The policy line of the Koizumi Cabinet in Perspective

By Titus North, March 3, 2003

 

INTRODUCTION

This paper is intended to help foreign financial journalists being dispatched to Tokyo with no specialized background in Japanese economics or politics understand the administration of Prime Minister Koizumi and his policies. It would be presented during the last week of February, 2003, on a consultant-client basis.

The first part will explain the logic of Koizumi’s rise to power and his political strategy for maintaining power. The next part will cover his policies, the history of the problems they address, and the possible outcomes of policies. It will deal with the chances of the policies being successfully implemented, but will avoid any normative value judgment as to the desirability of the policies. Policies will be divided into domestic and foreign, with domestic policy covering fiscal structural reform, resolution of the bad loan problem, postal privatization, and reform of government corporations. Foreign Policy will cover Koizumi’s position on Iraq and the “war on terrorism,” his opening to North Korea and his handling of its withdrawal from the Nuclear Non-proliferation Treaty, Russian relations, and Asian relations.

POLITICAL LOGIC AND STRATEGY

              Probably more than any other Japanese leader in history, Prime Minister Junichiro Koizumi is a creature of popularity. Because popular support is not usually the vehicle by which a politician arrives at the prime minister’s office, Koizumi’s political logic and strategy differ from those of his predecessors, as do his opportunities and limitations. Koizumi’s policy agenda is also atypical, and his sweeping structural reform proposals have received much attention outside Japan. In order to understand those policies and get an idea of the chances of their successful implementation, it is necessary to first consider the context in which he rose to power and his strategies for remaining in office.

Throughout most of the post-World War II era, the prime minister has been a leader of one of the ruling Liberal Democrat Party’s (LDP) patronage-based factions. When circumstances such as scandals prevent one of the faction leaders from moving into the prime minister’s office, the faction leaders select a broadly acceptable front man (Sosuke Uno and Toshiki Kaifu are examples).

              By the time the tenure of Koizumi’s predecessor, Prime Minister Yoshiro Mori, was cut short due to his habit of making unfortunate and inappropriate remarks, support for the Mori cabinet was at an abysmal 7.2%. Moreover, the LDP’s support rating among voters had fallen below 30%, while the combined support for the four opposition parties was well above 30%.[1] With Upper House elections due within a few months, the LDP needed someone not just acceptable to the faction leaders, but with the voters as well. However, it was not immediately clear who that would be.

Although Koizumi has enjoyed by far the highest poll ratings of any prime minister ever, he was until shortly before his election considered an "eccentric" by most people, and as of the time of Mori’s downfall had never led in polls of who people would like to see as prime minister. During the year prior to his election, the most popular politician by far was Makiko Tanaka, the daughter of the late prime minister Kakuei Tanaka, followed by Tokyo Governor Shintaro Ishihara, best known outside Japan for his book "the Japan that Can Say 'No'". As recently as December 2000 he also ranked behind not only former Prime Minister Ryutaro Hashimoto but also behind opposition figures Naoto Kan and Takako Doi[2]. However, in April 2001 when the LDP was forced to find a successor to Mori, Koizumi's name came to the forefront.

While not yet Japan’s favorite politician, as number two man in the Mori Faction, he had the solid backing of that faction, as well as backing from two minor factions led by fellow "reformers" Koichi Kato and Taku Yamasaki. This was enough to get his name put on the primary ballot and to assure that he would be taken seriously. Koizumi also benefited from a lack of attractive alternatives. Tanaka did not belong to any faction and was not well liked by her fellow LDP politicians. Ishihara was not qualified to become prime minister as he was not a sitting member of the Diet. Another logical candidate, former Foreign Minister Kono, had just been reprimanded for a scandal at the foreign ministry. Also, the largest and most powerful faction in the LDP, the Hashimoto Faction (which has remained at odds with Koizumi throughout his tenure), had trouble producing a candidate. Former Prime Minister Hashimoto, the faction's leader, was widely seen as a failure following his stint as PM, while the faction's number two man, former LDP Secretary General Nonaka, would have made a problematic candidate due to his status as a member of the Burakumin minority[3].

              In the end, there was a four‑man race, with the main rivals being Koizumi and Hashimoto. Hashimoto’s faction is by far the largest in the LDP, plus he had the backing of the large Horiuchi Faction. Under normal circumstances this would probably have assured him of victory, but with voter support for the party so thin many LDP politicians worried if Hashimoto would be able to led the party to victory in the Upper House elections.

