The nation’s traditional financial regulations are set to change course, at least structurally, with a transfer of power from the Finance Ministry to the new Financial Supervisory Agency, which begins operations Monday.
Incessant scandals and opaque relationships between the mighty ministry and the financial sector have led to a string of mismanaged administrative blunders, critics say.
And with the “Big Bang” financial deregulation gathering speed, transformation of the supervisory system itself, which is often based on guidance rather than judgment over compliance with rules, also seems inevitable.
In an effort to underscore FSA’s independence from the Finance Ministry, Prime Minister Ryutaro Hashimoto has designated Masaharu Hino, previously head of the Nagoya High Public Prosecutor’s Office, as its first director general.
But some experts, while hailing the new agency as a step forward, still express concern over both the expertise and number of inspectors.
Toru Nakakita, professor of economics at Toyo University, said the FSA’s key to success in securing transparent regulation and fair supervision will lie in having its staff learn the top-notch skills of financial inspection as quickly as possible. “If necessary, the agency should contemplate such ideas as hiring inspectors from abroad so that such knowhow can be passed on,” he said.
The FSA, which will be tasked with carrying out the inspection and supervision of financial institutions and take the Securities and Exchange Surveillance Commission under its wing, will have 403 staff, 377 of whom will be come in from the Finance Ministry.
Another three will be brought over from the National Police Agency, one more from the Justice Ministry, and 26 will be new hires.
But only 151 of these employees will be inspectors. And even with the addition of the 420 inspection officials at the Finance Ministry’s regional finance bureaus, who will assist at the local level, the figure is a far cry from the more than 9,000 similarly employed people in the world’s most powerful economy — the United States.
“Unless the agency’s capabilities rise dramatically to levels seen in other industrialized nations in a very short time, (the FSA) and its inspections will be denounced as a rehash of the Finance Ministry,” Nakakita said.
Criticism of the Finance Ministry — widely considered the pinnacle of the nation’s bureaucracy — has always existed. But it took such unpopular decisions as the ministry’s move two years ago to liquidate the seven “jusen” housing loan firms with 685 billion yen in public funds to bring the simmering situation to a boil.
Pressure from lawmakers to redistribute the ministry’s functions resulted in the formation of the Financial Supervisory Agency, which will be placed under the Prime Minister’s Office. It also led to enactment of a revised Bank of Japan Law that gives more autonomy to the central bank.
The moves came none too soon, as a total of four ministry inspectors and officials were arrested and indicted last winter on charges of receiving bribes from financial firms in the form of excessive entertainment.
For many, the scandal showed just how comfortable, informal and undisclosed the relationship between financial authorities and private financial firms had become under decades of the “convoy system” regulation.
The wining-and-dining fiasco in effect led to the appointment of two senior ministry officials who had been relatively distant from financial sector regulation as the agency’s deputy head and the director general of the new financial planning bureau to be set up at the Finance Ministry.
Ju-ichi Yamanaka, senior institutional economist at Nippon Life Insurance Co.’s NLI Research Institute, said the job that lies ahead of the fledgling agency is a tough one given the fact that its separation from the Finance Ministry is still incomplete. “At this point, the agency’s framework (of supervision) is only slightly different from (regulation) under the Finance Ministry, since it was set up with relatively minor changes made to the balance between the ministry’s powers over fiscal policy and financial administration,” he said.
It the agency fails to create concrete rules, take a strong stance vis-a-vis financial firms and improve the transparency of its inspections, then the financial markets, made freer by Big Bang reforms, will not trust its findings and depend on the information being provided by rating companies, Yamanaka warned.
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