JAPAN'S FAILED REVOLUTION To Richard Published by ANU E Press The Australian National University Canberra ACT 0200, Australia Email: [email protected] This title is also available online at http://epress.anu.edu.au National Library of Australia Cataloguing-in-Publication entry Author: Mulgan, Aurelia George, author. Title: Japan's failed revolution : Koizumi and the politics of economic reform / Aurelia George Mulgan. ISBN: 9781925021042 (paperback) 9781925021059 (ebook) Subjects: Japan--Politics and government--1989- Japan--Economic policy--1989- Dewey Number: 320.952 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying or otherwise, without the prior permission of the publisher. Printed by Griffin Press First published by Asia Pacific Press, 2002 This edition © 2013 ANU E Press CONTENTS ABBREVIATIONS vili ACKNOWLEDGMENTS ix 1 THE POLITICAL CONDITIONS FOR ECONOMIC REFORM 1 2 KOIZUMI'S POWER BASE 43 3 KOIZUMI'S REFORM TEAM, ITS POLICIES AND APPROACH 73 4 OPPORTUNITIES LOST 96 5 PARTY-BUREAUCRATIC GOVERNMENT 129 6 POllCY STALEMATE 177 7 TEAM WEAKNESSES, TACTICAL FLAWS AND POLICY DEFECTS 213 8 KOIZUMI'S FAILED REVOLUTION 238 REFERENCES 247 INDEX 256 VHl ABBREVIATIONS CEFP Council on Economic and Fiscal Policy DP] Democratic Parry of Japan FSA Financial Services Agency FY fiscal year GDP Gross Domestic Product IMF International Monetary Fund IT information technology lACE Japan Association of Corporate Executives ]CP Japan Communist Party JGB Japan Government Bond JIvL,\ Japan Medical Association JNOC Japan National Oil Corporation JNR Japan National Railways LDP Liberal Democratic Party LPG liquified petroleum gas MAFF Ministry of Agriculture, Forestry and Fisheries METI Ministry of Economy, Trade and Industry MITI Ministry of International Trade and Industry MMD multi-member district MOF Ministry of Finance NU Nippon Life Insurance NPL non-performing loan NTT Nippon Telepbone and Telegraph PARC Policy Affairs Research Council R&D research and development RCC Resolution and Collection Corporation SDP Social Democratic Party SMD single-member district SME small and medium enterprises UP] Union Financial of Japan UK United Kingdom US United States USSR Union of Soviet Socialist Republics YKK Yamasaki; Kato, Koizumi lX ACKNOWLEDGMENTS This hook originated in a paper I prepared for a discussion at the Australian Federal Government's Office of Narional Assessments on the Japanese economy in September 2001. It metamorphosed into a larger and more theoretically driven paper delivered to my department (Political and Social Change) in the Research School of Paciflc and Asian Studies at the Australian National Uni­ versity (At'JU) in April 2002. The final draft of the book was submitted to the publisher on I August 2002. Speed has been of the essence in writing the book given the urgency of understanding the political impediments to eCO­ nomic reform in Japan and the transience of Japanese prime ministerial office. At several key points in writing this work, I have benefired greatly from the generosity of colleagues who willingly shared their ideas, advice and written papers. I owe a particular debt of gratitude ro .Ellis Krauss and Arrhur Stockwin who unfailingly responded to questions and emails, and who read and commented on the page proofs. Llewelyn Hughes provided helpful observations and information while Toshio Takagi of the Menzies Library at the ANU was superb in supplying references and articles. I could not have complered the manuscript by the deadline without the support of my intrepid research assistant Manabu Kawakatsu who all toO frequently pur aside his own work in order to complete his assigned tasks for me. I am also indebted to the American Embassy in Tokyo for making available materials from the Japanese press and to the Japanese Embassy in Canberra for providing information and explanations. [ would also like to thank Peter Drysdale of the Australia-Japan Research Centre at the ANU who was kind enough to review the manuscript in the early stages, Maree 1ait of Asia Pacific Press (APP) for backing the publication so strongly, the APP staff for producing the book so quickly, and Ben Kerkvliet of the Department of Political and Social Change for providing such a congenial environment in which to conduct research and write books. I dedicate this book to my husband, Richard Mulgan, for his inesrirnable contriburions to my personal and academic life. Aurclia George Mulgan Ocrober 2002 1 THE POLITICAL CONDITIONS FOR ECONOMIC REFORM PREDICTING JAPAN'S ECONOMIC FUTURE If permanent high growth characterised the Japanese economy in the 1980s and permanent recession in the 1990s, then no one can predict what paradigm will capture the dominant economic trends in the first decade of the 21" century.' At the end of the 'lost decade' of the 1990s, the debate about Japan's economic future polarised into tWO contending schools of thought: the 'structural pessimists' (or 'Japan's sun is setting' school) and the 'techno, revivalists' (ot 'Japan's sun is rising') school. The structural pessimists argued that Japan's inability and unwillingness to engage ill fundamental economic reform condemned its economy to low or no growth and diminishing international influence. 