JAPAN must stick with its policy of painful financial reforms, and resist the temp-tation to spend its way out of the lingering slump, the country’s Prime Minister said yesterday.

In a combative interview before summit meetings in Russia and France, Junichiro Koizumi sought to dispel speculation that he was being forced to retreat from his efforts to modernise Japan’s economy.

“When I took office two years ago, I stated that I needed to ask people to put up with zero growth for two or three years,” he said. “We shall continue to push ahead with structural reforms, leaving to the private sector what the private sector does best.”

With Japan’s economy on course to slide back once again into recession, Mr Koizumi is under intense pressure from enemies within his ruling Liberal Democratic Party (LDP). They want him to abandon his reforms, under which public spending has been frozen and Japan’s banks are being forced to write off billions of pounds of bad loans.

Mr Koizumi insists that this is the only way to create a modern and efficient economy in a country which for decades relied on injections of public spending and irresponsible bank lending.

His opponents say that the price of his reforms — which have coincided with record unemployment, bankruptcies and the forced nationalisation of a leading bank — is too high.

Ever since the Resona banking group was forced to submit itself for de facto nationalisation a fortnight ago, there has been speculation that the Prime Minister would sack his chief ally, Heizo Takenaka, the financial services and economics minister.

Mr Koizumi insisted, however, that his programme of aggressive banking reform would continue. “The Takenaka policy remains unchanged and we shall continue towards the target of reducing non-performing loans,” he said.

“I understand that things are proceeding smoothly.”

Asked if he expected further banking collapses, after a day of market rumours that another of Japan’s big five was about to seek government help, Mr Koizumi said: “I assume not.”

His remarks represent an aggressive defence of an economy which has been in or close to recession for more than a decade.

Under Mr Koizumi the stock market has fallen to its lowest levels in 20 years and international credit rating agencies have awarded Japanese government bonds a rating lower than those of Botswana.

Along with most Western economists Mr Koizumi insists that the public spending employed by previous governments to stimulate the economy would be useless.

Explore World News

• World Agenda

• Iraq News

• US & Americas News

• Europe News

• Middle East News

• Afghanistan News

• Asia News

• Africa News

• Ireland News

Times Recommends

• No apology for Germany’s own Nazi victims
• Intricate web of fear and hope tying down deal
• Victims remembered a year after Mumbai attacks