Japan's incoming prime minister Shinzo Abe is going to officially take office on Dec. 26 after his Liberal Democratic Party (LDP) won a landslide victory in the recent lower house election, getting 294 out of the 480 seats.
Abe, who headed the government in 2006-2007, not only won back Japan as he said during the campaign, but also won back a country with major economic challenges.
ECONOMIC RECESSION
Abe said his cabinet would be a "crises-breakthrough cabinet", vowing to lead the country's economy out of recession.
A latest poll showed about 33.3 percent of Japanese surveyed welcome the LDP returning to power, but people still keep a strong impression of an irresponsible Abe for his sudden resign as prime minister in 2007.
Over 60 percent of voters in lower house polling said they paid much attention to economic policies.
Oohashi, a 27-year male voter supporting the LDP, said, "I have high expectation on the new government's new policy to boost the economy. Japan needs a strong restart."
"Japan's economy is in a very dangerous situation and it comes a declining year on year. We need to change the situation," said Abe at a press conference soon after his party won the election.
Some Japan-based private think tanks predicted Japan's gross domestic product (GDP) growth rate in fiscal 2013 to be 1.5 percent, lower than the government estimated 1.7 percent.
According to government data released earlier, Japan's GDP fell at an annual rate of 3.5 percent in inflation-adjusted terms, shrinking for a second consecutive quarter in the three months ending September, which indicated the world's third-largest economy has slipped into recession.
RISKS OF MONETARY EASING
The Bank of Japan (BOJ) set the year-round inflation target at 1 percent in February this year, and kept taking monetary measures to little avail. The central bank unveiled additional monetary easing steps in September and October in a row to bolster the country's anemic economic recovery and try to combat the yen's rise. The last time the bank took similar actions was nine years ago.
But in Abe's mind, the stimulus packages are not nearly enough. The LDP promised before the election to carry out a five-year economic reform plan to realize a nominal growth of at least 3 percent while setting a 2 percent inflation target, and declared their determination to pursue a bold monetary easing policy to fight deflation.
"There are structural problems in the Japanese economy. The Democratic Party of Japan made prudent economic policy to prevent economic downturn. The LDP claimed to stimulate the economy by some stronger and more effective economic measures, and it's doubtful," said Professor Jun Iio from the National Graduate Institute for Policy Studies.
BOJ Governor Masaaki Shirakawa, who is reluctant to accept higher inflation goal, said, "All Japan has to do is to enhance its growth potential, not adopting easy, short-term measures to boost domestic demand."
According to the BOJ, an unreasonably high inflation target would create various risks and unwanted side effects. Under the current economic situation, a 2 percent inflation rate would cause a dramatic rise in food and energy prices, increasing the burden on households. Higher living costs without higher wages would weaken domestic demand, dragging down Japan's economy even further.
Moreover, a super-loose monetary policy will damage Japan's economic structure in the long run, as some inefficient firms that should be eliminated could survive on low borrowing costs.
The outgoing prime minister, Yoshihiko Noda, also dismissed Abe 's plan as "extremely dangerous", because it would push Japan's public debt even higher.
Abe has called on the BOJ to take more aggressive monetary easing. With the terms of Shirakawa set to expire in April 2013, Abe said he wants someone who will approve the 2 percent inflation target to replace him.
ISLANDS DISPUTES WITH CHINA
Japan's overall exports in October fell 6.5 percent to 5.150 trillion yen (61.1 billion U.S. dollars) year on year, sustaining a fifth straight month of decline, said the government.
Its exports to China dropped even faster for five months in a row, diving by 11.6 percent to 947.8 billion yen (11.25 billion U. S. dollars) in October, with vehicle exports plummeting 82.0 percent, the sharpest fall in 11 years due to simmering disputes with China over the Diaoyu Island and its affiliated islets in the East China Sea.
A report of Daiwa Institute of Research said that a one-month suspension of exports to China, the largest trading partner of Japan, would cost the latter 2.2 trillion yen (26.12 billion U.S. dollars), a drop in real GDP of almost 0.2 percent. Japanese companies in China would loss 1.7 trillion yen (20.18 billion U.S. dollars) in sales revenue.
Abe told Xinhua after the LDP's win that he would intensify communication with China to improve bilateral relations because China is one of the most important trade partners, and Japan's economy would not develop without China.
However, he also told media there is no room for negotiations over the territorial disputes, and he felt "extremely regretful" that he didn't visit the Yasukuni Shrine, which honors some 2.5 million Japanese war dead including 14 leading war criminals, during his last tenure.
The Asian Development Bank has revised downward its outlook on Japan's economic growth recently, citing bilateral tensions between China and Japan as one key factor.
Data from the Japan External Trade Organization showed Japan's direct investment in China stood at 12.65 billion U.S. dollars as of 2011, accounting for 11 percent of the country's total investment abroad.
Japanese companies' direct investment in China grew 17 percent from January to September 2012, while their investment in the European Union fell dramatically amid lingering European debt crisis.
The average yield for Japan's investment in foreign countries in 2011 was 6.6 percent, while the figure was almost doubled in China at 12 percent, bringing Japan 7.9 billion U.S. dollars in profits.
If Japan's new government let the territorial standoff continue, Japan's economy will suffer more, which may even threaten political stability.
LONG-TERM ISSUES
Tokyo Electric Power's shares soared almost 33 percent after the LDP's win amid optimism about the new government's energy policy. The LDP has said it would decide whether to restart nuclear reactors in three years.
In contrast, Noda pledged to phase out nuclear energy in the 2030s after the nuclear disaster at the Fukushima No. 1 nuclear power plant in 2011.
A government report showed Japan's GDP would shrink by 1 percent to 5 percent in 2030 without nuclear power, and the power costs will rise due to the high prices of fuel.
Abe made his first campaign speech at Fukushima to show his attention to triple-disaster recovery, but the slow pace of reconstruction in disaster-hit areas has frustrated the survivors.
A resident even yelled at Abe, "You LDP built the nuclear power plant! You created the nuclear disaster!"
Abe's nuclear policy is expected to meet with strong disagreement both from opposition parties and the public, and disaster recovery is a job the new government can't afford to downplay.
There are other major issues for Abe to tackle.
An aging society and low birth rate have dampened Japan's domestic demand for years, leading to an imminent labor shortage.
"The LDP did not pay enough attention to a huge problem of Japan during the election campaign. Japan's population is aging and shrinking fast, it caused the structural problems in Japan's economy," said Professor Iio.
Many economists believe a true economic recovery requires efforts to foster new industries and address unemployment at the time of depression, calling for the government's support for promoting technological innovation and increasing productivity to optimize Japan's economic structure.
One-off stimulus can reduce the pain, but looking for new sources of growth is the only way to cure economic anemia.
"Solving all the problems demands a long time. Japan's ruling parties need to make credible policy to boost the economy with a long-term view, and realize the policy step by step," said Professor Iio.
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