Japan’s Finance Ministry in a Tailspin

Five years ago, many Japanese would walk by the forbidding Ministry of Finance and point. There, they would say in awed tones, is the real seat of Japan’s power.

Not so today.

After a string of fiscal disasters, Japan’s elite financial bureaucrats--once revered by politicians, businessmen and citizens alike--are now fighting off harsh public criticism of their treatment of the nation’s mammoth banking crisis. They are also struggling to retain the unquestioned power over Japan’s finances that they once regarded as their divine right.

That is why so many here were shocked by the decision last week by Ryutaro Hashimoto, the Liberal Democratic Party president and new Japanese prime minister, to appoint Wataru Kubo, a Socialist legislator with little government experience, as finance minister.

Kubo “has zero financial knowledge,” says Katsumi Samata, a former Socialist Party policy-maker who says Kubo simply read the economic speeches he wrote and never touched the details himself. “He is not suited to the sophisticated financial logic of the Ministry of Finance bureaucrats.”

Last year witnessed some of Japan’s worst financial catastrophes: mountains of previously undisclosed bad loans, the Daiwa Bank incident, a series of failed credit unions and bankruptcy of the housing loan companies, known as jusen. All of the problem areas were under the direct oversight of the Ministry of Finance.

A five-year lingering recession in Japan has heightened public pressure to find out who is responsible for the jusen fiasco in what may amount to a social witch hunt.

“Who Is the War Criminal?” asks the Mainichi newspaper, next to a chart of former finance ministers, ministry officials and Bank of Japan presidents.

The ministry’s spiraling problems, analysts say, require a stronger leader. The minister must defend the highly controversial, $6.78-billion bailout plan for the nation’s troubled housing finance firms against the fierce interrogation of New Frontier Party chief Ichiro Ozawa in the upcoming parliamentary session. He also will probably have to implement a highly unpopular consumption tax increase, from the current 3% to at least 5%.

The minister should also lead the charge to investigate who caused the financial mess and hold them accountable, as the public is demanding.

*

But Kubo lacks the political clout to do so, analysts say. The post once was coveted but in recent days at least two LDP heavy hitters turned it down. “None of those guys wants to get in the firing line now,” says Ron Bevacqua, a Merrill Lynch economist. “There are still a lot of fish to fry with the Finance Ministry and none of those guys wants to be involved.”

Politically, Kubo’s appointment helps the LDP eliminate three troublesome issues at once:

* It keeps blame for necessary but distasteful policies away from their own party until the next election.

* It keeps Kubo, who had threatened to bolt to the New Frontier Party, locked into the coalition.

* It ensures that the Socialists will be renouncing their last principles of fiscal expansion and anti-consumption tax rhetoric in a high-profile way, helping to guarantee their annihilation as a party in the next election.

Why Kubo agreed to the role is a question that baffles many.

But Samata said Kubo’s grasping ambition has caused him to blithely ignore campaign pledges and overturn policies in the past. Just as his predecessor, Masayoshi Takemura, was named the world’s worst finance minister in 1995 by a European financial publication, Kubo will no doubt be a front-runner for 1996, experts say.

Already, two top Finance Ministry officials have resigned over the recent scandals, an exceedingly rare happening. And the public is rapidly losing faith and confidence in this once invincible agency.

*

Further deterioration of the Finance Ministry’s authority could result in a dramatic restructuring in the financial system. Some experts say the transition has already begun.

“The Ministry of Finance has lost its authority,” says Kenji Mizutani, chief economist for Tokai Research Institute. “Ministry of Finance staff were once Japan’s most prominent people, but nowadays because of this banking mess they have no force and no dignity.”

Yukio Noguchi, professor of Economics at Hitotsubashi University, and a former ministry official, agrees. “The loss of confidence is very serious,” he says. “This means there is a possibility that the distance between the ministry and the business people will become even wider.”