Will Japan Be Able to Change Fast Enough?

The Asian financial crisis is finally forcing Tokyo to embrace economic reforms that are at least six years overdue, financial and political analysts say.

The question now is whether Japan’s notoriously slow process of consensus-based decision making will move fast and far enough to appease frightened international investors.

With the Nikkei stock index trembling and the yen touching 129 to the dollar Tuesday, its weakest level since the depths of Japan’s recession in 1991, markets are anxious to see whether the government will take decisive action to prop up Japan’s teetering financial system.

The ruling Liberal Democratic Party, or LDP, will hear recommendations today from a key committee studying banking reforms. The final, comprehensive stabilization package is not due until Dec. 10, but bearish investors won’t wait until then to sell if the government’s proposals look more like a Band-Aid than a bailout.

Japan needs to move fast to cure the bad debt hangover left by the 1991 collapse of its “bubble” economy. The Finance Ministry says bad private-sector loans total $220 billion, but analysts say that’s understated, that the real figure could be nearly double that.

Proposals range from merely protecting bank depositors by pouring money into the Deposit Insurance Corp., which is $1.64 billion in the red, to a full-scale banking bailout such as the United States used to deal with its savings and loan crisis in the 1980s. The latter outcome appears unlikely.

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Prime Minister Ryutaro Hashimoto’s blue-ribbon panel on administrative reform is scheduled tonight to release its final report on streamlining Japan’s unwieldy bureaucracy. However, analysts said the market expects those bureaucratic changes--unlike the key financial stabilization package--to have little effect on the economy.

One reason is that the bureaucracy reform plan would not curb the powers of the most critical--and criticized--bureaucracy, the Ministry of Finance. Its credibility with the markets has hit a new low during the recent crisis.

Almost as devastating as the revelation last week that Yamaichi Securities, Japan’s fourth-largest brokerage company, was going belly up was the news that the Finance Ministry hadn’t a clue that it was coming. Yamaichi executives said they told their lead creditor, Fuji Bank, about $2 billion in hidden bad debts on Oct. 6. Yet the Ministry of Finance, or MOF, only found out on Nov. 17. Yamaichi crashed seven days later.

“MOF’s oversight was an utter failure,” said Eiji Yamamoto, economics professor at Konan University in Kobe. Among other things, ministry executives were supposed to have put a stop long ago to the practice of tobashi, by which Yamaichi helped move stock losses off the balance sheets of favored corporate customers and ended up stuck with their debts.

Now inquiring investors want to know how many other Japanese firms have hidden losses--as well as how many others have been paying off sokaiya racketeers, who in return for money offer protection against disturbances at shareholder meetings, disturbances that might include questions about such debts.

In another embarrassing development, Yamaichi admitted Tuesday that a former Yamaichi chairman who presided over the firm while it was concealing its ballooning debt, had sold off $444,000 in company stock in February. Regulators evidently had not suspected insider trading.

Analysts say the market’s answer to such shenanigans is unequivocal: Japan needs financial glasnost. Restoring confidence will require more disclosure, more transparency, better-audited balance sheets, and regulators who behave like referees instead of coaches.

“MOF should completely back off from the market,” said Chang Yi, an analyst at Kokusai Securities Co. “They should be checking on whether there are any illegal activities by financial institutions instead of focusing on administrative guidance.”

Criticism of the Ministry of Finance aside, some see the economic impasse of the last six years finally beginning to dissolve.

“Events of the last couple of weeks signify an unprecedented about-turn in Japan’s economic policy and management,” argued Jesper Koll, vice president of J.P. Morgan Securities Asia.

Others are not so sure. “Time and again, the LDP has betrayed its professed commitment to reform,” says a recent issue of the Oriental Economist newsletter. It has “blocked moves to deregulate broad sectors of Japan’s economy, in an effort to protect the special interests that provide votes and financial contributions for the party. Without those reforms, the economy stands no real chance of recovering its once-famous vibrancy.”

Both sides note, however, that a government that once believed no bank should ever fail has let four financial institutions perish in the past month. This week, Hashimoto said that more weak banks should be allowed to go under.

Already, 10% of those employed in the Japanese securities industry are out on the street, according to Koll. “In a country where ‘jobs for life’ was the rule for employees of companies this size, the break with the past is obvious,” Koll said. “This is ‘restructuring’ even by the ruthless U.S. standards of capitalism.”

About 1,100 of the 10,000 people left jobless by the Yamaichi Securities crash will be snapped up by Japanese subsidiaries of two U.S.-based companies, Electronic Data Systems and American Family Life Insurance, Japanese media have reported. Daiwa Securities also is considering picking up some of Yamaichi’s shards.

However, what’s been termed the “Big Bang” deregulation of the financial sector is expected to kill off even more firms that are not competitive within the next year, perhaps spelling the end of Japan Inc.’s brand of protected capitalism.

And companies that weather the “Big Bang” may next face a credit crunch. As of April 1998, the government will require higher capital adequacy standards to crack down on lenders. This could dry up the money flow to small- and mid-sized companies and create a new rash of bankruptcies in local banks, life insurance and construction companies.

Economists predict the process may create negative growth rates in the short term but that it will produce a leaner and meaner--though less comfortable--Japan in the future.

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While the financial sector suffers, Japan’s manufacturers are in fine fighting form. These firms invested massively in technology to stay competitive when the yen soared in value, from 250 to the dollar to 130, in the late-1980s. The companies then shed employees and shifted production overseas in the “hollowing out” of the 1990s, as the yen reached a record 78 to the dollar by mid-1995.

Reform or no, analysts warn, companies with their backs to the wall and a weakening currency that makes their exports far cheaper mean the United States’ toughest competitors could soon turn into outright Terminators.

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Researcher Et suko Kawase in The Times’ Tokyo Bureau contributed to this report.