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Postelection policy management and the Japanese economy

by Yoshio Nakamura

The Sept. 11 House of Representatives election ended in a landslide victory for the ruling Liberal Democratic Party, which secured 296 out of the 480 seats in the lower chamber of the Diet.

A number of people have attributed the LDP’s big win to Prime Minister Junichiro Koizumi’s strategy of focusing on the single issue of postal privatization.

True, the LDP and its candidates emphasized the benefits of postal reform throughout the campaign. However, voters must be well-aware that postal privatization is not the only issue confronting Japan.

They voted for the LDP because they favored Koizumi’s message that postal privatization will be the first step toward bringing about a whole variety of other reforms. They preferred hearing a pointed message over the usual, all-encompassing set of general policy promises.

The stock market also favored the election result because it apparently gives stronger footing to the Koizumi administration.

Between Aug. 8 — the day the Lower House was dissolved — and Sept. 12 — the day after the election, the Topix index rose roughly 10 percent on the Tokyo Stock Exchange.

Particularly notable was the purchase of Japanese stocks by foreign investors. Amid widespread forecasts that the LDP would win, the net purchase of stocks by nonresident investors in August shot to 2.1 trillion yen — the second-highest monthly figure on record.

The LDP’s strong performance in this election indicates that more and more voters understand the inevitability of structural reform in this country. They have also witnessed what the Koizumi administration has achieved since 2001.

Over the past four years, the prime minister pushed for disposal of bad loans in the banking industry, which had been effectively strangling the Japanese economy since the 1990s. He also promoted reducing the economy’s reliance on public-sector demand, or government spending. This has in turn encouraged structural reform in the corporate sectors.

The performance of Japanese companies has substantially improved, and the the aggregate pretax profits of Japanese firms reached 45 trillion yen in fiscal 2004 — the highest level on record and even higher than the profits made during the asset-inflated bubble economy. The benefits have extended to the household sectors.

The nation’s unemployment rate, which had hit 5.5 percent at its peak, is now down to the lower half of the 4 percent range, and the wages of salaried workers are beginning to turn upward after a long decline. Consumer spending is now steady, serving as a growth engine together with brisk corporate capital investment.

The economic recovery slowed in the latter half of 2004, but has picked up steam in recent months. Japan’s gross domestic product grew at an annualized 5.8 percent in the January-March period compared with the previous quarter, and 3.3 percent in the April-June period.

Now it appears the economy is on track for robust growth. Basically, the structural reform of an economy concerns the supply side, and it is often difficult to implement radical reforms at a time when the economy is suffering from demand shortage — or when people call for macroeconomic measures to bolster demand. In this sense, Japan’s current economic climate is providing good conditions for such reforms.

We hope the government, after winning the Diet’s endorsement of the postal privatization bills, will strongly push for action in other areas, including administrative and fiscal reform and an overhaul of social security.

In another move welcomed during the election campaign, the LDP and many other parties called for measures to deal with the declining birthrate, including steps to lighten the economic burden on child-rearing families. Since the issue affects Japan’s long-term future, we hope the parties will continue active debate and come up with substantial measures to support child-rearing households.