It is time for Japan to break up the Ministry of Finance. Long a source of hidden strength for the Japanese economy, the MOF has become a bureaucratic threat to continued prosperity. Its regulators have proved incompetent at running the financial system, its people have failed to curb illegal trading practices overseas by big banks, and its ex-officers, who joined lending institutions for housing, turned a blind eye to gangster infiltration and corruption.
There is no other financial institution in the world with the power of the MOF. In U.S. terms, the MOF is the equivalent of the Treasury Dept., Federal Reserve, Securities & Exchange Commission, and the Internal Revenue Service combined. It draws up the annual budget that is rubber-stamped by the Japanese Diet. The MOF combines both budgetary and taxing powers: It decides on how large the government deficit will be, what kind of bonds are sold to finance it, and which banks buy which bonds.
But that is only the official face of power. By controlling the budget, it exerts heavy influence over all public institutions. And by seeding both private and other government institutions with its own people, unelected the MOF mandarins exert a feudal lock on the country, accountable to no one.
How should the MOF be split up? The MOF's cover-up of last year's Daiwa Bank Ltd. trading scandal surely argues for the creation of independent watchdog agencies with more focused, and limited, regulatory clout. But that is only the beginning. The MOF's budgetary and taxing power should be separated into two independent agencies, perhaps housed in different cities. Japan's recession was prolonged unnecessarily by the MOF's refusal to force the banks to dig themselves out of "bubble economy" speculation. It knew back in 1991 that gangster-controlled institutions were refusing to pay back overdue loans or sell underlying assets. It did nothing. Now the MOF has presented a plan, negotiated in secret, that would bail out the gangsters with taxpayer money. No wonder the Japanese public is outraged.
Prime Minister Ryutaro Hashimoto is under great pressure to break up the MOF. He was its head during some of the worst years, when legitimate bank lending to the yakuza became commonplace for the first time in Japan's history. So he feels compelled to do something, and he should act soon. There is a growing fear that the ministry may present a sham reform program that leaves its power undiminished. Hashimoto should be bold enough to challenge the bureaucrats.
But more must be done. The real reason the MOF is a titan is that past Prime Ministers and Diet members lacked the expertise--or interest--in shaping and selling difficult policy decisions to the public. The bureaucrats called the shots and wrote the scripts, which the pols recited like so many marionettes. Hashimoto and his brethren in the ruling Liberal Democratic Party boast the kind of new political sophistication to chart an independent policy course for a country desperately in need of one. If Hashimoto is serious, he should liberate budget, tax, and deregulation policy from the bureaucrats and return it to where it belongs: in the hands of elected officials who answer to voters.