Japan election puts spotlight on reviving economy

TOKYO (AP) -- It's the $6 trillion question: how to jolt Japan out of its 20-year economic slump.

The dozen or so parties vying in a Dec. 16 parliamentary election all agree the world's third-largest economy needs a jump-start, now that it has slid back into recession for the fifth time in 15 years.

They are at odds, however, over how to achieve enduring growth.

Former Prime Minister Shinzo Abe, who is poised to head the government again if his Liberal Democratic Party does as well most polls are forecasting, favors forcing the central bank to do whatever it takes to meet an inflation target, of perhaps 2 percent, to break the economy out of a spiral of falling prices known as deflation.

Many economists agree.

More than 20 years after its "miracle economy" bubble burst, Japan seems trapped in a vicious circle of sinking prices and weak demand as sluggish growth forces businesses to slash prices and frugal-minded consumers put off spending.

Creating the expectation that costs of big-ticket purchases such as housing or cars will rise due to inflation could help prod people into spending more, said Tony Nash, managing director at IHS Global Insight in Singapore.

"When people are uncertain, they hold cash," he said. "By stimulating inflation a bit, what Abe's trying to do is to push those purchasing decisions to now."

After a strong start to the year, Japan's recovery from its March 2011 earthquake and tsunami disasters fizzled as crisis-stricken Europe lost its appetite for Japanese exports of cars and electronics components. Exports took another hit as a territorial dispute over East China Sea islands set off anti-Japanese protests in China.

Meanwhile, domestic demand faltered, as the anticipated boost from reconstruction following the 2011 disasters fell short of expectations.

The Japanese are weighing many tough choices, including whether or not to phase out nuclear power following meltdowns at the Fukushima Dai-Ichi power plant which was crippled by the tsunami that devastated much of the northeastern coast.

But the biggest concern for many voters is getting growth back on track.

Revised data this week show the economy has slipped back into recession. Growth in the April-June quarter was revised to a contraction of 0.03 percent. The economy shrank 0.9 percent in July-September from the previous quarter and likely is still contracting, economists say.

"The economy has to be the top priority. It's also linked to the territorial problems and nuclear energy. They're all tied together," Masahiro Ikeda, a 65-year-old barber, said from his small shop in the western Tokyo suburb of Fuchu.

The election winner will provide Japan's seventh prime minister in seven years, though even the front-runner, Abe, is not expected to gain a strong majority. The constant changes in government have stymied progress on reforms needed to adapt the tax system, labor laws and other institutions to suit an era of rapid aging and slower growth.

"What the Japanese people want is an effective government, and they haven't seen one for a while," said Steven Reed, a political science professor at Chuo University in Tokyo.

Like the U.S. and other rich economies, Japan faces the hard choice of either spending its way deeper into debt, which already amounts to more than 220 percent of its 500 trillion yen ($6.1 trillion) GDP, or slashing spending and seeing the economy falter further.

Abe, who resigned as prime minister in 2007 after just a year in office due to health problems he says are now under control, wants the Bank of Japan to do more to spur growth. And he accuses Prime Minister Yoshihiko Noda of failing to spend enough on public works.

Noda's Democratic Party of Japan took power three years ago pledging to end wasteful spending and the cozy ties between politicians and bureaucrats that dominated LDP politics during its decades in power after World War II.

But the March 2011 disasters compounded the challenges of making such fundamental changes, and Noda was obliged to call elections in exchange for gaining passage in June of a highly unpopular sales tax increase.

Both parties are "tinkering at the margins," said David Rea, an economist at Capital Economics in London.

"The LDP seems like they're saying, 'Let's go back to the good old days,'" Rea said, by spending heavily on construction.

During Japan's decades of fast growth, massive investments in public works helped to redistribute wealth generated by its export sector to other, less competitive areas of the economy, and from the cities to the less affluent countryside.

The Liberal Democrats acted as the conduit, rewarding the construction sector and other bastions of support with massive pork-barrel spending.

Spending on public works might work in the short run, but given Japan's shrinking workforce and soaring social welfare and health costs, it is unsustainable in the long term, said Masahiro Matsumura, a professor at St. Andrews University in Osaka.

"We cannot afford to spend everywhere, so the government has to decide on a more effective approach," Matsumura said. "Investments that don't lead to improved efficiency will be wasted."

Reflecting such concerns, a $10.7 billion stimulus package announced late last month targeted spending on key sectors of the economy such as renewable energy and small and medium-sized companies.

Many economists argue the only thing Japan can afford less than higher debt is austerity. But while its bond market remains a "safe haven" for global investors and it is not facing the sort of repayment crisis that is plaguing Greece and other European economies, there are limits, said Rea.

"It is crucial that they put the economy on a more sustainable path," Rea said. "They are hugely indebted and paying more and more on refinancing a debt that will continue to go up."

Ikeda, whose son is working with him in his barber shop, is more concerned for his two children than for himself.

"My son isn't married. Salaries are low, so it's hard for him to get married or have a family or buy a home," he said.

"I wish he could just have a normal job and life, nothing fancy. But it's gotten difficult for that to happen in modern Japanese society."

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Associated Press writer Malcolm Foster contributed to this report.