Japan suggests change for state companies

Koizumi wants to cut 1 trillion yen for Japan's state companies out of the next budget

By CNN's Alex Frew McMillan in Hong Kong

TOKYO, Japan -- Prime Minister Junichiro Koizumi's government on Friday put out its preliminary plans for reforming Japan's state-run corporations.

The 161-page report wasn't as detailed as many had hoped. It mainly made suggestions for ways the huge companies could operate better.

Still, the report's findings will be reflected in the budget for fiscal 2002, a government spokesman said.

Cutting 1 trillion yen

Koizumi went unchallenged on Friday as he was reelected president of the ruling Liberal Democratic Party.

The highly popular prime minister has said he wants to privatize as many as 70 of the 77 state entities.

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They are getting $43 billion (5.3 trillion yen) in government subsidies and investment this fiscal year.

Experts say they are badly in need of an overhaul.

"They've grown beyond their need, and they represent an enormous drain on state finances," Ron Bevacqua, Japan economist at Deutsche Securities, told CNN.

Koizumi has vowed to trim their funding by as much as $8 billion (1 trillion yen) in the next budget.

The government meets Friday evening to approve a preliminary budget. Discussions on that will continue through December.

Koizumi has placed Nobutero Ishihara, a rising star in Japanese politics and son of the Tokyo governor, at the helm of the reforms.

Ishihara's Office of Administrative Reform produced Friday's report.

Freeze for highway construction

The report suggests the vast Japan Highway Public Corp. should scale back construction and freeze some projects.

It also recommended scrapping state subsidies for the Housing Loan Corp. It stated that the mortgage business should be handed by the private sector.

The HLC should focus on specialized areas such as turning bank mortgages into securities, like Fannie Mae and Freddie Mac in the United States.

The HLC dominates Japan's mortgage market. It gets $3.6 billion a year (440 billion yen) in government funding.

There had been some suggestion that Koizumi might call for a drastic overhaul of the HLC, perhaps preventing it from making any more loans.

Koizumi faces staunch opposition from within his own party. The conservative elements of his Liberal Democratic Party resist changing the state corporations.

Source of funding for LDP supporters

They are a source of pork-barrel funding for rural Japan and industries such as construction, both bases of LDP support.

"It's a battle of reform politicians versus old politicians," Bevacqua said. This is the boldest effort at change, he added.

But Koizumi has a fight on his hands. By targeting the state companies, he threatens the funding base of the old line.

The companies are also the source of cushy high-paid jobs for retired bureaucrats. Those jobs are generally seen as the reward for public service.

"This is an old, old battle. Time and again we have found that it's the old guard that wins," Bevacqua said.

Ishihara's report noted that the ministries and agencies in charge of the government-backed corporations are resisting reforms.

Japan's state-run corporations are massive and carry a huge debt load. Critics say they perform functions that the private sector could handle, particularly in finance.

The Office of Administrative Reform promises a full report in December. It says this third instalment of reforms reviews just how the state entities operate, with its findings on restructuring them due later this year.

Reuters contributed to this report.