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A key panel headed by Prime Minister Junichiro Koizumi on Thursday unveiled a sweeping reform program aimed at fixing the bad debt-crippled economy in two to three years.

In the interim, the painful reforms could hurt economic growth.

The program, mapped out by the Council on Economic and Fiscal Policy, defines the coming two to three years “as a period to intensively promote reform” and resolve the problem of nonperforming loans held by Japanese banks.

“Now that the scenario of reforming Japan’s economy has been laid out, our commitment to implement ‘structural reforms without sanctuaries’ has become even more visible,” Koizumi told the panel, after receiving the plan from Jiro Ushio, a council member and the chairman of Ushio Inc.

“Things are beginning, not ending, today. We will continue to have to present before the public a picture of Japan facing up squarely to reform.”

Countering criticism that his reform policy may backfire and worsen the economic woes, Koizumi maintained he only aims to eliminate the government’s wasteful spending.

The plan says cleaning up banks’ bad loans will be “the first step in economic reconstruction” and that growth led by domestic demand will be achieved after the economy’s fragility is fixed.

“With bold structural reforms of the private sector, financial system and the nation’s finances, Japan will be able to get out of the stagnant 10 years and look ahead to a vigorous 10 years after going through an adjustment period with deflationary pressure stemming from the disposal of bad loans,” the plan says.

Economic minister Heizo Takenaka has said that economic growth for this fiscal year will be low but that growth of 2 percent to 3 percent will be achieved in the medium term under the reform program.

The government has predicted 1.7 percent growth for the current fiscal year, but the plan projects it to be substantially lower.

It calls on the government to reinforce the operations of the state-backed Resolution and Collection Corp. so that it can buy bad loans that banks still have after the three years.

The plan also urges the Bank of Japan to be flexible with quantitative monetary easing as deflationary pressures are expected to persist during the period of reform.

The program, which remains subject to formal Cabinet approval next week after endorsement by the ruling coalition, proposes establishing safety-net measures to ease the pain, namely unemployment, expected to arise bad-loan cleanup proceeds.

Seven key areas for reform are set out in the plan, which incorporates Koizumi’s initiatives and provides a guideline for drafting the state budget for the next fiscal year.

Among other proposals, the program:

* Calls for a sweeping review of the social welfare system, public works projects and relations between the central and local governments to streamline the budget.

* Urges the promotion of privatization of state-run corporations.

* Calls for concrete discussion of privatization of the state-run postal delivery, savings and insurance services, and for cuts in subsidies to public corporations.

* Proposes allocating more tax resources to local governments from the central government to encourage local governments to be more financially independent.

“The most important thing is to get rid of the wasteful spending of taxpayers’ money,” Koizumi said. “And doing so will not have a negative impact on the economy; nor will it lead to austerity.

“I am also asking those making such an argument to reform their mentality like that.”

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