              In accordance with party rules, a primary election of LDP members was held to select delegates to join with the LDP Diet contingent in choosing the party leader. Backed with strong support from the mass media, Koizumi trounced Hashimoto so clearly in the primary election of the LDP's one million or so rank-and-file members that he overcame Hashimoto's seemingly unsurmountable advantage among LDP Diet members[4]. The result was stunning, and the sudden groundswell for Koizumi during April 2001 quite unexpected.

There is no single explanation for the sudden explosion of Koizumi’s popularity. Many LDP supporters saw him as a potential savior of the party in the next election, while many independents saw as someone who could transform the party into something worth supporting. Many in the opposition thought they could work with him on reforms. There is also no doubt that he was a media favorite in much the same way as Senator John McCain was in the last U.S. presidential election. Like McCain, Koizumi was a maverick within his own party who proposed sweeping reforms that threatened the status quo. Furthermore, Koizumi’s popularity fed on itself. To LDP partisans, the more popular he became, the better a savior he appeared. To the opposition, his popularity gave him the kind political independence needed to implement reforms.

In considering Koizumi’s policy course and leadership style since taking office, it is vital to remember that it was rank-and-file voters who in effect over-ruled the party’s factional leaders. Koizumi spent little effort in courting the favor of factional leaders, and has done much to challenge their traditional powers. Moreover, armed with popularity that stretches well beyond the LDP’s traditional voter base, Koizumi has been confident that he could win a general election no matter what party’s banner he runs under, and as a consequence has not hesitated to promote policies that run counter to the vested interests of many long-time LDP supporters.

Therefore, facing an Upper House election in July, the LDP's big-wigs had to accept Koizumi's insistence that he break with the tradition of allowing faction leaders to nominate cabinet ministers, and instead hand selected his own cabinet[5]. His appointments were designed to build on his sudden wave of popularity. He selected Tanaka to be his foreign minister and he chose Ishihara's son to be his Minister of State for Administrative Reform. A son of an LDP politician himself, Koizumi packed the cabinet with high profile heirs to political families, including the grandson of pre‑war Prime Minister Hiranuma and 1970's Prime Minister Fukuda. In his second cabinet he chose the son of 1980’s Prime Minister Suzuki. Koizumi also set records for the most women and most non‑politicians in his cabinet[6]. Koizumi’s second cabinet included the son of Prime Minster Suzuki.

              Koizumi has turned his back on some of the LDP's traditional support groups, most notably the construction industry, which had been courted by Hashimoto and Kamei[7]. His privatization plans for the post office anger politically powerful Specially Designated Postmasters, who are notables in rural communities and who had mobilized for Hashimoto in the primary election[8]. Furthermore, his drive to privatize government special corporations has made enemies out of the bureaucrats under whose jurisdictions these special corporations fall and who hope to receive lucrative employment in these special corporations following their retirement from the bureaucracy.

              However, Koizumi's policies initially gained him strong support from the major banks[9], and also from strong corporations who will survive the weeding out that will result from structural reforms[10]. Even people in some industries that would be better off under a more traditional LDP leader worry that without Koizumi at its helm, the LDP might once again loose power and a coalition led by someone even less acceptable (such as Naoto Kan) could take over.

              On the other hand, without support from the kingmakers within the LDP, Koizumi is more dependent on public opinion than probably any other prime minister. Many of the reforms he is proposing would cause “pain,” which he readily admits. He therefore has to be prudent enough with his reforms to avoid so much pain that he would lose his base of support with the public. He also cannot afford to push for policies that alienate the public, and this is limiting the support he can provide to President Bush’s push for an invasion of Iraq.

From the day he took office in April 2001 through January 2002, Koizumi enjoyed 70%, and 80% approval ratings, a social phenomenon that was probably spawned by more the media rather than public understanding of and support for specific policies. Then in February 2002 Koizumi sacked the popular Foreign Minister Makiko Tanaka due to her public bickering with Foreign Ministry bureaucrats and LDP politicians. Koizumi’s support rating fell below 50% and stayed there until his surprise visit to North Korean sent his ratings back above 60%. Now, once again his support is being eroded revelations about the North Korean nuclear weapons program and by his support for the U.S. position on Iraq.

