June 13, 2001	atimes.com

Editorials Koizumi must stay the course Japan's real gross domestic product shrank by 0.2 percent in the January-March quarter, an annualized 0.8 percent drop. Declines in corporate capital spending and exports were responsible for the contraction, according to a Cabinet Office preliminary report released on Monday. A 5.2 percent rise in public works expenditure on the previous term was the only source of growth in the latest figures. The only good news for the economy on Monday is Prime Minister Junichiro Koizumi's statement after the release of the data. "The economy won't recover without moving forward with reform. We need to think with a mid to long term view. This [the first-quarter decline] is all the more reason why reform is needed," Koizumi told reporters. Economy Minister Heizo Takenaka struck the same note, saying the drop in growth "was within expectations", and "will not require fundamental changes to the overall policy framework" or to policy guidelines for structural reform being discussed by the Council on Fiscal and Economic Policy. "Structural reform, not conventional demand-boosting government spending measures will be needed to restore growth in the economy," Takenaka said. To date, in his two months in office, Prime Minister Koizumi has not budged from his reform course which is focused on business deregulation, privatization and resolution of bad loans in the banking system. As time passes, in the short term at least, such resolve on his part will not get any easier to sustain. It is estimated that bad loan write-offs will lead to a doubling of the already large number of bankruptcies over the coming two years. Unemployment could rise by up to 500,000. But just how important government determination to stay its reform course is was indicated by the recent release to The Nihon Keizai Shimbun under Japan's new public information disclosure law of the minutes of the December 1998 to January 1999 proceedings of the former Financial Reconstruction Commission (now Financial Services Agency). They show strong pressure from politicians and big business to protect borrowers and for the FRC to adopt lax definitions of problem loans. The assets of state-owned banks, mostly loans to poorly performing general contractors, distribution businesses and joint public-private sector corporations, were ultimately rated as sound by the commission, postponing the liquidation of most troubled firms. Collapsing stock prices and a serious credit crunch threatening the financial system served as excuses for the government to delay dealing with de facto bankrupt companies. The minutes show that the FRC frequently discussed the need for disposing of bad loans in two or three years and of restructuring general contractors, but the government, for fear of being criticized for triggering bankruptcies, prevented decisive action. While official FRC criteria called for a ban on loans to companies at risk of failure, unofficial criteria permitted additional loans if the companies were sure to receive support from their main banks or local public entities. And so the bad-loan mess continued. As his reform drive continues while the economy is sliding back into recession, Koizumi will undoubtedly face growing pressure to "be reasonable", to once again come up with added deficit spending, and to go slower on loan resolution - all in the interest of protecting financial system stability. He'd be well advised to turn a deaf ear to such voices. The Bank of Japan's ultra-easy monetary policy provides ample liquidity to stem systemic financial system failure. The Japanese social security system will cushion the pain of added unemployment. With that in mind and clearly stated by Koizumi in the upcoming election campaign for the Upper House of Parliament, we hope and trust that Japanese voters will give the prime minister - and themselves - the chance for persisting in reform. ((c)2001 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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