- The Washington Times - Saturday, November 9, 2002

Japanese Prime Minister Junichiro Koizumi has become the master of the bait-and-switch. Once again, he has offered a watered-down reform that fails to address his nation's increasingly severe economic problems. While his rhetoric advancing the need for reform unfailingly hits the right notes, his follow-through falters time and again. In Texas, he would be ridiculed as "all hat, no cattle" and notwithstanding a half-hearted endorsement emanating from the White House for Japan's latest reform package, U.S. policy-makers must be aghast at Mr. Koizumi's latest missed opportunity.

Like many of his predecessors, he has become a cipher. It's such a shame because, unlike the others, he once seemed to offer so much promise. "Without structural reform and an endurance of pain," he bravely declared last year during his remarkable campaign for the presidency of the Liberal Democratic Party (LDP), "we cannot have a real economic recovery." In that spirit, Mr. Koizumi stormed into the prime minister's office 18 months ago. With the popularity of the long-ruling LDP in shambles, Mr. Koizumi and his maverick personality singlehandedly led the LDP to victory in parliamentary elections the following July. Since then, however, he has offered one disappointing reform package after another.

The package his government recently unveiled was perhaps the most disappointing policy response of all to Japan's worsening economic situation during the dozen years since its stock market and property bubbles burst.

With reform rhetoric ablaze in recent weeks, Mr. Koizumi fired the chief of the Financial Services Agency, Japan's financial regulatory body. He then installed Heizo Takenaka, a no-nonsense reformer who doubles as Mr. Koizumi's chief economic adviser. Once again, the prime minister committed himself to systemic change in Japan's teetering banking system, whose dud loans by the reckoning of most nongovernment analysts amount to as much as $1 trillion, or a quarter of Japan's annual economic output. Once again, however, the prime minister offered half-measures.

In a bald-faced effort to protect the insolvent, zombie-like construction companies and retail establishments that provide the major LDP factions with the bulk of their campaign funds, LDP party bosses revolted against Mr. Takenaka's proposals. Poorly managed major banks, already the beneficiaries of two bailouts in the last five years, threatened to sue. Why? Mr. Takenaka offered a perfectly reasonable proposal to limit the banks' predilection for using deferred tax credits as major components of their capital base. Deferred tax credits? Indicative of the extent to which major Japanese banks are in danger of imploding, nearly half of their core capital derives from the tax credits they expect to receive after they write off the dud loans on the asset side of their balance sheets.

Today, Japan is mired in its third recession since 1990. Prices have fallen four years in a row, including each of the past 37 months. The downward spiraling deflation is making it even more difficult for firms to repay their debts. Meanwhile, with a national debt approaching 150 percent of gross domestic product, by far the highest among industrialized countries, Japan carries a credit rating as low as that of AIDS-afflicted Botswana. Its budget deficit is about 8 percent of GDP, an amount comparable to $840 billion in the United States. Unemployment is at a near-record postwar level, and nearly half-a-million discouraged workers left the labor force in the last month alone.

Sooner or later, Japan will have to act. If anything has been learned from Japan's muddle-through policies of the past dozen years, action will be taken later, not sooner. By then, it may well be too late.

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