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FOLLOW
THE YEN
Part 2:
Koizumi's policy squad
By Richard
Hanson
Part 1: BOJ's five-year itch
"O myriad gods, aid me according to your
divine plan." - Shinto prayer
"We are going to
take back the power we lost." - Japanese Finance
Ministry official, November 2002
TOKYO -
Call it a quiet coup, or a divine plan.
Since
coming into office, Prime Minister Junichiro Koizumi,
perhaps unwittingly at first, has presided over what
amounts to a restoration of the Japan's Ministry of
Finance (MOF) from an institution whose prestige, along
with morale, plummeted to rock bottom in the
scandal-ridden 1990s.
Seven years ago,
demonstrators were chanting "abolish MOF" in front of
its heavy gates in Kasumigaseki, the heartland of
government. In the past year, senior MOF officials have
made a point of currying favor with the prime minister
as a means of restoring the ministry's reputation - and
clout. At some point in the past year MOF and the prime
minister found they had things in common.
For
the Finance Ministry, the energetic reform-minded prime
minister represented a new leader who truly could use
some help. MOF has more than a century of experience
controlling national finances, with fingers into every
nook and cranny of government. In the post-World War II
era, the defunct Okurasho was considered the most
influential center of government power.
As
Japan's economic bubble burst, MOF stumbled into some of
the worst scandals that it has ever experienced. In a
pique, the prime minister of the day, Ryutaro Hashimoto,
went so far as to strip the ministry of its control over
financial institutions. Out of spite, he abolished its
venerable Okurasho name in favor of a more
pedestrian Zaimusho (the name in English is
unchanged).
MOF officials were bitter and
believed Hashimoto had made them a scapegoat. The
ministry still held sway over the budget, taxes and
public finance, but the regulation and policymaking for
banks, brokers and insurance companies in the late 1990s
were shifted to a newly created Financial Services
Agency (FSA). This was the culmination of the "Japanese
big bang".
The relationship is complex (at least
for MOF). But MOF found a friend in the new Prime
Minister Koizumi, who had made a bitter enemy of Ryutaro
Hashimoto by soundly defeating him in the race for the
leadership of the ruling Liberal Democratic Party (LDP)
two years ago this April. Later, Koizumi attacked the
construction-industry lobby, which Hashimoto's faction
dominates.
That's probably one reason that MOF's
cadre of senior officials had some special sympathy when
things got rough for Koizumi last year. By forging
relations with Koizumi there was a chance to "take back
the power we lost", as one official bluntly put it. By
last summer, Koizumi needed help. He was down in the
polls. His reform-legislation agenda was in tatters,
with the Diet (parliament) passing only a fraction of
the bills he submitted to it. Koizumi's nemesis was
Hashimoto.
MOF had already embarked on a quiet
campaign to place the best and brightest of its rising
younger officials in key positions in the prime
minister's Cabinet Secretariat. In the bureaucracy, MOF
officials personally still were well regarded by their
peers. The problem was Japan. A frustrated Koizumi - the
starry-eyed, sexy crusader for "structural reform" -
needed help. As veteran providers of
behind-the-dark-services for politicians, MOF became one
of the prime minister's valuable assets.
Koizumi
needed the moneymen. MOF needed a politician. If some
good for Japan came out of it, all the better, but
regaining power was the priority. So during the
sweltering record-hot month of August last year, MOF got
to work on its first big power play. The prime minister
had his own little project planned: a trip to North
Korea, which turned out to be a fine booster for his
popularity polls.
MOF still had some of that
magic money touch.
The first concrete product of
the Koizumi-MOF encounter is called the Industrial
Revitalization Corp, or IRC. Just last week, Koizumi's
cabinet appointed a former Nomura Securities Co
executive, Atsushi Saito, and a high-profile academic,
Shinjiro Takagi (professor of law at Dokkyo University),
to lead the new organization. The task to be carried out
over five years is to decide which struggling companies
will get government financial backing. This will include
lining up private banks to participate in the financing
and other companies to act as sponsors in getting dud
companies back on their feet.
When it was rolled
out for public view, few would guess the origins of the
idea. But it was definitely the kind of big idea that
fits into Koizumi's somewhat fuzzy ideas about bringing
about "structural reform" in tandem with getting
economic deflation under control, and pushing banks to
resolve their bad loan problems.
