Japan - Trials and Tribulations

By Scott B. MacDonald

FY2002 was another difficult year for Japan. The Koizumi government's reforms were consistently attacked and weakened by conservative elements in the ruling LDP-led coalition, the banking sector remains a headache, and the hope that export-led growth would trickle down into the domestic economy and stimulate wider-based growth appears less and less likely. The fiscal situation has not improved and Japan's ratings took a beating. Even the opposition (that is those opposed to the LDP outside of the government alliance) spent the year in disarray. Yet, not all is lost.

Prime Minister Koizumi remains committed to reforming the Japanese economy and reforms, though not as strong as originally intended, have been passed. He still has a team of like-minded reformers in his cabinet, including Economy Minister Heizo Takenaka, who clearly wants to overhaul the banking and corporate sectors. Although Takenaka's comments that no bank or company was too big to fail roiled the markets and evoked considerable resistance, Koizumi has remained steadfast in his support for his minister and not entirely given up on bank reform.

One result of Takenaka's bluntness was that it appears to be pushing Japan's major banks into reforming themselves. Japan's four major banks - Mizuho Financial Group, Sumitomo Mitsui Financial Group, UFJ Group and Mitsubishi Tokyo Financial Group - have all recently announced plans to restructure and dispose of nonperforming loans. The banks were already feeling the pressure of plummeting stock market prices, which was raising the delicate issue of their capitalization. Then came Takenaka. The combination of market forces and the threat of greater government intervention helped push the banks into what is hopefully a better approach to the bad loan problem.

Indeed, Mizuho is undergoing a substantial reorganization to create a new structure that allows for the efficient provision of banking and securities services to different sets of clients, ranging from the biggest corporate customers to small depositors. While announcing the programs is one step, the real test has yet to come - implementation. However, there is at least some momentum on this front, where before it was a glacial pace.

The Koizumi government has also had to deal with road rage. In early December, there was a dramatic end to the highway debate, which involved a government panel mandated with the privatization of four heavily indebted public highway corporations. The four companies together have a debt of 40 trillion yen ($320 billion). In a heated meeting, the head of the panel, Takashi Imai, who favored continuing certain highway projects, resigned in protest. Imai had earlier sought to present a report that included both a recommendation to continue road works and to discontinue them.

A clear majority -five out of seven members - objected to this and regarded it important to send a clear message of the panel's preference. Consequently, the five forced a vote, which provoked Imai to resign in protest. However, the majority sent a report to the Prime Minister clearly advocating the creation of a new entity to take on the four corporations - debts and assets. The report also states that the privatized companies should buy highways back from the new ownership entity 10 years later. This would be done to force the companies to concentrate on maintaining profitability from their inception. The task ahead for the Koizumi administration is to clean up the report, convert it into a bill and present it to the Diet in the 2004 session, with a view toward privatization in 2005.

Despite the symbolic importance of the reformers winning the battle over the panel's report, the opposition to any such reform remains strong. Influential LDP members are still pushing for new highway projects. As in anything that threatens the old political economy, passage of highway reform will face many trials and tribulations.

While the road reform is still moving, the government plan to overhaul eight public financial institutions, including the Development Bank of Japan, was shelved. The government stated that -financing by public lenders was essential- in an environment of continued economic deterioration. The plan was not completely abandoned, but the timetable for reform was pushed back.

Although it is easy to be critical of the Prime Minister and his team for not pressing ahead at a faster pace, it must be remembered that the task he faces is no less than to remake Japan - to restructure a political economy in which there are vested interests opposed to reform - many of them within the ruling party. Ironically, the LDP, both the backward-looking conservatives and the forward-looking reformer, need Koizumi. While the conservative hardliners like Taro Aso (the LDP policy chief) seek to stop reform and look to a weaker yen to help boost exports again in the forlorn hope of seeing some type of cyclical growth, Japan's foreign competitors (especially China and Korea) will continue to make inroads into their markets. Consequently, Japan is likely to have another year of trials and tribulations in 2003 - much the same as in 2002. If only they let Koizumi be Koizumi.