SCMP Monday, July 9, 2001

Koizumi warns of pain

REUTERS in Tokyo

Japanese Prime Minister Junichiro Koizumi has vowed to push ahead with tough reforms to revive the world's second-biggest economy, telling his people that pain was inevitable - with or without change.
Old spendthrift policies that have helped to underpin growth - if only at a dead-slow pace - and ensured the Japanese are still among the richest people in the world even after an asset bubble burst a decade ago, were not the way to revive the economy, he said.
"Japan will be in dire straits if we do not press ahead with structural reforms," Mr Koizumi said.
"I do not think we can boost the economy by taking fiscal steps or issuing more government bonds. Instead, people will suffer even more because interest rates will rise and structural reforms will slow," he said.
He pulled no punches, stressing that his focus was on major surgery involving long-delayed and much-needed reforms and not applying salves that might prop up the faltering stock market.
He promised no quick fixes for an economy that was effectively in its fourth recession in less than 10 years after it shrank 0.2 per cent in the January to March quarter, and with government forecasts for the following quarter even worse.
Since sweeping to power in April on a grassroots desire for change in his conservative and long-ruling Liberal Democratic Party (LDP), Mr Koizumi has said he will tackle the mountain of bad loans held by banks that has been hanging over the economy for a decade. That vow, coupled with his promises to try to limit government debt issuance, is likely to put yet more pressure on economic growth - at least in the near term - and to swell unemployment.
The jobless level hit a record 4.9 per cent in May, even before Mr Koizumi's reforms start to bite and force debt-laden banks to shed soured loans, pushing deadbeat companies into bankruptcy.
Mr Koizumi stressed that rising joblessness should not be taken as a pretext to stop moving ahead with reforms.
"Do you think there will be fewer people out of jobs if we do not press ahead with reforms?" he said.
His remarks came a day after Finance Minister Masajuro Shiokawa pledged at a meeting of Group of Seven finance ministers in Rome to keep the flagging economy from contracting.
But Mr Koizumi said it was too early to start discussing a supplementary budget for the fiscal year to March next year while his administration was still working on reining in government spending.
But he did not entirely rule out another stimulus package.
"We can think about that in the autumn - considering various conditions," Mr Koizumi said.
Economists said he would probably prop up the economy with a sprinkling of extra deficit spending this year to prevent a public backlash that could dent his support and unravel his reform drive, with an announcement possible in September.
Mr Koizumi has pledged to limit the annual flood of new government bond issues to under 30 trillion yen (about HK$1.88 trillion) for the year from next April. He has sought fiscal discipline and structural reform rather than public spending to pump Japan's convalescing economy.
Grilled by opposition politicians about whether he really grasped the size of the bad-loan problem, Mr Koizumi was realistic: "I do understand that it is impossible to get rid of all existing bad loans within two to three years but we are working on reducing that," he said.
"I think it is a bit premature to say that the government does not have total grip on bad loans. What we are working on is the bigger issue of the economy."
In a government package released in April, Japan set a deadline for top banks to eliminate loans to borrowers in, or at risk of, bankruptcy - worth 11.7 trillion yen - in two years, or three years for new such loans. Some estimates placed the problem loans at banks at as much as 150 trillion yen.
The worries about banks have been a key factor in a prolonged stock market slump. Tokyo's benchmark Nikkei average is now down 15 per cent from its year-to-date high on May 7.

However, Mr Koizumi warned that Tokyo stock prices were poised to remain soggy for a while.