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Japan Finance Czar's Policies Prove Controversial - 2003-10-02

Japan's finance czar, Heizo Takenaka, has taken on a massive challenge. He has vowed to reinvigorate Japan's deeply indebted banking industry, which weighs heavily on the entire economy. Many of his adversaries say his ideas could do more harm than good.

Japanese Prime Minister Junichiro Koizumi reshuffled his cabinet in late September, but his point man on reforming Japan's troubled banking is staying put.

Heizo Takenaka, a 52-year-old former professor, has managed to hold on to his twin portfolios. He is Japan's top economics minister as well as the country's leading bank regulator.

He says he is glad to retain both jobs, even though achieving his goals will be extremely tough.

Mr. Takenaka says there are a range of opinions regarding his dual posts but he believes his reappointments show Prime Minister Koizumi's strong desire to proceed with structural reform, a task for which he is bracing.

He adds that the seeds of reform are finally starting to bud and that his role is to nurture those seeds into large trees.

Mr. Takenaka appears highly confident and his frequent statements to the media are often bold. He is famous in Japan for saying that "no company is too big to go bankrupt".

There are some signs that he is making good on his promises. His year-old bank-revival program is making headway. Japan's banks are slashing costs, writing off bad debt, and selling some of their shareholdings. Japan's banks have traditionally owned vast amounts of stock which makes them vulnerable to dips in the market. Perhaps Mr. Takenaka's key achievement to date is setting a deadline for the Japanese banking sector to resolve some of its most serious problems by the year 2005.

But at the same time, Mr. Takenaka is focusing on overhauling the world's second largest economy, which has been in and out of recession for more than a decade. The economy, which has recently shown some signs of picking up, remains troubled. Bankruptcies are rising, deflation is strong and unemployment is close to a record high.

Richard Koo, chief economist with Nomura Securities in Tokyo, explains that Mr. Takenaka must boost the economy and then wrestle with the banking system. He says it would be impossible to accomplish one task while ignoring the other, since the banking sector, which loans money to Japan's companies, is a vital engine for growth. He explains that Japan's banks, in addition to their huge debts, are having trouble finding new borrowers, a problem he believes Mr. Takenaka must also address.

"The fact that he has two portfolios one for the economy and one for the banking system should make him more aware of the fact that we cannot fix the banking system without fixing the economy," he said. "The economy has to be fixed first. Because if the banking system is the constraint on economic growth, we should see the bank lending rates go higher rather than lower. But in Japan we have the lowest bank lending rates in the history of mankind, because companies are all paying down debts."

While Mr. Takenaka's tough talk has captured the public's attention in a way that is unusual for Japanese banking regulators, it is far from clear if he will succeed because he has many enemies who resent his efforts.

Among them is Japan's largest bank, Mizuho. The bank's senior management says his prescriptions are potentially damaging to an already vulnerable economy. Mr. Takenaka himself has warned that as the government cuts spending and forces the banking sector to rid itself of bad loans, 200,000 jobs could be lost and economic growth could dry up.

These comments are deeply unsettling to many of Japan's old-guard politicians, who depend on the status quo to keep voters employed and happy. If the economy slows drastically, they could quickly lose support and find themselves out of office and on the unemployment line.

Mr. Takenaka, who is not an elected politician, is a political outsider and generally appears to be unconcerned with what Japan's lawmakers think of him. Even though many economists regard this as a strength, many are skeptical that he will be able to muster the support needed to reach his goals.

Richard Jerram, chief economist at investment bank ING Barings, says Prime Minister Koizumi must do more to back his finance czar, since he lacks broad political support from Japanese legislators or the country's powerful bureaucratic corps.

"He has the right ideas, but he lacks the authority to implement those ideas and Mr. Koizumi has not backed him up when it mattered," said Richard Jerram. "When Mr. Takenaka came up with a credible plan to reform the banking system one year ago, he was not supported by the prime minister and he was forced to water down that plan quite drastically."

So as Mr. Takenaka begins his second year as Japan's chief regulator and economy minister, he is likely to face more sniping from disgruntled politicians and battles with entrenched interest groups. But by mapping out priorities and setting up a timetable, bank reform is now back on the agenda in Japan.