Firestorm Around The Fortress

Visit Japan's Ministry of Finance on a typical day, and you would be hard-pressed to see it as the nation's single most powerful institution. Behind its hulking brick facade, bureaucrats scurry along creaking parquet floors, darting through poorly lit corridors to doors marked by hand-painted signs. MOF officials take a perverse pride in their shabby quarters, regarding them as proof that the most important ministry in Japan is preserving itself as a bastion of fiscal discipline.

But increasingly, they are under fire from critics at home and abroad. Japanese politicians charge that MOF's opposition to deficit spending is putting the faltering economy at risk. Bankers complain that stifling regulations threaten to turn Tokyo into a financial backwater. And Washington is targeting MOF as a major opponent in its battle to curb Japan's $130 billion global trade surplus.

AMMUNITION. MOF argues that relinquishing control would be disastrous, imperiling full employment and perhaps causing another stock market crash. But such intransigence poses big risks. Continued trade surpluses, for instance, could push up the yen and delay an economic recovery. And MOF's ultracautious control of financial markets may prolong Japan's $400 billion banking crisis and cut needy companies off from the flood of equity investment washing across Asia.

For the moment, MOF has plenty of ammunition to defend itself. Its control of government spending gives it the upper hand in everything from trade policy to regulation of the financial markets. Indeed, MOF has more influence than ever. Its rival, the Ministry of International Trade & Industry, is in retreat because the export giants it nurtured have outgrown its patronage. MOF has also gained from the fall of the Liberal Democratic Party. The LDP sometimes could moderate MOF's positions, but the government of Prime Minister Morihiro Hosokawa lacks clout. So MOF's senior bureaucrat, Vice-Minister Jiro Saito, seems dead set on running the ministry himself.

A curt man with an encyclopedic grasp of the budget system, Saito pops up constantly in the pages of Japanese tabloids. They are astounded that Saito, who took office last June, is disregarding the network of former top officials that MOF men usually consult before making all major appointments. Instead, he is creating a dynasty on his own. "He has his successors all lined up for the next 10 years," says one MOF insider.

The tabloids also grumble about the way Saito obstructed Hosokawa's $140 billion fiscal stimulus package last month. In a hard-won deal, MOF dropped demands that any income tax cuts be paid for by raising consumption taxes. But MOF imposed a one-year limit to the $60 billion tax cut, so the plan may not spur much growth.

SHADOWY NETWORK. MOF's influence over the financial markets is more subtle but just as pervasive. It can cow the market's players with no more than a pointed query. Last December, for example, as the Tokyo stock market slumped, MOF officials called major brokers and asked for a rundown on big sellers. Word of the request got around quickly, and the market promptly climbed 12%. But sometimes, MOF skips the phone call and just passes the word unofficially via industry facilitators known as "MOF-tan."

These folks--their job title means "MOF-assignment"--are banking- and securities-industry employees who track events inside the ministry full-time. They serve as conduits for regulators to quietly pass diktats back to those they govern. Because this shadowy network is hard for newcomers to crack, it is tilted against foreign financial institutions. Companies within the network make sure their MOF-tan wander by the offices of key officials regularly to seek favors and sense which way the regulatory wind is blowing.

Many Japanese politicians argue that this ingrown system allows MOF to make policy by enforcing regulations as it sees fit. Like other ministries, MOF has three political appointees, who answer to the Prime Minister. But their function is mainly decorative. To add more accountability to the bureaucracy, Hosokawa's most powerful backer, Ichiro Ozawa of the Japan Renewal Party, is pushing for more political appointments. But outsiders wonder how much power MOF will actually cede. "New appointees will only become pals with the bureaucrats," says Seiichi Ohta, a former MOF vice-minister.

While the debate over political control of MOF drags on, Japan's financial markets continue to drift. Despite record-low interest rates, MOF has kept all but a few banks and manufacturers from selling shares to help lift them out of recession. MOF fears a flood of initial public offerings could swamp the Tokyo stock market.

SCLEROSIS? Some industrialists say the ministry is preventing investors from taking risks on entrepreneurs. Eiji Suzuki, former president of Mitsubishi Kasei Corp. and chairman of a recent MOF panel on financial reform, says that the trickle of venture capital is putting Japan at risk of industrial sclerosis. "MOF absolutely will not allow such a spirit of adventure," he fumes. Finance is also preventing banks from fully addressing their bad-debt problem. MOF has allowed few tax benefits for write-offs and has kept banks from selling debt to investors.

Critics say MOF fears change. New financial products created by Western banks and brokers must be cleared with MOF one at a time. One foreign broker says he wasted nine months last year trying to get MOF to approve a new variety of bond option. "The way they look at it, I'm trying to change the rules," he says. MOF forbids options on individual equities--a mainstay in most financial capitals. Brokers can't make interest-rate swaps. Commercial banks can't issue bonds. Yet Eisuke Sakakibara, deputy director-general of MOF's International Finance Bureau, says deregulation is almost complete. "If [people] think we're against change, that's wrong," he says.

Holed up in their headquarters, MOF's bureaucrats appear oblivious to the storm raging outside. But given the risks of a weakening economy and a looming trade war, their hard-line ways are looking more dangerous by the day.

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