JAPAN: Koizumi's Postal Bomb

The Prime Minister's rejected reform legislation by Japan's Upper House is grave news for him and his ruling Liberal Democratic Party.

After weeks of fevered speculation -- and at times outright acrimony -- Japan's Upper House finally voted on Aug. 8 on Prime Minister Junichiro Koizumi's plans to reform the country's postal system. The outcome was bad news for Koizumi, who hoped to get the green light for reforms that would have paved the way for the gradual transfer to the private sector of the postal services' $3 trillion in assets. Instead, Koizumi and his supporters were dealt a seismic blow, losing the vote 125-108, with 30 rebel Liberal Democratic Party lawmakers either voting against the bills or not voting.

As bad an omen as the vote is for Koizumi, it could be even worse for the LDP. To the horror of many party bigwigs, Koizumi had insisted before the vote that he would dissolve Parliament if the bill failed. Now he's keeping his word. Immediately after hearing the Upper House result, Koizumo consulted New Komeito, the LDP's coalition partner, and called a general election for the Lower House on Sept. 11.

BAFFLING GAMBIT.  The reason for concern among the LDP's top brass is understandable. True, the party, which has been out of power only once in 50 years, is used to winning elections. And its main opposition group, the Democratic Party of Japan, trails in the polls. But the mishandling of the postal-reform bills combined with that possibility of anti-Koizumi rebels in the LDP forming a new breakaway party could lead to Katsuya Okada, the DPJ's leader, becoming Japan's next Prime Minister.

Adding to the sense of unease within the LDP are some doubts as to whether coalition partner New Komeito will continue its support. "If there's an election, the odds are very high that the LDP loses," says Steven Reed, a political science professor at Chuo University, in Tokyo.

For many, why Koizumi chose to gamble so much on an important but hardly urgent issue is baffling. Postal reform has been his pet project for almost three decades, but it has long been clear that within the LDP the appetite for change was muted. In July, the bills scraped through a Lower House vote by just five votes. Indeed, critics within his own party accuse Koizumi of risking everything for a project that doesn't even have public support. One recent poll found that only 24% of those surveyed backed privatization.

STILL POPULAR.  The post office is Japan's principal savings and investment vehicle, with $3 trillion of assets held in low-yield Japan Post savings accounts and life insurance policies. Critics of this system claim that under state management too much of the money ends up being channeled into pork-barrel projects. Those against the bill, though, argue that the post office provides banking and insurance services to rural communities, which profit-seeking banks might not want to do, and they want more guarantees that such services would be preserved.

Even if passed, the legislation, which would separate the mail-delivery business from banking and insurance services within a government-controlled holding company, wouldn't be completed until 2017. "There are so many other domestic issues that are more pressing," says Eisuke Sakakibara, a professor at Keio University in Tokyo and a former Vice-Minister in the Finance Ministry.

Despite the defeat for Koizumi, the LDP's best short-term bet may be to hang on to him. While many enemies within the LDP would love to see Koizumi ousted, the party arguably stands a better chance of retaining power with him. His sway may be waning within his own party, but he remains popular with the Japanese public, with approval ratings above 40%, which is regarded as high enough to remain in office.

POLICY ON ICE.  "Facing an election, the LDP Diet members would be almost suicidal to change leaders and disrupt the organization further," notes Robert Feldman, chief economist at Morgan Stanley in Tokyo. "The likelihood is that they will keep Koizumi for the election. They will dump him if they lose, of course."

Win or lose, the reformist policy agenda favored by Koizumi looks set to be put on ice. If the LDP wins the Lower House election and Koizumi stays on, the Upper House rebels will remain, making it tough to pass reformist legislation.

And even if New Okada and the DPJ win the Lower House, the LDP will still have a majority in the Upper House, a situation unlikely to change until July, 2007, when the next Upper House elections are scheduled. "Regardless of whoever wins the Lower House election, the Upper House will face chaos," says Feldman. "It will be very difficult to pass legislation."

A BROKEN LINK.  Whatever the implications for Koizumi and the individual political parties, it's not all gloom and doom for Japan. With the economy stronger than at any time in a decade, economists say the political turmoil in unlikely to derail the recovery. The Nikkei 225 stock index closed slightly up on Aug. 8, while bond and currency markets were largely unaffected by the reversal in the Upper House.

In part, that's because reforms already undertaken -- from cleaning up the banking sector to reductions in supplementary budgets -- have weakened the link between political and economic upheaval (for Standard & Poor's view, see "From Japan, a Blow to Global Growth?"). "Whether you have a policy vacuum or not, right now it doesn't matter as far as the economy is concerned," says Jesper Koll, chief Japan analyst at Merrill Lynch in Tokyo.

And that's a win for Koizumi, even though it won't help him when it comes to getting further reforms passed.

AMP Section Name:Privatization

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