Every time the expression “hot pot without panties” is repeated in the Japanese media these days, the reputation of Japan’s ministry of finance goes down a notch. Visits by MoF officials to the Lo Lan Chinese restaurant in Shinjuku, an entertainment district in Tokyo, were one small part of disclosures of unhealthy links between the MoF and the Japanese financial industry earlier this year.
All the same, allegations that Koichi Miyagawa, the MoF’s chief bank inspector had spent some time with the ladies at Lo Lan – known in Japanese financial circles for their willingness to remove their underwear for a ¥10,000 ($80) tip – were to have far-reaching consequences.
On January 26, for the first time in 50 years, a phalanx of public prosecutors climbed the well-worn stone stairs of the MoF’s headquarters. They had come to arrest Miyagawa and his deputy Toshimi Taniuchi on suspicion of having accepted the equivalent of tens of thousands of dollars in bribes from four Japanese banks in the form of lavish entertainment. In less than three days, finance minister Hiroshi Mitsuzuka would resign, two of his civil servant vice-ministers would be sacked, and the body of one of Miyagawa’s colleagues would be found hanging from a curtain rail in an apartment used by MoF bureaucrats.
Before February was over, the number of suicides in MoF-related scandals would reach three, including that of Shokei Arai, a politician who is alleged to have relied on his reputation as a former MoF official to force Nikko Securities into generating ¥29 million ($232,000) in profits in a discretionary account (see box on page 42).
In the following weeks there would be demands that the MoF’s monopoly on power – the right to formulate a budget, to tax, and to inspect financial institutions – be separated and given to three independent agencies as is the case in most other advanced industrialized countries. Allegations of corruption, incompetence, and arrogance at the MoF would be used as justification for quick action. It would be argued that there cannot be a genuine opening up of Japan’s financial industry to market forces – in keeping with prime minister Ryutaro Hashimoto’s much vaunted Japanese-style Big Bang – while MoF bureaucrats continue to wield arbitrary power, and to abuse it.
The sidelining of administrative vice-minister Takeshi Komura immediately after the arrests, could not have been contemplated at any time since 1955, the year that Japan’s two largest conservative parties united in a power-sharing agreement that was to last 38 years. In 1955, Japanese politicians surrendered what little power they had in making fiscal policy to the MoF and busied themselves with becoming elected lobbyists for their voters and for the interest groups who financed their campaigns. In the meantime, the MoF became ever more the private domain of a handful of graduates of the law faculty of Tokyo University. The ministry takes the top 20 law graduates every year and – through regular rotation at top posts, plus help in parachuting them into the president’s chairs of banks – guarantees this elite a life of power and riches until their dying day. Although neither Miyagawa nor Taniuchi are members of the Tokyo University elite, suspects in the two other parallel MoF-related scandals are (see boxes).
In late January, prime minister Hashimoto acted to take a bit of that power back from the Tokyo University law department alumni. By appointing Koji Tanami as vice-minister, Hashimoto made a personnel decision (long a prerogative of MoF bureaucrats) without consulting the bureaucracy. A former MoF official, Tanami had taken early retirement to go into a less prestigious post at the prime minister’s office from which, under normal circumstances, he ought not to have been able to return.
Although Komura’s personal reputation was not called into question, in keeping with Japanese practice the senior civil servant was required to resign to take responsibility for the banking inspectors who served under him, as was Mitsuzuka.
One weekly commented: “It’s all talk of recession for ordinary folk these days but here are some places we might all like to visit on other people’s money just as high ranking bureaucrats do.” It took the reader on an imaginary tour, including a round of golf (at ¥150,000 per game), exclusive restaurants (meals at ¥30,000 a head), and a visit to the infamous Lo Lan hot pot restaurant, ending at Kosugi, Tokyo’s detention centre for those awaiting trial.
Before being taken into custody, Miyagawa told a Japanese TV station, which recorded his comments, that he didn’t believe he had allowed himself to be entertained “beyond acceptable social limits”. Miyagawa, Taniuchi, and a former senior MoF official under arrest in a separate but related scandal, were to discover that since the bursting of Japan’s financial bubble in the early 90’s the goalposts had moved.
