The choice of Junichiro Koizumi as Japan's Prime Minister and president of the ruling Liberal Democrat Party demonstrates that a "soft" revolution is under way in Japan, not unlike those in the Soviet Union in the 1980s and Mexico in the 1990s. Given their first chance at democratically choosing a party leader, LDP members opted for a reformer who is challenging the political and economic status quo. Conservative, statist forces in the LDP will resist. Protected, subsidized industries will drag their heels. But after a decade of economic stagnation, the Japanese are increasingly demanding an end to top-down, state-directed economic policies. They want more open politics and a more entrepreneurial, market-based economy. This is a key moment for Japan. Failure to reform and continued economic stagnation could open the door to extreme nationalist forces that are surprisingly strong in Japan.
The big question is whether Koizumi can deliver change. He certainly is suggesting policies that would radically transform Japan. He wants to privatize Japan's $2 trillion postal savings system--the honey pot of politicians and bureaucrats. Koizumi ran the postal system in the 1980s and knows how LDP politicos use it to finance public-works projects and farm subsidies. Construction and real estate companies, as well as farm co-ops, return the favor by contributing heavily to the LDP election campaigns. An astonishing one in six Japanese workers is employed in construction, and the LDP gets their votes, as well as those in the countryside. In a gerrymandered electoral system, this keeps the LDP in power. Urban consumers get little except high sales and income taxes, which also go to subsidizing special economic interests. That's why they prefer Koizumi.
The new Prime Minister also wants the banks to get on with the job of writing off bad corporate debt still on their books, an endless task that has ground on for more than 10 years. He inherits the latest in a series of ill-formed bank bailout plans from his predecessor. He should dump it in favor of a tougher program to mandate write-offs by 2003, tougher rules on disclosing nonperforming loans and forcing banks to seize collateral from deadbeat borrowers. This, of course, could send unemployment much higher. Koizumi is proposing to shore up current jobless benefits to ease workers' pain. He is trying to shift some of the safety-net burden from corporations to the state. Finally, he wants to cap runaway deficit spending, which has given Japan the highest debt levels of any industrial nation.
Time is running out for Japan. Its corporations are putting a hold on investment. By cutting costs, they are lowering debt levels and becoming more competitive. But they are putting most savings into safe government bonds rather than risk new capital investments. Right now, companies see few investment opportunities and no need to expand capacity. But without investment, there is little growth. It's a vicious cycle.
The LDP is a ruling party with less and less legitimacy in Japan. It hasn't won an election in a city of 2 million or more in years. When voters are given a real chance, as they were with Koizumi, they opt for reformers. In recent years, they elected many independents in the regional prefectures and Tokyo itself. Frustrated urban Japanese have been voting for reform for a decade, with little effect.
Koizumi could change that. He must now form a Cabinet and prepare for July elections for the Upper House. Should LDP conservatives try to block him, they can check Japan's soft revolution--for the moment. The status quo cannot continue indefinitely. Economic stagnation has become a destabilizing force inside Japan, tearing apart the nation's social fabric and political consensus. The U.S. needs a stable, growing Japan. Koizumi's reforms represents the best path for Japan and the global economy.