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Koizumi's aversion to reform pays
dividends
By Richard
Hanson
TOKYO - A quiz about the world's
second largest economy. Question: What is now
"recovering steadily" after showing an "incipient recovery"
in November and December, but for a very long stretch
(at least it seemed very long) since early 2002 was at
best described as just "recovering"?
Answer:
Japan's Prime Minister Junichiro Koizumi.
Okay,
Japan's
economy is also correct. But for practical purposes
it's hard to separate the two issues. This is especially
true for Koizumi, who as leader of the governing
Liberal Democratic Party (LDP) faces a key
national election in July for the upper house of the
Diet, or parliament.
The health of economy - as
well the safety of Japanese troops deploying on a
humanitarian mission in dangerous post-war Iraq - could
spell victory or defeat for the LDP. What is striking
about the economy is that the signs of steady growth
have had little to do with the policies of reform
("structural" or economic) that have been the agenda of
Koizumi's administration.
There has been no real
reduction in the government's huge fiscal deficit, which
has meant further large issue of government bonds. Goals
such as dismantling the vested interests that benefit
from the public monopolies on public works spending -
most glaringly for roads and bridges - have yet to be
realized. The privatization of the postal system has
been delayed. On the financial side, Finance and
Economic Minister Heizo Takenaka's ambitious plans to
reduce the balance of bad loans in the banking system
have fallen behind, except for the strongest banks.
There has been foot dragging on the government's
biggest fiscal problem, the public pension system that
is vastly overstretched by Japan's demographics and
burdened by the fast-aging block of "baby boomers".
Paying for them will fall heavily on a younger
generation of social security payees.
Koizumi
is no economic reformer
Instead, Koizumi agreed
to keep the "pork barrel" churning out funds for local
governments by postponing reforms on distributing tax
revenues. The Financial Services Agency, under Takenaka,
is less keen on squeezing local banks into taking
measures that would undermine confidence among
depositors. Late last year, the government, using public
funds, took over the debt-ridden regional institution,
Ashikaga Bank, while assuring the safety of local
depositors' funds.
All this would seem to
indicate a failure to act decisively, a criticism that
has been increasingly heard from within in his own
governing LDP. There is much talk about "reform fatigue"
- or more pointedly "Koizumi fatigue". Thank goodness,
say others, that he hasn't rushed headlong into reform.
The reality is that a more aggressive and timely
implementation of the large grab-bag of "reforms" on his
agenda - first promised in April 2001, when he was
elected LDP president - would probably have slowed
economic growth. The government's official projection
for growth is 1.8 percent in the fiscal year starting
April 1. This is down a bit from the 2 percent initial
estimate for the current year ending March 31.
Cutting back fiscal spending, while the
government is already implementing a higher tax burden -
such as mandatory raising of national health fees -
would likely dampen the economy. What Koizumi remembers
is that in 1998 prime minister Ryutaro Hashimoto was
booted out of office after implementing an increase in
the consumption tax, in the face of an economic
downturn. The consumption tax is a flat, but modest, 5
percent charge on virtually everything bought or sold in
Japan. July that year, the LDP lost badly in the upper
house election. Koizumi knows well that the objective of
the upper house battle this July is to recover those
seats.
The best thing he has done is to avoid
damaging the economy. In any event, the economy is
chugging along quite nicely on the momentum of what
economists call a cyclical recovery. In other words,
industries are spending to replace and renovate the
things that grew old and worn because industries had to
tighten their belts during the frequent recessions of
the past decade.
Japan's real engine of
growth is China
The real engine of growth at the
moment, however, is spelled "C-h-i-n-a". Japanese
industry is piggy-backing on the nation's exports -
especially those imports demanded by China and other
Asian nations. China is pulling in a broad range of
goods, from steel to consumer products, at double-digit
rates. China is not only expanding its own markets
overseas, it is gearing up to host the 2008 Olympics and
a 2010 Shanghai World Expo. That combination of
unleashed capitalism and a desire for a better standard
of living is very much reminiscent of Japan's own
"economic miracle" of the 1960s.
The resulting
numbers are showing in Japan industrial activity. In
2003, Japan's industrial production indicators, such as
manufacturing and mining, turned upward for the first
time since the year 2000. Much of the improvement was
part of the so-called information-technology bubble in
the domestic market. Consumers are flocking to convert
their electronic gadgets into digital models.
More important, for voters, Japan's seasonally
adjusted monthly unemployment rate in December slipped
below 5 percent - to 4.9 percent, down 0.3 - for the
first time since June 2001. For the whole of 2003, the
unemployment rate was put at 5.3 percent. The government
thus upgraded its view of unemployment conditions to "a
sign of improvement".
This is not quite cause
for jubilation, but it it is down from the historic high
unemployment rate of 5.4 percent in 2002. To put this in
political perspective, this is the first annual drop in
13 years since 1990, when Japan's late 1980s economic
bubble burst, and the number of employed is now edging
upward. Still the male unemployment rate remains at a
all-time high of 5.5 percent. At the same time, the
government said there was no clear reason for the drop
in the jobless rate in the reporting month and that it
"remains unclear whether the jobless rate will continue
to fall from now".
Some economists have a name
for the current phase of economic growth: "Regulatory
reform and demand creation." There are no guarantees
about the future. The private Japan Center for Economic
Research cautions, in a forecast for 2003-2010, that
there has not yet been enough capital investment and
other inputs, such as personal consumption, to lead to
an "autonomous recovery in domestic demand".
Not yet at full recovery phase
"We are
not likely at a turning point where the economy will
enter a full-fledged recovery phase," the center also
said in another report released in December.
Japan still has to overcome the problems
accumulated during the 1990s - bad bank debts, bad
public policy and governance at the central and local
government level. Koizumi repeatedly has said that he
will not take steps to raise the nation's consumption
tax while in office. During the general election called
last November, the only serious opposition group, the
Democratic Party of Japan, proposed an increase in the
consumer tax to fund the national pension program.
If Koizumi stays in power for his mandated term
of office, there will be no significant economic reforms
undertaken until 2006. Where the economy will stand by
then is anyone's guess. If the private projections are
correct, the economy will continue to chug along at the
level of 1-2 percent growth a year.
In that
interim, however, the government has some wiggle room
left for the economy. If interest rates rise - from the
Bank of Japan's policy of zero interest rates in order
to fight deflation - the profits on government bonds
will rise. That would result in higher tax income on
those bonds.
The prime minister will benefit
from the economy if it continues to grow in the next two
quarters before the upper house contest in July. Whether
his popularity notices will look as good as the
improvement in the government estimates of growth will
depend on non-economic issues - like those Japanese
troops in Iraq.
(Copyright 2004 Asia Times
Online Co, Ltd. All rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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