TOKYO A rift in Japan's ruling party highlights a key weakness of Prime Minister Roshiro Mori's government its failure to tackle badly needed reforms to an economy fractured by a decade of recession.
Japan's banks are laden with bad debts, urgent changes to a strained pension system are being delayed and nudges for greater deregulation from the International Monetary Fund and the European Commission have largely fallen on deaf ears.
The result, argue many economists and critics of Mori's shaky coalition government, is an economy that remains virtually stagnant despite 10 stimulus packages worth 128 trillion yen ($1.18 trillion) to pump up the economy in the last eight years.
Protection in telecommunications has made one of the world's most high-tech countries a laggard in the Internet age.
And from milk to taxi fares, rents and basic utilities, Japanese consumers face an assault on their income unlike nearly anywhere in the world.
Thus enters Koichi Kato, a self-styled reformer and first real challenger to Mori's seven-month old leadership.
Kato, a dissident senior member of Mori's Liberal Democratic Party (LDP), has threatened to abstain or even support a no-confidence motion against Mori planned by the opposition, a move seen as a prologue in any bid to form his government.
Disparaging the LDP as party that could sink the nation into titanic-like oblivion, Kato has vowed reforms to end the LDP's streak of pork-barrel spending that has given Japan the industrialized world's worst debt burden.
Although economists are not convinced Kato would engineer the kind of reforms needed to deregulate fully Japan's highly protected economy, they agree that lack of reform is one of the biggest threats to the country's fitful economic expansion.
Focus on the Consumer "One of the broadest areas of priority is deregulation which serves to increase real spending power for consumers," said Chris Calderwood, chief economist at Jardine Fleming Securities.
"This means agriculture, restrictions on the real estate sector, restrictions on housing, something to get the real estate market going and re-allocating unused plots of land for building urban condominiums and houses," he said.
Mori's LDP has for decades relied on votes from industries such as agriculture, retailing and construction.
In return it has shielded them from foreign competition by shelling out subsidies and public works contracts and curbing imports of products ranging from rice to cement.
This has put a squeeze on Japanese consumers when the economy is in desperate need of a burst of heavy consumer spending an area that represents the biggest chunk of the economy at 60 percent of GDP but one that has failed to recover.
"I think Japanese consumers are overpaying proportionately for a number of household staples like utilities, like food, perhaps even rent," said Calderwood. "Reforms are needed to try to work on redressing the balance away from producers and back toward consumers." He said reforms were also needed to the labor market as part of a wider re-allocation of resources, moving workers from ailing industries into growth areas such as technology, while tackling growing concerns about social security.
"I don't think (consumers) are going to have much relief on the income front or the employment front for some time, but they could at least get a bigger bang for their buck if utility charges could come down, if agriculture deregulation and trade restrictions somehow allowed food prices to come down." Pace of Change Under Fire A European Commission official, visiting Japan in late October, expressed frustration with the slow pace of reforms that he said left Japan in a tangle of red tape and restrictive practices that deter foreign investors and entrepreneurs alike.
Start-ups in France and Germany, for example, account for 11 percent of economic output compared with just 4.6 percent in Japan, according to Japanese government figures cited by the EU.
Washington took Japan to task this year over high interconnection fees charged by former state monopoly Nippon Telegraph and Telephone Corp (NTT) to its competitors, forcing NTT to slash the so-called "last mile" rates.
Analysts cite telecommunications as an example of an area central to the government's hopes to make Japan a global information technology leader, but where slow reforms have kept costs high enough effectively to stunt growth in the industry.
For example, Japan ranked highest among Group of Seven nations the United States, Canada, Britain, Germany, France, Italy and Japan in Internet access charges as of March this year.
(Reuter)