But Koizumi the campaigner will be a tough act to follow. If, as most opinion polls predict, he leads a slate of forgettable candidates from his Liberal Democratic Party to victory in Upper House elections slated for July 29, Japan’s populist prime minister will have won only an even deeper challenge: he will finally have to deliver on his grand promises of reform, with a legislature ready to block his every move and a regional economy teetering on the brink of recession. Koizumi certainly isn’t a graybeard of the ilk that has ruled Japan since the second world war. But his fresh look, rock-star popularity and radical vision don’t guarantee a revolution. Koizumi, in fact, may essentially be the political equivalent of an Internet stock–a high flier with big ideas that fill the air with irrational exuberance. “Koizumi is popular because he hasn’t actually done anything,” says Temple University Japan specialist Jeffrey Kingston.
Up until now, Koizumi’s mantra of gain through pain has found a ready audience in part because his proposed reforms have a traditional gambaru (“try hard”) feel to them–everyone suffers now, but happiness awaits all with the next rising sun. The prime minister’s agenda is sweeping: to slash Japan’s bridges-to-nowhere public-works system, liquidate bad bank loans, privatize the nation’s postal savings system and other government-owned agencies, and break up the nation’s monopoly industries. Unemployment, already at a postwar high of 4.9 percent, is certain to increase. Japan will remain the largest issuer of government debt in the world, and bankruptcies are sure to skyrocket. But once the old system is torn down, Japan will emerge a more open, more competitive and more global nation. With that message Koizumi has drummed up approval ratings that have topped 80 percent during his brief tenure.
But as economies in the region and around the world have soured, many outside experts are beginning to question whether Koizumi may be overreaching. Correcting a structural change in the economy is a lot harder when times are dire than when the economy is doing well, and in industries like electronics, the outlook is grimmer than it’s been in recent memory. Forcing massive layoffs now could cripple domestic spending in Japan; some economists are even beginning to argue that the country should hold off the deepest part of the reform package until the U.S. economy recovers. “The timing is bad because there is an economic slowdown, and he proposes to cut back on fiscal expenditures,” says Joseph Stiglitz, professor of economics at Stanford University and former chairman of the U.S. Council of Economic Advisers. “That in itself would exacerbate a downturn in the economy.”
Countries in the region, also suffering heavily in the high-tech slowdown, look anxiously upon the prospect of higher Japanese unemployment and a concomitant downturn in demand. Japan still accounts for 12 percent of Asia’s exports, and 40 percent of the country’s imports come from Asia. Two weeks ago a senior International Monetary Fund official warned that the country’s structural reforms could undermine efforts in the rest of the region to recover from the economic crisis of 1997-98.
Skepticism within Japan is also making the prime minister’s job harder. Last week the Nikkei fell below the key 12,000 level for the first time in four months. This represents more than a crisis of confidence: as the market dips, banks, which are allowed to keep a large percentage of their capital base in stock in other companies, struggle to meet their minimum capital requirements. Koizumi will be under great pressure to bail them out with taxpayer money.
The worry is that these gloomy conditions could force the prime minister to neuter his reforms. Koizumi has so far fudged on his most radical promises. Even many of the economic analysts who support his reforms don’t believe that he will actually break up the nation’s big monopolies, much less privatize the postal savings system in the near future. Japan’s bloated public-works budget may decrease by only 1 trillion yen, to 38 trillion ($303 billion) –at a time when price declines for materials and other costs are running at a rate of 7 percent. “What people forget about Koizumi is that he has never said that Japan needs to start an aggressive fiscal tightening right away,” says Merrill Lynch economist Jesper Kroll.
Even if he is sincere, Koizumi will have an even harder time pushing reforms through a Diet filled with opponents within his own party. Of the 65 LDP candidates who are expected to win this election, 48 will likely be incumbents; according to one pro-Koizumi legislator, only a third of the party actually supports his reforms. The establishment factions win either way, says the Diet member: “If the party loses, they kick Koizumi out. If the party wins, they grow stronger.” Koizumi may be faced with the risky choice of calling another round of snap elections in an attempt to purge the old guard.
In the short run, at least, a dignified failure would quietly please many camps. LDP conservatives could claim they drank from the cup of reform, albeit just a teaspoon. The public could accept “reform lite” without much in the way of sacrifice. The banks and government-run agencies would be able to preserve the status quo. Trading partners would not have to suffer from dramatically decreased consumer demand. And Koizumi would join the ranks of all the graybeards who failed to turn Japan around.
