August 2, 2001	atimes.com

Editorials Japan: Pain and no gain? His unconventional style has made Jun-chan likeable and believable and hence Japanese voters presented the Japanese prime minister with a landslide victory in last Sunday's Upper House of parliament elections and a ringing endorsement of his "No recovery without reform" policy prescription. But could it be that the chins-up "No pain, no gain" message turns into a pain-and-no-gain reality? Chances are that it will. Japanese industrial production fell 0.7 percent in June from May, the Ministry of Economy, Trade and Industry said last Monday. The fall was larger than the economists' consensus estimate of an average 0.4 percent month-on-month decrease. The sharp drop in global demand for information technology-related goods has sharply curbed Japanese exports since late last year. For the full April-to-June quarter, industrial production sank 4.0 percent, marking a second straight quarter of output decline after the January-March period's 3.7 percent fall. The sharp quarterly drop portends an overall April-June economic contraction, confirming that the economy has sunk into recession, according to the technical definition of two consecutive quarters of declines. (GDP shrank 0.2 percent in the January-March period.) Prime Minister Junichiro Koizumi, on the strength of the election victory he engineered virtually single-handedly, will almost certainly be re-elected president of the ruling Liberal Democratic Party (LDP) in the fall. He thus will have the chance of concretizing and implementing the policies he has proposed and - like his mentor Nakasone in the 1980s - become a longer-serving prime minister able to leave his mark on Japanese politics. He can also proudly point to the fact that Sunday's LDP win was the first time in the past 70 years that a Japanese political party has won an election by advocating painful structural reform. The last time this happened was in the February 1930 general election in which the Minseito party of then prime minister Osachi Hamaguchi overwhelmed the Seiyukai party. Hamaguchi went on to lift a ban on gold exports, promoted fiscal austerity policy and called on people to endure economic hardship for the better of the nation. Poignantly, the communications minister in that government was Matajiro Koizumi, the present premier's grandfather. But the present Koizumi will likely fervently pray that the historical parallels end with that. The Minseito/Hamaguchi policies failed in combating economic depression. Hamaguchi's conciliatory policy toward China and compromise with the United States in the London Naval Treaty of 1930 were unpopular - to put it mildly - with the militarists of the day. Hamaguchi was shot by an ultranationalist in 1930 and died in 1931. The rest is painful history not to be repeated. We have been preaching painful reform for Japan in these pages for several years. While unhappy with the vagueness to date of Koizumi's reform proposals, we have lent our support to his general reform stance and commitment. But the danger with the Koizumi policies as outlined over the past three months - with financial system rehabilitation through accelerated bad-loan write-offs and fiscal consolidation at the core - is that they will have further depressive consequences for the economy, while measures capable of effecting business recovery have barely been mentioned. Japan needs accelerated new business formation and an overall increase in consumer purchasing power to get out of the present economic quagmire. To bring this about, it needs drastic business deregulation and tax relief. Without those, depression will follow recession and the Koizumi reign will prove shortlived. Banking system clean-up alone will not create new demand for bank lending. Thus, we anxiously await the new legislation Koizumi has promised to submit to the extraordinary session of parliament starting next month. Benchmarks for the potential success of reform and avoidance of a pain-but-no-gain scenario will be the enactment of far-reaching deregulation and tax reduction measures. And as those measures will take time to take hold, while the depressive effect of loan write-offs and fiscal austerity is immediate, Koizumi must also persuade the (central) Bank of Japan to conduct the easiest of monetary policy to avoid systemic financial shock. While Japan goes on vacation, Koizumi has his work cut out for him and would be well advised to contemplate certain lessons of history - and not necessarily at the Yasukuni Shrine. ((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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