Prime Minister Junichiro Koizumi’s new Cabinet faces immediate policy tasks that could affect the fate of the administration, from accelerating the disposal of problem loans at banks to fighting ongoing deflation.

In an effort to redouble the fight against these scourges, Koizumi on Monday replaced Financial Services Minister Hakuo Yanagisawa, who remains opposed to a fresh injection of public funds into banks, with Heizo Takenaka, who will also continue to serve as state minister in charge of economic and fiscal policy.

Meanwhile, Foreign Minister Yoriko Kawaguchi was retained and will be in charge of Japan’s normalization negotiations with North Korea, expected to resume later this month.

Domestic pressure on Koizumi to be tough on Pyongyang intensified after his Sept. 17 summit with Kim Jong Il, which brought revelations that eight of the Japanese abducted to North Korea in the 1970s and 1980s have since died. Handling of this sensitive issue could affect the fate of the Koizumi administration itself.

The upcoming extraordinary Diet session, scheduled to begin Oct. 18 and run through Dec. 13, will serve as a testing ground for the new lineup.

According to political commentator Minoru Morita, the latest reshuffle of the 17-member Cabinet was shaped by Koizumi’s initiative to keep changes to a minimum in order to pursue structural reforms, rather than being influenced by the usual factional pressures from ruling party heavyweights calling for major portfolio changes.

“I believe this became possible because of Koizumi’s improved public approval ratings following the Sept. 17 Japan-North Korea summit,” Morita said.

Koizumi’s success in realizing the historical meeting eased criticism from within the ruling bloc of his stalled economic reforms and provided him with political leverage to fend off ruling party pressure for a major reshuffle, Morita added.

The reshuffle, however, drew mixed reactions over whether economic ministers who have retained their posts — Takenaka and Finance Minister Masajuro Shiokawa — can successfully lead the economy out of its quagmire.

As a pillar of his economic revitalization steps, Koizumi pledged Friday that the government will end the nation’s bad-loan problem by the end of fiscal 2004. Fresh injections of taxpayer money into banks to bolster their financial health are considered the most feasible way to accelerate the bad-loan cleanup, although this prescription has failed twice before.

“The dismissal of Yanagisawa, who had opposed public fund injections into banks, can be appreciated in light of correcting the policy inconsistency among the three economic ministers in the previous Cabinet,” said Masaru Takagi, professor of economics at Meiji University.

Under the terms of the Deposit Insurance Law, the government must declare a state of financial crisis before banks apply for capital injections. Yanagisawa has insisted that Japan is not in a severe enough situation to warrant public fund injections.

Yanagisawa’s replacement paves the way for the government to recapitalize ailing banks with public funds, Takagi said, adding this may take place by March 31, the end of fiscal 2002.

Later this month, the government plans to draft specific measures to accelerate banks’ bad-loan disposals.

On the recapitalization of banks, LDP Secretary General Taku Yamasaki has proposed that public funds be used to make it easier for the state-run Resolution and Collection Corp. to buy bad loans. Currently, banks are reluctant to sell sour loans at market value and take the financial hit in their books.

But Susumu Takahashi, chief economist at Japan Research Institute, said that regardless of who the government’s top financial regulator may be, pumping taxpayer money into the banks alone will not be sufficient to end the problem.

“Capital injections into banks should take place with measures to revitalize Japan’s industrial strength,” Takahashi said. “In that sense, public funds should be used to sustain companies with viable prospects.”

Besides Japan’s massive bad loans, the government is also faced with the problem of stubborn deflation.

During a recent visit to Copenhagen to attend a three-day Asia-Europe summit, Koizumi ruled out the possibility of the government compiling a supplementary budget for the current fiscal year as a way to boost the economy and indirectly stimulate prices.

“Now is the time for the government to employ all available means to stimulate the economy, such as quick tax breaks and drastic deregulation,” Takagi said. “Otherwise, bad loans will continue to pile up as the economy worsens further.”

In foreign policy, Koizumi’s new Cabinet will likely face twists and turns before it can enter normalization talks with North Korea, particularly with mounting public anger over the abductions issue.

There is a “danger of the heavy door, which was opened (by the Koizumi-Kim talks) after years of painstaking efforts, closing between the two countries again,” said Pyon Jin Il, editor in chief of Korea Report, a magazine published in Japan specializing on North and South Korean issues. “As a condition to resuming talks, Japan has demanded that North Korea conduct full-scale investigations into the abduction cases, including cases in which eight people died.

“The impact of Pyongyang’s announcement of the death figure has been so large that Japan’s original plan to quickly resume normalization talks may have to be changed.”

Under these circumstances, the reappointment of Kawaguchi as foreign minister is the “best possible choice,” Pyon said, because she has already established personal ties with North Korean officials as well as Chinese and South Korean diplomats.