Backsliding in Japan

A senior official in the administration of Japanese Prime Minister Junichiro Koizumi is worried. "There are so many things we have to tackle," he says, asking not to be identified because of the sensitivity of his statements. But when he scans the halls of government, he sees little appetite for change. The once redoubtable Koizumi, who is scheduled to step down from his post this fall after five years in office, is already looking forward to the delights of retirement. His star policy architect, an academic and political outsider by the name of Heizo Takenaka, has been consigned to political purgatory. And the "vested interests"--once all-powerful bureaucrats and hidebound pols within the prime minister's ruling Liberal Democratic Party--are staging a quiet comeback. "Over the last six months," says the senior official, "it's as if we've gone back five years."

Could things really be that bad? Perhaps not; insiders do sometimes exaggerate. But the view from the outside doesn't look so great, either. In recent days Japan's much-heralded economic revival has hit an air pocket. The hitherto buoyant stock markets plunged last week, triggered by a nasty mix of worries over rising oil prices, negative economic data from the United States and possible tightening by Japan's central bank. And that's not all. Last week another prominent financial renegade--investor and shareholder activist Yoshiaki Murakami--was arrested on charges of insider trading, leading to fears in some quarters of a retrenchment against confrontational, "American-style" investment tactics. All these developments are exacerbating worries about the fate of Koizumi's reform agenda once he leaves the scene. "I think there is a bit of a quite natural backlash in Japan now," says Peter Ennis, an editor at The Oriental Economist, an investor newsletter devoted to things Japanese. "People are questioning so-called market fundamentalism."

It's a remarkable shift, considering that, not all that long ago, few officials could compete with Takenaka--then the finance czar, now Telecommunications and Internal Affairs minister--when it came to holding the prime minister's ear. Just last September, Koizumi won an overwhelming electoral victory by casting the vote as a referendum on his ambitious reform program--most of it cooked up by Takenaka in his personal policy shop, which he staffed, in a stark departure from tradition, with independent economic experts who had no ties to either government or the LDP. On May 22, by contrast, Takenaka's economic-policy council was superseded by a new body run by rival Kaoru Yosano, 67, an LDP grandee who has now brought economic policy back into the cozy fold of the party. "The [previous] council was an engine to promote structural reforms," Takenaka complained soon after the move. Now, he said, "the council has changed into a forum that merely expresses the opinions of its members." Kenji Yumoto, chief economist at the Japan Research Institute, agrees: "Takenaka's confrontational style and tough stance brought about results. But we won't be seeing that sort of radical approach for a while."

Suddenly, Yosano's name-- rarely mentioned until just a few months ago--is on everyone's lips. Rather than advocating dramatic reforms, though, he's grabbed headlines with a broad campaign to sanction a range of financial misdeeds by companies and individuals. The targets have ranged from banks to accounting firms, and in some cases the measures have zeroed in on precisely the kind of collusive bid-rigging that long characterized Japan's corrupt "iron triangle"--the cozy relationships between bureaucrats, businessmen and politicians. And the government has been steadily tightening rules to improve oversight of the country's financial system--the one area, it could be argued, where reform has been ongoing.

But the crackdown has also encompassed two prominent challengers to Japan's business establishment. In January, investigators lowered the boom on Internet tycoon Takafumi Horie, 33, who was arrested on charges that he used corporate fraud to boost his flagship company, Livedoor. Then, on June 2, Murakami, 46, admitted to charges of insider trading, announced his withdrawal from the world of finance and shortly thereafter found himself in the same Tokyo prison where Horie had been held until his release on bond in April. Before their downfalls, both Horie and Murakami had transformed themselves into highly public figures who declared it their mission to shake up Japan's postwar style of state-managed capitalism--not that dissimilar, on the face of things, from what Koizumi was trying to do on the government level. (Horie even campaigned for Parliament in last September's election on a pro-Koizumi platform.)

Many observers have been applauding Yosano's crusade, saying that it demonstrates an unprecedented government resolve to eliminate excesses that might have been quietly tolerated in earlier days. In this reading, the crackdown reflects Japan's tortured transition from the old system, dominated by unwritten rules of market behavior, toward a more formal one in line with international standards. "The Murakami Fund and Livedoor are both cases that highlight a need for rules and a system for overseeing market participants that has arisen as a result of a push toward a free market," Japan's top business daily, Nihon Keizai Shimbun, declared in an editorial on June 6. "They should serve as a lesson on the need for discipline that comes with freedom."

That's the benign interpretation. Skeptics say that, whatever the motives behind the crackdown, Japanese law as it stands today still offers the authorities considerable leeway in interpreting the definition of crimes such as insider trading. They also point out that those who want to put an end to "Wall Street capitalism" are deriving plenty of ammunition from the campaign--not least by constructing links in the public mind between Takenaka and the now tainted capitalists. LDP notable Koichi Kato accused Takenaka of helping out Horie, who once boasted that "money can buy people's hearts." Says Kato: "It's as if Takenaka wanted to give him government guarantees."

The suspicion can't be entirely dispelled that good old-fashioned power politics might be playing a role as well. The head of the special investigations unit of the Tokyo prosecutor's office, Motonari Otsuru, was quoted last year as telling his subordinates, "We will target those crimes which skew financial markets and make excessive profits." He's said to be the architect of the crackdown on Livedoor and has also been linked with the moves against Murakami. Otsuru is widely regarded as an ally of LDP traditionalists.

An important question is how the accusations and interpretations will play in the struggle to determine Koizumi's successor. The front runner in the race is still LDP Chief Cabinet Secretary Shinzo Abe, who has been close to Takenaka in the past; his power base draws its strength from the up-and-coming generation in the party. Abe's main competitor, Yasuo Fukuda, is an old-school politician who needs to rally traditional elements of the LDP to his cause if he wants to marshal enough votes to win. In a speech after the Livedoor scandal broke, Fukuda said: "Reforms are necessary, but it's also necessary to examine how they are working." Even more striking: LDP members have started mentioning Yosano as a contender as well. His closeness to influential businessmen and the still-powerful Ministry of Finance could help.

One thing's for sure: whoever inherits the top job will face a mountain of unfinished business left behind by Koizumi. Many LDP insiders looked askance at the prime minister's decision not to extend the current session of Parliament, despite the fact that several important bills are still pending. Craig Freedman, director of the Center for Japanese Economic Studies at Macquarie University in Sydney, says that Koizumi hasn't even begun to tackle long-term challenges like cutting costly subsidies to agriculture or reforming health care. And Toshihiro Ihori, economics professor at Tokyo University, warns that the administration "isn't seriously approaching the problem." Still, Ennis argues that at least some of Koizumi's achievements will withstand even the most powerful backlash. "The LDP is never going to play the role it's played before," he asserts, noting that Koizumi has succeeded in centralizing power in the prime minister's office and curtailing the powers of once formidable ministries. And, he adds, Koizumi still has three months left in office--and he's a man who's always good for a surprise. The prime minister may need one if he wants to jump-start a reform process that's now stuck in neutral.

Backsliding in Japan | News