Page 5 of
5 Challenges ahead for
premier By Hisane Masaki
stemming from Japan's history of
aggression and atrocities to its neighbors. Also,
Tokyo is locked in territorial disputes with
Beijing and Seoul, and the row over natural-gas
reserves in the East China Sea is smoldering
between Tokyo and Beijing.
Koizumi's
pilgrimages to the Shinto shrine drew particularly
angry protests from China and South Korea as
implicit glorification of Japan's past militarism.
The shrine is widely regarded as a
symbol of Japan's militarist
past, as it honors World War II l war criminals
among some 2.4 million war dead. China and South
Korea had rejected summit talks with Koizumi since
2005.
Abe's visit to Beijing was the first
by a Japanese premier since Koizumi went there in
October 2001. The summit talks were the first
since April 2005, when Koizumi and Chinese
President Hu Jintao met in Jakarta on the
sidelines of the Asia-Africa Summit. Abe's meeting
with South Korean President Roh Moo-hyun was also
the first Japan-South Korea summit since November
2005, when Koizumi and Roh met in Busan on the
fringes of an annual APEC summit.
Abe held
separate talks with Hu and Roh again soon
afterward, in Hanoi in mid-November on the fringes
of the most recent APEC summit. The focus of
attention in the new year is whether Japan will be
able to put relations with China and South Korea
back on a sound track. To this end, Japan is keen
to push ahead with top-level contacts with China
and South Korea by having their leaders visit
Tokyo in the new year.
Japan and China are
working to organize a visit to Japan by Chinese
Premier Wen Jiabao in late March or in April,
according to sources close to Japan-China
relations. The two nations are also studying the
possibility of a visit to Japan by President Hu in
the latter half of 2007, according to the sources.
The new year marks the 35th anniversary of
normalization of their relations in 1972. Japan
also sees 2007 as a year to promote cultural and
sport exchanges with China, as Beijing will host
the Summer Olympics in 2008.
As Koizumi's
chief cabinet secretary, Abe made a secret visit
to Yasukuni Shrine in April, five months before
succeeding Koizumi as premier. Abe has refused to
confirm the visit, saying that he will not tell
whether he has visited the shrine or plans to
visit in the future.
Outlook for
Japanese economy Japan has been emerging
from a decade of stagnation, recession and
deflation. After a decade in the doldrums, the
world's second-largest economy marked its longest
expansion since the end of World War II in
November.
Many analysts are optimistic
that the Japanese economy will keep expanding, at
least through the end of 2007, on the strength of
ongoing domestic private-sector demand. This bodes
well for Abe and his ruling coalition in the
election year.
The current boom that began
in February 2002 surpassed the previous record
growth spell of the 1960s, known as the
57-month-long "Izanagi" boom, which started a year
after the 1964 Tokyo Olympic Games and ended with
the 1970 Osaka World Expo.
Gross domestic
product (GDP) has grown at an annual pace of only
about 2% on average in real terms during the
current expansion phase. This growth rate is
vastly eclipsed by the much faster rates logged
during the past booms - 11-12% during the
"Izanagi" boom and about 5% during the "Heisei
bubble" boom of the late 1980s.
On
December 19, the government finalized its economic
outlook for fiscal 2007, which starts in April, as
a government policy target. It projects that the
nation's economy will grow at 2% in real terms -
or after adjustment for inflation - and 2.2% in
nominal terms - or before adjustment for inflation
- in fiscal 2007.
However, the government
revised sharply downward its economic growth
estimates for the current, fiscal 2006 because of
weak personal spending, to a real 1.9% from an
earlier projection of 2.1% and to a nominal 1.5%
from an earlier projection of 2.2%. Although the
government had earlier expected nominal growth to
exceed real growth - meaning an end to deflation
in terms of annual figures - in fiscal 2006, weak
price rises have prompted it to project the end
will be delayed into the next fiscal year.
However, there are potential risks to a
continued economic expansion, such as growing
signs of an economic slowdown in the United
States, Japan's biggest export market. For
resource-poor Japan, which imports almost all of
its crude oil, stubbornly high prices for oil are
also a matter of grave concern.
In late
November, the US administration revised downward
its growth forecasts for both 2006 and 2007, to
3.1% and 2.9% in real terms, respectively, from
3.6% and 3.3% predicted earlier.
Meanwhile, the Asian Development Bank also
predicted in early December that East Asia outside
of Japan will continue to grow at a healthy but
slower pace in 2007. Among other Asian economies,
China - Japan's biggest trading partner - will see
its growth slow down to 9.5% from an estimated
10.4% in 2006.
