TIME Asia | End of an Era?

	ASIA	FEBRUARY 9, 1998 VOL. 151 NO. 5
End of an Era? A bribery probe at Japan's Finance Ministry prompts two key resignations and a suicide. But can anything break its hold on the economy? BY FRANK GIBNEY JR. Tokyo In Japan, suicide means never having to say you're sorry. And so Yoichi Otsuki hanged himself from a curtain rod at his tiny Tokyo apartment last Wednesday, with one of the neckties he normally wore to work. By taking his life, the Ministry of Finance bureaucrat became a tragic casualty of a system gone awry. He killed himself just after an unprecedented raid on Japan's most powerful bureaucratic bastion, part of a sweeping investigation into government corruption that has already seen the arrest of two ministry officials for bribery. As the outrage grew, both the Finance Minister and his top deputy resigned. The media screamed for justice, though Prime Minister Ryutaro Hashimoto could only pledge that the scandal would not be repeated. "We offer our deepest apology," Hashimoto told an angry, often raucous group of national legislators. "We promise ... that the government will take appropriate measures not to allow the occurrence of similar cases." It will take much more than a crescendo of contrition to reverse the damage reflected in last week's tumult. With the rest of Asia in financial disarray, global markets have been looking for signs of life in the world's second-largest economy. Instead, news of the depth of Japan's crisis continues to pour out with relentless momentum. Last month, the Ministry of Finance disclosed that the sum of potentially bad loans burdening the country's banks was $585 billion, or nearly three times its previous official estimate. Now it is all too clear that the agency that should be pulling Japan out of its economic tailspin is in fact at the heart of the problem. The new allegations increase the weight of evidence that Japan's bureaucrats have been involved in covering up the true state of a host of problem-ridden institutions, from Yamaichi Securities, which collapsed last November, to Daiwa Bank, which in 1995 was forced to reveal a $1.1 billion bond-trading loss in New York. For optimists, the cascade of arrests and resignations signal that Japan's leadership is at last willing to dismantle the financial bureaucracy's choke-hold on the economy. "The Japanese people have been asking for someone to take responsibility" for the country's economic crisis, says Yoshihiko Miyauchi, president of Orix Corp., Japan's top leasing company. "Businessmen have, politicians have, but the bureaucrats never took responsibility for their actions." The dramatic raid by 100 investigators marked the first time in 50 years that sitting bureaucrats have been arrested. The Nikkei stock average soared on news that Finance Minister Hiroshi Mitsuzuka had resigned. And when Prime Minister Hashimoto subsequently demanded the resignation of Takeshi Komura, the Ministry of Finance's top career bureaucrat, editorials cheered the prospect of a comeuppance for a government culture steeped in arrogance and elitism. Says Richard Werner, chief economist at Jardine Fleming Securities in Tokyo: "This marks the end of the supremacy of the MOF." The latest allegations help justify the thorough public distrust. Two officials, both key administrators in the financial-control division of the ministry's inspection department, are charged with receiving $74,000 worth of lavish favors in return for burying damaging information on the banks they were supposed to be regulating. For Koichi Miyagawa, 53, that allegedly meant getting officials from Dai-Ichi Kangyo and Asahi Bank to discount the price of a condominium, and pony up golf excursions and $300-a-head dinners at a shabu shabu restaurant in Tokyo's Shinjuku area--where the main attraction was not the food but waitresses without underwear. In return, say prosecutors, Miyagawa not only leaked the dates of government inspections but also agreed to sanitize reports disclosing huge payoffs by Dai-Ichi Kangyo to a corporate racketeer. To a large extent, the collusion has been driven by the immense power of the ministry. Its career bureaucrats have been known to use their authority to squeeze politicians and threaten rival ministries. One saying has it that bankers cannot "lift their chopsticks" without the ministry's permission. As a result, banks long ago created posts for handlers, known as "MOF-tan," to gather intelligence from their ministry counterparts and, when possible, influence regulation. Since Japan's economic bubble burst in 1991, the chief responsibility of the MOF-tan has been to solicit details on bank inspections, thus giving their institutions time to hide data that would reveal the extent of bad loans and disastrous real estate investments. One reason the collusion worked so well: the bankers are often former ministry bureaucrats. That the Finance Ministry scandal broke at all is the result of dogged pursuit by the Tokyo district public prosecutor's office, one of Japan's most independent government entities. The investigation began early last year, when prosecutors arrested an alleged corporate racketeer named Ryuichi Koike for threatening to disrupt annual corporate meetings unless he was paid off. Koike's files led investigators to Nomura Securities and a string of other top financial institutions. Documents seized subsequently indicated not just payoffs to Koike but a web of relationships between banks and Finance Ministry officials that involved just the kind of entertainment-for-favors culture that is now unravelling. The rolling scandal has already made its mark. Last week, several leading financial institutions announced they would abolish the system of MOF-tan. Still, many analysts are skeptical there will be much change. "They may try to make the system look clean," says Hamao Yokota, a former banker who published an expose on corrupt banking practices. "But the banks know that MOF will protect them as long as [officials] are treated properly." The bigger question is whether Prime Minister Hashimoto can try to use the attack on the Finance Ministry to break a policy logjam over Japan's economy. Although stock prices may have ticked up slightly, the nation's banks are still struggling to stabilize their balance sheets and write off bad loans. Hashimoto needs to restore confidence in the financial system and give Japan's sagging economy a boost. But despite repeated proclamations of a forthcoming multibillion-dollar stimulus package that might offer the required jolt, demand is still limp and a recession looms. As Koji Omi, chief of the Economic Planning Agency, put it last week: "The nation's economy is worsening." Can Hashimoto turn things around? Last Friday, he appointed a former prosecutor and top trade official, Hikaru Matsunaga, as Minister of Finance. A prominent and respected lawmaker in the ruling Liberal Democratic Party, Matsunaga vowed to restore trust in the embattled bureaucracy. One hope is that the outsider will be able to clean house. Yet it is uncertain whether, given his lack of background in finance, the new minister will be able to push the billions of dollars in tax cuts that economists say is needed to stimulate demand. Moreover, analysts fear that Hashimoto, who has come under fire for being slow to exert authority during the crisis, may not have the political support to carry out serious reforms. Says Minoru Morita, a prominent political commentator: "Hashimoto has gained a great opportunity to change his policies and improve the public image of the government." Surely, given the high price Yoichi Otsuki paid last week for the rot in Japan's bureaucracy, it is high time to trade apologies for action. With reporting by Sachiko Sakamaki and Hiroko Tashiro/Tokyo
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A bribery probe at Japan's Finance Ministry prompts two key resignations and a suicide. But can anything break its hold on the economy?

