TOKYO -- When Japanese Prime Minister Keizo Obuchi reshuffled his Cabinet last Tuesday, his intended message to the markets was simple: It's still the economy, stupid. He retained veteran politician Kiichi Miyazawa as finance minister and popular author Taichi Sakaiya as economic planning minister. Both have won high marks over the past year for their roles in helping to orchestrate Japan's nascent recovery.

Yet Obuchi raised some eyebrows with his decision to replace reformer Hakuo Yanagisawa as head of the Financial Reconstruction Commission, or FRC, with a conservative 70-year-old politician named Michio Ochi.

As FRC chief, Yanagisawa took a surprisingly hard line on Japan's banks, forcing them to begin painful restructuring and to reveal with greater accuracy the depth of their bad debt problems. He also encouraged foreign institutions to participate in rebuilding this country's flagging banking system. Despite strong political pressure to do otherwise, one of his last acts at the FRC was to approve the sale of the nationalized Long-Term Credit Bank to the U.S. investment group Ripplewood Holdings.

So what's the problem with Ochi, who was a Ministry of Finance bureaucrat before becoming a finance guru within the ruling Liberal Democratic Party? Given that he also served two stints as head of the Economic Planning Agency, he clearly has the policy expertise required for his new job.

Additionally, with all his policy smarts, Ochi probably won't slip up in parliament and embarrass Obuchi. Starting from the next parliamentary session, set to convene in about a month, Cabinet members will finally have to do their policy homework. That's because bureaucrats will no longer be allowed to answer queries in parliament on behalf of ministers.

Questions about Ochi's suitability as FRC head have nothing to do with his intellectual candlepower. Rather, there are serious doubts that he's as interested in pushing the reform envelope as aggressively as Yanagisawa.

Echoing the concerns of many foreign bank analysts in town, mainstream newspapers began running articles last week laced with speculation that Ochi may try to turn back the clock. In a commentary Thursday, a writer for the usually staid Nihon Keizai Shimbun, Japan's leading business daily, beseeched him to "maintain a sense of balance so as not to revert to those bad old days of ultra-conservatism."

On the same day, the left-leaning Asahi Shimbun quoted Ochi as saying that he's really not concerned about the number of banks in Japan -- a rather startling course change from Yanagisawa, who actively pushed for consolidation in the industry, which is widely regarded as overcrowded.

He also broke from Yanagisawa by asserting that Japan's regional banks don't have to firm up their balance sheets by targeting 8% as their capital-adequacy ratios. Anything over 4% seems to be just fine by Ochi.

And, he's repeatedly given mixed signals on implementing a scheme to limit deposit insurance to 10 million yen ($93,183) per customer when a bank goes bust. (Currently, the coverage is unlimited.) While he has pledged to get the scheme in place by April 2001, as scheduled, he has also been issuing confusing warnings that it would be "extremely difficult" to thrash out the many complicated details necessary to make it happen in time.

While weak banks want the plan deferred because they fear that their customers will put their deposits into stronger institutions, delay would represent a step backward for reform and the imposition of greater market discipline on the financial sector.

This all must have been music to the ears of the banks having trouble getting back on their feet. It also smacks of electoral politics. Obuchi must call a poll in the lower house by October 2000. By easing up on the banks, the LDP stands to buy itself a few more votes. Bank restructuring means more unemployment. And remember, Japan's regional banks issue a lot of loans to construction companies, which happen to be big LDP supporters.

These political considerations aside, Ochi has raised concerns about his views on the participation of western banks in this market. At his first press conference as FRC chairman, he said that he didn't care about the nationality of capital. Nevertheless, just weeks ago, he quipped in reference to Ripplewood's prospective purchase of LTCB that "they're just here to make a quick meal of the bank."

To be sure, Yanagisawa was an anomaly. His "rottweiler" approach to his job -- and the success he achieved -- surprised everyone. It would probably be too much to expect Ochi to fill Yanagisawa's big reform shoes. Furthermore, Yanagisawa set a hard-line precedent that Japan's bank regulators have zealously embraced. Even if he's inclined to go slow, Ochi might not be able to significantly alter the trajectory of change Yanagisawa has plotted.

It's true, the initial crisis is over. Nevertheless, Japan's financial industry still must endure far more painful restructuring if it is ever to recapture a competitive edge internationally. Moreover, round two of the crisis may be just around the corner. This country's debt-ridden life insurers are a disaster waiting to happen.

It's still too early to tell if Ochi is the wrong person for the job. But early indications suggest that should the industry start heading south again, Obuchi will rue the day he installed this septuagenarian as Japan's financial watchdog chief.
John F. Neuffer, a longtime observer of Japanese politics, is an analyst at Mitsui Marine Research Institute. He writes occasional commentary for TSC. Neuffer publishes an in-depth roundup of Japanese politics at his Web site, behindthescreen.com. This column is exclusive to TheStreet.com.

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