Stealth Reformer; Japan: Koizumi has the charisma of a rock star, but as an agent of change he keeps a low profile. His approach may be working.(Junichiro Koizumi)

Byline: George Wehrfritz (With Hideko Takayama in Tokyo)

Prime Minister Junichiro Koizumi knows the danger of taking credit for success in Japan. Two years ago he appointed a tough new bank regulator, Heizo Takenaka, who declared in a NEWSWEEK interview: "No bank is too big to fail." This heretical attack on one of the traditional pillars of Japan Inc. led to a major sell-off of bank shares, pushed the already battered Nikkei index to historic lows and had Japan's media and political establishment calling for Takenaka's head. Far from firing his point man on reform, Koizumi quietly backed Takenaka's ongoing campaign to close down Japan's worst bank and force the rest to cut off deadbeat borrowers--setting the stage for the recovery of 2004, which surprised the world. Yet Koizumi did not claim even partial credit, much less victory. Instead he cited "market forces" for changes he deftly engineered.

In a world where politicians are far more likely to claim victories where there are none, this odd strategy may be unique to Koizumi and Japan. Hoisted into power at a time of national desperation three years ago, the silver-coiffed Tokyo outsider entered office chanting mantras like "reform without sanctuary," but quickly recognized the error of his boldness. Too many of his countrymen still opted for the comfortable, if debt-encumbered, status quo. Koizumi's answer: leadership by stealth.

Using his rock-star charisma to sell a popular but vague vision for recovery, Koizumi kept mum on details and left the spadework to key deputies who stayed largely out of the spotlight. "Koizumi-san is like a company president who sees the big picture and comes up with big ideas," says Takahide Kiuchi, a Nomura Securities economist, "but it is his employees who have to do the actual work." In the back offices, Koizumi's staffers have managed to restructure Japan's financial sector, set traps to bring down debt-ravaged corporations and lay preliminary plans to get the post office out of the savings-bank business. The man Koizumi appointed to privatize the $3 trillion system of postal savings accounts, which has been a major drag on investment: Takenaka.

In his insightful book "Arthritic Japan," American Japan expert Ed Lincoln argues that aversion to change is hard-wired into Japan's form of state-led capitalism because the majority of Japanese have vested interests in the established (and now failing) old order. They include homeowners with superlow mortgages provided by the government, households with postal savings accounts that offer ...