Koizumi's privatization push to start

By CNN's Alex Frew McMillan in Hong Kong

TOKYO, Japan -- Prime Minister Junichiro Koizumi will show how serious he is about reform Friday.

That's when his office is set to say which of Japan's 77 state-owned enterprises are targets for privatization.

Koizumi said Tuesday he wants to cut around $8 billion (1 trillion yen) from government spending on those state-owned companies. Their budget this year is around 5.3 trillion yen.

Friday is also the deadline for Koizumi to deliver a preliminary budget for fiscal 2002. Negotiations on that will then continue until it is finalized in December.

The announcements come against a backdrop of falling business optimism in Japan.

The cabinet office said Monday its "diffusion index," a measure of numerous business indicators, slumped to 31.3 percent for June, for the sixth straight month of decline. That means the economy is likely to get worse.

To help Japan turn around, Koizumi promises to take on the task of changing the way its state-owned corporations operate.

The huge entities dominate Japan, and many critics say they are inefficient and cumbersome.

Fighting a headwind

The reformist prime minister has charged Nobutero Ishihara, a young mover in Japanese politics and the son of the governor of Tokyo, to outline the changes at the Office of Administrative Reform.

His office will release a third report on Friday, with a final one due in December. Ishihara is targeting both how the companies are structured and how they operate.

But experts say it is ultimately up to Koizumi to lead the push. How successful he will be depends on whether his high public support carries over into a fight where he will meet heavy bureaucratic opposition.

The public supports the reforms. But Koizumi will meet plenty of pressure from within his own party.

"What you're seeing here is an attempt by reform politicians to take control away from vested interests," said Ron Bevacqua, Japan economist with Deutsche Securities.

"I don't know what to expect, because I simply don't know how powerful these guys are."

Bureaucrats likely to resist

Koizumi may push for as many as 70 of the state entities to be privatized. In particular, he is likely to target the large number of state-run financial institutions like the Japan Finance Corp. and the Development Bank of Japan.

One of the biggest targets is the Housing Loan Corp., which dominates Japan's mortgage sector. Koizumi is though to want to privatize the HLC and also cut its lending, perhaps stopping it from making new loans altogether.

That would open the door to commercial lenders. Many of the state-run companies provide services that the market could easily provide.

But bureaucrats will likely resist efforts of wholesale reform. Many career bureaucrats look to the state-run entities as a source of a cushy job and income in retirement.

The state entities are also a large source of pork-barrel funding for rural areas in Japan, as well as the construction industry, both key backers of the ruling Liberal Democratic Party.

That likely will ensure reforms don't go far enough, critics say.

"Generally what needs doing with them is the assets need selling and they need to be closed down," said Richard Jerram, chief economist with ING Barings in Tokyo.

Past prime ministers have tried to change the way Japan's monolithic state entities operate, with only moderate success.

Japan's national telephone company, NTT, was privatized in the 1980s, as were Japan Tobacco and the railways.

This push is more significant and could involve a flood of stock as the companies list in Japan.

But observers are skeptical whether they will get much in the way of specifics on Friday. The announcement will likely be more of a start than a plan for radical change.

"It's a start. The fat lady never sings here," Bevacqua said.

Koizumi is hampered by a Japan in recession and a vast amount of bad loans overhanging Japan's banks. Those two issues need to be tackled first, economists say.

"If you're not going to do anything about either of those, to be honest it's a deckchairs on the Titanic type of situation," Jerram said.