International Business: Japan

Can Ishihara Teach Tokyo to Say "No"?

The city's new governor is steering a course of austerity

Shintaro Ishihara, governor of Tokyo prefecture, just can't hide his contempt for his predecessors. In the plush anteroom of his City Hall office, he ticks off Tokyo's woes: a budget deficit of $6 billion, debts of $60 billion, a legacy of public-works boondoggles--including the $1.3 billion City Hall. Ishihara must also cope with a mounting homeless population and a horrifically bloated bureaucracy. No wonder the 67-year-old Ishihara fumes at those who came before him. "There has been no concept of profit and loss or efficiency," he says. "This would never be tolerated in the private sector."

Such rage is part of the persona for Japan's ranking conservative intellectual. In The Japan That Can Say No: Why Japan Will Be First Among Equals, the neonationalist screed he co-authored in 1989, Ishihara railed against Washington's dominance of postwar Japan. But since winning the governor's race in April, he has stunned local politicos by turning his ire on the Japanese system he so long admired.

As Tokyo's governor, he now sees evidence of fiscal recklessness pretty much everywhere. And every day, it seems, Ishihara proposes another radical scheme to pull Tokyo back from the brink. In the budget for the fiscal year beginning next March, Ishihara calls for a 12% cut in public housing outlays and a 14% cut in public-works expenditure. The bigger question, though, is whether he can restore Tokyo's fiscal health. Observers say Ishihara is deadly serious about trying. "He has spent a lot of time studying the revival of New York" from its 1970s brush with bankruptcy, says Jesper Koll, Merrill Lynch's Tokyo economist.

In many ways, Ishihara's problems are smaller versions of those facing Japan. Tax cuts and years of overspending have left Tokyo--along with many other cities--nearly insolvent. In assessing the mess, Ishihara's aim goes way beyond fiscal discipline. He wants to smash the lord-vassal relationship that has long existed between the national leadership and local government. "He is a latecomer but a real symbol of reform," says Yasunori Sone, a political scientist at Keio University in Tokyo. "He gives you the sense that a decisive politician can make a difference."

Ever the intellectual, Ishihara is quick to detail the historic roots of Tokyo's problem: overcentralized power and administration, which date to the Meiji Restoration of 1868, when Japan entered the modern era. As a result, local governments have little control over their own finances. For decades, the central government has shifted tax revenues from big urban areas to rural prefectures, where the ruling Liberal Democratic Party's backing is the strongest. Only 30% of Tokyo's tax revenues are returned to the city. By contrast, some distant prefectures receive many times more in subsidies than they send Tokyo in tax collections.BIG SPENDERS. Worse, the Ministry of Finance has shifted a big chunk of its deficits onto local governments by requiring them to issue bonds to help finance its spending plans. Naohiko Jinno, a government-finance specialist at Tokyo University, figures that municipalities finance 28% of public-works projects rolled out by the central government.

Ishihara's challenge is to use his popularity to change all this. His name has been a household word for decades. At 21, he published his first novel, a rebel-without-a-cause sensation called Season of the Sun. It won the prestigious Akutagawa Prize and furnished an anthem for Japan's first postwar generation. Ishihara's campaign slogan was "The Tokyo That Can Say No." Today, he enjoys a 70% approval rating--far above Prime Minister Keizo Obuchi's 47%.

Ishihara will need those ratings. Over the next three years, he will start cutting government salaries, which consume 30% of Tokyo's budget. He also plans to slash employee bonuses--by tradition a 13th month of pay--by 10%.NO BUYERS. These moves, analysts estimate, could cut the deficit in half by 2003. Pushing further, Ishihara is casting a gimlet eye on pending projects. A new subway line is being downsized to save $400 million. Ishihara dearly wants to sell off some assets, such as a half-finished, $20 billion man-made island. "But I doubt I would find many buyers," he laments. Ishihara has even insisted that the government rent out the governor's palatial residence; he continues to live in the well-to-do suburb of Denen-Chofu.

Tokyo needs to expand its tax base by creating jobs, Ishihara says. He has floated the idea of a casino in the Tokyo Bay area, an idea that so far has been greeted with skepticism. He also has enlisted Fuji Bank and others to create a bond market for small businesses. "The idea is to help these companies get ready for initial public offerings in the next five years," says Fuji investment banker Shuji Ayabe. Next March, $100 million in small-business loans, backed by the Tokyo government, are to be bundled into bonds and marketed.

Ishihara still meddles in foreign affairs. This reflects his conviction that Japan must play a more assertive role on the global stage. He drew Beijing's ire by paying a personal visit to Taiwan's independent-minded President Lee Teng-hui in November. And he is no softer now on the Japan-U.S. relationship than he was as a candidate. "Why is it that anyone who disagrees with the U.S. is called a nationalist by the Western press?" he asks.

Fair question. But Ishihara has made far too many enemies in the LDP, from which he bolted in 1995, to have a shot at becoming Foreign Minister or Premier. Yet if he can win Tokyo and other local governments more control over their destinies, Ishihara will be remembered for something other than saying "no."By Brian Bremner in Tokyo