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At the end of the recent Group of Eight summit in Kananaskis, Canada, Prime Minister Junichiro Koizumi expressed confidence in successfully implementing his reform programs, including plans for highway administration and postal services. Koizumi said, “My G8 partners praised and encouraged me when I told them that the programs are making steady progress and my stance on reforms has not wavered.”

But strong resistance in the ruling Liberal Democratic Party’s old guard and among bureaucrats has forced Koizumi to make a series of compromises concerning the reforms, and it is unclear if additional revisions will be necessary in the plans. Koizumi faces mounting pressure from within the LDP to reshuffle his Cabinet and LDP executives in September. Power struggles between Koizumi and his LDP rivals are intensifying.

Public approval ratings for the Koizumi Cabinet, which dived earlier this year, have recovered somewhat, but cannot be viewed as a strong turnaround. If Koizumi yields to pressure from the LDP’s “resistance” forces without achieving results in his reform agenda, he will quickly lose public support, the foundation of his administration.

The proposed privatization of the four government-backed highway corporations has symbolic significance as a model for Koizumi’s proposal to reform public corporations. Last December, the Koizumi Cabinet adopted a plan for restructuring governmental corporations, including the four highway corporations. In February, it proposed legislation in the Diet that would establish a committee to promote the privatization of the four corporations. That legislation passed the Diet last month.

In the committee’s inaugural meeting, Koizumi said reforming the four corporations was one of the most important elements in the government plan to restructure governmental corporations. He also told the panel that, if privatized, the four corporations eventually should be listed on the stock exchange. He clearly believes that the new corporations should be guided by market principles.

Koizumi clashed with LDP lawmakers with vested interests in highway administration over the appointment of members to the new committee. Defying objections from LDP officials, Koizumi appointed author Naoki Inose, an advocate of major highway administration reform and the suspension of all construction work on superhighways, as one of seven committee members. Appointments also included Masatake Matsuda, chairman of East Japan Railway Co., who played a leading role in breaking up and privatizing the defunct Japan National Railways.

At the G8 conference, Koizumi said, “I believe my appointments show that my stance on reforms has not wavered.”

The Fiscal System Council, an advisory panel to the finance minister, estimates a fiscal-spending requirement of 7.513 trillion yen for the 31 public corporations that receive government fiscal investments and loans generated by postal savings and postal insurance funds. Topping the list is Japan Highway Public Corp., which will draw 1.794 trillion yen over 46 years before all of its planned works are completed. The four highway corporations together will need 3 trillion yen, 40 percent of the fiscal-spending total.

The privatization promotion committee must first decide on how to reorganize the four highway corporations and then establish profitability standards for highway construction and operation.

The Ministry of Land, Infrastructure and Transport and lawmakers with special interests in highway administration have proposed that highways be owned by public corporations and operated by private companies. If the government is involved in construction, 2,400 km of incomplete sections in the planned 9,342-km national highway network can be built with government fiscal investments and loans.

But Koizumi and his aides have proposed that all highways be owned and operated by private companies. That approach would discourage investment in routes thought to be unprofitable.

The LDP has established its own committee on highways. Former LDP secretaries general Hiromu Nonaka and Makoto Koga, as well as Upper House LDP leader Mikio Aoki, are among the LDP heavyweights appointed to the committee, which will make policy proposals on expanding highway networks. This is a serious challenge to Koizumi.

Four bills related to postal services are likely to pass the current Diet session. Under the legislation, the present Postal Services Agency will be replaced by a government-backed corporation next April, and private companies will be allowed to enter part of the postal services market. Koizumi’s reform agenda suffered a serious setback when he had to accept a number of revisions in the bill under pressure from LDP lawmakers with ties to the postal sector.

Under the revised legislation, the new corporation will offer postal services nationwide. Private companies entering the market must install about the same number of postboxes as the national corporation. This will make entry by private companies difficult. Yamato Transport Co., Japan’s largest parcel delivery firm, has given up plans to enter the market, partly because the postal service business will remain under the close supervision of the Public Management, Home Affairs, Posts and Telecommunications Ministry.

The postal services-related legislation was a test case for political leadership under the prime minister. The bills were submitted to the Diet following Cabinet endorsement without the customary advance approval of the LDP’s Executive Council. They were revised during LDP-government negotiations. Riders attached would impose severe restrictions on the privatization of postal services.

The focus of postal services reform will be the privatization of the postal savings and insurance business, worth a total of 360 trillion yen. Funds from this business have been used in the government’s fiscal investment and loan programs, contributing to the inefficient administration of government-backed corporations, such as the Japan Highway Public Corp.

Koizumi has indicated that he will consider privatizing the postal savings and insurance business. Unless he tackles this challenge, he will never succeed in true economic reform.

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