Reform Could Be Ephemeral for Japan

The new economic team appointed Thursday by incoming Japanese Prime Minister Junichiro Koizumi sends a strong message through its inclusion of outsiders that reform will be more than a campaign pledge.

Somewhat less heartening, however, is the lack of hard-nosed experience needed to bring about Koizumi’s rather vaguely outlined reforms and tackle Japan’s deep-seated problems, economists and market watchers say.

“This is probably the first time we’ve ever seen such a huge gap between the high objectives set and the very poor [human] resources set out to achieve them,” said Shigenori Okazaki, analyst with UBS Warburg. “I’m really disappointed.”

Koizumi pulled off a stunning upset this week in a race to take over the ruling Liberal Democratic Party and become prime minister, bolstered by a loud grass-roots call for change.

His agenda includes tackling Japan’s massive problem bank debts, cutting public works spending and reforming its postal savings and insurance system--all part of a push to breath life into the its moribund economy.

Among Koizumi’s Cabinet picks, however, Finance Minister Masajuro Shiokawa, 79, has little grounding in finance or in putting budgets together, in sharp contrast to his experienced and respected predecessor, Kiichi Miyazawa.

And with a Group of 7 meeting coming up at the end of the month, Shiokawa has some fast cribbing to do. “He needs to study hard,” said Tomoko Fujii, chief economist for Nikko Salomon Smith Barney.

Heizo Takenaka, newly appointed state minister for economic and fiscal policy, is a respected economist and outspoken advocate of reforming Japan’s economic structure and policy toward markets.

The problem is, he’s a bit of an egghead, pundits say. “What he says is true, and his brain works very fast,” said Junji Ota, analyst with Okasan Securities. “But when theory contradicts reality, his first inclination at times is to say reality must be wrong.”

The one official earning consistently high marks is Hakuo Yanagisawa, 65, who will keep his job as financial services minister. Yanagisawa, a former Finance Ministry bureaucrat and market-force advocate, has overseen reform of the nation’s deeply troubled financial system.

Yanagisawa’s reappointment is seen as a sign the new administration plans to stick to a previously announced plan to write down the estimated $1.25 trillion in bad bank debt within the next two to three years--a mountain equivalent to nearly a quarter of all bank loans in the country.

Inevitably, however, Koizumi can’t achieve even the most symbolic of reforms if he doesn’t keep his job. With a general election in just three months, the new economic lineup appears designed more to extend his tenure than immediately tackle the daunting economic problems.

“It’s impossible to pull together much of a concrete plan before July,” said Masashi Hyuga, researcher with the NLI Research Institute. “And if they forced themselves to do it, the content would be very shallow.”

Also underlying the Cabinet makeup is a fundamental contradiction. As a pro-reform candidate, Koizumi needs people outside the mainstream of the insular ruling LDP who share his distrust of the business-as-usual policies underpinning Japan’s decade-long slide. Unfortunately, these allies often lack the brass-knuckle skills needed to outmaneuver resistant bureaucrats and back-stabbing political opponents.

Assuming Koizumi is not forced to step down after July, he has no shortage of economic problems to solve. And he’s outlined a few of his priorities over the last few years, albeit only in the vaguest of terms.

His most talked-about pledge is to privatize the Japanese postal system, which contains the world’s largest bank and largest insurer and competes with private institutions.

This initiative will probably be put off several years, however, given its political sensitivity. Not only has the system funneled billions into inefficient semi-state organizations, but it also has been a vote-gathering and fund-raising conduit for the LDP.

Koizumi also has spoken vaguely about the need to bring order to Japan’s troubled fiscal picture. Japan now has the most debt-ridden government among major industrialized nations, with debt now at 130% of gross domestic product. Koizumi has called for a cap on new borrowing at $25 billion a year, but given last year’s $23.3-billion borrowing level, that’s not a huge stretch.

He’s also called for a reduction in public works spending, which was nearly $415 billion last year. This, however, could quickly alienate many of the local LDP officials, who voted him into power.

A related concern is the faith that borrowers hold in Japan. Euromoney magazine recently reported that Japan has slipped to 16th place in terms of global credit-worthiness, down from 13th just six months ago.

Ultimately, even the most avid reformer must take into account Japan’s unique structure if he or she hopes to succeed. Japan’s unemployment insurance system, pension program and corporate bankruptcy law are underdeveloped because decades of relative stability made them largely unnecessary. Real shock treatment without a stronger safety net risks expensive social upheaval. “If Koizumi moves too quickly or dramatically, things could become much worse,” said Junichi Makino, analyst with Daiwa Research.

Koizumi has given ordinary Japanese hope of escape from their 1990s “lost decade.” But he’ll have to deliver on his promises quickly or see those hopes dissipate.

“At least we have a sense of empathy and possibility with Koizumi,” said Yoshihito Sakamoto, a 29-year-old construction company executive. “Still, I don’t know how he’s going to reduce Japan’s huge debt. Personally, life feels a bit bleak, and I’m quite worried about the future.”

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Hisako Ueno in the Tokyo bureau contributed to this report.

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Troubled Past

Japan’s economic troubles began in the early 1990s when its historically low unemployment rate began to soar. Despite repeated government rescue attempts, the change in the gross domestic product has bounced between positive and negative territory.

Sources: Japan Information Network, Economy.com

Researched by NONA YATES/Los Angeles Times