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Can really Mr.Koizumi succeed in Japan's reform? |
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The revival of the LDP's fortunes in the July 2001 elections for the Upper
House of the Diet, and in the June elections for the Tokyo regional assembly,
was driven by "Koizumi Fever". However, this fever is based on two inconsistent
expectations. One is the expectation that Mr. Koizumi will succeed with structural
reform, leading to Japan's revitalization after a decade of economic stagnation
and social desolation. The other is the expectation that the ruling LDP regime,
which was in decline until the emergence of the "Koizumi Fever" last April,
will be revived.
These two expectations are inconsistent, because the former depends on fundamental
change in the Japanese system, under which the public sector leads the private
sector and the central government rules local governments, while the latter
expectation depends on adjustments among various vested interest groups under
this same system to ensure the survival of LDP rule, which is deeply rooted
in it.
In the last two elections, the former expectation caused votes to shift from
the Democratic Party and Liberal Party to the LDP, while the latter expectation
brought dispersed LDP votes back into the fold.
The conflicts between these two expectations will become apparent during
the process of actual policy formation. This is because fulfilment of the former
expectation will require the alteration of the system through deregulation and
the decentralization of power. This implies a shift away from public sector
leadership and central government rule, to a system based on a self-supporting
private sector and independent local governments. In contrast, those who embrace
the latter expectation would prefer simply to adjust methods based on public
sector leadership and central government rule within the old system, in order
to maintain the vested interests that have long supported the LDP. The fundamental
reform of the Japanese system expected by the former group will surely undermine
the base for the LDP ruling expected by the latter group.
Take the specialized tax system used to finance road construction, for example.
Mr. Koizumi declared that this system should be reformed. Fundamental reformists
assert that the special tax system itself should be abolished, and that road
construction should be supported through general financing based on public sector
disbursement. On the other hand, the latter group of vested interests, which
consists of general construction contractors, bureaucrats of the former Construction
Ministry, and intermediating LDP politicians, contends that part of the funds
raised by this special tax system can be used to finance road-related public
works.
Similar conflicts between real change and patching-up within the LDP are arising
in many sectors, including the reform of the Postal System. There is serious
political dispute within the LDP about whether the Postal System should be fully
privatized or just reorganized as a state-owned company.
The conflicts among those who support Mr. Koizumi did not surface until the
Upper House election in July. The conservatives, who wanted to take advantage
of "Koizumi Fever" to restore LDP rule, kept silent until the election was over.
Mr. Koizumi himself spoke only in general terms about his willingness to reform
Japan and did not touch upon concrete measures to implement his reforms until
last July.
However, the conflicts are now arising between the conservative LDP leaders
and the Koizumi Cabinet, particularly Prime Minister Koizumi, Finance Minister
Shiokawa and Economic Planning Minister Takenaka, over the fiscal 2002 budget,
preparation of which started in August. Mr. Koizumi has demanded a five trillion
yen cut in expenditure on social security, public investment, subsidies to local
governments and ODA. On the other hand, he has encouraged a two trillion yen
increase in expenditure on emerging sectors, such as IT-related fields, other
new technologies, the environment and nursing care.
Mr. Koizumi thus intends to reduce total expenditure and government bond issues
by three trillion yen in the budget for fiscal 2002. The LDP leaders responsible
for policies on social security, public investment, subsidies for local governments
and ODA are now openly criticizing the proposed spending cuts in those areas.
In addition to opposition from the conservative leaders of the LDP, worsening
economic conditions also threaten the Koizumi reform plan.
Mr. Koizumi often tells the Japanese people that we must bear pain to accomplish
reform. However, the present recession has already brought pain in the form
rising unemployment even before Mr. Koizumi starts his reform plan. Will people
tolerate a further worsening of economic conditions when the reform plan actually
begins to work in the next year?
The reforms will inevitably be accompanied by cuts in expenditure on the old
vested interest groups, which have been supporting the conservative LDP leaders
and bureaucrats. At the same time, such spending cuts during a recession will
cause economic conditions to worsen even further. This is a chance for the conservative
vested interest groups and the related LDP politicians and bureaucrats to oppose
the reform program itself on the pretext that the economy needs a stimulus.
Thus, Mr. Koizumi faces two threats, one from the conservative anti-reform
group, and the other from the economic recession.
At least two scenarios are open to Japan. One is that Mr. Koizumi will compromise
with the conservative LDP leaders and slow down his reform program. The support
of the conservative LDP leaders for the Koizumi Cabinet will continue but "Koizumi
Fever" will cool.
The other scenario is that Mr. Koizumi will stick to his reform plan, thereby
losing the confidence of the majority of LDP members. However, our Liberal Party
and most members of the Democratic Party would support Mr. Koizumi, leading
to a reorganization of the political parties. The two opposing groups that have
driven the "Koizumi Fever" would be divided, and the fever itself would continue
to the extent that it is based on real reform expectations.
We, the Liberal Party, would then propose that structural reforms with the
potential to stimulate economic activities in the private sector should be implemented
first. This would allow Japan to cope with the recession while continuing the
reforms at the same time. The reforms would include, for example, privatization
of government-owned assets accompanied by deregulation to give business opportunities
to the private sector. Funds raised by selling government-owned assets should
be used for the most efficient types of public investment in urban areas, and
for income tax cuts. The assets to be sold include government-owned enterprises,
such as the Japan Highway Public Corporation, the Housing Loan Corporation,
government financial institutions and the Postal System, as well as real estate
that is not used by the public sector.
These policy proposals are exactly in line with the goal of the structural
reforms, which is to create a system consisting of a self-supporting and active
private sector together with a small and efficient public sector.
The Bank of Japan should maintain its present zero interest monetary policy.
Japan's monetary situation corresponds exactly to what J.M. Keynes called a
"liquidity trap", whereby increases in base money simply pile up an "idle balance"
in the money market, while the market rate remains at zero level without declining
any further.
The idea of "inflation targeting" is meaningless, because the BOJ has no tools
to trigger inflation. Increasing the supply of base money would simply result
in a further increase in the idle balance, from its present level of six trillion
yen.
The measures that are badly needed today are obviously not monetary policy,
but structural reform policies that will replace the old Japanese system with
one that provides better resource allocation.