Koizumi's legacy could be a strong
economy By Richard Hanson
TOKYO - As far as prime ministers go, Junichiro
Koizumi appears to rank "legacy" high on his priority
list.
To become Japan's leader three years ago,
he defeated an old guard of ruling Liberal Democratic
Party (LDP) conservatives, who were determined to
protect entrenched special interests - public works and
road building, the postal system and other sacred cows.
Koizumi broke the ice with North Korea. From the start,
his goal was a vague sort of "structural" reform, a
concept broad enough to cover many bases, which would be
followed by healthy economic growth.
Well, he
seems to have done it. The surprise question being asked
in economic circles is whether Koizumi's legacy will
indeed be in the realm of the economy, a subject about
which he has expressed bafflement and, for the most
part, left to others in his cabinet and the influential
bureaucracy to handle.
After more than a decade
of poor economic performance, Japan might just be
entering what could be called the Koizumi Keiki -
taken to mean "prosperity". In the early decades in the
pantheon of the post-World War II recovery booms (or
even miracles) there were two Keiki named after
the historical imperial figures Izanami and Jimmu. But
as one senior government official said when summing up
the current improving economy, it remains to be seen
whether the Koizumi Boom of 2004 "will have legs".
The average Japanese producer, or consumer, of
goods and services is too busy to notice. He or she is
just too busy producing and consuming those things at
faster clips than at almost any other time in the decade
of the 1990s. During that uncertain period, between the
bursting of the late 1980s bubble economy and today, the
economy slipped into recession as the gross domestic
product (GDP) contracted at least three times, pushing
unemployment rates to record highs, to a historical peak
of around 5.6 percent.
The latest GDP numbers
for the January-March quarter indicate that the economy
grew at an annual pace of 5.6 percent for those three
months. This followed a 6.9 percent increase (annual
basis) in the prior three months. In all, the economy
has chalked up six quarters of consecutive growth.
High domestic demand pumps $ into
economy The best news is that these numbers now
reflect an economy in which domestic demand for goods
and services is pumping money into the economy, which
had been supported nicely by an export boom in goods
sold at a torrid pace to China and the United
States.
Personal spending rose at a yearly pace
of 4 percent, accounting for more than 50 percent of the
value of the economy. In April alone, consumption jumped
to a 7.2 percent year-on-year pace. That is strong
enough to encourage companies to spend money to restock
inventories of goods that are selling well.
Meanwhile, healthy companies are pumping money
into new machinery and plants just to keep up with the
projected demand. Other numbers are also encouraging.
Publicly traded non-financial companies expect
their group pretax profits to grow 12 percent in fiscal
2004, marking the third consecutive year of profit
increases, according to data compiled by Nihon Keizai
Shimbun. Electronics firms are projecting strong sales
as "digitized" products keep rolling into consumers'
hands. Manufacturers of machinery and precision devices
expect profit growth as companies increase capital
investment. Domestic demand will also prop up retailers
and others that depend on domestic demand.
The
report says that profit growth will likely slow down
this fiscal year (April 2004 to March 2005) due to
rising raw materials and other costs. But sales are
projected to rise 3.1 percent, topping the 2 percent
increase recorded in fiscal 2003. Electronics firms
expect to earn a combined 3 trillion yen (US$27.1
billion) in pretax profits, up 19 percent. Machinery and
equipment manufacturers forecast jumps of 32 percent and
24 percent, respectively, Nikkei said.
Trading
houses expect 50 percent jumps in profits as prices rise
on vital commodities such as coal and iron ore from
demand in China and other countries. Retailers will
benefit from better payrolls as companies profit more,
with profits up 17 percent. But auto parts
manufacturers, which saw strong profits (up 20 percent
last year), are projecting a 3 percent decline in their
combined profits. They may be hurt by a stronger yen,
which cuts profit margins on exports.
Picture
bleak for corporate Japan The picture for
corporate Japan, however, is far from rosy. Take the
venerable, 111-year-old, troubled textile and household
products maker, Kanebo Ltd, which on Monday unveiled a
revival plan involving drastic restructuring. In return,
the company will receive financial assistance of about
150 billion yen. Kanebo's turnaround plan will be
implemented in cooperation with the government-backed
Industrial Revitalization Corp of Japan (IRCJ), which on
Monday committed itself to a 20-billion-yen capital
injection.
It can be said that Kanebo on the
corporate side represents the true role that the Koizumi
government has played in supporting the economy, during
its darkest days just a couple years ago. This included
a second round of bail-outs for the banking sector,
following the government move toward its first
nationalization of some banks in 1998-99. Among other
things, this led to the purchase of one bank by foreign
interests (which most recently sold out at a handsome
profit).
It's best to put Prime Minister
Koizumi's recent role in perspective.
Just a
little more than two years ago, during winter 2002, the
prime minister himself had his own deep worries about
the economy. But he was no economics buff. At the time,
he candidly told one reporter from a US newspaper that
he just couldn't figure out why, despite pouring a lot
of public money into the economy on the advice of money
men, things still looked bleak.
