Koizumi Vows to Avoid Borrowing in Cutting Debt

Japanese Prime Minister Junichiro Koizumi pledged today to reduce the country’s debt by financing all spending except debt repayment without additional borrowing.

In his first policy speech since being elected prime minister, Koizumi said the government will rely on taxes and other revenue to pay for programs, rejecting borrow-and-spend policies that have failed to pull the economy out of a decade-long slump.

Koizumi’s speech lacked other new measures, as he largely reiterated previous proposals and reaffirmed his campaign pledge to change Japan’s political process and fix the economy, even if it means recession and higher unemployment.

The prime minister said he was determined to push through reforms “without being afraid of pain, being daunted by those who have vested interests and being hampered by previous experiences.”

Koizumi’s reform talk has been cheered by investors. Japan’s Nikkei 225 stock average has surged 3.3%, buoyed by foreign investors, since his inauguration April 26.

The yen also has risen 1.8% against the dollar in the last month amid optimism Japan may finally depart from failed policies of massive state spending that have produced negligible growth.

“Since the 1990s, the Japanese economy has been trapped in a prolonged slump, trust in politics has been tainted, and our society is filled with the sense of deadlock,” the 59-year-old Koizumi said.

Though the government has poured as much as $1.07 trillion into pump-priming packages since 1992, Japan’s growth averaged only 1.2% in the last decade.

Koizumi also has ignored the factional politics that have determined Cabinet posts in Japan’s postwar period. He excluded from his Cabinet senior members of his Liberal Democratic Party’s largest factions--those who have been regarded as representing the country’s vested interests.

Koizumi enjoys broad popular support. He now has to back up his talk with action, said Hitoshi Ichio, a strategist at Commerz Securities (Japan) Co.

“So far, Koizumi has earned high popularity, but financial markets will soon get irritated unless he draws a specific road map to implement his reform policies,” Ichio said before today’s address. “I guess the time limit for him is the end of May.”

After that, the new prime minister faces a popular referendum on his efforts in July, when Japan holds elections for the upper house of parliament.

Koizumi’s proposal to “balance” the budget, in the sense of keeping spending on government programs below revenue, would be the second step of what he called his two-step plan to reduce debt. He had pledged earlier to cap new bond sales at $246 billion a year, starting in the fiscal year beginning next April.

“Amid economic slumps in recent years, the government has implemented public works projects and tax cuts to stimulate demand,” Koizumi said in his speech. “However, the government has been compelled to repeat these measures for years and now we find Japan is under huge fiscal debt.”

Japan’s public debt will reach $5.5 trillion in March 2002, or 129% of the gross domestic product, the government estimates.

New Finance Minister Masajuro Shiokawa has said the government must trim $24.6 billion in general spending to cap the next year’s new bond sales at $246 billion.

Koizumi also reiterated his earlier promise to remove bad loans from Japanese banks’ balance sheet within two to three years.