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Last Updated: Friday, 7 November, 2003, 05:15 GMT
Economy dominates Japan poll
By Jeremy Scott-Joynt
BBC News Online business reporter

Japanese Prime Minister Junichiro Koizumi
Koizumi's popularity is dented but still intact
Some time soon, Japan will become a two-party democracy. But for now it will remain the task of the ruling party to try and reform the economy - a task it has been struggling with for more than a decade.

For the first time in a decade - and only the second in half a century - the ruling Liberal Democratic Party is facing something close to a serious challenge to its hegemony in the general election which takes place on Sunday 9 November.

That could mean serious political argument about how to go about fixing Japan's economy, battered by repeated recession, stubborn deflation, and the long hangover from the collapse of its asset bubble at the start of the 1990s.

Several captains of industry have said they would like to see the LDP and its charismatic Prime Minister, Junichiro Koizumi, forced to deal with a serious challenge from the left-Democratic Party of Japan (DPJ)

Among them are the heads of technology group Kyocera and scientific instrument firm Horiba, and management guru Kenichi Ohmae.

The three were among business leaders who co-signed an advert in the country's biggest newspapers warning that 50 years of cohabitation between the LDP, bureaucrats and business made it "impossible for normal politics to proceed".

"As a result there is a sense of stalemate in Japan," they said.

Beauty contest

But the big change may have to wait a while.

How will the government cope with an ageing population?
The economy:
Jobs are hard to come by and the recovery is fragile at best, while public debt is still high
Public sector reform: Unwieldy postal savings and highways agencies are still waiting to be sold off
Recent high-profile cases involving children, foreigners and yakuza gangsters are highlighting the issue despite low crime rates by international standards
Mr Koizumi wants to repeal the pacifist sections of the Constitution - and send troops to Iraq
The DPJ and its leader, Naoto Kan, are doing everything they can to present themselves as a genuine alternative government - not something opposition parties have really done in the past - including the unprecedented move of publishing a detailed manifesto.

Even so, few forecasters think they can knock the LDP off its perch quite yet, although many believe the LDP-led ruling coalition could lose seats.

The economy, by far the biggest issue for most voters, is finally showing signs of revival, with growth estimated at 1.2% for this year - painfully slow by some standards but a turnaround from years of stagnation.

Under pressure from Mr Koizumi's hard-line economics minister, Heizo Takenaka, the banks are at last cleaning up their stacks of bad debts, a factor which has been crippling investment for years.

The Nikkei 225 index of leading shares is up more than 30% this year.

DPJ chief Naoto Kan
Opposition leader Naoto Kan insists it is time for a change
And in what is developing into a beauty contest between the two party leaders - both relatively young by Japanese standards - Mr Koizumi certainly seems to have the edge.

Trouble in store?

Not that Japan is out of the woods, as Mr Kan is at pains to point out.

The number of people in work is continuing to fall, down more than 600,000 over the two years since Mr Koizumi replaced his lacklustre predecessor Yoshiro Mori, and unemployment is now at 5.1%.

Deflation, or falling prices, is still dogging Japan, making people cautious about spending and hampering domestic companies' performance.

And despite having swept to power on reform credentials, critics charge - with some justification - that not much has actually been done.

Aside from the acceleration of the banking cleanup, the promised privatisation of state enterprises such as the mammoth postal savings system - with 1.2 trillion yen ($100bn) on its books - and the heavily loss-making highways agency have got nowhere.

Despite some action, the country's huge debts, ballooned by a series of pork-barrel public works projects in the 1990s, remain close to 140% of national output.

And the pensions system remains broadly unreformed, despite widespread worries that the rapid ageing of the population means prompt and radical action is needed to fix it.

A Toyota Prius car rolls off the production line
Japan's economy is undergoing a fragile recovery
The DPJ hopes these factors, and its own specific proposals to use consumption taxes to patch pensions and abolish the highways agency, will help give it the balance of power in the elections.

It is also betting on a strong turnout as some newspaper polls predict, which traditionally acts against the LDP.

Out with the old...

But given that the DPJ is unlikely to win the election outright, the irony is that a big victory by Mr Koizumi may strengthen his hand in carrying out reforms once the election is over.

One reason the postal savings and highways agency have been so difficult to tackle is the power of the LDP's old guard, who have used the two as cash-cows to help friends in business and provide jobs when they retire.

But several big names have been kicked off the party's lists for this election - and in an absolutely unprecedented move, the head of the highways agency was unceremoniously sacked.

That, coupled with the rapid promotion of younger MPs to key positions, might make more room to push reform forward.

And the fact that the last election in 2000 was held when the LDP was in a trough under Yoshiro Mori could make it easier to show an improved position this time around.

Overall, a strong showing would make it easier for Mr Koizumi to resist the anti-reform agenda in his factionalised party.

The BBC's Clive Myrie reports from Tokyo
"Job security is like gold dust"

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