Still, structural reform will benefit many younger, urban professionals who have traditionally been written off by the LDP and who are in a position to take advantage of changes in the economy. These are the same people that the main opposition Democrat Party has been courting, and indeed during the Upper House elections in July the Democrats tried to sell themselves as the true supporters of Koizumi's reforms.

 

Approval ratings for the Koizumi Cabinet[11]

	2001	2001	2001	2001	2001	2001
	29-Apr	27-May	1-Jul	15-Jul	5-Aug	19-Aug
Support	79.40%	84.10%	81.70%	76.60%	73.10%	72.40%
Non-support	9.70%	5.50%	9.30%	12.60%	14.60%	15.20%
	2001	2001	2001	2001	2002	2002
	23-Sep	14-Oct	18-Nov	16-Dec	20-Jan	3-Feb
Support	77.90%	76.40%	74.60%	72.90%	74.20%	51.50%
Non-support	11.60%	12.60%	13.30%	15.00%	15.90%	34.60%
	2002	2002	2002	2002	2002	2002
	24-Feb	17-Mar	29-Apr	19-May	23-Jun	21-Jul
Support	47.10%	51.80%	47.60%	40.20%	42.30%	46.10%
Non-support	40.90%	37.00%	39.20%	44.10%	43.50%	36.10%
	2002	2002	2002	2002	2002	2003
	25-Aug	22-Sep	6-Oct	3-Nov	15-Dec	26-Jan
Support	44.20%	63.20%	63.20%	60.80%	55.70%	49.30%
Non-support	39.60%	20.80%	23.40%	22.00%	28.40%	35.70%

 

 

Koizumi’s allies have recently been dropping hints that he might call general elections just prior to the expiration of his two-year term as LDP leader in September 2003. Assuming he leads the party to a sizable victory at the polls, the party would not dare turn around and choose another leader after Koizumi won a mandate with the public. In fact, as long as Koizumi remains popular, the LDP will be unable to dump him no matter how much he breaks with traditional LDP policies due to the distinct possibility that he could call elections and form his own party or jump into the a Democrat Party that would likely welcome him and his allies. Should this happen and the liberal (in the sense of neoliberal economics) reformers from the LDP join forces with their counterparts in the opposition, it could mean an end to Japan as the developmental state as its vast public sector is privatized and its economic life deregulated .

 

DOMESTIC POLICY

Structural Reform and Growth Policy

              Junichiro Koizumi has dubbed his cabinet the Structural Reform Cabinet (Kozo Kaikaku Naikaku), and more than anything else Koizumi's cabinet is identified with Structural Reform. To Koizumi structural reform means fiscal discipline, and this inhibits him from resorting to fiscal stimulus in order to spur economic growth. Koizumi immediately sought a drastic cut in public works spending[12]. Public works projects in Japan typically refer to infrastructure projects such as highways, bridges, railroads, and river embankment projects. They form a very large part of the construction sector in Japan, and have kept the vast number of construction companies both large and small as major LDP contributors and construction workers as loyal LDP voters. However, Thatcherites in the Koizumi Cabinet such as Minister of State for Fiscal and Economic Affairs Takenaka see public works projects as wasteful and providing little return in terms of economic growth. They therefore seek to cut public works spending in order to reduce the budget deficit.

              Another manifestation of Koizumi's policy of fiscal discipline is the limitation of Japanese Government Bond issuance (a measure of the budget deficit) to yen 30 trillion per year that he pledged for fiscal years 2001 and 2002. For the pledge to succeed, it required spending cuts in both welfare and public works spending. It also made it difficult to cut taxes. However, the sluggish economy made the pledge almost impossible by reducing revenues from taxes and straining the welfare system with extra unemployment benefit payments. Many prominent LDP politicians outside the cabinet, such as faction leader and former Construction Minister Kamei, opposed the yen 30tn cap on bond issuance and prefer Keynesian‑style economic stimulus by way of increased government spending centering on public works. Actually, the only way that the yen 30 trillion cap could be maintained during FY2001 was by using funds that had been set aside for future redemption of maturing Japanese Government Bonds[13]. As for FY2002, Koizumi maintained the fiction of sticking to the cap as long as he could. However, the original budget’s estimates for tax revenues were overcome by the deteriorating economy (corporate tax revenues in particular were down), and by autumn it had become clear that some yen 2.5tn in bonds would have to be issued just to cover the shortfall. Furthermore, there was considerable pressure for a stimulatory supplementary budget, and at any rate the recession created more demand for non-discretionary entitlements than had been included in the original budget.

