Indonesia - Progress Report

Indonesia has never looked stronger as all factors conspire to progress the country. The only setback was the Asian tsunami that destroyed the province of Aceh. Perhaps that tragedy provided the goodwill for the recent piece settlement. The strengths of the country are:

1. Highly prospective for resource exploration - which can serve as a basis for mineral & agricultural export industries
2. New popular leader able to drive policy direction
3. Peace agreement in Aceh which will facilitate investment
4. Tax reform being adopted by the President
5. Petroleum revenues helping the country to preserve its energy self-reliance

The Indonesian Archipelago is however not without its problems, the most important being:

1. High levels of corruption & business
2. Lack of public accountability in goverment and corporates
3. Ethnic and religious tensions which divide the country and remain a basis for tension. Prior resettlement policies could incite such problems. Regional autonomy will be critical.

The Indonesian government and Acehnese rebels have reached a landmark peace agreement after 30 years of fighting. The Free Aceh Movement (GAM) has surrendered 25% of their weapons, and will surrender the balance on 31st Dec’05. The Indonesian government is responding by gradually withdrawing its troops from the province. This peace agreement will be a big boon for Indonesia.

Russia - Progress Report

Political Reform
Russian politics matured considerably in the 1990s. Following the election of President Putin, the Russian leadership has come to terms with the need to countenance public opinion. Putin released this after a few mishandlings of issues, eg. The Checheyan terrorist attacks, the failed rescue of naval personnel from a nuclear submarine.

The Russian government continues to oppose US foreign intervention (often with China) in an attempt to limit its influence in the Asian region.

Russian Society
Russia is divided between those with money and those without. Alot of those without money drink excessively or resort to crime. Youth delinquency is a major issue as social problems escalate. The nationalist movement in the country is strong - particularly among naive youth attracted into the movement. Corruption is rife. On the positive side, Russia has a credible education system and the importance of education is widely recognised.

Russian Economy
In 2004, the Russian economy grew by 7.1% primarily as a result of strong commodity exports, the most important of which is oil. Urban growth was much stronger in St Petersburg, which recorded growth of 14% - establishing itself as a centre of future economic development.

The biggest investors in Russia to date have been the Europeans & US, with Japan trailing because of security concerns and existing tensions between the countries over Russian annexation of Japan’s northern islands in the closing days of WWII. Some Japanese companies already have a big presence – with Toyota the best selling foreign car company. Toyota will also open a car plant in Dec’07. Japanese companies have invested just $1 billion to date.

United States - the bursting economy

The United States is the largest `relatively` free country on the planet. It is however more than its politics - it has a superior sense of life than any other country. It is a country that gets things done by virtue of its values. Sadly its grounded in religious rationalisations, making them such `hopeful` hypocrits.

US Political Organisation
The US political system is as good as most by virtue of its strong voter participation and the general ethos of self-reliance that permeates the whole country, including the Democrat Party. The protracted political process is effective at rooting out dubious presidential candidates. The only disappointment is that its not a preferential voting system. The implication is that even if you are a Libertarian, you`d probably vote for George Bush to make your vote count.

Prior to WWII the US had no interest in global affairs, but it has since taken national pride in being the `global policeman` - in extending freedom to the rest of the world. Sadly this policy has lacked integrity and any strategic direction. It has been poorly executed.

The US Economy
The current economic cycle (1992-2005) has delivered the US an average GDP growth rate of 3.2% (?) per annum. Initially growth was soundly based on rising incomes and production, however in the late 1990s expansions monetary policy have created a `money illusion` that has artificially stimulated domestic consumption. Record low Fed rates, tax cuts and easy credit growth artificially pushed up housing & equity markets, giving Americans the illusion of wealth creation. On the east & west coasts property prices have risen by 120% over this period (compared to base line growth of ??).

The consequence is that the US is now recording record budget deficits of 6.8% of GDP and monthly current account deficits of $US60billion at a time when interest rates are at record lows. Its true that the US has a capacity to absorb more debt than any other economies because its debt is denominated in its own currency. But this debt poses a huge concern because the spending is being undertaken on the premise that income and consumption growth (and this housing & equity prices) are sustainable.

