Japan Economy

	ASIA	April 13, 1998 VOL. 151 NO. 14
Bang, You're Liberalized Japan's big move to free its financial markets is marred by a wave of bad news and investor jitters By DONALD MACINTYRE Tokyo hen Prime Minister Ryutaro Hashimoto announced Japan's "Big Bang" a year and a half ago, he pledged to create "free, fair and global" markets. So why did prominent bureaucrats and politicians spend the days leading up to the April 1 kick-off trying to drive up share prices on Tokyo's sputtering stock exchange? The effort wasn't subtle either: leaders of Hashimoto's Liberal Democratic Party openly set a target of 18,000 for the Nikkei average, a level that would have bolstered the portfolios of Japan's troubled banks. The Postal Ministry obliged the politicians, loudly promising to pump more than $7 billion into the market from its huge pool of postal savings and pension funds. The attempt to rig prices flopped-the Nikkei closed at 16,527 on March 31, the end of the business year, and it was down another 6.5% by Friday. But nobody's apologizing. The blatant meddling in the market was "a necessary evil," says Kazuo Nukazawa, a top official at the Keidanren, Japan's leading business lobby. "When your house is burning, you don't care whether the water is drinkable or dirty." Maybe not, but the incident highlighted Japan's reluctance to ease the bureaucrats and pols out of the driver's seat and let market forces take over. For decades, the elite bureaucrats of the Finance Ministry have micro-managed Japan's financial system, relying on a thicket of vaguely worded regulations and their power to grant licenses. The system guaranteed nobody would go bust, but it also stifled creativity and short-changed the country's savers. And it ensured that Tokyo would lag behind vibrant financial centers like London and New York. Japan's Big Bang is meant to correct that deficiency by breaking down barriers between banks, insurers and securities firms, liberalizing brokerage commissions and foreign exchange laws and opening the door to foreign competitors and new financial products. All that should offer the nation's savers-who are sitting on about $9 trillion-better places to park their cash than their local banks, which now offer annual returns of a few tenths of a percent. For now, however, the loudest noise in Tokyo is the sound of the Nikkei deflating. The reforms introduced last week were modest-this was never meant to be a cataclysmic, London-style Big Bang. While the Japanese borrowed the terminology, what they had in mind was a series of little detonations over the next three years. The government kicked things off by ending the banks' monopoly on forex transactions, making it easier for Japanese to open foreign currency accounts overseas and liberalizing commissions on stock trades worth more than $380,000. The Bank of Japan also got more autonomy from the Finance Ministry to set interest rates. Small steps, perhaps, but the writing is on the wall. "In the past, the Finance Ministry showed us the way,'' said Tsukasa Ojima, a manager at Sanwa Bank. "Now we'll have to use our wits to compete.'' The slow pace of reform is another indication of the bureaucrats' reluctance to give up power. But it doesn't help that the economy is worsening by the day, making it even tougher to push through changes that will cost jobs. As the government fiddled with the Nikkei, investors were paying more attention to the steady drumbeat of bad news on the economy. The central bank's widely watched Tankan survey showed confidence plunging among Japan's managers. Another report confirmed that consumers are still reluctant to spend. And unemployment is at a postwar high of 3.6%. Hashimoto now looks certain to ease away from his promise to slash Japan's mammoth deficit. Instead, he'll try to cut income taxes again. Yet it may be too little, too late. Things are already so bad that Moody's Investors Service last week said it might have to take another look at Japan's gold-plated triple-A debt. The U.S. credit rating company changed its outlook for Japan from stable to negative, meaning it could cut Japan's rating if the country doesn't get its act together. That sent the yen to a 6 1/2-year low against the U.S. dollar. One of Moody's biggest concerns is Japan's failure to clean up the bad-loan problem at the country's banks. All those non-performing loans are forcing banks to cut lending, so businesses are suffocating for lack of credit. That's why Hashimoto's allies were so anxious to prop up the Nikkei: banks are Japan's biggest shareholders, and they can use paper profits on stocks to avoid going into the red when they write off soured loans. For the Big Bang really to work, however, that meddlesome mind-set will have to change. Tokyo will need to beef up its legal system as well, so that lawyers can sort out disputes that the bureaucrats used to mediate. Still, Japan's financial landscape is certain to look vastly different by the year 2001. The government is setting in motion changes that could snowball as investors start to take advantage of them. With any luck, the country's aging population will soon have a better shot at saving enough for retirement. And if the Japanese get a better return on their savings, maybe they'll be able to spend a little more to get their economy out of its doldrums. Reported by Sachiko Sakamaki/Tokyo
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Japan's big move to free its financial markets is marred by a wave of bad news and investor jitters