“When the Japanese economy was expanding, people didn’t care if bureaucrats had a good time,” says Richard Hanson, author of a recent history of the MoF. “But during the present, long recession, the semi-corruption that has been part of the Japanese financial industry is no longer seen as acceptable.”
Entertainment for favours
Miyagawa and Taniuchi are accused of having leaked the dates, times and locations of MoF bank inspections. It is suspected that confidential information obtained during a MoF inspection of one bank, Toyo Trust, was passed on to officials of Sanwa Bank, who had expressed an interest in buying a trust bank.
The president of Sanwa Bank, Naotaka Saeki, resigned earlier this year as head of the Federation of Bankers’ Associations of Japan, to be replaced by Satoru Kishi of Tokyo-Mitsubishi. Saeki denied that Sanwa requested any information from MoF inspectors on Toyo Trust. At the time of his resignation the banks named in the entertainment-for-favours scandal included Sanwa, Dai-ichi Kangyo Bank, Asahi Bank and the now defunct Hokkaido Takushoku Bank. Within days, however, allegations surfaced that before the merger of the Bank of Tokyo and Mitsubishi, the latter bank had also participated in the wining and dining of banking inspectors. A few days later, Sumitomo Bank was also named in the entertainment-for-favours affair.
Repeated allegations in the media not only involving Miyagawa and Taniuchi but also vast armies of unnamed MoF officials being entertained by bankers in return for favours have become so thoroughly embedded in the public imagination that the words “no pan shabu shabu” (no pan being short for “no panties” and shabu shabu standing for hot pot in Japanese) have come to symbolize popular indignation with the country’s once-trusted elite financial bureaucracy.
Public outcry
Coming within a few weeks of the failures of Yamaichi and Sanyo, Japan’s fourth and seventh largest brokerages, as well as Hokkaido Takushoku, the country’s 10th largest bank, the “no pan shabu shabu” affair has triggered an outpouring of bitterness and resentment against the MoF rarely seen before. The Asahi, Japan’s leading liberal national daily, described the scandal as a case of “rot at the MoF, a consequence of administrative policies at the ministry which thwarted disclosure of bad debts, contradicted proper rules of a free marketplace and relied on the regulatory powers of officials to subjugate Japan’s financial industry”.
Perhaps the most consistently cited abuse has been the MoF’s demands on the Japanese financial industry to provide high-paying jobs for ministry retirees known as amakudari, or persons who have descended from heaven. When the MoF was the undisputed centre of financial power in Japan, such individuals were welcome because they were seen as a pipeline to power. Recently, a number of amakudari, including a former director of the MoF’s banking bureau, have left the ministry for jobs at banks only to watch them go under.
Hyogo Bank’s collapse in 1995 with 25 times the amount in bad debts than it originally reported is a favourite of MoF critics. This bank was headed by a former director of the MoF’s banking bureau when it went under, revealing a remarkable disregard for accepted international standards of disclosure. Hyogo’s collapse increased the premium on borrowings abroad of Japanese banks. Similar discrepancies in disclosure at Hanwa Bank, have added fuel to the fire of popular indignation.
Financial commentator Naoki Tanaka, author of 10 books on current affairs, and president of Group 21, an independent think tank, sees the reaction to the affair as being not about perks but power: “The attacks on the ministry are not happening because a couple of MoF officials went off to Shinjuku to have a good time. The process started a lot earlier and it had to do with the fact that the MoF was no longer serving the interests of the nation as a whole.”
MoF historian Hanson notes that the scandal is an indication of the ministry’s waning power: “The allegations are coming out in large part because the ministry has already lost its previous ability to keep these things in-house and quiet, and to take care of them without going this far.”
One of the MoF’s harshest critics is Noriko Kontani, a senior fellow at a think tank connected to the Japanese securities industry. She argues that MoF officials acted inconsistently when they disclosed that Yamaichi Securities had “off-book bad debts” to the public, thus sealing the fate of the brokerage. “How different are such ‘off-book bad debts’ from the plain ‘window-dressing of accounts’ which were discovered at Hyogo Bank, when it was managed by the former head of the MoF’s banking bureau?” Kontani asks.
One thing leads to another
Just as the 1970s Watergate scandal in the US began with a botched hotel room break-in, so Tokyo’s “no pan shabu shabu” affair started with documents seized in a raid on a case unrelated to the MoF.
