Koizumi's Priorities: Economic or Political?

By Noriko Hama (Research Director, Mitsubishi Research Institute)

Press coverage of Prime Minister Koizumi's reform plans by both Japanese and foreign reporters reveals two central emphases, one on economic reform and one on political reform. The following essay presents a kind of unified view, offering some insight into Mr. Koizumi's policy priority issue and an interesting proposal for dealing with it.

Koizumi's Priorities: Economic or Political?
(from NBR's Japan Forum; 6/10/2001)

By Richard Katz
(The Oriental Economist Report: Author of "Japan, the System That Soured")

The thought has occurred to me that, despite all the talk of economic reform, when it comes to concrete action, Prime Minister Koizumi may be putting much of his initial focus on political reform rather than economic reform. For example, much of what is called fiscal reform seems aimed at undercutting the power of the construction zoku, e.g. the road tax issue as well as the more general attack on public works spending.

Now, reports the Wall Street Journal on May 31, Koizumi is urging the Diet to redraw election districts so as to correct the urban-rural imbalance (e.g. every rural vote is worth 2-3 urban votes for choosing Diet members). I'd be curious to see our political experts' judgment as to the chances of this happening, or how hard Koizumi will push for it. Could this hasten an LDP split?

While such political reform is indispensable, it does raise the issue of sequencing. It seems to me that the success of reform often depends on the ordering the measures. Doing the right things in the wrong order is wrong. Deng Xiao Peng, for example, seemed a master at this; Gorbachev was not.

I am not by any means suggesting that Koizumi put off issues like election redistricting or the road tax problem. However, I am very concerned about the fact that he seems to be putting more stress on fiscal retrenchment than solving the banks' bad loan/bad debtor problem. He may be doing this for the political reasons I noted above, or just because he mistakenly believes this is the right ordering. But, I believe he puts himself of becoming "Hashimoto, take 2."

In my view, he needs to tackle the bank debt first, and then the budget. The budget deficit cannot be resolved without reviving the tax base. Two-thirds of the rise in the deficit: GDP ratio came from dropping tax revenues rather than increased spending. The tax base, in turn, cannot be revived without reviving private sector growth, and the latter, in turn, cannot be done without resolving the banking/bad borrower problem. To just cut spending and/or raise taxes in the face of a weakening economy is repeating Hashimoto's error. It gives reform a bad name.

In fact, solving the banking problem is going to cost lots of money: for a capital injection (this time with better conditions); unemployment compensation and other measures to deal with 2-4 million lost jobs; and a tax cut for individuals to offset the depressive effects of mass foreclosures and unemployment. To limit the banking measures to 12 trillion yen and debt forgiveness means, in effect, a continuation of the failed policies of the past.

The Japanese voters might be willing to accept a few years of sacrifice that promises a better life at the end; but why should they tolerate a needless downturn that doesn't even cleanse the system?

I suspect Koizumi is going to have to find a graceful way to keep his 30 trillion limit on new government bonds, but make an exception for an entirely new class of "special emergency, bad loan, social safety net bonds."

(From NBR's JAPAN FORUM: See http://lists.nbr.org/japanforum)