[paper] WHY THE MARKETS CAST DOUBT ON THE REFORMS OF THE KOIZUMI ADMINISTRATION

Paul Sheard: Chief Economist Asia for Lehman Brothers

Born in 1954, Received Ph.D. at the Australian National University. Held positions at Stanford University, Institute for Monetary and Economic Studies at the Bank of Japan, Osaka University. Publications include The Crisis of Main Bank Capitalism(Meinbanku Sihonsyugi No Kiki) (which received the Suntory Artistic Award) and Corporate Mega-restructuring(Kigyou Mega Saihen).

The market is anxious about the Structural Reforms of the Koizumi Administration.

The Three Points about which the Market is Anxious concerning the Koizumi Cabinet

The first reason is that the "Basic Guidelines" might hold the same mistakes as the past policies concerning the financial system. At the time that the Emergency Economic Measures were decided on April 6, 2001, the issue of non-performing assets were taken up as the most important problem, and "measures were to be taken" for solution of the problem by the government in a strong manner.

However, in the Basic Guidelines of this Koizumi Administration, the issue of non-performing assets are to "proceed under the voluntary determination of the financial institutions". However, didn't the past ten years lessons show that voluntary handling by the financial institutions did not work under governing of the Financial Services Agency or the former Ministry of Finance.Secondly, the market is anxious because there is no framework for handling the issue of non-performing assets. The Financial Revitalization Committee was abolished this January, and the framework for capital strengthening came to term this March. On the other hand, six days later, it was announced that the issue of non-performing assets was the most serious problem for the Japanese economy, and that this issue would be handled in a concentrated manner. From April 1st, the framework for responding to the financial crisis went into effect, and it is not as if there is no framework at all, but this framework cannot be used unless a financial crisis occurs. In this, it can be said that there is a large blank between the recognition of the severity of the problem and the systemic framework to handle this issue.Thirdly, there is the possibility that the priorities of the policy might become bungled. In the State of the Nation address, Prime Minister Koizumi listed a policy mix of which the first problem was the solution of the issue of non-performing assets, the second as the relaxation of regulations and the third as the restructuring of fiscal policy. This can be held as correct in large measure. However, looking at the actual handling of the problems, the issue of non-performing assets has receded, and the problem of restructuring of the fiscal policy is being held as the first priority. It is clear from the failure of the Hashimoto administration that this policy mix is dangerous. In this manner, this economic policy can be seen as an "Alice in Wonderland" policy.

Two Methods of Structural Reforms

The question is that since such issues are faced by the Basic Guidelines, it is unclear how the larger directions of the policies will go. For structural reform, there are largely two methods. The first is to have the government take a leadership role and proceed within set time limits. Another method is to leave the issue to the market and to reach a form of hard landing.

This author believes that because there is such a strengthening of public participation in these financial issues, the first approach should be taken. However, in actuality, it appears that the course taken is a mix between these two options. In other words, if a crisis occurs, it appears that the direction of former methods which respond to containing the market movements will be taken. However, this method will not solve the issues.If the approach where the government becomes involved in a strong manner temporarily is taken, it may not be possible to avoid the further increase of public funds. However, the Koizumi administration places significance on the restructuring of fiscal policy, and it will not be possible to create such a flow. It looks as if the emphasis on fiscal reform makes it difficult to harden the resolve to step into the issue of non-performing assets in a serious manner.

Escaping from the Bureaucratic Economy

The slogan raised by Prime Minister Koizumi "no economic vitalization without structural reform" is a point that this author has emphasized in past publications. The issue is the order placed on the contents and policy of that slogan. The handling of the issue of non-performing assets should proceed in a strong manner, and to escape quickly from the present bureaucratic economy.

(Translated from original Japanese.)