Washington Post: Japanese Prime Minister Junichiro Koizumi last weekend completed a remarkable feat of political leadership, taking his Liberal Democratic Party from near-death to victory in upper house parliamentary elections. Now, it is generally agreed, he must take on an even more difficult challenge of revival in the Japanese economy, which appears to be drifting into yet another period of recession after more than a decade of poor performance.
For Japan's economic partners and the world economy, the good news is that there is at last a strong leader in Tokyo with a mandate from voters to implement essential and long-delayed reforms. But the worrying part is that Mr. Koizumi has not yet spelled out what he will do -- and it's not clear that the political establishment he just resurrected will help him.
Mr. Koizumi has been promising for months that he will stop the government's futile attempts to prop up the economy with wasteful public works spending, deregulate or break up entrenched interests such as the postal service and clean up the bad loans that for years have weighed down the banking system. Now, however, he must establish priorities and build these ideas into concrete items in the government's new budget and legislative program. In doing so, he faces several serious obstacles.
Fiscal austerity: First, a leap toward fiscal austerity at a time when the economy is already declining risks pushing Japan -- and even the world -- into a much-steeper downturn. In addition, Mr. Koizumi's success in getting voters' support for his Liberal Democratic Party may end up making his job harder, as many of the LDP politicians elected to the upper house are defenders of the status quo. Even if he can steamroll such opponents, Mr. Koizumi is unlikely to retain his popularity with voters for long if Japan's already high unemployment shoots upward without any reinforcement of its relatively skimpy social safety net.
Economic revival: In the end Mr. Koizumi will probably not be able to push through his various reform ideas all at once. For that reason, he would do best to start with an aggressive cleanup of the banking system's bad loans, which is the measure most likely to bring about the revival of the Japanese economy. In the short term, spending that is trimmed from wasteful public works should be recycled into the social safety net or investment incentives for business.
Though all of the reforms will be painful, the alternative strategy -- imposing austerity on government spending while making a slower start on the banking system -- risks feeding the recession while not providing the means of recovery. The Bush administration, which has made improved relations with Japan one of its foreign-policy priorities, can help by encouraging Mr. Koizumi to pursue an aggressive financial cleanup -- and offering strong public support once he acts.