JPRI Critique Vol. VIII No. 5 (June 2001)
Koizumi's Victory: A Blow to Change
by Sam Jameson

Non-Performing Loans: The Kuroko of Japan's Economy
by Sam Jameson

Koizumi's Victory: A Blow to Change
by Sam Jameson

The surprising triumph of maverick reformer Junichiro Koizumi as leader of the Liberal Democratic Party and prime minister of Japan ironically could wind up sabotaging hopes for periodic changes in government. For years, political analysts and opposition leaders have been predicting that a grand realignment of politicians would create a new force capable of heading the government and giving Japan a two-party political structure. The spark for such an upheaval, the analysts insisted, would be another rebellion in the LDP similar to 1993 when a party split drove it out of power for 10 months.

Koizumi's victory, however, has eliminated the possibility of a realignment, at least for the foreseeable future. All of a sudden, the LDP's most disgruntled politicians-- the ones who were most likely to bolt the LDP-- are running the party. And without "realigners," you can't have realignment.

Now it is the opposition, not the LDP, which must worry about defectors. Indeed, two members of a factional offshoot of the Democratic Party broke ranks and cast their ballots for Koizumi in the lower house election of the prime minister. Koizumi and the rebels he brought into his government may fall short of expectations or be undercut by renewed factional strife in the LDP. But they are not likely to leave the party.

The LDP Remains

Last November, the ill-fated protest launched by Koichi Kato against Prime Minister Yoshiro Mori underscored how important LDP rebels consider their party membership to be. Even while threatening to vote with the opposition in favor of a non-confidence motion against the prime minister, Kato insisted neither he nor his rebels would leave the LDP. And when he withdrew his threat, Kato cited the fear of expulsion from the party as "a price too dear to pay." "LDP politics is Japanese politics," Kato said. And "without changing politics, Japan cannot change."

Koizumi made the same point this time by calling for reforming the LDP to reform Japan. Young Turks like Nobuteru Ishihara, who now finds himself in the cabinet, always rejected any thought of bolting the party even as they bitterly complained about its corruption, its back room decision making, and its seniority appointments. Makiko Tanaka, the daughter of the late Prime Minister Kakuei Tanaka, three years ago characterized an LDP election for party president as a "garage sale" pitting against each other "a military man, an ordinary man, and a strange man," (referring, respectively, to the late Seiroku Kajiyama, the late Prime Minister Keizo Obuchi, who won the election that Tanaka was condemning, and Koizumi), but she never threatened to leave the party. Now, she, too, is in the cabinet, serving as foreign minister under the very man she called "strange."

The fact is that LDP rebels have no place to flee. As Columbia University Professor Gerald L. Curtis notes, Japan is one of the few countries in the world in which backing for opposition parties does not grow when the ruling party loses support. "When support for the LDP goes down to 20 percent, support for the Democrats goes down to 8 percent." The new major opposition party led by Yukio Hatoyama, himself a fugitive from the Liberal Democratic Party, has been called a "refugee camp." It is already full of politicians who left a hodgepodge of other political parties to seek refuge under its broad catch-all anti-LDP approach. But not only has it failed to unify itself behind clear policies; it also lacks anything that resembles the nation-wide organization of the Liberal Democratic Party and the "supporters associations" (koenkai) of its individual members of parliament. Most of all it lacks what glues the factions of the Liberal Democratic Party together: power.

Without control of the government, political commentator Takao Iwami has argued, the LDP would disintegrate within a year. Historically speaking, the selection of Koizumi reaffirmed the ruling party's flexibility, although cynics might call it lack of principle. Every time threats to its control of government have emerged in the past, the LDP has taken radical action to deal with the challenge.

In 1974, when Kakuei Tanaka was forced out of office by charges of illicit political wheeling-and-dealing, Etsusaburo Shiina, the LDP's king-maker of the day, hand-picked Takeo Miki, an LDP "Balkan politician" (i.e., an outsider), to give the party a "clean" face. In 1989, after losing their majority in an upper house election debacle, the Liberal Democrats plucked Toshiki Kaifu-- another powerless "Mr. Clean"-- out of obscurity to give the party an aura of reform. In 1994, the LDP turned to the Socialist Party, its arch-enemy over four decades, and put its chairman, Tomiichi Murayama, on the throne to ride his coattails back into power.

The late factional boss Michio Watanabe explained the party's tactics by citing the kabuki play, Chushingura. The play has been performed again and again over the centuries yet the people never tire of it because new lead actors "add a new flavor even while the script never changes," he explained.

Plus Ça Change?

The brilliant sparkle of Koizumi's astronomical support ratings (of around 80 percent) brings to mind similar flashes in the past. Yohei Kono ignited one in 1976 when he bolted the LDP and set up his New Liberal Club. Morihiro Hosokawa triggered another when he became prime minister in 1993 only a year and a half after founding a new political party. Like Kono and Hosokawa, Koizumi could easily turn out to be a flash in the pan if he fails to live up to expectations. But with the LDP still controlling the lower house of Parliament, only a change in voting behavior greater than has been displayed by the electorate until now could force a political realignment.

