Japan Promises a 'Big Bang;' But Some Say It Could Fizzle

Deregulation seen as key to competitiveness of financial industry

Prime Minister Ryutaro Hashimoto demonstrated last week that he can talk the talk of deregulation and reform. But analysts, having heard much of this sort of rhetoric before, are waiting for action.

Just days after being confirmed a second time as prime minister following his party's election victory last month, Mr. Hashimoto announced a list of measures designed to liberalize and internationalize Japan's financial industry. Newly appointed Finance Minister Hiroshi Mitsuzuka promised a "big bang" that would match the 1986 deregulation of London's banks, insurance companies, and investment houses.

Hashimoto also gave his new trade and industry minister a one-month deadline to come up with a package of reforms that would allow the world's second largest economy to flourish in the 21st century. The prime minister, in accepting a report urging a more powerful central bank, also said the reform of the Bank of Japan was a "top priority."

"Japan must implement free market rules and promote competition in order to revitalize the economy and reform the economic structure," said a deregulation advisory group commissioned by the Economic Planning Agency. Its report called for changes in six industries.

The announcement of proposed financial-industry reforms appeared to have been drawn from the advisory group's work, which also recommended deregulation in information technology, the way goods are distributed from producer to consumer, the rules governing land use, employment practices, and medical care.

Perhaps most significant is the tone of the recent pronouncements - a sense that the time for real change has finally come. Concern is widespread in Japan that the high level of regulation will make this country's industries less able to compete in a globalized economy. That disadvantage, economists warn, will make it difficult for the government and big companies to keep paying pensions and providing health care and other social services to an aging populace.

Seiroku Kajiyama, the chief Cabinet secretary, said last week that Hashimoto "thinks Japan will not be able to function in the new era if it does not make fundamental changes now."

The financial industry seems likely to be the most immediately affected. Tokyo once aspired to be a financial center alongside New York and London. But in recent years, the city's stature has slipped. Many foreign companies have stopped trading their shares on the Tokyo Stock Exchange. Even Japanese investors increasingly buy stock in Japanese companies in London, where transaction fees are lower. But there is some recent evidence of a revived interest by foreign firms in Japan's financial industry.

The proposed financial reforms - including the removal of restrictions on banks, investment houses, and insurers from engaging in one another's businesses and the introduction of investment vehicles that bureaucrats have until now judged too risky for Japan - are designed to restore some of Tokyo's financial eminence. At the same time, however, the industry has a massive bad-loan problem caused by steadily falling land prices - a problem that deregulation alone will not fix.

Hashimoto leads a minority government, since his Liberal Democratic Party failed to capture a simple majority in the lower house of parliament. Last month's elections heralded a return of sorts for the LDP, which ruled from 1955 until 1993. During those years it presided over the rise of the regulatory apparatus it now pledges to break down.

That irony accounts for some of the skepticism, but many observers seem willing to give the party a chance. What Hashimoto has said "is a good start, so we should not be so pessimistic," says Yoshio Nakamura, managing director of a federation of business groups called the Keidanren. The organization has long agitated for deregulation.

Still, it's unclear whether Hashimoto can turn words into action. "It just comes down a question of how powerful Hashimoto is and how much he can thrash heads together to get things done," says Robert Feldman, chief economist at Salomon Brothers Asia in Tokyo.

Much as been made of the deadline Hashimoto is setting for some of his reform proposals - the year 2001. That length of time seems unneeded, given that many of the proposals, particularly in the financial sector, are not new. Mr. Feldman says, "It's less of a 'big bang' than a long bang."

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