The anticipated slowdown in
the economies of Japan's two biggest trading
partners - China and the US - makes it all the
more crucial for Japan to spur domestic demand.
But personal consumption, a main component of
economic activity accounting for about 55% of GDP,
is losing steam.
The year 2006 is nearing
an end amid mixed indicators on Japan's economic
health.
On December 15, the BOJ's closely
watched quarterly tankan survey showed
optimism among Japanese companies is at its
highest level in two years. But government
figures, released earlier in December, showed that
Japan's economy has grown more slowly than
predicted. GDP in the July-to-September period was
up 0.8% from the same period of 2005, compared
with the 2% forecast earlier. The government said
the main reason for the disappointing economic
figures was a drop in domestic demand, which
contracted by 0.2% from the previous three-month
period.
Economy Minister Hiroko Ota played
down any fears that the recovery was wobbling.
"Although the economy shows some signs of slowing,
there is no worry about the economy going back to
recession or hitting a soft patch," she said. "The
lower GDP was mainly caused by weak consumption. I
don't have any concerns that the economy will fall
into a downward trend."
BOJ governor
Toshihiko Fukui said in May that the driver of
Japan's economic growth would gradually shift to
consumer spending from corporate investment. But
that has not yet happened. Consumption is weaker
than expected, largely because of lagging income
gains. Japanese wages still have not reversed
their decade-long slide even with the country's
longest postwar economic expansion. While
businesses plan to increase their capital
expenditures at the fastest pace in 16 years in
the current fiscal, higher costs for raw materials
and fuel make them reluctant to raise pay.
Although companies have begun to add to
their payrolls, a record high proportion of
Japanese people - about a third of the total
workforce - now work as "irregular" (temporary or
contractual) employees, a status lower paid and
more insecure than their regular colleagues. After
years of slashing the number of regular workers in
favor of irregular ones to cut costs, however,
Japanese companies are beginning to hire more
regular workers, amid the ongoing economic
recovery and an anticipated mass retirement of
baby-boomers in 2007.
Despite record
corporate earnings and an improving job market,
wages earned by Japanese fell almost 10% between
1997 and 2005, an average cut of more than 400,000
yen ($3,400), Labor Ministry reports show. Japan's
households kept themselves afloat during those
years by spending money they would otherwise have
put away for the future. As a result, the
country's savings rate declined to 2.4% from
10.4%.
Even if salaries rise more quickly,
many households may choose to rebuild savings
rather than spend. Most Japanese are increasingly
concerned about a possible sharp surge in
social-security and tax burdens amid the rapid
aging of society and declining birth rates. In
2005, Japan's population began to decline for the
first time since World War II. The country's
working population had begun to shrink several
years earlier.
Experts warn that the
country's social-security systems - such as
pensions, health care and nursing care for the
elderly - will collapse unless there is a
significant increase in social-security
contributions, a reduction in benefits, or a tax
increase. The benefits of the current boom have
yet to spread fully to small businesses and rural
areas, as well as to households.
The focus
of immediate attention is the timing of next
interest-rate hikes by the central bank.
The slowdown in growth, if not the end of
the boom, has posed a conundrum for the BOJ, which
is cautiously weighing the timing of its next rate
hike after ending its zero-interest policy of
nearly six years in July. The central bank raised
its target for the unsecured overnight call rate,
which it uses as the key target rate in the
short-term money market, to 0.25% from nearly
zero.
The BOJ has said it has no set time
frame for its next rate increase and will raise
rates only gradually as long as the economy
expands and prices climb. In addition to the
slowdown in growth, prices have failed to rise as
much as expected in recent months. The core
Consumer Price Index, which excludes volatile
fresh-food prices, rose 0.1% in October from a
year earlier. That was lower than the 0.2%
increase in September and 0.3% in August.
Until the release of the figures on the
July-September growth, many analysts had expected
the BOJ to make another interest-rate increase at
its policy board meeting on December 18 and 19.
But the central bank took no action on monetary
policy there, apparently after judging that the
domestic economic data were not strong enough to
justify another rate increase. Still, many
analysts expect the BOJ's next rate hike as early
as January.
BOJ governor Fukui has
repeatedly said there is a need to carry out
phased, small-margin interest-rate hikes to
achieve sustained economic growth. But many in
Abe's LDP and government are cautious about
further tightening any time soon, which they
believe may choke off the current economic boom.
Hisane Masaki is a Tokyo-based
journalist, commentator and scholar on
international politics and economy. Masaki's
e-mail address is yiu45535@nifty.com.
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