Payoff Scandal Further Threat to Japanese Rehabilitation

The resignation of the nation’s top bank regulator Sunday over a payoff scandal threatens to further undermine Japanese government credibility at a time when its economy, political system and stock market are all on shaky legs.

Prime Minister Yoshiro Mori effectively dismissed Kimitaka Kuze, chairman of the Financial Reconstruction Commission, over allegations that he received office space in the early 1990s worth $550,000 from Mitsubishi Trust & Banking Corp.--one of the institutions the agency oversees--along with $2.3 million from a religious organization and $940,000 from a real estate developer. Particularly damaging was the news that Mori knew about the problem in advance and appointed him anyway.

“This can’t provide too much confidence they’re going to remain tough on the financial institutions,” said Ron Bevacqua, economist with Commerz Securities Japan.

The departure is the second in less than six months at the FRC, which is charged with restructuring Japan’s debt-laden financial system. The previous chairman, Michio Ochi, quit in February after he was quoted suggesting that financial institutions could expect lenient treatment from government inspectors.

Analysts said the latest scandal comes with the economy showing signs of recovery, the stock market in an extremely jittery state and the Mori administration rudderless and lacking in political support.

“The timing is very, very bad,” said Kazuhiko Ogata, senior economist with ABN Amro Securities. “Equity prices have fallen terribly because people are worried about the future. There’s a lot of uncertainty.”

The benchmark Nikkei-225 closed at a 16-month low Friday. And the index continued to fall sharply Monday morning, trading mid-morning at 15,661, down 1.1%, largely in response to the U.S. stock market sell-off late last week.

Some fear the sharp market decline will further weaken consumer spending, which makes up 60% of the economy, and add more deflationary pressure to the Japanese economy. Natsuko Uchida, 63, a part-time office worker in Tokyo, says she has little faith in the government. “I don’t get any feeling the economy is recovering,” she said.

Analysts, meanwhile, cite several factors behind the recent decline in Nikkei average, which has fallen 26% since April 12. While capital spending has picked up in recent months, personal consumption remains weak. And with few other bright spots ahead, some economists expect economic momentum to weaken in the second half of 2000.

“It’s not going to be a train wreck, but it’s slowing down,” said Chris Calderwood, chief economist with Jardine Fleming Securities Ltd. “The economy is going to be less exciting.”

Furthermore, the $1-trillion flood of stimulus spending during the 1990s is slowing as Japan confronts its growing fiscal debt burden--now approaching 130% of gross national product. And the external picture looks less favorable, amid concerns that the U.S. economy will either slow down or see more interest rate increases, slowing export demand.

Closer to home, the collapse of Japanese retailer Sogo Co. in mid-July under $5.4 billion in debt has reawakened concerns that debts in the corporate sector are worse than some appreciated. So far, the Sogo debacle has not had a domino effect on suppliers. But experts are bracing for more bad news, and all this has reflected negatively on bank stocks as the institutions holding the debt.

Further influencing the recent stock swoon, analysts say, is an unwinding of shares across the Japanese economy. For decades, Japanese banks and other businesses have held stock in their corporate customers in a bid to strengthen insider loyalty and blunt outsider pressure. Recent scandals and accounting changes, however, have prompted banks and others to unload these investments, adding to downward stock-price pressure.

“Banks are unwinding their cross-shareholdings at an earlier stage,” said Yasunari Ueno, chief economist with Fuji Securities. “And foreign investors feel uncertain about the future of Japanese policy and the slow pace of structural reform.”

Finally, in a case of bad timing, the Nikkei average was reconfigured in April to include more technology stocks. While the decision was made last year, by the time it happened, technology stocks were into their own correction, further lowering the benchmark’s value.

Former Economic Planning Agency chief and finance ministry bureaucrat Hideyuki Aizawa was tapped Sunday to replace Kuze.

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Hisako Ueno in the Tokyo bureau contributed to this report.