A devil at the heart of Japan Inc

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The Independent Online
A bizarre little scene was enacted on one of the Japanese television shows the other day. A devil with glue-on horns and grotesque mask was being led around the centre of Tokyo, with attendant camera crew. Every few yards, passers-by ran up and, with shrieks of "Banish the devils!", reached into buckets and pelted the unfortunate demon with handfuls of beans.

The bean-throwing pantomime is an ancient one, enacted at shrines and temples all over the country. In a normal year, the devil might represent an unpopular cabinet minister or other contemporary bete noire. But this year, the sign around the devil's neck bore anunexpected name - Okurasho, or the Ministry of Finance. Despite stiff competition from crazed religious terrorists and bungling politicians the title of Public Enemy Number One has been awarded to the country's most powerful and prestigious government ministry.

In a society where policy is devised by bureaucrats behind closed doors rather than elected politicians in parliament, all the Japanese ministries enjoy great power, but MoF is the most powerful of them all. In part this is because of its structure, which groups under a single roof functions which in other countries are divided. Through its Tax Bureau, and the affiliated National Tax Administration, the ministry fills the public purse and devises tax policy. But via its Financial Bureau, it sets national budgets and allocates money to other ministries. If a businessman or politician is investigated for tax evasion, it is the MoF which sets the wheels in motion. If the Health or Science Ministry want to increase their budget, it is with their Finance colleagues that they must argue.

Understandably, such people are wary of upsetting MoF, and its personnel have acquired a reputation for contemptuous arrogance. In some ways this is earned: the fast-track MoF men are among the cleverest men in the country, recruited almost exclusively from Tokyo University's peerlessly prestigious law department. The relatively low bureaucrats' salaries are compensated for by a tradition known as amakudari, literally, "descent from heaven". After a career up in the ministerial clouds, the typical Finance official will be reincarnated on earth as a richly paid director. The governor of the Bank of Japan, the head of the Tokyo Stock Exchange, and the president of the Export-Import Bank of Japan are all ex-MoF.

It is through this network of co-operative ex-employees that MoF operates "administrative guidance" - informal "advice" on loose goals and strategies offered to banks and securities firms by the ministry. In theory, companies are free to ignore these friendly pointers; in practice, they are followed assiduously. This is the essence of Japan Inc: an army of private companies, free to innovate and compete within limits, but drilled and directed by the ministerial field marshals.

For 50 years there were few serious complaints. Then, last summer, MoF was shaken by a series of scandals. The director of the monetary unit resigned after he was shown to have played the stock market with 160m (pounds 1m) of loans and "gifts" from friends. Then came the scandal at Daiwa bank where a Leeson-like rogue trader amassed hidden losses of $1.1bn in New York. MoF, it turned out, knew about the loss six weeks before the US banking authorities.

More seriously, the ministry has increasingly appeared to be failing in its basic task of running the economy. The sudden collapse of property prices in the early 1990s, and the bursting of Japan's "bubble" economy, left banks with huge burdens of bad debts. But only last year, after the collapse of a handful of small banks, did the MoF devise a consolidated strategy, by which time the debts were at mind-boggling proportions.

If a few showers of beans were all they amounted to, the MoF would be able to brazen it out. But recently Japan's most powerful politicians have begun to suggest that MoF should be reformed, even broken up. On Friday, the coalition government set up a task force to come up with a blue print for bureaucratic reform.

Their conclusions are months away, but the potential consequences are staggering. For years, economists and foreign governments have urged Japan to open up its notoriously rigid markets; long-winded talk has so far exceeded any concrete action. But to dismantle MoF, the supreme regulator, would go to the heart of the matter. Other ministries would come under pressure to follow suit, and the traditional balance of power between weak politicians and their bureaucratic puppet-masters would be permanently altered.

Substantial change is still far off. The first problem is practical: when faced with a problem, Japanese politicians turn first to the bureaucrats.The MoF, in other words, would have to collaborate in its own demise. The second question is whether the government has the will to go through with it.

Serving politicians bear their own share of the responsibilities for Japan's problems, including the Prime Minister, Ryutaro Hashimoto, himself a former minister of finance. He will be wise to heed a familiar saying: let him who is without sin cast the first bean.