Japan’s Cozy Economy

Finance Minister Hiroshi Mitsuzuka apologized and bowed in contrition, assuming responsibility for two bank inspectors accused of taking bribes. Deja vu? An unfolding scandal once again puts a spotlight on the enduring coziness of Japanese business and government. When it comes to banking, this arrangement has been especially dangerous. Tokyo has been unable to get a handle on its wobbly financial system, and the minister’s resignation is a symbol of the problem but offers no cure.

Only substantive changes in the system will make a difference. Japan’s economy is a mess. Addressing banking problems is crucial for the stability of Japan, Asia and ultimately the Western world.

Prime Minister Ryutaro Hashimoto’s government should use the scandal as an opportunity to shift course on economic policies and make the country’s banking system more open to scrutiny. What Tokyo needs is stimulation of the economy and a hard look at the powerful Finance Ministry, which has bungled the oversight of banks. Japan must not try to export its way out of this moribund economy.

The politically embattled Hashimoto, whose popularity is at a new low, clearly should be more aggressive. He’s treating one of the world’s foremost industrial engines like a mid-level economy. Japan should lead, not muddle.

Corruption itself is something that could bear the prime minister’s attention. As a former finance minister, he certainly is familiar with its effects. He had to resign that position in 1991 when the ministry was accused of not doing enough to prevent banking and brokerage business scandals. How little has changed.

Mitsuzuka, the resigned finance minister, has been accused of no wrongdoing, but it was on his watch that the two bank inspectors were accused of accepting lavish meals and weekend golf trips in exchange for telling four banks when they would be subject to “surprise” inspections. One inspector was also accused of sitting on reports that showed the magnitude of problem loans at a bank.

The scandal is an extreme example of the harmful effects of too friendly relations. Short of outright misconduct, it is widely believed that the traditional close ties between government and business have long prevented banks from being forthright with information.

When Japan’s bubble economy of the 1980s popped, the news should not have come as a surprise but in many ways it did. That upheaval was mainly the result of secretive and irresponsible bank lending practices.

Now Japan’s parliament is considering a financial stabilization package. It includes spending $250 billion in public money to bail out banks and a tax cut to stimulate spending. News of the legislation had helped boost Japan’s stock market until the Mitsuzuka scandal broke.

If Japan, known for the discipline that created the world’s second-largest economy, cannot get moving, this government and those that preceded it in recent years--all led by the long-ruling Liberal Democratic Party--should bear the blame and the political consequences.