In Aug05 we are seeing the first signs that this boom is not going to hold. The risks posed to the market are:

1. Oil prices: In current $US terms, oil prices in 1981 reached $93/barrel compared to $US70/bbl today. This is a rationalisation used to justify asset prices rising higher. But consider that oil prices are still rising, households are more indebted than the 1980s and the trade imbalance.
2. Inflation: There are signs of inflation which will eventually feed into higher interest rates. Inflation in itself is not bad for asset prices, and it can be ignored by the Fed Reserve at the economies peril. Inflation has a nasty habit of running away as production slows and more money is chasing fewer goods. In the expansion phase inflation is countered by falling unit costs (productivity).

The US has record debt levels at a time when Asian economies are clinging to mercantilist policies. The EU is struggling to unite. Where is the prospect for future global growth when western markets are so indebted. There is no capacity for the Chinese to spend, Japanese incomes are flat, and it will be years before the LDP Party will be able to see the benefits of reform. The US is facing an aging population, however it has some capacity to easy this burden through increased immigration.

Whilst households are indebted, US S&P500 companies are sitting on $US621 billion in cash. There are several reasons for this. Since 2003, companies have been taxed directly on dividends, rather than having them taxed at the marginal tax rate. For this reason, some companies have adopted capital returns, but the majority are clinging to cash in preparation for a `correction`. This provides them with the funds to engage in takeover activity. Buybacks make alot of sense too because the add value to executive stock options, but not much longer as expensing options becomes a compulsory requirement. The S&P500 dividend yield is currently 1.7%, compared to an historic average of 4%. When the global economy slumps, earnings expectations will look highly unrealistic.

The US is facing a $US50billion clean-up bill relating to the New Orleans flooding. Thats on top of already strained public coffers. US retail sales plunged by 2.1% in Aug'05, even before the impact of Hurricane Katrina. This is the largest fall since Nov'01 (2.9%) in the wake of Sept 11th. The bulk of the fall was caused by a 12% fall in car sales, otherwise non-car retail sales were up 1%. Regardless the increase reflected higher petroleum sales (prices). On the positive side, the PPI fell in Aug'05 and the trade deficit narrowed. Might this however reflect the stronger $US.

EuroZone - breakup on the cards

The EuroZone like Japan has languished as it struggles with national reform and regional integration. Integrating regions with entrenched regional identities was always going to be difficult, particularly when these countries have very different identities. My forecast is that the EuroZone is going to suffer a breakup based on values. I can see several blocks, namely:

1. Northern countries: Germany, France, Netherlands, Sweden, Austria, Finland
2. Southern EU countries: Spain, Portugal, Italy, Greece
3. EU Tigers: Poland, Czech Republic, Hungary need not separate, as they might closely allign themselves with the Northern EU countries.

These countries can still integrate at a certain level such as trade tariffs, but they will not integrate on currency & interest rate policy or public spending priorities. A the moment, the saving countries (France & Germany) dont need higher interest rates, but the other countries do. EU monetary growth is 4x faster than economic growth - thus monetary policy is too easy.

Australia - Progress Report

The Australian economy has long been recognised as a `commodities play` because of its reliance on mineral & agricultural exports, but in fact the economy is considerably stronger than that precisely because of that dependence. If global demand for commodities subsides the $A declines and offshore commodity revenues (priced in $US terms) are preserved. Better still - the country benefits from increased tourism. The housing markets tend to suffer from higher interest rates as the Reserve Bank of Australia attempts to stabilise the economy. The economic paradigm has changed recently though.

Political Organisation
Australia has a stable democracy. The encumbent Prime Minister John Howard is the longest serving PM since his mentor Bob Menzies held power in the 1950s and 1960s. Both leaders led their conservative Liberal Party to successive election victories. Both leaders oversaw periods of economic prosperity, but in Howard`s case, it was largely by default, with no meaningful opposition.

The Howard government has however been disciplined in reducing the huge public deficit accumulated under the Labor Party in the 1980s. The debt has been reduced from $168billion to just $28bil, and that is likely to be a bottom given the desire to retain a liquid bond market.

My belief is that the Australian government will attempt to expand its immigration program to lift subdued domestic demand in future, as well as provide marginal support to nation-building infrastructure programs. In the process it hopes to stimulate new investment in under-funded infrastructure, as well as reducing debt in per capita terms.

Economic Activity
The Australian economy has been one of the fastest growing OECD countries over the last decade - largely as a result of labour market reform, privatisation of key state-owned enterprises and subsidies to the housing sector, in addition to falls in interest rates. The late 1990s and early 200os were particularly strong as mineral export prices & volumes improved and housing prices took off. In the last 3years, China largely accounted for the bulk of the incremental demand, and that demand will evaporate in future when the US & Chinese property markets fall.

