The extraordinary thing about prime minister Yasuo Fukuda is not that he’s survived the pressures of office this long, but that he’s still on his feet at all. The 71-year-old came to the job last year after his predecessor fell prey to the usual political scandals, and it has been all downhill since then.

Fukuda’s popularity ratings have hit the skids. His attempt to reform the health service (by making the elderly pay more) has outraged the press, his plans to improve Japan’s environmental record would send taxes through the roof and in June his ruling party lost a critical vote of censure from the upper house of parliament, where his bitter rivals have very much the upper hand.

Constructive criticism
Well, perhaps I’m exaggerating a little. Not quite everything is going downhill. Mr Fukuda has deflected all the bullets that have come his way over his public construction policy, and bounced them straight back at his adversaries.

I ought to explain that public construction is a divisive subject in Japan. Ever since its economic crisis in 1990, with the collapse of the property market and a 65 per cent stock market crash from which it has never recovered, Japan has kept the wheels of its industry turning by building – bridges to towns that don’t exist yet, airports that nobody uses – whatever it takes to keep unemployment down, maintain the illusion of growth and avoid acknowledging that the economy is going nowhere fast.

But in the process it’s racked up a public sector debt that the Organisation for Economic
Co-operation and Development (OECD) now estimates at 180 per cent of its gross domestic product. By comparison, the EU starts tearing its hair out if members breach the 100 per cent mark.
 
Putting on the brakes
It had to stop eventually. In April, the OECD published a report declaring that ‘an improvement in the budget balance of between four and five per cent of GDP is needed just to stabilise the debt to GDP ratio – a first step towards the government’s goal of lowering the [debt] ratio in the 2010s’; and that ‘tax reform is an urgent priority, as Japan needs five to six per cent of GDP of additional revenue’ just to regain its balance. It also noted that a rapidly ageing population and growing income inequality were going to present problems that would blight the economy for decades if nothing was done.

Well, now something has been done. By charging the elderly more for healthcare, and by planning to send taxes soaring for the benefit of the environment, Mr Fukuda has made a tough start. And he’s cut the national building programme too – it now consumes 2.5 per cent less of the economy.

The budget deficit has come down to 2.9 per cent of GDP –  better than Britain’s performance. But Fukuda’s biggest coup this year has been to spike his attackers’ guns by unexpectedly agreeing it was time to scale back building still further, and to scrap taxes that had been planned to fund it. Having defused their entire main assault, the wily old man has left them with nothing to attack him with. The opposition is in complete chaos.

The economic woes persist
It’s hard to say just how much longer Mr Fukuda’s luck can hold.  June’s industry survey showed a steep fall in business confidence, with the number of optimistic companies outnumbering the pessimistic by only five per cent. Retail sales are on the floor, and though unemployment is only four per cent, it’s going to rise quickly when the construction work stops.

But, most spookily, the yen has started to rise – up from 123 to the dollar in June 2007 to a wince-making 96 in March, although it has since weakened a little. The point here is that Japanese exports will soon start flagging, even if the US manages to escape a full-blown recession this year. Japan can still boast a sharply diminished current account surplus of around US$220 billion (£110 billion) a year (to April 2008), but even that is going to take another battering in the next six months.

There is grim news on the investment front too. Last year, according to the OECD, foreign investors pumped only about $20 billion into the Japanese economy, but they withdrew $75 billion. So where’s the money going? China.
 
Looking for the downside
And yet things could still be worse. Japan’s banks don’t have much exposure to the sub-prime shocks that have been rocking the Western world – which is perhaps why the overall stock market rose by 12 per cent from March to May, at a time when markets in Britain and the US were battered by the Bear Stearns bail-out. Okay, you couldn’t call
a 14 per cent fall in the Nikkei during the first half a convincing performance, but against the backdrop of a rising yen it looked more hopeful than Britain’s FTSE.

Even so, July brought a downturn that’s got the world wondering how much worse it
can get. The Nikkei fell for 12 consecutive days – the longest run since 1954. They weren’t very big price falls, but they managed to spook the market.

So, what is Japan like as a place to invest? Well, it’s not the buzzing international hub that its fans might suggest. More than 90 per cent of its stocks are held by domestic Japanese investors, and the same goes for its vast market in government bonds, which are overwhelmingly owned by private households. And it’s just as well when you consider that Japanese shares pay a dividend yield of barely 1.6 per cent.

In theory, Japanese shares are much cheaper than they used to be. Today’s quoted p/e figure of 17 (from Reuters, for a group of companies worth 75 per cent of the Japanese stock market) seems very low compared with the days when 50 to 60 was more typical for the Nikkei 225. But things would start to look very different if you bought a Japanese fund. Are there enough reasons for buying into Japan’s ambitious reforms?

Under present conditions, with the trade balance in danger and the yen too expensive, no. And if Mr Fukuda comes under renewed attack in the autumn, as he almost certainly will, absolutely not. A global economic crisis is a lousy time to start a political dogfight.