Japan’s Central Bank Snared by Growing Scandal

Confidence in the Japanese economy plummeted Wednesday when a deepening financial scandal engulfed the central bank, the heart of Japan’s financial system and an institution thought to be above politics and corruption.

In an unprecedented raid on the 116-year-old Bank of Japan that sent the yen tumbling and investors running for safety, prosecutors arrested a top bank official on charges of giving out inside information in return for lavish dinners and other entertainment.

The arrest of Yasuyuki Yoshizawa, 42, head of the central bank’s capital markets division, is expected to prompt the resignation of the bank’s well-respected governor, Yasuo Matsushita, 72. That would make him the highest-ranking victim yet in a scandal that is spreading by the day.

Prime Minister Ryutaro Hashimoto said today that Matsushita told him late Wednesday of his intention to resign.

“I take his intention very seriously, although I told him that for now, I want him to do his best to fulfill his duties in his post,” Hashimoto said.

Wednesday’s developments--tantamount in the United States to indictments and resignations at the top levels of the Federal Reserve System--further undercut the wavering confidence in Japan’s financial system.

News of the widening scandal sent the dollar soaring against the yen on Wednesday. In New York, the dollar jumped 2.08 yen to 129.55.

Early today in Tokyo, yields on government bonds tumbled to a record low as investors poured into bonds--despite the paltry returns--on a bet that the scandal will make the economy’s dire situation even worse in the near term.

The Nikkei-225 stock index slumped 1.3% to 16,756 on Wednesday and was modestly lower early today.

The unfolding scandal threatens a dramatic upheaval in the government-business alliance that has overseen Japan’s fortunes since World War II and is credited with the country’s ascendancy to the rank of an economic superpower.

Prosecutors are taking direct aim at a central feature of what has often been called Japan Inc.--the “iron triangle” linking bureaucrats, politicians and businesspeople, an unchallenged structure that gave the Liberal Democratic Party its 1955-93 lock on power.

The system’s hallmark was a series of favors from businesses 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.

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

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.

With Koike as an opening wedge, investigators under the direction of Katsuhiko Kumazaki, head of the special investigations division of the Tokyo District Public Prosecutors Office, have now invaded once-sacred territory: In January, his team conducted the first investigative raid on the Finance Ministry. And Wednesday’s raid on the Bank of Japan was without precedent.

The crackdown has now led to the arrests of more than 30 top financial firm executives 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 from the Industrial Bank of Japan and Sanwa Bank on 89 occasions 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.

Lavish expense-account dinners have long been a feature of Japan Inc. Expensive evening socializing, which for many years was seen as acceptable, helped cement the links among Japan’s business, bureaucratic and political worlds.

A good dinner can easily cost $150 a person in Tokyo, and among elite circles $1,000-a-head dinner bills are nothing 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 too surprising in terms simply of the cost.

In comments Wednesday to the Kyodo News Service shortly before his arrest, Yoshizawa insisted that his meals were “within the scope of social courtesy.”

Meanwhile, there have long been complaints in Japan that potentially market-moving data are 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 has kept the scandal alive, analysts say.

These include pressures to create a more fair and open regulatory system as Japan liberalizes its financial markets under Hashimoto’s “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.

Another reason is the crusading Kumazaki.

The top ranks of Japan’s bureaucracy are filled almost exclusively with graduates of Tokyo University. But Kumazaki, 56, is not a Tokyo University graduate, and some observers believe he lacks the old-boy-network sense of shared privileges and shared loyalties that helped hold the old system together.

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