Fall Of The Finance Shoguns
Japan's Ministry of Finance is in a clash of Titans with the Bank of Japan. For months it has unsuccessfully pushed the bank to loosen money supply. While the fight rages, the lethal mix of slack fiscal policy that MOF loves and the tight money that the BOJ prefers is driving the yen--and budget deficits--sky-high while locking the economy on a juddering stop-go path. After showing a bit of a recovery earlier this year, Japan's gross domestic product plunged at an annual rate of 3.8% in the third quarter.
MOF's inability to prevail is eloquent testimony to how low it has fallen. From a gray fortress in central Tokyo's administrative quarter, its elite corps once dictated tax policy, oversaw banks and stock markets, fashioned quiet bailouts, and stood as undisputed guardian of the yen. By any measure, it was the most powerful bureaucracy in the industrialized world. No longer. Some of its powers were blown away by Tokyo's Big Bang financial reforms in 1996. But since then, largely self-inflicted wounds from a series of corruption scandals, policy flubs that plunged Japan into a recession, and regulatory abuses have turned the Ministry into a symbol of all that is wrong with Japan Inc.
NOT GIVING UP. Rival agencies have torn down the fortress walls in just two years. Supervision of the banking and securities industries was switched to the Financial Supervisory Agency (FSA), created in June 1998, which reports to Financial Reconstruction Minister Michio Ochi. The BOJ, once under MOF's de facto control, has a new charter that gives it complete authority over monetary policy: Governor Masaru Hayami no longer has to endure meddling by Finance Minister Kiichi Miyazawa or his officials. Even the ruling Liberal Democratic Party is drafting its own budget and fiscal policies rather than relying entirely on MOF. "We will never be able to go back to where we were 10 years ago," frets State Secretary for Finance Yoshimasa Hayashi, one of the top political appointees in the Ministry.
Wounded it may be, but the Ministry still purrs with brainpower. Members of the tight-knit clique that runs the place--all grads of the elite University of Tokyo--haven't yet thrown in the towel. MOF has, for instance, launched an offensive to internationalize the yen, start up a $100 billion Asian Monetary Fund, and represent the nation's financial interests abroad. And it may still carve a crucial role in rebuilding Japan's tattered public finances, if and when it can get a full-fledged recovery going.
Though it dismays the in-house hotshots, MOF's humbling isn't all bad. Absent the ferocious gatekeeper, domestic and foreign players have far more freedom to shape their strategies and raid each others' turf. Citigroup, Merrill Lynch, GE Capital, and others, for instance, are all muscling into once hermetically sealed Japanese financial services markets. On the flip side, of course, it's no longer enough just to wine and dine the right MOF contact to get approval for a project, figure which way policy is headed, or beg a favor. Nor can domestic players who run into trouble count on being bailed out any longer.
Meanwhile, MOF's arch-rivals have had a field day. The International Trade & Industry Ministry has made a comeback by taking the lead in planning Japan's future, particularly the development of its Internet economy. The FSA has quickly carved itself a slice of power as well. It is charged with the all-important business of selling off or merging bankrupt lenders, and it is remaking Japan's financial system with MOF as a mere spectator. Not only is there more diversity in policymaking, but decisions are being made more quickly. Already, the FSA has closed or taken over half a dozen ailing financial institutions. And its elbows are a lot sharper: MOF's banking bureau had regularly given Nippon Credit Bank a clean bill of health, but the FSA nationalized it in December, 1998, concluding that NCB's books were doctored.
If MOF is ever to redeem itself, its best hope may be to defuse the growing debt bomb it helped build. In early December the Ministry raised its estimate of Japan's national debt by the end of fiscal year 1999 to more than 100% of gross domestic product. Kenneth S. Courtis, chief economist at Deutsche Bank Group Asia Pacific, figures it will be a huge 151% in 2001. MOF's Hayashi says the Ministry has set up a committee to get a handle on the various obligations of local governments and state-linked corporations and lenders. It is working on a set of recommendations to close the budget gap that would include tax hikes, sales of state holdings, and increases in the premiums that pay for social welfare programs. "I'm pretty sure MOF will be a scapegoat once again," Hayashi says with a grin.
For now, MOF and the BOJ need to ensure that the $70 billion in new government bond issues expected next year doesn't trigger a spike in long-term interest rates and crush the recovery entirely. That's a worry, because the $2 trillion postal savings system, controlled by MOF and a big buyer of government bonds, is expecting massive outflows of $430 billion in maturing 10-year time deposits that yield 6%, vs. the typical 1% it offers on new deposits. Unless MOF or Japanese institutional investors buy the government bonds, the BOJ will have to step in. The central bank has promised to act as buyer of last resort but only through repurchase agreements. That means MOF will be on the hook to buy back the bonds at some point.
YEN AGENDA. Of course, MOF could buff its luster and international clout if one of its alums, former Vice-Minister for International Affairs Eisuke Sakakibara, wins the position of managing director of the International Monetary Fund. Sakakibara, who's skeptical of the free market, would most likely bring more Japanese economists into the IMF and be less critical of Tokyo's go-slow policies than the current regime. However, he's a long shot.
Meanwhile, Sakakibara's successor, Haruhiko Kuroda, has been lobbying central bankers in East Asia to nudge their foreign currency holdings away from dollars and toward the yen and euro. That, he says, would better reflect the region's trade patterns. He sees the de facto dollar-pegged system as a real culprit behind the 1997 currency crisis in Asia. "This was a lesson learned at a very big cost," says Kuroda, who also thinks some managed currency range between the yen, dollar, and euro should be explored.
Of course, MOF's gambit to boost the yen's importance in the global economy won't get far until Japan's trading partners have good reason to hold the currency. "Japan has to open up its trade markets and import more from its neighbors," says Yoon Dae Euh, president of the Korea Center for International Finance. Still, he thinks the region should consider some kind of currency reform.
MOF is a shadow of its former self, its absolute power over all things financial in Japan vanished for good. And that's to the nation's benefit. If the Ministry sticks to what it knows best--fiscal policy and international finance--it may be able to restore itself to a central role in Japan's affairs. Until that day arrives, MOF bashing will remain a national blood sport.