Structural
Reform
Since assuming office in April 2001, Prime Minister Junichiro
Koizumi has fought for the idea of implementing "structural
reforms without sanctuaries" aimed at overhauling Japan's
economy, and has formed an agenda including everything from
fiscal reform to privatization of governmental corporations,
such as Japan Highway Public Corporation (*1) and Japan Post.(*2)
Because many of the proposals could hurt vested interests, however,
Koizumi is facing increasing resistance from opponents, including
bureaucrats and members of his own ruling Liberal Democratic
Party.
To achieve his structural reform goals, Koizumi has been making
full use of the Council on Economic and Fiscal Policy (CEFP)(*3),
a key government panel headed by the prime minister. The council,
which is empowered to draw up the national budget, was created
through a government reorganization that kicked off in January
2001. As a follow-up to the reform program announced in 2001,
the Council finalized the second round of reform policies in
June 2002 that proposed a comprehensive review of the tax system
and economic revitalization steps, including the creation of
special structural reform zones, where businesses would be allowed
to operate free from specific regulations.
With the ruling Liberal Democratic Party and its coalition parties
having won majority at the lower house election in November
2003, Koizumi reiterated his commitment to structural reform
of the economy. The challenges facing him, however, look even
greater.
Koizumi wants to see the economy achieve nominal growth of more
than 2% by fiscal year 2006, as otherwise the economy will likely
not achieve a stable recovery. He has moved ahead with a plan
to set up special deregulation zones and cut taxes by ¥1.8
trillion while trimming public-works spending. Such policy measures,
which are aimed at stimulating private-sector demand, have produced
some results.
However, the banking and non-bank finance companies have yet
to be resuscitated. The Financial Services Agency, which oversees
financial industry, intends to have banks' non-performing loans
halved as a percentage of their outstanding loans by the end
of fiscal year 2004. The government in April 2003 established
Industrial Revitalization Corp. of Japan (IRCJ)(*4), which is
to use ¥10 trillion yen of public funds to purchase problem
loans from financial institutions in hopes of reviving the businesses
of their nearly 100 corporate borrowers within five years. There
is no doubt that the crucial issue for the Japanese economy
remains to be whether banks can resolve their bad loans once
and for all.
Privatization of Postal Services
One of Koizumi's key structural reform initiatives is the privatization
of the postal services, which consist of mail delivery service,
postal savings and insurance services. Koizumi has called on
the CEFP to discuss and submit a final report on postal privatization
by the fall of 2004. The necessary legislation will be submitted
during the 2005 regular Diet session and privatization would
begin in April 2007, according to a timetable laid out by Koizumi.
The primary issue that must be addressed is the loss-stricken
structure of mail services. Due to factors such as the proliferation
of e-mail, upon the launching of Japan Post in April 2003, these
services were already ¥570 billion in deficit. With mail
volume handled by the postal service on the decline, outlook
of a recovery in earnings remains cloudy. Japan Post President
Masaharu Ikuta is showing interest in overseas operations, such
as in other Asian countries, as a way to mitigate such losses.
Privatizing the postal savings and life insurance programs will
also pose major challenges. If the postal savings system is
privatized and existing restrictions on deposits and other areas
are lifted, its 24,700 branches nationwide would make it a major
force in the finance industry. Some fear that as a privatized
entity it could siphon market share from other private-sector
financial institutions. The consolidation and closing of certain
post office branches will become necessary if it is to create
a structure that is capable of generating a profit even in the
face of a decline in revenue. But the government decided in
October 2003 that it would seek to maintain the present network
of post office branches and workers, as it is.
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