Japan: Koizumi's Quixotic Quest

It's crunch time for Japanese Prime Minister Junichiro Koizumi. For three decades, Koizumi has been pursuing what he regards as the most important domestic reform: the privatization of Japan's postal savings system. Now, more than four years into his term, Koizumi has succeeded in putting the needed legislation on the table. In early August, Japan's Upper House is expected to vote on several bills that would start the privatization process.

Why is privatization of postal savings so important? Because the post office is the nation's principal savings and investment vehicle. The public holds some $3 trillion in low-yield Japan Post savings accounts and life insurance policies -- money that reformers such as Koizumi have long argued should be managed by the private sector and invested in Japan's future growth. Instead, too much of the money, critics charge, has been used by the Liberal Democratic Party, which leads the ruling coalition, for loans to pork barrel projects.

To some, the legislation is the mildest possible reform: It separates the mail delivery business from banking and insurance services, which would be privatized over a period of 10 years starting in 2007. Nevertheless, the proposal has triggered a furious rebellion. In early July, the Lower House passed the bills by just five votes after 51 of the 250 LDP lawmakers voted no or abstained. Getting the reform package through the Upper House looks even tougher. A July 25 survey by the newspaper The Asahi Shimbun of 43 wavering lawmakers predicted 13 will vote against the bill, with an additional 27 undecided. It would take just 18 no votes to defeat Koizumi's plan. "Advocates of the reforms are hoping to turn things around, but as things stand there's little chance," says Minoru Morita, an independent political analyst. Aware of the need to get every possible vote, Koizumi is threatening to call a general election if the bills are defeated.

That could cause a political earthquake. While the Democratic Party of Japan (DPJ), the main opposition group, trails the LDP in the polls, if LDP rebels were to break away and form a new party and then team up with DPJ, the LDP could find itself on the losing side of an election after 50 years of almost uninterrupted rule.

Seeking Compromises

Critics within the LDP accuse Koizumi of risking everything for a project that doesn't even have public support. One recent poll found only 24% of those surveyed backed privatization. "Just concentrating on privatizing postal services is crazy," says Eisuke Sakakibara, a professor at Keio University in Tokyo and a former Finance Vice-Minister. "There are so many other domestic issues that are more pressing."

For all the tough talk, some kind of compromise could yet be reached. LDP lawmakers, after all, have little to gain from a general election they might lose. One possibility would be delaying the vote. Another would be to strike a deal to appease the rebels. Koizumi could step down sooner than planned -- he has said he will retire in September 2006 -- in return for the support of his critics. "It just doesn't make any sense to fight an election over this issue," says Paul Sheard, chief economist at Lehman Brothers Inc. (LEH ) in Tokyo. "That suggests there could be some sort of compromise." For Koizumi, a compromise would be acceptable if it preserves what he hopes will be the most important part of his political legacy.

By Ian Rowley and Hiroko Tashiro in Tokyo

Edited by Michael S. Serrill

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