Would Kajiyama keep to reform pledges?

By Linda Sieg

TOKYO (Reuters): Conservative politician Seiroku Kajiyama has emerged as a financial market favorite for Japan's next prime minister, but some question just how deep his commitment to real reform runs.

"He has managed to create a reformist image, but if he becomes prime minister, it is clearly questionable whether drastic reforms would be implemented," said Muneyuki Shindo, a political science professor at Rikkyo University in Tokyo.

Kajiyama appeared poised on Friday to challenge Foreign Minister Keizo Obuchi to succeed Prime Minister Ryutaro Hashimoto as head of the ruling Liberal Democratic Party and hence premier. Hashimoto is resigning to take the blame for the party's massive setback in last Sunday's Upper House election.

News that Kajiyama would challenge his party faction leader Obuchi -- whose lack of economic know-how is viewed as a glaring shortcoming given Japan's urgent economic and financial woes -- helped boost Tokyo share prices and the yen on Thursday.

Markets have been enticed by Kajiyama's tough talk over the past year, since he resigned as chief spokesman for the Hashimoto cabinet, about the need for aggressive steps to clean up the bad loan-laden banking system and his forecast of an industry consolidation which could halve the number of banks.

He has also urged hefty public works spending to rescue the economy from recession, and many expect that he would implement big income and corporate tax cuts as well without worrying much about the government's large budget deficit.

Kajiyama's reputation as a "reformer" has come late in the career of the 72-year-old politician, long seen mainly as a nationalist and a back-room fixer in the traditional LDP mould.

"Kajiyama is trying to appeal with these policies, but considering his previous political path, he has advanced on the back of various domestic industrial-sector interests, be it banks or be it construction companies," Shindo said.

Few would question Kajiyama's desire to create a strong and globally competitive Japanese economy, nor are his domestic political skills in any doubt.

"Kajiyama and his supporters are completely committed nationalists. They want, by hook or by crook, a strong Japan," said Jesper Koll, chief economist at J.P. Morgan.

He has, however, virtually no experience on the international stage, in contrast to his predecessor Hashimoto.

Some analysts say when it comes to an aggressive financial system cleanup, Kajiyama probably means what he says.

"The only good point of Mr. Kajiyama is his proposal for financial (sector) reform," said Yasunori Sone, a political science professor at Tokyo's Keio University, who added that the best scenario would thus be a one-year term for Kajiyama during which he focused on a banking sector cleanup.

Others, however, wonder how tough a line Kajiyama would take -- given his decades-old ties to the construction industry -- on the debt-laden builders which would face a serious credit crunch if the banks which now lend to them failed.

"Kajiyama's job for the past six months has been to make life difficult for Hashimoto because he lost a power struggle in September," said Jeff Young, chief economist for Japan at Salomon Smith Barney.

"That meant he didn't have to come up with a consistent policy and his statements are very inconsistent," Young added. Whether Kajiyama would speed up "Big Bang" financial reforms set in motion by Hashimoto and favored by foreign investors is another unanswered question.

But most troubling longer term is Kajiyama's adherence to an old-style stance which sees the government, rather than markets, in control of the economy, several analysts said.

Many economists have pointed to the need to let market principles work, to deregulate, and to scale back the economic role of government as vital steps for Japan's future growth.

"Kajiyama's economic philosophy is to use the resources of the state to prevent market outcomes," Salomon's Young said. In that sense, the clearest policy contrast would be offered -- should he decide to run -- by Health Minister Junichiro Koizumi.

Koizumi, 56, is best known for his controversial proposal to privatize the postal system and for proposals to scale down the role and size of government. But by midday Friday he had not yet made clear whether he intended to run for the top post, and is seen as a long shot to win even if he does.