Japan Bank Deal Falls Apart Just as Obuchi Leaves for U.S.

Any hope that today’s summit between President Clinton and Japanese Prime Minister Keizo Obuchi might calm world markets and show the world’s two economic gorillas heading in the same direction has been shattered by renewed infighting over Japan’s vital bank bailout bill.

The political deal was supposed to be the cornerstone of the summit and show that Japan was ready to fix its own economy, which in turn would support global financial recovery.

Mere hours after Japan’s government and its emboldened opposition bowed and shook hands over the plan to tackle Japan’s $1-trillion bad-loan crisis, however, it started to unravel. This leaves Obuchi walking into today’s meeting, being held in a mansion just outside New York City, looking weak and paves the way for further criticism that Japan is fiddling while the global economy burns.

“It’s clear Clinton is going to say, ‘I thought we had a deal,’ ” said Garry Evans, strategist with HSBC Securities. “This is worse than going back to square one.”

In an ironic twist, political analysts say, it was Obuchi’s own party that cut his diplomatic legs off.

Toward the end of weeks of tough negotiating on the banking deal, the most intense differences were over two key issues: the use of public money to prop up the crippled Long-Term Credit Bank of Japan Ltd. and whether the nation’s powerful Finance Ministry or an independent agency would decide the fate of troubled banks.

Just hours before Obuchi got on the plane, a deal was patched together putting controls on any public funds and limiting the Finance Ministry’s oversight role. This favored the opposition, which has sought to sever traditional collusive links between Japanese bureaucrats, bankers and the ruling Liberal Democratic Party. But a few key words were also inserted at the last minute--the English equivalent of et cetera--giving the LDP some wiggle room.

A political understanding that these differences would be papered over temporarily so Obuchi could take the deal to Clinton foundered, however, when individual LDP members started crowing almost immediately about how the opposition’s win was illusory. At that point, the opposition arched its back and the deal’s weaknesses were apparent to the world.

“The whole thing backfired,” said one political analyst. “This was not the kind of message the LDP hoped to give Obuchi for the summit.”

But analysts add that the deal is still salvageable. It’s just going to be a messy process. And the markets will no doubt grow increasingly impatient in the meantime. On Monday, rating agency Fitch IBCA lowered Japan’s foreign currency rating to AA+ from top-notch AAA.

One reason beyond shifting power politics why Japan has not moved faster to tackle its financial problems is that Japanese voters don’t make the direct link between the banking crisis and the ills of the domestic economy at large, said Akio Watanabe, professor of international economics at Aoyamagakuin University.

Furthermore, a bank deal has little upside domestically and lots of downside, other analysts said. Even if Japan passes the best possible deal, stock prices are not likely to rise any time soon. And if it doesn’t, stock prices will only fall further, leaving lots of room for blame. The Nikkei average hit another 12-year low Monday to close at 13,597.30, down 385.82 points, and lost 31.92 points during early trading Tuesday.