No. 3 — January 26, 1996


Weekly Review

--- by Douglas Ostrom

By definition, the finance ministers and the central bank chiefs from the seven large industrial nations that make up the Group of Seven form one of the world's most exclusive groups. Their periodic confabs typically are fairly congenial as long as currency markets are not in disarray. Given the recent relative tranquility of the yen-dollar relationship, newly selected Finance Minister Wataru Kubo might have expected that the January 20 G-7 meeting in Paris would provide an amiable introduction to the elite group. Yet, the veteran Social Democratic Party of Japan legislator was visibly tense and reportedly had trouble smiling even when Secretary of the Treasury Robert Rubin congratulated him on his selection as Japan's most visible official on financial matters. The reason for anxiety probably had to do with a single word guaranteed to wipe the smile off any Japanese politician's face — jusen, a shorthand term for Japan's housing loan companies, seven of eight of which appear insolvent.

Mr. Kubo is in a particularly tough spot. While the jusen issue involves several government agencies, the minister of finance long has been the point man. A plan announced in late December by the outgoing administration of Tomiichi Murayama (see JEI Report No. 41B, December 22, 1995) has proven to be so unpopular — particularly the proposed use of public funds for resolving the jusen problem — that incoming Prime Minister Ryutaro Hashimoto reportedly had difficulty coming up with a candidate for finance minister, usually one of the most prestigious cabinet posts (see JEI Report No. 2B, January 19, 1996).

Through the Paris trip Mr. Kubo escaped for a few days the continuing fusillade of criticism and even protest in Japan over the government's proposal to use at least ¥685 billion ($6.9 billion at ¥100=$1.00) in taxpayers' funds to offset losses resulting from jusen loans to real estate and construction companies. Absent government assistance, much more of the losses probably would have been borne by agricultural cooperatives, which are among the largest lenders to the jusen. Both Mr. Kubo and Mr. Hashimoto have pressed for fuller disclosure of the identity of the real estate and construction company borrowers and the circumstances under which their loans went bad.

One of Mr. Kubo's main tasks in Paris was explaining the jusen resolution plan to his counterparts from Canada, France, Germany, Great Britain, Italy and the United States. Some analysts fear that, given the role played by banks in international finance, the jusen problems could affect the global financial system. French Finance Minister Jean Arthuis gave voice to these concerns following the G-7 confab when he called the jusen difficulties an international financial problem. Other experts, however, believe such a fear is overblown.

By all accounts Mr. Kubo and his Bank of Japan counterpart, Yasushi Matsushita, received a sympathetic hearing in Paris and were urged to press ahead with a solution. For example, in a meeting with the finance minister shortly before the G-7 session Mr. Rubin took a position similarly described by a Treasury spokesman and Mr. Kubo as supportive of the scheme.

Other issues also surfaced in Paris. Mr. Rubin asked Mr. Kubo, for example, about the implementation of an October 1994 accord to liberalize Japan's insurance market. American officials have voiced concerns in recent months that the timing of the liberalization of the so-called third sector — which encompasses such products as personal accident, medical, nursing care and hospitalization policies and is the stronghold of foreign insurers — could leave American firms at a disadvantage (see JEI Report No. 38B, October 7, 1994).

The typical central focus of G-7 meetings, the status of currency markets, won expressions of satisfaction. At a meeting last October the group had noted with approval the yen's slide since April; that slide, in turn, had followed closely on the heels of a spring G-7 meeting (see JEI Report No. 16B, April 28, 1995). In October the group also expressed the desire that the yen's drop continue (see JEI Report No. 38B, October 13, 1995). From that time through the Paris meeting the yen dipped a few more points against the dollar. In separate statements following the meeting France's Mr. Arthuis, Deputy Treasury Secretary Lawrence Summers and Mr. Kubo, among others, expressed their support for the relatively strong dollar. Mr. Arthuis, who chaired the talks, emphasized in the chairman's statement the G-7's continued willingness to cooperate on the objective of achieving stable exchange rates.

The impact of the meeting and the subsequent statements on the dollar vis-a-vis the yen appeared moderately bullish. Within three trading days of the G-7 meeting the dollar rose to the highest level since February 1994, closing in Tokyo January 24 at ¥106.8=$1.00.

Mr. Kubo seemed to receive less pressure to stimulate his country's economy than is usual for a Japanese finance minister at a G-7 meeting. Although the economy is hardly surging, it has shown signs of life even as European and North American economies are giving indications that they are slowing. The G-7 officials emphasized the need for each participant nation to take economic countercyclical measures as appropriate.

Mr. Kubo subsequently took the heat at home for what he may have told his G-7 counterparts on the subject of the jusen. One concern was that he may have gone overboard in efforts to be reassuring regarding the seriousness of the problem and Tokyo's efforts to deal with it. Some critics suggested that, if Mr. Kubo claimed that the jusen bailout proposal was all but assured of approval, he was being dangerously misleading. In fact, the jusen budget appropriation is likely to get close scrutiny in the Diet. Although virtually all Japanese precedents indicate legislative approval of budgets without modification, some analysts have predicted that the proposed jusen assistance plan could be deleted from the FY 1996 general account spending package or altered.

Several analysts believe that the Ministry of Finance in general and Mr. Kubo in particular had a somewhat different agenda for the Paris meeting regarding the jusen problems. In this view the finance minister was trying to build support at home for the government's unpopular plan by invoking the approval of the other G-7 members and by implying that adoption of the proposal was an international obligation of Japan. If Mr. Kubo either treated the plan as a fait accompli in Paris or if he appears to be playing the "international card" to gain adoption of the plan, any radical changes to the bailout proposal could prove highly embarrassing to Japanese representatives at subsequent G-7 meetings.

One way or another the G-7 conference appears to have resulted in the already high political stakes involving the jusen being raised still further. Nihon Keizai Shimbun, Japan's leading business daily, editorialized throughout late January about the benefits of pressing the government to be more forthright about the causes and the costs of the bailout. The editorial writers especially focused on Mr. Hashimoto, whom they accused of being less than fully candid about the jusen rescue in his first remarks to the Diet as prime minister (see previous article). Asahi Shimbun, another leading daily, called editorially for rejecting the use of public funds.

Even before the Paris confab, not a few analysts speculated that — win or lose in the Diet over the jusen plan — Mr. Kubo would end up sacrificing his position. After the G-7 meeting and the subsequent debate the odds of that outcome may well have increased. Moreover, the cast of implicated political figures has expanded in sync with the growth of the jusen controversy. Analysts have noted that Mr. Hashimoto during his late 1989-late 1991 tenure as finance minister played a role in approving rule changes that had the effect of expanding the scope of jusen activities and, by inference, the extent of their eventual difficulties. In addition, at least one prominent member of the main opposition party, Shinshinto, was involved as a cabinet member in jusen deliberations prior to leaving the Liberal Democratic Party for Shinshinto. While Mr. Kubo's first G-7 meeting may end up being his last, few Japanese politicians are likely to step forward to join that elite group if the cost of membership is wallowing in the jusen quagmire.

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

Top aaaa Issue Index aaaa 1996 Archive Indexaaaa Search aaaa Subscriber Area aaaa Home