IN a major speech to the Japanese Diet last week, Prime Minister Yoshihiko Noda put his career on the line.
The government, he said, would press ahead with plans to raise the consumption tax to 8 per cent in April 2014, and to 10 per cent by Oct 2015. Highly unpopular, the tax hike is nevertheless seen by analysts as essential if the government is to have any hope of improving its finances.
After decades of fiscal pump priming in an attempt to stimulate the economy, the Japanese government is heavily in debt. Outstanding public debt in fiscal 2012 is projected to exceed the 42.3 trillion yen (S$693 billion) the government expects to collect in taxes by roughly 17 times. The value of new bonds issued this year is set to exceed tax revenues for the third consecutive year.
Despite this, the opposition conservative Liberal Democratic Party (LDP), which controls the upper house, is playing politics. Having earlier admitted that a rise in the consumption tax was necessary, the party has since refused to discuss the issue. Instead, the LDP is pressing Mr Noda to dissolve the Lower House and call an election.
Legislative gridlock has become common in Japan in recent years. Mr Noda also has to deal with ambitious figures within the ruling Democratic Party of Japan (DPJ) who are waiting for him to miscalculate. Tokyo has seen a prime minister removed from office every year since 2006.
Trade is another area where the reformist prime minister hopes to make a difference. Once an export powerhouse, Japan experienced its first annual trade deficit in more than 30 years in 2011.
On Jan 24, Bank of Japan Governor Masaaki Shirakawa put on a brave face, arguing that the deficit would not become a "firmly established trend". It was, he said, due to "temporary factors".
Chief among these was the earthquake and tsunami in March last year, which damaged factories and disrupted the supply chains of major companies such as Toyota and Sony.
The problems of exporters were further exacerbated by events associated with the flooding of Japanese production facilities in Thailand. But given that Japan’s major export markets, the United States and Europe, appear to be heading for recession, it would not be surprising if the trade deficit continues.
Added to this is the fact that the persistently strong yen has been encouraging Japanese companies to shift their production bases overseas. South Korea and other Asian nations are also increasingly competing in markets which Japanese companies had previously dominated.
The Fukushima nuclear disaster has also added to the import bill by forcing utility companies to shut down nuclear power plants and restart conventional ones powered by oil and liquefied natural gas. It may be years before nuclear power once again becomes politically acceptable.
Since taking office in September last year, Mr Noda has tried to revitalise exports by refocusing government efforts on free trade talks.
Negotiations on a free trade agreement have resumed with Australia, and Tokyo recently concluded a joint study with China and South Korea on the possibility of signing a tripartite free-trade accord.
A free trade pact between Japan and Peru is set to take effect on March 1. Tokyo already has a similar agreement with the 10-member Association of South- east Asian Nations.
Mr Noda’s most important move, however, has been the decision to participate in talks on the proposed Trans-Pacific Partnership (TPP) agreement. This multilateral free-trade initiative is supported by Keidanren, an organisation representing Japanese manufacturers, but is strongly opposed by the nation’s influential and highly protected farm lobby.
As with the proposed tax hike, the road ahead is likely to be rocky. Apart from domestic opposition, bilateral agreements could be undermined by longstanding diplomatic tensions.
In November, when Mr Noda and South Korean President Lee Myung Bak met in Kyoto, the Japanese prime minister took the opportunity to call for an early resumption of negotiations on a bilateral free trade agreement.
But the two leaders failed to set a date after Mr Lee insisted that Mr Noda first resolve the long-standing issue of compensating women who were forced into wartime sex slavery by the Imperial Japanese military.
Meanwhile, economic growth continues to disappoint. Earlier this month, the International Monetary Fund lowered its 2012 growth forecast sharply, dashing hopes that a stronger economy would boost government revenues significantly.
The IMF now says that the Japanese economy will grow by just 1.7 per cent this year, down 0.6 percentage point from its estimate in September.
Mr Noda’s attempts to revitalise the economy by introducing long overdue reforms are laudable. But any assessment of the prospects for implementation must take account of the fact that Japanese politics has become increasingly unstable in recent years. Even if the tax hike legislation gets through the current session of parliament, for example, there is no guarantee that, come 2014, a new prime minister will implement it.