Toothless bank-reform plan leaves Koizumi much to prove

Japan's parliament undid a bid Wednesday to end the cozy relationship between banks, politics, and debt.

A day after parliament squashed a bold plan backed by Prime Minister Koizumi to reform Japan's troubled financial system, the reaction in Tokyo political and media circles was one of resignation to a status quo that has lasted years.

A month-long showdown between Tokyo's financial establishment and a set of reformers led by Prime Minister Junichiro Koizumi and his maverick economic minister fell flat when parliament blunted a set of sharp-edged banking reforms targeting hundreds of billions of dollars in bad loans, and forcing painful changes in accounting practices.

Many top-shelf overseas-investment firms saw the fight as a moment of truth for the world's second largest economy, and Mr. Koizumi's clout as a reformer. For weeks, he skirmished with senior members of his own Liberal Democratic Party (LDP) coalition. Meanwhile, 12 bank presidents' wrath fell on the slightly disheveled head of former professor Heizo Takenaka, brought in by Koizumi last month to battle the Goliaths of Japanese business.

"We had to take into account criticism that the Takenaka plan would create a bad spiral of unemployment and fiscal chaos," the prime minister's spokeswoman, Misako Kaji, told the Monitor yesterday after the defeat. "But I stress that this is not the end of reform. Banks are not off the hook."

In an announcement coinciding with the plan's release, Japan's central bank said Wednesday it will relax its monetary policies to help promote growth. Japan's economy has stagnated for a decade due to bad loans – and a Parliament so far unwilling to stop the government spending that supports those loans – analysts say.

Last month, drawing on newfound popularity after a trip to North Korea, Koizumi unveiled Mr. Takenaka and his blueprint – aimed at breaking up an old circle of vested interests between banks, politicians, and corporations.

The Takenaka plan would have forced banks to adopt international standards that restrict lending to corporations unable to pay back loans. The result: exposure of the whopping size of nonperforming loans in Tokyo banks – estimated between $400 billion and $1 trillion. Such measures would not only force some companies into bankruptcy, but the resulting loss of trust in banks would likely put some of them out of business as well – a prospect seen as cataclysmic in the delicately balanced world of Tokyo finance.

Instead, a revised plan offered late Wednesday sought to regulate loans, roughly by 2005. It also created a state-run body that will help rehabilitate corporations that begin to sink if banks curb their lending practices.

International investors in Tokyo yesterday roundly bemoaned the new policy as too little, too late. Local critics felt the outcome showed that old guard forces within the LDP were too strong for Koizumi.

"This is a weak reform because it doesn't include a way to raise the demand on banks," said Takatoshi Ito of Tokyo University, a former government finance minister. "This watered-down version makes Koizumi look weak. He put the responsibility on Takenaka to work out the package, rather than to stand strongly himself."

"We know we have to get out of the wilderness, and everyone knows [the Takenaka plan] is the way to go," said a senior ruling party member last week. "The US is supportive. Foreign banks are supportive. But there is a dilemma: If reforms are successful, companies go bankrupt. It if fails, it looks like Koizumi is unable to get anything done.... What I worry about is a status quo that simply builds up debt for future generations."

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