Koizumi calls for spending restraint

Recent flooding will be an easier fix than public debt

Japan needs to stop throwing money away on wasteful public works schemes that have left the country mired in debt and covered in concrete, Prime Minister Junichiro Koizumi has told his cabinet.

The plans form part of a package outlined in a note to the cabinet, including further cuts to agriculture subsidies and privatisations for loss-making public corporations - some of which, like the Japan Highway Public Corporation, have debts of more than 40 trillion yen ($345bn; £218bn).

The idea is a positive one, especially if it leads to the reallocation of money away from wasteful spending

Mamoru Yamazaki
Barclays Capital Japan

Throughout ten years of economic stagnation, successive governments have tried to stimulate recovery by borrowing trillions of yen to pay for new roads, bridges and other hardware.

But the repeated "supplementary budgets" have had little effect except to keep heavily-indebted construction companies afloat, and the practice has helped feed the deep cynicism most Japanese harbour about their government's commitment to reform.

The result is public debt of more than 130% of gross domestic product (GDP).

Regaining credentials

Mr Koizumi has seen his popularity drain away in the six months since infighting within the ruling party forced him to sack his popular, if sometimes controversial, foreign minister, Makiko Tanaka.

Observers say his reform credentials are in need of a revival, and capping public works at levels last seen before the bubble economy of soaring stock and land prices imploded in the early 1990s is seen as a key ingredient.

By announcing the plans now he puts down markers for next year's budget, and gives himself time to win support.

Koizumi needs reform urgently to appease the electorate

"There is absolutely no change in my resolve to proceed with structural reforms," he wrote in his note, which calls for seven cabinet ministers to draw up firm plans by late August.

At the same time, Finance Minister Masaru Hayami called for the private sector to reform too, saying that the government was ready to back consolidation of Japan's more than 700 banks.

Caught in the middle

But Mr Koizumi faces a problem in that however much he may want these reforms, many of his Liberal Democratic Party's (LDP) parliamentarians oppose them.

The construction industry is one of the biggest and most open-handed lobbyists in Japan, and dozens of politicians rely on its money for their re-election funds.

Added to which, the possibilities of bringing construction work and its attendant job opportunities to their constituencies can prove irresistible.

Fingers crossed

Observers hope Mr Koizumi is more successful at slimming down the spending.

"I think the idea is a positive one in principle, especially if it leads to the reallocation of money to more effective uses and away from wasteful spending," said Mamoru Yamazaki, chief economist at Barclays Capital Japan.

But analysts worry remains that without wholesale reform elsewhere and more improvement in the economy, the cuts - while necessary - could be painful.

"Since the economy is still fragile, I think it could be problematic if the cuts are too drastic," said Mr Yamazaki.