Koizumi sets Japan reform course

Tokyo rose on the strength of bank reforms said to be the centerpiece of an advisory panel's findings

TOKYO, Japan -- Japanese Prime Minister Junichiro Koizumi on Thursday released a key policy document declaring serious economic reform had begun.

Tokyo stocks responded to the news by surging ahead, in expectation the reform would help Japanese banks dispose of bad loans.

In releasing the report, Koizumi tried to reassure disenchanted voters that the painful changes outlined in the document would bear fruit in a few years.

The Council on Economic and Fiscal Policy (CEFP), Koizumi's top economic advisers, admitted growth would fall short of an official 1.7 percent target in the fiscal year from April but stressed the benefits from reforms would kick in soon afterwards.

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"There will be no economic growth without reforms, and we will vigorously pursue this," Koizumi told reporters after the council's meeting finalised the report.

"With this report, we are showing to the nation and to the world that Japan has begun full-fledged reforms."

The report is in effect a manifesto for Koizumi's reform progams to put the world's second largest economy back on a healthy growth track -- a crucial message to the nation ahead of next month's Upper House election.

Economics Minister Heizo Takenaka, the spokesman for the council, forecast growth of near zero percent for this fiscal year and below one percent for the coming two to three years.

But he added that he saw a potential for a healthy growth of two to three percent if the reforms progressed.

The CEFP report, the content of which was widely leaked to the media a day earlier, outlines his reform plans on a wide range of issues, such as fixing banks' bad loan problems and repairing the government's tattered finances.

After a decade of stop-and-go growth, funded by huge deficit spending totalling some 128 trillion yen ($1.03 trillion) since 1992, Japan now faces the worst government debt burden among industrial countries at 130 percent of gross domestic product.

Risky undertaking

Recent data has suggested Japan was about to slide into its fourth recession in a decade, with concerns lingering that banks' bad loan disposals and a fiscal discipline policy could speed up bankruptcies and unemployment.

But Koizumi, who in recent opinion polls have won popularity ratings of above 80 percent, has public opinion on his side, at least for now.

"It's nice to have a rallying cry but positive changes will not necessarily mean immediate economic growth," said Michael Brown, head of equities and capital markets at ABN AMRO Securities in Tokyo.

"In this situation there's a great opportunity because the Koizumi government has a much more broad-based support than previous Japanese governments. There is a mandate from the Japanese people to effect a change."

One politically risky reform prosposed in the report is reviewing the use of auto-related tax revenues currently earmarked for road construction, a move which cuts right in the heart of pork-barrel politics that are seen as the culprit of wasteful spendings.

By freeing up the revenues for use in other areas which would have more impact on growth, the government thinks it can help achieve spending cuts without hampering growth.

Yet, new economic data showed that the economy may be continuing to shrink in the current quarter after a contraction in the first three months of the year.

Such an outcome would meet a commonly used definition of recession of two straight quarters of economic contraction.

Further on the horizon, the banking sector reforms were expected to take a toll on employment, with the jobless rate already running near record high levels.

Takenaka said Japan may see 100,000 to 200,000 job losses resulting from the bad loan cleanup.

Reuters contributed to this report.