Koizumi: How Real is Japan’s Reform?

Does Prime Minister Koizumi live up to his image as the arch-reformer?

February 18, 2002

Does Prime Minister Koizumi live up to his image as the arch-reformer?

To most observers, the 2001 election of Junichiro Koizumi as prime minister of Japan signaled a stunning break-through. After all, the Japanese political scene has been dominated for decades by stony-faced bosses in the Liberal Democratic Party (LDP). And, as the saying goes, the LDP is neither liberal nor democratic nor a party.

Though an LDP stalwart himself, Mr. Koizumi became prime minister when the party bosses caved in to pressure from the party’s rank and file for change at the top. His charismatic and informal style brought new faces and a new style to Japanese government.

Recently, however, the prime minister’s popularity took a nose dive in Japanese opinion polls — after remaining stunningly high through his first 10 months in office. (Mr. Koizumi’s 23% drop in one opinion poll coincided with his firing of popular foreign minister Makiko Tanaka.)

Mr. Koizumi’s popularity still hovers at close to 50% in the polls. But there are some colossal ironies hidden within the “Koizumi phenomenon.” Numbered among them, for instance, is that the prime minister’s rise to power — even on a reformist platform — injected new life into the creaky LDP.

The rise of Mr. Koizumi also may have postponed the restructuring of a political system that appears increasingly mismatched with Japanese voters’ desires. Today’s Japan, in fact, has precisely the form of government to which China’s communists aspire — rule by the party. And if Japan’s chief economic problem is non-performing loans, its chief political problem is “non-performing politicians.”

In the Japanese political system, the cabinet consists mainly of mere figureheads. Real power resides with senior party members who are linked to even more senior officials. The secretary general of the party is the all-important figure in Japanese politics, but he is not required to answer to the country’s parliament.

Only the ministers answer to the parliament — and most of them serve terms of less than a year. Thus, power lies not in the hands of the government, but in the hands of those who run it from behind the scenes.

At present, none of Japan’s political parties are very popular. The main opposition party, the Democratic Party of Japan (DPJ), receives only about 6 to 8% support in recent opinion polls. The LDP itself garners only about 30 percent approval.

The strong desire for change is rooted in the fact that Japanese politics is dominated by old constituencies and habits. Such combinations — including the unholy alliance of pork barrel construction projects promoted by the LDP and union support for the opposition — are no longer sustainable.

Yet prospects for changing the system via the ballot box are dim. In fact, a class of “hereditary politicians” remains in place. (Koizumi himself is a third-generation politician.) Why is that? Well, one way to explain it is to pay close attention to the three bans which are essential to the stagnation of Japanese politics — jiban, or local base; kanban, or name recognition; and kaban, or “the bag” (that is, financial resources).

The importance of those first two “ban” is easily explained. As political parties and concrete issues recede in importance in Japanese political system, politicians become ever more dependent on their local base and name recognition.

Yet, kaban is also very important in sustaining the old system. The big companies that created the LDP in 1955 remain out of the spotlight, but these corporations have strong personal and financial connections to senior politicians.

For instance, these companies have continually protected their own interests in tax reform legislation — but they have not done so by dealing with the government. Rather, they work closely with the senior members of the Japanese parliament’s tax committee.

However, even some of those who benefit from the current system have had enough of it. A new generation of Japanese farmers, for instance, has tired of the country’s existing policy on subsidies.

They would prefer more freedom to run their businesses without restrictions on the amount that they are allowed to produce.

In fact, many entrepreneurs in Japan’s “new economy” were attracted to information technology because it was unencumbered by political deals. They continue to try “not to make eye contact” with politicians.

Even among younger politicians there is considerable agreement across party boundaries about what is needed to restructure Japanese politics. Yet they have little practical sense of how to achieve that aim. One element would certainly include a major reshuffling of the structure of Japanese parties.

Such a reform agenda, however, runs squarely into the paradox of Mr. Koizumi. Until recently, the prime minister’s now declining popularity as a reformer had raced far ahead of his track record of change.

Yes, Mr. Koizumi staked out an impressive position of military support for the United States after the September 11 terrorist attacks. More important, however, was that he pushed it through the Japanese parliament — marking a watershed in Japan’s postwar history.

On economic issues, by contrast, the prime minister’s instincts have been far less certain. Mr. Koizumi’s supporters would say he has put hard issues such as tax reform or flaws in the country’s banking system on the table.

His detractors would argue that he has only kicked them down the road by putting them in study commissions. They’d also mention that his timidity in this area — allied with the firing of Ms. Tanaka — has cost him dearly in the opinion polls.

The prize question in Japanese politics is this: What sort of near-term Japanese crisis might provoke the dramatic change desired by its citizens? Or, at the very least, what might trigger the changes needed to revitalize its economy?

Those “non-performing loans” that are weighing down Japan’s banking system are one key place to look. Japan’s own banking crisis has been long in duration and economically pervasive. That crisis could also come to a head relatively soon.

Japan’s financial year ends on March 31, and some of its major institutions could become visibly insolvent as a result of a shift to tight accounting practices at that time.

Worse, Japan’s real interest rates have hovered close to zero. So it has been possible to simply roll over the mountain of debt represented by existing loans — no matter how dubious they may be. But there may no longer be any room to roll them over again.

Japan also faces a quandary over the cost of capital. Deregulation is supposed to decrease the cost of capital. Yet, even without deregulation, the return on investments has been declining in Japan for 25 years.

Thus, the cost of capital can only go up — and interest rates may rise as well. When that happens, rolling over all the existing bad loans will no longer be a free ride. A chain of insolvencies, in fact, might touch off a financial panic — driving the value of the yen down sharply.

In the end, the Japanese voters appear more nervous than angry. Several more years of muddling through is a distinct possibility, especially given Japan’s conservative bent.

In fact, bold political moves — such as a 1997 increase in the consumption tax — probably deepened Japan’s economic slump. It may well be that things will have to get much worse before they get any better for Japan and its people.