Commentary: Japan's Finances Need Shaking Out Not Propping Up

First, Tokyo dissembles for years about the scale of its mess. Then, with the collapse of four institutions last month, the ruling Liberal Democratic Party says that yes, there might be a problem. Now, an LDP task force is about to approve a plan to raise $77 billion from bond sales to prevent a panic. Has Japan's crisis come mercifully to an end?

Don't count on it. True, investors turned euphoric on Dec. 9, after Prime Minister Ryutaro Hashimoto backed the plan. Having taxed the nation into fresh recession this year, Hashimoto has--for now--dropped his fixation with cutting Japan's budget deficit. With support dwindling, he has little choice.

Yet Hashimoto is no match for the entrenched interests. Macroeconomic and reform policies have already been hijacked by LDP elders with ties to the ministries and industries they oversee. When the LDP unveils its bailout package on Dec. 16, investors may be shocked. Rather than speed a shakeout of the financial sector, the LDP may instead prop up its rickety structure.

COZY TIES. A month ago, Hashimoto and Minister of Finance Hiroshi Mitsuzuka suggested that public funds would cover only depositors and investors. The markets would determine the fates of banks and brokers. Now, there's talk at LDP headquarters of using money to shore up the very institutions that made the mess.

Former Premier Kiichi Miyazawa thinks some money should buy the preferred shares of the weaker players. Seiroku Kajiyama, the LDP's former chief cabinet secretary, also suggests that regulators postpone new rules that would make it tougher for debt-laden companies to borrow. If Kajiyama gets his way, banks could keep rolling over problem loans--which helped bring on the crisis. Other elements of Hashimoto's Big Bang overhaul of Japan's markets could be put off as well.

You can't blame party hacks for trying--but then again, maybe you can. Their links with financial institutions have long enriched politicians and party coffers--and not always legally. Why strain these cozy ties now? Yet clinging to the status quo is not merely wrongheaded: It's economic hara-kiri. Any bank getting public money may be viewed as damaged goods--and could risk a run on its deposits. "You send the wrong signal if you line up in front of MOF for help," says Brian Waterhouse, a banking analyst at HSBC James Capel.

If Japan isn't careful--and if a massive run on the banks ensues--the cost of a bailout will be far higher than anyone now imagines. Japan will also send the wrong signal to the region's declawed Tigers as they struggle to shutter failing banks and brokers.

Finance Ministry insiders insist that cooler heads will prevail and that the government will use most bailout funds to replenish the Deposit Insurance Corp. The DIC would also get expanded power to merge or shut enfeebled banks. Any banks getting help will be carefully screened, insists Sei Nakai, deputy director-general of MOF's Banking Bureau. Fine, but why aren't reform-minded MOF bureaucrats publicly repudiating the LDP's misguided approach? "Hiding behind the curtain is necessary," Nakai says.

As a matter of expedience, maybe. But that's precisely the problem. Just when the governing elite should lead a public debate about the need to endure economic pain, everybody is retreating into the shadows. Ordinary Japanese haven't a clue how this money will be spent. And the architects of Japan's lost decade aren't about to tell them.

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