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February 27, 2006

Resolve for Reform Comes Under Strain in Livedoor Scandal

Masahiko ISHIZUKA (Councilor of the Foreign Press Center/Japan)

Mistaken identification of disgraced entrepreneur Horie with reform program initiated by Koizumi threatens to shake public's will for change

The arrest of Takafumi Horie, founder and former president of high-flying Internet firm Livedoor Co., for alleged fraudulent securities transactions and accounting malpractices, is continuing to have reverberations through society and even some political implications. Known by his popular nickname, Horiemon, he is now being held for interrogation. Nevertheless some of the general public still admire his freewheeling style of business that seemed to shake up a tradition-bound system.

Horie became a champion of the times, viewed as representing a new force at work in a society that is undergoing profound change in moving to a deregulated, market-oriented and competitive capitalist economy. Accompanying this change is the perceived polarization of income and wealth. It is fashionable to distinguish "winners" and "losers" in this society that many think is growing in inequality.

As a young chief executive, Horie, 33, amassed a huge fortune and built a conglomerate through shrewd, now alleged to be shady, use of the deregulated and Internet-connected stock market, corporate acquisitions, and headline-grabbing performances that culminated in an independent candidacy in the lower house election last September, with the blessing of the Liberal Democratic Party's bigwigs, including Prime Minister Junichiro Koizumi and his point man on reform agenda Heizo Takenaka, then economics minister. He was an anointed winner in the emerging society that Koizumi sees as the goal of his reform.

Even before his downfall it might have been wrong to identify Horie with Koizumi's reform agenda, but the irony is that Horie as an icon of winners had been heaped with praise and support by young people, and some of their elders, most of whom are likely to end up being losers in the emerging society. For that matter, the strong public support Koizumi has commanded contains the same irony, if his reform agenda results in polarization in wealth and income.

The fact that Horie has become such a social phenomenon, in both his swift rise and fall, explains what the Japanese public is seeing in the coming society. This is a crucial point because Koizumi's reform agenda is being criticized as encouraging the growth of inequality in a society long known for a high degree of egalitarianism.

Growing inequality at issue

Whether Japan is turning into a society of inequality has become a major focus of debate. Just a few decades ago, the country was a famously egalitarian society, where 80% of its people called themselves middle class. But today, the percentage has dwindled to well below 60%, with many viewing themselves to be lower middle or poor. When the nation's economy as a whole was growing at a rapid pace, and given a social and political system designed to allocate wealth equally, most people could feel they were middle class, but no longer.

The question is whether Koizumi's push for reform - more competition, less regulation and less government spending - is responsible for this widening of the wealth gap, and whether the premier aims at greater income disparity on the grounds that it stimulates people's incentive to work, thus boosting productivity. However, he does not seem to be intent on that.

It is even more unlikely that Horie's business methods worked to widen the income gap in society, even if he became a billionaire personally. Except for the fact that Horie allegedly breached securities laws, it is irrelevant to point a finger at him as evidence of the failure of Koizumi's reform agenda. The Livedoor scandal simply bared the inadequacy of the surveillance system for securities transactions, which should have stopped him much earlier.

The reform initiative, which won Koizumi such overwhelming support at the polls, will have to eliminate waste and abuse in the economy under the guise of protecting the weak but actually defending vested interests. It should also put an end to bureaucratic interference in private activities in the name of protecting public interests but actually defending bureaucratic turf at the expense of taxpayers. It should also abolish archaic regulations, rules and systems that stifle free and efficient workings of the market and the larger economy, again serving only special interests. Reform should combat easy reliance on public funds in the form of subsidies and other giveaways that exacerbate fiscal crises.

If reforms inspired by Koizumi target these goals, how Horie came to be lionized is worthy of serious reflection. Perhaps it was a collective mood intoxicated with the rhetoric of reform, with which Horie's freewheeling style was identified, and which marked a clean break with the past.

It is true that Koizumi and the LDP tried to capitalize on Horie's popularity with the public, but was he not little more than a mood maker? It must be an embarrassment for the LDP to have been so closely identified with Horie and to have supported him in the strongest possible way during the election campaign.

The Koizumi cabinet's approval rating has posted a significant fall since last December, hit by a combination of scandals, such as the Livedoor shock, and its own failures. But Koizumi must convince the public that his reform agenda is solid enough not to be shaken by this incident, which is irrelevant to his reform program. This also means that the public's resolve for reform is being sorely tested.

(Originally appeared in the February 20, 2006 issue of The Nikkei Weekly, reproduced here with permission.)

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