Oh dear.

From Bloomberg on Thursday:

The spokesman, Japan’s chief cabinet secretary Yoshito Sengoku, was explaining the sentiments behind PM Kan’s pledge in a TV interview on Wednesday night to stake his “political life” on addressing Japan’s rising social welfare costs and increasing public debt, a day after he said “now is the time” to face these problems.

The prime minister “was expressing his deep sense of crisis and resolution about the sustainability of social security as the aging population increases under a low birth rate,” Sengoku said on Thursday. “The supporting fiscal conditions don’t allow for any delays, it’s finally approaching the edge of a cliff.”

It’s all part of a new push by Kan’s DPJ government to raise support for a sweeping reform of Japan’s tax system, amid fresh howls about the pain of yen strength from big Japanese exporters, general griping about the economy and rising political opposition.

A valiant effort to defend his boss indeed. But with spokesmen like that, Japan doesn’t need any detractors.

As usual in the land of contrasts, though, you have some rather baffling views being put forward – not least by some of Japan’s top business leaders.

As the Wall Street Journal reports on Thursday, leaders of Japan’s three leading business lobbies – the Japan Federation of Economic Organizations (known as Keidanren), the Japan Association of Corporate Executives, and the Japan Chamber of Commerce – predicted a mild economic recovery in the next fiscal year, led by growth in the US and emerging markets.

Not only that, their attitude to yen strength stood in stark contrast to a recent claim by Toyota that the yen-dollar exchange rate should be a minimum of Y90 (it’s currently around Y83) if Japanese jobs are not to be cut by struggling exporters. The lobby leaders took a sanguine view, saying the currency was likely to depreciate against the dollar as the US and European economies pick up.

Japanese stocks hit an eight-month high on Thursday while the rest of Asia was generally flat, as the FT reports. The yen took a slight dip against the dollar, falling 1.5 per cent on Wednesday to Y83.26, largely due to Toyota’s recent plea for yen weakening – and subsequent speculation about Bank of Japan intervention (again) to curb yen strength.

But even if further rounds of intervention are on the cards, yen weakening seems unlikely, according to Nomura analysts. In a Wednesday note, they said the yen’s recent strength comes not from yen-buying by Japanese investors, but from the “somewhat overblown impact of USD selling by foreign investors amid thin trading”.

From here, they warn, hedge funds could sell the “overvalued” yen, with focus on the wider US-Japan rate differential. So far though, there are no signs of the investment flows from Japanese investors essential for any sustained yen weakening, Nomura concludes.

RBS Securities Japan meanwhile gives us a surprisingly upbeat view of Japan’s prospects for 2011, saying in its latest note:

If we raise key factors for [Japan's] economy in 2011 as we did a year ago, these would be: 1) coupling of global economies; 2) currency rates (sustained yen gains); and 3) US monetary policy. In particular, a closer match of economic cycles, led by excess liquidity, may increase overall volatility of global economy. High interest-rate volatility seen late last year, spurred by expectations of a US economic recovery, could be viewed as a precursor of this trend.

… the Japanese economy is likely to exhibit a cyclical recovery in 2011. Given the result of industrial production, 4Q GDP is likely to record minus growth with less policy assistance, we foresee a modest recovery trend through the second half of the year.

On RBS’s list of “positives” and “negatives” for Japan’s economy:

Positives
- Sustained accommodative policies in developed economies
- Continued inflow of excess liquidity to developing economies and a growth-driver role for these economies
- Improved employment condition on delayed support from the v-shaped recovery in corporate profits during 2010
- Cyclical recovery for capital investment

Negatives
- Lingering adverse cycle of deflation, high real interest rates, yen appreciation, and more deflation
- Return of cost-push inflation
- Inventory adjustment mainly for IT-related products and spill-over for other products
- Political upheaval in early 2011

Unsurprisingly, however, mixed signals continue to be the order of the day. As the FT’s Asia editor David Pilling notes in his latest column, it is easy to make the case for Japan’s decline.

But underlying that argument, he notes, are two key assumptions:

The first, that a successful economy is one in which foreign businesses find it easy to make money. By that yardstick Japan is a failure and post-war Iraq a glittering triumph. The second is that the purpose of a national economy is to outperform its peers.

If one starts from a completely different proposition — that the business of a state is to serve its own people — the picture looks rather different, even in the narrowest economic sense, says Pilling.

Japan’s real performance has been masked by deflation and a stagnant population. But look at real per capita income – what people in the country actually care about – and things are far less bleak. By that measure, according to figures compiled by Paul Sheard, chief economist at Nomura, Japan has grown at an annual 0.3 per cent in the past five years. That may not sound like much. But the US is worse, with real per capita income rising 0.0 per cent over the same period.

That, however, may be of very cold comfort to those concerned as the country’s finances continue drifting towards the edge.

Related links:
Recipe for Japanese ‘healthiness’ eludes Kan – FT
The Italy of Asia - WSJ
To the Japanisation of bonds and back again – FT Alphaville
Japan is not the end game – ZeroHedge