Professor Hatoyama holds forth

Before entering politics — the family business — Hatoyama Yukio was a fledging academic, a Stanford-educated engineer. His background as an academic is often on display when he delivers set piece addresses. He has a penchant for abstraction, for drawing upon broad principles and shying away from the nitty gritty details of policy. This tendency is perhaps common to all leaders, but Hatoyama seems to take particular interest in how to frame policies intellectually (see his persistent use of his pet term yuai last year).

Remarkably, Hatoyama only used the term yuai once in his latest address, his policy speech for the new ordinary session of the Japanese Diet. But in this speech Hatoyama once again spent an inordinate time discussing the abstract principles behind his government's policies, in this case the idea of "protecting life." It took nearly half the speech before the prime minister began discussing the specifics of his agenda.

And even then, the policies were discussed less in terms of specific items of legislation than in terms of goals to be achieved at some point in the future. Like his government's growth strategy, it is unclear how the Hatoyama government plans to get from where Japan is today to where it wants Japan to be in ten years. Japan faces serious, immediate problems, most notably continuing deflation. (For a reminder of why deflation is destructive, Brad DeLong recently linked to an old paper of his explaining "why we should fear deflation.") On this question of deflation, Hatoyama simply waved at his government's budgets and said that his government is promoting "strong and comprehensive" economic policies with the Bank of Japan. As the Economist reports, the truth behind the prime minister's statement is more complicated. On this question of deflation, what for most governments would be at the top of the agenda, Hatoyama breezed through it with nary a detail.

As was clear during last year's campaign, the DPJ under Hatoyama is much better on political and administrative reform than on the economy, promising reforms to the administrative and public-service corporations that have been a source for considerable waste through amakudari, writing the national strategy bureau into law, centralizing the cabinet's personnel management, and reorganizing agencies and ministries (perhaps for real this time, unlike the Hashimoto-era reforms that simply created agglomerated superministries). While this section is also short on policy specifics, it is at least rooted in a clear-headed assessments of problems in national administration and a consistent set of proposals to fix them.

The same cannot be said for Hatoyama's remarks on economic reform. Under the heading of "Turning crisis into opportunity — opening frontiers," Hatoyama renews his party's call for an economy and economic growth that serves individuals, instead of enslaving them. What follows is the familiar refrain of green technology as a chance to transform the Japanese economy, coupled with embracing Japan's links with other Asian economies, especially through the promotion of tourism (he speaks of "tourism policy" without stating what that means in detail). Similarly, turning to economically stagnant provincial Japan, he calls for the modernization of Japanese agriculture and the achievement of a fifty-percent rate of self-sufficiency in food production, although the only policy to which he refers is his government's plan for direct income payments to farmers, which could prove beneficial for Japanese agriculture but not without other policies. Hatoyama is a little better when discussing decentralization — he calls for the creation of an equal relationship between central and local governments and describes this year as year zero for the "regional sovereignty revolution," but once again, there are few specifics on how this will translate into legislation.

Compared to these sections on the government's agenda at home, the foreign policy section of the speech provides a useful guide to the Hatoyama government's thinking. This is in part due to the nature of foreign policy, which is more abstract and therefore involves fewer proposals in the form of legislation or regulation. A policy address can actually provide a useful guide to how a government approaches the world.

What does Hatoyama's address tell us about his government's worldview?

First, his government takes the US-Japan alliance seriously to the point of wanting to change it so that it is suitable for twenty-first century challenges. Tellingly, his section on the alliance discusses Futenma briefly — reiterating his promise that his government will have a plan by May, and that any plan has to square with the desires of the Okinawan people — but focuses mostly on transnational challenges, namely climate change, nuclear proliferation, and terrorism (briefly). He does not speak of deterrence or regional public goods. While it would be nice to get some statement on the security cooperation layer of what Hatoyama calls a multi-layered relationship, I understand what the Hatoyama government is trying to do. A US-Japan relationship that focuses on bilateral security cooperation to the exclusion of nearly everything else is inevitably an unequal relationship, a relationship in which the stronger US presses a weaker Japan to take on new roles and acquire new capabilities. A relationship in which the two countries discuss other issues, non-traditional security issues or development for example, is inevitably a more equal relationship.

