Mightiest In Japan Humbled

In early December, a pair of Japanese lawmakers decided they were too proud to beg.

During the annual budget process, politicians and government officials visit the Ministry of Finance to ask for funding. "Ask" is too nice a word. They are there to plead. The key phrase in these encounters is onegai shimasu, or "I humbly request."

But Ichita Yamamoto and Taro Kono decided that they wouldn't say onegai shimasu in discussing foreign aid with the ministry. "It feels strange," Mr. Yamamoto says of the balance of power in his government. "Why do we have to ask them? We are members of parliament, and they are bureaucrats."

The two men made their point, although Yamamoto says the officials they met seemed "embarrassed" by the lack of pleading. The incident shows just how powerful the Finance Ministry is - amid its dingy hallways and cluttered offices even this nation's elected leaders must grovel.

But the Ministry has also begun to look like the root of some of Japan's gravest economic problems.

Its officials have been criticized for the mismanagement of this country's troubled financial industry and failing to engineer a recovery of a long-stagnant economy. Now come accusations of garden-variety bribetaking: On Monday, prosecutors arrested two ministry officials on corruption charges, alleging they provided banks with advance word of ministry inspections in exchange for lavish entertainment and other gifts.

Yesterday, Finance Minister Hiroshi Mitsuzuka resigned to acknowledge his responsibility for the scandal, although the bank inspectors in question have denied wrongdoing.

The state of Japan's economy - and how it is managed - is more and more a matter of international concern. US officials in particular have been urging the Japanese government to revive this economy in order to help out the rest of Asia, where crises in South Korea, Indonesia, and other countries could trigger rapid deflation on a global scale. Japanese officials and politicians have long promised reforms, notably a package of changes in the financial industry called the "big bang," but critics say it is very little, very late.

The basic disagreement concerns the structure of Japan's economy and how it should change. At the pinnacle of this structure is the Finance Ministry, an organization that has good reason to feel a sense of institutional pride. Its officials shepherded the growth of Japanese companies after World War II - creating the world's second-largest economy in a matter of decades.

Along the way these bureaucrats put together the most economically egalitarian society on the planet, including a huge middle class whose children are well educated and where just about any working-age man who wants a job can have one. From its low crime rates to its punctual trains, Japan has a lot going for it, many officials here feel.

All this has been accomplished under a top-down structure that mixes some elements of capitalism and democracy with a Confucian reverence for officialdom. Japan's civil servants, particularly those in the Finance Ministry, are considered the best and the brightest, but they run the country with a confidence that is often labeled as arrogance.

Ever since Japan's "bubble economy" burst in the late 1980s, when prices for land and other assets surged beyond reason and then plunged, the image of the bureaucracy has begun to fade. But the effect of the collapse is still being felt among banks and securities houses, which have been going bankrupt over the past year or so.

Only this month did the ministry acknowledge that Japan's banks and loan companies have about $580 billion worth of bad loans on their books, confirming what private analysts had said for years. Yoichi Masuzoe, a political commentator, says even ministry officials began to lose perspective during the bubble years, when Japan was flush with cash. "If we hadn't had a bubble economy, they would have been more self-restrained," he says of the arrested officials.

The economy has yet to recover from the excesses of the bubble era, and every prime minister of the 1990s has been criticized, at home and abroad, for bad economic policy.

That criticism has become sharper since East Asian markets and currencies began to collapse last summer. US Treasury Secretary Robert Rubin and others have said Japan must revive its economy and clean up its financial system in order to lead Asia out of regional recession.

Many Japanese critics and officials agree that some parts of the economy need to change, but there is debate over the pace and scope. The Japanese approach is to do things gradually, by developing consensus and minimizing negative effects. The US advocates a "let her rip" approach, says one Tokyo-based US executive, while the Japanese worry that such a strategy would produce high unemployment, a lot of bankruptcies, and a host of social problems.

In other words, says the executive, summarizing the Japanese view: "We don't want to have your system, America; we want to do it our way."

Scandals in the Finance Ministry may strengthen the case for rapid, far-reaching reform, since it makes the bureaucracy seem less credible. On the other hand the ministry, which performs a vast range of economic functions that other countries divide among several agencies, has so far been successful in fending off calls for a breakup.

Some politicians have begun to treat the bureaucracy more harshly, insisting they are the ones who should make policy, especially now the once-esteemed officials have begun to look fallible.

But as Yamamoto says of his decision to use less deference at the Finance Ministry, "This is just a small step."