Japan will have to endure low economic growth over the next two to three years as the nation undergoes radical reforms, a key government economic panel said in the draft of a reform blueprint to be released later this month.

The draft of the Council on Economic and Fiscal Policy report, to be officially released on June 27, designates the coming two to three years as an “intensive adjustment period” for economic revival.

It seeks public understanding of the “pain” of reforms, including a possible economic contraction, during the period. People “must endure low economic growth in the short term” while structural reform steps are taken, according to the draft, which was released Monday.

The draft also calls on the Bank of Japan to “take quantitative monetary easing steps if necessary” while the economy is under deflationary pressure stemming from structural reforms.

During Monday’s meeting, panel members discussed specifics to guidelines adopted May 31 that center on Prime Minister Junichiro Koizumi’s reform initiatives, including an overhaul of the state budget and quickly ending banks’ bad-loan problems.

Heizo Takenaka, state minister in charge of economic and fiscal policy, who has played a leading role in compiling the guidelines, told a news conference after Monday’s meeting that panel members agreed on the draft and that he will do his utmost to finalize the report as planned.

According to the draft, resolving banks’ nonperforming loans is the “first step toward economic revitalization,” adding that Japan will be able to achieve domestic demand-led growth only through structural reform.

The draft features reform programs in seven fields, including promoting privatization of state-run businesses, deregulation, and encouraging local governments to reduce fiscal dependence on state coffers.

On promoting privatization, the final draft says the government will study privatizing postal services and cutting subsidies to government-affiliated special public corporations.

The draft also calls for consolidating the collection and management of taxes and contributions to social security programs so that each citizen can be assigned a “social security individual account.”

In tackling the rigid fiscal structure, the draft calls for a reduction in the percentage of public investment to gross domestic product over the medium term, and a review of the use of special tax revenues currently earmarked only for road construction.

The council was set up in January in line with the realignment of ministries and agencies.

S&P to wait and see

Standard & Poor’s Corp. said Tuesday it will not upgrade its sovereign rating for Japan simply because Prime Minister Junichiro Koizumi has promised he will reform the nation.

“We don’t think the ratings of Japan warrant an upgrading just because he is addressing it,” said Chang Yu-tsung, managing director of the U.S. credit-rating agency.

He said the lack of effort by the previous government under Prime Minister Yoshiro Mori to implement structural reform was one of the major reasons that the firm downgraded the Japanese ratings in February.

“We didn’t see it (structural reform) at the time, the government was not serious enough to tackle the issue,” Chang, who is also an S&P representative in Tokyo, said.

“Now the Koizumi Cabinet has come into being, and we do believe that he is going to tackle this problem . . . and he is addressing the issues.”

He said the key is whether the popular prime minister can actually resolve the problem, which remains to be seen.

S&P will be closely monitoring “what kind of developments and results he will be achieving in the next few years,” and the firm will pay extra attention to Koizumi’s determination to deal with the problem of nonperforming loans at banks, Chang said.

In February, S&P lowered its long-term local and foreign currency credit ratings on Japan to double-A-plus from triple-A, five months after the downgrade on yen-denominated domestic securities issued or guaranteed by the Japanese government to Aa2 from Aa1 by Moody’s Investors Service Inc., its rival credit-rating agency.

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