Already, there is talk of dissolving the lower house of Parliament to stage a double election in July for both chambers in the hope of restoring the LDP's unilateral control of government. Even the Koizumi flash, however, may not be enough for the Liberal Democrats to regain a unilateral majority in the upper house. To do so, they would need to win 63 percent of the seats at stake in the triennial election-- a feat they have never accomplished in the upper house. A coalition majority-- which could be secured with victories in only 53 percent of the contests-- would be far less difficult to achieve. Half of the seats in the upper house are up for election every three years. This time, only 121 seats will be contested to reduce the size of the chamber from 252 to 247 seats.

In a speech at the traditional May Day labor rally, Koizumi urged labor union members to look at his victory as "a kind of change in government." If voters continue to balk at administering a coup de grace to the LDP, Koizumi's administration, indeed, may be as close as Japanese politics gets to a change in government.

Non-Performing Loans: The Kuroko of Japan's Economy
by Sam Jameson

For more than a decade, Japan's financial authorities have been trying to treat the growing mountain of bad loans at Japanese banks as a "kuroko" of the economy. In kabuki, a kuroko stagehand dressed in black from head to toe, who isn't supposed to been seen, comes on stage to change props in the middle of a play. In the same fashion, the banks dressed up their non-performing loans so they also would not been seen.

Even when Japan teetered on the brink of a financial collapse in 1997-98, officials such as Eisuke Sakakibara, vice minister of finance for international affairs, insisted that the bad loan problem "had passed its peak"-- the same phrase that Yasushi Mieno, governor of the Bank of Japan, had used in 1994 while adjusting the black robes on the kuroko of financial props. More recently, then Prime Minister Yoshiro Mori flew all the way to Davos, Switzerland, to tell the World Economic Forum that Japanese banks and corporations are now completing the clean-up of their balance sheets and would be flying high within a year or so.

In fact, banks were not carrying out "write-offs" of bad loans, as they claimed. Instead, they just set aside funds as reserves for many of their bad loans. The loans themselves remained on the books, growing bigger each year as prices of collateral real estate plummeted.

Back in 1994, Takashi Hosomi, a former vice minister of finance for international affairs and now an adviser to the Nippon Seimei Research Institute, described the kuroko operation as follows: "Japanese are happy if problems are cured while they remain unaware of them existing. Basically, Japanese like being deceived. Right now, the authorities are busy deceiving them." At that time, the government was claiming that bad loans held by the banks amounted to only 13 trillion yen, but Hosomi estimated the actual sum was probably around 70 trillion yen. Today, the government claims that banks are carrying about 32 trillion yen in bad loans but non-government estimates still range up to 70 trillion yen.

Worse yet, neither the Japanese government nor the average Japanese seems to realize how much damage the bad loans are inflicting upon the economy. Instead of forcing banks to clear their books of the bad loans, the Bank of Japan has, since 1995, virtually eliminated interest payments to savers to rescue the banks and their borrowers. If Japanese savers and investors were receiving just the ordinary 5 percent return that Americans banks paid throughout most of the 1990s, an extra 65 trillion yen would be flowing into the Japanese economy every year. That is what a 5 percent yield would produce on the 1,300 trillion yen worth of personal assets that Japanese hold. The sum, twice as large as the government's estimate of the bad loans, is equal to about 13 percent of the Japanese economy. Clearly, cleaning up the banking mess-- the core of Japan's illness-- would inject a great deal of vigor into the economy.

What Needs To Be Done

Procrastination and deception in the hope that public works spending would refloat the economy have only exacerbated the problem. Now, the recent plunge in prices on the Tokyo Stock Exchange and President George W. Bush's prodding of Mori during their meeting in Washington on March 19 have pulled the mask off the kuroko of bad loans-- at least for a fleeting moment. Mori and Taro Aso, Mori's economic and fiscal policy minister, offered an amorphous mumble to Bush that they would do something.

To really clean up the bad loan mess, Richard Jerram, chief economist of ING Baring Securities (Japan) Ltd., says that Japan might have to spend 30 percent of the GDP. Up to 20 percent of the GDP would be handed over-- as a gift-- to replenish the banks' capital and enable them to remove the bad loans from their balance sheets. As much as another 10 percent of the GDP would go to providing a safety net for victims of bankruptcies and unemployment. Even as a minimum, Jerram estimates that 20 percent of the GDP would be needed for the two programs. Jerram's estimates range from 100 trillion yen to nearly 160 trillion yen. Clearly, no leader capable of making decisions in such stratospheric dimensions is anywhere in sight.

The "good news," Jerram says, is that Japan probably will avoid a crisis. His "bad news" is that there is no hope "for the banking sector to return to health any time soon." In May 1998, Robert Alan Friedman, chief economist of Morgan Stanley Dean Witter & Co., said that the Japanese people, rather than choosing to regain vitality by adopting reform that hurt specific segments of society, might opt for sluggishness by sharing the sacrifices throughout society. Looking at the lack of public debate over how the government has handled the bad loan issue, one cannot help but wonder if the Japanese people have already silently chosen sluggishness.

The upshot is that Japan is likely to get nothing more than another round of changing the stage props by a kuroko with a fresh set of black robes.

SAM JAMESON is the dean of American journalists in Japan, where he has lived and worked for 40 years. A former Tokyo Bureau Chief of the Chicago Tribune and the Los Angeles Times, he is now writing a book about Japan while serving as a reporter for Asian Business and a columnist for the Japan Times, in which these two columns were published on April 2 and May 2, 2001.

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