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At
the Devil’s Gate – Observations of the Koizumi “Revolution”
By
Scott B. MacDonald
On
November 9th, 2003 Japanese voters went to the polls to elect
their next government. Although the opposition Democratic
Party of Japan (DPJ) achieved substantial gains (winning
40 additional seats to end up with a total of 177), Prime
Minister Junichiro Koizumi’s Liberal Democrats won
240 seats, which with its coalition allies, gives it a secure
majority of 278 seats in the lower house of the Diet. Koizumi
now starts a second term with a popular mandate to implement
the so-called “Koizumi revolution.” But is it
really a revolution? Is the Prime Minister really capable
of moving Japan into a new era of sustainable economic growth,
supported by a restructured economy?
The expression “Devil’s Gate” came up during a conversation
in Tokyo in 2003 about President George W. Bush’s decision to invade
Iraq. The Japanese speaker indicated that by invading Iraq, the President put
himself at the Devil’s Gate – at the door of considerable potential
troubles. Simply stated, on one side of the Devil’s Gate all was well;
on the other side were the demons of treachery, war and deceit. For many reasons
President Bush walked through the Devil’s Gate and the United States
entered unknown country. In the same respect, Junichiro Koizumi’s decision
to become Japan’s prime minister in 2001 took him to the Devil’s
Gate. While Japan can hardly compare to Iraq in terms of political chaos, the
East Asian country was in a troubled state – the economy was suffering
from over a decade of stagnation, the political will for change was largely
lacking, and society was adrift, transfixed by the dilemmas of an aging population
and a sense of unease over the economic malaise. In addition, there was a sense
that Japan’s place in the world was slipping, especially before the rising
economic power of China and, to a lesser extent, South Korea. For a combination
of reasons, Koizumi decided to walk through the Devil’s Gate into the
unknown.
Since 2001, Koizumi has given the world the image of Godzilla, the famous screen
monster, always rising out of the sea and fighting over Japan, usually against
bad monsters. In a broad sense, Godzilla represented the Schumpeter-like forces
of creative destruction. Although Godzilla often destroyed Tokyo (while fighting
the bad monsters), this caused the inhabitants to rebuild their city – at
least the city was always brand new in each successive movie. In the same sense,
Koizumi projects an image that he too is releasing creative destruction and
from the ruins of the old Japanese economy, a new stronger and more modern
economy will emerge. Consequently, Koizumi is credited for launching a “revolution” of
economic change in Japan. He has made proclamations of his willingness to shake
up Japan, uproot the political order and bring the economy back to a period
of sustainable economic growth. All of this, of course, will help restore Japan’s
role in the world.
There is little question that Koizumi is a breath of fresh air in what had
become a stale world of Japanese politics. His proposed reforms to overhaul
the state sector (with an eye to reducing wasteful spending), to privatize
parts of it (mainly the postal system and highway corporation), to clean up
bad bank debt, and reform the taxation, medical care and public pension systems,
all promised much to an increasingly cynical and frustrated public. After two
years, much of Koizumi’s program remains unfulfilled. The rhetoric of
revolution remains in place, but the results seem lacking.
The Koizumi revolution confronts considerable opposition, both within the government
and out. Members of Koizumi’s own Liberal Democratic party (LDP) have
fought hard against reform as have business leaders from the protected and
often inefficient domestic sector – agriculture, retail and construction.
Koizumi’s supporters have been under fire for pushing reforms and in
some cases there have been sustained efforts to force them to resign.
Additional opposition to the Koizumi reforms comes from the banks, many of
which carry bad debts from what have come to be known as the zombie companies.
It is no mistake that most of the zombies are in the retail, agriculture and
construction sectors. Many of the same companies have long held close political
ties to the ruling LDP. LDP members have not been shy about seeking ongoing
government and bank forbearance for dead-beat companies. Adding another layer
of opposition to reform comes from within the bureaucracy, where certain factions
have been ill at ease at the idea of allowing bankrupt companies to actually
go bankrupt. This also implies that the banks should stop providing loans and
begin calling non-performing loans what they are – lost money.
All of this means that Koizumi coming to power in 2001 faced a Gordian Knot
of the Japanese political economy, an intricate system created in the aftermath
of the Second World War to help Japan catch up with the West economically.
The system placed an emphasis on business, government and the LDP working together
to expand and upgrade the country’s industrial infrastructure geared
for export markets. In essence, the government guided the nation’s development,
channeling credit to key sectors through the financial system.
The high level of success of that development model in the 1950s and 1960s,
however, guaranteed that making any substantial changes would be difficult.
While the global economy changed and Japan’s major exporting companies
adapted, the rest of the development model did not. It was politically easier
to tinker around the edges than it was to make a meaningful overhaul. While
the 1980s showed a highly dynamic Japanese economy to the world, the structural
weaknesses inherent in the system, in particular the stunted role of the banks,
the shallow nature of capital markets, and poor corporate governance were all
to be revealed in the “lost decade” of the 1990s.
The consensus-driven nature of Japanese society and the factional nature of
its politics made the arrival of a strong leader, willing and able to cut the
Gordian Knot of the political economy, difficult. Throughout much of the postwar
era, Japanese prime ministers have operated with far less power than their
Western counterparts, considering that they often had to play to a number of
factions within the LDP. Achieving consensus was time-consuming and opaque,
allowing considerable latitude to the bureaucracy in how policy should be implemented.