Second, the Hatoyama government is determined to reorient Japan to Asia. For decades Japan has tried to square its Asia policy with the US-Japan alliance; henceforth Tokyo will have to figure out how the alliance fits in with its Asia policy. This change did not begin with Hatoyama, but it has definitely become more pronounced. What is clear in this speech and other statements by Hatoyama is that Japan is not "America passing" when it comes to China. Just as Japanese concerns about the US government's "Japan passing" were (are?) overwrought, so too are American concerns about the Hatoyama government's cozying up to China. Yes, the Hatoyama government wants a "strategic, reciprocal relationship" with China (a phrase that originated with Abe, by the way), but it also wants better bilateral relationships with South Korea, Russia, India, Australia, and the countries of ASEAN. He wants Japan to have numerous bilateral, trilateral, and multilateral relationships in the region, and he wants his country engaged in tackling transnational problems within the region and around the world. While there are plenty of obstacles standing in the way of realizing these foreign policy goals — not least the limits imposed on the government by the public's desire to see domestic problems fixed — these remarks provide some indication to how Hatoyama's government will act internationally.

With that in mind, this speech is still instructive even though it is short on policy details. Perhaps the most noteworthy lesson from this speech is what it says about the DPJ's political base. In one section Hatoyama discusses the goal of "not allowing individuals to be isolated." To that end his government will protect employment, regulate the use of temporary workers, and enabling women, the young, and the old to participate fully in the economy and make use of their skills. Combined with its advocacy for stagnant regions, there are hints here that the DPJ over time could become the party of outsiders and laborers (whose interests clash to a certain extent). The natural rival for this party would be a Koizumian party, rooted in the middle and upper classes, prosperous urban and suburban districts, and supported by big business. Given that the Koizumians have been virtually driven from the LDP, it is difficult, for the moment, to see the LDP becoming this party. For now, economic insecurity means both parties are competing to speak for the marginalized, but should the economy recover a cleavage of this sort may be likely.

Finally, reading this speech calls to mind another recent prime minister from a prominent political family whose speeches were long on vision and ideas (and phrases in katakana) and short on policy details: Abe Shinzo. Obviously there are major differences between how Hatoyama and Abe see the world — Hatoyama is at least interested in the problems facing the Japanese people today — but like Abe, Hatoyama seems disinclined to dirty his hands with crafting a detailed policy agenda or the messy work of making policy proposals reality (i.e., politics). I cannot help but wonder whether a leader who appears so uninterested in the details of his policies and so unwilling to fight for them can be successful in power.

A twenty years' crisis

"Japan is an economy that is almost certainly producing well below its productive capacity - that is, the immediate problem facing Japan is one of demand, not supply. And it gives every appearance of being in a liquidity trap - that is, conventional monetary policy appears to have been pushed to its limits, yet the economy remains depressed. What can be done?"

So wrote Paul Krugman in his 1998 analysis of Japan's prolonged economic crisis, in which he argued that to escape its liquidity trap, it was necessary for "the central bank to credibly promise to be irresponsible - to make a persuasive case that it will permit inflation to occur, thereby producing the negative real interest rates the economy needs."

Four years later, then-Fed governor Ben Bernanke, in his noteworthy speech on deflation, echoed Krugman, arguing "We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation" — but then concluded that Japan's prolonged crisis was not the result of ineffective monetary policy but reluctance on the part of political actors to implement structural reforms, reforms that, Krugman argued, may be necessary but would do little to "induce people to spend more."

A decade after Krugman, Japanese authorities are once again stuck trying to stimulate aggregate demand.

