Wall Street Journal - 09/22/98
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 clash between the country's entrenched rural interests and its overtaxed and angry urban population -- a dispute having consequences that are starting to ripple around the world.
The inability of these two feuding forces to come to terms over a banking- workout plan helped to trigger a global stock-market hiccup on Monday. Only last week, Japan's governing Liberal Democratic 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 gift of a solid banking plan to take to his meeting with President Clinton Tuesday.
Accord Is Unraveling
But even before Mr. Obuchi arrived in New York, the agreement was unraveling in Tokyo, with the LDP and the opposition yelling at each other on Japan's weekend political talk shows. By Monday, the mood had soured. As Japan's politicians kept bickering, foreign investors sold shares on fears that the impasse over the banking mess will drive the Japanese economy deeper into recession.
On Monday, the benchmark Nikkei stock average fell 385.82 points, or 2.8%, to close at 13597.30. Leading the decline were big banks, steel companies and electronicgoods makers. Until recently, these were the favorite issues of foreign investors, who sold a net $2.07 billion in Japanese stocks last week alone. In Europe, major markets slipped 1% or more, with the Xetra DAX Index in Germany off a full 4%.
Downgrading Japan
Pessimism caused British credit-rating service Fitch IBCA to strip Japan of its triple-A foreign-currency rating on Monday. "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 cutting that rating to double-A-plus. Among
reasons for the downgrade was Japan's "deteriorating" banking system.
The Nikkei recovered a bit early Tuesday morning on news that the LDP was seeking to compromise with the opposition in a plan to support weak banks. But by the close of the morning session, the average was down 31.92 points to 13565.38.
Traders said Mr. Obuchi helped lift prices early by downplaying the rift with the opposition. But in Tokyo the outlook for banking reform was anything but clear, and the continuing worries helped send share prices back down.
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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