- The Washington Times - Sunday, August 12, 2001

Japan's most popular postwar prime minister, Junichiro Koizumi has talked much about the need to reduce $300 billion in annual pork-barrel spending projects. While a boon to his Liberal Democratic Party-friendly construction industry, these misguided projects have utterly failed to lift Japan from the decade-long doldrums its economy has experienced since the property and stock market bubbles burst in the early 1990s. At the same time, the spending binges have increased Japan's ratio of public debt to gross domestic product to the highest level of all of the G-7 nations. Now, however, with his LDP party the ruling party in the upper, though less powerful House of Councillors, Mr. Koizumi needs to act.

The Nikkei 225 has lost 70 percent of its value from its peak a decade ago, industrial output has continued to plummet, recently reaching 1998 recessionary levels and virtually guaranteeing that Japan has entered yet another recession, and unemployment is at a postwar high. Still, little action from Mr. Koizumi.

He knows Japan is suffering from a deflationary spiral that has discouraged current consumption (why purchase something today when its price will be lower tomorrow?), and that worthless loans have crippled Japan's banking system.

The cure for deflation is reflation, which would encourage consumption and increase the demand for exports, whose relative prices would fall as a result of a depreciating yen. That, of course, is where Mr. Koizumi must begin when he finally gets around to acting.

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