Japan’s New Leader Vows to Stay the Course on Economy

Japan’s tradition of gradualism and its reluctance even during a major crisis to turn policy corners should benefit the world’s second-largest economy over the short-term following the sudden loss of its prime minister.

Newly named Prime Minister Yoshiro Mori, tapped to lead the country Wednesday after his predecessor, Keizo Obuchi, slipped into a stroke-induced coma three days earlier, has vowed to carry on where Obuchi left off.

“My biggest responsibility is to continue the Obuchi administration policy, especially the economic policy, which he staked his life on,” Mori said in a speech Wednesday.

Economists say stepping into Obuchi’s shoes, socks and mantle makes sense at a time when Japan’s troubled economy is just coming off life support and any rapid shift could damage or even reverse early hopes for a recovery.

“This is an economy still very vulnerable to shock,” said Russell Jones, chief economist with Lehman Bros. Japan.

The longer-term danger, however, economists add, is that Japan’s enduring preference for the status quo will further undercut reform and frustrate early efforts to breathe new vitality into this troubled nation.

But for now, many welcome the continuity. After two consecutive quarters of negative economic growth, a number of indicators related to business investment and confidence have only started to turn up, and economists say these need to be nurtured.

Sachio Okutomi, a 62-year-old food-service worker in Tokyo, says she’s noticed a small but perceptible change around her recently as people slowly gain more confidence and start opening their wallets. She recently spent more than $1,000 on exercise equipment, her biggest purchase in years.

“I’m not as scared as I used to be,” Okutomi said. “Everyone seems to be feeling a little more at ease.”

Japan’s financial industry continues to struggle. A wave of bank mega-mergers finally is starting to chip away at inefficiencies even as institutions start writing off bad loans and lending more to small companies. But significant dangers still remain, particularly in the troubled life-insurance industry.

The new prime minister walks into this delicate situation as a relative unknown with, by most accounts, little knowledge of or interest in the economy. Yet the lack of expertise also suggests Japan will keep in place the current seasoned band of economic advisors, including Finance Minister Kiichi Miyazawa, Economic Planning Agency Director General Taichi Sakaiya and central bank head Masaru Hayami.

This stability also should keep the nation’s powerful ministries on track and minimize infighting, in a nation where regulators still maintain inordinate control over citizen’s lives.

“The bureaucrats usually prefer consistency, so they should feel OK with Mr. Mori,” said Tomoko Fujii, economist with Nikko Salomon Smith Barney.

So far, the markets have shrugged off the transition. The benchmark Nikkei rose on Monday after news of Obuchi’s condition to a level not seen since late 1997, largely due to currency-related shifts. Since then, the Tokyo market has largely followed the gyrations of its U.S. counterparts.

“It’s the only country . . . where the top leader collapses and the stock prices rise,” said Takeshi Jingu, head of Asian research at Nomura Research Institute.

Even in matters of style, Japan has opted for a diet of sameness, prompting some to label Mori an Obuchi clone. Both men are old-style politicians and political fixers more adept at borrowing others’ ideas than developing their own. Both are 62, longtime friends since their days at prestigious Waseda University and head large LDP factions. And both rose through the ranks by capitalizing on their pragmatism, loyalty and ability to work well with both opposition and party members.

“It’s cold pizza continued,” said Yukio Akatsuka, a social critic, referring to a widely quoted criticism of Obuchi’s personality.

Economists favor holding elections earlier than October, the legal deadline, to reduce the pressure to pander to voters with costly election-eve promises. But Mori insisted Wednesday that he will not be pressured into holding snap elections, saying he has too many other tasks to tackle first.

The opposition, and some LDP members, had called for holding the election as soon as possible in order to capitalize on a wellspring of sympathy for the incapacitated Obuchi. But the Mori camp is wary of antagonizing its main coalition partner, the Buddhist-backed New Komei Party, which opposes early elections. The Yomiuri newspaper, Japan’s largest daily, reported in today’s editions that the LDP is now contemplating a June 4 election date. One issue looming after the election is government spending. Japan has spent a whopping $1 trillion during the last decade to prop up its limp economy. In the process, its public debt has ballooned to nearly 130% of GDP, the highest for any industrialized nation.

Obuchi was an avid spender and Mori is cut from the same silk, but voices are growing louder both inside and outside Japan to bring this spending torrent under control. Reining in boondoggle spending without pushing the economy into withdrawal will be one of the government’s early challenges.

“If they get the timing wrong, they could end up with another recession and a further fall in tax revenue,” said Nikko’s Fujii.

The second important issue, and one in which continued incrementalism could most hurt Japan, is structural reform across the government and the economy. Deregulation has already slowed to a crawl as earlier fears of an economic free fall have faded.

Here, Mori as an old-line LDP politicians shows little appetite for upsetting the sake cart. “He doesn’t appear to be much of a reformer,” said Richard Jerram, analyst with ING Barings. In fact, Mori was until recently a member of a parliamentary anti-deregulation group that has successfully blocked enhanced competition in the taxi and liquor retailing industries.

Fortunately for Japan, economists say, meaningful reforms are proceeding much faster in the business world, where blistering competition and pressure from global markets is forcing companies to pick up the pace in recent months in laying off tens of thousands of workers, restructuring operations and spurring productivity.

While government decisions can still act as a major drag on the economy, the gap between new progressive parts of the economy and the old Japan is only widening.

“In the future, the New York Stock Exchange will have a bigger impact on Japan’s economy than government budget decisions,” said Eiji Yamamoto, economics professor with Konan University.

Hisako Ueno in The Times’ Tokyo Bureau contributed to this report.

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Nervous Time

New Japanese premier Yoshiro Mori is not expected to change economic policies, even though the nation has slipped back into recession. Japan’s gross domestic product by quarter, percentage change from previous period:

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4th quarter 1999: -1.4%

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Despite GDP Figures, Nikkei Gains

The Tokyo stock market’s Nikkei index, monthly closes plus daily for this week:

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Monday: Investors shrugged off news that Prime Minister Keizo Obuchi had collapsed, sending the Nikkei index to a 2-year high.

Wednesday: 20,462.77

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Sources: Bloomberg News, OECD

Researched by NONA YATES / Los Angeles Times