The Japanese government and an increasingly emboldened opposition agreed late Friday on a long-awaited plan to sort out the nation's crippled financial system in advance of Tuesday's summit between President Clinton and Prime Minister Keizo Obuchi in New York.
The stakes are considerable, given that fixing Japan's bad-debt problem--estimated at between $650 billion and $1 trillion--is an essential step in turning around the world's second-largest economy. Fixing Japan's economy is, in turn, a condition for getting Asia back on its feet.
Although the deal leaves some sizable holes and does not answer many important questions of implementation, it appears to ease Japan's immediate political bottleneck and pave the way for temporary government ownership of wounded or insolvent banks. It also opens the door for the expected use of at least $100 billion in taxpayer money to shore up parts of the financial system.
"It clears the logjam so broader reforms can go forward," said Charles H. Dallara, president of Washington's Institute of International Finance, speaking in Tokyo.
Foreign leaders, financial markets and Japanese opinion leaders have applied growing pressure on Japanese politicians in recent weeks to move faster, even as parliament members squabbled, redrew alliances and appeared oblivious to the broader crisis. This dissent in the political ranks, however, signals an increasingly viable opposition that may help shape clearer, more transparent national policy.
As outlined, the Japanese government would be able to take over large, troubled banks and dissolve smaller institutions. The deal would also create new mechanisms for removing bad debts from bank balance sheets, with its first test likely to be on Japan's giant, beleaguered Long-Term Credit Bank, or LTCB.
The compromise also provides for the creation of "bridge banks"--temporary entities that acquire good loans from insolvent banks, thereby allowing restaurants, small shops and other companies to remain in business--and for a public debt-collection agency. Both of these steps are designed to keep credit flowing through Japan's troubled economy.
Finally, in one of the biggest sticking points, the deal appears to strip the forceful Finance Ministry of some of its power to decide which banks are viable and which are insolvent, an important separation of powers for opposition reformers trying to end cozy links between bureaucrats and bankers.
"I'm determined Japan won't be the source of a global financial meltdown," Obuchi said, referring to the deal.
On the face of it, most key points were won by the opposition, which has grown increasingly feisty after its upset victory in the legislature's upper house July 12 against the ruling Liberal Democratic Party. Its newfound power to block legislation allowed it to play hard ball against the ruling LDP and insist on tighter control over the use of public funds, greater disclosure, and having relatively more of the burden shouldered by bankers and shareholders than taxpayers. Some of the differences may have been more cosmetic than real, however, analysts said, nor should the LDP be ruled out.
The tough stance, however, improves prospects that the opposition will control the government in the next election for the lower house, which must be held by the autumn of 2000. The possibility of a shift in control is noteworthy in Japan, given that the ruling LDP has only shared or been out of power for about 30 months since 1955.
In Washington, a spokesman for the Treasury Department said Japan's bank reform developments were "under review," and it "would not be appropriate to comment beyond that at this time."
The markets remain wary until they can see the deal's terms applied. And many important questions remain unanswered, including how the government will acquire the shares of insolvent banks and how Japan will handle weak but viable institutions. In the case of LTCB, bad debts could be siphoned off by the government before a possible forced merger with Sumitomo Trust Bank. As opposition-favored limits on public funds became evident Friday, LTCB shares hit an all-time low of 18 yen, or about 13 cents.
Financial analysts also want to see how flexible the bailout and forced closure machinery are as they brace for more bank failures in the near future. "In two or three months, the real shape of the bad assets will be revealed," said Tetsuro Sugiura, chief economist with Fuji Research Institute.
Others said the deal fails to address many of the systemic problems that landed Japan into such trouble to begin with, including a history of weak financial supervision and poor disclosure. Nor does it do much to address Japan's credit crunch, to encourage mergers, give overt government support to healthier banks or send a strong message that weak banks should be allowed to fail, said Brian Waterhouse, banking analyst with HSBC Securities.
Also left unanswered is whether the opposition's insistence on more disclosure and tougher treatment for banks will further destabilize a shaky financial system, and how much expertise Japan has to staff the new oversight agencies and decide which troubled banks are worth saving.
"There are only 600 bank examiners in this country, compared to 10,000 in the U.S.," said Richard Koo, chief economist at Nomura Securities. "Of the 600, only 200 are considered any good."
Naoto Kan, leader of the largest opposition party, the Democratic Party of Japan, was dead set against giving the Finance Ministry discretionary power over troubled banks. The popular Kan, who helped disclose a Japanese Health Ministry cover-up of HIV-tainted blood products, has sought to curtail the LDP's power and stem potential collusion. In a last-minute compromise, however, the LDP delayed some structural changes and inserted a few vague words in key places, paving the way for some fierce interpretation battles later.
Furthermore, in reality the Finance Ministry houses a great deal of the nation's financial expertise and will likely play a major role regardless of the structure.
"The ministry may have created a new Kabuki [play], where it doesn't appear to be pulling the strings but really is," said Steve Clemons, vice president of the Economic Strategy Institute.
The LDP and Japanese bureaucrats have a history of passing vaguely worded laws that can subsequently be manipulated through administrative guidance.
But all the political wrangling, as maddening as it is coming during a global crisis, also suggests that Japan may finally be developing a viable opposition capable of challenging the LDP's 4-decade-old grip on power.
Times staff writer Evelyn Iritani in Los Angeles contributed to this report.