PM faces number of hurdles before much-needed reforms can be implemented
The popularity of Japanese prime minister Koizumi may not be enough to ensure that the much-needed economic reforms he has proposed are implemented, according to Standard Life Investments.
Head of global strategy at the group Andrew Milligan said the Japanese economy has been trapped in an economic slump for 10 years, which has been reflected in the poor performance of its stock market.
The group sees Japan's problems as deep rooted: it is suffering from a mountain of bad debt, an ineffective banking system, rising unemployment, falling industrial production and weak consumer spending.
'These problems have been worsened by the seemingly impenetrable 'iron triangle' of big business, bureaucracy and government, along with the impact of the global slump,' said Milligan.
For many Western investors, the election of Koizumi on a reform ticket has handed the economy a lifeline but the new prime minister faces a number of significant hurdles.
The prime minister's strategy to restore investor confidence in the world's second-largest economy is three-pronged. He is tackling the government's escalating debt by reducing public works spending. He wants to force the banks to dispose of their huge non-performing loan portfolios. Finally, he favours deregulation and the privatisation of some state-owned institutions, such as the post office.
Milligan said: 'Koizumi enjoys unprecedented levels of popularity among his electorate. However, the question remains, can he translate this into economic change? While crucial to the long-term recovery of the ailing economy, these reforms will also lead to short-term problems if they go ahead. Increased inflationary pressures, public spending cuts and further rises in unemployment can all be expected.'
Milligan believes the pain these short-term problems could inflict should not be underestimated as none of Koizumi's solutions will help Japan's problems immediately.
Standard Life argues a purge on the banks will lead to lower domestic spending, for example, while the cuts in public spending will come at a time when the Japanese economy is in a sharp cyclical downturn. With no obvious short-term benefits from the reforms, however, there is a serious risk the public could turn against the reform process despite repeated warnings of 'no pain, no gain', according to Milligan.
He believes crunch time for the new prime minister is likely to come in autumn, when he is due to present the supplementary budget.
'The content of this will be a good early indication of his ability to deliver,' Milligan said. 'If the package contains measures improving social security safety nets to offset rising unemployment, this will be a good sign. If it simply contains additional spending on public works then it would appear that the traditionalists within the party are still managing to flex their muscles.'
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