Junichiro Koizumi, the newly elected Liberal Democratic Party president who is set to become prime minister, faces a rough road in trying to deliver the economic reforms he promised in his campaign.
With the Upper House election set for July, his emphasis on fiscal and economic structural reforms may shift to progrowth policies as he will probably have to compromise with LDP factions and his party’s coalition partners, which are nervous about the pain reforms might cause voters.
Throughout his campaign, he called for changing the country.
“Japan’s economic recovery will not be achieved without carrying out structural reform,” he often said.
But details of Koizumi’s reforms have yet to be worked out.
Economists say Koizumi may seek a “realistic approach” of simultaneously pursuing reforms and supporting the flagging economy, rather than immediately tackling the dire straits that the country’s finances are in by reducing public spending.
“Among the four (LDP presidential) candidates, Koizumi appeared least concerned about additional economic stimulus, focusing on long-term reforms instead,” said Masaru Takagi, a professor of economics at Meiji University. “But he hasn’t pledged to reduce government debt as the first step of fiscal reform.”
So far, Koizumi has said that the issuance of government bonds in future budgets should stay below 30 trillion yen so the government can distance itself from debt-oriented budget-making. This alone, however, cannot be called a step toward fiscal reform, Takagi said.
“Constraining new bond issuance below 30 trillion yen seems little different from the 28 trillion yen in new bonds for the current fiscal year, which means Koizumi’s fiscal policy is unlikely to change the current fiscal condition anytime soon,” Takagi said. “But I believe this is a realistic approach in light of the current economic situation.”
Susumu Takahashi, a chief economist at Japan Research Institute, also said Koizumi’s steps toward economic reform may not be as drastic as they sounded during his campaign.
“Rather than reducing government debt, Koizumi will likely focus on changing the balance of government expenditures, such as cutting off dormant public works projects and shifting more resources to new areas,” Takahashi said. “These steps may be the best he can do in the initial stages of fiscal reform.”
But whatever reforms he tries to effect could weigh on the economy in the short term, which is already on the brink of recession and gripped by stubborn deflation.
Among the measures Koizumi has supported, accelerating banks’ final disposal of bad loans could increase corporate bankruptcies and the number of jobless in the short term. Koizumi has said the financial sector should be rehabilitated in two to three years.
Banks’ final disposal of problem loans means removing the loans from their balance sheets. Banks either forgive the borrowers’ debt or seize borrowers’ collateral and sell it at market value, which would drive financially troubled corporate borrowers out of business.
Koizumi himself has acknowledged the public may suffer some pain but stressed that “Japan must accept a year or two of stagnation or even economic contraction as a price for needed reform.”
With the current economic conditions taken into account, however, Koizumi would be soon urged to shift toward economic support measures that would require further fiscal provisions, Takagi argued.
“Despite his reform emphasis, Koizumi will have to consider additional fiscal spending to create a safety net to deal with a possible increase in unemployment,” Takagi said. “Fiscal provisions would also become necessary to inject more public funds into banks, for which Koizumi has expressed support.”
In fact, differences among the four candidates over their economic policies seem to have narrowed as the election campaign entered the final stage.
LDP policy chief Shizuka Kamei, who was the most prostimulus candidate among the four but dropped out of the race at the last minute, said Monday, “I don’t think Koizumi will follow policies that will aggravate deflation and drive the economy to decline.”
This can be a sign of policy compromise on the part of Koizumi. Indeed, he may be forced into a series of concessions in working out concrete steps to introduce an emergency economic package outlined by the previous administration on April 6, one of the first tasks he would face once elected as the prime minister.
So far, Koizumi has not detailed how to launch a stock-buying entity to absorb banks’ cross-held shares or carry out securities-related tax reform.
“Leaving a large gray area in his economic policy agenda is considered a campaign tactic,” Takahashi said. “But he might damage public support and market expectations if he fails to quickly specify his stance on both short- and long-term policy objectives.”
Koizumi’s determination to deliver on his campaign promises will be put to the test as he formulates his Cabinet, which is expected to set the basic tone for economic policies of the new administration.
In addition, Koizumi will be urged to determine his basic stance toward compiling the fiscal 2002 budget in May or June, when the government’s Council on Economic and Fiscal Policy draws up a guideline for ministries and agencies to draft their budget requests for the next fiscal year.
“If Koizumi fails to reflect his resolve for reforms in these processes, both the public and the market would become disillusioned with his leadership,” Takahashi said. “This would eventually affect the LDP’s Upper House election results in July.”
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