Battle for Policy Power Sees Dominant Japanese Ministry Curbed

  • Ministry of Finance is losing influence to PM's office
  • It's struggling to prevent Abe delaying sales-tax hike

Shinzo Abe, Japan's prime minister.

Photographer: Kiyoshi Ota/Bloomberg

The Ministry of Finance, an institution that’s shaped the views of Japanese lawmakers for generations, is waking to a new reality after three years of government under Prime Minister Shinzo Abe.

There’s been a perceptible shift of power in Tokyo -- away from the ministry and its insistence on higher taxes and restrained spending -- to the office of the Prime Minister, his Cabinet and a close circle of advisers.

QuickTake Abenomics

Through personnel appointments, the use of independent experts and even foreign Nobel laureates, Abe and Chief Cabinet Secretary Yoshihide Suga have blunted pressure from the ministry, known as MOF, to focus efforts on reining in swelling public debt in an economy struggling to escape deflation. The administration is now debating a second straight delay to an increase in the nation’s sales tax, and has sought the guidance of foreign economists including Joseph Stiglitz and Paul Krugman in the process, side-stepping the ministry.

“MOF is the ministry of ministries," given its power, said Stephen Church, an equity research analyst at Haitong International Japaninvest KK in Tokyo who has studied Japanese markets and policymaking since 1979. “The bureaucracy expects to run things, and this is unheard of” to have a political leader say "no," he said.

Ironically, the change coincides with evidence that MOF’s past successes have born fruit in terms of raising revenue. Along with a 3 percentage point sales-tax increase implemented in 2014, inheritance levies and the top marginal income tax has increased in recent years.

With the economy still stuck in a stop-go pattern, however, the nation’s debt burden has continued to increase, even with historically low borrowing costs. Emboldened by MOF’s declining sway, lawmakers also have sought greater spending and lower corporate taxes.

With the ink barely dry on parliament’s approval of a record budget for the fiscal year starting Friday, Abe said earlier this week that the government would seek to front-load its spending. He brushed of suggestions from some members of his ruling party for more money to pile on top of this budget, only for the national broadcaster to reignite speculation of supplementary stimulus a day later.

Another bad sign for the fiscal austerians at MOF, which was set up in the 1860s: one of the ruling Liberal Democratic Party’s top lawmakers recently proposed that the government make full use of near-zero borrowing costs to fund economic stimulus and to help realize an "explosive increase" in private investment for Japan to escape deflation. Toshihiro Nikai, chairman of the LDP’s General Council, didn’t put a number on the idea.

Officials at the Ministry of Finance declined to comment on whether MOF’s influence in policy making had diminished.

The ministry honed its influence-building skills over decades, constructing a budget-writing process that kept it at the center of deliberations. Drawing on its pool of well-educated civil servants, lower-level bureaucrats handle most of the paperwork, leaving senior officials to spend much of their time consulting with lawmakers, delivering MOF’s views.

It is well attuned to political shifts, establishing links with rising stars. Perhaps the peak of its persuasive power came just a few years ago, with the conversion of former Prime Minister Yoshihiko Noda. After becoming finance minister, Noda abandoned his party’s tax pledges and then as leader pushed through a two-stage sales-levy increase that Abe, leader of the LDP, inherited when he took office in December 2012.

Abe’s Resurrection

The ministry made a grave miscalculation with Abe, according to one of the prime minister’s advisers: it didn’t anticipate his return to power.

Following Abe’s resignation in 2007 after an ill-fated first turn as prime minister that lasted less than a year, MOF largely stopped liaising with him, said Yoichi Takahashi, a professor of Kaetsu University who used to work at the ministry and has served as an adviser to Abe on economics. Not since the 1940s had a prime minister come back to serve again, so it was easy to conclude that Abe’s political career had peaked. 

Without regular MOF counseling, Abe began conferring with a wider circle that included economists and analysts outside of government, such as Etsuro Honda and Koichi Hamada, setting the stage for a second turn at the helm of power that’s seen an unprecedented increase in influence of advisers to the prime minister.  

Further bad news for the ministry came when Abe tapped Suga to be his cabinet chief, choosing a lawmaker who wrote the book on how to manage bureaucrats. (Literally: it’s called “A Politician’s Determination -- Dealing With Bureaucrats.”)

Key Appointments

Suga spearheaded legislation that gave his office power over more than 600 senior appointments in the bureaucracy, putting the topmost civil servant jobs under political supervision for the first time.

While MOF officials typically have favored higher taxes and restrained spending, the ministry isn’t a monolith. Honda, one of Abe’s top two economic advisers, was a career bureaucrat there but has advised against raising the sales tax.

Since the law giving the cabinet office authority over top appointments was enacted, one of Abe’s former secretaries, Kazuho Tanaka, was made the most senior bureaucrat at MOF.

"The Kantei’s power has never been stronger," said Koichi Nakano, a professor of Sophia University in Tokyo, referring to the office of the prime minister and Cabinet run by Suga. "Abe picks MOF officials who are not thought to be mainstream, and divides MOF."

The ministry has also effectively seen its say on exchange rates eclipsed by the Bank of Japan. Abe’s pick for BOJ governor, Haruhiko Kuroda -- a former head of currency policy at MOF -- has been the prime influencer of the yen through monetary stimulus. It’s a far cry from the days when traders the world over would be glued to comments from the vice finance minister for international affairs. One, Eisuke Sakakibara back in the 1990s, had such a large presence that he was dubbed Mr. Yen.

Alumni Network

Another historical channel of power for MOF has been planting its alumni in senior positions elsewhere in the economy. Several BOJ governors have been former Ministry of Finance officials, including Kuroda -- who has remained on the side of proceeding with sales-tax increases. The Asian Development Bank president typically comes from MOF. Government-linked companies have also had a history of senior executives coming from the ministry, including Japan Tobacco Inc.

Japan Post Holdings Co., one of the world’s largest deposit-taking institutions and majority-owned by MOF, became an early battleground for Suga. The chief cabinet secretary installed a former Toshiba Corp. executive as CEO of the bank in 2013, ousting an ex-MOF official after only months in the job, local media reported.

There are some areas that politicians have yet to attempt encroaching on. While the government held an IPO for Japan Post last year -- the fruit of a multi-year effort -- there’s little movement toward further privatization of MOF-held assets that include valuable land holdings. Nor has Abe sought to revive an idea of removing the National Tax Agency from the ministry’s grips.

Staying Power

One major advantage for MOF: it’s part of the government’s permanent architecture, unlike Abe or Suga. And the ministry has sought to build ties with at least two potential future prime ministers.

Tomomi Inada, a Liberal Democratic Party lawmaker who’s seen by some in the ruling party as potentially Japan’s first modern-day woman leader, is the LDP’s policy chief. As head of a panel that looks at fiscal reform, she consults with MOF officials, and has earned a reputation among other lawmakers as a budget hawk.

Shinjiro Koizumi, a cabinet member who is the son of a former prime minister, heads a sub-committee of the panel and also confers with MOF officials.

"They will patiently wait for the administration to change," said Takahashi of his former colleagues at the ministry. "MOF is immortal. Lawmakers don’t live forever."