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Japan’s politics begin to hurt the economy

The resignation of yet another prime minister has contributed to Japan’s credit-rating downgrade

Every nation fears a downgrade of their debt, except Japan, or so it seemed on Wednesday. So muted was the reaction to Moody’s message of riskier times ahead that the ratings agency’s cut to AA3 barely registered on world markets.

Japan is strangely disconnected from the world financial system given its size, mainly because the Japanese themselves own so much of their own debt (about 95%) and many of the shares in Tokyo-listed corporations. This wraps the country in a soft insulation blanket that in turn absorbs the impact of attacks by foreign investors.

What cannot be disguised is the unhealthy state of Japan’s economy. As in much of Europe, welfare demands are growing as sources of income are drying up. Big firms refuse to pay high wages and are moving jobs abroad. Lower profits over the last three years have also cut corporate tax receipts.

With a post-tsunami reconstruction plan to pay for and an ageing middle class reluctant to pick up the tab, the government plans to borrow even more cash, despite debt as a proportion of GDP already standing at about 200%.

Moody’s singled out the inability of politicians to make decisions as the main reason for the downgrade. Japan will soon elect its sixth leader in five years to replace the unpopular prime minister, Naoto Kan, who is under fire for his handling of the response to the tsunami and the Fukushima nuclear power plant disaster. A poll found Kan’s approval ratings slipping to a new low of 15.8% at the weekend.

Kan is undoubtedly a novel character in Japanese politics. A product of civic grassroots movements rather than party machines, he came to prominence as health minister during 1996 when he took sides against the government bureaucracy when it denied responsibility for HIV-tainted blood.

However, his suspicion of civil servants was his undoing when he tried to bypass them following the tsunami and pull together a rescue operation almost single-handed.

Kan’s frustration during 14 months in the top job has only increased as the yen has strengthened, making exports more expensive and tax increases, which he favours, a distant prospect. The end result is that Japan remains one of the biggest losers from the financial crisis with GDP still 5% below its 2007 level.

Some Japanese pundits believe the dysfunctional nature of the country’s democracy has reached a new low and the parliament is unlikely to get a grip on government finances until the markets refuse to lend any more money. With ordinary households unlikely to use their savings to buy more debt, foreign investors will play a greater role.

Digging for gold

Which brings us neatly to the European debt crisis, which took a new twist yesterday when the Austrians said they wanted a cash deposit from the Greeks before agreeing to further EU loans.

To be fair, the Austrian message was a little more nuanced. The argument ran that a deal last week between Athens and Finland that will oblige the Greeks to deposit cash in a Helsinki bank account should be scrapped or Austria be given the same terms.

Austria set out its argument a day after the vice-chairman of Angela Merkel’s CDU party argued the Germans should go further and demand Athens stump up gold as an insurance policy against the prospect of a default.

Officially, the Netherlands, Germany and other rich eurozone countries oppose the deal, since it would be financed through Greece’s €109bn bailout. However, the Netherlands, Slovenia and Slovakia have indicated behind the scenes that they would like a similar side deal with Athens (without specifying a preference for gold or cash).

This manoeuvring shows the burghers of Amsterdam, Ljubljana and Bratislava fear that a second bailout for Greece will fail. No wonder Greek borrowing costs went back to record levels on Wednesday night.

Ireland, on the other hand, is quietly growing its way out of trouble. A €4bn trade surplus in June was its highest on record, and something to make Portugal and Greece salivate. Exports were up 5.6% on 2010. Sales to the US jumped 11.8% to €9bn. But there can be only one Ireland; not everyone can cut corporation taxes to 12.5% (or less if the company is Google). If they did, Ireland’s attraction would evaporate. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds