Japan Opts for Tepid Reform

A monthlong battle in Japan that saw Financial Services Minister Heizo Takenaka portrayed as a reformer, destroyer and ruthless American wannabe ended with a whimper Wednesday when the government unveiled another in a long string of watered-down economic reform packages.

Takenaka, 51, had threatened changes that would force a more accurate reckoning of the nation’s bad debts -- officially pegged at $418 billion but in reality far higher, independent analysts say -- by instituting painful accounting changes, tightening capital requirements, and even nationalizing banks and forcing out incompetent bank managers.

That’s heady stuff in Japan, and the outcry from the political and business establishment was fast and furious; the toned-down nature of Wednesday’s announcement gave some indication of the tire tracks left on Takenaka’s back.

Under the amended plan, accounting changes were put off indefinitely, the idea of nationalizing banks was dropped, and loans and subsidies were extended to small companies to cushion future pain.

“The results are just a big back-off,” said Ayako Mitsui, economist with the investment banking firm UBS Warburg. “Most investors were disappointed to see those trying to do the right thing defeated.”

Markets took it in stride. The benchmark Nikkei index closed Wednesday at 8,756.59, up 47.83 points, on a day the central bank also eased monetary policy. Today, the market opened lower at 8,682.56, down 74.03.

In a reform tussle that Japanese media characterized as a battle between the nation’s old and new guards, Takenaka showed some of the mettle needed to become a white knight. But ultimately he had too little clout or political support.

Most of his proposed reforms were fairly orthodox, at least outside Japan’s borders. But the author and former professor has little political experience and lacked the decades of back-room dealing required to get things done here. He also could have used more support from his boss, Prime Minister Junichiro Koizumi.

“It’s difficult to push a plan while you’re being fired on from all sides,” said Kazuo Mizuno, chief economist with Mitsubishi Securities. “The main issue here is rebuilding Japan, and something as significant as arguably nationalizing banks should be done by the prime minister himself.”

Analysts said a related problem is that Koizumi may not understand economics all that well.

Takenaka downplayed criticism that Wednesday’s plan involved too much compromise. “There are those who say it was watered down,” he said. “But I believe it was an achievement by grappling a problem that’s been lingering for 10 years in one month.”

As momentum built against Takenaka’s reform plan in recent weeks, he was labeled by tabloid newspapers as a believer in the American “winner-take-all” approach -- not a compliment in Japan -- and someone who enjoys real estate and stock speculation, also a less than favorable characterization. “Takenaka Shock,” said one headline.

On other fronts, Takenaka had to battle top lawmakers from the ruling Liberal Democratic Party who argued that he was an armchair theorist, didn’t understand the plight of small companies and picked the wrong time to force banks into a corner. Not to be outdone, the political opposition filed a censure motion against him in parliament.

Japan’s 12 leading banks also slammed his initial proposal, even threatening to sue the government for attempting to change the rules midstream, which they said risked causing a credit crunch and economic collapse. The proposal that particularly angered them was one that would have limited their ability to count deferred taxes as part of their capital base.

“Takenaka is learning what happens when reformers go up against the massive inertia at the core of the political machine,” said the Asahi newspaper. “The results weren’t pretty.”

Ultimately, analysts said, Takenaka’s proposal threatened to break apart the ruling coalition at a time when the appetite for change seemed to be waning among voters. “Public opinion seemed to be split between those in favor of radical change and those afraid for their own jobs,” said UBS’ Mitsui.

It remains to be seen whether the dilution of Takenaka’s proposals will undercut his political effectiveness.

Takenaka, a college professor with a schoolboy haircut, grew up in Wakayama, a city of 400,000 on Japan’s main island. He embraced the dismal science after seeing his father, a shoe store owner, work hard for so little while others seemed to slide by easily, the minister said in a 2000 book he co-wrote called “So That’s What Economics Is About.”

Kazuaki Fujishiro, 52, a fellow student of Takenaka’s at Toin High School, remembers him as persistent, popular and someone who rarely seemed to study but remained near the top of his class.

“I never at the time imagined he’d be so successful,” Fujishiro said. “I respect him for taking on the minister’s job given how much resistance he knew he’d face.”

After graduating from Tokyo’s Hitotsubashi University, Takenaka worked for eight years at what is now the Development Bank of Japan before spending a decade bouncing back and forth between the United States and Japan. He was a visiting scholar at Harvard University and the University of Pennsylvania in 1981, where he reportedly warmed to supply-side economics, which was just gaining attention during the Reagan administration.

Upon returning from the U.S., he spent several years in Japan’s Finance Ministry.

In 1989, he became a visiting assistant professor at Harvard before returning to Japan to teach at prestigious Keio University, leading to a full professorship in 1996.

Takenaka, a reformer armed with easy-to-understand arguments, soon became a fixture on news programs and at symposiums. He once blamed Japan’s decade-long economic slump on “a society that doesn’t have a system to destroy, only to protect.”

At some point as his national profile grew, he attracted the attention of Koizumi.

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Takashi Yokota in The Times’ Tokyo Bureau contributed to this report.