BY FRANK GIBNEY JR. Tokyo

In Japan, suicide means never having to say you're sorry. And so Yoichi Otsuki hanged himself from a curtain rod at his tiny Tokyo apartment last Wednesday, with one of the neckties he normally wore to work. By taking his life, the Ministry of Finance bureaucrat became a tragic casualty of a system gone awry. He killed himself just after an unprecedented raid on Japan's most powerful bureaucratic bastion, part of a sweeping investigation into government corruption that has already seen the arrest of two ministry officials for bribery. As the outrage grew, both the Finance Minister and his top deputy resigned. The media screamed for justice, though Prime Minister Ryutaro Hashimoto could only pledge that the scandal would not be repeated. "We offer our deepest apology," Hashimoto told an angry, often raucous group of national legislators. "We promise ... that the government will take appropriate measures not to allow the occurrence of similar cases."

It will take much more than a crescendo of contrition to reverse the damage reflected in last week's tumult. With the rest of Asia in financial disarray, global markets have been looking for signs of life in the world's second-largest economy. Instead, news of the depth of Japan's crisis continues to pour out with relentless momentum. Last month, the Ministry of Finance disclosed that the sum of potentially bad loans burdening the country's banks was $585 billion, or nearly three times its previous official estimate. Now it is all too clear that the agency that should be pulling Japan out of its economic tailspin is in fact at the heart of the problem. The new allegations increase the weight of evidence that Japan's bureaucrats have been involved in covering up the true state of a host of problem-ridden institutions, from Yamaichi Securities, which collapsed last November, to Daiwa Bank, which in 1995 was forced to reveal a $1.1 billion bond-trading loss in New York.

