Unfinished Business — page 3

Economy
One of the apparently unqualified successes of Koizumi's time in office has been Japan's surprisingly robust economic rebound. After fading in and out of recession for more than a decade, the country has posted two consecutive quarters of annualized GDP growth in excess of 6% (making it the world's fastest-growing mature economy), and results for the quarter ended June 30 are expected to be equally impressive. Japan's Nikkei 225 stock-market index, meanwhile, has surged 56% since its 20-year lows reached last April, corporate profits and confidence are stronger than they have been in a decade, and household spending, consumer confidence and employee bonuses are all on the rise.

Koizumi has garnered the most praise for filling high economic and policymaking posts with effective leaders. Financial Services Minister Heizo Takenaka, for example, has forced ailing Japanese banks—once seen as the single greatest threat to the nation's financial stability—to radically overhaul their balance sheets. Thanks to Takenaka's get-tough measures, nonperforming loans at major Japanese banks have fallen from 8% in 2001 to 5.2% at the end of March 2004; debt-rating agency Standard & Poor's has just lifted its assessment of several Japanese banks for the first time in 21 years. Meanwhile, Toshihiko Fukui, who was appointed Bank of Japan governor in March 2003, has been much more successful than his predecessor in stifling Japan's pernicious, decade-long bout of deflation through unconventionally loose monetary policies.

Even with such savvy appointments, many critics maintain that Koizumi has still mostly been lucky—that the economy has been buoyed primarily by forces beyond his control. While Koizumi has not attempted to kick-start growth via wasteful public-spending projects the way many of his predecessors did, much of Japan's economic revival is the result of self-initiated restructuring by many of the country's world-class multinational businesses. (Meanwhile, Japan's highly inefficient domestic industries, such as mom-and-pop retailing and food production, bumble along as unprofitably as ever.) And the voracious appetite of Chinese industries for basic materials, not to mention that country's growing consumer demand, has proved to be a surprising and welcome salvation to a broad swath of Japanese manufacturers and exporters that only recently had been sounding the alarms about China's ability to "export deflation" or "hollow out Japanese industry" by taking over factory jobs once handled by domestic workers.

Regardless of the immediate causes of Japan's recovery, questions remain about its sustainability. Koizumi came to power as an economic reformer. Yet his three pet reform initiatives—privatizing the postal system, reforming the quasi-governmental highway-development companies, and overhauling the pension system—have barely left the drawing board since he made some of them central campaign planks as far back as 2001. In interviews with the Japanese press last month, Koizumi said that privatizing the postal system—an oddball governmental institution that not only delivers mail but also acts as the country's largest savings bank and as an insurance company—was his highest priority. An increasingly skeptical populace has been hearing that same promise for more than three years, and few believe he has enough political capital left to force unwilling LDP members to make the radical legislative changes necessary. Editor Toshikawa says, "He simply doesn't have the clout to carry out these privatization schemes. And if the LDP doesn't get 51 seats [in the Upper House election], he might abandon postal reform altogether."

Even those who are sanguine about Japan's recent economic performance warn that as long as structural reforms and a pension overhaul remain uncompleted, the country's fundamentals will continue to decay. The soaring stock market, they say, has papered over lingering inefficiencies at many companies, giving a much-needed (though potentially short-lived) boost to their asset levels. Similarly, Japan faces the worst demographic time bomb in the industrialized world—a problem that Koizumi and the LDP's pension reforms have done little to address. Many say Koizumi has lost any taste he may have had for the battles necessary to effect change. "The whole pension system needs to be taken apart and rebuilt," says Kazuhiko Nishizawa, an analyst at the Japan Research Institute in Tokyo, "but the administration isn't thinking that far ahead."

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