By Makiko Yamazaki and John Geddie

TOKYO (Reuters) – Yuichiro Tamaki, the leader of a small opposition party now able to wield huge political influence, has long wondered how to revive a moribund Japanese economy mired in deflation.

A former finance ministry bureaucrat, his early career was steeped in fiscal conservatism, but even so, he became convinced that the mild “Abenomics” fiscal and monetary stimulus policies favored by Japan’s leaders for about a decade had not gone far enough. away.

His light bulb moment came after he read a 2016 speech by Federal Reserve Chair Janet Yellen about running a “high pressure” economy — one in which demand outstrips supply in a tight labor market to spur economic growth and dispel economic misfortune.

“It felt like something that had been unclear in my head was erased,” Tamaki said in a 2021 blog post, praising Yellen’s proposals.

Tamaki, 55, now advocates aggressive tax breaks and social spending. As leader of the Democratic People’s Party (DPP), he may well have opportunities to put his theories to the test.

Elections on October 27 left the ruling Liberal Democratic Party (LDP) and its coalition partner Komeito running a fragile minority. Prime Minister Shigeru Ishiba’s administration has sought cooperation with the DPP, particularly on economic measures, and Tamaki said he could support coalition policies where they can find common ground.

But while some economists say Tamaki’s plans could boost a still-fragile economy, others fear they could swell Japan’s debt mountain, unsettle investors and complicate the central bank’s efforts to rid the country of decades of stimulus massive monetary.

THE UNORTHODOX APPROACH

Originally from a small rural town in western Japan, Tamaki studied law at the University of Tokyo before beginning a 13-year stint as a career bureaucrat in 1993, just after the country’s housing and stock market bubble burst.

Despite climbing the ladder to get a job in the cabinet office of LDP Prime Minister Junichiro Koizumi, Tamaki decided to join the opposition and run in the 2005 election.

He lost, spent four years in the political wilderness, but then came back to win a seat in 2009, when the opposition ousted the LDP for the second time in Japan’s postwar era.

Asked why he rejected fiscal conservatism, Tamaki said at a news conference Friday that he had seen firsthand how those policies had failed to stave off a nearly 30-year decline in real wages.

Tamaki is not the first to advocate fiscal largesse to revive Japan’s economy – which some predicted half a century ago could overtake the United States to become the world’s largest, but last year slipped below Germany on fourth place.

Abenomics, named after Prime Minister Shinzo Abe, who led the LDP back to power in 2012, increased the money supply, increased government spending and sought to reform corporate governance. But it didn’t do the trick, Tamaki says, because demand was stifled by successive increases in the consumption tax.

Tamaki’s vision, such as increasing the basic tax-free income allowance, temporarily halving the country’s consumption tax and cutting the petrol tax, has won significant support among younger voters.

He also said the Bank of Japan should pause its efforts to raise interest rates for at least six months.

While his rise to prominence was marred this week by revelations of an extramarital affair, his party has rallied behind him in support.

WHO PAYS?

As the ruling coalition debates the DPP’s policy proposals, the finance ministry, in apparent protest, has estimated that Tamaki’s proposed increase in the income tax threshold could trigger a drop in tax revenue of more than ¥7 trillion (46 billion of dollars).

But Tamaki remained unmoved, stressing that Japan’s inflation remains low compared to other developed economies and that it has room to spend given the huge tax revenues of recent years.

Takuya Hoshino, chief economist at the Dai-ichi Life Research Institute, said Tamaki’s policies could be effective in boosting long-stagnant consumption.

But other economists say his policies risk fueling inflation and increasing public debt, which is already more than twice the size of Japan’s economy.

The policies are “short-sighted” and could unsettle bond investors at a time when the central bank is trying to reduce its holdings of government bonds bought through its emergency quantitative easing program, said Norihiro Yamaguchi, senior economist at Oxford Economics in Tokyo. .

“It’s like a huge tax burden and eventually somebody has to pay,” he said.

(Reporting by Makiko Yamazaki and John Geddie; Additional reporting by Tim Kelly; Editing by Edwina Gibbs)