Japanese Koizumi's phoney reforms

Junichiro Koizumi's recent rise in popularity has attracted much attention but the Japanese prime minister's poll numbers are irrelevant to the prospects for reform in Japan. Indeed, no prime minister from the Liberal Democratic party can fundamentally change Japan because reforms such as privatising the postal service and cleaning up Japan's banking sector would ravage the LDP's power base.

Japan is unlikely to regain its economic predominance while the LDP is in power, while the public remain disengaged from politics and without a true outsider emerging as a leader.

Japan's postal system controls about a quarter of all the country's household savings. Last week Japan's parliament passed legislation that was heralded as the privatisation of the postal service – and a victory for Mr Koizumi's postal reform. It was not. Real reform would entail removing massive private funds from the government's control. All the legislation achieved was to permit private carriers to deliver mail.

The postal system is at the core of the LDP's power and funding. Its savings and insurance deposits total Y370,000bn ($3,100bn), the largest deposit of hard currency in the world, essentially giving the LDP control of the world's largest bank. With 25,000 post offices and close to 150,000 postal service employees, the institution's relationship to the LDP is similar to that of trade unions to the US Democratic party during the 1960s and 1970s. Postal workers organise and bring new members into the party and ensure turn-out on election day. They channel funds to LDP politicians' pet public works projects, many of which are large and wasteful.

Turning this system over to independent private hands would be to dismantle a party machine. No political party would willingly let such an institution fall out of its control.

Japan's most immediate challenge is the financial sector's estimated $1,200bn in non-performing loans. The lack of aggression of the LDP-installed Resolution and Collection Corporation is evidence that the LDP values maintaining political control above fixing Japan's banking problems.

The RCC has not forced banks to rid their books of bad loans more rapidly. It has allowed two to three years for clean-up. Clearing up the problem swiftly would cause many banks to fail, which they should. But, more importantly for the LDP, in the sectors with the largest bad debts – property, construction and heavy industry – staunch financial supporters of the LDP would go out of business. This is not about ancient, sacred honour and obligation; it is about money. Bankrupt companies cannot contribute funds to the LDP coffers.

As the subsidised postal savin gs system continues to compete unfairly with private banks and insurance companies, and the RCC puts off fixing the banking problem, it cripples the one sector in which Japan has the potential to continue to dominate regionally and globally: financial services. The LDP is allowing competitors from Korea and China to gain significant ground. And a senior executive of one of Japan's largest banks pointed recently to another looming problem. Every day there are new non-performing loans, partly because of the burden essentially insolvent banks and companies place on the economy.

Japan has some genuinely reform-minded politicians. But to prevail they will have to build coalitions with politicians who support the status quo. And given these politicians' history of loyalty to the LDP, persuading the public that they will bring real reform is daunting.

Much of the blame for Japan's problems lies with its politically apathetic public. To bring about reform, the public must become more directly involved in politics and unite to demand change. The public has not been a dynamic political force in Japan since shortly after the second world war, before the LDP secured its stranglehold on the political system. There is a cynicism and depression lingering over Japan because many feel that they cannot make a difference.

For all the talk of Mr Koizumi's high approval ratings, the public demonstration of support for the prime minister was and is non-existent – beyond approving answers to carefully worded poll questions.

Perhaps the most important requirement for change is a non-LDP national leader. Shintaro Ishihara, Governor of Tokyo, has been mentioned by some. Even in the event of a temporary economic collapse – which many observers suggest would be a catalyst for real change – without the emergence of a strong, independent leader, the LDP would be likely to pick up the pieces in the aftermath.

There is an old Japanese saying that "the nail that sticks up gets knocked down". It is a phrase designed to instill the virtues of conformity and of failing to demand change. But without the political will to implement genuine structural reform, Japan may never regain its former place among the world's economic leaders.