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Sunday, 29 July, 2001, 17:27 GMT 18:27 UK
Can Koizumi save Japan?
by BBC News Online's Jeremy Scott-Joynt
Japan's charismatic new leader, Junichiro Koizumi, faces an unenviable task.
For more than a decade, the economy has suffered from one of the longest financial hangovers in living memory, compounded by a succession of lacklustre leaders and a decrepit political system.
However, his personal popularity is sky-high, boosted by his apparent determination to take genuine action against Japan's ailing economy.
And it seems that this has been enough to retain his party's majority in the upper house elections on Sunday.
But can his government succeed in wrenching Japan out of the doldrums where others have failed even to make a dent?
Prior to the election, Mr Koizumi did not have nearly enough time to make a serious impact on Japan's range of problems.
They include huge and persistent bad debts among corporations and banks, a population refusing to spend, continuing deflation, skyrocketing unemployment and ballooning government debt after a string of unsuccessful financial stimulus packages.
These have been compounded by sliding profitability at Japanese corporations and a diving stock market, which recently hit a 16-year low.
Economic activity fell 0.9% across the board in May after a 2.3% slip in April.
Bad debts, though, are the biggest part of the equation.
Corporate Japan ran headlong into massive borrowing, often secured against real estate or portfolios of shares held in partner companies, as the economy boomed in the 1980s.
The weak control over lending was allowed because of the keiretsu tradition, which links companies with their banks via complex cross-shareholdings.
In the past, these shareholdings have prompted keiretsu groups to bail out any of their members who got into trouble.
Now, though, with the stock market more than two-thirds off its peak and property prices at historic lows, those loans are near-worthless.
And Japanese banks are struggling to pick up the pieces and can no longer afford any more bail-outs.
Tip of the iceberg
No one knows how bad the problem really is.
The government says 18 trillion yen ($150bn) of debts need to be taken off banks' balance sheets.
But Japanese bank Nomura estimates that at worst the figure could reach 200 trillion yen ($1.6 trillion) - close to 40% of the country's gross domestic product (GDP).
And there is little sign of improvement, with exports down 7.8% for the year to June.
As for domestic demand, retail sales slid for a third straight month in June, exacerbating deflation.
That prompted the governor of the Bank of Japan, Masaru Hayami, to make a rare plea to the government.
"In order for Japan to return to the path of sustainable economic growth with full support from the current monetary policy easing, progress in structural reform is necessary," he said.
Part of that will be supported by the zero-interest rate policy that the Bank is espousing, he said.
But he added that financial institutions need to work harder to sort out their bad debt problems.
Many Japanese voters, scared by the decade-long trial Japan has endured, blame the LDP for their problems.
Hardly surprising as the LDP has been in power - bar a short break in 1993 - continuously since the 1950s.
The "bubble economy", the term for the huge explosion of asset prices in the1980s which burst to create the crunch of the 1990s, happened under its watch.
So the question investors are asking themselves is whether the new man at the top is enough to counterbalance the apparent refusal of his party to make painful, but necessary, changes.
The LDP has historically survived on intimate relationships with agriculture and the construction industry, to name but two sources of its income.
The reforms needed would of necessity cut into the huge subsidies and payments made to the party's supporters and LDP old-timers.
Japan's parliament, or Diet, has more septuagenarians and octogenarians than almost any other, and they are ill-prepared for radical changes.
Mr Koizumi's victory on Sunday should give him enough breathing space to start the long-awaited reforms.
But no one knows whether the Japanese electorate, or the LDP, is really ready for the pain that reforms would cause - at least for a few years.
The chances are that for the foreseeable future the reforms will be modest.
However, they may lay the groundwork for the next generation of Japanese politicians to stare the problems more squarely in the face.
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