Introduction

Prime Minister Koizumi came into office April 2001, when the economy was in serious, protracted stagnation and deflation, despite nine years of repeated government stimulus packages and the unprecedented ZIRP of the BOJ starting February 1999. In 2001, the economy was in renewed decline, and real GDP growth was only 0.21 percent in 2001, after a brief modest recovery in 2000 (2.4 percent real growth). The unemployment rate of 5.0 percent in 2001 was the highest in postwar history and was still climbing. Deflation continued with a 0.77 percent decline in the CPI in 2001 (OECD, various years). Observers in and outside Japan were wondering whether a “second lost decade” was in the making. The Japanese public and businesses felt helpless in the face of the seemingly insurmountable economic stagnation and ineffective government policy. They were desperate for any change or any political leader who could offer any alternative solution to the economic and financial distress that had passed the decade mark.

The Japanese placed their hope in Koizumi – very unconventional, energetic, and atypical of LDP leaders – when he emerged in 2001 with the promise of changing Japan and engineering economic growth and, if necessary, destroying his own LDP in the process. Koizumi attempted reform in many areas of the economy and government intervention, some successfully and some not so successfully.