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

First, Tokyo officialdom dissembles for most of a decade about the scale of the post-bubble mess. Then, with the collapse of four banking and brokerage institutions last month, the ruling Liberal Democratic Party starts to straighten up. Well, yes, say the party's front men, there might be a problem after all. Now, a hastily assembled LDP task force is about to approve a plan to raise $77 billion from government bond sales to prevent a full-blown financial panic. So, has Japan's crisis come mercifully to an end?

Don't count on it. True, the figure is headline material. And investors turned euphoric on Dec. 9, after Prime Minister Ryutaro Hashimoto backed the big commitment: The Nikkei jumped 3.5%. Having taxed the nation into fresh recession earlier this year, Hashimoto has--for now, anyway--wisely dropped his fixation with cutting Japan's huge budget deficit. With popular support dwindling, he has little choice.

Yet Hashimoto's weak political standing makes him no match for Japan's entrenched special interests. The nation's macroeconomic and reform policies have already been hijacked by the LDP's zoku-giin--party elders with friendly ties to the ministries and industries they oversee. When the LDP unveils its bailout package on Dec. 16, investors may be in for a shock. Rather than use the money to speed a shakeout of Tokyo's crowded, inefficient, and corrupt financial sector, the LDP may instead prove itself intent upon propping up the whole rickety structure.

BYZANTINE MESS. Just a month ago, Hashimoto and Minister of Finance Hiroshi Mitsuzuka suggested that public funds would be used to cover only depositors and investors, while the markets would determine the fates of banks and brokers. Although painful, such a move is a decade overdue. But now, there's talk at LDP headquarters of cleverly diverting money to shore up the capital of the institutions that made the mess.

Former Premier Kiichi Miyazawa thinks some of the 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 more from banks. If Kajiyama gets his way, banks could keep rolling over problem loans--a practice that helped bring on the crisis. Other harsh elements of Hashimoto's Big Bang overhaul of Japan's byzantine markets could be put off as well.

You can't blame the party hacks for trying--but then again maybe you can. Links between the LDP and the nation's leading financial institutions have long enriched politicians and party campaign coffers--and not always legally, either. Why strain these cozy ties unless it is inevitable? Yet clinging to the status quo is not merely wrongheaded: It's hara-kiri. Any bank that receives public money may well be viewed as damaged goods--and could face the risk of a run on its deposits. "You send the wrong signal to depositors 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 run on the banks ensues--the cost of bailing out banks and brokerages will be far higher than anyone imagines. Japan will also send the wrong signal to the region's declawed Tiger economies as they grapple with the International Monetary Fund's demands to shutter failing banks and brokers.

Finance Ministry insiders insist that cooler heads will prevail. Rather than inject massive capital into sick banks, the government will devote most to replenishing the Deposit Insurance Corp. to prevent a train wreck. The DIC would also get expanded power to merge or shut weak banks. Any lenders 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 nation's governing elite should lead an honest 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--to say nothing of whether it will be spent wisely. And the architects of Japan's lost decade aren't about to tell them.

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