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Commentary (December 2, 2004)

Gov't, Public Sector Have Yet to Undergo Drastic Reforms

Masahiko ISHIZUKA (Counselor, Foreign Press Center/Japan)

When the nation was frantic to find a way out of the persistent economic slump that had plagued it for a decade, people could not or would not pay full attention to a larger, more serious problem - the nation's bankrupt fiscal condition and the uncertainty this evokes about the future. Everyone knew it was there, and was even getting worse day by day, but pretended it was something they could afford to ignore for the time being.

Now, as people breathe a sigh of relief as the slump has been overcome, this problem is looming larger and in clearer focus, prompting a sober mood. Until the nation faces up to this problem in earnest, pundits say, truly robust and healthy economic growth will not return, because the cloud of uncertainty will continue to hang over the popular mind about the future.

This does not simply refer to fiscal issues; it means that the nation, and its political leaders in particular, have failed to be clear about what to expect of government and what not to.

In short, Japanese people have irresponsibly believed that the government, or the state, is almighty in the sense that it can and should provide them with whatever they need, be it immediate measures to help the nation move out of its economic slump, or long-term security of pensions, medicare, unemployment and other social welfare programs.

The seemingly unmanageable public debt is of epic proportions - it currently totals 1.6 times the gross domestic product - and it illustrates the consequences of such an outlook of people, and the system that has brought about this all has been left largely intact. The real target of the much-touted structural reforms that Prime Minister Junichiro Koizumi continues to identify himself with, lies here, but it remains little changed.

There is consensus that the economic recovery is the result of desperate restructuring efforts by private sector businesses and the sacrifices of people who are employed by them. Standing in sharp contrast is the government and public sector, which have yet to undergo reforms equal to the private sector's.

When Koizumi proclaimed with fanfare more than three years ago that he would fight for structural reform, people took it as a promise that would work magic to reverse the economic downturn quickly, not necessarily as a difficult and painful fight against this formidable system of the public sector. It was the government or the state itself that had to be gutted and cleansed.

Whether Koizumi was aware of the magnitude of the task he said he intended to accomplish is not clear. As has been the case with other things, he is a man who does not seem to give deep, careful thought to what strikes his mind, and therefore he might have been content with spouting a mere catchword. That is what people are finding in this politician, and they appear to be starting to write him off as a leader genuinely resolved and committed to grappling with this central issue the nation faces.

This certainly is not a burden that can be heaped upon this particular prime minister alone. It concerns the system that has essentially been staunchly supported by the national inclination to depend on and seek the protection of higher authorities. To borrow the popular phrase, it is a form of "moral hazard," meaning sidestepping responsibility for problems and asking for government or public help.

This inclination has worked to build up a formidable bureaucratic system, to which are linked vested interests and the political power that supports them, which have survived repeated attempts at reform in times of acute national crisis. The system can be viewed as the backbone of the Japanese system, and therefore it would take a revolution-like force to change it.

Whether wittingly or by instinct, Koizumi seems to have equated his proclaimed task of "reform" with fight with his own Liberal Democratic Party which is the political embodiment of this Japanese system. But it is not clear whether the public thought deeply enough that the real target of Koizumi's fight would be the system itself.

It is commendable that Japan's private sector businesses, at least those in strong, competitive fields, have been able to get over the slump without massive government spending (typically, public works investment) this time around.

Companies have worked hard to make themselves lean and more profitable. What looms now is the legacy of the past abuses of public works spending - the massive public debt - and the inefficient, wasteful and archaic but inexorably resistant public sector and forces that support it.

A columnist in The Nihon Keizai Shimbun wrote that one reason the Japanese stock market could remain lethargic in the longer term is looming concern about this specter, the consequences of having left the public system basically untamed. The overhanging government debt, which also reflects efforts to protect weak sectors of the economy, is considered possible to lead to sharp tax rises in the future, social insurance premium hikes, or inflation.

After Koizumi fades out failing to deliver his promised reforms, a leader this nation needs is someone who can inspire people to face up to this specter and work to change it. A political party, in place of the LDP, will also be needed to do this. A new horizon will open on the nation only when people and the government really realize the problem and have willingness to address it. The agenda for the nation is all too clear.

(Originally appeared in the November 29, 2004 issue of The Nikkei Weekly, reproduced here with permission.)

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