TCS Daily

Japan's "Lion King" Sharpens His Claws

By Rowan Callick - September 7, 2005 12:00 AM

After more than a decade of stagnation and agonisingly slow moving public life in Japan, more Noh theatre than vibrant modern democracy, suddenly the world's second largest economy is on fast-forward. Previously unthinkable political and economic reforms now look doable, and quickly.

Strangely, the trigger is the post office.

Japan Post employs 260,000 people who are said to deliver, amplified through their families, a million votes. It has 25,000 branches. And it is by a multiple of four times the world's biggest deposit taking financial institution, holding US $3.1 trillion, or about 60 percent of Japan's gross domestic product. It is also the world's biggest insurer.

Prime Minister Junichiro Koizumi, who once held the post office portfolio, as did his grandfather, vowed even before he took office in April 2001, to beat this economic and social gorilla into submission. For it is also the biggest holder of government debt, with about US $978 billion in bonds, a quarter of all those on issue. This vast issue of government paper, pushing public debt past 150 percent of GDP, has chiefly been deployed to pump up Japan's already bloated infrastructure and construction industries, building roads to nowhere.

Koizumi drew up legislation to restructure Japan Post into four corporate entities: savings, life assurance, mail service and branch network administration. They would be progressively privatized over the next decade.

He squeezed the six post office bills through the lower house in July, by just five votes, with 37 of his own 250 Liberal Democratic Party MPs rebelling. But on August 8, the upper house rejected the bills by 125 to 108, with 22 LDP rebels switching sides, anxious not to alienate their financial backers in the industries under fire.

Koizumi had threatened to dissolve parliament and call an election two years early, if the legislation failed. His enemies gambled that he was bluffing. He had form on this, having drastically watered down previous reform efforts in the face of entrenched interests, chiefly in factions of his own party and in the bureaucracy. But this time he went ahead, and disendorsed the LDP MPs who voted against the Japan Post reforms.

He thereby set up an unusual election in which he is as much seeking a public mandate to purge his own party -- which has been in power for all but ten months of the last 50 years -- as to accelerate his broader reform program.

The opinion polls are all pointing to a handsome victory on September 11 by Koizumi, who is widely dubbed "Lion King" in Japan for his mane-like hairdo, but who overall has been disappointing by acting less courageously in pursuing reform, than his rhetoric and appearance promised.

Japan is growing faster than Europe has during the last two years, and appears set to move further ahead, fuelled substantially by the double digit growth of its new lead trading partner, China. Since emerging from negative growth, Japan's economy has increased by 2.7 percent in 2004, is expected to fall back to 2 percent this year, and to accelerate again in 2006. It remains about three times the size of the Chinese economy.

As Koizumi goes to the polls, he will be gambling on completing three great agendas of unfinished business that will determine his ultimate place in history: resurrecting Japan as a proactive international player with a sturdy security capacity; reshaping his LDP as a modern, policy-driven institution responsive to a single leader rather than to backroom factional chiefs; and completing his economic reform program, including Japan Post -- a task given added urgency by the rapid ageing of the population which threatens to crush young workers with the weight of dependency.

In the decade before Koizumi, Japan had eight prime ministers. He says if he wins he will still step down, as he announced earlier, at a party convention in September 2006.

The election is presenting clear cut policy alternatives for the first time in many living memories. For instance, Koizumi is likely to keep Japanese forces in Iraq, while the opposition Democratic Party of Japan (DPJ, slightly to the left of the center-right LDP) promises to bring them home in December. Katsuya Okada, the DPJ leader, is eager to engage Koizumi on this and other foreign policy issues, including Japan's increasingly fraught relations with its Asian neighbours, especially China and South Korea, the result of what he calls Koizumi's "xenophobic nationalism."

But media attention has been focused on the constituencies where Koizumi is battling the LDP old guard he disendorsed; in many cases, the new LDP candidates are feisty, high profile women.

If Koizumi gets his way, the markets will respond positively. But what about the longer term? Peter Morgan, chief Japan economist of HSBC Securities, says the "three excesses" of the corporate sector -- employment, capacity and debt -- have largely been eliminated. But more still needs to be done to free up the movements of capital and labour.

The expectations of Koizumi will be fierce if he wins as expected on September 11.

Rowan Callick is Asia-Pacific editor of The Australian Financial Review.


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