Improvements in Australia`s terms of trade have been matched by increasing imports from China, which have helped to keep domestic inflation low, as the $A has rallied from $US0.48 t0 $US0.80, and since fallen to $US0.76. During the 1995-04 property boom, housing prices rose by an average of 250%(?), going from 3x annual average incomes to 9x, as prices rose with incomes and their capacity to borrow (new jobs & lower interest rates). The concern is that the bursting of the US housing market by high oil prices & excessive household debt will undermine global economic activity. We can thus expect a much lower $A and higher interest rates, which will take a huge hit on the Australia property market.
There remains considerable optimism about the health of the global economy. Iron ore & coal annual contract prices are up 50%, and such companies along with the oil companies are sparking an investment boom in WA and NT. These investments will take 2-4 years of construction. Investment in other areas is less active because mineral prices in Australia have not risen greatly in $A terms because of the strength in the $A. The positive is that as mineral prices fall, so will the $A. Just gold prices in $A terms will perform very well.

Equity Markets & Corporate Earnings
Australian equities posted solid earnings in 2004-5, and the minerals sector which renegotiated annual contract prices in Mar'05, will see stronger earnings this year, and those contract prices are likely to be preserved in coming years if the $US weakens.
The broader market is not likely to repeat its strong 2004 growth since high household debts and rising interest rates are likely to undermine retail sales. Inflation initially can be expected to boost earnings since the value of capital will boost balance sheets, whilst corporations are able to pass on costs. Corporates have resorted to boosting dividend pay-out ratios (DPRs) from 77% in 2004 to 80% in 2005. Two companies going against the broad trend:

1. BHP Billiton has the made the lowest dividend payout ratio of 23% in years as it embarks on a $6bil capital expenditure program to boost output. This trend is evident across the resources sector, with Div Payout Ratio (DPR) in the resources sector falling from 49% to 31% between 2004-05, suggesting resource companies will have some nice profit/dividend growth in future, whilst the broader market is stretching itself. Clearly they are hoping the market will react to stronger metal prices in the short term and higher dividend yields (DPRs) as the commodity prices correct.
2. Telstra: The new CEO of Telstra has disclosed that the company has under-funded capital expenditure by $2-3billion over 3-5 years to boost earnings, whilst at the same time delaying the adoption of ADSL at $30/month. Under-investment in the past (reflected by 14% line faults) means higher investment in the future, so lower earnings, and likely squeeze on margins, particularly if the Fed govt proceeds with a break up of Telstra. Lower dividends, particularly since the payout ratio from earnings is very high.
   Telstra’s dividend of 40c per share was based on a pay-out ratio of 93% (up from 75%) - suggesting they retained only 7% of earnings for capex. Its intention is of course to boost the share price for the privatisation, whilst not disclosing the capital investment required to maintain services. Telstra had to borrow $550mil from its Special (share premium) Reserve to fund this dividend, and the same for the special 2006 dividend.

Housing Market
Recent housing figures (July'05) suggest households are taking comfort in the persistence of housing prices, interest rates and strong labour market. The consequence has been a strong recovery in the housing refurbishment market. The consequence of this is likely to be a lift in interest rates by 0.25%, particularly as inflationary pressures are high.

Inflation
Strong inflation has yet to register in the CPI figures, but it seems likely in coming quarters as:

1. Wages rise: Wages rose 7.4% annualised in the Jun’05 qtr.
2. Employment: The labour market remains tight with the unemployment rate still at 5%.
3. Purchasing Power Index: The PPI, a measure of producers cost variability has increased due to higher fuel & material costs.

The Forex Market
The $A can be expected to trade higher due to the strong momentum in the housing market. Australia will also benefit from strong terms of trade as the recently negotiated mineral export contract prices still have some time (9mths) to run. A lift in interest rates will only help the $A remain high, but in6mths time it will come off strongly as commodity prices fall.

China - Progress report

This is a review of the Chinese economy which I will update as snippets of information become available. It will initially be a conceptual overview, but I will add statistical evidence for my views (from other sources) as I integrate them.

