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Glimmer of Japan Reform Hope Among Clouds of Skepticism

Japan's main opposition Liberal Democratic Party (LDP) President Shinzo Abe holds a TV interview after the party won parliamentary elections on December 16, 2012.
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Japan's main opposition Liberal Democratic Party (LDP) President Shinzo Abe holds a TV interview after the party won parliamentary elections on December 16, 2012.

Doubting politicians' commitment to economic reform is a tough habit for Japan experts to kick, so the air of cautious optimism around the appointments of dynamic CEOs to advise on boosting industrial competitiveness comes as a bit of a surprise.

Prime Minister Shinzo Abe, who returned to power last month after his business-friendly Liberal Democratic Party's (LDP) big election win, has prescribed a potent mix of government spending and easy money to revive a stagnant economy. But critics question whether he will also tackle the more painful structural reforms needed for longer-term growth.

The list of eight CEOs and an academic joining cabinet ministers in a panel to advise on steps for competitiveness, however, has raised hopes that Abe may have a bigger appetite for reform than first thought.

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"Clearly, the 'wall of worry' over the next few months is that it's nothing but old-style LDP pork barrel," said Jesper Koll, director of equity research at JP Morgan in Tokyo. "But he's picked people from leading Japanese companies, old and new, with proven records of strong competitiveness in highly competitive industries. Will he dare tell them it was all for show? It's highly unlikely."

Among those tapped for the advisory panel are Hiroshi Mikitani, 47, CEO of e-commerce operator and Amazon.com rival Rakuten; convenience store chain Lawson CEO Takeshi Niinami, 53; and construction equipment maker Komatsu Chairman Masahiro Sakane, 72, ranked by Harvard Business Review among the top 20 global CEOs in 2009.

Mikitani, for one, has been an outspoken critic of Japan's 'old guard' business leaders, dropping out of the biggest lobby Keidanren and starting his own rival group.

"My mission is to contribute to creating a framework that makes it easy to start venture businesses," local media quoted Mikitani as telling reporters, mentioning tax breaks and other steps.

Also included is academic Heizo Takenaka, an ex-economics minister who served as then-premier Junichiro Koizumi's reform czar during the latter's 2001-06 tenure and the arch-nemesis of many LDP politicians for favouring reforms that would hurt the interests of some of their staunchest supporters. Takenaka has also criticised Abe's plan to boost public works in light of the country's massive public debt, now more than twice the size of its economy.

Unlike the maverick Koizumi, Abe has no history of commitment to economic reforms. Indeed, during his first brief term in office, which ended with his abrupt resignation in 2007, Abe welcomed back rebels who had left the LDP to protest Koizumi's plan to privatize Japan's giant postal system.

"The Economy, Stupid"

This time, though, with another tough national election for parliament's upper house looming in July, Abe has made reviving the economy his top priority. The LDP and its coalition partner have a two-thirds majority in the lower house and so can over-ride rejections of bills by the upper chamber, but want to win a majority there to make enacting legislation smoother.

"The most urgent issue is that he needs to show results or lose the election, and he is working on all kinds of things to spend and print money that could produce results in the short-term," said Martin Schulz, senior economist at Fujitsu Research Institute. "On the other hand, he has to follow up on structural policies - and this is where we could have some hope."

(Read More: Is 2013 the Year Japan's Economy Turns Around?)

Still, skepticism remains strong given the deep resistance to change among many of the vested interest groups, such as doctors, farmers and small businesses, that could suffer from deregulation seen by many experts as key to generating growth in an economy whose population is ageing fast and shrinking.

"They've learned that 'It's the economy, stupid', but in terms of structural policies, most of Abe's supporters are not friends of structural reform," Schulz added. "That the LDP does nothing is still the most likely forecast."

Concerns persist that the LDP might slip into bailout-mode when it comes to key industries such as electronics, while the party remains deeply conflicted over joining a U.S.-led free trade pact, the Trans-Pacific Partnership (TPP), for fear of angering the powerful farm lobby ahead of the July poll.

"This is Japan and it's always going to be a kinder, gentler capitalism," Koll said. "They are still wavering on TPP and they aren't going to 'get religion' before the election because it cuts into vested interests."

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Even if Abe takes on board recommendations crafted by the panel for a growth strategy to be drafted by June, some fear the reforms may help companies, but not the domestic economy itself.

"What the Abe government is thinking of as structural reform is ... how to reduce costs to boost the competitiveness of the manufacturing sector, so they can increase exports. But that will expand the current account surplus and the yen will rise again and competitiveness will decline," said Koichi Haji, chief economist at NLI Research Institute in Tokyo.

"What they are thinking about is how to reduce the corporate burden, rather than how to develop businesses that will help the Japanese economy develop," he said. "Because they are not just old-fashioned manufacturers, we can have some hope, but their concept is to make money from overseas demand.

"It's a half-step forward from focusing on public works and construction, but it doesn't mean a big change in thinking."

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