If Japan was a ship, its captain
would be giving orders to go full speed ahead.
The captain, Prime Minister Junichiro
Koizumi, has turned the ship around: he won a
second mandate for reform in September elections,
the Nikkei is up for the year, the economy is in
recovery and the global economic environment
remains conducive to Japanese growth prospects.
Shortly after the elections, the new diet
passed Koizumi's prized postal reform bill into
law. Real estate prices have stopped falling and
in some places are actually rising. The banks are
now repaying government bailout money extended
during the 1990s and the brokerages appear to be
set to enjoy a good year.
Koizumi has
reasons to be proud.
The economy expanded
at a 3.3% annual pace in quarter two, driven by
business and consumer spending. This is the first
recovery since 1991 that is being driven by
consumer and capital
spending. In the past,
economic growth was led by exports and government
funding, which were unable to sustain momentum.
In a critical break with the past, both
external and domestic parts of the economy appear
to be working in tandem. This has major
implications for Japan as well as the global
economy. Although we do not expect that Japan will
entirely pick up the slack caused by Europe's
slug-like economic performance, it will certainly
help the rest of Asia, both in terms of an export
destination and a source of foreign investment.
While the Koizumi "revolution" has brought
significant change to Japan, there remains much
more work to be done. Getting the postal reform
bill passed is only a part of this. Koizumi also
needs to move on other issues - reducing personnel
costs for civil servants, consolidating
government-affiliated financial institutions,
improving the managerial efficiency of government
assets and liabilities, and overhauling local
government finances.
Health care reform is
also looming as a critical issue, especially as
there is a pressing need for a better medical
insurance program. And then there is the difficult
issue of reducing public sector debt, expected to
reach yen 774 trillion ($6.7 trillion), or 151% of
GDP by March 2006 (end of the fiscal year).
Because of the scope of reform still
required for Japan, the question of who will
succeed Koizumi is so critical. The current head
of government has done well by Japanese standards,
having one of the longest stretches in office. One
must look back to Yasuhiro Nakasone and Shigeru
Yoshida to find anyone who has been in office as
long.
Although his leadership of the
Liberal Democratic Party (LDP) has often been
stormy, Koizumi has provided a high degree of
political stability for the country. In turn,
political stability created an environment
conducive to painful structural reforms in the
economy.
The late October cabinet shuffle
has positioned three potential heirs - Shinzo Abe
(chief cabinet secretary), Taro Aso (foreign
minister) and Sadakazu Tanigaki (finance
minister). Each is regarded as a Koizumi loyalist,
with reformist credentials.
They also are
in highly visible positions. Abe must help
maintain the government's overall momentum on the
reform front, which means holding the various LDP
factions together. Aso has the delicate task of
dealing with China, Korea and the US over a score
of tough issues, and Tanigaki has a lingering
number of financial reform issues, though the sale
of Japan Post goes to Heizo Takenaka, newly
appointed minister of internal affairs and
communications.
Consequently, Japan's
policy environment will be shaped by two forces -
Koizumi's push to finish up as much reform as
possible before he steps down as scheduled in
September and the competition to succeed him.
Fortunately, it is in the interest of all
parties to be as successful as possible. It is
also beneficial for the Japanese economy,
something investors are increasingly recognizing.
Japan has become a compelling investment story as
Koizumi has managed to place a new generation of
LDP politicians in place who are reform-oriented
and likely to benefit from sustainable economic
recovery. Indeed, he will need them in his final
push for reform and to ensure that his legacy will
be lasting.
Scott B MacDonald is
editor, Senior Consultant, KWR International
Advisor.
(Posted with permission from
KWR International, Inc,
(KWR), a consulting firm specializing in the
delivery of research, communications and
advisory services.)
