EDITORIAL: Challenges facing Kan

Naoto Kan replaced Hirohisa Fujii as finance minister after the latter stepped down Wednesday for health reasons.

Kan has been a key political ally of Prime Minister Yukio Hatoyama since 1996, when the Democratic Party of Japan was formed, and as deputy prime minister is the No. 2 person in the Cabinet. Also, as the minister in charge of developing national strategies, Kan was deeply involved in drafting the fiscal 2010 budget, the first major challenge for the Hatoyama administration.

Kan is well qualified for his new post, given his political clout and achievements as well as his reputation as the most powerful debater within the party.

Kan faces a raft of formidable challenges. To stem the deflationary downturn, the second supplementary budget for fiscal 2009 and the fiscal 2010 budget must be enacted quickly. Kan will lead the government's efforts to enact these bills during the ordinary Diet session starting Jan. 18.

He will also have to seek closer policy coordination between his ministry and the Bank of Japan in the government's efforts to tame deflation and deal with the appreciation of the yen. Another major issue is the rehabilitation of Japan Airlines Corp. The work to craft a bailout plan, which will probably use public money, is now in the final stage.

Kan must quicken the process of designing an environment tax, although the government postponed the introduction of such a levy. Kan also needs to push through with reforms he cited at his inaugural news conference as finance minister on Thursday, such as disclosure of information about the implementation of budgets and a sweeping review of both the general and special accounts.

Fujii's remarks about exchange rates immediately after he became finance minister led to the yen's rise against the dollar. This episode was apparently on Kan's mind when he said at the news conference, "I would like to see the yen weaken a bit," in an apparent attempt to "talk down" the yen.

Kan will face the first major test of his prowess during the meeting of finance ministers and central bank governors of Group of Seven industrialized nations scheduled for early February.

All these are important. But Kan's primary mission is to map out a plan for the long-term fiscal sustainability of the nation.

Tax revenue is plunging because of the economic crisis, and the government's tax receipts will cover less than half of its spending under the draft budget for the year from April. The government depends on bonds--debt--and maizokin--reserves and surpluses in special accounts--for the financing of the budget.

But it is becoming clear that the government can no longer expect a large amount of maizokin. Meanwhile, the bond market is becoming increasingly wary of the swelling government debt. If nothing is done, the budget crunch will only get harsher in the years ahead.

It is vital for the government to consider tax increases, especially a hike in the consumption tax rate, as the economy starts emerging from the crisis and deflation. Kan, however, showed caution on raising taxes at the news conference, although he did acknowledge the need to increase tax revenue.

"We will be able to debate a tax increase earnestly only when wasteful expenditures have been eliminated completely," he said.

The government is absolutely correct in focusing first on cutting wasteful spending and uncovering maizokin. The Hatoyama administration, however, has shown some troubling signs of shying away from telling the public that a tax increase is inevitable. It seems to be putting priority on its efforts to secure victory in the Upper House election this summer. The government's Tax Commission, for instance, didn't even discuss raising the consumption tax rate.

If the government maintains this stance, the nation's debt will only keep growing. It will probably be difficult for the government even to raise the money to finance the DPJ's key proposals for shifting policy focus from public works projects to people's livelihoods.

The government can no longer put off efforts to regain fiscal health. As the new finance minister, Kan should exercise strong leadership in tackling this colossal job.

--The Asahi Shimbun, Jan. 8