TCS Daily

New Japan Is Rising

By Rowan Callick - October 13, 2005 12:00 AM

Japan's sun is rising again, in the form of "Lion King" Junichiro Koizumi, whose crushing electoral victory last month unleashed a wave of optimism that has surged through the key markets.

This is especially good news for the rest of East Asia, which has grown steadily more dependent on China as its single, dominant growth engine during Japan's 15 year economic hibernation. Just before Japan's bubble burst, triggering this prolonged introverted slump, the grounds of the imperial palace in the centre of Tokyo were valued at greater than the entire state of California.

Prime Minister Koizumi -- who insists he will step down next September, as the constitution of his own Liberal Democratic Party (LDP) stipulates -- called the election two years early after the upper house voted against his bill to break up and then begin privatising Japan Post, which is also by a multiple of four times in size of deposits, the world's largest bank, holding $US 3.1 trillion mainly from households.

He sacked the 37 LDP rebels who opposed his bill -- whose secondary target was the $US 1 trillion bonds bought by Japan Post and chiefly used to build roads and bridges to nowhere, keeping the LDP construction industry faction and its sponsors happy. Such bonds had pushed public debt beyond 150 per cent of gross domestic product.

Only 18 of the 37 rebels survived the election. Overall, Koizumi won 296 of 480 lower house seats, 47 more than last time. Its coalition partner, the Buddhist group New Komeito, won 31 seats. Together, they have secured the two thirds majority that enables them to pass legislation regardless of the upper house, if they wish.

Koizumi gained many seats from the Democratic Party of Japan -- which had also been running on a reform ticket, though more broadly based than Koizumi's focus on the post office. These formerly DPJ seats are in urban areas, aiding the LDP's transition from a conservative rural party with dominant factions reflecting a protectionist, agrarian ethos, to a modern, pragmatic party. The prime minister reflected: "I have destroyed the old LDP. It has become reborn as a new party."

He attracted an extraordinary level of corporate support for his do-or-die campaign. Takeo Fukui, president of Honda, said: "We support the change from the old Japan to a new Japan. That's why we are in the pro-Koizumi camp". Toyota executives campaigned with Koizumi. The powerful Keidanren, the senior business organisation in Japan, explicitly backed him, the first time it had weighed in at an election. After the election, the Nikkei stock market index jumped 1.2 percent, breaking 12,900 points for the first time in four years.

Australian Japan expert Professor Aurelia George Mulgan, of the Defence Force Academy, said: "This was an issue driven election, with structural reform hitting a responsive chord. The campaign also indicated that although Japanese are supposed, culturally, to favour consensus, they like strong leaders." The most important outcome of the election, she said, was that policy formation and decision making was now in the hands of the Prime Minister and Cabinet, rather than of LDP faction power brokers and bureaucratic chiefs as before.

Koizumi provided some more detail about his acceleration of reform in his first address to the new parliament, on September 26. As well as pushing through the post office sell-off as a priority, he said he would privatise the remaining eight government banks, cut public service numbers and salaries, and overhaul the relationships between central and local governments.

After 9/11, Koizumi had grabbed the chance to restructure Japan's foreign policy, aligning it more strongly with Washington and starting to "normalise" its approach to security by changing the constitution to allow easier deployment of forces overseas.

This has, however, heightened friction over energy access and over residual World War II issues with Japan's neighbours, especially China and South Korea. And surveys show that Japanese voters are now looking to Koizumi to help defuse such tensions. The Osaka High Court is helping him do so, ruling on September 30 that his visits to the Yasukuni Shinto shrine, which honours convicted war criminals among the war dead, are official acts and thus violate the constitutional separation of religion and state.

At the inaugural East Asia Summit in Kuala Lumpur, Malaysia, in December -- which had been expected to be dominated by Beijing -- the resurgent Koizumi is now expected to take a counter-balancing leadership role, unofficially, within the strong group of democratic countries at the meeting, including Australia, India, Singapore and Indonesia.

The extent of the ambitions of the new Koizumi agenda, in international economic matters, was indicated in a recent interview I conducted with Japan's influential vice finance minister for international affairs, Hiroshi Watanabe -- the current "Mr Yen".

He said that Japan is now keen to pursue again its vision of an Asian monetary fund, which the International Monetary Fund, the USA and China had all initially opposed. China has since changed its tune. He pointed out that Asian finance ministers had this year doubled, to $US 100 billion, their commitment to provide liquidity, under the Chiang Mai Agreement, to regional countries with a short term problem.

He said Japan wanted to help build an Asian bond market. Most of the region's savings, he said, were today sent to the US or Europe, "where there is a double mismatch, in currency and in maturity." It needs capital in its own currencies, invested for the medium to long term, and good secondary markets, Watanabe said.

Japan also wishes, he said, to take a leading role in moves so far championed by Beijing towards an Asian economic community. North America and Europe already have such communities, he said. "Why not Asia? " It is certainly more diverse than Europe, he conceded. But France and Germany had put aside ancient rivalries in the European project, despite its present failures, said Watanabe. Surely China and Japan could do the same in leading Asia, he said. For such a project to succeed, "we need less diversity and more interdependence. The most important element is political will" -- something Koizumi has now demonstrated in abundance.

Watanabe's clear articulation of the renewed ambition of 21st century Japan will not, however, go uncontested. China, and to a degree also South Korea, are fiercely competitive with Japan for historical, cultural, economic and domestic political reasons, and the contest for influence within Asia is likely to become even hotter as the region overtakes Europe as the world's second major economic power after North America.

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


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