Background
Since the 1990s the Chinese economy has expanded with increasing momentum as western companies gained increasing evidence that the Chinese government was adopting pro-market reforms. Despite a decade of very strong growth, the Chinese economy is still relatively small and export-orientated. With a population of 1.3billion - there is considerable potential for market expansion, but thats only as long as western companies have confidence in the stability of the region.
There is strong evidence to suggest stability will be maintained. Citizens in the poor rural western provinces are prone to move to the east coast - the centre of investment - rather than protest against the disparity between city & rural incomes. The problem however emerges in future - when China`s export-based industries can no longer expand and those millions of rural farmers migrating to the cities cannot get a job. They might be joined by homeowners unhappy with the collapse of the property bubble. Will they resort to protests? This seems likely, but with a 10mil strong military force, the Chinese government is well-positioned to suppress it.

Political Organisation
China is a country in transition from a communist regime to a market economy. That is a long path requiring a change in values - foremost in government, but since the government has the power, it usually takes much longer for market participants to assert their individuality. The Communist Party has moved from its hard-core socialist values. Today the Communist Party is different because free markets have demonstrated their practicality, foremost to party leaders at local & provincial levels, who are able to earn significant bribes for state approvals and licences. The argument is often made that China does not permit democracy because people don`t have the right to form opposing political parties. True. But the party is no longer an ideological entity it once was, rather an political organisation in which various factions fight for power. There is some value in this. We don`t see the appeals to populism evident in western democracies which undermines political integrity in favour of short term expediency. China is playing catch-up, economically and philosophically. Participating in a market economy implicitly changes values. People develop a sense of ambition, their own autonomy and values, and when they have achieved a level of comfort, they seek to express themselves.
There are alot of expatriate Chinese in Australia, Canada and the USA, which will similarly play an important role changing values in China.

Chinese economy
The Chinese economy is booming - largely because its cheap labour, potential market and technical skills make it a compelling proposition for western investment. The country is appealing for raw material processing, assembly, but increasingly companies are shifting all their manufacturing capacity there. The country is growing so rapidly that there are severe capacity bottlenecks on infrastructure and raw materials, leading to slowing productivity and higher prices. For these reasons some companies are reluctant to make China the centre the focus of their manufacturing.

China is undergoing a boom in foreign & domestic investment, but most of the activity relates to just 3 sectors:

1. Property: Higher incomes earned by Chinese people, mainly working in foreign JV companies or those offering technical skills or self-employed successful business people are fuelling a property boom. In addition, expatriate Chinese are reinvesting in Chinese real estate.
2. Export industries: There is a huge influx of foreign investment in factories, assembly & processing plants.
3. Infrastructure: All this activity is stimulating a demand for basic services, eg. Power, roads, highways, railways, gas, water & sewage reticulation systems, etc.

The consequence of these activities is that fixed capital investment accounted for 50% of GDP in 2004. This causes an immense disparity between income capacity and spending. The problem with this is that capital spending is servicing export markets, making the Chinese economy highly vulnerable to a slump in global activity. The problem is that there is a serious risk of a slump because:

1. Asian countries have adopted japan-style mercantilist policies at the expense of western interests, as well as the well-being of their own people.
2. The United States has propelled its economy by adopting an overly-stimulatory monetary policy that has sparked a property boom on top of an equity boom. This has placed US finances in jeopardy, requiring higher interest rates and undermining its currency.

Japan - Progress Report

The Japanese economy is regarded as holding considerable promise, but there is a pre-qualifier - substantial reform.

Political System
Japan has a western-style democratic institution in name only. Institutions are a facade in Japan. There is a legal system to protect civil rights, but no one uses it. Many marriages are dysfunctional, but there are few divorces. Most have a job, but can`t justify it.
Nevertheless, the political process is increasingly becoming more like the west. Historically political power has been retained by the Liberal Democratic Party (LDP), which has won all but one election (1994-5?) since the US Occupation. Within the LDP faction leaders held most of the power because of their capacity to generate campaign funds. Money has always meant power, and in Japan this has meant considerable misallocation of postal savings & tax receipts into dubious public works programs. Corruption was an accepted part of politics until the late 1990s. Adoption of the Political Funds Control Law was however discouraged corruption, and thus weakened the power base of faction leaders. Faction heads unable to find a leader to ignite a party lagging in the polls, chose a 'lone wolf' in Junichi Koizumi. To their surprise, Koizumi has emerged as a populist leader and a reformer. His popularity gave him the power in the recent Sept 2005 election to oust the old faction MPs who opposed his reform agenda (Postal Savings Proivatisation Bill), and replace them with popular public figures with no political history. The strategy worked, and Koizumi was able to swing more votes, and thus a mandate for his reform agenda. At the same time, he was able to introduce women MPs into the parliament and unify the party behind him, as well as increase their power.

