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Japan Bank Deal Unraveling As CLinton Comes to Pay Visit

By Sandra Sugawara
The Washington Post

On the eve of Prime Minister Keizo Obuchi's meeting with President Clinton, a Japanese government deal to address the nation's banking crisis appears to be unraveling, raising questions about the nation's ability to pull itself out of a recession that is contributing to global economic troubles.

Obuchi's ruling Liberal Democratic Party and the opposition parties agreed Friday to a series of changes in the nation's banking system. But after some LDP members raised questions about parts of the deal, opposition groups appeared both troubled and stunned, as did stock investors.

Tokyo stocks plunged 2.76 percent Monday to a 12-year low. Stocks fell elsewhere in Asia and in Europe. On Wall Street, stocks dropped sharply in early trading, but rallied later.

"A lot of people thought they had an agreement on Friday night. Now a lot of people are scratching their heads, confused," said Robert Alan Feldman, an economist with Morgan Stanley Dean Witter. "There's a feeling that nobody is really in control of the process."

After the Tokyo market closed, a London-based credit rating agency, Fitch IBCA, downgraded Japan's long-term foreign currency rating, citing a "weak and deteriorating banking system, hesitant policy responses to challenges and a mounting public debt."

The confusion over the bill raises the prospect of a period of deadlock within the Japanese government as the debt-burdened banking system continues to choke off investment and the world's second-largest economy continues to contract.

Clinton administration officials have been urging Japanese leaders for months to take more aggressive action to revive their banking system and economy, and Obuchi had hoped to tout the banking agreement as a sign of progress when he meets with the president Tuesday.

The agreement included plans to nationalize insolvent banks, curb the powers of the Finance Ministry and create an entity similar to the U.S. Resolution Trust Corp. to buy bad debt from banks and sell off the collateral.

Analysts said the framework would permit the restructuring of the banking industry, including the closing of weak banks, something the LDP and Finance Ministry had fought. A Foreign Ministry official said Friday evening that Obuchi had agreed to the many concessions because he was more interested in reform than in "saving face."

The Long Term Credit Bank of Japan, a major lender widely thought to be on the verge of bankruptcy, was to be handled under the new rules, both sides said Friday evening. That meant it could not receive an immediate bailout, as the LDP had planned, and would probably be nationalized, although both sides had said then that the details remained to be worked out.

But on Sunday, Obuchi told reporters on his way to New York that he would tell Clinton that the Long Term Credit Bank would not be allowed to fail. Monday the LDP's chief cabinet secretary, Hiromu Nonaka, said the government might rescue the Long Term Credit Bank if the bank's condition became critical before the law was passed, which was expected to be within about two weeks. There also were news media reports that the LDP was backing away from its agreement to strip the Finance Ministry of its power over banks.

"Obuchi is reported to have said that no major banks will fail. If that is true, it is clearly a breach of trust" with the opposition groups, said Takayoshi Miyagawa, a political analyst. He said that making such a statement would indicate that Obuchi did not have support within the party for the agreement.

"It has to make you wonder about Obuchi's fortunes here, because at least with a deal in hand, he could go to Clinton and say, 'I'm getting things tackled' and then he could come back here and argue that he's got the U.S. relationship under control," said Matthew Goodman, director of government relations for Goldman Sachs Japan Ltd. "But if this falls apart and he isn't even able to say that, people within the party and outside the party are going to say: Can this guy really govern?"