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March 31 ends the fiscal year for Japan and the pressure is building on Prime Minster Naoto Kan and the Democratic Party of Japan (DPJ) as they prepare to press their budget plan for the next year through the Diet – the Japanese parliament.
Japan is facing multiple economic challenges that each threatens to hamper the countries national economy as well as trade. Politically, the situation is equally unsettling as the government is up against a phenomenon known as a ‘twisted Diet’ – a term describing the situation where the Upper and Lower houses are controlled by opposing sides. The ruling coalition headed by PM Kan lost its Upper House majority in July’s election and since the Upper House cannot be dissolved, Mr. Kan will have a difficult time passing bills for the upcoming budgetary plan.
Among the financial concerns of the nation is trade. After a surprisingly stable trading market during the last two years, the Japanese Ministry of Finance revealed a gloomy trade deficit this February. Paradoxically, large cooperations such as Toyota, Honda and Nintendo were actually recovering quickly on top of the global financial crises but what threatens to derail the process is now the unusually strong yen. Toyota reported a drop of 39% in profits from the last quarter, Honda had an equal drop of 40% while Nintendo, which generates up to 80% of its revenue abroad, claim to have a 75% decrease in profits between April and December 2010. Much of the blame is directed at the record high exchange rate for the Yen, currently at its highest in fifteen years.
This has put a damper on the country’s export as the expensive yen on one hand stifle the price-competitiveness of Japanese product and on the other, eats up the profit in the process of converting from foreign currency into Japan’s national monetary standard. Larger cooperations are responding to the situation by moving capital and production out of Japan – Toyota has already started to produce their popular hybrid car Prius in Thailand.
Another grave concern is the public debt burden which is estimated to be about twice the size of gross domestic product. Mr. Kan is planning to reduce the debt by reorganizing the national finances, raise taxes and scrap the DPJ’s pledge of doubling childcare handouts to household. But the Kan administration’s budget is being met with strong opposition by economists. “The government barely scraped by getting revenue to match spending” said Hiroshi Miyazaki, chief economist at Tokyo-based Shinkin Asset Management, to Bloomberg. The budget “doesn’t work to improve the state of public finances but it doesn’t do anything to spur the economy either.” A strategist at Sumitomo Trust & Banking Co. also said to Bloomberg “What’s most problematic is that there is almost no visible clue to how Japan will consolidate its finances”.
Several commentators predict that the biggest focus in the coming time will be not on the content of the budget, but how the DPJ expect to get it through the Diet. PM Kan has seen his popularity dwindle in the last six months but is resisting claims that he will join his four predecessors of the last four years in what is called the ‘revolving door’ of Japanese politics. He wants to bring reform but it is uncertain if his goals will be fulfilled – and if so, if it will be on the expense of Mr. Kan’s position. The end of the fiscal year will show if this is the beginning of the end for the DPJ or the start of a fundamental restructuring of the Japanese market and political climate.