Entering The Sumo Ring

Of all the fresh faces in Japan's new cabinet, Sadakazu Tanigaki's is the most likely to sport a black eye or two sometime soon. As head of the powerful Ministry of Finance, he's fighting to shore up Japan's shrinking tax base, fund a massive pension scheme saddled with a staggering $4 trillion shortfall, support corporate restructuring and rationalize social-welfare spending--all from within a bureaucracy that built Japan's failed economic system and traditionally has opposed radical reforms. He knows the challenges, both from his stint as a parliamentary finance vice minister in the mid-1990s and more recently as head of the new Industrial Revitalization Corp., which rehabilitates weak companies. He spoke with NEWSWEEK's George Wehrfritz and Hideko Takayama in Tokyo last week. Excerpts:

NEWSWEEK: "Convoy capitalism" has long been your ministry's trademark. Are the days when Tokyo supported banks and industry by preventing large-scale bankruptcies over?

TANIGAKI: When I served as a parliamentary vice finance minister we saw the failures of the Long-Term Credit Bank and Nippon Credit Bank. At that time the convoy system was already becoming a thing of the past. To abolish it we needed a structure to handle [corporate] failures, but we had insufficient mechanisms at our disposal. Five years later, we have mechanisms to deal with failures.

The Daiei retail chain is reportedly set to seek a debt bailout for the second time in less than two years. If that happens, will you rubber-stamp a deal as the ministry did in the past?

I do not have enough information to comment on individual businesses. However, I see that it would be very difficult for any business to be revived solely reliant on debt forgiveness. Further strategies are needed to create value.

Would you welcome more foreign investment in Japan's financial sector?

We cannot but go along with the principle of nondiscrimination between foreign and domestic investors. This is the way to go.

Experts warn that Prime Minister Junichiro Koizumi can't meet his pledge to balance the budget by 2010 without raising taxes. Do you plan to do that?

Prime Minister Koizumi has stated clearly that within the next three years he is not going to hike the consumption tax rate. It is my job to follow that policy. Of course, his goal is to balance the budget by 2010, which is far into the future. In the meantime we're confronting the dual issues of aging and lower fertility for the Japanese population, so our greatest challenge is to secure a sustainable base for the pension system. We hear almost no public objections to the idea that the consumption tax is a possible future source of funds for pension and other needs.

How will you address the $4 trillion pension-system deficit?

That will be the most important issue when we compile the next budget. I'm expecting to enter the sumo ring for a match against the minister of Health, Labor and Welfare. We'll face each other head-on [to set] a desirable benefit level and [determine] to what extent that burden can be shouldered. One third of our taxes currently goes to fund pensions. There's been discussion that in the next fiscal year that sum should rise to one half. But taxes must be spent where they're most needed. Pensions now pay uniformly to high- and low-income earners. The most critical point is whether that system is sustainable or not.

Do you support plans to transfer revenues now earmarked for road construction?

It would be desirable to see such a transfer so the budget could be used more flexibly.

Your ministry's power is legendary. How will you react if bureaucrats block reform?

I have to tell them that we must put ourselves in the people's shoes and understand their situation. My other important message is that we must gather information from the private sector. Those are the keys to rebuilding the ministry. What if bureaucrats get in my way? Ministry staffers are very capable people. It is not necessarily to constantly fight. We're following the cabinet's policies, so if the ministry moves in a different direction I have to correct it. Otherwise my ability as the minister will be questioned.

Entering The Sumo Ring | News