Prospects Fade for Speedy Financial Reforms in Japan

Hopes crumbled Wednesday that Japan’s month-old government would move swiftly to defang a fierce financial crisis as parliament became gridlocked over the administration’s bank bailout plan, debate intensified over the wisdom of Prime Minister Keizo Obuchi’s policies, and Japanese markets reeled.

The Nikkei stock index at one point today fell 3.3% to 14,379, a three-year low. It ended the morning session at 14,460, down 2.73% on top of a 1.37% fall Wednesday.

“We’re approaching the abyss, and knowing the Japanese system, they’ll . . . descend into it,” said Louis Ross, strategist with Merrill Lynch Japan, on Wednesday as the yield on 10-year government bonds fell briefly to a record 1.11%--what some traders insisted was the lowest seen in any nation in more than 300 years.

Opposition parties staged a one-day walkout that paralyzed parliament, warning that taxpayers’ money is about to be poured down the bottomless gullets of hopelessly insolvent banks.

The turmoil cast doubt over whether Obuchi, who came into office four weeks ago vowing an emergency rescue package to keep Japan’s ills from dragging down the global economy, will be able to deliver on that promise soon enough to appease “the 26-year-old currency traders who run the world,” as one wag put it.

Obuchi’s finance minister, Kiichi Miyazawa, is scheduled to meet with Treasury Secretary Robert E. Rubin next week, a prelude to Obuchi’s meeting with President Clinton in the United States in late September. Political etiquette demands that the Japanese leaders arrive bearing a package of six financial reform laws that Obuchi has pledged to pass.

“They want to say to America, ‘Here’s what we’ve done to prevent Japan from causing a worldwide financial crisis,’ ” Kyoto University professor Takamitsu Sawa said. But the opposition has inconveniently united to produce an alternative banking bill that would, among other things, force potentially damaging disclosures of how taxpayers’ money is being used and make the banks that get it more accountable.

“Usually, they just nit-pick, but this time they actually came up with their own policy plan, which is really rare,” Sawa said. The ruling Liberal Democratic Party is promising to compromise but is unaccustomed to dealing with such substantive demands from a parliament that has traditionally been an LDP lap dog. “It could be time-consuming,” Sawa said.

Critics say the Obuchi government differs little from its predecessors, promising reform while trying to avoid any of the painful restructuring that most Westerners and a growing number of Japanese say is unavoidable.

“It’s like [the Bill Murray movie] ‘Groundhog Day,’ ” said Alexander Kinmont, Japan strategist for Morgan Stanley. “They’re going around and around in circles. There’s a lot of technical stuff, but it doesn’t add up to a policy.”

Obuchi’s defenders--of whom there are still plenty--say the Japanese financial crisis is so wide and so deep that allowing banks to fail now would create panic, lead to a meltdown in Japanese and world financial markets and trigger a chain reaction of bankruptcies among relatively healthy borrowers.

“You don’t put a person who’s about to die on a diet; it could be fatal,” said Richard C. Koo, chief economist at Nomura Research Institute. Koo, formerly with the U.S. Federal Reserve, argued that Obuchi has no choice but to spend billions of dollars to prop up good and bad banks alike in order to keep the nation’s economy afloat.

Critics, however, cite the following as evidence that Obuchi is not embracing the free-market reforms sought by the U.S. government and others:

* A senior LDP leader, Taku Yamasaki, deflated financial markets last week by reportedly assuring Indonesian President B. J. Habibie that Japan would not shut any of its top 19 banks--many of which have made mammoth bad loans to Indonesia and several of which are believed to be near bankruptcy. Yamasaki later retracted the remarks, but other senior party leaders have continued to promise a “soft landing” for the major banks.

* Government officials have stated that none of the top 19 banks are insolvent--preempting the findings of what was heralded as the first truly independent financial audits by a new banking police, the Financial Supervisory Agency, or FSA. “How can the government announce that all 19 are solvent when the FSA has not completed its audits?” asked economist Richard Katz, author of “Japan: The System That Soured.” “It’s verdict first, then trial,” he said.

* Top Japanese business leaders are “turning their backs” on the new Obuchi government, which many doubt will live to see 1999, according to Japanese media reports and professor Sawa. The respected Asahi and Nikkei newspapers reported that Nobuyuki Idei, president of Sony Corp., and Jiro Ushio, head of the influential Japan Assn. of Corporate Executives, declined to sit on a new Obuchi economic advisory panel--and that Toyota Motor Corp. President Hiroshi Okuda, who had declared himself “not interested,” joined only after his boss was personally lobbied by the prime minister.

* In what is widely decried as a return to Japan’s old “convoy system” of government control and protection of banks, the government is trying to stave off the collapse of the troubled Long-Term Credit Bank of Japan, or LTCB, by forcing Sumitomo Trust to take it over in a shotgun marriage with a taxpayer-financed dowry of as much as $7 billion.

Informed sources said a draconian plan for restructuring LTCB, Japan’s eighth-largest bank, was personally drafted by Chief Cabinet Secretary Hiromu Nonaka, one of the most powerful figures in the new Obuchi administration. The Finance Ministry “filled in the details” of the Nonaka draft, and LTCB executives were presented with the plan and told to accept it or go gracefully into bankruptcy, the sources said.

According to the Nikkei Weekly, the night before the restructuring plan was announced, Obuchi summoned Sumitomo Trust President Atsushi Takahashi to the prime minister’s residence for a meeting with the nation’s top brass: the premier, Nonaka, Finance Minister Miyazawa and FSA head Masaharu Hino. The not-so-subtle message to Sumitomo, which has been reluctant to take on LTCB’s $20 billion in loans, was accept the government’s choice of bride. Sumitomo said “I do”--and the value of its already battered stock fell an additional 3% today. But parliament is balking at the deal.

Such heavy-handed government “guidance” is nothing new in Japan. But Western critics say it sends precisely the wrong message to the markets.

Who will buy stock in even the strongest Japanese bank, Katz asked, if the government tomorrow might force that bank to weaken itself through an unwanted merger designed to rescue a failing institution? “The LDP just doesn’t get it,” he said. “This is Tokyo fiddling around while the Asian economies burn.”