No. 9 — March 3, 2000


Weekly Review

--- by Douglas Ostrom

Japan's financial mess refuses to go away. Just when regulators seemed to be getting matters under control, another controversy arose. Michio Ochi, the cabinet-level head of the Financial Reconstruction Commission, was heard February 24 in a tape recording making remarks to bank executives that led analysts and some government insiders to question his commitment to financial reform. Once made public, Mr. Ochi's statements quickly led to his forced resignation and replacement February 25 by Sadakazu Tanigaki, widely considered a rising star in the Liberal Democratic Party.

Only days earlier, Mr. Ochi's agency had taken steps to restore to private ownership Long-Term Credit Bank of Japan, Ltd. and Nippon Credit Bank, Ltd., both of which had been nationalized in late 1998 at the height of the country's banking crisis (see JEI Report No. 8B, February 25, 2000). Moreover, at least a couple of large banks, including the biggest, Bank of Tokyo-Mitsubishi, Ltd., had broached the possibility of early repayment of the capital injected in them in 1998 and 1999 by the government — a process for which the FRC has responsibility (see JEI Report No. 43A, November 12, 1999).

Mr. Ochi made his controversial comments during a February 19 meeting with about 40 local banking and shinkumi (credit cooperatives) officials in Tochigi prefecture north of Tokyo. Improving the financial health of regional banks and shinkumi is viewed by many as one of the toughest problems standing in the way of an end to Japan's banking crisis. Despite ongoing mergers and liquidations, the group as a whole remains saddled with an unmanageable amount of bad loans, and the financial condition of many institutions is precarious.

Mr. Ochi previously had advocated relatively lenient regulatory treatment for smaller regional banks and shinkumi. One outcome of this position, which many LDP politicians back, was that the scheduled April 1, 2001 expiration of unlimited deposit insurance at banks of all types was extended by a year (see JEI Report No. 2B, January 14, 2000). Nonetheless, the government's line for some time has been that neither regional banks nor shinkumi and shinkin (credit associations) will receive special favors. If audits reveal problems that raise questions about their medium-term viability, at-risk institutions are to resolve the financial shortcomings promptly or else go out of business. The days of the "crossed-fingers" strategy of keeping quiet and hoping that problems would evaporate are officially over.

In this context, Mr. Ochi's words were shocking. The FRC chairman was heard on a tape played in the Diet by an opposition Democratic Party of Japan member to tell the bankers: "Please inform us of any complaints about the inspection, if it's severe. I will give it the utmost consideration if you make a written request to Mr. Hasumi [a local LDP legislator] and he passes it to me." Mr. Ochi also appealed to banks in need to use his agency's resources, stating: "Say the word, and money can come out of my place — ¥60 trillion ($545.5 billion at ¥110=$1.00) plus ¥10 trillion ($90.9 billion). There's a lot more left so please tell me if you are in trouble." He added, however, "[w]e cannot rescue you if [your bank's financial situation] becomes really serious, so please talk to us as early as possible."

In defense of his remarks, Mr. Ochi noted that the Financial Supervisory Agency, not the FRC, inspects banks. Furthermore, the FRC chief does not receive copies of the reports. Mr. Ochi apparently was trying to suggest that he could not interfere with FSA inspections even if he wanted to; he was interested only in the results of the FSA examinations. Exactly how the FRC, given its mandate, could assist other than by interfering is not clear. The public funds to which Mr. Ochi referred are reserved for potentially viable banking institutions whose financial condition cannot be determined without a credible FSA audit.

Mr. Ochi's departure was greeted in certain quarters by a chorus of "good riddance." Tokyo Gov. Shintaro Ishihara, who had clashed with him over the municipal government's plan to tax the adjusted gross profits of big banks (see JEI Report No. 7B, February 18, 2000), went so far as to attribute the FRC chief's exit to kamikaze, presumably meaning its original definition of divine wind rather than its wartime reference to a suicide bomber. Press accounts of Mr. Ochi's tenure as head of the FRC were equally pointed.

Mr. Ochi's replacement hardly can be considered a fresh face. Mr. Tanigaki served as head of the Science and Technology Agency in the government of Prime Minister Ryutaro Hashimoto from 1997 to 1998. When Keizo Obuchi replaced Mr. Hashimoto as prime minister in July 1998, he named Mr. Tanigaki, a close ally of Kiichi Miyazawa, as the Ministry of Finance's parliamentary vice minister, putting him directly under Mr. Miyazawa, who was appointed Finance minister. As expected, over the next 15 months, the relatively youthful Mr. Tanigaki, now 54, often filled in for the elderly Mr. Miyazawa, particularly at overseas events.

When Mr. Obuchi reshuffled his cabinet last October (see JEI Report No. 39B, October 15, 1999), he reportedly wanted to name Mr. Tanigaki to the top FRC post, even though Mr. Tanigaki's LDP faction, once headed by Mr. Miyazawa and now led by Koichi Kato, had not included him on its list of candidates. Analysts believed that Mr. Obuchi was trying to embarrass Mr. Kato, who had just challenged him for the party presidency. Despite some editorial comments urging Mr. Tanigaki to put the country's interests above politics, he refused the offer, thereby allowing Mr. Kato to save face.

Mr. Tanigaki's acceptance this time around could indicate his belief that Mr. Ochi had botched the job. Or, perhaps he thought that Mr. Ochi's comments had so weakened the FRC's credibility that he no longer could refuse the position, political considerations aside. The most popular theory, however, is that Mr. Tanigaki's appointment was the result of mended relations between Mr. Kato and Mr. Obuchi ahead of the critical lower house elections that must be held in the next seven months. In the Byzantine world of Japanese politics, though, the clearest winner was Mr. Miyazawa, who, with one of his closest associates installed at the helm of the FRC, now influences two of Japan's three financial regulatory and supervisory agencies.

Mr. Tanigaki gave few early indications of how he would proceed. He did say that he might be willing to back the approval of banking licenses for nonfinancial companies — a marked departure from Tokyo's current stance but consistent with what Washington did in the early 1990s during the savings and loan and banking crises. Obviously, a longer list of bidders for failed or faltering banks could result in higher prices and reduce the FRC's burden. The new agency chief also mentioned, without elaborating, the possibility of using public funds to help restore the financial footing of regional banks and other small depository institutions — the very group before which Mr. Ochi made the remarks that led to his resignation.

If Mr. Tanigaki eventually emerges as the man who cleaned up Japan's banking system once and for all, he will become an unusual celebrity among Japanese politicians since their accomplishments mostly are anonymous. Based on the experience of Mr. Ochi, who lasted a mere five months in the job, the odds are good that Mr. Tanigaki is putting his rising-star status at considerable risk.

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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