A Peek at Plan Koizumi

Nothing is on the table yet, but what's emerging looks radical

Junichiro Koizumi, Japan's new Prime Minister, is on a roll. He recently made front-page news by showing up at the annual sumo tournament to present the Emperor's Cup to the new champ. The fans roared--as audiences do almost everywhere Koizumi appears--and tossed their seat mats into the air. Later, the TV networks had a field day when he presented flowers to opera singer Plácido Domingo after catching a June 3 performance of Samson et Dalila.

Koizumi mania is sweeping the nation. Polls gauge the colorful Premier's approval rating at 80%. But skeptics are wondering how long the euphoria can last. For the other Koizumi, the economic taskmaster, hasn't yet begun to tighten the thumbscrews on Japan's economy. "It will definitely hurt--that goes part and parcel along with structural reform," says Hiroshi Okuda, head of the Japan Federation of Employers' Associations, or Nikkeiren, and chairman of Toyota Motor Corp.

Despite Koizumi's reformist rhetoric, few concrete proposals for change had emerged from his government until recent days. Now he has begun putting some meat on his skeletal reform plan. His Council on Economic & Fiscal Policy, a think tank of bureaucrats, economists, and academics headed by Economy & Fiscal Policy Minister Heizo Takenaka, is leaking portions of what could be called Plan Koizumi.

Some of the Prime Minister's proposals are downright radical. Those who thought Koizumi's talk about "structural reform without sanctuaries" was empty rhetoric a few weeks ago are pleasantly surprised, says Fujitsu Research Institute Chairman Toshihiko Fukui. "We can only see the fragments of the plan, but I have high expectations."

Such hopes may prove misplaced: No reformist legislation is on the table yet. But these are proposals no one has dared to float before. The overall goal of the plan is to rein in Japan's fiscal deficit, in part by capping bond issuance at $250 billion in 2002. That means drilling deep into the hidden recesses of Japan's budget: road construction and other public works, social welfare spending, and all sorts of grants and subsidies to local governments. The plan will spread the pain to big prefectures like Tokyo, Kanagawa, and Osaka, which have yawning fiscal gaps of their own.

SLAYING THE BEAST. The council would practically reinvent local government to recover Japan's fiscal soundness. One proposal, for instance, would merge Japan's 3,200 hamlets, villages, and towns into 300 metro areas. The goal is to reduce the duplication of local services such as garbage collection, public education, and policing. Further, the think-tank council wants to reallocate $36 billion in gasoline and other auto-related taxes, which have been steered to road construction in rural areas, and use the money for urban projects and central government social services.

There's also a plan to slay the beast that the politically connected construction industry has turned into. Takenaka and Koizumi would axe about $40 billion worth of regional public works spending; there would be no more white elephants like the Aqua-Line Bridge over Tokyo Bay, which drivers shun because of its high tolls. And Tokyo would abolish the practice of covering 50% of the principal and interest payments on local government bonds--ones that fund projects such as concert halls in rural areas to keep construction crews busy and local Liberal Democratic Party chapters well-supplied with campaign gifts.

Even more surprising is Koizumi's privatization plan. He has long argued that Japan's $2 trillion-plus postal savings system, now managed by the government, should be put into private hands. But on top of that, the council is considering a plan to sell off Narita and Haneda international airports and state-owned corporations such as Japan Highway Corp., which funds road construction. Many of the 70-odd state-owned corporations like the National Forest Service and Japan Development Bank that are not sold off would be forced to raise funds in the capital markets instead of casually borrowing money from the postal savings system.

In a clear attempt at intellectual as well as economic reform, ex-academic Takenaka is even going after his own clan. He would privatize several national universities and then make it harder for the professors, now treated like civil servants, to get tenure. "The system gives tenure to guys in their 20s, who don't have to compete or publish," says Hirotaka Takeuchi, dean of Hitotsubashi University's Graduate School of International Corporate Strategy. "This is going to shake a lot of people."

Even Japan's seniors may be in for some pain. Japan's rapidly aging society has sent government health spending on the 70-plus crowd into the stratosphere. The health-care budget for the group is approaching $85 billion and absorbs about 30% of all medical expenditures. With Japan's heavily subsidized health system in danger of collapsing, Koizumi wants to cap spending per patient or hike the payroll deductions that help pay for it. Those ideas were once politically unimaginable.

One key area for which Koizumi has no concrete plan is bank reform. Clearing out the banks' crushing load of bad debt and restructuring their operations is the responsibility of Financial Services Agency head Hakuo Yanagisawa. He wants better disclosure and a greater willingness to cut off dead-beat borrowers. "Speeding up the disposal of bad loans over a two- to three-year period will trigger a rise in unemployment," notes Toyota's Okuda, so the challenge is to soften that blow. The issue will likely be put off until after July's elections for the Upper House.

BUSINESS BACKING. The question now is whether Koizumi can turn his ideas into law. He has surprising support from the business Establishment, given the pain involved. A massive contraction in public spending, combined with bank reform, would hammer the private sector, too. For Japan Inc. to cleanse itself, says Akio Mikuni, president of Japanese credit-rating agency Mikuni & Co., the nation "will probably have to reduce overall industrial and service industry capacity by 25%." Koizumi promises to ease the pain by expanding jobless benefits and redirecting spending from public works to job retraining.

To make any of this happen, he first has to guide his party to victory in July, then get his full Cabinet, including his many foes in the ruling LDP, behind the plan. If he can't, he may call a snap election for the Lower House. His hope: that the public gives him as warm an endorsement at the polls as they have when he poses with sumo wrestlers and opera stars.

By Brian Bremner and Chester Dawson in Tokyo

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