Takeshita Marks 1st Anniversary in Office Amid Storm of Stock Scandal

Japanese Prime Minister Noboru Takeshita marks his first anniversary in office Sunday amid the storm of a stock scandal that threatens either to derail the tax reform that is the cornerstone of his domestic program or undermine his carefully crafted image as a master at political conciliation. It could also turn into a criminal case he cannot control.

Since succeeding Yasuhiro Nakasone as prime minister, the mild-mannered Takeshita has demonstrated surprising leadership in international affairs and consolidated his grasp on the conservative power structure at home, scoring high marks for his effectiveness at getting things done.

His honeymoon has been spoiled, however, by the so-called Recruit scandal, a web of intrigue stemming from apparently legal but ethically questionable stock trading by an all-star cast of politicians, government officials, businessmen and journalists.

Odds are that the prime minister himself will emerge largely unscathed from the imbroglio, even though one of his personal secretaries engaged in insider trading of Recruit Cosmos Co. shares, along with aides of several ruling party leaders.

Takeshita’s government is also expected to withstand the shock of the scandal, owing to the overwhelming clout of his faction within the Liberal Democratic Party and the fact that several opposition lawmakers are among the expanding list of people believed to have reaped exorbitant profits by receiving the privilege to buy Recruit Cosmos stock before the booming apartment development firm was listed on the over-the-counter market in 1986.

Takumi Ueda of the Japan Socialist Party announced Friday that he is resigning his seat in the Lower House to take responsibility for Recruit trading by an aide, while still denying any involvement. It was not clear whether his action would set a precedent for the 15 other members of the Parliament who have been implicated in the case so far.

But the scandal sheds revealing light on how politicians are believed to raise underground funds in Japan, and it underscores the unwritten rules of confrontation and compromise in the Parliament.

Opposition parties have demanded that the Recruit affair be scrutinized in the Parliament before a vote is taken on the tax reform legislation, which Takeshita and his conservative allies have characterized as long overdue to rectify inequities in the tax system.

A criminal investigation by the Tokyo District Prosecutor’s Office and an accelerating campaign in the media have bolstered the opposition call for full disclosure, which held up deliberations on the tax legislation until Friday. Continued protests could force Takeshita to extend the current Parliament to a second extraordinary session or possibly resort to ramming through his tax legislation, a move that would belie his posture as a consensus-builder.

So far, prosecutors have focused their probe on allegations that a Recruit Cosmos employee attempted to buy cooperation from Yanosuke Narazaki, an opposition lawmaker who has been spearheading the inquiry into the affair by the Select Committee on the Tax System in the Lower House of Parliament since allegations first surfaced in June. The Recruit Cosmos employee, Hiroshi Matsubara, was arrested on bribery charges Oct. 20.

Last week, a new and volatile dimension was added to the scandal when it was alleged that Hisashi Shinto, the chairman of Nippon Telegraph & Telephone, Japan’s recently privatized telecommunications monopoly, was among those who traded, or whose aides traded, in Recruit Cosmos.

Shinto denied the charges, but news reports disclosed transactions in which NTT bought two supercomputers in 1987 from Cray Research of the United States and resold them to Recruit Co., the parent of Recruit Cosmos, allegedly at a discount.

Nakasone, then prime minister, was reportedly involved in the negotiations for the transaction, designed to assuage U.S. concerns over the trade imbalance.

“If the prosecutor’s office hadn’t become involved, Recruit would not be a problem,” said Masaya Itoh, a political analyst. “But right now there’s no telling where it will go, or what the potential is for criminality. It’s very difficult to gather evidence in a case like this.”

Compared to Lockheed Scandal

Some observers are already attempting to make a comparison between Recruit and the Lockheed scandal, in which 15 Japanese politicians and businessmen--including former Prime Minister Kakuei Tanaka--were convicted on charges related to the payment of more than $9 million in bribes by the American aircraft maker in the early 1970s. Tanaka was accused of promoting sales of Lockheed’s TriStar jetliner to help offset Japan’s coming trade surplus.

Independent action by the prosecutors in the Lockheed case has been heralded as a sign of maturity in Japan’s postwar democratic system, but questions are being raised about how far the prosecutor’s office will go under the Takeshita administration. Takeshita appointed the current chief prosecutor, Hiroshi Maeda, in March.

“Even if the younger assistant prosecutors go after the case vigorously, you have to ask whether there might be some political pressure exerted on their superiors,” political commentator Ryuichiro Hosokawa said.

The question of criminal culpability in the Recruit case hangs largely on a subtle interpretation of who actually owned the stock, and whether profits derived from trading should be construed as bribes, political contributions or merely untied favors that Hiromasa Ezoe, 52, the founder of Recruit Co., bestowed on his friends. Insider trading in pre-listed stock does not violate securities law in Japan.

Many of the politicians associated with the list of at least 76 people whom Ezoe allegedly invited to invest in Recruit Cosmos contend that their aides traded in the stock without their knowledge. In most cases, transactions were conducted in the names of aides, although Finance Minister Kiichi Miyazawa has admitted that his aide allowed a friend to trade in Miyazawa’s name.

Miyazawa has apologized for his oversight in supervision, but rebuffed calls that he resign, with backing from Takeshita.

“He has no choice but to endure,” said Itoh, the political analyst. “If he bends, the entire Takeshita Cabinet would crumble.”

One of the most controversial trades was conducted by Takashi Kato, at the time the vice minister of labor whose responsibility it was to regulate the employment agency activities that are the main line of business of Recruit Co., the parent corporation headed by Ezoe. Kato allegedly bought the shares with credit from a finance company affiliated with Recruit.

Shares in Recruit Cosmos initially sold for as little as 1,200 yen ($9.60 at current exchange rates) and shot up to as high as 5,000 yen ($40) after the stock was listed on the over-the-counter market on Oct. 31, 1986. Some investors who were among the 76 names are reported to have made up to $1 million in trading.

At the heart of the scandal is the question of fairness, especially in that it came at a time when regulatory authorities were trying to raise consciousness about ethical problems associated with Japan’s deeply entrenched traditions of insider trading and stock market manipulation.

The cause of tax reform, too, is inextricably linked to matters of fairness. Takeshita and the ruling party architects of the legislative package argue that their aim is to introduce more fairness and openness to an antiquated system that places an undue burden on salaried workers. To rectify the imbalance between direct and indirect tax, they propose cutting income taxes and levying a 3% consumption tax on most goods and services. One of the items on their list of exemptions is securities transfers.

Since beginning his two-year term as prime minister last Nov. 6, Takeshita has all but staked his career on the fate of tax reform. A bungled attempt to push through a similar value-added tax in the spring of 1987 created a furor that nearly forced Nakasone to step down prematurely. Small retailers and subcontractors adamantly oppose a new indirect tax because they believe that it would make them less competitive.

After reaching an accommodation with opposition parties by which deliberation on tax reform and the inquiry in Recruit will now proceed along parallel tracks, the ruling party hopes to demonstrate at public hearings scheduled to begin Tuesday that it is sympathetic to taxpayer opinion.

But cooperation from the opposition is likely to depend on whether the Recruit scandal continues to take on a life of its own.