The long-running debate over breaking up the Ministry of Finance has ended with a compromise that will keep the ministry more or less as it is — the most powerful of Japan’s government offices. The MOF will be renamed the “Treasury Ministry,” and will be charged mainly with fiscal and budgetary affairs, beginning in 2001, but will continue to have its say when dealing with failures of financial institutions and crises in the financial system.

These functions will be shared with the “Financial Agency,” the reinforced policymaking and regulatory body for private financial institutions that will absorb the existing Financial Supervisory Agency. Under this “cojurisdiction” formula, worked out last week by the ruling Liberal Democratic Party and opposition New Komeito, responsibility will rest primarily with the new body. But in financial failures and crises involving the use of public money, the Treasury Ministry will have as much say as the Financial Agency.

The political compromise on the MOF reform represents an anticlimax for the bureaucratic streamlining program that was launched with such fanfare by former Prime Minister Ryutaro Hashimoto. Downsizing the MOF is the centerpiece of the government reorganization that, beginning in January 2001, will halve the number of ministries. The current bloated bureaucracy comprises the Prime Minister’s Office (to be renamed “Cabinet Office”) and 21 ministries.

The reform package, set for Cabinet approval next Tuesday, is expected to pass the Diet with the support of the LDP, New Komeito and the Liberal Party. However, the very fact that a political compromise has been struck over MOF reorganization suggests that the going will be rough. With two separate entities responding to financial emergencies, the government will need to make greater efforts to ensure transparency and secure unity in policy administration.

The renaming of the Finance Ministry is largely symbolic, given that many of its powers and prerogatives will be kept essentially intact. Changing the name to “zaimusho” (Treasury Ministry) was first proposed by Mr. Hashimoto. The idea, however, met fierce initial resistance from ministry bureaucrats and their political patrons, who all favored sticking with “okurasho” (Ministry of Finance) — a historic name dating back to the eighth century, when an embryonic system of central government was created in this country.

For Prime Minister Keizo Obuchi, therefore, even the simple task of changing the name was a litmus test of his determination to push bureaucratic reform. If Mr. Obuchi, yielding to the bureaucratic opposition, had kept the old name — which was badly tarnished following a spate of corruption scandals and policy errors — he would have come under fire from the public for backpedaling on his drive for small government.

That the MOF will lose its hallowed name means, to say the least, a loss of face for its proud mandarins. But, having retained a substantial portion of policymaking powers over the private financial sector, the ministry has, for all practical purposes, protected its turf. The danger is that cojurisdiction might polarize financial policymaking and create confusion, conflict and even collusion in the course of the two bureaucracies’ activities.

The best way to deal with crises is for the Cabinet to take unified action under strong leadership, instead of leaving it to the discretion of bureaucrats. For that reason, a plan to set up in the Cabinet Office a permanent council charged with dealing with financial crises is a step in the right direction. Such a panel is urgently needed, given the Cabinet’s proven inability to deal effectively with such crises.

Finance Ministry bureaucrats have contended that it is unrealistic to completely separate fiscal and financial functions, arguing that use of taxpayer money for a bank bailout, for instance, requires the ministry’s active involvement. They have also dismissed concerns about cozy ties to private industry on the ground that “Big Bang” deregulation will make government-business relations more transparent. Still, the burden of proof falls squarely on the ministry, which has committed numerous mistakes and blunders in the conduct of its financial policy, including the bad-loan debacle.

The Financial Agency, its stated leadership position notwithstanding, could find itself living in the shadow of the Treasury Ministry because most agency staff will come from the MOF. Setting up a new ministry and an agency is in itself no assurance that policy will be administered according to consistent and transparent rules. This is an issue that the Diet must discuss thoroughly before it clears the package bill.

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