Koizumi: Twilight of a Reformer?

The Japanese Prime Minister's chances for meaningful change are fading fast

He still garners huge ratings in the polls. Adulatory citizens press around him wherever he appears. And Japanese Prime Minister Junichiro Koizumi can still score victories. On Oct. 28, his ruling Liberal Democratic Party picked up two seats in key parliamentary by-elections, giving the party a majority in the powerful lower house for the first time in 16 months. A day later, the legislature approved Koizumi's controversial request to back up American forces fighting Afghanistan with noncombat Japanese troops.

Yet six months into his tenure, Koizumi has made almost no progress toward doing what he was elected to do: shake up the bureaucracy and turn the economy around. Bankers are balking at his efforts to force bad-loan write-offs. Ministries are sabotaging his plans to abolish public corporations. Headline-grabbing proposals--such as a pledge to hold the fiscal deficit in check by keeping government bond issuance under $250 billion next year--may be dead on arrival when they come up for debate in the next parliamentary session. Meanwhile, the economy is sliding rapidly into recession, deflation is worsening, and joblessness is at record levels. The bottom line: Koizumi's room to maneuver is shrinking fast. So are chances for effective reform. "Japan has no time to waste," says Takashi Imai, chairman of the Japanese business group Keidanren and head of Nippon Steel.

The obstacles for Koizumi are daunting. By yearend, the Finance Ministry has to present its 2002 budget for review. Koizumi's proposals for the budget will set his opponents howling, since they call for a big dial-back in government spending and dismantling state-backed corporations. But it's unclear if his ideas will get into the final plan. "The anti-revolutionary movement has been very intense," says Takashi Inoguchi, a professor of political science at Tokyo University.

The stiffest opposition Koizumi faces comes from rivals within his own LDP. In the wake of the popular politician's rise to power last April, LDP hard-liners lay low as the party prepared for crucial July elections to the parliament's upper house. Koizumi's 90% approval rating secured an LDP victory in that summer contest. But now that their parliamentary seats are safe, "the party is reverting back to the LDP of old," says Commerz Securities political analyst Hitoshi Ichio. Key politicians and bureaucrats will do all they can to keep Koizumi from dismantling their pork-barrel apparatus.

Consider the friendly fire coming from the LDP's largest faction. Party bigwig Hiromu Nonaka has come out against Koizumi's proposal to dispatch an Aegis-equipped battleship into position off the coast of Pakistan. But some analysts believe Nonaka is just grabbing any chance he can to undermine Koizumi. Nonaka and his protégé, Makoto Koga, strongly support the 77 state-funded companies and 86 other quasi-public corporations that Koizumi wants to curb because they drain huge sums from the budget.

BODY BLOW. One of the most expensive is Japan Highway Public Corp. (JHPC), whose road-building and maintenance operations will cost the Japanese taxpayer $2.5 billion this year--an expenditure all the more galling because many of its projects are allegedly devised to channel funds to party-connected contractors. Koizumi has vowed to freeze new expressway construction as a prelude to closing JHPC down. "The freeze is nonsense," says Koga, a former head of the LDP's research commission on highways. "We can't accept it." He says the government must fulfill its promise to local governments to build new highways.

Koga and others are arguing that Koizumi's austerity plan will deal a body blow to a sick economy. The news certainly isn't going Koizumi's way. The government is expected to concede within the next few days that its earlier estimates for growth this year in gross domestic product are way off. GDP contracted 0.8% in the quarter ending in June. And then came the blow from the September 11 attacks. As a result, government tax revenue is likely to fall far short of projected levels.

That means Koizumi will be harder pressed than ever to contain government borrowing--a key part of his platform. LDP conservatives have already wrung a new stimulus package out of the Prime Minister. Meantime, the bureaucracy has plans to short-circuit any cuts in spending. In response to a Koizumi plan to deep-six the state-owned Japan National Oil Corp., which has accumulated $3.5 billion in losses in recent years, the Economy, Trade & Industry Ministry may simply shuffle operations and ensure its survival under a new name.

One important policy aim is likely to come to fruition in the current legislative session. The Diet is set to approve Koizumi's proposal to beef up funding for the Resolution & Collection Corp. The RCC is supposed to engineer the restructuring and rescue of Japan's banks, the 15 largest of which are saddled with at least $145 billion in bad loans. What the bill doesn't do, critics stress, is commit the government to earmarking more money to bail out the banks, an idea that is political dynamite. As a result, Koizumi's vow to restore the bank system to health within three years is looking hollow.

PORK-BARREL CAP. Can Koizumi still pull off reform? His supporters haven't given up. The strategy, says one source familiar with the Prime Minister's tactics, was for Koizumi to aim high rhetorically during his first months in office to signal his seriousness about reform, wait for the protests from conservatives to reach a crescendo, then make tactical compromises that achieve most of his goals. Thus, doing away with public corporations may prove impossible in the short term. But putting a cap on pork-barrel spending would be a real accomplishment.

Maybe so--politics everywhere is the art of compromise. But many observers instead view Koizumi's enemies as simply too powerful for him ever to win against them. "On the economy, Koizumi seems to be incapable of doing anything," says Inoguchi of the University of Tokyo.

At least the old guard can't force Koizumi to resign. Such a naked grab for power would infuriate voters. But if the hard-liners can force Koizumi to make ugly compromises on one proposal after another, his popularity could eventually sink and leave him at the mercy of the party bosses.

A pretty grim scenario. Koizumi could yet take drastic action--such as reshuffling his Cabinet and stacking it with Young Turks, or even calling lower house elections to chase the recalcitrant LDP factions out of power. There's no sign of that, though. Instead, the evidence that Koizumi's administration will be one more opportunity lost continues to mount.

By Chester Dawson in Tokyo

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