              It was at this time (September 30, 2002) that Koizumi reshuffled his cabinet. He retained most of his ministers, but Minister of State for Financial Affairs Yanagisawa was dismissed, and his portfolio was give to Takenaka, who also retained the Fiscal and Economic Affairs portfolio. For a few weeks Takenaka became the center of attention, overshadowing even Koizumi. Many politicians, most notably former Prime Minister Nakasone, criticized Koizumi for “completely delegating economic policy” to Takenaka.[14] The decision to replace of Yanagisawa with Takenaka was made in consideration of the bad loan problem, and even Takenaka’s expanded portfolio gave him no authority over the budget. Nevertheless, he favored a minimal supplementary budget that would cover tax revenue shortfalls, non-discretionary expenses, and an expanded “safety net” for unemployed workers and small businesses that would be hard hit by his policy of accelerating bad loan liquidation. During October and November there was considerable debate. While budget drafting is the Ministry of Finance’s job, the decision to implement a supplementary budget and its scale and scope are a political decision. The locus of the decision making process was in the governments Council of Fiscal and Economic Advisors, a body that Koizumi created (and chaired) that was intended to wrestle budget writing initiative away from MOF. The Council includes relevant cabinet ministers as well as private sector representatives. In general, Koizumi, Takenaka, and MOF favored a minimal supplementary budget including no public works spending, while the LDP, their coalition partners, and many of their supporters in industry favored a large one that would include as much as yen 5-10tn in public works spending. In the end, a yen 4.2tn budget was drafted that required yen 4.9tn in government bond issuance. The budget broke down as follows: yen 1.5tn for public works, yen 1.5tn for safety net strengthening, yen 900bn for non-discretionary spending, and yen 300bn for other categories.[15]

              The compromise does not satisfy either side. The public works portion of the budget pales in comparison with stimulus measures taken in previous years and falls far short of what pro-stimulus forces were calling for. On the other hand, Koizumi had made high profile pledges to keep bond issuance to 30tn and to halt fiscal stimulus based on public works, and by reneging on those pledges he has left himself vulnerable to attacks from his opponents. He and Takenaka no doubt intend to stick to a program of fiscal discipline and spending cuts, but appear to be on the verge of being overwhelmed by circumstances as deflation and recession hold down tax revenues and increase demand for welfare spending, and as public opinion favors emphasizing economic growth over structural reform. In planning the FY2003 regular budget, Koizumi abandoned altogether a target for government bond issuance, and instead set up a longer-term objective for fiscal discipline, namely achieving a primary budget balance (one not counting debt servicing costs) by 2010. However, even this target may not be realistic, and Takenaka told the Council of Fiscal and Economic Advisors that accelerated bad loan liquidation could prolong the recession enough to push back achievement of this goal by two or more years.[16] Furthermore, ruling party politicians are taking aim at the Koizumi/MOF principle of only cutting taxes in conjunction with codified future tax hikes so that revenue neutrality is maintained over a five-year period.

              We can expect fiscal discipline to be chipped away at for two reasons. First of all, an environment of deflation and recession is not conducive to contractionary fiscal policies. Secondly, the top priority for Takenaka as Koizumi’s main economic advisor is the prompt liquidation of bad loans, and if fiscal discipline is the cost of pushing forward with that priority then Takenaka and Koizumi will pay the price. Koizumi’s popularity gives him a certain political cushion for implementing painful fiscal structural reforms, especially seeing as he entered office explicitly talking about the pain of structural reforms. However, opinion polls show that his economic policies do not receive nearly as high numbers as his own popularity ratings.[17] He has been backing off somewhat from his original hard-line stance on fiscal discipline, but is seeking support from a new source: the Bank of Japan.