By DONALD MACINTYRE Tokyo

hen Prime Minister Ryutaro Hashimoto announced Japan's "Big Bang" a year and a half ago, he pledged to create "free, fair and global" markets. So why did prominent bureaucrats and politicians spend the days leading up to the April 1 kick-off trying to drive up share prices on Tokyo's sputtering stock exchange? The effort wasn't subtle either: leaders of Hashimoto's Liberal Democratic Party openly set a target of 18,000 for the Nikkei average, a level that would have bolstered the portfolios of Japan's troubled banks. The Postal Ministry obliged the politicians, loudly promising to pump more than $7 billion into the market from its huge pool of postal savings and pension funds.

The attempt to rig prices flopped-the Nikkei closed at 16,527 on March 31, the end of the business year, and it was down another 6.5% by Friday. But nobody's apologizing. The blatant meddling in the market was "a necessary evil," says Kazuo Nukazawa, a top official at the Keidanren, Japan's leading business lobby. "When your house is burning, you don't care whether the water is drinkable or dirty."

Maybe not, but the incident highlighted Japan's reluctance to ease the bureaucrats and pols out of the driver's seat and let market forces take over. For decades, the elite bureaucrats of the Finance Ministry have micro-managed Japan's financial system, relying on a thicket of vaguely worded regulations and their power to grant licenses. The system guaranteed nobody would go bust, but it also stifled creativity and short-changed the country's savers. And it ensured that Tokyo would lag behind vibrant financial centers like London and New York. Japan's Big Bang is meant to correct that deficiency by breaking down barriers between banks, insurers and securities firms, liberalizing brokerage commissions and foreign exchange laws and opening the door to foreign competitors and new financial products. All that should offer the nation's savers-who are sitting on about $9 trillion-better places to park their cash than their local banks, which now offer annual returns of a few tenths of a percent.

For now, however, the loudest noise in Tokyo is the sound of the Nikkei deflating. The reforms introduced last week were modest-this was never meant to be a cataclysmic, London-style Big Bang. While the Japanese borrowed the terminology, what they had in mind was a series of little detonations over the next three years. The government kicked things off by ending the banks' monopoly on forex transactions, making it easier for Japanese to open foreign currency accounts overseas and liberalizing commissions on stock trades worth more than $380,000. The Bank of Japan also got more autonomy from the Finance Ministry to set interest rates. Small steps, perhaps, but the writing is on the wall. "In the past, the Finance Ministry showed us the way,'' said Tsukasa Ojima, a manager at Sanwa Bank. "Now we'll have to use our wits to compete.''

The slow pace of reform is another indication of the bureaucrats' reluctance to give up power. But it doesn't help that the economy is worsening by the day, making it even tougher to push through changes that will cost jobs. As the government fiddled with the Nikkei, investors were paying more attention to the steady drumbeat of bad news on the economy. The central bank's widely watched Tankan survey showed confidence plunging among Japan's managers. Another report confirmed that consumers are still reluctant to spend. And unemployment is at a postwar high of 3.6%. Hashimoto now looks certain to ease away from his promise to slash Japan's mammoth deficit. Instead, he'll try to cut income taxes again. Yet it may be too little, too late.

Things are already so bad that Moody's Investors Service last week said it might have to take another look at Japan's gold-plated triple-A debt. The U.S. credit rating company changed its outlook for Japan from stable to negative, meaning it could cut Japan's rating if the country doesn't get its act together. That sent the yen to a 6 1/2-year low against the U.S. dollar. One of Moody's biggest concerns is Japan's failure to clean up the bad-loan problem at the country's banks. All those non-performing loans are forcing banks to cut lending, so businesses are suffocating for lack of credit. That's why Hashimoto's allies were so anxious to prop up the Nikkei: banks are Japan's biggest shareholders, and they can use paper profits on stocks to avoid going into the red when they write off soured loans.

For the Big Bang really to work, however, that meddlesome mind-set will have to change. Tokyo will need to beef up its legal system as well, so that lawyers can sort out disputes that the bureaucrats used to mediate. Still, Japan's financial landscape is certain to look vastly different by the year 2001. The government is setting in motion changes that could snowball as investors start to take advantage of them. With any luck, the country's aging population will soon have a better shot at saving enough for retirement. And if the Japanese get a better return on their savings, maybe they'll be able to spend a little more to get their economy out of its doldrums.

Reported by Sachiko Sakamaki/Tokyo