Japan: Will Reform Really Happen?

MITI's Yosano pledges that it will reform

It was once the undisputed prince of Japanese ministries. The planners at the Ministry of International Trade & Industry guided Japan's postwar resurgence, nurturing the auto industry, building critical mass in steel. But around 1980, the game changed, and MITI's great rival, the Ministry of Finance, seized the initiative in planning Japan's future. MOF convinced Japan's rulers that the country now had to focus on husbanding and allocating its vast wealth instead of targeting the next industry to dominate. Thus, MOF emerged as the top player in Kasumigaseki, the administrative quarter of Tokyo.

But Trade Minister Kaoru Yosano, MITI's new chief, now sees a chance to reassert his ministry's old dominance. In this season of fear, voters and legislators revile MOF as the architect of Japan's economic mess, and MOF's mandarins, normally arrogantly self-confident, seem hobbled by self-doubt.

SHIFTING CENTER. That's the kind of opening a seasoned Liberal Democratic Party player such as Yosano is too shrewd to ignore. In recent weeks, he has worked furiously to position MITI as the leader of a much needed restructuring in industry and the planner of Japan's rescue. He has also eagerly crossed swords with U.S. trade negotiators about export policies. It's unclear if Yosano is sincere about forcing Japan to take the painful steps needed to restore its economic health. But he sure is serious about turning MITI into the country's No. 1 power center.

Yosano is an unlikely character to act as an agent of change. Granted, he talks readily about Japan's need for a deregulation that, though painful, will get large pockets of the domestic economy up to global standards. "Regardless of whoever cries for help, this is going to happen," he vows. Yet such gutsy talk was until recently quite out of sync for an LDP heavyweight of Yosano's standing and pedigree. He's the grandchild of famous Japanese poets Tekkan and Akiko Yosano. After graduating from Tokyo University with a law degree in 1963, he quickly caught the eye of party bigwig and future Premier Yasuhiro Nakasone, who brought him on as a senior staff member. Elected to the Diet in 1976, Yosano steadily moved up the ranks. Last year, as Prime Minister Ryutaro Hashimoto's deputy cabinet minister, he supported MOF's policy goal of reining in the runaway budget deficit. As a result, he backed Hashimoto's ill-fated move to hike the consumption tax, which pushed Japan into recession in late 1997 and helped aggravate the banking crisis.

That disaster brought down the Hashimoto government--and apparently triggered an about-face in Yosano's thinking. By the time the new LDP Prime Minister, Keizo Obuchi, enlisted Yosano to run MITI last July, Yosano had morphed into a Keynesian apostle. To the utter horror of Finance Minister Kiichi Miyazawa, Yosano condemned MOF's fiscal conservatism and called for a massive round of public-works spending, government loans for cash-strapped companies, tax cuts, and other incentives to get the economy moving again.

Yosano also quickly marshaled the policy wonks at MITI to back his argument. MITI planners started to make a convincing case that the economy would incur a catastrophic plunge if the government didn't open the fiscal floodgates. According to one MITI document that circulated around the government in the early fall, the deflationary forces would vaporize roughly 8% of Japan's economy over a four-year period through 2001. "We are staring at the door of a deflationary spiral," says Yosano. That kind of Sentiment prompted the Obuchi government to launch a $200 billion spending package on Nov. 16. News of the package sent a strong signal that Yosano has elbowed aside Finance MinistEr Miyazawa as Obuchi's chief cabinet voice on economic policy.

But Yosano still has to consolidate his victory by proving that MITI knows best. He has staked his career--and MITI's comeback--on an all-or-nothing bet that Japan can make one final spending push to reflate the economy before its debt reaches unsustainable levels. If the billions set aside for high-tech public-works projects and government loans to cash-strapped companies are squandered on politically motivated handouts, Miyazawa might get the last laugh. Indeed, the fear that Japan will do just that has already prompted Moody's Investors Service to strip the nation of its top-grade credit rating.

And Yosano still has not shown how MITI can pull off the restructuring and deregulation that corporate Japan needs to revive. He is looking to create a European-style mix of job retraining and generous unemployment benefits to ease the pain of change. And he wants MITI to be a kind of massive McKinsey & Co. consulting firm to help instill best-business practices in the most uncompetitive sectors. MITI is moving toward opening sensitive sectors such as energy, retailing, inland transportation, and distribution to some tough deregulation that will hike Japan's jobless rate to Western levels. But serious deregulation and restructuring have yet to begin.

trade tantrum. Yosano can argue that he needs breathing room for the economy before tackling the hard stuff. He also wants to keep exports flowing at record levels to keep Japan's economic vital signs steady. America's ballooning trade deficit could well restart the trade war with Japan sometime next year, but Yosano is not ready to have Japan pull back.

Thus, Yosano banged heads with combative U.S. Trade Representative Charlene Barshefsky at the recent Asia-Pacific Economic Cooperation summit in Kuala Lumpur. There, Yosano and his aides insisted on excluding fishery and forestry products from a round of tariff reductions. It was part of a larger apec free-trade accord covering nine industries that has been shelved for a year. Japan's combative stance steamed the U.S. negotiators, who suspect that Tokyo is using its crisis as an excuse to pump out exports and prop up trade barriers.

However Yosano's moves play out, there's no doubt he has done a superb job of getting MITI back into the game. What better way for MITI to ensure its survival than to position itself as Japan's central agent of change? The Obuchi government has pledged to downsize the sprawling central government once the current crisis passes. Some economists would like to see bureaucratic payrolls slashed by 50% early next century. A MITI cloaked in reformist clothing might stay intact--and a master strategist such as Yosano might emerge as the top dog in Kasumigaseki.