Koizumi's rescue plans have left the Japanese all shook up

The Elvis-loving Prime Minister has tough new proposals to save the economy

The Japanese pop charts were rocked on Friday by a curious new entry. Junichiro Koizumi, the hugely popular Prime Minister who shares his birthday with The King, released an Elvis compilation album with pictures of both birthday boys on the front cover.

The CD is likely to be a roaring success. Koizumi, fresh from his victory in the Japanese parliament's Upper House elections, is still riding high in public estimation. Even the pan-Asian furore surrounding his recent visit to the Yasukuni shrine made no inroads on his approval ratings, down from their 93 per cent peak, but still in the 80s.

But these diversions will not work forever. Last week the Nikkei crashed to levels it last hit in 1984, and analysts believe the market may have further to fall. Koizumi was elected on a platform of reform. The trouble is that his proposed reforms are sweeping, and the market knows they could create a lot of pain before the country starts to gain. And the Japanese public's patience will last only so long.

Japan's economy, still languishing after more than a decade of downturn, is in dire need of stimulation. Before that, several dire straits must be navigated. The biggest is the bad debt that has crippled Japan's banking industry. The excesses of the bubble-era loan culture have finally caught up, and Koizumi has made clear he is not going to resort to the strategy his predecessors adopted: dishing out financial recovery packages and hoping for the best.

Another major issue has been Koizumi's suggestion that spending on government-funded projects will be cut radically. Traditionally, public building projects such as bridges and roads have given the government a way to keep unemployment levels low and local economies stimulated. Analysis by Nomura Securities suggests that if Koizumi's reforms were passed in their present form, unemployment in Japan could soar over 10 per cent.

But by setting his sights on these two problems, Koizumi has given himself a difficult course to steer. Not only does he have to rebuild the economy in a way that does not ruin the lives of ordinary people; he has to get his measures past the old guard of his party. He does not have long to do it.

Japan's parliament is in recess at the moment and Koizumi has pushed back the reconvening date to late September. "Reading between the lines, he knows it will take the extra time to bring his party round to his way of thinking on these reforms," says Andrew Nagele, senior fund manager at Legal & General. "The old guard is used to pork-barrel solutions and Koizumi's reforms are different."

Koizumi is trying to establish a safety net for Japan. He knows that as his reforms bite, times will get tougher, and his political tenure depends on keeping the country sweet. His reforms are backed by extensive plans to save money from the more wasteful areas of the Japanese public sector.

Unsurprisingly, these have met stiff criticism. For example, Koizumi has threatened to abolish the Japan National Oil Corporation, which has traditionally provided a lucrative and easy retirement post for LDP party politicians and bureaucrats. Other proposals include privatisation of the cumbersome Post Office.

"Koizumi can expect a very rough ride on these ideas," says Nagele. "Knowing Japan, it is also not out of the question that his opponents – even those within his party – [will] dream up some scandal to hit him with and hurt his popularity."

The only apparent solution to the stock market's miserable trough again rests on the Japanese public. As one analyst says: "Somebody has to persuade the Mrs Ta-nakas [Japan's "Joe Public"] to take a bit of their cash out of savings and into equities. Even if only 3 per cent of all savings in Japan were put into the market, it would be sent back on the path to recovery."

Koizumi has to hope that, like his CD, the public is still prepared to buy into his dynamic image. Commerzbank strategist Chris Rigg says: "The release of a specific schedule for dealing with key issues would help set the Koizumi cabinet apart from the Hosokawa, Hashimoto and Obuchi ones, all of which promised reforms that never got past the planning stage."