Japan’s new prime minister, Naoto Kan, has been given a poisoned chalice to say the least. Although GDP is growing again, the magnitude of the country’s economic challenges is gargantuan:

• A fiscal deficit of around 10% of GDP
• A public debt burden of 200% of GDP
• An ageing and shrinking population
• Weak private consumption
• Consumer price deflation
• A weak external environment, with a real possibility that China – Japan’s biggest trade partner – could slow sharply.

Given the sheer scope of these problems, no Japanese leader, no matter how capable, can be expected to make progress in tackling these any time soon. Most likely, it would take at least 5-10 years to put Japan on the path to sustained recovery. However, the temporal dynamics of Japanese politics do not allow prime ministers that much time.

Revolving Door Premiers Hobble Leadership

Kan is Japan’s fifth prime minister in four years, and the thirteenth since 1990. As far as I can tell, Japan has the world’s fastest turnover of heads-of-government. No wonder that they have been referred to as ‘revolving door’ prime ministers (alas, with no Superman in sight). Indeed, the political system has a chronic inability to produce strong and durable leaders. The main exception to this pattern was Junichiro Koizumi (2001-2006), who presided over a strong period of economic growth supported by a robust global economy. This allowed the government to trim back its budget deficit and stabilise its debt burden. However, with the economy souring thereafter, successive premiers have come a cropper very quickly.

Essentially, Japan’s political culture makes it virtually impossible for prime ministers to hold onto office if their approval ratings drop below 25%. And, given the economic challenges I listed above, it is virtually inevitable that the incumbent prime minister’s popularity will slide below 25% within a year of taking office. Kan’s immediate political test will come in late July, when Upper House elections are held. A poor performance by his Democratic Party of Japan would severely weaken his leadership.

Thus, I see very little scope for Japan to break the cycle of revolving door prime ministers. This means that real power will continue to be wielded largely behind the scenes by party heavyweights and the bureaucratic machinery, with the latter generally being averse to political and economic reform. Yet without such reforms, Japan will find itself unable to reverse its seemingly irreversible decline.

Meanwhile, the rapid turnover of Japanese premiers leads to policy confusion for voters and investors alike. With each successive premier reshuffling cabinet posts and consolidating his authority, this means that a considerable amount of political capital is spent on jockeying for position rather than meeting the challenges at hand.

Fiscal Consolidation Becoming Urgent

Kan’s top priority will be bringing about fiscal consolidation, lest investors conclude that Japan will eventually experience a fiscal or debt crisis. However, striking a balance between cutting spending and raising taxes will be difficult, since this could tip the economy back into recession just as it appears to be recovering.