Last week was likely the most important in the tenure of Prime Minister Junichiro Koizumi. Three events — by-elections, the unveiling of his economic plan and the start of normalization talks with North Korea — tested his commitment to bringing about change in Japan.

The first test was Oct. 27, when the ruling coalition — consisting of Koizumi’s Liberal Democratic Party, Komeito and the New Conservative Party — won five Diet seats in seven by-elections. Four of the elections were triggered when politicians were forced to resign over financial scandals. Scandal, though, wasn’t enough to get voters to the ballot box: Six of the seven elections had the lowest turnout ever recorded. Nonetheless, the results helped demonstrate that there is still no credible opposition to Koizumi.

The second test was also domestic. During the 18 months the Koizumi administration has been in office, it has adopted two antideflation packages that have failed to arrest the economy’s slump. Last week it revealed its third, a combination of measures designed to reflate the economy and speed up disposal of bad debt hanging over the financial sector. Even before its official release, the plan unleashed a storm of criticism against Heizo Takenaka, the author of the report and the economy czar.

In one especially poignant moment, Takenaka was called before the Diet and forced to disavow his comment that “no company is too big to fail.” Opposition in the LDP and banking industry obliged the government to postpone announcement of the plan. A panel representing the ruling coalition had rejected key parts of the proposal and put forth its own, which went easier on banks and companies in debt.

Key provisions of the government package revealed last Wednesday include stricter assessments of bank assets and the creation of a new body to buy debt from struggling companies and possibly extend further financial assistance to debtors. Additional measures include tax reform and strengthening the social safety net.

Response was less than overwhelming. Headlines tagged the plan “watered down,” and even Takenaka conceded it was only “a good start.” The package lacks key elements of the draft. The stricter bank accounting rules — key to any cleanup of the debt problem — have no implementation date and the upper limit for deferred tax assets has been removed.

No plan will yield instant results, but the issue is Koizumi’s credibility. Having backed away from Takenaka’s proposals, he appears to have no stomach for reform, and has undermined the authority of his new minister. The skeptics’ case will be confirmed if, as expected, the prime minister also abandons his pledge to cap new bond issues at 30 trillion yen and opens the public works spigot. Fiscal stimulus is needed, but spending without measures that force banks to clean up their debt or clean out corporate deadwood will signal a victory for the old guard.

The third challenge concerned foreign policy. Last week Tokyo began negotiations with North Korea on normalizing relations. Koizumi’s bold attempt to break the stalemate with Pyongyang has since been overshadowed by the revelations that eight of 13 Japanese nationals abducted by North Korean agents more than 20 years ago are dead and that North Korea has pursued a clandestine nuclear weapons development program. Attention is now focused on the Foreign Ministry’s preparations — or lack thereof.

Negotiations with North Korea pose risks for the Japan-U.S. relationship. When the United States disclosed that the North had admitted to cheating on the 1994 Agreed Framework, questions were immediately raised about Koizumi’s attention to the nuclear issue in his talks with the North. An aide to the prime minister is reported to have said the U.S. information was incomplete and, therefore, “wasn’t taken so seriously.”

Japan won’t turn a blind eye to the North’s attempts to build a nuclear arsenal. After all, Japan would be the likely target of its missiles. The public still has a powerful allergy to all things nuclear; Beijing’s 1995 test of nuclear weapons was enough to prod Tokyo to temporarily suspend its aid to China. Questions surrounding the abductees will stiffen Tokyo’s spine in all other matters on the negotiating agenda.

The danger — and this also exists with South Korea and China — is that Japan’s willingness to negotiate with the North could put it at odds with the U.S. Make no mistake: North Korea should honor its obligations; bad behavior should not be rewarded. But the U.S. administration seems to consider the very act of negotiating with the North to be a reward.

For the Bush administration, North Korea must dismantle its nuclear program before Washington will talk. North Korea’s Asian neighbors are unlikely to go that far. For them, insistence on a peaceful resolution to the nuclear weapons issue requires talks. There is the additional danger that Japan — like South Korea — will acquire a stake in the negotiating process and seek to continue talking past the point of U.S. tolerance.

If Pyongyang had any diplomatic acumen, it would use that gap to drive a wedge between the U.S. and its Asian allies. It would offer enough concessions to Japan and South Korea to keep them engaged and to keep the benefits flowing. Fortunately, North Korea has not shown itself to be that smart. In their first day of talks, North Korean negotiators refused to discuss security issues with the Japanese. After the second day, Japanese officials announced that the two sides had agreed to set up in November a panel of working-level officials to discuss security issues, including the North’s missile and nuclear weapons programs. That may be Pyongyang’s crude attempt to split the U.S. from Tokyo; if so, the North will have to be more forthcoming to achieve any success.

For Pyongyang and Washington, the key is to appear conciliatory even while sticking to a hard line. We won’t know how shrewd the North Koreans are — and how successful Japanese diplomacy is — until sometime in the distant future.

The same time horizon applies to Koizumi’s economic strategy. Fortunately for the prime minister, he can afford to focus on the long term: His opposition continues to be weak and ineffectual. So while it may look like politics as usual in Tokyo, this could be a week of historic decision-making.

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