Its apparent that Koizumi has learned a great deal from US politics - whether under the instruction of US political analysts or his own minders. He danced with Richard Gere, appeased conservatives by visiting the controversial Yasokuni Shrine honouring Japanese soldiers, published his own Elvis hits, named his website after his hair style and expediently (before an election) appointed a string of women to his party, in the hope of drawing alot of support from women for his pro-reform agenda, since few young Japanese women vote.

During the last 4 years Koizumi has been unable to convince LDP faction leaders of his reform agenda. Some opposed it outright, others had their own schemes. He responsed by ousting those opponents, replacing them with outsiders whose popularity was tied to his, and made the Postal Reform Bill the focus of this election. In the wake of the election, the factions are cosiderably weakened. Ryutaro Hashimoto, the Ryotaro 'Hashimoto faction' leader has retired, and another faction leader - Shizuka Kamei - has been purged, while their factions have lost 15 and 12 lower house seats respectively to Koizumi's benefit. Both leaders opposed his Postal Reform Bill. He got his `reform mandate`, meaning that the government will in its next term of government be able to achieve a great deal. The big issues are:

1. Social Security Reform: The social security system costs are rising by a modest Y500 billion per year due to the country's aging population. In 2004 social security expenditure rose by 0.8% to Y84.27 trillion.
2. Health Insurance System: Every year the health insurance system has a funding shortfall of Y300 billion covered by the government.
3. Pension System: The number of aging baby boomers retiring will increase greatly after 2007. Pension, nursing & medical costs accounted for Y59.3trillion (70.4%), with just Y3.16trillion spent on children, family support (including child rearing & child birth benefits), equal to 3.8%. Pension benefits amounted to 53% of payments in 2003 and medical benefits 31.6%.
4. Bureaucracy: The public service is over-paid by up to 20%, and in need of cut backs. Japan Post is one of the worst offenders.
5. Public sector debt: A great deal is made of the public sector debt (150%of GDP), however it could quickly be slashed by a series of privatisations, whether its NTT, Japan Post, Japan Airlines, Tokyo Electric, Tokyo Gas, airports or other government-owned infrastructure. The government can also resort to printing money. Importantly this public sector debt is mostly owed to Japanese citizens, so a new tax would just redirect the burden to a more prosperous sector of the economy.

Substantitive reform is needed in these areas, and its mostly likely that the consumption tax will be increased from 5% to 10%. But the public sector represents just 25% of the economy. Koizumi will need to pass significant reforms in the private sector to boost productivities and incomes, otherwise a higher consumption tax will just undermine consumption. In Koizumi's favour is the fact that the real estate market is priced on 'attractive yields' and foreign investors are keen to invest in Japan given their over-priced domestic markets and the possibility of reform in Japan. Facing a sanguine foreign export market, domestic economic growth will require income growth - wich will drive spending and the housing market to underpin confidence. With so much money swashing around, there is little chance that softer foreign markets will undermine that.

The government is attempting to get its budget under control. It has postponed an increase in the GST until domestic spending recovers. Public debt serving costs rose 11.1% in 2004-5, whilst grants to local governments are up 4.7%. The Japanese government proposes to cut 10% of civil servants in coming years.

The election result left the LDP with 296 seats (excluding former LDP members who ran as independents in opposition to the Postal Savings Reform), DPJ 113 seats, New Komeito Party 31 seats, Japan Communist Party 9 seats, Social Democrat Party 7 seats, Independents 18 seats, with a total of 480 seats contested. Its thus apparent that the LDP can adopt its 'reform mandate' without the support of its Coalition members - the New Komeito, and some of those former-LDP might reform the party. The LDP only needed 269 seats to ensure the smooth passage of legislation through the Diet. The result gives the LDP a majority position in all Lower House committees. The LDP performed well in the urban areas of Tokyo, Chiba and Kanagawa, areas traditionally strong for the DPJ. The New Nippon Party won just 1 seat, showing that Japanese voters have little faith in 'new institutions', and that they vote for parties not candidates.

Koizumi prior to the election claimed to have no plans beyond his contract expiry in Sept'06. Yet given his overwhelming support among LDP members and the wider public, it seems likely he will stay on to implement his reform agenda. Its likely his comments were made in the light of his stalled agenda. To date he has hardly achieved anything - so to date he's not leaving much of a legacy. Perhaps his greater influence has been to shift executive government from deal-making, consensus-building to image-driven, media-managed policy based on simple messages for the public. If Koizumi leaves, Deputy LDP Secretary General Shinzo Abe seems the most likely replacement. He's 50yo, hawkish on China & North Korea. He's popular with women despite his attitudes to sexual equality. He likes to visit the Yasukuni Shrine.

