Corporate Governance

Japan, the Ministry of Finance, and Bureaucratic Authority (Part 2)

By J. Robert Brown

Japan has a powerful bureaucracy.  The bureaucracy, particularly the Ministry of International Trade and Industry or MITI (later reorganized as the Ministry of Economy, Trade and Industry), was given the lions share of the credit for managing the country's recovery after the devastation of World War II.  But in fact there is no bureaucracy more powerful than the Ministry of Finance, at one time responsible for overseeing not only the budget and system of taxation but also the financial system, including the securities markets and banks. 

The authority has been weakened to some degree.  In the aftermath of the economic collapse in the late 1980s, something attributed in part to the banking system, the Ministry was punished, with financial market oversight largely transferred to the Financial Services Agency.  In fact, however, the bureaucratic reforms merely cleaved off portions of the regulatory process that were viewed within the MoF as far less important and, frankly, a likely source of political and bureaucratic difficulty. 

Responsible for taxes and the budget, the MoF has an incentive to encourage economic growth, no different than economic ministries in other governments.  It traditionally falls to the central bank to be responsible for inflation, even if it means tempering economic growth.  In Japan, however, the MoF has always had considerable sway at the Bank of Japan.  Through the practice of amakudari (translated as descent from heaven), its former officials obtained positions of great importance in various organizations in the financial markets. 

They include the Bank of Japan, the country's central bank.  The practice for most of the post war era (only a few exceptions to the contrary) has been to rotate the Governor of the Bank of Japan between a former official from the MoF and a career official from the Bank of Japan.  Moreover, in the periods when a BoJ career official held the post, an official from MoF typically served as one of the deputy directors. 

It is the Prime Minister who appoints the Governor.  Because of the close ties between the ruling Liberal Democratic Party (a number of prime ministers from this party have come out of the Ministry of Finance) and MoF, the Prime Minister can generally be counted on to make the anticipated appointment.  Which brings us to the current situation, something we address in the next post.

Full post as published by The Race to the Bottom on March 19, 2008 (boomark / email).