Revival will take time says Japan P.M.

Koizumi is promising to clean up Japan's badt debt problem

TOKYO, Japan -- Japan's Prime Minister Junichiro Koizumi says his plan to resuscitate the world's second-largest economy will take up to five years and require a massive re-allocation of public spending.

In an exclusive interview with CNN, Koizumi says the administrative and financial reform he is planning to introduce to return Japan to its former prosperity "will not have immediate effects".

His caveat came as fresh economic data on Friday showed Japan's retail sales flagged in April and consumer prices fell further, underlining nagging deflationary pressures and weak spending by Japan's consumers.

Japan's consumer prices, excluding fresh food, fell for the 19th straight month in April, slipping 0.5 percent. Analysts say improving private spending and eliminating deflation will be crucial to Japan's economic recovery.

VIDEO CNN's Marina Kamimura says Prime Minister Junichiro Koizumi vows to get Japan 'back on track' (May 24) Play video (QuickTime, Real or Windows Media)

The popular new prime minister, who swept to power last month after assuming the leadership of the ruling Liberal Democratic Party, plans to outline a framework of economic revival policies by mid-June.

"For the time being, our target is disposing of the banks' non-performing loans or bad debt, because this is a huge impediment to Japan's economic recovery," he told CNN's Marina Kamimura in Tokyo.

Giving his first in-depth interview with a major Western media outlet, Koizumi said he aimed to dispose of the non-performing loans that threaten to cripple Japan's banking sector within two to three years.

"We are doing are best to start that process," he said.

Public spending

Another key pillar of his economic recovery plan is a change in the deployment of public funds.

"Specifically in next fiscal year's budget, I think we must change the allocation of expenditures," he said.

Koizumi says it may take up to five years for his reforms to revive Japan's economy

"Take the special funds for road-building, where revenues from gasoline and auto taxes can only be used for constructing roads. Despite strong resistance, I have clearly said that this fund must be reviewed."

"If we increase expenditures for employment measures or science and technology promotion or social security other expenditures must be decreased. Targeting mid to the end of June, we are going to come up with an alternate framework of policies."

Economists have cautiously welcomed Koizumi's pledge for a shake-up of Japan's economy. Some, however, have criticized the new leader's promises for seeming vague and occasionally contradictory.

During the race for the LDP leadership, Koizumi was seen as the best option because of his strongly reformist rhetoric, in both an economic and political sense.

"I always thought that the modus operandi of the Japanese government of the past would not last for a long time," he told CNN.

"The Japanese economy declined into a recessionary period; interest rates (were) cut to the lowest level possible; fiscal policies exerted to the maximum; money borrowed to the fullest in compiling budgets; taxes cut; and public works increased. All of these measures were okay for the short term."

'Excessive interference'

"But I always thought this would not last. There has been excessive interference from the government in the private sector. This should be corrected."

"Take the three postal businesses . . . postal savings, insurance and delivery services. They are part of an enormously complicated public structure. A lot of money is being wasted in these bloated government-related industries."

"About 300-thousand government workers wouldn't need to be there, if these services were privatized. This would lead to the consolidation and rearrangement of vast government related structures including special public corporations.

"If we decisively shift these services to the hands of private sector corporations there would be less of a waste of tax revenues. On the other hand, we would have more private sector companies paying taxes.

"No government would touch these sectors saying they were taboo. But this is something that the Koizumi cabinet has dared to touch for the very first time. Our will to try and touch these areas shows our determination to be serious about reform."

Since taking office as prime minister, economists are now placing Koizumi's promises under a microscope to see if they hold up to closer scrutiny.

Broad-brush themes

"He came out first with quite a few broad-brush themes, saying Japan has too much debt and spends it public money the wrong way," said Nikko Salomon Smith Barney head of economic and market analysis Jeffrey Young.

"Then he gave some specifics on the bad debt situation, perhaps more detail than we would have expected, but we are yet to see anything comprehensive on the fiscal reform, and we don't expect anything soon."

"I am concerned about the lack of attention to micro-economic reform; things like deregulation of perhaps the less exciting industries such as energy, transport and real estate," said another economist, who asked not to be identified.

"On the reform side, I'm a little bit worried that they might do too much too soon.

"The Japanese economy right now is extremely weak, and public spending is one of its key pillars.

"If they went cold turkey on some areas of spending I fear it might not necessarily have a short-term positive impact."