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After Japan's frustrated voters handed power to the Democratic Party of Japan (DPJ) in the Aug. 30 parliamentary election, many had hopes that the country's new leaders would begin to solve some of the country's intractable economic problems. Among other popular proposals, the new government, led by Prime Minister Yukio Hatoyama, vowed to provide more government assistance for families to promote consumer spending while simultaneously taming the country's ballooning debt, which at nearly 200% of GDP is the highest among rich nations.

But the DPJ is finding it easier to make campaign promises than to keep them. Less than two months after taking over, Hatoyama's administration is being forced into a difficult balancing act between the need to prevent a double-dip recession and the desire to keep Japan's budget deficit from spinning out of control. The recession is knocking tax revenues so far below expectations that the deficit will rise to $548 billion this year, an enormous 10% of GDP. Yet, despite Hatoyama's instructions to keep next year's spending no higher than this year's initial budget of $970 billion, the country's ministries have submitted 2010 spending requests totaling $1.04 trillion.

Thankfully, in the face of mounting bad news on the budget front, Hatoyama is not stubbornly clinging to pledges of fiscal austerity. Major spending cuts have been rendered unrealistic by the current economic climate. Falling real wages and low business investment mean Japan's recovery is fragile. A recent Nikkei newspaper survey showed that 38% of top Japanese executives rated the likelihood of another downturn next year as high or somewhat high. The biggest risk, cited by 69% of respondents, was "the effect of fiscal stimulus measures wearing off." Hatoyama appears to be willing to continue stimulus spending under the circumstances even if that means more red ink. He has learned a lesson from 1997, when Tokyo prolonged and deepened a recession by raising taxes prematurely.

Yet Hatoyama is not explaining this U-turn very well — nor is his message consistent. For example, he has indicated that, in the interest of fiscal responsibility, he may toss overboard some of the $77 billion in programs that the DPJ offered to increase household disposable income. The purpose of this spending is to help shift Japan from an export-led economic model to one led by consumption. During the country's 2002-07 recovery, fully one-third of GDP growth was attributable to a rising trade surplus. As the severity of Japan's current recession showed, this is not a sustainable path.

In an effort to make this vital structural change, the DPJ has recognized a simple fact long denied by predecessors: consumer spending is weak because household income is so low relative to GDP. Real wages per worker have fallen every year but one since 2001. In response, the DPJ, in its policy manifesto used to win the election, came up with a series of programs that will not only put more money into the pockets of consumers but also ease the financial burdens of child-rearing. Programs would include a child allowance of $3,000 per year per child, free medical care for children, free education through high school at public schools and a number of tax cuts.

By delaying or reducing these programs to hold down the deficit, and by repeatedly setting budget and spending targets that he is unable to keep, Hatoyama runs the risk of making it look as if he is being dragged along by events rather than taking charge of a difficult situation. He claims that this apparent waffling will not hurt the DPJ's popularity, saying recently that "the public is flexible about the [DPJ's] policy manifesto." Certainly it seems to have done no harm so far. In mid-October, the government's approval rating remained very high at 73%. But the honeymoon is unlikely to last forever.

Behind Hatoyama's flip-flops is contradictory advice from top aides. Some are telling him to stick to fiscal austerity to mollify voters' fear of ever-larger deficits — a public concern that could hurt the DPJ's chances of winning a majority in crucial July 2010 elections for the Diet's Upper House to accompany its newly won majority in the Lower House. But come next July, the DPJ would be hurt a lot worse at the polls by higher unemployment than a higher deficit. What Japan needs today is fiscal stimulus that stresses the DPJ program to shift Japan to consumer-led growth. Once the economy truly recovers, that will be time to focus on deficit reduction. If Hatoyama gets the order right, hopes that the DPJ's historic election victory might bring real change to Japan might be justified.

Katz is editor of The Oriental Economist Report and author of Japanese Phoenix

• Richard Katz
• Why Japan's new Prime Minister is finding it hard to manage the country's economic mess