Does Japan Need a New Koizumi?
Friday, October 19, 2007 Posted: 06:07 AM JST
The world worries again about Japan. Japan needs "a man of strong views," former U.S. Secretary of State Colin Powell said Thursday in a lecture at Tokyo's Waseda University. "People are looking for leaders who have to make compromises as a political matter but still are compromising within a range of principles, that they are doing what they believe, and we saw that very much in Prime Minister Koizumi." The political upheavals of this Summer showing a backlash against "Koizumi reforms" and the impression that old-style Japanese politics have returned to Tokyo are generating these worries. But does Japan really need a new Koizumi?
Many seem to think so. Kyodo News eagerly picked up Powell's statements under the headline Japan needs Koizumi-style leadership. Foreign investors are loosing hope and investment in Japan is down. Foreign direct investment inflows to Japan turned negative in 2006 for the first time since 1989, the Japan Times reports. "People are losing interest in Japan," Kiichi Murashima, chief economist of Nikko Citigroup in Tokyo, is quoted by the Financial Times' David Pilling.
But Pilling calls the Koizumi story a myth:
Mr Koizumi, prime minister from April 2001 to September 2006, convinced the electorate – and not a few foreign investors – that there could be 'no growth without reform'. Since his period in office coincided with the longest recovery in years, people concluded it must have been the reform that did the trick. The corollary of this simplistic analysis is that if reforms stop now, so will growth.
There is a misunderstanding about the nature of structural reform and what role, if any, it played in Japan’s recovery. At the best of times, 'reform' is a sloppy word used to mean 'good change', a convenient sanctuary for politicians unwilling to concede that not every new law they instigate is beneficial. In Japan, where it has been conflated to mean both fiscal consolidation and deregulation, the term is less illuminating still.
What role did either cutting budgets or pushing deregulation under Mr Koizumi have in boosting growth? Almost none.
"Deregulation can accelerate growth," Pilling explains, "but most Japanese deregulation was instigated before Mr Koizumi arrived on the scene."
"The biggest genuine Koizumi reform was postal privatisation. This did not start until a year after he left office and will not be completed until 2017. Yet foreign investors seized on postal privatisation in late 2005 as a reason to snap up Japanese equities, precipitating a near-40 per cent stock market rally."
Lehman Brothers agree. “The excitement and rhetorical flourishes of the Koizumi era notwithstanding," the company writes in a recent publication, "the pace of structural reform did not particularly accelerate.”
"The real key to recovery under Mr Koizumi," says Pilling, "was the beneficial effect of a booming China on exporters and success in getting banks in shape. Exports were helped further by massive currency intervention to keep the yen low."
Pilling's conclusion: "Since Mr Koizumi did not usher in a brave new world, concerns that Mr Fukuda may dismantle all the good work are misplaced."
I totally agree with Pilling. But impressions often count for more than reality. And the mistaken impression that Fukuda and the opposition are bringing "Kozumi reforms" to a standstill could badly hurt foreign investments in the Japanese economy.
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