TOKYO -- Uh oh! Is Japanese Prime Minister Keizo Obuchi losing his appetite for reforming this country's economy? It's hard to avoid this conclusion in the wake of decisions made by his government in the final days of 1999.
First and foremost, the three-party ruling coalition announced on Dec. 29 its intention to delay by one year the introduction of a plan to limit depositor insurance. Fearing a run on weak banks four years ago, the government implemented an emergency measure to provide full-deposit protection. That measure was to be replaced by a scheme on April 1, 2001, whereby protection would be limited to 10 million yen ($95,000) per customer if a bank goes under.
Why the one-year delay? Many of Japan's regional banks and local credit co-ops fear that once full-deposit protection is lifted, customers will withdraw their funds and put them in stronger, bigger financial institutions, like the national publicly traded money-center banks. This in turn would likely drive some of the weaker local banks out of business along with the farmers and small companies that borrow from them.
This is exactly the kind of shakeout many experts think is long overdue. But lawmakers in the Liberal Democratic Party (the LDP is the dominant force in the ruling coalition) aren't particularly excited about inflicting this kind of hardship on key voter blocs in the run-up to a lower house election, which must be held by Oct. 20.Tokyo's financial regulators have long believed that imposition of limited depositor protection next year would force banks to get their act together and send a strong signal to the markets that Japan is genuinely committed to financial system reform. While some LDP lawmakers share these objectives, electoral politics ultimately carried the day. Credibility be damned. Another reform put on hold: consolidated taxation. Unlike in the U.S., profitable companies in Japan can't take tax write-offs against losses accrued by their subsidiaries. To reduce tax exposure on Japanese companies and increase their international competitiveness, the government was planning to establish consolidated taxation beginning fiscal 2001. This initiative has also been postponed for a year. The delay had nothing to do with elections. Instead, according to Garry Evans, a strategist for HSBC Securities in Tokyo, it smacked of a resurgence of the Ministry of Finance. Consolidated taxation means reduced tax revenue. That's bad news for MOF, which is growing increasingly panicked about Japan's soaring budget deficit. Evans thinks the one-year delay had MOF's fingerprints all over it. Yet another significant setback for reform came in the guise of a government recommendation to scale back preferential tax treatment for individual pension plans similar to defined-contribution 401(k)s in the U.S. Scheduled to win parliamentary approval this spring, these new pension plans could come on line as early as this fall. Again, the tight-fisted MOF was almost certainly behind the decision to limit the tax benefits of the 401(k)-like plans. This half-baked approach may save MOF a few bucks, but one must question the wisdom of undercutting the attractiveness of the schemes, which are critical in helping Japan cope with its aging society and represent an important fix for the nation's hopelessly underfunded defined-benefit corporate pension plans. Finally, in another sign that politicians are growing less interested in pushing the reform envelope, the LDP antideregulation committee established last fall has been hard at work. Japanese media reported last week that the committee, comprised of more than 100 LDP lawmakers, is creating four separate working groups to study the negative impact of regulatory changes on Japan's small enterprises, which are big backers of the LDP. The committee has said it will make recommendations to the government this spring, and these are sure to include measures intended to derail the deregulatory movement in the country. For now, this committee is probably more interested in pre-election posturing than anything else. But the antideregulation lawmakers are supported by none other than LDP policy chieftain Shizuka Kamei and their movement represents a troubling shift away from getting the government out of the way of business and encouraging growth under a more market-oriented system. Will these attempts to ease up on reform subside after the lower house election this year? Don't bet on it. Once that poll is finished, the LDP will set its sights on an upper-house election that must be held in the summer of 2001. Lacking a majority in that chamber, the LDP will be working furiously to win the support of its traditional voter blocs, such as the construction industry and farm lobby. And it's these folks that are most threatened by the painful reforms that must be implemented before this economy can return to sustainable recovery. More importantly, an acute sense of impending doom is what finally drove Japan's lawmakers to get off their hands and start passing reform legislation. Well, the government has stabilized the nation's banking system, the economy will almost certainly see positive growth this fiscal year and unemployment is no longer rising. So where's the impetus for change? For an awful lot of LDP members, it's apparent there is none.