Japanese Prime Minister, Mr Keizo Obuchi, secured a last-minute deal yesterday to salvage Japan's ailing banks with a stunning cave-in to a raft of tough opposition demands.
The agreement delivers a hard landing for the bad loan-ridden banking system and places ailing Long-Term Credit Bank of Japan Ltd. (LTCB) under temporary state control before it is merged or liquidated.
The end of cliffhanger negotiations ahead of the premier's New York summit Tuesday with US President Bill Clinton was reached in talks with Mr Naoto Kan, leader of the largest opposition Democratic Party of Japan.
"The stabilisation of the financial system will encourage everyone," Mr Obuchi told reporters after meeting Mr Kan and the leaders of three other smaller opposition parties.
"I made a final political decision in order to stabilise the system," the prime minister said, adding that the key finance bills would pass parliament by the end of the current session on October 7th.
But the deal came at a high cost to the ruling Liberal Democratic Party (LDP), which was forced to accept almost the entire opposition program to reform the finance sector.
"It is now clear that the government and the LDP have accepted most of the ideas of the three (opposition) groups and will make amendments," Mr Kan told a news conference.
A statement from the two parties distributed after the meeting said that "both parties agreed to co-operate and promptly enact what was agreed at working-level talks".
This included opposition demands to place LTCB under state control, it said.
The agreement also envisages legislation going to parliament after January next year that strips the finance ministry of its financial sector powers.
The powers over the finance sector would instead go to a Financial Revival Committee, also an opposition demand. The premier or the entire cabinet would take over those powers in the meantime.
"The legislation should have come several years ago, so the agreement is not really great news when the economy is already in the doldrums," said Okasan Economic Research Institute economist, Mr Junji Ota.
Other analysts said critical details were still missing, such as who will be on the Financial Revival Committee and how it will determine which banks are to go to the wall or be saved.
With Mr Kan's support, the ruling party can easily pass the legislation in the opposition-controlled upper house of parliament. Other opposition parties were expected to follow his lead.
LTCB shares earlier fell to a record low of 18 yen on the Tokyo Stock Exchange before closing at 19 yen, down three yen or 13.6 per cent from the previous day.
The United States urged Japan to pump public money into its ailing banking sector.
Washington believed the injection of taxpayers' money into the financial sector was "essential", visiting US Under Secretary for Economic, Business and Agricultural Affairs, Mr Stuart Eizenstat told a news conference.