The IRC
embraced by Prime Minister Koizumi may not be the
Japanese equivalent of a Marshall Plan for hundreds of
ailing (dying might be a more accurate description for
some) companies that have suffered badly over the past
recession-pocked decade. The idea is to get money
flowing into the production side of the economy. The IRC
may also give the ruling LPD a boost in the local
elections that will be held throughout the nation
starting next month.
The idea is simple. Get
trillions of yen moving amid some of the worst banking
and economic troubles Japan has ever experienced in
peacetime. For MOF, it was bureaucratic abracadabra. It
was also a dig at the Financial Services Agency and its
state minister, Heizo Takenaka. The story of its origins
is revealing.
According to press accounts, the
plan was set in motion last October 23 when Koizumi's
high-powered economic cabinet members met to review a
crucial interim report on a package of anti-deflation
and other economic measures that was to be unveiled on
October 30 to the public. This was only three weeks
after Koizumi completed his first cabinet reshuffle. In
that reshuffle, he turned Takenaka into what the press
called the "economic czar". He was promoted from just
state minister for the economic and fiscal policy to a
dual post that included the Financial Services Agency.
An emergency committee was set up to tackle the
bad-bank-loan crisis, looking for a fast-track solution
to jump-start the disposal of bad loans.
Present
at the meeting - and the focus of attention - was State
Minister for Economy and Financial Services Takenaka, a
dual position created in the September cabinet
reshuffle. Takenaka was charged with drafting what
amounted to emergency government manifesto, a measure
that might calm financial markets. Stock prices were
falling, among other things, on reports of tough
measures to be taken against feeble banks that were
drowning in bad loans. Other participants were the chief
cabinet secretary, the finance minister, the economy,
trade and industry minister, as well as the governor of
the Bank of Japan.
At one point in the
discussion the octogenarian Finance Minister Masajuro
Shiokawa was recognized. Seemingly out of the blue,
Shiokawa turned the discussion to the subject of
industrial revitalization. He wanted to speed it up.
"I'll have Vice Finance Minister Toshiro Muto study a
necessary structure," he told the gathering. This came
as a surprise to most of the people there.
There
was some bantering about on the idea of using the
Resolution and Collection Corp (RCC), under the aegis of
the Development Bank of Japan, whose work was to help
revive ailing industries. But Takenaka was unprepared to
talk about that idea in any detail. But two days later,
at another gathering of cabinet ministers, a Cabinet
Office official was there to present to concrete plan to
create what he called the "Industrial Revitalization
Corp". He suggested that it might even take over some of
the functions of the RCC.
Finance Minister
Shiokawa then suggested that all this could be placed
under the government's already functioning Deposit
Insurance Corp, which was created in 1971 by the Finance
Ministry and located nominally within the Bank of Japan
(BOJ). Both MOF and BOJ were shareholders. What Shiokawa
did not hint at was that MOF secretly began work on the
IRC concept in August.
By the time State
Minister Takenaka presented to the nation his
committee's anti-deflationary measures on October 30,
the establishment of the IRC loomed large on the agenda.
In effect, MOF had killed the industrial aid plans of
the Financial Services Agency. That was sweet revenge.
MOF had already drawn up plans for the fiscal
2003 budget plan that for approval by the cabinet in
December. It included an increase in the budget of the
Deposit Insurance Corp, allowing an increase of 10
trillion yen in funding capacity earmarked for the
IRC.
There was some historic irony to all of
this.
Old boys at MOF would recognize the likely
inspiration for the IRC in the controversial postwar
Occupation-era emergency policies of the maverick
finance minister Tanzan Ishibashi, an economist who
defied the Occupation authority curbs on financing
inflationary aid to war-damaged industries. The
government went ahead and created the Reconstruction
Finance Bank, which poured funds into damaged vital
industries. This proved highly inflationary - but it
also sparked industrial production - until SCAP (Supreme
Commander of the Allied Powers) shut it down.
The IRC is expected to be up and running by
April or May. The role that the Bank of Japan will play
in the IRC is still unclear. The Deposit Insurance Corp
was selected because it has direct access to public
sources of financing.
