Japan’s Finance Ministry Rocked by Bribery Scandal

In a scandal likely to rock Japan’s unsteady financial sector, two key Ministry of Finance officials were arrested Monday for allegedly accepting bribes from the banks they regulate.

The charges that the two senior banking inspectors had accepted tens of thousands of dollars’ worth of favors from banks seeking inside information on their audits seemed to confirm what Japanese cynics have long maintained and what foreign investors have long feared--that Japan’s financial regulatory system is not only complicated and confusing but also corrupt.

“The ministry and the banks have ignored depositors and the public in naked pursuit of their own profits,” financial commentator Makoto Sataka declared on state-run NHK television. “The degree of corruption is dreadful.”

Prime Minister Ryutaro Hashimoto apologized this morning and said it was his government’s duty “to show the public concretely how to prevent a recurrence.” He said the Cabinet had discussed introducing a new ethics law to replace the Japanese civil servants’ code, which is vague on exactly what constitutes corruption.

Finance Minister Hiroshi Mitsuzuka pledged to “do everything I can to restore public trust.” But the three largest opposition parties agreed today to call for Mitsuzuka’s resignation, and Democratic Party of Japan leader Yukio Hatoyama vowed to boycott the parliament in session until the finance minister quits. Hashimoto’s Liberal Democratic Party is now trying to push a vital financial stabilization package through the parliament.

The four Japanese banks accused of bribing the officials have declined to comment on the charges. But prosecutors said that by showering the bureaucrats with such favors as lavish meals, golfing excursions and a special deal on a condominium for one, the banks hoped to learn the timing and location of upcoming “surprise” inspections, the Japanese media reported. They also apparently hoped that well-fed regulators would be more charitable in classifying fewer of the banks’ bad loans as uncollectable.

While Mitsuzuka’s fate was unclear this morning, his discomfiture was on full display on instant replay after he was informed on camera by the television crews staking out the Finance Ministry that about 50 prosecutors were inside confiscating documents and interrogating officials.

The Finance Ministry is considered the most powerful and prestigious agency in Japan, and it had been considered off limits to investigators from the more lowly prosecutor’s office. Although the ministry “used to be a sanctuary untouchable by the prosecutor’s office, that taboo has now been broken,” said political analyst Minoru Morita. “This [arrest] symbolizes how [it] has become so corrupt that it is self-destructing.”

The ministry plays a crucial role in drafting the national budget, formulating economic policy, writing financial legislation and then regulating banks, insurance companies and the financial markets--functions that in the United States are divided among the Office of Management and Budget, Treasury Department, Securities and Exchange Commission, Congress and the president.

Even before the Asian currency crisis sent a shudder through Japan’s debt-laden financial sector in the fall, the prime minister’s blue-ribbon panel on administrative reform was studying a plan to split the ministry into two agencies, one to handle administrative functions and the other to perform financial oversight.

Independent analysts, the political opposition and many Japanese business leaders have long argued that a less monolithic, clearer system of supervision is essential as Japan embarks on its “Big Bang” program of financial deregulation, which is to begin April 1.

But the reform panel abandoned the proposal, reportedly due to pressure from the Finance Ministry’s powerful political friends. Further evidence of the ministry’s undiminished clout came last week when the Liberal Democratic Party, or LDP, postponed any decision on whether to split the ministry until after 2000.

Hashimoto reversed that decision today, announcing that the Cabinet would reopen discussion on reorganizing the Finance Ministry “as soon as possible.”

Monday’s raid was “a big surprise because in the past year, the [ministry] has amazingly not only escaped from the administrative reform process unscathed but came out even stronger than before,” said a Western financial analyst.

The Finance Ministry has been under fire for bungling its bank supervision, leading to Japan’s bad-debt crisis. And it recently lost ground in its battle for financial austerity to deal with Japan’s huge budget deficit. Since December, the LDP has reversed course by proposing a tax cut and bank bailout aimed at keeping the stalled economy from plunging into recession.

Still, despite the current scandal, Morita said: “The public still believes the bureaucrats are better than the politicians. That’s Japanese culture.”

The two men arrested Monday wielded vast authority over Japanese banks, but it was quickly noted that they did not hail from the ranks of the elite Tokyo University graduates who hold the very highest positions in the agency. Koichi Miyagawa, 53, head of the Finance Ministry’s banking inspection section, was a high school graduate who was disciplined in 1994 for accepting too much hospitality from Dai-Ichi Kangyo Bank.

Prosecutors alleged that Miyagawa had accepted about $64,000 in bribes, including being entertained on 35 occasions by Dai-Ichi and Asahi banks. He is also accused of buying a condominium at below-market price in a deal arranged by Asahi.

His colleague, Toshimi Taniuchi, 49, who controlled the timing of bank inspections, took more than $20,000, prosecutors said, including 52 invitations to wine and dine at the expense of Sanwa Bank and Hokkaido Takushoku Bank. The latter went bankrupt under an avalanche of bad loans in November--but not before mounting a massive entertainment blitz apparently aimed at currying favor with its regulators, prosecutors said. Hokkaido Takushoku was allowed to merge with another regional bank rather than shut down.

In a stunning leak today, prosecution sources told Kyodo News that Miyagawa had sat on a damaging report from the Finance Ministry inspection team that audited Asahi Bank in August 1996. The inspectors found that Asahi Bank had filed a false report on its bad loans. Moreover, Miyagawa allegedly asked Asahi to find him a condominium while the inspection was in progress.

In an interview recorded with Nihon Television last week, Miyagawa denied giving preferential treatment to banks with whose managers he had dined.

The Japanese public has been inundated recently with tales of high living by the very bureaucrats and financial executives whose poor judgment is blamed for the current economic woes.

Miyagawa’s former boss at the Finance Ministry was also arrested on corruption charges earlier this month. Takehiko Isaka, former finance director of Japan Highway Public Corp., was accused of picking Nomura Securities to underwrite bonds for the quasi-governmental agency after Nomura executives spent $20,315 to entertain him over 18 months. Two former Nomura executives were also arrested.

Prosecutors said they had uncovered records of the lavish entertainment of Miyagawa and Taniuchi last year when they raided banks and securities firms that had been making illegal payoffs of hush money to racketeers. Now it appears that some of the same banks had simultaneously been trying to buy off their regulators.

The Japanese stock market and the yen fell slightly in trading today. The benchmark Nikkei Stock Index closed the morning session at 17,022 down 51 points.

Chiaki Kitada of The Times’ Tokyo Bureau contributed to this report.