Quotes of the Day

In its first hours as Japan's new ruling party, the Democratic Party of Japan (DPJ) and its leader Yukio Hatoyama wasted no time preparing for a transition of government. In the historic Aug. 30 general election, the Japanese people — about 70% of eligible voters cast ballots — ended a half-century of nearly unbroken rule by the Liberal Democratic Party (LDP). Hatoyama's party took 308 of the 480 seats in the House of Representatives, 12 seats shy of a two-thirds majority that would have allowed the party to single-handedly pass bills rejected by the upper house. The LDP won 119, slightly more than a third of what it had before Prime Minister Taro Aso dissolved parliament in July. Aso stepped down as party chief the day after elections.

Handed a mandate to steer Japan out of a malaise of economic crisis and failed social systems, the next Prime Minister of Japan and his party need to reverse the nation's lost confidence in government leadership. A misstep, scandal or lack of fortitude in reform could cost the DPJ the upper-house elections next July — a severe check on the new administration's progress. Experts pinpoint five areas where the new ruling party should put its focus to get the nation back on track.

Get the Budget Under Control

In mid-September, the DPJ will take over as the official ruling party, with the Diet's election of Hatoyama as Prime Minister and the appointment of ministers. That leaves 100 days for the new administration to draft a budget for the next fiscal year that doesn't increase the national deficit — now at 180% of GDP — but still holds to its costly election-year pledges. If the national budget is not prepared by the end of the year, the green shoots of economic growth could dry up.

THe DPJ says it can recover $97.8 billion in "wasteful spending," partly through reductions in civil-servant-personnel costs and the upkeep of government offices, in order to realize its campaign promises over the next four years. Those promises include cash handouts to families with children, free high school education, free highways, a four-year freeze on consumption tax (now at 5%) and a curbing of bond issuances. The DPJ must deliver on its promises without increasing the level of deficit financing "to demonstrate that they're fiscally responsible," says Gerald Curtis, a Japanese-politics expert and professor at Columbia University.

Not everyone is convinced the DPJ can do that. Masaaki Kanno, chief economist at JPMorgan Securities in Tokyo, is skeptical that cutting wasteful spending and finding hidden reserves will compensate for growing expenditures; social security, for example, will need to expand by up to 1.5 trillion yen annually. "Within two years, the DPJ will have to show people a consistent way to finance additional spending," he says. "[The need for growth] has nothing to do with political ideologies. It's the reality of economic equations."

Find a New Way to Grow

The global economic crisis dealt a blow to Japan's export-led economy, and there was little to fall back on. Domestic consumption and investment need to be closer to the center of economic growth, and that requires major change, including regulatory reform. Leaning less on export-oriented growth doesn't mean cutting back on exports if the government uses deregulation to stimulate domestic consumption, says Naohiro Yashiro, an economics professor at Tokyo's International Christian University. The DPJ plans to do that by increasing household income through monthly child allowances and the elimination of highway tolls, which should have the same effect as tax cuts. It also aims to develop new environmental technologies and create jobs in nursing, health care and agriculture. Toshihiro Ihori, an economics professor at Tokyo University, says that in addition to regulatory reform, offering favorable treatment to skilled foreign labor and foreign corporations would generate more investment and domestic economic activity.

Wrest Power from the Bureaucracy — Gently

Japan's system is unlike that of the U.S. in that there's no personnel overhaul with a change in administration. Japanese bureaucrats wield more power — sometimes even more than elected officials — and have long called the shots on everything from budget formulation to foreign policy. The DPJ has vowed to expand the power of the Prime Minister's office and the Cabinet, something pursued by previous Prime Ministers. But it's a delicate job, and one that could easily go sour.

The DPJ plans to appoint 100 ruling politicians to oversee ministries. In order to transfer more power to the Cabinet — and away from ministry bureaucrats — the DPJ will also replace the Council on Economic and Fiscal Policy, an advisory group to the Prime Minister's office set up in 2001, with a National Strategy Bureau (NSB) reporting to the Prime Minister. The NSB will be key in budget and diplomatic-policy formulation. The DPJ also wants to eliminate amakudari, or descent from heaven, which places retired bureaucrats in plush jobs. "This is a new way of doing business in this country," says Curtis. "[But you] can't bash and demoralize [the bureaucrats]. The DPJ has to find a way to enlist them on their behalf."

Buddy Up with the Rest of Asia

China is now Japan's largest trading partner and is the powerhouse for growth in Asia. Japan, which has helped build the region with economic assistance and technology, needs to continue to cultivate Asia's economic potential and strengthen diplomatic ties. "Japan can benefit from high Asian growth rate even with low domestic demand," says JPMorgan's Kanno. Closer relationships with Asian economies, he says, are a must, particularly in terms of agricultural trade and free-trade agreements. "If Japan accepts more agricultural imports, then it will have closer relations and trade volume will rise." Kanno says agricultural reform has the potential to have more of an impact than the overhaul of Japan's vast and costly postal system, a pet reform of former Prime Minister Junichiro Koizumi.

Know that Old Is the New Young

With a birth rate hovering around 1.3 and with nearly half of Japan's population of 95 million expected to be over age 60 by 2050, Japan is the most rapidly aging country in the world. Its demographics have traditionally been seen as a liability and a drag on productivity. But it could be a ripe opportunity for the domestic economy. The health-care-service industry is growing, and the technologies developed to handle the aging population will be of use to other industrialized nations when their time comes. Liberalization of growing sectors such as nursing and medical care would allow consumers to pay extra for premium services and thus stimulate domestic demand. While public health insurance is necessary, economists say that high-quality private hospitals and clinics that charge more could hire more doctors. "Why don't localities try to become the Miami, Fla., or Arizona of Japan? Because of regulation," says Curtis. It is, after all, the land of the rising sun. And all eyes are now focused on how the new administration will deal with what looms on the horizon.

— With reporting by Yuki Oda

• Coco Masters / Tokyo
• Japan's opposition party just won a landmark election victory. Now for the hard part