For optimists, the cascade of arrests and resignations signal that Japan's leadership is at last willing to dismantle the financial bureaucracy's choke-hold on the economy. "The Japanese people have been asking for someone to take responsibility" for the country's economic crisis, says Yoshihiko Miyauchi, president of Orix Corp., Japan's top leasing company. "Businessmen have, politicians have, but the bureaucrats never took responsibility for their actions." The dramatic raid by 100 investigators marked the first time in 50 years that sitting bureaucrats have been arrested. The Nikkei stock average soared on news that Finance Minister Hiroshi Mitsuzuka had resigned. And when Prime Minister Hashimoto subsequently demanded the resignation of Takeshi Komura, the Ministry of Finance's top career bureaucrat, editorials cheered the prospect of a comeuppance for a government culture steeped in arrogance and elitism. Says Richard Werner, chief economist at Jardine Fleming Securities in Tokyo: "This marks the end of the supremacy of the MOF."

The latest allegations help justify the thorough public distrust. Two officials, both key administrators in the financial-control division of the ministry's inspection department, are charged with receiving $74,000 worth of lavish favors in return for burying damaging information on the banks they were supposed to be regulating. For Koichi Miyagawa, 53, that allegedly meant getting officials from Dai-Ichi Kangyo and Asahi Bank to discount the price of a condominium, and pony up golf excursions and $300-a-head dinners at a shabu shabu restaurant in Tokyo's Shinjuku area--where the main attraction was not the food but waitresses without underwear. In return, say prosecutors, Miyagawa not only leaked the dates of government inspections but also agreed to sanitize reports disclosing huge payoffs by Dai-Ichi Kangyo to a corporate racketeer.

To a large extent, the collusion has been driven by the immense power of the ministry. Its career bureaucrats have been known to use their authority to squeeze politicians and threaten rival ministries. One saying has it that bankers cannot "lift their chopsticks" without the ministry's permission. As a result, banks long ago created posts for handlers, known as "MOF-tan," to gather intelligence from their ministry counterparts and, when possible, influence regulation. Since Japan's economic bubble burst in 1991, the chief responsibility of the MOF-tan has been to solicit details on bank inspections, thus giving their institutions time to hide data that would reveal the extent of bad loans and disastrous real estate investments. One reason the collusion worked so well: the bankers are often former ministry bureaucrats.

That the Finance Ministry scandal broke at all is the result of dogged pursuit by the Tokyo district public prosecutor's office, one of Japan's most independent government entities. The investigation began early last year, when prosecutors arrested an alleged corporate racketeer named Ryuichi Koike for threatening to disrupt annual corporate meetings unless he was paid off. Koike's files led investigators to Nomura Securities and a string of other top financial institutions. Documents seized subsequently indicated not just payoffs to Koike but a web of relationships between banks and Finance Ministry officials that involved just the kind of entertainment-for-favors culture that is now unravelling.

The rolling scandal has already made its mark. Last week, several leading financial institutions announced they would abolish the system of MOF-tan. Still, many analysts are skeptical there will be much change. "They may try to make the system look clean," says Hamao Yokota, a former banker who published an expose on corrupt banking practices. "But the banks know that MOF will protect them as long as [officials] are treated properly."

The bigger question is whether Prime Minister Hashimoto can try to use the attack on the Finance Ministry to break a policy logjam over Japan's economy. Although stock prices may have ticked up slightly, the nation's banks are still struggling to stabilize their balance sheets and write off bad loans. Hashimoto needs to restore confidence in the financial system and give Japan's sagging economy a boost. But despite repeated proclamations of a forthcoming multibillion-dollar stimulus package that might offer the required jolt, demand is still limp and a recession looms. As Koji Omi, chief of the Economic Planning Agency, put it last week: "The nation's economy is worsening."

Can Hashimoto turn things around? Last Friday, he appointed a former prosecutor and top trade official, Hikaru Matsunaga, as Minister of Finance. A prominent and respected lawmaker in the ruling Liberal Democratic Party, Matsunaga vowed to restore trust in the embattled bureaucracy. One hope is that the outsider will be able to clean house. Yet it is uncertain whether, given his lack of background in finance, the new minister will be able to push the billions of dollars in tax cuts that economists say is needed to stimulate demand. Moreover, analysts fear that Hashimoto, who has come under fire for being slow to exert authority during the crisis, may not have the political support to carry out serious reforms. Says Minoru Morita, a prominent political commentator: "Hashimoto has gained a great opportunity to change his policies and improve the public image of the government." Surely, given the high price Yoichi Otsuki paid last week for the rot in Japan's bureaucracy, it is high time to trade apologies for action.

With reporting by Sachiko Sakamaki and Hiroko Tashiro/Tokyo