Koizumi outlines reform plans

The popular Koizumi, pictured at a May Day rally, says Japan faces hardships in dealing with economic reform

In this story: Bankruptcies and unemployment still threats An encouraging start Government unlikely to hit target RELATED STORIES

By Staff and wire reports

TOKYO, Japan -- Japan's new prime minister, Junichiro Koizumi, promised a two-step program of fiscal reforms to attack the country's decade-long slump.

Delivering his inaugural speech to Japan's parliament Monday afternoon, Koizumi reiterated his promise to take a new tack to turn around the economy.

Koizumi swept to power in late April on a reform platform. But he has been vague about what approach he would take.

Previous administrations focused on heavy government spending, often on unnecessary construction projects.

That's a path Koizumi again said he does not want to go down. He also renewed his promise to cap Japanese government bonds at 30 trillion yen, a point he made in his campaign platform.

"Since the 1990s, the Japanese economy has struggled for a long time, people have lost faith in politics and there is an air of stagnation in the society," he said.

Bankruptcies and unemployment still threats

Koizumi, 59, said Japan's government would make good on an earlier promise to write off bad bank loans over the next two to three fiscal years.

The government will take steps to ease the pain for Japanese workers and small businesses, he said.

But Koizumi conceded that tough reforms would lead to bankruptcies and higher unemployment. Japan's jobless rate is at 4.7 percent, just off its all-time high of 4.9 percent.

As a result, economists say there is some risk Koizumi could jeopardize Japan if he pushes too much, too quickly.

"He'll have a hard time pushing fiscal cuts if the economy falls very sharply," said James Malcolm, senior Japan economist with J.P. Morgan.

Malcolm characterized Koizumi's address as "slightly encouraging." The new PM did not backtrack from previous promises. But he mainly voiced ideas he had already aired.

"He's very much sticking to everything he's seen so far, but not rocking the boat too far in terms of anything new," he said.

An encouraging start

Previous reformist prime ministers have been undermined by eroding support within the ruling Liberal Democratic Party.

Some analysts believe the highly popular Koizumi may suffer the same fate after seeing the LDP through elections in July.

Koizumi moderated the wilder elements of his approach in the election runup. But experts feel it is encouraging that he has not backed down from pushing for change.

Heizo Takenaka, Japan's new minister of economics and fiscal policy, also admitted Monday that Japan's economy remains weak.

He added that the government was revisiting its assessment of the economy with a view to a possible downgrade. It will fine-tune its assessment "in the next couple of days," Takenaka said.

Government unlikely to hit target

Experts were hoping for a turnaround in Japan but have been surprised to see its economy slow again in 2001.

Japan in March lowered its economic assessment for the second straight month. For the first time in two years, it admitted Japan was experiencing "mild deflation."

Takenaka noted last week that the government may need to lower its economic growth target of 1.7 percent for 2001, set last December.

Economists say that target will be impossible to meet, given the rate of the slowdown in the first quarter.

Takenaka also noted that the U.S. government is pushing Japan to clean up a mountain of bad loans on the books of its banks.

The U.S. government has frequently encouraged Japan to push ahead with large-scale structural reforms to revolutionize its moribund economy. Bad loans with the country's banks have been a particular focus.

Experts say the amount of bad loans in Japan may equal 6 percent of the nation's annual output. Many believe Japanese banks are hindering its economy by propping up unviable businesses.

Takenaka said the topic came up again during his recent meetings in Washington.

"Hopes among U.S. officials were much stronger than my expectations," Takenaka told a Japanese television program on Sunday, after he returned from the U.S. capital.

Malcolm at J.P. Morgan noted that both Japan and the United States have recently welcomed in new administrations.

U.S. President George W. Bush's team has reverted to a more traditional stance on Japanese reforms, Malcolm said, depending more on calls for structural reforms. The previous Clinton administration had pushed change within Japan's government.

"At the end of the day there's not much they can do except be supportive and talk supportively about the Japanese economy," Malcolm said. "They want to keep up this momentum behind banks to resolve this bad debt."

Reuters contributed to this report.

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