2 In contrast~ the techno-revivalisrs asserted that the Japanese economy had teached a turning point and would soon ride the wave of burgeoning IT industries to recovery.' With the techno-revivalists discredited by Japan's continuing economic malaise, the debate shifted to disagreement between those who remained uniformly pessimistic about the future of the Japanese economy' and those who were cautiously optimistic.' In 2001-02, economic trends in Japan tended to favour the pessimists. In December 200 1, the Japa nese prime ministet admitted that: 'The Japanese economy is still experiencing a period of concentrated adjustment and the severe conditions will continue, with zero 2 JAPAN'S FAILED REVOLUTlOK growth projected for FY 2002'." Only three months later, however, the Minister of State for Economic and Fiscal Policy claimed that economic growth would move to the plus side in the second half of 2002.' This positive outlook was later endorsed by the Minister of Finance who claimed that the narion's protracted economic slwnp had bottomed out, citing evidence of a business recovery, a growth in exports, stabilisadon of consumer prices and the unemployment rate, as well as other positive indicators.' Evidence of a cyclical uprurn prompted some commentators to hope that improving economic conditions might solve some of the long-term problems besetting tl,e Japanese economy.' The prediction that the economy had bottomed out was supported by official June 2002 flgutes for real GD P growth of 1.4 per cent in the January­ March quarter.)O The economic turnaround was attributed to 'the huge growth in exports led by the recovery of the U .S. economy and other external factors'. J1 The question now is how sustainable the Japanese economic recovery will be in the ligbt of continuing det1atioll (a continuous downward trend in price levels),)2 financial system instability," and other negative factors for GDP growth. The economic situation remains severe in spite of slight signs of recovery.14 The government's 'Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2002' acknowledges that the economy has 'entered the bottom stage in its cyclical changes [bur also cautions that] buslness investment remains weak, employment and income conditions continue to be severe, and recovery in household consumption ... [is] delayed and hovering'." Even the cautious optimists argue that the 'much-hoped-for recovery will likely be fragile, unless economic fundamental~ are strengthened'." Others emphasise the need to get public policy settings right as well as improving corporate governance. 17 In short, most concede that the key to sustainable recovery is economic reform. Understanding the likely Sllccess or failure of Japan's current reform program is, therefore, important to assessing the future of the Japanese economy. It is in rhis context that the dynamics of the so-called 'Knizwni revolution' loom so large. KOIZUMI'S 'STRUCTURt\L REFORM' REVOLUTION In April 200 I, Prime Minister Koizumi Junichir6 stepped into tbe political limelight vv-;th a bold slate of reforms to rescue the Japanese economy. Since that time, he bas attracted a great deal of comment in both the academic and THE POLITICAL CONDmONS FOR ECONOMiC REFORM 3 popular press." Much of the discussion has focussed on his unconventional leadership style and on his mission to change Japan. Koizumi has adopted the manU. of 'structural reform' (kl!zJ kaikaktt) to encapsulate his agenda and to signal his commitment to radical change. 'Structural reform' is a rather rubbety concept that means different things to different people. In a general sense it involves fundamental changes that have the effecr of altering the fixed characteristics of economic, political, social and administrative systems. It.} As Saw-a commenrs, H'structure,j means a mechanisnl that does uot easily change, so changing that mechanism is "structural refotm". For example, the systems and practices rhat define the mechanisms of Japan's economy are "structures!» because they do not easily change'.20 In economic policy, structural reform means market-oriented reform, that is, moving economies in the direction of freer and fnore transparent markets by introducing Or strengthening the market mechanism. In more general policy con tens, structural reform encompasses not only the idea of market reform, but also notions of small et and more efficient government. In addition to reforms such as deregulation, trade liberalisati011, strengthened competition policy and financial sector resrructuring, ir also includes reforms of the stare sector such as privatisation, fiscal and tax teform, and welfare and pension reform." In sum, it refers to a package of interrelated policy 'correctives' aiming at more efficient resource allocation, higher productivity and increased growth prospects for states.