The Other Loser in Japan's Election

The Democratic Party of Japan has pledged to severely curtail the powerful Finance Ministry
Prime Minister-elect Hatoyama: Mulling a National Strategy Bureau Toru Yamanaka/Afp/Getty Images

Tokyo - Time was, mere mention of Japan's Finance Ministry was enough to strike fear into the hearts of policymakers from the White House to Whitehall. The ministry's 15,000 bureaucrats guided Japan's postwar expansion, steering money to everything from social security and defense to rice subsidies and construction. While it has lost some power recently, the ministry still allocates $2.4 trillion—about 44% of Japan's gross domestic product.

These days, though, much of the fear seems to be coming from inside the ministry itself. The Democratic Party of Japan, which won a landslide election on Aug. 30, has promised to break up the "Iron Triangle" of government, bureaucracy, and Big Business. "We will revive Japan by shifting from bureaucrat-led politics to politics led by the people," DPJ leader—and soon, Prime Minister—Yukio Hatoyama has said.

That doesn't augur well for Finance. One key DPJ idea is a "National Strategy Bureau" where politicians, rather than career bureaucrats, allocate funds. That would represent a huge change from the decades-long practice of ministry staffers drawing up state spending plans with little input from the Diet.

Any challenge would be another in a long series of humiliations for the ministry. In recent years, it has ceded its role of market watchdog to the Financial Services Agency and has lost its influence over monetary policy to the Bank of Japan. It even suffered the indignity of having its name changed from Okura-sho (a centuries-old term redolent of honor that meant the empire's central treasury) to Zaimu-sho, a modern word largely stripped of formality that simply means Ministry of Financial Affairs.

In public, the ministry has put on a brave face. "We must work appropriately if a new government has a new policy," the ministry's top bureaucrat, Vice-Minister Yasutake Tango, told reporters after the election.

But behind the scenes a big spat is brewing. Ministry officials have called the DPJ's proposed National Strategy Bureau "General Headquarters"—a reference to the U.S. forces that dictated policy after World War II. On the other side, DPJ senior adviser Hirohisa Fujii—a favorite to become the new Finance Minister—told Tango to consider stepping down if he's unhappy with the new government. And Fujii, who spent two decades at the ministry, has vowed to block funding for "wasteful" projects such as a $5 billion dam and a $125 million comic book museum (a favorite of outgoing Prime Minister, and manga fan, Taro Aso.)


But for all the bickering, the two sides will have to get along. The DPJ's lack of administrative experience could slow efforts to take on the old guard. And the ministry may be the DPJ's best hope of finding the $100 billion-plus in annual savings it needs to fund costly pledges such as handouts to families with children.

In the near term, the ministry may even strengthen its hand, given its knowledge of budgets at rival ministries that oversee key sectors such as transportation and health. "The DPJ can maintain a hawkish stand in public," says Masaaki Kanno, chief economist at JPMorgan Securities (JPM) in Tokyo. "But without the help of bureaucrats, nothing can be done."

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