Clock ticks louder for Koizumi's reforms
(Reuters)
Updated: 2005-09-13 22:07

Japanese Prime Minister Junichiro Koizumi's resounding election win has fueled hopes for bolder reform, but the heightened optimism also raises the risk that the euphoria will quickly turn into disappointment.

It now seems to be a foregone conclusion that the bills to privatise Japan's bloated postal system, the central issue for Sunday's election, will swiftly pass parliament.

The problem is that most of the other big issues facing the world's second biggest economy -- ranging from fixing the creaking pension and healthcare systems to reining in a ballooning budget deficit -- cannot be resolved overnight or by the sheer size of the vote margin.

Still, a two-thirds majority in the powerful lower house of parliament and greater clout for Koizumi within his ruling Liberal Democratic Party (LDP) will allow him to push through potentially painful steps that would otherwise have met stiff resistance, analysts say.

Even outspoken critics of Koizumi say he should make the most of his party's newfound grip on parliament.

"From here on, the reform issues become very complex and I doubt if we will see anything significant," said Eisuke Sakakibara, a former top official at the Ministry of Finance and now a professor at Keio University in Tokyo.

"But...Koizumi's strengthened position is an opportunity for the Finance Ministry to carry out fiscal reform."

Kunji Okue, an economist at Dresdner Kleiwort Wasserstein and an expert on public finance, agreed Koizumi's fiscal policies would be mainly about executing the ministry's blueprints, though he expected efforts to reduce the deficit to accelerate.

"I would expect fiscal reform to move at a significant pace, both on the spending side and tax hikes," he said.

Such prospects will no doubt fuel criticism that Koizumi is merely a puppet of the bureaucrats and that his reform steps inflict pain on taxpayers.

But analysts say Japan's finances are in such dire straits that no simple solution to satisfy everyone is available and the use of brute force might be necessary.

PAINFUL REFORM

So how exactly can Koizumi cash in on his mandate?

Dresdner's Okue said it meant the government can now afford to step on the toes of the lobby groups that the LDP has traditionally relied on for votes -- notably the doctors who have been fiercely opposed to a plan to reduce medical costs.

Healthcare costs, along with state funding for pension schemes, will be key battlegrounds for looming cuts in social security costs -- the main focus of fiscal reform.

Japan's public sector debt of nearly $6.4 trillion equals 150 percent of the country's gross domestic product, the worst ratio among industrial countries. Nearly half of its annual general budget of about $745 billion is funded by new bond issuance.

The government has pledged to return to a balanced budget early in the 2010s, but that target would be a long shot without a profound cut in spending and a sizeable increase in taxes.

Public works outlays, often cited as a symbol of wasteful spending, have already been cut by 20 percent in Koizumi's four years in office.

The government plans to cut a further 3 percent next year.

But such cuts will do little to dent the $300 billion annual deficit and experts say radical cuts in previously untouched areas such as social security are needed.

On pension reform, merging pension plans for civil servants and those for salaried workers is the next big issue, with the civil servants' unions strongly opposed to the idea.

But since the unions back the opposition Democrats, the ruling parties' lower house superiority gives the LDP a golden opportunity to strike hard at its rival's support base by helping Koizumi pursue the merger, Dresdner's Okue said.

Cutting the number of civil servants and their average pay would be in the pipeline for the same reason.

Ryuji Kakimoto, research analyst at Credit Suisse First Boston, said he expected the postal privatisation and the generally increased momentum for reform should benefit the financial sector.

"Specifically, restructuring of state-backed financial institutions, the blueprint for which should be unveiled this autumn, becomes more realistic," he said in a research note.

"Fresh in our memory is the the increase in private-sector banks' housing loans resulting from a reform of the Government Housing Loan Corp," he said.

($1=110.24 yen)

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