The term of the current governor, Masaru Hayami, is due to expire in March 2003, and Koizumi and Takenaka were talking about reaching a “policy accord” with Hayami’s successor even before selecting former BOJ Vice Governor Toshihiko Fukui as the new Governor. It is unclear whether Fukui will be disposed towards such an accord, which would bind BoJ to an even looser monetary policy. As Vice Governor, Fukui was instrumental in getting a new Bank of Japan Law passed that greatly increased the central bank’s autonomy, and he may not want to compromise that autonomy by making formal promises to the government. Moreover, it would be difficult to make monetary policy even looser than it already is. The Official Discount Rate was lowered to 0.1% in September 2001, and the Unsecured Interbank Overnight Rate (the main money market rate) has been lured down to 0.001%. With interest rates at an effective 0%, the central bank next turned towards flooding banks with liquidity in order to spur economic activity. The target for draft deposits held by private financial institutions at the central bank was steadily raised up to a record yen 20tn.[18] Even so, banks are decreasing their outstanding loan balances, especially to (politically important) small companies.

The debate over further loosening monetary policy focuses on the idea of “inflation targeting.” This would entail announcing a target for inflation and then utilizing the central bank’s policy tools (interest rates, money supply, foreign exchange intervention, and even stock purchases) until that target is met. The impact would largely be psychological – both via the “announcement effect” and by making central bank actions more predictable. Britain and New Zealand both used inflation targeting to fight inflation, but no country has ever used it against deflation. Hayami and the BoJ staff have opposed LDP pressure to embark on the policy, and indications are that Fukui will also resist it.[19] From the government’s point of view, an accord that mandates inflation targeting could stimulate economic growth without requiring fiscal outlays. However, it could also backfire if the central bank pushes the government to match a looser monetary policy with a looser fiscal policy.

 

Bad loans

              The bad loan problem may well be the most important issue facing the government, as the inability of banks to rid their balance sheets of bad loans feeds into a vicious cycle of credit crunch, corporate bankruptcy, stagnant consumption, economic recession, loan defaults, and deteriorating bank finances. Koizumi has promoted the rapid liquidation of the bad loans that remain on Japanese banks’ books a decade after the collapse of the financial bubble. There are many corporations that are still in business but are behind in their loan payments, so loans to those corporations are considered bad. There are also companies that are not behind in their payments but are in depressed industries and operate in the red, and by some standards loans to these companies are considered bad. If banks continue to make loans to troubled companies, they could face major losses and even failure if the companies go bankrupt and cannot repay the loans. However, if banks refuse to make additional loans to troubled companies, many will certainly go bankrupt and default on their existing loans, which in turn could cause losses and failure for the banks. There is a debate even within the cabinet as to which approach is less dangerous. International organizations such as the IMF, the OECD, and the Bank of International Settlements have long pushed for rapid liquidation, saying that there can be no end to Japan's economic slump until the mountain of debt is liquidated[20].

              Shortly after taking over the Financial Affairs Portfolio in September 2002, Takenaka drew up a Financial Rebirth Plan that called on banks to speed up the liquidation of the bad loans. According to the plan, the Financial Services Agency (FSA), which was now under Takenaka’s jurisdiction, would conduct special audits of the loan accounts of troubled firms using new, stricter guidelines. This has pushed banks to raise capital both domestically and overseas in order to allow them to cover the losses they will incur in liquidating their bad loans without letting their capital asset ratios slipped below the 8% minimum requirement. As banks would certainly want to rid themselves of loans to firms struggling under the slow economy, Takenaka softened the package by creating a new Industrial Rebirth Organ (IRO) that will purchase from banks loans to companies that have a good chance of survival. The IRO is to be capitalized by with both private and public sector funds, although so far the BoJ is balking at contributing capital.[21]

              One of the most bizarre aspects of the bad loan problem nowadays is that Thacherites are promoting bank nationalization in order to solve the problem while Communists are opposing nationalization. During much of 2002 Minister of State for Financial Affairs Yanagisawa and Minister of State for Fiscal and Economic Affairs Takenaka feuded over the state of health of Japan's banks, with Yanagisawa saying banks were basically sound and Takenaka saying they were undercapitalized. Yanagisawa (who is neither Thatcherite nor Communist) based his assertion on the fact that the major banks all had capital asset ratios well in excess of the 8% minimum required of banks engaged in international business by the Basel-based Bank of International Settlements (BIS). Takenaka (the Thatcherite), on the other hand, argued that the reason that these capital-asset ratios exceeded the minimum requirement is that the banks were including expected refunds from tax overpayments (or “tax-deferred assets) as part of their capitalization and because they had received injections of public funds. Without tax refunds or public funds, the banks would actually not meet the 8% requirement, Takenaka insisted.

