, appear willing to
accept this new role of providing military
hardware to the US or participating in future
conflicts in conjunction with the US. They want
Japan to assume a more assertive role on the world
stage and to change its low profile in
international politics by amending the pacifist
restrictions contained in Japan's present
constitution, as they view the current
constitution as anachronistic, unrealistic and
irresponsible in a new, more turbulent world.
Thus, whether the LDP is broken up,
Koizumi and his generation of politicians will
seek to redefine Japanese politics in the next
decade. Members of this generation understand that
Japan's decade-long depression cannot end by the
traditional solution of an export surge into the
US. They also understand they cannot force a
Japanese recovery without a massive overhaul of
the country's postwar institutions. This strategic
thinking about economic solutions leads inevitably
to the political framework of the constitution and
the question of the military, and that is the real
beef in the political party manifestoes of the
2005 general election.
Darrel
Whitten has been following Japan's politics,
economy and financial markets for the past 27
years. A former head of Japanese equities research
for three global investment banks, he is currently
the owner of his own consulting company and is the
editor and publisher of The JapanInvestor.com, a
subscription-based investment newsletter service.
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