Koizumi's budget faces old challenges

Japan: Long walk back to economic health

Japan's free-spending public corporations are proving the first stumbling block to a budget slashing government spending for the first time in four years.

The country's reformist prime minister, Junichiro Koizumi, on Thursday won an unopposed two-year term as leader of his Liberal Democratic Party (LDP) in an election brought forward after a solid win in Upper House elections in July.

Mr Koizumi's draft budget - presented to cabinet on Friday - is intended to cap new borrowing at 30,000bn yen ($245bn; £172bn). Government debt as risen in 10 years from 51% of gross domestic product to about 666,000bn yen or 130% of GDP, the worst among industrial countries.

But the budget's main thrust, a 3,000bn yen drop in the overall 80,000bn yen spending plan, was overshadowed by a report on reining in public corporations which was long on "suggestions" but very short on specifics.

Pork barrel

The 161-page report, released by the office of administrative reform minister Nobuteru Ishihara, was filled with fierce defences of groups such as the Japan Highway Public Corp, which has debts of 24,000bn yen, mounted by their parent ministries.

In reality, I think the tough part starts here

Junichiro Koizumi, Japanese prime minister

The public corporations are criticised as comfortable retirement homes for ex-civil servants and conduits for Japan's perennial pork-barrelling.

Cutting public spending is an imperative after years of "supplementary" budgets ploughing money into roads, bridges and other projects designed to stimulate the economy in general and the LDP's pet industries in particular.

The budget plans still need to be ratified by the cabinet, as a first step towards tackling the bad debts - both public and private - that are crippling the economy.

Cabinet differences

Many of Mr Koizumi's ministers have been vocal about their responsibilities, and less compliant with the wishes of their bureaucrats than has usually been the case in Japan's recent past.

But some ministers, notably trade minister Takeo Hiranuma, have suggested that small and medium-sized businesses should not be expected to make good their unperforming loans as long as they are making a profit.

The idea is to "go for growth", a traditional Japanese strategy. Mr Koizumi - and so far, it seems, a thoroughly disillusioned Japanese population - accept that "gain through pain" is probably the only way forward.

Koizumi faces cabinet struggles over reform

And with the various ministries fighting the corner of their client bodies, Mr Koizumi's target of a 10% cut in public works spending could be at risk.

Mr Koizumi acknowledged as much in a press conference after his re-election.

"In reality, I think the tough part starts here," he said.

And LDP MPs are traditionally closely associated with ministries and industrial groups in so-called "tribes" called zoku.

Many old-school MPs were on the defensive in the recent election, feeling with some justification that the voters blame them and their party's 45-year, near-unbroken hold on power for the country's decade-long economic woes.

Draft budget highlights

Total spending: 80,000bn yen

Overall cut: 3,000bn yen

Cut to public works: 5,000bn yen

Extra money for key areas: 2,000bn yen

Planned borrowing: 30,000bn yen

Total government debt: 666,000bn yen

But the poll win, some believe, could mean that old habits of protecting clients in the construction and other industries linger on.

As it stands in the draft issued by the Council on Economic & Fiscal Policy (CEFP), the budget for general government spending in 2002-3 totals 47,800bn yen, 900bn yen down on the current year.

The public works cuts are intended to produce another 5,000bn yen or so.

Consumer confidence blow

That should leave about 2,000bn yen for increases in seven key budget areas, including education, science and technology, social security and the environment.

The CEFP believes that should help cushion the blow to the economy of the fiscal austerity.

The Japanese populace remains sunk in economic gloom.

A government study released on 10 August showed consumer confidence falling for the seventh straight month.

Another survey indicated that the number of people committing suicide through economic hardship rose to record levels.