              Yanagisawa's insistence that banks were healthy may have been partly due to his wish to avoid additional injections of public funds into the banks. During a 1999 stint in the cabinet as Chairman of the Financial Reconstruction Commission (essentially the same portfolio he held in 2002), Yanagisawa approved the injection of some yen 13tn in public funds into Japan's major banks, and he reportedly regretted the move as he believed that banks had not lived up to their obligations under the injection agreement.

              Takenaka's argument, meanwhile, is somewhat difficult to follow. When banks write off bad loans by making transfers to failed loan reserves, they pay taxes on income used to make the transfers as the transfers do not represent losses. However, once those loans are liquidated and finally removed from bank balance sheets, the transfers can be treated as losses and the banks are entitled to refunds on the taxes paid on the transfers. This is not just some accounting trick. Furthermore, Takenaka says that banks are undercapitalized despite capital asset ratios in excess of 8% because their capital includes public funds, yet he is proposing additional injections of public funds.

              However, upon closer examination Takenaka’s position appears less irrational. First of all, his push for additional public funds in not intended to bail out the banks in their present form but to insure that they have adequate capital to write off bad loans with. Regarding the tax deferred assets, accounting rules limit in principle the amount of tax-deferred assets that can be included in capitalization calculations to no more than one-year’s worth of taxable income unless there are special circumstances. However, tax deferred assets that arise under special circumstances such as restructuring or legal revisions can be claimed in amounts of up to five times that amount, and as banks have accelerated their bad loan liquidation they have taken advantage of this exception to the rule. It is this rule and how much to allow exceptions to it that are at the core of the struggle between Takenaka and the LDP’s banking lobby. [22]

Takenaka apparently believes that the banks are not strong enough to survive the writing off of all their current bad loans and the loans that will likely go bad if the recession continues without substantial assistance from the government. Because all major banks except for Tokyo-Mitsubishi Bank and Mitsubishi Trust Bank have already issued considerable amounts of preferred shares to the government (which can be converted to common stock with voting rights if the banks fail to pay dividends on them), any additional injection of public funds via issuance of preferred shares is likely to lead to a situation in which the government is the majority shareholder in many of the banks. This would effectively nationalize the banks. Takenaka's motivation in declaring the banks in poor health is to pave the way for nationalization. While under government ownership, taxpayers' money could be used to quickly, completely, and finally write off bad loans, following which the banks, their financial health restored, would be sold back to the private sector.

              Such a scenario, of course, would involve considerable burdens for the taxpayer. However, the scale of the bad loan problem is so immense that there is no way it can be overcome without the man in the street bearing the burden. The only question is in what capacity he will take the hit: as a taxpayer, a depositor, a consumer, a wage earner, a shareholder, an insurance or annuity policy holder, or a home owner. Already, home owners who purchased their property during the bubble era have taken a huge hit, but there is still a major overhang of bad debt. Takenaka evidently feels that taxpayers would most efficiently and promptly remedy the problem with the least pain and disruption in the long run. However, Takenaka's plan has opponents from all quarters. Even the Communist Party opposes nationalization, despite the fact that banking was one of the "commanding heights" that Lenin said must be nationalized if a socialist government was to oversee a market economy. The Communists fear that once the taxpayer has paid the price of bailing out the banks and their corporate borrowers via nationalization, the ruling parties will be able to reward their friends with sweetheart deals when they sell the banks back to the private sector. They say that the United States is gung ho for Takenaka's agenda because they believe that American financial interest will be on the receiving end of some of these sweetheart deals. Indeed, the nationalization and subsequent privatization of Nippon Credit Bank and the Long-term Credit Bank of Japan involved such sweetheart deals, whereby the purchasers (the U.S. investment firm Ripplewood in the case of LTCB) were allowed to sell back to the government any loans whose market price decreased by 20% or more over the course of three years, effectively immunizing them from bad loans at taxpayer expense.

              The managers of major banks oppose Takenaka’s agenda, despite the prospect of their banks being restored to health. This is because any injection of additional public funds, regardless of whether it leads to nationalization, would involve the present management teams of the banks resigning and foregoing the usual lucrative retirement packages.