Japanese Economy
The Japanese economy has been subdued since 1991 (about 15 years) as the 1980s property bubble deflated leaving the Japanese banking system in tatters, and undermining personal incomes and domestic consumption. The export-orientated of the economy has remained surprisingly strong (despite a strong Yen)due to subdued domestic demand (for imports) and strong exports to a bouyant US and Chinese/Asian economies. In recent years, inconsistent growth in the Japanese economy has largely come from Japanese capital spending tied to cyclical fixed capital investment and Chinese/US-inpsired export demand and foreign earned income. Since 2004 the Japanese economy gained a little strength from a recovering property & construiction market (after 15years of decline averaging 9% per annum) . New investment was sparked by record low interest rates, increasing preparedness of banks to lend, and high yields on property. Already there are signs of oversupply of residential apartments in & around Tokyo, which is why a rise in household incomes is needed to sustain the economic recovery. This can only come with productivity-generating reform. High oil prices and softer US-Chinese markets will not help.

Japanese household spending fell 3.3% in July05 YoY , due to an average monthly fall in household income by 3.6% to Y572,399. At the moment the gains are patchy. Certain retail groups like furniture and clothing
have benefited from real declines in prices from Chinese imports. More progress is needed on retail reform and utilities to reduce the cost of living. The other retail sector to record strong growth (9.1%) was housing.

The financial system
The Japanese economy has stagnated for the last 13 years whilst households have seen their home equity eroded and backs have haemorraged under the weight of non-performing loans. The problem was that corporations & households were encouraged to debt finance capital expansion, and this spilled into household & public consumption, some of it frivilous spending on rural resorts, civil infrastructure, etc. In the last 13 years the banking sector has been reluctant to lend to households, while corporate demand for finance has been weak. Instead the Japanese banks have rebuilt their reserves by lending overseas to lifting margins. Now that asset prices have stabilised, Japanese banks are feeling more confident about lending. They have made considerable progress writing off bad loans to clean up their balance sheets, such that bad loans have fallen by 28% in the year to Mar'05 to Y24.9trillion ($US240 billion). This figure might however be treated as conservative. Regardless, it will take time for bank credit expansion to get into full swing. There is no doubt more progress can be made in the financial sector. Private banks in Japan trail other developed markets in productivity and innovation. It would not be surprising to see Koizumi allow foreign banks to enter the market, and privatising the Postal Savings & Insurance Scheme is the first step towards an improvement in the Japanese banking system. Privatising the Postal Savings Scheme would mean savings would no longer be channelled into public infrastructure projects, and its likely that interest rates would rise.

The Outlook for Japan
If the Japanese government is able to implement substantive reform, we might expect the government to print money to rein in the excessive public debt (150% of GDP). Most of this debt is held by Japanese institutions and investors at nominal interest rates. Such inflationary pressures would create a `money illusion` to rebuild confidence, whilst the government embarks on its reform program, which would deliver real savings for households.

ADDENDUM

Postal Savings Reform - the start of something bigger: PM Koizumi tried to sell off the post offices (Japan Post) but failed because LDP factions didnt like the impact on rural electorates where the post office is subsidised by generous rent & payments unrelated to turnover. There are some 19,000 privately run post offices in isolated rural areas those existence cannot be justified. Japan Post has been in the red since 1997, and 60% of its expenses are labour costs. This largesse will not change under the current proposed reforms, but will likely be revisited if he wins many seats. Having failed on that, he turned his attention to selling the Postal Savings scheme. This organisation controls Y340 trillion in pension & depositor savings, paying minimal interest. Even members of his own party oppose sale of this government cash-cow. Its because of non-discerning, conservative investors that interest rates in Japan are so low, so if the Postal Savings did not have a political purpose then interest rates would be higher, as they would be chasing higher returns in property, equities and overseas, rather than Japanese govt bonds. Foreigners are not interested in Japanese bonds, so interest rates will have to rise. Thats good for savers. PS: Japanese debt is public, and mostly held by Japanese institutions and individuals. Thus Koizumi need only increase tax or print money to repay it. I bet he will print money to stimulate the economy after he gets some reforms through. This will lift consumption, counter deflation and make everyone feel good about more reform. It will create jobs to replace those lost by reform. Go Koizumi!