[PEN-L:30570] So what do ya'll think of Japan?

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Reuters Business Report
Speculation Rises on Japan Cabinet, Banks
Thursday September 26, 12:47 am ET

By Linda Sieg


TOKYO (Reuters) - Speculation swirled Thursday that Japanese Prime Minister
Junichiro Koizumi will replace his top financial regulator as a prelude to
adopting a more aggressive policy on cleaning up the nation's ailing banks.
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Hopes that the rickety banking system would finally get the attention it
deserves pushed up bank stocks and the yen.

Analysts said, however, that even if Financial Services Minister Hakuo
Yanagisawa loses his job in an expected cabinet reshuffle, hopes of bold
measures might be confounded -- again.

"There would be an announcement of a policy shift implied if Yanagisawa
goes, but whether policy would actually shift is a separate question," said
a Western political analyst.

"Still, we'd be happy if Koizumi simply made clear that the banking issues
have moved to the top of the agenda."

Koizumi was to meet his two coalition partners later in the day to discuss a
possible cabinet reshuffle that media reports said would likely take place
Monday when he must decide whether to keep key ruling party executives in
their posts.

Yanagisawa denied Wednesday a newspaper report that said he might resign
over policy differences with Koizumi. The prime minister said only that the
matter had not yet been broached.

Yanagisawa has been balking at suggestions that Japan should take the
politically touchy step of injecting taxpayers' money into banks to help
them write off heaps of bad loans, amassed after Japan's asset bubble burst
in the early 1990s and inflated during the subsequent years of economic
stagnation and deflation.

Some analysts wondered whether pro-reform Economics Minister Heizo Takenaka
would stay or go although most think he will stay on.

Takenaka favors public funds injections if strict conditions are met.
"Public funds...and if needed, even nationalization should be considered,"
Takenaka told Reuters Wednesday.

Takenaka, a professor of economics, is seen somewhat vulnerable because he
is an outsider and has no power base within the ruling Liberal Democratic
Party.

A small question mark hangs over Finance Minister Masajuro Shiokawa, who
turns 81 next week but Koizumi is thought to want to keep the political
veteran on board.

PRESSURE MOUNTS, GOSSIP SWIRLS

Pressure to fire Yanagisawa has mounted since the Bank of Japan's surprise
announcement last week of a controversial plan to buy shares from banks.

Many in the financial markets initially thought the BOJ move would presage
an equally aggressive policy shift by the government.

Some analysts have also said a surge in Koizumi's popularity to nearly 70
percent due to his high-profile summit with North Korean leader Kim Jong-il
last week could provide a window of opportunity to take bold measures on
banks.

Those hopes, though, were at least temporarily betrayed when Koizumi merely
repeated past pledges to speed up banks' disposal of bad loans and said he
would unveil more plans in October.

The markets were nonetheless afire with talk of possible replacements for
Yanagisawa, 67, even as media reported a new BOJ proposal to smooth the path
for public fund injections.

Among those mentioned as candidates to replace Yanagiswa are pro-reform
ruling party lawmaker Yasuhisa Shiozaki, a 51-year-old "young Turk" whose
career includes study at Harvard and a stint at the central bank.

Skeptics said the talk was probably more a matter of wishful thinking than
expectation.

Others cited included Okiharu Yasuoka, 63, a former parliamentary vice
finance minister who helped craft Japan's current legislation on banking
reform; one-time finance ministry bureaucrat Yuji Tsushima, 72; and
Kazuyoshi Kaneko, 59, deputy chairman of the LDP's financial affairs panel.

Some pundits said 83-year-old Hideyuki Aizawa, head of an LDP anti-deflation
task force, was in the running. But others said his calls for fiscal
pump-priming would clash too harshly with Koizumi's commitment to reining in
Japan's huge public debt.

AND THEN WHAT?

Japanese government bond prices fell, the yen took heart, and Tokyo stocks
firmed in morning trade as market players bet -- though cautiously -- that
policy change was in the wind.

But died-in-the-wool pessimists said such hopes could easily evaporate, as
they have countless times over the past decade.

"Whatever Koizumi does to the cabinet will be designed to promote reform and
to persuade the public that reform will continue, and continue faster," the
Western analyst said.

"As to whether it works -- well, we have been disappointed so often."

A decision to inject public funds into the banks would still leave a slew of
unanswered questions, including whether banks would be nationalized or
closed and whether the dead-beat firms whose debts they have been carrying
would be allowed to fail.

"I don't think there is any consensus about what to do," said Shigenori
Okazaki, political analyst at UBS Warburg.