Bank of Japan Exec Arrested in Deepening Scandal

A deepening financial scandal engulfed the Bank of Japan on Wednesday with an unprecedented raid on the august institution and the arrest of a top official on charges of giving out insider information in return for lavish dinners.

The arrest of Yasuyuki Yoshizawa, 42, head of the central bank’s capital markets division, prompted immediate speculation that its highly respected governor, Yasuo Matsushita, 72, will resign in a traditional Japanese gesture of taking responsibility for the misdeeds of subordinates.

“I feel grave responsibility as the head of the organization,” Matsushita told reporters after the arrest, in comments that some Japanese media interpreted as a signal that he will resign.

The escalation of Japan’s financial scandal, triggered by a corporate racketeer last year, drove the yen sharply lower in early trading today. The dollar traded at 129.55 yen, up from 127 yen on Wednesday morning.

The still-deepening scandal began with the arrest last year of racketeer Ryuichi Koike, who succeeded in blackmailing Japan’s four largest brokerages and several banks. Raids conducted in that case led to documents implicating various bank and brokerage officials and bureaucrats, which led to still more raids.

The crackdown has now led to the arrests of more than 30 top executives of financial firms and at least five Finance Ministry and Bank of Japan bureaucrats; the bankruptcy of Yamaichi Securities Co., which was Japan’s fourth-largest brokerage but failed after investigators uncovered massive hidden debts; the suicides of one former bank chairman, two bureaucrats and one member of parliament; and the resignation of a finance minister and a vice finance minister.

Yoshizawa is accused of accepting $33,600 worth of lavish dinners and other entertainment such as golf from the Industrial Bank of Japan and Sanwa Bank in 89 engagements between 1993 and 1997. In return, he allegedly gave out information on the central bank’s market operations and leaked a widely watched quarterly survey of business sentiment.

There have long been complaints in Japan that potentially market-moving data is only loosely controlled at some ministries, with financial markets frequently reacting to information before it is formally released. It has been extremely rare, however, for bureaucrats to be caught and punished for leaking such information.

A host of other factors besides the Koike-linked investigations have contributed to the scandal’s staying power, analysts say.

These include a crusading prosecutor and pressures to create a more fair and open regulatory system as Japan liberalizes its financial markets under Prime Minister Ryutaro Hashimoto’s so-called Big Bang reform program. Some observers also say that authorities hope ultimately to protect the reputation of bureaucrats by exposing and prosecuting selected cases of abuse.

“One reason why the prosecutor’s office is going after the Finance Ministry and the Bank of Japan is that they believe the current system, which is unclear and doesn’t meet international standards, needs to be straightened up before the coming Big Bang,” said Takeo Toshikawa, a prominent political commentator.

“Another reason . . . is they are seriously concerned that public distrust against the Finance Ministry will lead to distrust against the whole system,” Toshikawa added. “They want to protect the bureaucratic system.”

The unfolding scandal, if it has a lasting impact, will mark a dramatic change in the rules for Japan’s elite. Lavish expense-account dinners hosted by businessmen with politicians and bureaucrats as their guests have long been an almost stereotypical feature of what was often called Japan Inc.

A slightly fancy meal can easily cost $150 per person in Tokyo, and among elite circles $1,000-per-head dinner bills are not extraordinary. The accusation against Yoshizawa works out to about $378 per outing for the 89 engagements--which many Japanese might find inappropriate, but few would find surprising in terms of the cost.

In comments Wednesday to the Kyodo news agency shortly before his arrest, which he knew was coming, Yoshizawa insisted that his meals with banking contacts were “within the scope of social courtesy.”

“I have never received excessive entertainment,” he declared.

Expensive evening socializing, which for many years was seen as acceptable, helped cement the links among Japan’s business, bureaucratic and political worlds that produced the collaboration observers once credited for Japan’s “miracle” growth in the decades after World War II.

These ties became so strong that this three-way alliance was dubbed “the iron triangle.” One effect was to create an unchallengeable power structure that gave the Liberal Democratic Party a lock on power from 1955 to 1993.

The way the system basically worked was that businesses provided favors to politicians and bureaucrats, who reciprocated by providing regulatory favors. This gave conservative politicians the funds needed to win elections and let bureaucrats exercise the “administrative guidance” by which they directed Japan’s extraordinary growth.

As long as Japan’s bureaucrats were viewed as the country’s best and brightest and the economy kept growing, the Japanese people tolerated the situation.

But Japan’s economic troubles of the 1990s have tarnished the image of the once-almighty bureaucrats, who still largely run Japan. That opened them to attack in a way never seen before.

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