Wednesday September 16, 2009

FACTBOX - Policy challenges facing Japan's new government

By Yoko Nishikawa

(Reuters) - Japan's new prime minister, Yukio Hatoyama, faces a raft of challenges including growing social welfare costs in a rapidly ageing society and tattered public finances.

Japan's new ruling Democratic Party of Japan (DPJ) leader Yukio Hatoyama (R) listens to Hirohisa Fujii, who served as Japan's finance minister from 1993-1994, at the Lower House of Parliament in Tokyo September 16, 2009. (REUTERS/Toru Hanai)

Following are major challenges for the new government:

ECONOMY

Japan has crawled out of its longest recession since World War Two but economists say it could lose momentum later this year, with deflation and job cuts weighing on the world's second-largest economy.

The Bank of Japan is already forecasting two years of deflation, and if it persists longer than expected it could delay the BOJ's exit from very low interest rates.

Hatoyama's Democratic Party has vowed to put more money in the hands of households to help the economy, but some analysts worry that its spending plans will inflate a public debt already about 170 percent of GDP, the highest among advanced countries.

The party will need to act quickly if it wants to compile the state budget for the fiscal from next April by the end of December, as usual, because it will take time to overhaul the structure of annual budgets as it has promised.

The Democrats' ability to bring elite bureaucrats to heel will also be tested. The party made curbing the clout of bureaucrats over policy-making a key plank in its platform.

AGEING POPULATION, SALES TAX DEBATE

One of Japan's biggest challenges is to revamp and pay for soaring costs of health, social welfare and pension measures as a wave of postwar baby boomers retire.

For a graphic tracking Japanese demographics click:

http://graphics.thomsonreuters.com/079/JP_POPDCL0709.jpg

Economists say funding these will mean raising the 5 percent consumption tax, but the subject is politically touchy. The Democrats say they will not raise the tax for at least four years.

EMISSIONS AND ENVIRONMENT

The Democrats will target a 25 percent cut in emissions by Japan, the world's fifth-biggest greenhouse gas emitter, from 1990 levels by 2020. That is much tougher than the outgoing government's 2020 aim of a cut of 8 percent below 1990 levels, and has prompted an outcry from businesses.

The Democrats also plan to eliminate highway tolls and abolish a decades-old surcharge of about 25 yen (27.5 U.S. cents) per litre on gasoline from April. Those plans have led green groups to question the party's resolve for a greener lifestyle.

FOREIGN RELATIONS

The Democrats' pledge to forge a more independent stance from key security ally Washington has raised concern about possible friction, although Hatoyama has said the alliance remains at the core of Japan's diplomacy.

Ties between Japan and China have improved recently after years of friction over Japan's military aggression in Asia before and during World War Two, but territorial and maritime disputes still simmer along with mutual mistrust over military ambitions.

NEW H1N1 FLU

One imminent challenge may be tackling the spread of the new H1N1 flu, as Japan is still lagging in vaccine production and must finalise details on importing vaccine and how to deal with possible side effects.

REFORM BACKLASH

The Democrats have distanced themselves from reforms promoted by former premier Junichiro Koizumi between 2001 to 2006, such as postal privatisation and the job market deregulation, which critics say have widened social, income and regional gaps.

Companies worry that calls for a return to tighter regulation could become stronger under a Democratic Party government, given the party's support among labour unions.

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