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STRUCTURAL REFORMS

Risks in waiting on Koizumi

by Mamoru Ishida

When he debuted as prime minister, Junichiro Koizumi pledged economic and political reforms, saying there will be “no economic recovery without structural reforms.” To implement the reforms, Koizumi said he was ready to overhaul the governing Liberal Democratic Party. I have supported Koizumi’s determination, but now I doubt that his plans will put the economy back on recovery track, as he promised. Leading me to this conclusion are a serious defect in his agenda and the recent political chaos.

First, the reform agenda is flawed. In a recent session of the Lower House Budget Committee, Democratic Party of Japan Secretary General Naoto Kan challenged Koizumi to explain how his structural reforms will lead to economic recovery, but the prime minister said only that the economy would recover following an adjustment period of about two years. That’s because Koizumi’s reform agenda lists individual reform plans for Japan’s economic revival in seven categories — without linking them to the potential for economic growth.

Solving various economic problems such as banks’ nonperforming loans is necessary, but that in itself will not lead to economic growth. It is common knowledge in the business community that the lack of investment opportunities in Japan, amid intense international competition related to economic globalization, is the basic cause of Japan’s long-term slump. Therefore, structural reforms must be sharply focused on improving the environment for business activities, especially for investments, through deregulation and cost reductions.

While some LDP lawmakers call for stemming Japan’s deindustrialization, the Economy, Trade and Industry Ministry is pushing efforts to strengthen the nation’s industrial competitiveness. Their views have never been incorporated into the core principle of Koizumi’s reform plans. Economic policymakers in the Koizumi Cabinet are deficient in such strategic planning. This is clear from the position of Heizo Takenaka, the state minister in charge of economic and fiscal policy, who continues to expect the Bank of Japan to set an inflation target, a move that would not strengthen Japan’s competitiveness in any way.

Second, vested interests comprising politicians, bureaucrats and business resist plans for legal measures to promote deregulation and cost cuts required by Koizumi’s reform plans. The scandals of LDP lawmakers Muneo Suzuki and Koichi Kato have revealed how government bids for public-works projects have been tampered with for the benefit of businesses that contribute to politicians.

Economic reform is impossible without political reform. For that reason, voters placed high expectations on Koizumi, who said he was willing to revamp the LDP. But the circumstances that led to the dismissal of Makiko Tanaka as foreign minister indicate that Koizumi has chosen to depend on the backing of major LDP factions — rather than voter support — to remain in power. To the public, Koizumi has appeared to have aligned himself with the forces he pledged to overhaul. As a result, public-support ratings for the Koizumi Cabinet have plunged from 80 percent to 50 percent.

From the beginning, the Koizumi administration has been beset with a fundamental contradiction — his inability to implement reforms without revamping the LDP, of which he is president. Recognizing this, Eisuke Sakakibara, former vice finance minister for international affairs, says Koizumi’s reforms are bound to be adjustments within the ruling system. Sakakibara wonders how long the Japanese economy and society will survive such adjustments.

As there is little time left for reforms, it is in Japan’s interest for Koizumi to implement drastic reforms of his own party and create a political environment conducive to reform. If he fails, voters will oust his party from power.

At present, it seems unlikely that the two prerequisites for salvaging Koizumi’s reform agenda — reforming the LDP and reworking the plans for economic reform — will be met. That is why I told a public hearing of the Lower House Budget Committee on Feb. 27 that if the implementation of Koizumi’s reform plans is too difficult, new reform plans should be worked out urgently by an alternative political group.

Who should work out and implement new reform plans?

The DPJ, the top opposition party, does not have specific plans for structural reforms that will lead to economic recovery, if its Web site is any indication. According to public opinion polls, about 30 percent of the respondents have withdrawn their support for the Koizumi administration and no longer back any political party. Clearly, this is because the opposition forces have not come out with credible alternative plans.

Under the two-party system, when a ruling party loses public support, the other party takes over. In Britain, the Conservative and Labour parties make comprehensive policy statements in their manifestos to appeal for voter support.

The DPJ should announce a convincing political vision and reform strategy at once, as the first step toward assuming power.

If the Koizumi administration or its successor does not succeed in the reforms, the situation will worsen and require even more drastic reforms. Outstanding government debt, now at an alarmingly high level, cannot be increased for long by 30 trillion yen annually, the minimum amount needed to prevent the economy from collapsing.

I support Sakakibara’s opinion that the Japanese people are now beginning to favor sweeping structural reforms. It is time for the political leaders to respond, whether they belong to the ruling or opposition forces.