FOUR-YEAR REPORT CARD

Is the economy better off under Koizumi?

by Reiji Yoshida

Prime Minister Junichiro Koizumi on Tuesday enters the fifth year of his administration.

In April 2001, Koizumi, who was seen by many as an “eccentric” maverick of the ruling Liberal Democratic Party, was swept into office on a wave of support for his pledge to enact reforms to turn around the ailing economy.

But has the one-time national hero lived up to the public’s hopes over the past four years? In some areas he has, observers say. But in most others he has not.

“People had too big an illusion about Koizumi’s reforms,” said Jun Iio, a professor at the National Graduate Institute for Policy Studies and an expert on government administration.

Recent polls suggest voters are more disappointed than satisfied with Koizumi’s achievements, and this is casting a shadow over the remaining 1 1/2 years of his tenure as LDP chief. Koizumi has said he will quit as prime minister when his term as party president expires in September 2006.

The approval ratings for his Cabinet are nearly half what they were during the first months of the administration, and many of his followers tell pollsters they support him because they see no other candidate qualified to be prime minister.

Among Koizumi’s achievements so far, economists hail his policy steps that helped halve the amount of nonperforming loans at major financial institutions — once considered a time bomb that could have triggered a financial crisis and crippled the economy.

Koizumi, who has also barely stuck to his policy of curbing government bond issues, turned out to be a relatively good choice compared with other LDP leaders, economists say.

“(The Koizumi administration) has removed potential risk factors that could hamper economic recovery, such as financial instability and a jump in the long-term interest rate,” said Takahide Kiuchi, a senior economist at the Financial and Economic Research Center of Nomura Securities Co.

But that does not mean the Koizumi Cabinet can be credited with turning the economy around, as the prime minister once boasted, he said.

Instead, the current recovery has largely been aided by the efforts of the private sector, particularly the corporate sector, he added.

Soon after his inauguration, Koizumi pledged to settle the bad-loan problem “within a few years,” setting a target in October 2002 to halve the ratio of bad loans in major banks’ overall lending portfolios, which was 8.4 percent at the time.

A rigorous inspections policy maintained by Heizo Takenaka, the financial services minister, has forced major banks to accelerate bad-loan disposal, bringing the ratio to 4.7 percent as of September 2004, just as Koizumi promised.

“Some people criticized me, saying corporate bankruptcy would increase, the jobless rate would surge and deflation would deteriorate if we accelerate disposal of bad loans,” Koizumi told a news conference on March 23 after the fiscal 2005 budget cleared the Diet.

“But in fact, the number of bankruptcies kept declining for 30 consecutive months. The jobless rate has dropped (from its peak of 5.8 percent in March 2003) to 4.5 percent (in January),” Koizumi said as he defended his economic policies.

Economists, however, argue that the economy has been kept afloat by factors other than Koizumi’s reforms.

“I think (the Koizumi government) has been saved by economic recovery that has nothing to do with the government’s (economic) policies,” said Tatsuya Torikoshi, a senior economist at the Daiwa Institute of Research.

Torikoshi attributed the latest recovery mainly to the restructuring efforts of private-sector companies and surging exports to China, rather than to any policy initiated by Koizumi.

On issues other than the bad-loan problem, the Koizumi Cabinet has been a disappointment, observers said as they compared his promises to his achievements.

One of the key features of Koizumi’s “structural reforms” of government spending was privatization of four debt-ridden public expressway-building corporations.

Koizumi took up reform of the expressway operators as a symbol of what is wrong with the nation’s debt-ridden semigovernmental corporations.

But Koizumi, after compromising with opponents to the plan in his own LDP, eventually adopted a plan that paves the way for continued construction of the loss-making roads. Koizumi insists he kept his promise of “privatizing” the road corporations.

Professor Iio says that although Koizumi has been repeating sound-bite campaign slogans such as “reforms” or “privatization” since the beginning of his administration, his plans have often lacked substance.

“What Koizumi meant by ‘reforms’ was not clear at all, but people interpreted them the way they wanted to interpret them,” Iio said.

“And Koizumi had the political skill to turn that expectation into support for him,” he said.

Koizumi’s latest privatization campaign targets the state-run postal service, which has long served as a powerful vote-gathering machine for the LDP.

But opinion polls show that voters consider postal privatization a low-priority issue, and Koizumi’s opponents in the LDP are now putting up stiffer resistance as he tries to put the finishing touches on the privatization bills due to be submitted to the Diet.

Iio credits Koizumi for exposing the problems in Japan’s political system — such as the government’s and the ruling LDP’s heavy reliance on bureaucrats in policy matters — and for weakening the power of factional bosses within the LDP.

But while Koizumi may have served as an antithesis to the LDP’s old guard, he has not provided substantial fresh policies nor established new political mechanisms to implement them, Iio said.

“I think Koizumi has his own limitations as a prime minister in a transitional period,” he said.