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Post-Koizumi question marks

Post-Koizumi question marks

Few elections may be more pivotal for global markets than one happening in Tokyo next month.
After more than five years of shaking up Japan's economy, Junichiro Koizumi is stepping down. Oddly, global markets seem to be paying scant attention to one of the most important power shifts in the modern history of the No. 2 economy.
Perhaps that's because the frontrunners seem reasonably bland compared with the charismatic Koizumi. How many leaders would want Elvis and Graceland to be part of their political swan song? How many politicians can say actor Tom Hanks covets their hairstyle?
It's also easy to dismiss elections because Japan is essentially a one-party nation. The Liberal Democratic Party has ruled Japan for all but 10 months since 1955. The question "Does it really matter who heads the LDP?" has long been a valid one in this nation of 127 million people.
That was until Koizumi came along. He changed the tone in Tokyo and put the issue of economic modernization on the front burner. While China's boom and private-sector restructuring get most of the credit for Japan's recovery, Koizumi's efforts to reduce the government's role in the economy helped.
Yet Koizumi's drive for change never really got beyond second gear, at best, belying claims he'll be remembered as Japan's answer to Margaret Thatcher. Koizumi is far more of a Mikhail Gorbachev-like figure: a leader who helped set the stage for a Thatcher-like reformer to rise up and revolutionize the system.
Shaken, not stirred
Koizumi has shaken things up a bit, but rarely shown the flashes of true independence and audacity needed to transform Japan. That's why markets should pay close attention to the person who replaces him after the LDP's September 20 election.
There are scores of questions investors should be asking Japan's next prime minister, whether it's Chief Cabinet Secretary Shinzo Abe, Finance Minister Sadakazu Tanigaki, Foreign Minister Taro Aso or someone else. Here are four key ones.
1. What about the debt? "The most pressing challenge is regaining sustainability in the public finances," International Monetary Fund Managing Director Rodrigo de Rato said in Tokyo on August 3. "We urge policy makers not to be overly optimistic about what can be achieved through spending cuts."
Or economic growth. While de Rato's comment was right on, officials in Tokyo also seem to think Japan's recent growth will reduce debt. The 2 percent expansion the central bank expects next year won't be enough to do that.
It hardly helps that the Organization for Economic Cooperation and Development estimates Japan's debt burden is 170 percent of gross domestic product, the largest in the industrialized world and bigger than the government claims. Not only is debt holding Japan's credit rating below Botswana's, but a "crowding out" dynamic is making it hard for healthy companies to issue debt to expand.
2. How about more babies? Japan's population actually shrank in 2005 thanks to a declining birthrate in a country where a fifth of the people are already 65 or older. Japan needs to figure out how to pay lower debt-servicing costs -which now eat up 20 percent of the budget - so it can pay for rising social- security costs.
Part of the issue is tackling discrimination against women in the workplace. While things are improving, motherhood remains a career-ending proposition for all too many women. Underutilizing the female workforce not only holds back growth, it also means women will increasingly delay childbirth. Without action, the labor pool will dry up further.
BOJ meddling
3. Will you leave the BOJ alone? An ominous suggestion came last week from Hidenao Nakagawa, head of the LDP's policy-making board, who said Japan's next leader should look for ways for the Bank of Japan and the government to cooperate more to boost growth.
You really have to wonder how independent a central bank that lowers interest rates to zero really is. After all, if politicians had done their part 10 years ago to deregulate the economy and boost employment instead of relying on free money, the 1990s wouldn't have been a lost decade.
Investors should be very afraid at the mere suggestion the BOJ could be any more helpful to politicians. It's imperative that Japan's next leader leave the BOJ alone and focus instead on repairing the nation's fiscal position and tweaking tax policies to make the economy more productive.
4. Whither Japan's role in Asia? It's a simpler question than it seems and it may boil down to one thing: Yasukuni Shrine.
It's just as sensitive an issue in Japan as outside, but few topics will say more about how connected the economy will be to Asia's economic rise. Sixty-plus years after World War II, Japanese want to move on. Visits by top Japanese officials to Yasukuni, which honors 14 war criminals among the dead it commemorates, are increasingly unnerving China and South Korea.
Asia has much to grapple with, including record oil prices, rising debt levels, surging interest rates, poverty and the risk of bird flu. Too bad the leaders of the region's three biggest economies can't sit in a room together to chew things over. Yasukuni is something Japan's next leader must settle for good.
William Pesek is a Bloomberg News columnist.


Updated : 2021-10-22 03:18 GMT+08:00