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Finance Ministry Faces Ethics Clampdown

March 12, 1998

The Ministry of Finance is looking harder at its officials' ethics. (Photo: Kyodo)

The arrest of two officials of the Ministry of Finance at the end of January 1998 on suspicion of corruption relating to financial inspections has prompted the resignations of the finance minister and vice minister. Seriously alarmed, the government is devoting all its energy to preventing a recurrence and restoring confidence, enforcing official discipline by rushing through an ethics bill and pushing for greater transparency as the "Big Bang" financial reforms get under way. In a plenary session of the House of Representatives on February 5, 1998, Prime Minister Ryutaro Hashimoto issued an interim report on the corruption case in the Ministry of Finance and stressed the need for establishment of a stricter and more effective system of financial inspection and a switch to more transparent methods of financial administration.

Government Gets Tough
The arrests, for acceptance of bribes in the form of excessive hospitality, came on January 26, 1998. Tokyo prosecutors allege that two of the ministry's bank inspectors revealed information to several big banks regarding the timing and locations of upcoming inspections, in return for largesse worth millions of yen at restaurants, night clubs, and golf courses. The inspections, made once every 2-4 years without notice, are intended to investigate whether operations are sound and legal. All financial institutions under the control of the ministry are checked. The prosecutors consider this scandal to be an incident undermining the very foundation of financial inspection in Japan. Accordingly, a particularly exhaustive investigation is underway.

But on January 18, a week before the abovementioned arrests, a former director-general of the Finance Ministry's Mint Bureau was arrested on suspicion of bribe-taking for leaking details of a bond issue by Japan Highway Public Corp., where he was employed as a financial director. The repercussions of these scandals, the latest involving a Finance Ministry official, have spread not only through the Finance Ministry but across the whole Japanese bureaucracy and to the public at large.

The consecutive departures of the finance minister and his top ministry official were highly unusual. Resigning on January 28, Minister of Finance Hiroshi Mitsuzuka apologized for the scandal and said he "keenly felt his supervisory responsibility." Next day Administrative Vice-Minister of Finance Takeshi Komura echoed this line: "The people's trust has been betrayed," he said on resigning to take responsibility, "and for this I am deeply sorry." Mitsuzuka's replacement, former Minister of International Trade and Industry Hikaru Matsunaga, took office on January 30, vowing to the press that every effort would be made to thoroughly enforce official discipline.

In-House Graft Busters
The Japanese government is making all efforts to prevent a recurrence of this sort of scandal and to restore confidence in the system. A key part of the Japanese government's measures will be enforcement of discipline among officials. Ministries and agencies already have in-house ethics codes. Similar codes were enacted more or less across the board after a string of scandals involving civil servants, including the arrest in December 1996 of the top bureaucrat at the Ministry of Health and Welfare for taking bribes in return for approval of construction of a home for the aged and other welfare facilities. These ethics codes have 12 "don'ts", including acceptance of meals, gifts, and other forms of hospitality from companies under ministry supervision, and acceptance of fees for speeches and manuscripts for publication. Violation can result in disciplinary action.

On January 28, 1998, immediately after the latest scandal broke, the Finance Ministry set up a Personnel Inspectors Office within its Secretariat. This move represents a departure from the current system, which depends on voluntary confessions in cases where financial inspectors and supervisors transgress. This new inspection department will thoroughly investigate suspected ethical violations revealed by media reports and other sources, and mete out administrative sanctions.

Ten officials have been appointed as personnel inspectors; they will lack legal powers, but they will be able to seek advice from two specially commissioned lawyers. In the nonclerical divisions of the National Land Agency, Ministry of Posts and Telecommunications, and some other bureaucracies, there are already such inspectors with legal powers of investigation. The Finance Ministry, which plans a structural reform at the end of 1998, wants to upgrade its own watchdog operation into a system with legal powers from fiscal 1999 (April 1999 to March 2000).

Meanwhile, the administration is speeding up efforts to enact an ethics bill for civil servants. The Liberal Democratic Party and its two allies in power, the Social Democratic Party and New Party Sakigake, agreed at a summit of their leaders on February 2, 1998, to enact such a bill as soon as possible. That day, the government set up an investigative committee including the vice ministers of all the ministries and agencies, and decided to hasten preparations for submitting a draft bill to the Diet during the present ordinary session. At the lower house plenary session on February 5, Hashimoto stated that "we are proceeding urgently with deliberations on a legal framework for ethics in the civil service" and stressed the need for the establishment of the ethics bill.

Details of the bill will be thrashed out by the Cabinet and government parties. Some proposals have been submitted; one is full incorporation of the provisions in the current ethics codes that ban acceptance of excessive hospitality, with addition of penalties, and another is establishment of a new investigative body with prosecutory and other powers to look into cases of that hospitality.

Raising Transparency
The other measure for ending the cycle of scandals is guaranteeing administrative transparency. For many years it has been the custom for financial institutions to appoint so-called "MOF-tan"--elite employees who handle ties with the ministry--to cultivate personal relations with bureaucrats and gather information. To date, financial institutions have needed ministry approval for everything from branch openings to product launches, so it has been indispensable for financial institutions to appoint special persons to keep close ties with administrators and gain insights into ministry intentions. But these ties have come to be viewed as a hotbed for scandals. The excessive hospitality that grew into the most recent scandal is thought to have been repeatedly organized through connections established by the MOF-tan.

The overseers of Japan's financial system are now at a turning point in their efforts to achieve a level of administrative transparency where the MOF-tan can be dispensed with. The pivotal point is the Big Bang financial reforms, which will get properly under way in April with the enforcement of revised foreign-exchange legislation. The keywords are "free, fair, and global"; the aim is revitalization of Japan's financial markets through meaningful abolition and easing of regulations.

After Big Bang, financial companies will be able to compete more freely under global standards. The flip side will be stiff penalties when market regulations are not obeyed. In the new climate of transparency, financial authorities will shift their emphasis to inspection and supervision to check whether market rules are being followed.

The Finance Ministry has been forced to reform not only financial operations but its entire administrative apparatus. At the same time, companies likewise are facing pressure to make their managements sounder and more transparent, to win greater confidence from domestic and foreign investors and consumers.

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Trends in Japan Edited by Japan Echo Inc. based on domestic Japanese news sources. Articles presented here are offered for reference purposes and do not necessarily represent the policy or views of the Japanese Government.
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