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NO. 9 — March 6, 1998

 

Feature Article

FINANCIAL SCANDALS RENEW FOCUS ON BUREAUCRATIC POWER by Barbara Wanner

Summary

Already under fire for major policy failures, the once-vaunted Ministry of Finance finally appeared to be toppled from its pedestal in late January when, for the first time in 50 years, the Tokyo Prosecutor's Office raided MOF headquarters. The subsequent arrest of two Banking Bureau officials on charges of accepting bribes from commercial banks precipitated a series of top-level resignations as well as the suicide of a third examiner. The Finance Ministry, anxious to restore its prestige, established a new internal investigation team to check its 500-plus inspectors for similar wrongdoing. The arrests also caused renewed calls for legislation to establish a code of ethics for civil servants.

Why did prosecutors zero in on the mighty Finance Ministry, particularly when it is common knowledge in Tokyo that major companies routinely shower gifts and often-lavish entertainment on officials from ministries and agencies important to their interests? Insiders answer that prosecutors had unearthed damning evidence in the course of their more than yearlong investigation of banks' ties to corporate racketeers. They also note that MOF was especially vulnerable to attack because its reputation had been shattered by the mess in Japan's financial sector and its responsibility for other policy flops.

The scandals involving MOF have focused attention on the milieu that gave rise to the graft. Experts point to the extraordinary power wielded by Japan's legions of civil servants. Throughout the postwar period, they have been the primary drafters and driving forces behind most legislation. Moreover, bureaucrats often have crafted deliberately vague or difficult-to-interpret statutes to ensure for themselves enormous discretion in implementing laws and regulations. Not only does this system give bureaucrats the upper hand in dealing with elected officials on policy matters, but the resulting lack of transparency compels companies to develop close relationships with ministries and agencies in order to know whether their activities comply with current interpretations of the laws on the books.

At another time, close ties between government and industry were regarded as key to Japan's growth and prosperity. However, with the bursting of the economic "bubble" at the start of the 1990s and the subsequent push for deregulation to get the economy moving again, the flaws of the closed, state-dominated system have been magnified. New ethics laws and promises by companies to stop currying favor with government officials may compel bureaucrats at MOF and elsewhere to be on their best behavior in the near term. But, barring fundamental change in the balance of power between the bureaucracy and the legislature, the potential for recurrent corruption in government-industry relations remains strong.

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Weekly Review

AMERICAN WORRIES MOUNT ABOUT JAPAN'S ECONOMY by Douglas Ostrom

American participants in economic policy debates are a contentious lot, but they seem to have come to a consensus that Japan's economy faces serious problems. These influentials also appear to be in broad agreement about what Tokyo needs to do. At the same time, they express little confidence that the government of Prime Minister Ryutaro Hashimoto will act in a timely fashion. Meanwhile, the economic news from Japan appears to confirm their worst fears — on an almost daily basis. The concerns are very real, but the potential impact of Japan's economic woes on the U.S. economy has been exaggerated by some analysts.

 

FINANCIAL-SECTOR FLUX IN JAPAN CREATES OPENINGS FOR FOREIGN FIRMS by Jon Choy

Japan's financial markets have a reputation for being closed. For much of the postwar period, a web of government regulations and business practices worked intentionally or otherwise to frustrate the efforts of foreign firms trying to gain a toehold. While the 1980 revisions to the Foreign Exchange and Foreign Trade Control Law, the 1984 U.S.-Japan yen-dollar accord and subsequent bilateral and multilateral pacts opened the doors of Japan's financial markets to outsiders, government rules and private operating methods continued to hamstring foreign financial services providers.

 

JAPAN, UNITED STATES PRESS SUHARTO TO SPEED IMF REFORMS, SHELVE CURRENCY BOARD by Eric Altbach

The White House has issued a strong message to President Suharto that the only solution to Indonesia's economic crisis is for Jakarta to implement the reforms specified by the International Monetary Fund. During his meeting with Mr. Suharto in Jakarta March 3, Special Envoy Walter Mondale emphasized the Clinton administration's view that there are no "quick fixes" for the Indonesian economy. The former vice president reiterated Washington's opposition to the establishment of a currency board to stabilize the rupiah. Tokyo, previously silent about the controversial idea, expressed carefully worded reservations. European officials joined in to call for implementation of the IMF plan.

 

JAPAN, RUSSIA INCH TOWARD PEACE TREATY by Barbara Wanner

Foreign Minister Keizo Obuchi and his Russian counterpart, Yevgeny Primakov, meeting in Moscow February 22, reaffirmed the goal of both countries to formally end the state of war between them by the year 2000. The two officials issued this statement at the first meeting of a special joint committee established last November by Prime Minister Ryutaro Hashimoto and Russian President Boris Yeltsin to facilitate conclusion of a peace treaty within the next two years. Mr. Obuchi described his three days of meetings with Mr. Primakov and Mr. Yeltsin as "the first step to translate the Krasnoyarsk agreement into reality," a reference to the breakthrough accord concluded by the two heads of government in the eastern Siberian city where they met late last year (see JEI Report No. 42B, November 7, 1997).

 

NOTES: SEMICONDUCTOR SALES IN JAPAN

American and other offshore semiconductor manufacturers lost ground in Japan's soft chip market in the third quarter of 1997 (see Table), the Department of Commerce and the Office of the U.S. Trade Representative reported February 24. Word of the setback, the first since the April-June 1996 period, came at a politically inopportune time for transpacific relations. To USTR Charlene Barshefsky and other Clinton administration officials who have been lecturing the Japanese government on the need to get the economy back on a strong growth track so that it can absorb more products from struggling Asian nations and elsewhere, the plunge in the foreign market share to 32.1 percent from a record 35.8 percent in 1997's second quarter was new support for their argument. All Ministry of International Trade and Industry officials and Japanese electronics executives could point to in rebuttal was that the market share figure for the mainly U.S. competition came in above the White House's new de facto minimum-access threshold of 30 percent.

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