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In the face of record high unemployment, and with the Japanese stock market at a 17-year low, Prime Minister Junichiro Koizumi has abandoned the economic reforms that might have helped his country turn the corner. As a result, Koizumi is expected to embrace Japanese nationalism to maintain his popularity and hold on power.
Japanese Prime Minister Junichiro Koizumi won election last April promising a radically new way of dealing with the country’s economic problems: unrelenting reforms and an avoidance of debt. Unlike his predecessors, he bluntly warned that the process would be excruciatingly painful and Japan would not experience real economic growth for at least three years.
But due to the feared political backlash, Koizumi is now backpedaling on the few positive policies that his predecessor, Prime Minister Yoshiro Mori, actually managed to put forward. His reaction to the country’s economic problems will only add to Japan’s already historical economic meltdown and lead the prime minister to adopt a more nationalist stance to in hopes of staying in power.
Japan is facing record high unemployment, and its stock market hit a 17-year low on Aug. 30. Even by the time Koizumi took office five months ago, Japan’s economy – the world’s second largest – had probably already fallen too far to be salvaged by the prime minister’s proposed reforms. Koizumi is already backing away from his campaign promises, which if enacted would inflict pain the likes of which the Japanese have not known for more than a generation.
For example, the government is now refusing to force Japanese banks to write off their mountain of bad loans. This debt is crushing the banks, and since their assets are predominately stock holdings in companies that should be declared bankrupt, they are finding it impossible to generate the capital needed to function as lenders. Writing off those loans is essential if Japan is ever to have a healthy financial system, and it is the one thing that might be able jumpstart new economic activity.
The Mori plan, which Koizumi embraced as his own, would have forced write-offs on most of those bad loans within three years. Now, only half of those loans will be dumped in seven years, turning a plan of limited efficacy into a worthless one.
Koizumi’s employment initiative is equally underwhelming. Japan’s current unemployment rate of 5 percent is the highest of its post-World War II history. Since the government’s method of collecting statistics masks underemployment, the actual rate is probably underestimated by at least half. And for a consensus-based society like Japan’s, the impact of 1 in 20 people being out of work is far greater than in individualistic America.
Instead of trying to retrain workers or promote reforms that would boost businesses, Koizumi last week announced a policy that will pay companies 300,000 yen ($2,500) for every unemployed person older than 45 that they hire. The government is in effect subsidizing the rehiring of middle managers who were let go because they weren’t productive in the first place.
That’s hardly the type of “reform” Japan’s arthritic economy needs, but it will help Koizumi pacify the Japanese electorate as the economy continues to contract.
There is, however, one potential bright spot for Japan’s future. Of the nearly 20,000 positions Toshiba is eliminating, 17,000 are in Japan, demonstrating that the company recognizes its home operations are among its least efficient. If companies start reforming on their own, the trend might force Koizumi to engage in more realistic policies.
Finally, there’s the debt issue. At the core of Tokyo’s inability to resuscitate the economy is the nearly $6 trillion in debt the federal government has accrued. Much of the debt originated as “supplementary budgets,” stimulus packages directed to Liberal Democratic Party allies in the construction sector for wasteful infrastructure projects.
Koizumi has now decided for political reasons to continue with the supplementary budgets. The new spending, weighing in at a mere $15 billion, allows the prime minister to keep his promise for now to limit bond-financed deficit spending.
But $15 billion certainly won’t be enough to defibrillate the dying $4 trillion Japanese economy. More spending must eventually flow, which would wash away the last of Koizumi’s campaign promises.
No democratic leader can break all of his major pledges and preside over an economic crumbling, without severe political consequences. It is highly likely Koizumi will start looking for some scapegoats.
Koizumi may first purge some of the more incompetent members of his Cabinet, but not all of the scapegoats need to be domestic. Koizumi has already laid the groundwork for whipping the public into a frenzy against outside powers and there is no shortage of candidates.
Diplomatic clashes that would grant Koizumi huge amounts of political capital are brewing with South Korea over historical revisionism, with Russia over the status of the Russian-occupied Kuril Islands, and with the United States over security issues. The juiciest target, however, is China, Japan’s traditional bugaboo.
Using nationalism to increase his popularity is a far more attainable strategy for Koizumi than his economic reform plans, and falls into his populist image. Everything from Koizumi T-shirts to CDs indicates the prime minister is becoming a cultural icon.
The mix of nationalism and populism may not be the best way to manage Japan’s economy, but it will be more than enough to keep Koizumi in power – at least until the Japan economic bedrock collapses under him.