During the budget debate
last year, MOF officials also provided the prime
minister with a practical solution to the anticipated
dilemma of how much it would cost to pay human cost of
closing down banks and companies. MOF's Budget Bureau
proposed that it would be better to create a financial
"safety net" to help displaced or unemployed workers
directly after the failures. This proved a popular
solution, as government agencies quickly put in their
requests for a slice of the safety net pie with the MOF
Budget Bureau as the details of budget for fiscal 2003
(from April 1) were ironed out.
As the IRC
illustrates, questions of overlapping jurisdictions and
"independence" are inevitable. The question of the
"independence" of the Bank of Japan became a hot topic
as FSA chief Takenaka strongly suggested that BOJ
cooperate more directly in using monetary policy to
stimulate the economy. A stubborn governor Masaru Hayami
rejected such suggestions. He also rejected the idea
that BOJ might look at a numerical target for inflation
as an anti-deflation strategy, another Takenaka
favorite.
This did not turn out to be a decisive
issue in Koizumi's selection of veteran central banker
Toshihiko Fukui as the new BOJ governor. Any challenge
to matters of turf is a sensitive issue. There is also
the question of how reputations of individual ministers
can influence events and the clout of a ministry or
agency in the government. Takenaka, for example, has
found himself at the center of controversy of late. As a
cabinet member without a seat in parliament, he serves
in government at the whim of the prime minister. He has
been in the news in unfavorable circumstances of late.
Last Friday, Takenaka denied he violated cabinet
rules by meeting with the chief executives of Goldman
Sachs Group Inc and Sumitomo Mitsui Financial Group Inc.
A local weekly magazine reported that Takenaka had been
asked sensitive questions concerning the firms' business
while being entertained. The state minister is reported
to have referred the matter to his lawyers.
This
is likely to come up in the Diet. Recently, Takenaka
also was forced to apologize for suggesting to fellow
cabinet members that buying so-called Exchange Trade
Funds would be profitable, another possible breach of
the rules. In both cases, Takenaka's detractors -
including former prime minister Yasuhiro Nakasone - have
suggested he should resign.
Takenaka was a very
active proponent of certain like-minded individuals as
candidates for the BOJ governor's position. The common
theme was BOJ cooperation with the government in
carrying out policy, with veiled threats of government
intervention under provisions of the new BOJ law of
1998.
MOF's implied influence over BOJ, and for
that matter within Koizumi's inner circle, raises some
eyebrows. As things stand, Koizumi's choice of the
veteran central banker Toshihiko Fukui is sailing
through the Diet, as should his choice of retired MOF
administrative vice minister Toshiro Muto and Cabinet
Office director for policy planning Kazumasa Iwata.
Here again the Finance Ministry's de facto
presence at BOJ will appear to be strong. Koizumi is
said to have developed a very good working relationship
with Muto while he was, until January 6, still working
for MOF. The timing of Muto's retirement is noteworthy.
On December 24, Finance Minister Shiokawa
surprised just about everyone by announcing sweeping
retirements and a reshuffle of almost all of the
highest-ranked senior officials in the Finance Ministry
- the day after the Emperor's Birthday, a national
holiday in Japan. Shiokawa said this was a chance to
"refresh" MOF senior officials. Normally they get
refreshed later, in the spring.
This began, of
course, with Muto, who had served for a postwar-record
two-and-a-half years in the position. Masakazu Hayashi,
the director general of the Budget Bureau, replaced him.
This is a normal career path for MOF, but it is highly
unusual for the budget director to leave his post before
the Diet passes the annual budget (set for March). At
the end of 1997, amid a serious MOF bribery scandal, the
top vice minister was sacked and the finance minister
resigned. But that was an extraordinary event.
The other noteworthy MOF retirement announced at
year's end was Haruhiko Kuroda, who served for a record
three-and-a-half years as vice minister for
international affairs. Last week, Koizumi appointed
Kuroda, 58, as an advisor to the Cabinet Secretariat.
Was the early personnel reshuffle intended as
smokescreen to make Muto available for nomination as
deputy governor? Maybe. Koizumi and MOF are both
sticklers for secrecy. That would be a sure sign that
the prime minister and MOF were getting to know each
other better.
(©2003 Asia Times Online Co, Ltd.
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