LDP Is Accused of Backing Rural Interests
As Banking Crisis Masks Political Conflicts
By JATHON SAPSFORD
Staff Reporter of THE WALL STREET JOURNAL
TOKYO -- Behind the fight over Japan's banking mess is a resounding clash
between this country's entrenched rural interests and its overtaxed and angry
urban population -- a dispute whose consequences are starting to ripple
around the world.
The inability of these two feuding forces to come
to terms over a bank-cleanup plan helped trigger
a global stock-market hiccup on Monday. Only
last week, Japan's ruling party, which draws much
of its support from the countryside, and the
opposition, increasingly representing urban voters,
had proclaimed a landmark agreement on banking
reform. Prime Minister Keizo Obuchi declared he
had a solid banking plan to take along to his
summit with President Clinton in New York
Tuesday.
But even before Mr. Obuchi arrived in New York, the agreement was
unraveling in Tokyo, with the ruling party and the opposition yelling at each
other on Japan's version of weekend political talk shows. By Monday, the
mood had soured. As the politicians kept bickering, foreign investors sold
shares on fears that the impasse over the banking mess will drive the economy
deeper into recession.
Market Repercussions
As a result, the benchmark Nikkei Stock Average lost 385.82 points, or
2.8%, on Monday to close at 13597.30, its lowest close since February 1986.
Leading the decline were big banks, steel companies, and electronics makers
-- until recently the favorite issues of foreign investors, who sold a net $2.07
billion in Japanese stocks last week alone.
Similar pessimism caused British credit-rating agency IBCA Fitch on Monday
to strip Japan of its triple-A foreign-currency rating. "Foreign investors have
already been moving out of Japanese assets, and Japanese investors could
soon follow them, provoking a fall in the yen," Fitch said upon lowering that
rating to double-A-plus. Among Fitch's main reasons for the downgrade: the
nation's "deteriorating" banking system.
Yet special interests make the banking mess intractable. The ruling Liberal
Democratic Party has long lavished the countryside with public-works
spending and other fiscal largess. Now the opposition accuses the government
of planning to pump tax money into the banking system as a backhanded way
of letting rural agricultural cooperatives and sleepy credit associations off the
hook for lending to deadbeats.
"They just want public money to rescue agricultural cooperatives," said
Motohisa Ikeda, a senior member of the opposition Democratic Party. It's
"political," he added.
Case in Point
For a case in point, consider the fight over the fate of the struggling
Long-Term Credit Bank of Japan Ltd. The opposition has long wanted to
temporarily natonalize LTCB, then dissolve the bank in an orderly manner; on
Friday, some in the LDP had apparently agreed to those plans instead of
pumping LTCB full of public money and marrying it off to another bank in a
rescue merger.
But many LDP lawmakers still want to sink public money into LTCB, which in
exchange has agreed to forgive a huge swathe of loans to three affiliates,
including a troubled leasing company called Japan Leasing Corp. The catch is
that freeing Japan Leasing from its loan obligations to LTCB would allow the
affiliate to pay back about $3 billion it has borrowed from dozens of
agricultural cooperatives and credit associations.
To the opposition, this is a raw deal in which LTCB gets public money to
forgive loans to a weak borrower -- just so that borrower can pay back
money it owes to rural constituents of the LDP. "City folks in Japan are the
taxpayers," said Yoshito Sengoku of the Democrats, who tend to draw urban
voters. "Country people are tax eaters."
The LDP counters that it is just trying to preserve the financial system, which,
after all, is why the party created a public credit line of $100 billion intended
for shoring up weak but worthy banks earlier this year. "How can we avoid
using public money?" asked Yoshiro Mori, an LDP party leader, at a news
conference on Monday.
Too Exposed to Fail
Some LDP leaders also insist the agricultural cooperatives are too exposed to
fail. One adviser to the government, who asked not to be named, noted that
rural credit cooperatives have no deposit insurance scheme. Without such a
safety net, it would be imprudent to force these "fragile institutions" to take
losses, he said. Sinking money into LTCB, the official said, would ease the
burden on the credit cooperatives.
To opposition politicians, the fight over public funds has grown so fierce that
they even accuse Washington of siding with the LDP. Over the past week,
U.S. officials from U.S. Treasury Secretary Robert Rubin on down have
pointedly reminded Japan that they think public money will be necessary not
only to protect the depositors of failed banks, but also to recapitalize ones that
are weak but still viable.
Opposition leader Naoto Kan, however, feels betrayed. American officials
have spent the last year preaching to Asians on the need for belt tightening, job
cuts and austerity, he said. Now, the Americans are suddenly telling Japan to
rescue banks rather then letting them go under. "That's just a little
contradictory, don't you think?" Mr. Kan said in an interview.
Instead, Mr. Kan simply insists that banks shouldn't receive any public funds
until shareholders are first wiped out and managers lose their jobs -- hardly the
sort of talk that will calm stock markets. "Then we can consider public money,"
he said. "But first people must take responsibility for their mistakes."
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