Hard Slog Begins As Obuchi Becomes Pm

Sydney Morning Herald

Friday July 31, 1998

By RUSSELL SKELTON Herald Correspondent in Tokyo

After a day of uncertainty in Japan's fractious Diet and mounting concern about the enormity of bad loans crippling the banking system, the unassuming leader of the ruling Liberal Democratic Party, Mr Keizo Obuchi, was formally elected the nation's new Prime Minister yesterday.

Mr Obuchi, 61, takes over the top job during the worst recession in 50 years and with a stream of economic data showing the world's second-largest economy is continuing to contract.

There is also growing criticism of his party's draft "bridge bank" legislation designed to rescue the nation's insolvent banks.

A report published in Washington yesterday said United States officials and financial experts had concluded Japan's bad-loan problem, widely viewed by economists as the biggest obstacle to economic recovery, could be $US1 trillion ($1.63 trillion) - double the official estimates made by Tokyo finance officials.

The new estimates suggest that Mr Obuchi's plans for a public bailout of Japan's insolvent banks - which include some of the world's largest - could cost his new Government far more than the $US215 billion that has been set aside.

Japanese officials recently revised the bad-debt figure from $US550 billion to $US700 billion.

Mr Obuchi's tenure as Prime Minister began ignominiously yesterday after the opposition-dominated Upper House voted for the leader of the Democratic Party of Japan, Mr Naoto Kan, 51, in a rare display of unity.

Mr Kan won the vote with 142 votes, against Mr Obuchi's 103.

But the position was reversed in the Lower House, where the LDP used its majority to deliver Mr Obuchi 268 of the 494 votes.

With both houses divided, the will of the traditionally more powerful Lower House prevailed and Mr Obuchi was formally appointed.

But the divided parliamentary vote is a warning that Mr Obuchi's Government may find it difficult to secure co-operation from the Upper House for the quick passage of legislation needed to revive the economy.

With a dismal public approval rating of just 11 per cent and the opposition demanding a general election, Mr Obuchi's leadership is likely to be turbulent.

He replaces Mr Ryutaro Hashimoto, who resigned to take the blame for the Upper-House election losses on July 12.

Economic data show retail sales and industrial production are continuing to plunge, and the first big test for Mr Obuchi and his new Finance Minister, Mr Kiichi Miyazawa, will be in trying to have the bridge bank legislation passed and implemented.

The draft legislation, inspired by Mr Miyazawa, is broadly based on a United States model used to dispense with massive bad loans left in the wake of the savings and loans collapse of the 1980s, with some important differences.

Where the US model gave regulators the power to define and determine the extent of bad loans afflicting banks, the Japanese one calls for the voluntary disclosure of bad loans by banks.

Bank analysts believe this gives Japan's notoriously secretive banks a loophole that could let them avoid full disclosure of their problem loans.

Japanese authorities have also admitted that they are having problems finding staff with the expertise to scrutinise and investigate bank balance sheets.

The extent of the bad-loan problem was underscored yesterday when Moody's Investors Service downgraded the big Sumitomo Bank, one of the top 10, from "stable" to "negative".

© 1998 Sydney Morning Herald

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