September 16, 2005


Keep Your Eyes on Japan:
The World Has a Huge Stake in Koizumi's Financial Reforms (R. Glenn Hubbard, September 16, 2005, Business Week)

The financial reforms championed by Koizumi can raise the growth rates for both Japanese productivity and the economy. That faster pace would, in turn, reduce Japan's looming fiscal stresses. And successful financial reforms in Japan can offer a road map for economic restructuring in China, whose creaky financial system requires modernization if the mainland is to keep growing at a rapid rate.

The economy Koizumi inherited in 2001 had been languishing since the crash of Japanese equity and property markets in 1990. Banks struggled with nonperforming loans, racking up taxpayer bailout costs and channeling loans to large but insolvent businesses while strangling the abilities of new entrepreneurial businesses to obtain credit. And the '90s saw a big increase in public-works spending, benefiting the politically connected construction industry more than Japan's long-term growth.

Koizumi has made substantial progress in banking reform. Japan's bank regulator is no longer a captive of its regulated clients. Nonperforming loans have been reduced. And wasteful public-works spending has been trimmed. Those developments have helped taxpayers and borrowers alike.

But Koizumi faces a far bigger challenge in his bid to break up and introduce competition for the postal system, Japan Post, whose $3.3 trillion worth of deposits and life insurance policies lie at the heart of Japan's financial restructuring and growth ills.

It's extraordinarily unlikely that Mr. Koizumi's reforming momentum can survive his retirement next year just as the Democrats couldn't stick to the Third Way once Bill Clinton was gone.

Posted by Orrin Judd at September 16, 2005 3:03 PM

Most likely right, but Japan has a tendency towards inertia. Reform has been building since 1994 or so. Koizumi may just be the crest over the dike instead of an aberration. If so, the trend is likely to continue no matter who leads the LDP. If not, there may be enough outrage to revive the NDP.

Posted by: Chris Durnell at September 16, 2005 7:47 PM

Is his retirement next year a personal choice or dictated by law?

Posted by: erp at September 17, 2005 12:14 PM