Economist Ikeda Nobuo, in considering Japan's sluggish aggregate demand, concludes, like Bernanke, that the high liquidity preference of Japanese households — nearly half of Japanese household assets are held in cash or low-risk, low-return bank accounts — is a response to inefficient Japanese companies. Pessimistic that the Japanese government is capable of stimulating Japanese demand in the absence of foreign demand for Japanese goods, Ikeda concludes that the lost decade never ended: Japan is in the midst of a "lost twenty years."

A group of fifteen LDP lawmakers, however, has decided to embrace Krugman's solution, calling for the government to run the printing presses, expanding the money supply by 50,000 billion yen independently of the Bank of Japan in order to finance further economic stimulus. The "Diet Members League to consider the issuance of interest-free government bonds and government money" will hold its first meeting on Tuesday, with upper house member Tamura Kotaro chairing. Former finance ministry official Takahashi Yoichi will address the inaugural meeting.

The group's motto is essentially "desperate times call for desperate measures." Acknowledging that running the presses has positive and negative consequences, the group believes that the economic situation is sufficiently dire to merit the risk of hyperinflation. Quoted in an FT article, Mr. Tamura clearly has read his Krugman: "We are facing hyper-deflation, so we need a policy to create hyper-inflation. We have to do something to undermine the central bank and government’s credibility or else we won’t be able to halt the yen’s rise. So, while we know this is drastic medicine, we will do it."

The new study group has drawn the opposition of senior LDP and cabinet officials. Yosano Kaoru, minister without portfolio for economic and fiscal policy, suggested that the government should issue more bonds instead of printing currency. Shirakawa Masaaki, president of the BOJ, insisted that the policy would do precisely what its proponents intend, namely undermine the credibility of his bank and the health of the currency. The heads of the LDP's factions were equally critical of the proposal, with Tsushima Yuji, the eponymous head of the Tsushima faction, likening the proposal to the enten ponzi scheme.

In other words, this is yet another policy upon which the LDP is divided and unsure of how to proceed, yet another sign of the governing party's flailing about in hope of finding some way to save itself (and Japan).

Not being an economist, I cannot say whether this group's proposal is appropriate. After years of weak domestic aggregate demand, it may be that only drastic inflation may be the only way to make Japanese spend at home — or demand less liquid assets with higher returns — no matter how politically risky it is for the LDP. Pensioners, already angry at the government, will presumably be no less angry as they watch inflation erode their fixed incomes.

But however appropriate the inflationary proposal, it may be beyond the power of the Aso government to implement. Whatever legitimacy the LDP-Komeito government had is now in tatters. The prime minister's latest misstep is to call for the revision of the postal privatization scheme, the very basis of the government's parliamentary supermajority. Mr. Aso questioned whether it is appropriate to divide the postal system into four companies, and stated that now is the time to revise the privatization scheme. He blithely stated that this position is wholly unrelated to the 2005 election that gave the government its mandate. Public opinion may have changed since 2005, but to backtrack now makes a mockery of democratic legitimation. If the government wants to revert from a policy that was critical to returning the coalition to power, it should have to go to the people and ask for approval to change course. (Nakagawa Hidenao made this argument at his blog, as did DPJ member Nagashima Akihisa.)

Naturally LDP proponents of postal reform have been quick to criticize the prime minister for his naked appeal to find some issue that will rescue his sinking government. (It bears noting that Mr. Aso has spoken of preserving the quality of postal services, a major concern of the public when it comes to privatization.) Koizumi confidante Takebe Tsutomu was perhaps the most succinct in his criticism: "What nonsense! I wish he would be more discrete in his speech."

In short, the prime minister is gradually losing whatever ability he has to rally his party and the public to an agenda. He is incapable of setting priorities or taking decisive action. The halls of power echo with rumors of plots to unseat him.

It is unlikely that this shiftless prime minister is capable of deciding on so risky and decisive a policy as proposed by the new league.

This prime minister, his party, and his government are bereft of authority and legitimacy — and they appear determined to drag Japan into the abyss with them.

As MTC so eloquently observes, hopefully Secretary Clinton will take heed of the stench of decay when she visits Japan later this month.