It was therefore a surprise in 2001 when Koizumi, one of the country’s
more colorful leaders, emerged as the head of the LDP and became prime minister.
Regarded as handsome, with wavy hair and slender build, he became well know
for being an Elvis fan and for having something lacking in earlier leaders,
flamboyance.
The reality of the Koizumi revolution is that is really more of an evolution.
For all the marketing of Prime Minister Koizumi as a revolutionary, he is more
of a reformer and a master manipulator of the press. Simply stated, Japan under
Koizumi since 2001 is seeing an evolution of reform, not a revolution. One
of the definitions for revolution is “any complete change of method or
conditions”. This implies sweeping changes in how things are done. Japan
after two years of Koizumi is not at this stage.
From an Anglo-American standpoint this evokes a sense of disappointment, that
Japan is forever condemned to the promise of reform, but a reality of inaction
and ultimately economic decline. From the standpoint of many Western analysts,
Japan has seen too many failed reformers, heard too many claims that reforms
will now work; and observed too many policy dead-ends. Koizumi initially had
considerable goodwill, but patience has been eroded as the Prime Minister’s
promises have not fully matched expectations. Deflation is still a problem,
the banking sector remains wobbly, and the domestic sectors contain many of
the same pitfalls that characterized them pre-Koizumi. And, behind all of this
is a stark demographic reality – Japan’s population is aging, which
will place that much more pressure on the economy. Accordingly, the Nikkei
Newspaper recently noted a National Institute of Population and Social Security
report that households headed by those aged 65 and older are projected to increase
65 percent from 2000 to 18.43 million in 2025, accounting for nearly 40 percent
of the all Japanese households.
From a Japanese standpoint, what Koizumi is pushing is radical – he is
calling for and, in a piecemeal fashion, breaking up the old political economy.
He has adopted the mantra of “structural reform” or kozo kaikaku
to sum up his agenda and to signal his commitment to radical change. For conservative
members of the LDP, the many special interest groups in the domestic economy
and parts of the bureaucracy, any change is dangerous as it represents a loss
of power, the strong potential of more business failures, and an overall loss
of control over the economy by the bureaucracy.
Somewhere between the Western and Japanese views sits reality. Japan is making
changes and reforms are occurring, but the process is slow, convoluted, and
at risk of slippage back to inaction. Because of this, it is difficult to measure
the progress that has been made. It is also difficult to gauge the role of
Koizumi and what his long-term impact will be on Japan. It is therefore important
to underscore that the two issues are entwined – Koizumi’s place
in Japanese history will be judged by how much he changes his country. Stated
in another fashion, Koizumi will be judged on his ability to halt the decline
of Japan.
Although there is frustration about the gradual nature of reform, Koizumi is
changing Japan. The domestic sector is being forced to embrace structural adjustments,
some companies are being allowed to fail, and others are coming under much
greater pressure from their bankers to restructure with a coherent and more
transparent plan. There has been some creative chaos as reflected by the high
levels of bankruptcies in the 2001-2003 period. The banks have made an effort
to reduce bad loans. In two cases (Long-Term Credit Bank and Nippon Credit
Bank), Japanese banks have been sold to foreigners, and one major bank, Resona,
was taken over by the government after it failed to have adequate capital ratios.
Legislation has also moved forward pertaining to the privatization/overhaul
of the postal system and the highway corporation.
Currently Koizumi appears as a transitory figure. Within the lexicon of historical
figures, he sits somewhere between the Soviet Union’s Mikhail Gorbachev
and the United Kingdom’s Margaret Thatcher. The former understood the
need for reform and started the process, but was unable to bring it to a successful
conclusion. Once started, reform quickly overcame Gorbachev’s ability
to control the process and his base of support – the Communist Party
and the state – proved wholly inadequate to accommodate change and ultimately
brittle, destined to fragment. In 1992, the Soviet Union ceased to exist and
Russia emerged as the major successor state, commencing a long and difficult
process of economic reform.
In sharp contrast to Gorbachev, Thatcher was able to advance her revolution,
which entailed the radical overhaul of the British economy. Thatcher was abrasive
and ruthless in executing her reforms and the opposition was weak and ultimately
lacked widespread public support. By the time Thatcher was ousted from power
by her own party, she was largely successful in reversing decades of decline
and a profound sense of national drift. Today the United Kingdom is one of
the world’s healthier economies.
As Koizumi embarks upon his second term in office he must give serious consideration
to his place in history. Thus far he has lasted longer in office than many
other Japanese prime ministers in recent history. However, lasting in office
is not making a revolution. Much has been promised. He now has a popular mandate
to make good those promises. In a sense, Koizumi has pulled Japan across the
Devil’s Gate threshold, but not moved much beyond. Does he have the strength
to take Japan further into the unknown country, where there are tough challenges
and very likely considerable rewards? If so, he will be remembered as one of
his country’s exceptional leaders. If not, he will be seen a man with
vision, but limited by his inability to implement badly needed changes – a
transitory figure, waiting for another more capable (or maybe luckier) figure
to come along. Only time will tell.
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