Daily Yomiuri, January 4, 2000

Despite the seeming weight of evidence to the contrary, reports of the Finance Ministry's death are greatly exaggerated, according to three of four foreign experts who spoke with The Daily Yomiuri.

"As far as the general strength of the Finance Ministry is concerned, I think that what one has to recognize is that at a time when the use of public debt and public spending to support the economy has been so critical, when the public deficit is getting on for 10 percent of gross domestic product, when public debt levels are well above 100 percent of GDP, that actually makes the Finance Ministry stronger and more important because they're the ones who find the money, they're the ones who manage the money and they will be the ones in future who have to manage the means by which these debts and this deficit problem are dealt with," Bill Emmott, editor of The Economist, said in an interview. "So don't jump to the conclusion that the golden days of the Finance Ministry are dead for ever. It's still incredibly important."

Emmott, author of the 1989 book "The Sun Also Sets - Why Japan Will Not Be Number One, " which described with great prescience many of the factors that led to the ongoing economic slump, conceded that the convoy system had been "severely weakened," but pointed to the recapitalization of banks in March 1998 through injections of public funds, which he said had been carried out "in a very 'convoy' sort of way, in which everyone was required to take fixed, almost identical amounts of money," as proof that old habits of administrative guidance die hard.

Vested interests

The title of Emmott's book made ironic reference to "Why Japan Will Be Number One," the best-selling book published 10 years earlier by Harvard Prof. Ezra Vogel, which was premised on the argument that the West had much to learn from Japanese social organization and management techniques. Vogel told The Daily Yomiuri he does not expect the convoy system will disappear.

"There are too many people still committed to that approach, with too many vested interests, to end it in a democratic country, with that speed," Vogel said, referring to the FSA's assumption last year of the inspection and regulatory powers of the Finance Ministry and next year's reorganization of the ministry into a "treasury ministry."

"Many people in Japan believe that while market competition can be very healthy, in the end, for keeping a stable society and healthy long-term companies, Japanese government officials, working in collaboration with company officials, can balance the markets by helping to keep a strong society," Vogel said.

Arthur D. Little (Japan) Inc. President Glen Fukushima told The Daily Yomiuri that there continues to be a high degree of "industry consciousness" - as opposed to "firm consciousness" - in the Japanese financial sector, with the bureaucratic mind-set still thinking in terms of "Japanese banks" and "Japanese insurance companies," rather than "X Bank" or "Y Insurance Company."

"The convoy system is certainly weaker now than it was five years, or even three years ago," said Fukushima, president of the American Chamber of Commerce in Japan 1998-99. "But it is by no means dead."

Richard Werner, chief economist and managing director of Profit Research Center Ltd., begs to differ. Describing the Finance Ministry as the "biggest obstacle to serious reform," Werner told The Daily Yomiuri he believed the ministry had been "virtually annihilated" in the process of Big Bang reforms, the progress of which he praised as "substantial, lasting and of historic proportions."

Emmott and Fukushima gave a qualified endorsement to the Big Bang reforms. While identifying some worrying signs of "delay and slippage" in the process of implementation of the Hashimoto package, in particular the introduction of consolidated accounting, which would increase transparency in the management of financial institutions, Emmott said the program was "good overall." However, he sounded a more cautious note with regard to the problems that the FSA will face in renovating the life insurance sector, whose firms he described as "sick as hell."

Fukushima referred to bureaucratic concerns over the "Wimbledon Effect" - the envisaged domination of Japan's financial markets by foreign institutions if they are allowed to operate freely - which, he said, leads bureaucrats to be "very cautious of opening up to allow full access."

Recovery factor

"I would like to think that the pace of reform in Japan's financial sector would be spurred, not slowed, by an economic upturn," Fukushima said. "The fear now among some quarters is that the Japanese financial sector is too weak and too fragile to withstand true deregulation, market-opening and competition. With the recovery of Japan's economy, one would hope that the benefits of reform will be seen to outweigh the potential harm."

Describing the Big Bang reforms as a "ratchet effect," Emmott said he did not foresee the reversal of changes that have already been implemented, but warned, "I don't think that you should expect the pace of progress to continue if crises go away and if the economy recovers."

Asked what lessons the new regulatory regime in Japan could learn from foreign models, Werner said Japan could learn a cautionary lesson and avoid "overdoing" the process of deregulation by looking at the United States, where "a deregulated, liberalized, privatized, stock market-based economic system leads to focus on short-term profits and engages a large proportion of the population in totally unproductive activities, namely stock speculation... The bubble in Japan in the 1980s has already demonstrated what will happen next."

Referring to the FSA's investigations of foreign financial institutions operating in Japan that are suspected of marketing derivatives products that effectively have been used to conceal loan losses, Werner said he believed the derivatives scam was "fairly widespread," but that he expected the agency to begin focusing on "other areas that are more productive and forward-looking."

Looking toward the reorganization of the Finance Ministry in 2001 into a "treasury ministry" - a name change that Werner said was designed to humiliate - and the expansion of the FSA into a "financial agency," Emmott said the crucial element in financial regulation was separation of the responsibility for supervising and regulating financial institutions from the general macroeconomic responsibility of managing the public finances, monitoring the economy and injecting or withdrawing money when necessary.