              The chances for prompt resolution of the bad loan problem are not good. First of all, many in the LDP are openly hostile to Takenaka because they resent having such an important cabinet post being given to a non-politician. Also, his most drastic policies would force many firms, large and small alike, into bankruptcy. Any improvement in the bad loan ledgers of banks would be short-lived as a worsened recession fueled by the newly unemployed would create new bad loans among companies whose sales would no doubt suffer. Koizumi has little choice other than to exercise a certain amount of caution with regards to bad loan liquidation, and will have to balance the contradictory priorities of stimulating the economy, pursuing fiscal restructuring, and pushing for bad loan write offs. Even with the best of luck, the most that can be hoped for is for Japan to plod through several more years of stagnation before resolving its bad loans and various other various economic problems. 

 

Postal Privatization

Before becoming prime minister, Koizumi had stints in the Cabinet as Minister of Posts and Telecommunications and also as Minister of Health and Welfare. He was mostly known for his call for the privatization of the three postal operations (postal deliveries, postal savings, and postal life insurance)[23].

              Approximately one third of Japanese personal savings deposits are held at the post office, making it the largest financial institution in the world[24]. Private banks have long demanded the abolishment of, or at least limitations on, the postal savings system, which they see as unfair competition[25]. In the past the post office offered higher interest rates to savers, which were made possible by the fact that the postal savings system could use the existing network of post offices instead of having to construct its own costly network of branches. Nowadays, with savings interest rates next to zero, it still enjoys the advantage of an implicit government guarantee of security at a time when many banks are failing. Life insurance companies have similar complaints about the postal life insurance operations.

              Before Koizumi became prime minister, it had already been decided that the post office, which has always been operated directly by the Ministry of Posts and Telecommunications, would be transformed into an independent government corporation.[26] After becoming PM, Koizumi pushed for total post office privatization, but soon compromised and shifted his emphasis on privatization of government special corporations. His change in emphasis was due to the fact that there is massive opposition to complete privatization of the post office within the LDP, its coalition allies, and the opposition parties[27]. Opponents of postal privatization argue that private banks would never be willing to provide financial services in Japan's remote areas, and privatization would leave these areas in the lurch.

              While the decision to transform the post office the Postal Public Corporation on April 1, 2003 had been decided before Koizumi became PM, he can take some credit for having been the most outspoken proponent of the change. As PM, Koizumi has not been able to get the government to commit to total privatization, although he has gotten a commitment to review the status of the postal public corporation after a few years. Should he be able to hang on as prime minister, it is entirely possible that he could successfully push for complete privatization at a later date, but if he is ousted the issue will likely be placed indefinitely on the back burner.

 

Government corporations

              There are roughly 150 government special corporations (tokushu hojin), including large government‑owned banks such as the Japan Policy Investment Bank (formed from the merger of the Export‑Import Bank and the Japan Development Bank) the Housing Loan Corporation and the Small Business Loan Corporation. There are also special corporations that build and run highways, such as the Japan Highway Corporation. Other special corporations are involved in financing oil exploration, conducting scientific research, and a number of other activities. The corporations until recently were financed with loans from the Fiscal Investment and Loan Program (FILP or Zaito), which was run by a bureau of the Ministry of Finance that was entrusted with investing postal savings and postal insurance funds.

              Starting in 2001, a few of these government special corporations issued bonds on the market without government guarantees in order to finance themselves based on their own strength. The move was intended to subject them to market discipline. However, because the vast majority of the special government corporations would be unable to find purchasers for their bonds without government guarantees, the Ministry of Finance issues special Zaito Bonds (which are not Japanese Government Bonds but nonetheless carry a government guarantee), and these funds are then lent to the government special corporations. Because it is the postal savings system that purchases most of these Zaito Bonds, no real change has taken place in the nature of the flow of low‑interest funds from the postal savings system to the government special corporations[28]. However, the size of the flow is decreasing steadily, with the Zaito plan being reduced by over 10% for FY2003 to yen 23tn, marking the fourth straight year-on-year cut in the Zaito plan, which used to rival the government budget in scale.[29]

              Koizumi is calling for the abolition or privatization of all government special corporations. As a Thatcherite (he was described to the author as “Margret Thatcher in pants” by Kiyomi Tsujimoto, Policy Affairs Committee Chairwoman of the Social Democrat Party, in an interview on Jun 4,