Koizumi win good for bonds

Business Asia, Nov, 2003 by William Jr Pesek

It's a rare thing in Japan to see more excitement after an election than before it. Yet the Liberal Democratic Party's (LDP) feeble showing is tantalizing pundits and investors alike.

The LDP, led by Prime Minister Junichiro Koizumi, stayed in power, but also got an unexpected slap on the wrist from voters fed up with its failure to end deflation. The once unbeatable LDP even had to rely on a merger with the smallest party in its ruling coalition to shore up its power.

But the real story this month's election was the strong showing by the opposition Democratic Party of Japan (DPJ). Its gains raised the specter of a two party system in a nation that's been ruled by just one for 45 of the past 48 years. The DPJ has a plausible chance of eventually unseating the dithering LDP. Finally, Japan has a credible opposition.

The importance of all this could be profound, The main problem with the political system here is accountability, or the lack thereof. A two-party system would increase transparency and responsibility in policies, especially economic ones. Also, many of the LDP seats lost were among the old guard factions; some change-resistant lawmakers are finally being shown the door.

Reforms?

Conventional wisdom seems to be that Koizumi's victory is good for the economy because he'll stick to his structural reform drive. Yet it presupposes one is really in place.

Since becoming premier in April 2001, Koizumi has being working to pressure banks to write down bad plans and deregulate an economy that's far more dependent on exports than it should be, given its size. Koizumi has had some victories, albeit small ones,

Cutting public works spending and limiting government bond sales come to mind. So does his effort to privatize poorly run, highly indebted public corporations. If you're looking for the bold, fresh thinking Tokyo needs to end a 13-year slump, however, Koizumi has yet to prove he's your man.

True, his economy czar, Heizo Takenaka, has been tougher on banks than the powerful Ministry of Finance. Koizumi also talks, acts and presents himself differently from most politicians.

Female voters

That's helped endear him to female voters and younger Japanese.

Trouble is, Koizumi is on a shorter leash than many investors believe, The old guard of the LDP still calls the shots and Koizumi doesn't have as much latitude as he requires to push through the painful, destabilizing reforms the economy needs.

All this means deflation is likely to persist in the world's second biggest economy. It's an ideal environment for bends: tepid growth, failing consumer prices and shaky consumer demand, It's not a great one for stocks. Companies here are benefiting more from stronger global growth than domestic trends, making profits less reliable. Tokyo's efforts to weaken the yen are a part of it.

In fact, even the worst fears about the election may bode well for bonds. One of the theories is that the LDP's weaker-than-expected showing may weaken Koizumi's efforts to quell government spending, clean up bad loans and take other steps to make the recovery sustainable. He may be forced to step up bond sales.

The wild card is that Koizumi is a more impressive leader politician than we know. Perhaps his strategy all along was to win a second term so he would have the carte blanche to reform Japan's outdated economy. Maybe his recent success in bumping out some older LDP members in favour of younger blood is part of his master plan.

More likely, though, history will remember Keizumi as a Gorbachev like figure: a leader who helped set the stage for a Thatcher--like reformer to rise up and revolutionize things.

William Pesek Jr is a columnist for Bloomberg.