Aso’s appointment of arch-conservative Shoichi Nakagawa as both minister of finance AND minister of state for financial services might seem, well, natural to the uninitiated. They’re both financial, aren’t they? For his part, PM Taro Aso has called the decision “more functional than dealing with [financial issues such as the Lehman bankruptcy] separately.”
Functional it may be, but I have my doubts that moving financial regulation back to the finance ministry will prove productive. Independent, prudent, and transparent financial regulations are part of what has allowed Japan’s financial sector to reap the benefits of late 90s deregulations and attract a base of foreign investors. That Japan has escaped the worst of the recent financial meltdown is a testament to the Financial Services Agency’s competence to regulate without the guiding hand of an all-powerful finance ministry. The Nikkei editorial board shares my concerns and has called any aims at reuniting fiscal policy with direct finance industry oversight “extremely problematic.”
As FujiSankei Business-i
explains, the initial decision to separate financial administration and law enforcement was taken in 1991 when Nomura Securities was found illegally compensating clients for stock investment losses. The Financial Services Agency was created later as the stand-alone financial industry regulator when the finance ministry itself saw its credibility devastated by corruption scandals. Currently, financial matters are divided thusly: FSA/SESC are the finance industry regulators, the Bank of Japan is an independent entity responsible for maintaining liquidity and monitoring inflation, and the finance ministry, as keeper of the treasury, has a more limited direct role and keeps an eye on exchange rates and participates in international meetings.
The arrangement appears to work well, except it is partially incompatible with international norms. The G7 meeting of finance ministers, for example, is attended only by Japan’s finance minister, despite his portfolio not extending to financial industry regulations (at the top of the current agenda). Predictably, an anonymous source in the finance ministry welcomes this turn of fortune as it represents a possible restoration of powers, regardless of Aso’s insistence that he chose people based on their dedication to “national interest” and not their ministry’s interest.
In his first post-appointment press conference, Nakagawa gave a somewhat muddled explanation mentioning that while he understands the debate of 10 years ago, fiscal and monetary policy are “two sides of the same coin” and should be handled together in “delicate” times such as these.
As I mentioned above, on the face of it this doesn’t even look that bad. But getting financial regulation out from under MOF’s thumb has been an important step forward to achieving more normal financial services in this country. The ministry of finance was for decades the symbol of Japan Inc, the comprehensive term for the elite consensus that sustained Japan as a development state. But those days are over, and Japan has been in the process of adopting a more “mature” economy, a part of which was the creation of the FSA.
I have not made a comprehensive review of all the new government’s comments, but so far I have seen zero justification except the need to have someone responsible for financial industry regulation at the G7 finance ministers meeting. I hope they keep it limited to that.
The FSA has established a reputation as tough but fair in the minds of the industry and the new administration, if it does get a chance to govern, would do well to respect that.