Because of a revision of the Japanese Commercial Law in 1992, prosecutors have been given greater powers to go after a type of financial criminal known as the sokaiya, literally, “shareholder-meeting specialist”. Ever sensitive to any disclosures of management failures, Japanese corporations have become victims of sokaiya who have extorted huge sums from them in return for keeping quiet at shareholders meetings.
Having discovered that a sokaiya had been shaking down all of Japan’s then Big Four brokerages, Nomura, Daiwa, Nikko and Yamaichi, prosecutors raided the offices of all four, seizing thousands of documents. From these it became clear that in 1991 the sokaiya had obtained a loan of ¥4 billion from the Dai-ichi Kangyo Bank. Prosecutors were originally interested in the loan because it explained how the racketeer was able to finance his purchase of the huge numbers of shares required to table questions with management at the annual meetings of all four major brokerages.
Later, prosecutors would find that payments on the sokaiya loan at DKB had been in arrears for two years in 1994 but that an audit carried out on the bank that year by the MoF had failed to indicate the existence of the non-performing loan. The failure of the MoF to report the sokaiya-related loan raised a red flag at the prosecutor’s office. All through the latter half of last year, prosecutors quietly gathered information on the manner and scale of entertainment of MoF banking inspectors. Evidence that prosecutors were about to act could be had from a number of leaks. It was the publication in mid-January in a weekly magazine of a list of 12 MoF officials to be called in for questioning which led to the suicide on January 27 of Yoichi Otsuki, a banking inspector and colleague of Miyagawa. Otsuki called the prosecutor’s office, discovered that the report was true, and never went home.
Commentator Tanaka says the combination of anti-MoF fall-out from the collapse of three financial institutions in November (Yamaichi, Sanyo and Hokkaido Takushoku) plus the entertainment-for-favours affair has already resulted in changes in how fiscal policy is formulated. “When prime minister Hashimoto announced a ¥2 trillion income tax cut in next year’s budget, the first MoF officials knew about it was when they heard the news on TV,” says Tanaka.
Not only did Hashimoto act unilaterally but he also implicitly drew a line between himself and the MoF whose advice he had followed early last year when he permitted an increase in the consumption tax (Japan’s version of VAT). The 2% jump in the tax has been cited as the main reason for a drastic fall last year in Japanese stock prices, a decline in spending, and the general faltering of economic recovery.
Tanaka sees the MoF’s policy mistake on the tax issue as yet further evidence of the ministry’s inability to serve the nation in the way it once did when Japan was poor and a bureaucratic elite was needed to allocate scarce capital in a rational manner. Tanaka predicts that in a few years, “there will be many power centres, many groups offering budget proposals, not just the MoF”.
It remains to be seen if “no pan shabu shabu” will result in a shift in the centre of power in Japan. Japanese politicians, unlike those in other democracies, lack the kind of policy-making apparatus that exists at the MoF. Hideaki Kase, adviser to a former Japanese foreign minister, says: “Japanese politicians are totally dependent on bureaucrats. When I presented a policy paper to a group of Japanese politicians, the note-taking was done by a senior official whose job was to draw up a memo to himself based on my comments on behalf of the politicians in attendance.” Kase says he sees little hope of an immediate and successful rebellion by politicians against an elite bureaucracy.
Hanson also sees problems in the MoF’s proposal to eliminate corruption of bank inspectors by warning banks ahead of time of inspection dates. “What the MoF is saying is ‘rather than making prior warning a crime, let’s make it standard operating procedure’. There is a perverse logic to this. Regulators do have to regulate banks.”
Moreover, the MoF’s advice on how to go about regulating banks is all the more interesting given that the new Financial Supervision Agency, to take over from the department headed by the disgraced Miyagawa, is to be separated from the MoF – how separate remains to be seen. Although the new body will be permitted to hire outside experts in such fields as derivatives, on which MoF does not have a sufficient number of in-house experts, the agency will be tiny compared with the regulatory agencies the US.
According to one Japanese financial commentator, one reason the MoF’s banking inspectors felt no resistance to establishing cosy relationships with banks is that they wanted to notify banks of the dates of inspections – they had no choice. With a staff of just 150 inspectors, if they didn’t give prior warning to banks, the mountain of paperwork could not be completed in the short time allotted for each inspection.
