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Japan’s New Prime Minister to Tackle Economy at the G20

September 23, 2009

When Lehman Brothers collapsed one year ago, Japan entered the worst of the global financial crisis with a unique perspective. It had experienced its own asset bubble in the late 1980s, and the slowness and inadequacy of its response led to a decade of stagnation and missed economic opportunity. One result of that experience was an abundance of caution. Japanese banks avoided many of the subprime loans that had laid the groundwork for the financial crisis in the United States, and high household savings rates and a favorable balance of trade placed it in a stronger position than many of its G20 peers.

Japan’s export-oriented economy could not escape the crisis, however. Even prior to the collapse of Lehman Brothers, Japan’s economy had been shrinking, and the value of its exports had declined. By late 2008, Japan officially slipped into recession, and in early 2009, it experienced its first current account deficit in 13 years, as global demand plummeted. Under Prime Minister Taro Aso, Japan responded with debt-financed stimulus packages totaling $270 billon, or approximately 5 percent of the country’s gross domestic product. Unlike Japan’s failed stimulus efforts in the “lost decade” of the 1990s, these packages did not finance bloated and unnecessary infrastructure projects. Instead, they focused on providing services to laid-off workers and on investing in green energy projects. Many economists, however, feared that these efforts had come too late to be truly effective.

At this week’s G20 Summit in Pittsburgh, Japan is represented by a new prime minister. Yukio Hatoyama and his Democratic Party of Japan (DPJ) won a resounding electoral victory last month, sweeping away the Liberal Democratic Party (LDP) and its nearly 55-year grip on power. Although he expressed generic disapproval with “American-style free-market economics” during the election campaign, Hatoyama’s economic policies differed little from Taro Aso’s. Instead, the DPJ campaign waged war on Japan’s underlying political structure. Hatoyama called for wholesale reforms of the bureaucratic machinery that had sustained the LDP’s longevity.

Achieving these structural reforms would be a tall order even in a solid economic climate. Today, they must compete with Japan’s pressing economic needs and its obligations to the global financial system. Hatoyama is something of an unknown quantity, especially on the diplomatic stage, and the G20 meeting represents his first international summit since taking office. Hatoyama will be closely watched by his fellow heads of government, as will his actions in the coming months. How he reconciles his desire for structural reform in Japan with the global imperative for economic crisis management is an open question. It is unclear yet if Hatoyama has an adequate answer.

Daniel Widome is a former Junior Associate at The Asia Foundation.

View all posts by Daniel Widome

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