Not Turning The Corner Yet

At first, Koichi Kato was elated. Exit polls on the afternoon of Sept. 11 showed a decisive lead for his Liberal Democratic Party--and vindication for LDP leader Junichiro Koizumi, who had called Japan's snap general election a little less than a month earlier in an audacious gamble to silence opponents within his own party. Kato was re-elected to his seat in the lower house of the Japanese Parliament with a thundering 70 percent of the vote, and the LDP's nationwide tally was no less overwhelming. The ruling party achieved an absolute majority with a breathtaking 296 seats in the 480-seat chamber--far exceeding any of the pundits' predictions and marking one of the most decisive victories in the party's 50-year history. Still, Kato felt uneasy. "It was a surprising victory, amazing, an unexpectedly large margin," he says. "But I couldn't help wondering if we had swallowed too much."

The LDP's landslide victory not only wiped out Koizumi's critics within the party, who were forced into the political wilderness by the wily prime minister, but also the opposition Democratic Party of Japan, thereby severing a long string of electoral successes by the LDP's main rival. Koizumi now finds himself occupying the commanding heights of Japan's political landscape. But make no mistake: the story of Koizumi's bid to transform the Japanese economy is far from over. The problems remain vast, the means unclear--and the time all too short. Gerald Curtis, a leading Japan expert at Columbia University, says that the challenge for Koizumi now is to live up to the overwhelming expectations of the voters. "He has to come up with a package of legislative proposals to get through the next six to 10 months," notes Curtis. "The problem is that there is no such package at the moment."

The good news first. The economy has been picking up. Corporate profits are high, banks have begun to lend again and investors (especially optimistic foreigners) have been piling into Japanese stocks with abandon, pushing Tokyo markets to four-year highs. Koizumi can claim at least part of the credit, thanks to his cleanup of the moribund banking sector and his refusal to succumb to the sort of pump-priming public-works programs favored by his predecessors. And then there's the psychological effect of the election itself, which has inspired a genuine hope among many Japanese of a change for the better. "The expectation that things are going to get better is itself a force for positive change," says Curtis. "That in itself creates a positive boost to the economy."

What's more, Koizumi's signature reform cause--the privatization of Japan Post--has received the resounding imprimatur of the voters, meaning that the once contentious initiative now looks set to sail through both houses of Parliament. Those who once expressed opposition to privatization have been hurrying to declare their loyalty to the vengeful Koizumi, who had brought the party's considerable resources to bear against them during the election. "Koizumi showed how deadly he can be," says Mitsuhiro Fukao, an economist at Keio University. Not that Koizumi needs the upper house now, anyway. The LDP's victory was so overwhelming that, along with its junior coalition partner, the New Komeito Party, it can easily muster the two-thirds majority necessary to override any obstacles placed in his way by the chamber.

Yet Koizumi's skill at turning the election into a referendum on postal privatization--a grand simplification that left his opponents groping to articulate a competing message--could become his Achilles' heel. The problem is that he hasn't laid out a clear agenda for solving any of the other problems that desperately need to be addressed. One especially pressing task: pension reform. The first baby boomers will retire starting in 2007, placing immense strain on a system that's already creaking under the pressure of a rapidly aging society. And then there's the country's extraordinary fiscal crisis, which has actually increased under Koizumi. Owing to ballooning pension costs, tax cuts and incomplete privatization efforts, the nation's public debt has swelled from 540 trillion Yen at the start of his term in 2001 to 780 trillion Yen as of the end of March (a dizzying 150 percent of GDP). "Koizumi came to office promising small government, just like Bush," says Keio University economics professor Masaru Kaneko. "Instead we have a level of indebtedness unprecedented in Japanese history in the absence of war or hyperinflation."

Some of Koizumi's associates have been making the right noises. Shortly after the election, reform czar Heizo Takenaka told reporters that the new government would "accelerate reform" once postal privatization is out of the way. As priorities he cited reforming state banks, cutting the civil service and shrinking the government's balance sheet. The LDP's surge of support in cities could also give the party the latitude to push through long overdue cuts in agricultural subsidies. Koizumi has also weakened his party's once incestuous ties to the Japanese medical lobby, opening up maneuvering room for urgently needed modernization of the costly and antiquated health-care system.

But so far the Koizumi team has been strikingly short on specifics--and that could lead to new resistance when the time comes to get down to the nitty-gritty. "After postal reform, people will begin to demand that Koizumi accommodate their requests and the LDP members will also begin to voice their opinions," says Minoru Morita, a well-known Tokyo political analyst. "After postal reform, all the inconsistencies and contradictions will surface." Not to mention the all-powerful (and unelected) bureaucracy, which has already watered down or frustrated some of Koizumi's earlier privatization efforts.

Koizumi himself has provided clarity on only two salient points. First, he's rejected proposals for a new consumption tax, proposed by many experts as one possible solution to the looming pension crisis. Second, he insists that he's still planning to step down as party leader when his term runs out in September of next year. That leaves loyalists wondering how he plans to get anything done in the few months after the post-office bills have been passed. "Comprehensive reform will take more time than that," notes economist Fukao. "With his popularity, he probably could have passed the consumption tax and used part of that to finance pension reform. But he doesn't seem to want to do it. As things stand now, he'll have to leave that to his successor."

The catch is that, with just a year to go, Koizumi has shown little interest in designating a favored replacement. That has sparked worries that, once postal reform is out of the way, factional infighting will resurface as contenders for the LDP throne jockey for position. Political intrigue could frustrate a new reform agenda, with LDP rivals perhaps displaying some resistance to Koizumi's more painful reforms if they see political advantage in doing so. The prime minister's only response to persistent questioning on the subject has been that the next party leader should "study hard" and "be for reform."

Koizumi could yet be persuaded to extend his term, of course. But that looks unlikely, given a political career marked by the stubborn pursuit of his own contrarian agenda. Kato has another worry--that Koizumi may have unleashed forces beyond his party's control. Even before the election, after all, Koizumi completely transformed the way the LDP did business, undermining the old backroom faction system and cutting ties to once powerful vested interests. "The reaction from the young generation to Koizumi's call for reform was surprisingly strong," Kato notes. "So what happens to the party when Koizumi is gone?" Good question. And it looks as though the answer may be coming sooner than the LDP would like.