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Monday, Dec. 18, 2000

JAPANESE PERSPECTIVES

Popularity polls belie Mori's 'reform plans'


Prime Minister Yoshiro Mori launched his new Cabinet on Dec. 5, reshuffling his team to prepare for the reorganization of government ministries and agencies in January.

Although Mori said he created a powerful team that can implement the socioeconomic reforms necessary to revive the nation in the 21st century, media surveys show that popular support remains sluggish, and there is a persistent sentiment within the Liberal Democratic Party that it will be headed for heavy losses in next summer's Upper House election as long as Mori is at the helm.

For fiscal 2000 through March, the government is expected to attain its goal of 1.5 percent annual GDP growth. Still, recent stock market trends indicate investors are still uncertain about the future of the economy.

Consumer spending must become stronger to put the economy on a full-scale recovery path, but this is an area where, regrettably, signs of an upward trend are still unclear.

Uncertainty appears to be deeply embedded in the mind-set of the people, and to dissipate that, Mori needs to present a grand design for structural reforms.

Japan's potential for economic growth will inevitably decline unless something is done to cope with the rapid aging of its population. The health of state coffers, including those for social security, could continue to deteriorate, and the ever-rising taxpayer burden would be an additional growth-hampering factor.

Bold reforms are needed to break this vicious cycle.

Former Prime Minister Ryutaro Hashimoto, who has joined the new Mori Cabinet, took the initiative in 1997 to launch a set of six major reforms, but his attempt at fiscal reform was crushed halfway. The reasons for his failure were that he was unable to coordinate his fiscal reforms with those in other areas -- such as social welfare programs -- and because he set impossible goals and timetables.

In addition, rapid changes in other economic circumstances, including rising doubts over the nation's financial industry and the Asian financial turmoil that began in 1997, also negatively affected Hashimoto's efforts.

It is high time that Prime Minister Mori embarked on bold reforms by learning from the lessons of 1997. New reform initiatives must be comprehensive, well-planned and flexible, and Mori should draw up an overall design for reforming the nation's welfare, taxation and fiscal structures.

An estimate by the Japan Federation of Economic Organizations (Keidanren) indicates that Japan's annual growth potential will fall into the 1 percent range if the current condition of the economy is ignored, and that the overall burden on taxpayers, including tax and welfare costs, will account for 70 percent of their salaries in 2025, or nearly double the current 37 percent.

At that point, the consumption tax rate will have been hiked to 25 percent.

However, radical cuts in government spending, along with pension, medical insurance, and other welfare reforms, could enable Japan's economy to grow by 2.4 percent annually if a more moderate consumption tax rate of 10 percent could be attained. This would also keep the taxpayer burden at 46.5 percent.

The new Council on Economic and Fiscal Policy, to be created next month, is to be charged with directing the government's economic management. Signs of discord are already emerging within Mori's Cabinet over what role and status the panel is to be given, but its primary task will be to present the public with the grand design for the nation and eliminate the people's anxieties about their future.

And that is the best way for Mori and the LDP to win back voter trust and survive the Upper House election.

Yoshio Nakamura is managing director of the Japan Federation of Economic Organizations (Keidanren).


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