The line-up of Mr. Hatoyama's first cabinet, announced yesterday, leaves little doubt that Japan is about to take a giant economic step backward in both economic and financial policy. Shizuka Kamei, a former Liberal Democratic Party leader, has been appointed to run the all-important Financial Services Agency. Mr. Kamei is best-known for opposing former Prime Minister Junichiro Koizumi's deregulation and privatization drive earlier this decade. Prime Minister Hatoyama has also assigned Mr. Kamei to re-reform Japan Post. In that position, he will likely stop the postal privatization process and probably begin to reverse it.

This would be a significant mistake. Japanese savings in the nationally backed postal bank dropped to 18% last year from almost 30% in the late 1990s, creating significant profit opportunities for the private sector. If Mr. Kamei reverses course and resurrects financial socialism by not only keeping but expanding the role of the postal bank, it will be possible for inefficient companies to be kept alive through below market-rate loans. This is bad news not just for private banks and other financial institutions, but also for all other entrepreneurs. The more companies have access to cheap, publicly backed funding, the fewer real entrepreneurs will be able to compete.

Against this, Mr. Kamei's record on fiscal prudence is impressive at first sight. He drastically cut wasteful public spending when he was construction minister for the LDP in the late 1990s. More than 20 wasteful dam-building projects were terminated under his leadership. As head of the LDP's policy research council, he killed more than 200 public works projects, savings almost 3 trillion yen ($33 billion at today's exchange rate) for taxpayers at that time, more than 0.5% of that year's GDP. However, he now seeks to reverse this and advocates the resumption of large-scale deficit spending. To cure Japan's ills he has been advocating 40-trillion-yen-worth of new public spending, which equals about 8% of this year's GDP.