Japan’s voters back Koizumi

Sep 12th 2005
From The Economist Global Agenda

Junichiro Koizumi’s party has won a landslide victory in Japan’s election, as voters overwhelmingly endorsed the prime minister’s plan to privatise the country’s postal-savings bank, the world’s biggest financial institution. The outlook for other reforms, however, is less clear

VERYBODY knows what is going to happen next. Junichiro Koizumi told the public repeatedly and emphatically that he wanted the election on Sunday September 11th to be about one issue: Japan Post. This giant receives subsidised postal-savings deposits and life-insurance premiums from tens of millions of Japanese citizens through its 24,700 branches, and thus controls a staggering ¥330 trillion ($3 trillion) in household financial assets. Mr Koizumi, the prime minister, wants to privatise it, and billed this election as a referendum on his idea. Japan’s voters have now given him overwhelming support, electing members of his two-party coalition to 327 of parliament’s 480 seats. Some time this autumn, the new parliament is expected to approve Mr Koizumi’s most cherished reform.

Japan’s stockmarket leapt on the news. The Nikkei rose by 1.6% on Monday, adding to the 7% that it had gained in the month leading up to the vote as the economic outlook grew brighter and as Mr Koizumi’s lead in opinion polls widened. Investors also applauded revised economic figures that were released on the same day, showing that GDP grew at an annual rate of 3.3%, more than previously announced, in the second quarter.

The election victory was a stunning vindication for Mr Koizumi, who clearly knew what he was doing when he decided to dissolve parliament’s lower house in early August. At the time, 22 members of his own Liberal Democratic Party (LDP) had just voted against postal privatisation in the upper house, helping to defeat his plan. Although he could not dissolve the upper chamber, he called a snap election for the lower house, and withheld LDP support from the 37 members of the party who had voted against postal privatisation in that chamber. He then recruited high-profile candidates from across Japan, including many well-known women, to take on the LDP’s rebels in their own districts.

Mr Koizumi’s gamble left his rump LDP defending only 212 seats in the lower house; and his ruling coalition—which includes New Komeito, a Buddhist-backed party—entered the election with a slim majority of only 246 seats. Now, that coalition will dominate the chamber.

At the LDP’s headquarters on Sunday night, the top row of its election board was filled with the fake red roses that the party used to mark the columns that its candidates had won (see picture). The stems were absent, but Japan’s reformists were already busy considering the potential thorns.

The most obvious was the LDP’s demolition of the main opposition party, the Democratic Party of Japan (DPJ). The DPJ had used the previous couple of elections to establish itself as a legitimate rival to the LDP, feeding hopes that a close, two-way competition might soon emerge in Japanese politics. Those hopes have now been badly damaged, if not dashed altogether. The DPJ lost 64 of its 177 seats in the election, and Katsuya Okada, who took over less than 18 months ago, resigned as the party’s leader. While the party scans its ranks for a successor, it must try to hold together its disparate factions, which may lose much of their faith in teamwork after such a resounding defeat.

If the DPJ disintegrates or sinks into uselessness, the loss of a legitimate opposition could yet do more harm to Japan’s chances of reform than the immediate benefits it has gained from Mr Koizumi’s victory. LDP term limits will require him to step down as the party’s leader within one year. After Sunday’s victory, Mr Koizumi repeated his plan to leave office next September, rather than to seek a revision of those rules. If he does go, that could easily stall any momentum for reform, since the party now has a huge majority and its next leader may lack the inclination or charisma to carry out further changes. Yet more reform is clearly needed. Japan’s pension and health-care financing, for example, need to be addressed, given the country’s high public debts and a looming demographic crunch.

For now, however, Mr Koizumi will celebrate his victory by starting the process of liberating Japan’s huge pool of savings from the manipulative and unaccountable hands of the state. He will call a special session of parliament sometime in the autumn, to approve a privatisation plan for Japan Post. Although no seats in the upper house have changed hands, many members of that chamber who voted against privatisation last month have said that they will back it now that the public has spoken so clearly. Even if the upper house were to resist, moreover, the ruling coalition now has a two-thirds majority in the lower house, which gives it the right to overturn votes in the upper chamber.

The privatisation plan that Mr Koizumi has put forward would take effect over the course of a decade, beginning in April 2007. Peter Morgan, an economist at HSBC Securities, reckons that a privatised Japan Post would sell roughly ¥200 trillion of Japanese government bonds (JGBs), as it shifted its assets towards direct loans to companies and consumers (as well as, more modestly, towards Japanese equities and foreign assets). The impact of such a shift would be softened somewhat by banks and other investors, who would no doubt rejig their own portfolios to accommodate the postal giant’s metamorphosis, and snap up many of those JGBs in the process.

Many reformists would wish for a lot more. They want to see a faster privatisation schedule, for example, and Japan Post’s banking and life-insurance arms scaled down and made subject to more stringent competition rules before they are unleashed on the private sector. Besides its obvious pension and health-care problems, Japan would also benefit from further reforms to its other public financial institutions and its tax code, as well as a convincing devolution of power to local governments.

Still, by the standards of Japan’s recent history, the privatisation of Japan Post would represent a big step forward, politically as well as economically. For the first time in many years, a Japanese leader has picked a genuine fight over an important issue and refused to compromise. And the voters have rewarded his courage.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.