No. 30 — August 4, 2000


Weekly Review


--- by Barbara Wanner

Basking in the afterglow of an upbeat, mishap-free summit of the heads of government of the Group of Seven industrial nations plus Russia, Prime Minister Yoshiro Mori opened a special Diet session July 28 by emphasizing the positive outcomes of the July 21-23 gathering of world leaders on Okinawa. He noted in particular the group's pledge to promote the international advancement of information technology (see JEI Report No. 29B, July 28, 2000). Toward that end, Mr. Mori renewed his promise to put the economy on a self-sustaining expansion track by promoting the IT revolution as well as continuing current stimulatory fiscal and monetary policies. Such a course would lead to the "rebirth of Japan" in the international community, the prime minister told assembled lawmakers.

The perfunctory applause for Mr. Mori's speech had barely died down, however, when his three-week-old second administration was rocked by a scandal that forced a cabinet member to resign and renewed questions about the premier's judgment and fitness for leadership. Mr. Mori also devoted a good part of his speech to educational reform and potential breakthroughs in Japan's long-frosty relations with both North Korea and Russia. However, he may have little opportunity to realize these policy goals. In fact, Mr. Mori could be out of a job much sooner than even his critics had anticipated.

The brouhaha that set the Tokyo rumor mill churning about Mr. Mori's fate was precipitated by the July 28 revelation that Financial Reconstruction Minister Kimitaka Kuze had received tens of millions of yen from Mitsubishi Trust & Banking Corp. over a seven-year period until 1994 for advisory services and to set up and staff an office in Tokyo. Two days later, reports surfaced that Mr. Kuze also had been paid ¥100 million ($909,000 at ¥110=$1.00) by big condominium builder Daikyo Inc. in 1991 as well as an undisclosed amount by Reiyukai, a Buddhist religious organization. These monies ostensibly were used to cover membership fees to the Liberal Democratic Party, a move aimed at boosting Mr. Kuze's standing on the list of LDP candidates vying for seats in the upper house under that chamber's proportional-representation formula.

After an avalanche of criticism from the political opposition and the national media, Mr. Kuze resigned July 30. This latest example of the still-strong link between big money and politics came on the heels of the arrest of former Construction Minister Eiichi Nakao on suspicion of receiving ¥30 million ($272,700) in bribes from Wakachiku Construction Co., Ltd. while in office four years ago.

The Kuze scandal could not have broken at a more opportune time for a political opposition already emboldened by its gains in the June 25 lower house elections (see JEI Report No. 25B, June 30, 2000). Smelling blood, the nonruling parties served notice of their intention to lambaste Mr. Mori during the 13-day special Diet session concerning his decision to appoint Mr. Kuze to head the Financial Reconstruction Commission, given the importance of financial reform in Japan. Hammering on the Wakachiku scandal also was part of the opposition's plan to embarrass the Mori government into supporting new legislation on political ethics.

Furthermore, the Democratic Party of Japan-led bloc has been champing at the bit to attack the coalition government over its aborted plan to bail out department store operator Sogo Co., Ltd. (see JEI Report No. 28B, July 21, 2000). The FRC's early June sign-off on a deal to sell nationalized Nippon Credit Bank, Ltd. to a consortium led by Internet investor Softbank Corp. is expected to serve as further grist for the mill (see JEI Report No. 24B, June 23, 2000). Of concern to the nonruling parties is a clause in the NCB-Softbank agreement that is quite similar to a proviso governing the transfer of ownership of also nationalized Long-Term Credit Bank of Japan, Ltd. to a syndicate of mainly foreign buyers. Activation of that condition triggered a series of events that culminated in Sogo's bankruptcy.

