Commentary on the Koizumi Reform

Peter Tasker (Arcus Investment)

This commentary originally appeared in the "Japan-U.S. Discussion Fourm" (http://lists.nbr.org/japanforum) on October 17, 2002: posted here with the author's permission.

I'm nervous about the way "reform" is being bandied about these days, without any clear definition of what is to be reformed and for whose benefit. The word alone tends to give Westerners warm fuzzy feelings, with its echoes of FDR, standing up for the little man, and so on. But to the Japanese elites it may mean something else entirely.

In the 1930s it was the radical bureaucrats who considered themselves reformers in their patriotic struggle against corrupt "old guard" politicians. Today's version of reform means squeezing the fiscal deficit in the midst of a deflationary recession and asking the little man to bear the pain. It means top-down industrial reorganization, with resources being directed to "productive" uses as defined by the elites, with the little man again being asked to bear the pain. It means shrugging your shoulders at an astonishing collapse in housing wealth and calling it a healthy adjustment. It means claiming, as one official did recently, that the reason for sluggish consumption is that Japanese people already own everything they could possible want.

What about the political reform we hear so much about? If the factions (ie. conventional LDP politicians) are being sidelined, who's going to gain power instead ?

Not the opposition parties, who are in worse disarray than ever. Not the cabinet, which is packed with neophytes and non-political appointees. The legislature? The Nikkei recently reported that the government would resort to "flexible interpretation" of the old bank stabilization law rather than put a new one to the Diet and run the risk of "confusion" (ie debate and disagreement).

What about the prime minister's office? This is from today's Nikkei. "The image of a "presidential" prime minister's office is starting to be accepted at home and abroad. But the reality is rather different. A presidential prime minister's office should create its own policies and work the Diet to push them through. The Koizumi office has no policy-drafting team, and no measures for working the Diet..."

So who is going to fill the power vacuum? Step forward the traditional enemy of politicians – the bureaucracy.

Consider the 30 trillion yen cap on bond issues, the one economic commitment that Koizumi has been scrupulous in keeping. He didn't breathe a word of it in his election campaign, but it's no secret that restoring fiscal discipline was a key objective of the ministry of finance well before Koizumi was even thought of.

Or consider the North Korea mess. We now know that normalization was a clandestine project carried out by foreign ministry officials without the knowledge of the serving foreign minister, Makiko Tanaka. We also know they iceboxed the abductee issue for over a decade, viewing the existence of kidnapped Japanese citizens as an "obstruction" to their agenda.

Back in the 1980s there was indeed a move to raise the living standards of ordinary Japanese people. It was given expression in the Maekawa report, with its ambitions for turning Japan into a nation of leisured consumers. That was also the thinking behind the Hosokawa administration in 1993. But the atmosphere now is very different. Here's the economic strategy of the Yomiuri, which has been one of the main Koizumi cheerleaders.

"Tax reforms for the fiscal year starting April 1st should emphasize comprehensive measures to revitalize industries... The government should implement policy-oriented tax cuts of more than 1 trillion yen in specific areas which would indicate the future direction Japanese industry should take to survive. It is indispensable for Japan to renew existing domestic facilities, not only to compete with the United States, but also in response to increasingly advanced technology in China and SE Asia. It is important that the government come up with measures to induce industries needing to shift their lines of business to replace existing facilities and reinvest in plant and equipment..."

Not much here for the little man, who will be handing the government a few trillion yen MORE next year. But quite a bit for corporations, and plenty for the old industrial policy crowd to sink their teeth into.