A year after taking office as Japan's prime minister, Junichiro Koizumi the flim-flam man of little accomplishment is familiar to all of us.
But is it possible that there is another Koizumi we have missed? Could it be that on the dark side of Koizumi's moon, there is an astute administrator advancing a reform program so large and ambitious that we can't see it? It's time to consider this prospect, and whether Japan- watchers have been looking for signs of progress in the wrong places. Time, too, to recognize that the prevailing consensus on Koizumi's Japan reflects the erroneous -- not to say blinding -- assumption that the Anglo-American model is the measure of economic, financial, political, and administrative reform.
The fact is that Japan now has four sweeping reform programs well into their middle years. They include makeovers of the financial services sector, the huge, opaque universe of public sector agencies and corporations, the national tax system, and local government finance. These endeavors have been slow-moving and little publicized. But they're so far along in their timetables that they can't be ignored or dismissed any longer.
PHOTO: AFP
"All the talk of `no reform in Japan' is completely off- base," says Stephen Church, the Tokyo representative of Analytica Japan, a financial research consultancy. "It's a question of understanding a Mandarinate administration -- seeing, or not, what is right before our eyes."
Do I join Church in suggesting that Japan is midway in a reform era worthy of its great predecessors -- the Meiji modernization of the late 19th century being the most familiar. Am I suggesting a reinvented Japan will come out the other end of this process? Nothing less.
As to the shape of the Japan to come, it's immensely complicated but easily put. To judge by reform programs now in motion, Japan will emerge over the next 10 years or so looking very like an updated version of Germany's postwar social democracy -- a "social market" system made for the 21st century.
Koizumi has disappointed almost everybody in terms of his ability to meet his promise to advance Japan out of 11 years of sluggish growth, recession, and stasis. Political reform has gone nowhere: At this point, the prime minister appears vulnerable to pressures from anti-reformists in the governing Liberal Democratic Party.
As to the banking mess, it seems to sit there unattended, except for shows of concern that never amount to much, even as the world grows ever more anxious about the consequences of a sudden crisis. "They just don't get it" is the familiar refrain.
These concerns, while justified, reflect a failure of perspective. Outside observers over the past decade have allowed their own preoccupations and preconceptions to obscure some rather large phenomena. It's a form of narcissism, in my view, and it leaves the outsiders as the ones who don't get it.
Consider the following reform programs as an exercise in the restoration of vision:
1. Financial institutions are consolidating to form a universal banking system modeled on Germany's "Allfinanz" institutions. Policy duration: 1985-2010.
2. A shift from a US-style taxation system -- an inappropriate fit with Japan's social welfare burdens -- to a EU-style system based on proportionately higher indirect taxes and a value-added tax. Policy duration: 1985-2020;
3. Reform of public sector agencies and public corporations. Policy duration: 1995-2010 or 2015.
4. Reform of local government finance to rebalance fund-raising responsibility between Tokyo and the prefectures and municipalities. Duration of program: 1995-2010 or later.
The implications of these policies are important across the board. The "Allfinanz" system will have a major impact on foreign competitors in the Japanese market for financial services; tax and local government reforms will give Japan a European look.
But the largest reform now at issue is number three.
Reforming the unmapped continent that is Japan's public sector has been a priority ever since the banking crisis hit in the early 1990s. Just as the non-performing loan problem began to emerge, so did "asset quality" problems, to put it politely, among public corporations and agencies that operate under what was then the Ministry of Finance's Trust Fund Bureau. Add to this the aging of Japan, and you're looking at an emergency administered not by private banks but the MOF.
How big is the Japanese public sector and how big is the problem? Among the core public entities are nine financial corporations, including seven public sector banks, and 45 corporations that range from the successful and necessary to the failed and useless. Somewhere in the maze are 16 mysterious "special accounts" and other lending mechanisms that are virtually impossible to see into.
In all, the MOF manages some ?440 trillion (US$3.43 trillion) in public funds, which are deployed via the Trust Fund Bureau in its new incarnation as the Fiscal Investment & Loan Program, or FILP.
As to the size of the problem, please sit down. No one has a global view of FILP and its finances, not even the bureaucrats who sit atop this unique empire, because all the agencies and companies under FILP operate independently and keep their books primitively, idiosyncratically, and un-transparently. Church has worked through 70 sets of accounts and developed some numbers.
FILP's risk exposure, he believes, comes to ?360 trillion; add credit guarantees, loans, and investments in FILP agency balance sheets, and the figure runs to ?545 trillion. Church reckons conservatively that ?129 trillion of this is irrecoverable. Translation: Japan's public sector has a distressed-asset problem equivalent to at least 25 percent of gross domestic product.
"Public Sector Reform in Japan," the just-issued Analytica paper detailing these calculations, is the first effort by anyone, Japanese or non-Japanese, in government or out, to devise a method by which the sprawling mess under FILP can be quantified and mapped. Even the FILP bureaucrats familiar with it recognize it as a breakthrough document.
"A lot of very capable people in the FILP system know that foreigners must start to comprehend what's going on," Church tells me. "They also know that the impact of the FILP reform program will be felt throughout Japanese finance."
How is this reform supposed to proceed? The MOF plan calls for FILP's direct financings to be replaced by massive bond issues and the privatization of those agencies and corporations that are commercially viable. The flotsam will be jettisoned and agencies providing public goods without the prospect of profitability will continue to receive government subsidies.
It's complex, ambitious, and fraught with difficulties. Chief among them now is the pace Koizumi has set. He didn't hatch the plan by which the public sector is to be brought under control, but he has drastically accelerated policies developed primarily during the premiership of Ryutaro Hashimoto in the late 1990s.
For the moment, at least, it's proving too fast for the markets as well as the prime minister's anti-reformist adversaries in the LDP. At the end of March, the Japan Highway Public Corp pulled the second portion of a bond issue worth ?150 billion because the future of the company is simply too unclear.
"Speeding things up seems to be upsetting the apple cart of the MOF's reforms," Church explains.
Can we nonetheless assume some measure of success as the decade unfolds? I think these reforms will loom large in history.
Japan will be a leveler playing field for private companies in everything from banking to road construction. In reshaping the public sector, Koizumi also is attacking the political grip of legislators who control its various fiefdoms. That's the political reform standing between the old Japan and the new.
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