As if the political opposition's impending assault were not worrisome enough, some members of the New Komeito, which governs in cooperation with the LDP and the New Conservative Party, have leaked to the press that this latest example of political graft has them considering making a break from the triparty union. The LDP depends on the New Komeito's 31 lower house members to give the coalition an absolute majority in the 480-member House of Representatives (see Table). Their departure would create a highly unstable governing arrangement. For that reason, some analysts speculate that in a last-gasp effort to keep the centrist party in the coalition, the LDP may be more accommodating of the New Komeito's positions on policy-related and other leadership matters.
e--aaaaa- --aaaaa-

Party Membership in the Diet, July 19, 2000



Ruling Parties

aa Liberal Democratic Party



aa New Komeito



aa New Conservative Party



Opposition Parties

aa Democratic Party of Japan



aa Japan Communist Party



aa Liberal Party



aa Social Democratic Party of Japan



aa Independents/Minor Parties









Source: Kyodo News Wire Service, July 19, 2000.

Moreover, with Mr. Mori's public approval ratings already at rock bottom — some 60.8 percent of those recently surveyed by Yomiuri Shimbun said that they disapproved of the Mori government — movement within the LDP's ranks to cut him loose appears to be building. Originally tapped in early April to succeed then-ailing Prime Minister Keizo Obuchi, the LDP chief is considered strictly a caretaker premier. Liberal Democratic doyens wanted in Mr. Obuchi's successor an individual who would not divide the party, who would say and do as they instructed and who possessed sufficient gravitas to host the G-8 summit. These requirements apparently also influenced Mr. Mori's July 4 reelection as prime minister — despite his party's lackluster performance in the lower house polls (see JEI Report No. 28A, July 21, 2000). But with the summit now behind him, the premier's never-secure hold on power is even shakier.

Mr. Mori tried to quell the furor by publicly apologizing for Mr. Kuze's appointment, initially to the lower house July 31 and then to the upper house the following day. "I feel regret over the fact that I appointed a cabinet minister who, in the end, had no choice but to resign," the prime minister told the House of Representatives. "I offer my apologies to the people of Japan."

Mr. Mori quickly turned to Hideyuki Aizawa, a former director general of the Economic Planning Agency, and named him to the top job at the FRC. But no sooner had the new financial regulatory chief been sworn in July 30 then questions arose about his suitability for the position. Some experts argued that Mr. Aizawa, although recognized as an expert on financial and economic matters, is too close to financial services providers. Over the years, the banking industry has been one of the LDP's most generous contributors. In particular, while chairing the LDP's financial affairs committee, Mr. Aizawa called for an extension of the full guarantee on bank deposits for a year to March 2002 (see JEI Report No. 2B, January 14, 2000), a move that these analysts contend will delay systemic reform still further.

In the near term, however, Mr. Aizawa's questionable track record on financial reform may be the least of Mr. Mori's worries. The prime minister has admitted that he was aware of Mr. Kuze's relationship with Mitsubishi Trust but thought that it posed no legal or moral problem. Creating an even stickier wicket, the Japanese press has reported that Mr. Mori and senior LDP officials were given documentary evidence of Daikyo's payment to Mr. Kuze before the July 4 formation of the new cabinet.

The latter allegation and reports of the Reiyukai contribution, if proved correct, could corner the beleaguered prime minister. He is on record as being uninformed about the full extent of the donations to Mr. Kuze. The opposition now might have an easier time co-opting support from the New Komeito and the New Conservative Party and possibly even from LDP members for a vote of no confidence. DPJ chief Yukio Hatoyama already has demanded that Mr. Mori resign to assume responsibility for his poor judgment.

As frustrated — and as regretful — as Liberal Democratic leaders may be about their decision to rally around a politician who has not been able to rise to the challenges of governing Japan, they are not likely to abandon Mr. Mori in the near term. The LDP chief will remain on his shaky perch unless and until another contender can rally sufficient internal support to unseat him. At this stage, though, former LDP Secretary General Koichi Kato and former LDP President and now Foreign Minister Yohei Kono — two likely challengers — appear to prefer a wait-and-see strategy. However, their patience may not last if Mr. Mori continues to stumble.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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