Koizumi is,
however, an astute politician. He knew a bad economy,
which he inherited in April 2001 when he defeated his
LDP opponent to become prime minister, did not win
elections. He was also savvy enough to know that raising
taxes was bad politics too. At the time, his greatest
enemies were within his own party. There was an "old
guard" that resented his campaign promise to bring about
sweeping "structural" reform of the government and the
economy. So Koizumi concentrated on the enemies he knew
in his own party. He would rely on others to take care
of the economy.
The prime minister's platform
was aimed at curbing the power of entrenched vested
interests in the LDP. These included the big road
building and public works lobbies, a huge postal
monopoly, fiercely protected farm interests and other
assorted barriers to Koizumi reform. In the late spring
and early summer of 2002, Koizumi's battles within the
LDP itself deteriorated into threats. At one famous
moment, the prime minister and president of the party
threatened to "destroy" the LDP (his own party) if key
parts of his reform drive were blocked in the Diet
(parliament). Fortuitously, Koizumi's swashbuckling, Don
Quixote-ish image serendipitously attracted, in the nick
of time as it turned out, the support from two important
sources.
Big business in quiet deal with
Koizumi First and most tangibly, came Japan's
recession-hobbled business "establishment". In early
July, while the disastrous Diet session was still in
session, Koizumi was visited secretly by a trio of
Japan's most prominent business leaders. They were
spearheaded by the newly appointed head of the business
federation Nippon Keidanren (and also Toyota Motor's
chairman), strong-willed Hiroshi Okuda, perhaps the most
politically influential business leader from Japan's
biggest most profitable company since Toshio Doko,
considered the don of the postwar business world.
Okuda offered the prime minister a deal he could
not turn down. Big business would support him personally
- not the anti-reform parts of the LDP per se - as well
as the Koizumi "vision" of structural and political
reform. In a nutshell, Koizumi would be able to dominate
the LDP. Within a year, Koizumi would have virtually
eliminated the power of personal LDP factions within the
party.
In return, big business simply wanted
stable politics, and, of course, a sympathetic,
pro-business prime minister. Koizumi was the man. At the
time, Keidanren's Okuda predicted, with firm conviction,
that Japanese business would respond. Mired in the worst
recession since World War II, business and a largely
disgraced financial world was badly in need of
restructuring.
The weakest companies might fall,
and they did fail in large numbers after the collapse of
the late 1980s bubble economy. Hundreds of businesses,
banks, brokers and insurance companies - you name it -
collapsed along with property and stock values. On the
political side, the ruling LDP itself, in 1993, was
kicked out of office, in an internal party coup, for the
first time since its founding in 1955.
Koizumi
accepted the help of businesses, as well as Okuda. The
key, however, was to rally the government bureaucracy
itself - centered on the Ministry of Finance (MOF),
whose reputation had been ruined in the scandal-marred
1990s. MOF, once the undisputed financial overlord of
Japan, was purged in the late 1990s, its power dispersed
to a Financial Services Agency (FSA). But, MOF's
dominance over public finance, tax and the annual
national budget remained intact.
Plan to
rescue corporate basket cases That was crucial
in formulating a plan for Koizumi, who accepted all the
help he could get. In short, MOF devised budget and
other means of supporting the economy through a
combination of budget and tax measures. In a spurt of
innovation, MOF planned and arranged for the financing
of a government-backed organization to rescue corporate
basket cases. This MOF creation became the Industrial
Revitalization Corp of Japan (IRCJ), the entity that is
taking control of the failing Kanebo, and other
companies in need of help.
In bureaucratic
terms, MOF made itself useful to the prime minister by
placing its people in key positions in the FSA, under
the ministership of Heizo Takenaka, an academic, who
proposed strong measures for reforming the banks
quickly.
Fortunately, the measures were not
fully implemented because of political pressures from
local bank lobbies. Meanwhile, other institutions,
mainly the Bank of Japan (BOJ, the central bank)
supported the economy by maintaining a policy of "zero"
interest rates and very relaxed supplies of money to the
economy. BOJ and MOF closely coordinated these moves.
Both institutions had a keen interest in bringing a halt
to the deflationary pressures that had undermined the
economy throughout the 1990s and into the current
decade.
Koizumi, meanwhile, with the help of
powerful friends in business and his own unflagging
levels of popular support in the polls, consolidated his
grip on the LDP and the coalition government that he
rules. His major contribution was to essentially abolish
the power of LDP factions that had opposed him and his
reform crusade. The LDP won the general election in
November 2003, despite a vigorous opposition by the
Democratic Party of Japan.
As one senior
government official points out, Koizumi's biggest hurdle
now is to do reasonably well in a crucial Upper House
election on July 12. By that time, fresh economic data
should be available to determine whether Japanese
economy's recovery is more firmly in place.
There are questions about the level of support
that the government may have to pony up over the summer
months to bolster still weak segments of local
economies. The central government has much to do in
reforming the its own financial backyard,which is
littered with wasteful programs. Longer term, the
government has not resolved such core issues as funding
the scandalously run national pensions and other welfare
organizations.
All that said, the economy itself
might continue on its growth path. And there is always
the matter of winning or losing in the July election.
That will be, for all practical purposes, Koizumi's’s
last major national election. His term as president of
the LDP, and hence the prime minister's job, will expire
in a little more than two years.
If the Koizumi
prosperity, or boom, continues to prop up the nation,
the name may just provide the legacy he seeks.
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