With the resounding victory of the Liberal Democratic Party in the general election, Prime Minister Junichiro Koizumi can now boldly kick-start the stagnant process of structural reform. Utilizing the strong leadership consolidated in the triumph, Mr. Koizumi must set about breaking up the LDP cliques and the vested interests ensconced in the bureaucracy, and show concrete results in reform.

As he has said, the first task is to enact the postal privatization bills, now a comparatively easy goal. It is also important for the government to quickly point the way toward fiscal reconstruction, which should become the framework of a “reformed” Japan and be the premise for other individual policies.

Even under the Koizumi administration, the issue of government bonds has remained at a high level of 30 trillion yen or so every year. Outstanding debt amounts to 538 trillion, yen a figure equivalent to 12 years of tax revenue. This is a deplorable situation. Moreover, while faced with such a crisis, the government compiled a budget for the current fiscal year in which the general account budget (funds for regular operation of government offices) is not covered by tax revenues alone.

Imagine this situation in terms of a monthly household account by replacing the trillions with thousands. The monthly income (tax revenue and nontax revenue) would be 470,000 yen. Take away loan principal and interest repayments (debt servicing) of 180,000 yen, and this leaves a disposable income of 290,000 yen. Household expenses (general expenditure), however, comes to 470,000 yen, and an estimated 160,000 yen must be sent to support dependents (local allocation tax). The household is forced to depend on new loans (government bonds) to the tune of 340,000 yen.

No bank would lend money to a household in such a state of virtual bankruptcy.

This is the result of the government and bureaucracy gradually letting debts pile up by putting off the problem for many years with makeshift measures. Moreover, if the economic recovery continues and interest rates are raised from the current “nearly” zero rate, the debt burden is going to increase. If interest rates rise by 1 percent by the end of next March, the debt will increase by 1.5 trillion yen in fiscal 2006 and 4.4 trillion yen in fiscal 2008.

There really is no time to lose. The government thinks that fiscal balance will not be possible through expenditure cuts alone and has plotted a way forward with the aim of achieving a surplus through integration with measures on the revenue side. In order to move toward smaller government, though, it is essential to cut into the various systems and practices that the government and bureaucracy have turned into “sanctuaries” and to cut back on expenditures as much as possible.

There are a lot of things the Koizumi administration can do toward putting its mark on the next fiscal year budget if it sincerely wants to. For example, it should cut public works, reduce personnel expenses for civil servants, and trim the number of Diet members.

It is almost certain that the consumption tax will be raised in fiscal 2007. However, there are things to do before that. The government has decided to reduce fixed income-tax deductions beginning next year, but addressing the long-standing issue of the supplementary income of the self-employed is also an urgent matter. The unfairness felt among salaried workers, whose income is transparent by comparison, should not go unanswered.

In addition, the LDP’s election manifesto called for the revision of specified financial revenues without any sanctuaries. The government can no longer put off the transfer of highway revenues to the general revenue account, a move that so far has been obstructed by the LDP’s highway clique.

In opinion surveys, people have cited reforms of the pension- and health-insurance systems as the most urgent issues. Few people think that the pension reform of 2004 relieved anxiety about old age. The unification of pension plans and reduction of medical expenses for elderly people must be discussed as priority issues in the Diet. In addition, there is a mountain of other problems — including the reorganization of government-run financial institutions and the transfer of more authority and financial resources to regional governments — that need to be tackled by yearend.

In his policy speech at the Special Diet session Monday, Mr. Koizumi only reiterated what he said during election campaign and on other occasions. He should ditch the method of leaving everything to the bureaucracy, as he did during the reform of Japan Highway Public Corp. and so forth. Instead he should take over the reins of reform himself, displaying his leadership on every single matter. Otherwise, reform is going to end with just a changing of the doorplate names of the bureaucracy.

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