Quotes of the Day
Japan's Prime Minister Junichiro Koizumi is used to making other politicians unhappy. But even he seemed shaken when his longtime supporter Mikio Aoki took the floor of the Diet last Tuesday and added his voice to the growing dissension over the Prime Minister's latest round of banking reform proposals. In a withering attack, he accused Koizumi's new finance chief Heizo Takenaka of being a loose cannon, an unelected and unaccountable radical operating outside the system. And he finished with a direct salvo against the man he used to defend, telling Koizumi, "What is lacking most is leadership in coping with economic issues." When the barrage was over, the Prime Minister smiled wanly and thanked Aoki for his "encouragement."
That was just the opening act of a contentious political drama still playing out on the floor of the Diet, one that may prove the most important showdown of Koizumi's career. The fate of Takenaka and his banking plans has become a critical test of the underwhelming Koizumi era. If Koizumi enacts the package without sacrificing all of its major planks, the path toward sweeping economic reform may have finally begun. If, however, the formidable phalanx of Koizumi's opponents blocks the proposals?or waters them down to the point of irrelevance?then the Prime Minister's credibility as a reformer, if not his career, is likely finished.
Koizumi swept into office in April 2001 amid a wave of popular optimism. Eighteen months later, none of his mighty promises?such as privatizing bloated state-run companies and slashing wasteful public works projects?have come to pass. Relentless political opposition is partly to blame, as is capricious support from erstwhile allies in his own camp, who can't seem to decide if they need him more than he needs them or vice versa. In the meantime, nonperforming loans at the nation's banks have ballooned to between $420 billion and $1.05 trillion, the stock market flirts with 20-year lows and GDP growth is forecast to be no more than 0.2% for the fiscal year ending March 31, 2003.
Though still extremely popular with the public?his approval rating hit 64% in early October?Koizumi's failure to follow through on his platform has left the silver-maned politician with a reputation for being all charisma, no clout. "He's always been a reformer at heart, but he wasted a lot of political capital by taking on secondary issues," says Steve Vogel, a professor of political science at the University of California, Berkeley. That's why Koizumi's appointment of Takenaka last month to head the financial services agency surprised many, who took it as a demonstration of renewed seriousness about breaking the reform gridlock. Others saw it as a last-ditch effort?the political equivalent of the Hail Mary pass?to salvage any semblance of a lasting legacy.
When details leaked out before the scheduled Tuesday evening release of his preliminary proposals, those grumblings turned into a revolt. On Tuesday morning, Liberal Democratic Party (LDP) heavyweights Mitsuo Horiuchi, Taro Aso and Taku Yamasaki vowed to intervene. While Koizumi briefed the emperor at the Imperial Palace that evening, the three leaders and other LDP bosses confronted Takenaka behind closed doors in the Diet building. Takenaka left the meeting looking visibly pale. "This was poor leadership from Koizumi," says Mamoru Yamazaki, chief economist at Barclays Capital Management. "Takenaka was accused by the leading politicians of the Diet, and the Prime Minister wasn't protecting him." That evening, Takenaka said the publication of his plan was postponed till the end of October, though he later insisted that he wouldn't temper his proposals. Since then, economic debates in the Diet have been fiercely divisive, leaving Takenaka and Koizumi badly bloodied.
What is it about the proposed plan that its opponents find so objectionable? First, it aims to compel Japanese banks to assess the quality of their loans more rigorously and boost the percentage of total capital they must keep on hand to safeguard against potential delinquencies. Second, the plan seeks to tighten capital accounting rules: banks today are booking the expected income from deferred tax assets as up to 40% of their core capital, but Takenaka wants to force them to lower that amount to 10%. Either of these measures would force many banks into violation of their mandated 8% capital adequacy ratios. This would allow the government to seize control, dispose of bad loans and restructure as it sees fit?a terrifying threat.
Koizumi's opponents are worried about a host of factors, including what they deem a "Takenaka Recession." Under the finance chief's plan, the easy pipeline of money from complacent banks to profitless companies would be cut off, giving these companies no choice but to shut down and throw their workers out on the street. "Companies are going to go under and Japan offers no support for the unemployed," frets Minoru Morita, a prominent political analyst. Already, LDP politicians and Tokyo bankers are circulating a list of 51 companies presumed likely to meet with peril under the plan?including retailer Mitsukoshi, video gamemaker Sega and trading outfit Nissho Iwai, plus a slew of construction, heavy machinery and real estate companies. Goldman Sachs estimates that if all 51 companies on the list were to close, Japan's unemployment rate would jump from 5.4% to 6.1%. And that tally doesn't include thousands of small and medium-sized businesses also likely to go belly-up. Indeed, bleaker estimates suggest that unemployment could spike to 10%. In Japan, that grim prospect is less palatable than trillions of yen in bad debt?not just to politicians but to the majority of Japanese citizens who vote for them.
Though the saga is likely to drag on, many observers are betting that the Prime Minister will ultimately buckle, compro- mising on the plan's recommendations until they are impotent. Real reform, they say, is about as likely as the successful completion of that Hail Mary pass. "The reformers are on their own 25-yard line and the anti-reformers control the rest of the field," says Peter Ennis, editor of the Oriental Economist. For Koizumi, failure may mean the end of his last, best hope of being remembered as a great reformer. "If the latest round goes down poorly, Koizumi will very quickly start thinking about how to make an exit that preserves his political viability," predicts Gary Saxonhouse, a professor of economics at Princeton University and a friend of Takenaka's. "Very soon, you might have a different Prime Minister or you are going to have a eunuch running the Japanese government."
- Jim Frederick/Tokyo
- Finance chief Takenaka's reforms are under attack, making it showdown time for Prime Minister Koizumi