Koizumi's Sputtering Reforms Seen Ensuring More Strife for Japan
The shaggy-haired premier charged into power 16 months ago promising painful structural reforms to lift the nation out of a decade in the doldrums.
But each step of the way, his plans have hit a wall of resistance from the old guard of his ruling Liberal Democratic Party (LDP) whose vested interests benefit from the current system.
Koizumi has promised to bulldoze a mountain of non performing loans held by Japanese banks within two to three years, cap new government bond issues to rein in ballooning government debt and slash pork-barrel public works projects.
Several public corporations were also earmarked for privatization. One, the postal service, had been at the top of Koizumi's personal political agenda for years before he took over the leadership.
Despite the rhetoric, little has been delivered and it is only thanks to a recovery in exports that the economy is tentatively starting to stir.
"Consensus expects a recovery later this year, but a rise in the yen and weaker stock prices as well as slow growth in the United States have put a downside risk on the economy and that is effecting government policy," cautioned Shuji Shirota, an economist at Dresdner Kleinwort Wasserstein.
Koizumi appears inclined to give way on his original reform agenda by reverting to the wasteful spending policies and muddle-along approach of past administrations, AFP quoted economists as saying.
The premier has already watered down promises to rid Japanese banks of bad loans, commonly cited as a central cause of the country's decade long malaise.
The embattled premier has also said he may break a 30 trillion yen ($250 billion) limit on new government bond issues in the next budget year. More bonds are likely to be needed to plug a yawning gap between falling government revenue -- aggravated by promised tax cuts -- and plans for higher spending.
Even a pledge to reduce wasteful public works projects -- Japan is strewn with bridges to nowhere and near empty rural highways -- has been watered down under a budget framework approved by the cabinet last week.
"The first plan was to cut public works spending by 10 percent but now the cut is only three percent that is a big shift in fiscal policy," said Shirota.
Koizumi has convinced the government to devise legislation to open up Japan's lucrative mail business to the private sector after 130 years of state control. But critics say the victory is virtually meaningless.
The stringent conditions laid down for private-sector entrants -- such as setting up vast networks of letter boxes -- mean there is likely to be little change to the status quo.
Such compromises mean "it is hard now to distinguish his administration from other LDP administrations," said CSFB's Walker.
Without fundamental structural reforms this recovery -- like three others seen since Japan's economic bubble burst in 1990 -- is likely to be short-lived.
The most vital step is to help restore the banking sector to health by injecting another round of public funds to help them write off bad loans, said Paul Sheard, Lehman Brothers' chief economist for Asia.
Non-performing loans (NPLS) at Japanese banks have snowballed to a record 43.2 trillion yen, according to the latest official figures, despite increased write-offs.
"The NPLS can only be purged from the system by an injection of money into the banking system in a substantial scale," said Sheard. "The frameworks exist to do this but unfortunately the political will and policy coordination has been lacking."
Koizumi has maintained the banks will only get more money if there is a financial crisis but economists argue this would condemn japan to more years of economic drift.
"We can expect the same sort of Kabuki (traditional Japanese) theatre coming up next year," said Walker.