Koizumi Shakes Up His Cabinet

An official who already serves as the minister for economics and fiscal policy will take on responsibility for cleaning up Japan’s banking sector as Prime Minister Junichiro Koizumi responds to growing international pressure to revive the economy.

As part of a Cabinet shakeup Monday, Koizumi fired a top economic advisor who had balked at instituting aggressive financial reform measures. He reappointed a dozen ministers, including most of those holding key posts. Five were replaced, including the agriculture minister, who had been criticized for his handling of Japan’s “mad cow” disease outbreak, and the defense minister, whose agency had been criticized for collecting data on those who submitted freedom of information requests.

But the most significant change was the replacement of Hakuo Yanagisawa, who as head of the Financial Services Agency was Japan’s top banking regulator. He had objected to using public money to help banks write off their nonperforming loans.

Yanagisawa’s job will be assumed by Heizo Takenaka, who will continue in his Cabinet post as economics and fiscal policy minister. Yanagisawa and Takenaka were known to disagree about how best to resolve Japan’s bad-loan mess.

Koizumi termed the nonperforming loans the biggest obstacle to reforming the economy, which he says is his top priority.

“The bad loans have been a shackle on reform,” he said.

Among the few Cabinet ministers who are not members of parliament, Takenaka, 51, previously taught economics at Keio University and has taught at Harvard. Past banking regulators, including Yanagisawa, have been career bureaucrats, long viewed as being too cozy with the industry.

Takenaka vowed to “fix whatever needs fixing.”

The Financial Services Agency has put the total of nonperforming loans--those made by banks to companies that haven’t kept up with interest payments--at $400 billion.

Takenaka has said publicly that the figure is too low. Analysts suspect that the true figure might be two or three times higher. Banks have been reluctant to write off the bad loans or set aside reserves to cover them for fear of eroding their capital base.

Koizumi’s vow to get tougher on the bad-loan problems came after Japan was embarrassed in a Washington meeting of international finance ministers and bankers last weekend. The International Monetary Fund urged Japan, which remains the world’s second-largest economy, to vigorously promote restructuring of its banking and corporate sectors and clean up its bad loans.

Japanese officials couldn’t seem to agree among themselves about a solution to the banking problems. Finance Minister Masajuro Shiokawa said he told U.S. Treasury Secretary Paul H. O’Neill that it was possible to inject public money into the cleanup effort. But bureaucrats at Shiokawa’s ministry denied that he had talked about a bailout. Shiokawa later angrily insisted to reporters that he had meant what he said. Shiokawa was one of those reappointed Monday by the prime minister.

O’Neill said he left the meeting with Shiokawa without a clear sense of Japan’s course.

“I did not come away with an understanding of how these particular interventions are going to contribute to the change,” O’Neill said.

Japan’s economy has been mired in deflation and a decade-long slump. Its stock market, which peaked in 1989, has tumbled to 19-year lows. Businesses have failed and land values have plummeted. Because property values have plunged, many loans are believed to exceed their collateral property values.

The Financial Services Agency was set up in 1998 to review bad assets and force banks to write them off. Legislation was enacted that called for aggressive penalties against banks with inadequate capital. But so far, relatively few of the loans have been disposed of.

Opinion is divided about whether Takenaka can change Japan’s financial course.

Robert Feldman, chief economist at Morgan Stanley Japan Ltd., heralded Takenaka’s appointment as “a new dawn.”

“They need somebody on top with a different way of thinking,” he said.

However, Tetsuro Sugiura, chief economist at Mizuho Research Institute in Tokyo, said that if Takenaka moves too aggressively he could make Japan’s economic problems worse.

Japan’s central bank was so concerned about the nonperforming loans that it said last month it would purchase stock shares from banks to help them accelerate the disposal of bad loans.

Koizumi said that the government and the Bank of Japan are coordinating policy and that he hopes to resolve the problem by 2004.

*

Hisako Ueno in The Times’ Tokyo Bureau contributed to this report.