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REFORMING THE ECONOMY
Japan's overall economy has brightened considerably under Koizumi's watch. The Nikkei stock market index is up 66% over the past three years, Japan's GDP grew at more than 3% last year and there are signs that the country's five-year-long bout with deflation may at last be at an end. Upon taking office, Koizumi and his financial czar, an academic economist and political outsider named Heizo Takenaka, called for a dramatic liberalization of Japan's stagnating, overly centralized economy. His agenda has had some clear successes—corporate balance sheets have been cleaned up, the big banks' mountainous bad loans have been reduced, and the corporate-tax code has been tweaked to encourage entrepreneurialism. A new law that went into effect in May makes it far easier and cheaper to start a business from scratch.
But here again, Koizumi's record is mixed. The LDP's old guard watered down or postponed initiatives in pensions, highway planning and health care. Take their success at sabotaging highway-privatization reform, after years of grinding debate. The government announced in February that most of a 1999 plan to build more than 9,000 km of expressways will go ahead as scheduled, even though a panel determined that some 2,000 km of it may not be financially viable. Jesper Koll, chief Japan analyst at Merrill Lynch in Tokyo, doubts that Japan's lawmakers will muster much enthusiasm for more change once its primary cheerleader is gone. "This is the end of a golden era of pro-market reform," Koll says. "Koizumi was an outsider who looked for new ways to tackle problems. All of his possible successors, every single one of them, are insiders who always go to the same old people for economic advice. Koizumi's as good as it's going to get on that front for some time."
Towards the end, even Koizumi seemed to lose his taste for constant battles. After all, just to pass his most dearly held pet project—privatizing Japan's gigantic postal-savings system—he had to wage war on his own party by dissolving parliament, calling for snap elections last year and running handpicked candidates against LDP members who opposed him. The gamble paid off, but full privatization won't take effect until 2017. And after Koizumi's election victory, the predicted avalanche of other reform legislation never materialized. Proposals to amend Japan's pacifist constitution and upgrade its defense forces to a full-fledged ministry—once Koizumi priorities—both died as the Diet went into recess. "I think, in the final months, he just got tired of fighting," says Mamoru Yamazaki, an economist at HSBC in Tokyo. In late May, Kaoru Yosano, the very definition of an old-fashioned LDP man, took control of a new government economic council that has replaced the one that Takenaka had once led. Takenaka's dismay was palpable. At a press conference, he said, "The council was once an engine to promote structural reform. But now it is ... a forum that merely expresses the opinions of its members."
Whoever succeeds Koizumi will have to wrestle with some troubling consequences of change. As industries have streamlined, many of the perks of Japan Inc.'s longstanding paternalism have disappeared. Lifetime employment is no longer a Japanese birthright, widespread layoffs are common, and income disparity is on the rise. These developments have unleashed a widening conviction that Japan is losing its supposedly egalitarian roots and turning into a nation of haves and have-nots. It's a phenomenon that Charles D. Lake II, the vice chairman of Aflac Japan and the president of the American Chamber of Commerce in Japan, calls "reform fatigue." Lake warns that cultural alienation from what is sometimes now called "Koizumi's market fundamentalism" or Japan's new "winner-take-all society" may be far larger than most people appreciate. He points to the popularity of a book called The Dignity of a State. Authored by Masahiko Fujiwara, a university mathematician, the slim volume is ostensibly a nostalgic call for Japan to return to its traditional virtues. But it's also an emotional attack on free markets and globalism, which the book describes as "a system that clearly divides society into a minority of winners and a majority of losers." The Dignity of a State has sold 2 million copies since last November.
Sadakazu Tanigaki, the finance minister, and a long shot for the next Prime Minister, admits that Koizumi left a number of pressing financial concerns unaddressed. Japan has a fiscal deficit that runs at about 6% of GDP, and a national debt that's 160% of GDP. One day, it is going to have to raise taxes to meet the expectations of its aging population. Tanigaki has been a lonely voice in pointing out this unpopular truth. The problem of finding a stable system of social security, he told TIME, is one "that we will have to solve post-Koizumi."