While Japan’s reform and recovery are under way, says Heizo Takenaka, the minister responsible for privatizing the post office, plenty of challenges remain

When I took office as a member of Junichiro Koizumi’s inaugural administration in 2001, the three letters NPL stood simply for “non-performing loans”. They now stand for Japan’s “new political landscape”. Democracy has been reinvigorated by the snap election that Koizumi called last year (2005) when facing opposition from within our ruling Liberal Democratic Party (LDP) to post office privatization. Moves towards smaller government are well under way. And young, urban and female politicians are finally gaining a voice in our parliament, the Diet.

Luck and leadership

In 2002, we made a pledge that we would halve non-performing loans, which then stood at 8.4% of loans outstanding, by the end of March 2005. Few believed we could. Fewer still thought that I, as the minister in charge of financial services, could steer a course through the political storms in the interim. I was seen as a know-nothing academic just out of my ivory tower. “Takenaka-bashing” was a favourite national pastime. Fortunately for my sanity, every day Koizumi would call me on my mobile to repeat the same, reassuring message: “Takenaka-san, you must do what you think is right, whatever you really believe in.”

Four years on, the ratio of non-performing loans as a proportion of the total outstanding has fallen below 3%. The number of big Japanese banks whose collapse could cause risks of a systemic kind – of which there used to be more than a dozen – has been reduced to just three.

Leadership and luck have enabled us to accomplish what had been thought unachievable.
A trained economist may be able to come up with a road map for economic reforms. It takes political leadership as well as luck, however, to turn that plan into reality. Fortunately, in Koizumi we have a visionary leader who stands out in our consensus-driven culture.

Luck has played its part, too. Both our accounting system and the Japanese bank supervisory system had undergone massive improvements before we took office. Moreover, shortly before we assumed office in 2001, a series of laws giving greater power to the prime minister and the cabinet had come into effect. A committee similar to the American president’s National Economic Council began to play a critical role in laying out economic reform packages. This resulted, first, in the privatization of Japan’s national highway agency and, eventually, put us on the path we are on to privatize Japan’s postal system.

The post office monster

Why reform the postal system? Many still ask. Part of the confusion arises from the fact that many foreigners do not realize that Japan Post is not just a mail service, as it is in so many other countries. It is also the world’s largest financial institution. It uses its vast network of almost 25,000 branches to collect life-insurance premiums and savings from millions of Japanese citizens.

The government pulls in some 26% of household savings, mainly through Japan Post. Thanks to our high savings ratio and a state subsidy, Japan Post controls some ¥330 trillion (about $3 trillion) in household financial assets. This distorts our capital markets in several ways.

First, it is difficult for any bank to compete with the savings terms we offer. Moreover, in the past, funds from Japan Post have been diverted to special interests and ill-judged government-backed projects. Capital has not been used in the most efficient way. Some 19% of debt raised by Japanese companies comes from our eight government-run banks. The total sum these government-backed banks lend amounts to almost 18% of our national income, compared with about 3% to 5% in Europe. To reform this system and, especially, Japan Post, is to change – fundamentally and for the better – Japan’s economy.

Over the next 10 years we aim to reduce the ratio of household savings that the government captures by four-fifths, to 5%. We also plan to reduce the ratio of government-related financing of the private sector by more than two-thirds, to 6%.

The privatization of Japan Post will take its 260,000 employees off the taxpayers’ payroll. With one third of all government employees scheduled to move into the private sector, this is also about reducing the size of the government by an unprecedented extent. Post office reform is thus all about rebuilding Japan’s capitalism to make it much more market-friendly and far less risk-averse.

Biting the bullet

Throughout the 1980s, Japan’s economy grew by 4.5% a year. This fell to 1% for the ensuing decade. Economists agree that Japan’s potential rate of growth has continued to be about 2%. When the economy experienced a growth gap on such a scale and for so long, it showed that this was no simple cyclical downturn. The economy was in need of structural reform.

Of course, it is not Koizumi’s political reforms alone that have pulled the nation out of its prolonged economic doldrums. Japan’s business also bit the bullet. Prodded by a new corporate governance code and accounting changes, they cleaned their stables. As a result, our corporate performance has never been better. Our unemployment rate has dropped by a full point from its peak to 4.4%. The stock market has revived after more than a decade of decline. And our growth rate is a healthy 2%.

Meanwhile, the number of corporate mergers and acquisitions (M&A) has jumped five-fold over the past 10 years. Who said M&A activities would remain “foreign” in Japan’s conformist corporate culture? Conformist or not, people in Japan have already accepted many new types, ranging from corporate raiders, green mailers, and, yes, “lipstick ninjas” who ousted our own rebel LDP candidates in the snap general election that Koizumi called and won by a landslide last September.

Spend wisely

Koizumi’s approval ratings are still among the highest of any of his predecessors, but we must, nonetheless, spend his political capital wisely. Thanks to an LDP term limit, he is due to step down as prime minister this September, and he has said that he will not push for a change in the rules.
The clock is ticking. But gone are the days when we had to look only in the rear-view mirror to drive Japan’s economy. The road ahead, however, is no less bumpy. We must build a momentum that will snowball, so that no matter who succeeds us, the next cabinet will remain as reformist as Koizumi’s.

We should all be supply-siders in Japan because we can no longer afford government on the vast scale that we have now. The government is spending ¥82 trillion ($740 billion) annually, but raises less than half that in taxes. Unfortunately, some of our own LDP members have favoured “pork barrel” spending schemes for their own interests and constituencies rather than the sort of spending restraint we need.

It is these whom Koizumi dubbed “forces of resistance”. Now, with most of the old forces of resistance gone from mainstream politics, a new, even more formidable, force of resistance has emerged in the form of fiscal conservatives. The conservatives, led by bureaucrats from the Ministry of Finance, advocate a big tax hike. Where they are right is that we cannot continue as we are, with this gap between spending and revenue collection. And the country will have to decide on a viable tax policy. But that will not happen overnight.

Faced with our own deadline, the Koizumi administration must reduce government fat, which Japan has like no other. The Japanese government runs a big balance sheet – it is 10 times bigger than that of America relative to national income. We must sell whatever saleable government assets we have before hastily raising any tax rate.

“Reform or die,” was what Koizumi said when calling the snap election last September. “Sell or die,” should be the next clarion call for us during the crucial remainder of the term of the Koizumi administration. Will we be successful? I do not know. Yet, as an economist, I am fully aware that it will be suicidal if we end up having only a tax hike and no further reduction of the size of the government.

CV Heizo Takenaka

Heizo Takenaka is Japan’s internal affairs and communications minister, and is responsible for privatizing Japan Post. First appointed a minister in 2001, he was previously professor of economics at Keio University and held a fellowship at Harvard University.