Political Paralysis Slows Japan’s Decision on Needed Financial Reforms

Japanese leaders, with their fear palpable and craven political ends ever more clearly their chief concern, on Wednesday delayed critical decisions about how to cope with a troubled financial system and stagnant economy.

Their paralysis can be attributed both to looming July parliamentary elections, during which they must try to save their own skins, as well as the sharply different choices they are being offered in a must-do banking bailout:

Do they employ billions in taxpayer money to protect Japanese depositors, the little guys, and let some big institutions go bust? Or do they spend huge sums to prop up this nation’s sickly financial institutions, protecting the businesspeople and bureaucrats who got Japan into this mess?

While President Clinton and the international community may have hopes for how this situation is resolved and how Japan might lead Asia out of its financial crisis, for Japanese politicians, either path may prove parlous--and yet rewarding--in the short- and long-term.

“At this point, it is really difficult to predict what kinds of measures will be taken,” said Norihiko Narita, a law professor at Surugadai University. “Everybody is scared of provoking public anger.”

Major policy proposals were scheduled to be announced Wednesday. But that target date for the ruling Liberal Democratic Party, or LDP, to release a financial stabilization package has now been pushed back. Some ideas may be announced Friday, party officials said, and the complete package is now scheduled to be released Tuesday. It remains unclear whether even that deadline can be met.

Japan’s banks are burdened by massive bad loans officially said to total about $220 billion but estimated by many private analysts at twice that amount. Economic growth, which was moderately strong last year, has stalled over the past six months after April 1 tax hikes that were aimed at strengthening Japan’s long-term government finances.

The one strong point in Japan’s economy is exports. In a reflection of how the weak yen is powering Japanese exports and stunting imports, the Finance Ministry announced Wednesday that Japan’s global surplus in October in its current account, the broadest measure of trade in goods and services, more than tripled from the same month last year to 1.1 trillion yen, or $8.4 billion.

Repairing the financial system, which could help encourage economic growth led by domestic consumption rather than exports, is a key step toward limiting Japan’s huge trade surpluses. U.S. officials have been demanding for months that Japan stimulate domestic demand rather than depend on exports for economic growth.

One ruling-party camp, led by former Prime Minister Kiichi Miyazawa, favors first using public money to strengthen the deposit insurance system to protect depositors, then with that safety net in place letting weaker financial institutions go bankrupt.

This approach fits with Prime Minister Ryutaro Hashimoto’s proposed “Big Bang” liberalization reforms, named after a sudden and successful deregulation of London’s financial markets. It would bring a consolidation of Japan’s banking industry, imposing losses on shareholders of firms that go bankrupt but leaving strong banks healthier.

An opposing plan recently has been floated by former Chief Cabinet Secretary Seiroku Kajiyama, a conservative rival of Hashimoto. It calls for Japan to issue $77 billion in a new type of government bond. Money from the sale of these instruments would then be used to inject capital into weak financial institutions to prevent their collapse--an approach that harks back to the paternalistic traditions of “Japan Inc.” that the Big Bang is supposed to dismantle by 2001.

Kajiyama’s plan also would effectively reverse the steps taken by Hashimoto to bring the government’s long-term fiscal deficit under control, analysts say. Hashimoto has tried to do that by raising taxes, cutting spending and reducing the issuing of bonds.

Many analysts believe that any strong government action to address the financial system’s problems would boost stock prices, but some are skeptical that the Kajiyama plan will do the trick.

“I don’t think the [stock] market’s reaction will necessarily be positive,” if Kajiyama’s plan is adopted, said Mamoru Yamaguchi, an analyst at Nikko Research Center. “The funds would be used to purchase financial institutions’ preferred shares and subordinated shares. This helps financial institutions but does not solve the bad-loan problem.”

The Kajiyama plan, Yamaguchi added, “opens the possibility of bringing back the old ‘convoy system,’ ” under which strong banks were required to support weak banks so that none ever went bankrupt. “Weak firms may be protected by this system,” he said.

But Hashimoto, the architect of the Big Bang, lacks strong support in his own party and no longer packs as much punch within the LDP as he did six months or a year ago. Hashimoto had built much of his leadership strength on high ratings in public opinion polls. In recent months, his popularity has plunged, and with it his power.

Backed into a corner, Hashimoto said Monday night that he had told ruling party leaders and top bureaucrats to consider adopting Kajiyama’s proposal for special bonds.

That helped send the Tokyo Stock Exchange’s benchmark Nikkei Index up Tuesday by 554.94 points, or 3.44%, to close at 16,686.51. The Nikkei fell back Wednesday as investors mulled over reports that LDP insiders are skeptical of the Kajiyama proposal. The index lost 208.39 points, or 1.25%, to close Wednesday at 16,478.12.

“Right now, Miyazawa and Kajiyama, who had left [the front lines of] the political scene, are coming back, and Hashimoto is taking orders from them,” said Chang Yi, an analyst at Kokusai Securities Co. “I guess the LDP is setting aside the idea of fiscal reform for now. . . . I think they want to get through this emergency situation no matter what it takes.”

The Kajiyama plan calls for the $77 billion in bonds to be backed by government shares in Nippon Telegraph & Telephone Corp., or NTT, and Japan Tobacco Inc., state-controlled firms that are being privatized. The bonds also would be repaid by sale of those shares over the next decade.

But many analysts have ridiculed this transaction, saying it is a transparent attempt to hide the government’s backtracking on cutting deficit spending.

“NTT and Japan Tobacco shares are among Japan’s important financial assets,” said Takamitsu Sawa, a professor at Kyoto University’s Institute of Economic Research. “If the government uses these assets for this new bond plan, it won’t be able to use them to reconstruct the fiscal structure of the country or for any other purposes. Using them as collateral is an excuse in order to avoid criticism from the public, since issuing bonds conflicts with [Hashimoto’s fiscal] reforms.”

Etsuko Kawase of The Times’ Tokyo Bureau contributed to this report.