Japan’s Finance Minister Quits in Scandal

Japanese Finance Minister Hiroshi Mitsuzuka resigned today, two days after prosecutors swooped into his powerful ministry to arrest two key officials for allegedly taking bribes from the banks they regulated.

Mitsuzuka quit under fierce pressure from a suddenly united opposition, which was poised to extract maximum political mileage from the exposure of corruption in the very agency that is charged with extricating Japan from its current financial troubles.

The United States and international lenders have insisted that Japan must undertake major reforms and resolve its fiscal woes so it can serve as the engine to power Asia out of the region’s economic crisis.

But in Tokyo on Tuesday, opposition leaders threatened to boycott the parliament session that is supposed to be devoted to passing vital financial stabilization legislation, including a tax cut intended to revive the moribund Japanese economy. Next, prosecutors launched fresh raids on four banks accused of trying to buy off their Finance Ministry regulators with lavish meals, golf games and other favors.

Within hours, Mitsuzuka’s own Liberal Democratic Party, or LDP, realized that, politically speaking, a human sacrifice would be needed to quell the outrage before it threatened financial stability and the campaign for the upper-house parliamentary elections to be held in July.

By 6 p.m. Tuesday, Mitsuzuka--an LDP warhorse who has served as minister of transport, international trade and industry, and foreign affairs--was headed for Prime Minister Ryutaro Hashimoto’s residence to resign.

“Hashimoto has chopped off the finance minister’s head in order to save his own,” said Eiichiro Suganuma, an editor at the Asahi newspaper. “However, his inner moat has been filled up with dirt. Now he’s defenseless.”

It was not clear who will replace Mitsuzuka, and for the time being Hashimoto was considering doing the job himself, according to the Japanese media.

The Japanese stock and currency markets, which had been recovering from the turmoil in Asia and in the domestic financial sector, lost ground Tuesday. The benchmark Nikkei stock index closed at 16,981, down 91.71 points, while the yen lost 0.68 to finish at 126.26 to the dollar.

But analysts said the markets will not pine for Mitsuzuka as long as the LDP can push through its financial stabilization package without him. “The perception is that the transition should be smooth and they should be able to pass the legislation,” said Kathy Matsui, chief strategist for Goldman Sachs in Japan. “It could take a little bit of the steam out of the market. . . . People are a little bit concerned now that the timetable of what the government wants to do in the short time left in the fiscal year might be a little tight.”

The Japanese fiscal year ends March 31, and there are fears of a rash of bankruptcies if stock prices plummet before then.

Hashimoto vowed to push ahead with financial reforms, including a possible overhaul of the Ministry of Finance, the agency once credited with helping create the Japanese economic miracle and now accused of arrogance and bungling its job of financial oversight. He said the Cabinet will also consider adopting a new ethics law for civil servants.

The two senior bank inspectors arrested Monday were accused of having been wined, dined and showered with favors worth $84,000, in exchange for tipping off four banks about where and when “surprise” financial inspections would be held.

Koichi Miyagawa, head of the banking inspection unit, suppressed an internal report that said Asahi Bank had filed a false statement about a bad loan, while at the same time he accepted a special deal on a condominium purchase arranged through an Asahi subsidiary, prosecutors told Japanese media after his arrest.

A government spokesman said Tuesday that all top Finance Ministry officials will be investigated to uncover any other bribe-takers. But analysts questioned whether the latest scandal will bring any real change in the cozy relationships between bureaucrats and the businesses they regulate and then frequently retire into at age 55.

Previous ministry investigations have been toothless, said Takao Toshikawa, editor of the Tokyo Insideline newsletter on Japanese politics. “The investigation consists of a guy going around and asking everyone, ‘Are you OK? Do you have a problem?’ and they all reply, ‘I’m clean,’ ” Toshikawa said. “And they’re all colleagues, so the report says, ‘He’s clean.’ ”

He said that senior ministry officials knew the two banking inspectors were under suspicion last year but that, in accord with Japanese bureaucratic tradition, they made no effort to demote or dismiss the wrongdoers. Instead, he said, the officials lobbied their colleagues at the Justice Ministry not to allow prosecutors to indict the two.

“If these guys know a lot of secrets, sooner or later they’ll talk. That’s the Japanese assumption,” Toshikawa explained. “So it’s better to keep them inside your organization. If they are exposed or kicked out, they’ll just tell everything . . . and if you transfer them right away, it just looks suspicious. So it’s better to wait until things cool down.”

When Finance Ministry mandarins learned earlier this month of the probable two arrests, Toshikawa said, their response was to move the banking bureau out of the Finance Ministry headquarters--a distinctive prewar building with arches that is instantly recognizable to Japanese television viewers. The banking bureau went, instead, into a nondescript skyscraper nearby.

“Their building has always been a sanctuary,” unsullied by prosecutorial intrusion since the arrest of a senior Finance Ministry official in 1948, Toshikawa said. “It was unthinkable to have prosecutors coming into their building, so they moved [the banking unit] out.”

It also is unclear if Japan really will crack down on the custom of regulators being lavishly entertained by those whom they regulate or if the nation will halt amakudari--bureaucrats “descending from heaven” into cushy post-retirement jobs at the companies they once supervised.

“Busting these guys is a step in the right direction, but they still haven’t addressed the structural problems,” said John F. Neuffer, a senior research fellow at the Mitsui Marine Research Institute.

“If this doesn’t lead to them getting rid of amakudari, getting rid of the political culture that accepts collusive practices between government and the private sector, and stripping power away from the almighty Ministry of Finance, then what happened this week doesn’t have much meaning.”