During the 1990s, Japan's economy languished -- rocked by what seemed like an endless stream of financial and political scandals.
Prime Minister Morihiro Hosokawa was forced to resign in April 1994, just eight months after taking office, following allegations that he had mismanaged personal funds in the 1980s.That same year a former Liberal Democratic Party (LDP) construction minister gave himself up to the police for supposedly taking a $95,000 bribe from a construction company.
In 1998 two bank inspectors from the Ministry of Finance were arrested for allegedly taking about $40,000 in gifts from banks, in return for which they were given advance notice of supposedly 'surprise' inspections. And later that year the Bank of Japan took disciplinary action against almost 100 officials in connection with bribery and 'gift' issues.
It was with these memories fresh in voters' minds that the dynamic Junichiro Koizumi came to power in April 2001 with reformist proposals, a promise to tackle corruption, and to end the often murky collusion between companies and government employees. He took office recognising the need to rebuild the public trust and said he was willing to take on, and even break up, the old political factionalism -- which LDP leaders had traditionally relied upon for support -- to push through his reforms.
So it seems strange that Koizumi has been so vocal about supporting the Bank of Japan governor, Toshihiko Fukui, as a crisis erupted over the governor's impartiality.
Last month it was revealed that Fukui had until recently been investing in a fund whose manager has been arrested for suspected insider trading. It was revealed that a 10 million yen (about $86,000) investment he made back in October 1999 in the controversial Murakami fund had more than doubled in value.
An investment made several years before he came to head the BOJ in 2003 might not have been an issue for Fukui, except that he did not terminate his investment on becoming governor. To make matters worse, when he eventually did so this February, it came just before the central bank signalled its intention to tighten monetary policy, leading some to question Fukui's timing.
This created a political and media storm with opposition party leaders demanding he resign. The public's confidence was also rocked, with a poll published in the Yomiuri Shimbun showing almost three quarters of respondents believed that his investment would influence bank policy. Adding to this pressure, the head of the LDP's monetary policy panel also suggested that he should resign immediately.
Into this crisis stepped Koizumi who, rather than question the wisdom of Fukui's investment, (or at least keep quiet) announced his support for Fukui, arguing that he should serve out the rest of his term which is due to expire in 2008. Koizumi has since re-iterated this support. Fukui also received heavyweight backing from parts of the financial sector, with President of the Tokyo Stock Exchange Inc.,Taizo Nishimuro, throwing in his support.
The main argument for Fukui to stay on is that he is somehow indispensable to Japan's economic recovery. Indeed he is extremely well qualified for the job -- having graduated from the illustrious University of Tokyo, going on to work in the bank in a number of roles for 40 years. And it is undoubtedly true that Japan's economy is recovering nicely.
Yet the recovery owes more to a typically Japanese -- and cautious -- approach to reform than it does to a man some here have tried to portray as Asia's Alan Greenspan. The labour market has been made more flexible, banks reformed and corporate debt has been paid down significantly. There has also been anti-trust reform and the promise of tougher penalties for wrong-doers. Koizumi has also tried to reduce pork-laden public work schemes which were used to keep key constituents happy.
Of course this has not made Japan immune to scandal -- as the controversy over Livedoor boss Takafumie Horie showed last year. And many of Koizumi's supposedly bold reforms were still much watered down. Still, the country has made a great deal of progress and the notion that its recovery rests with one man is wrong.
Japan's leaders will need to inspire confidence and trust in its institutions if these gains are to be consolidated after Koizumi has gone. But Fukui is not the man to inspire this trust. And in a country that is becoming increasingly concerned about inequality, a public servant making big gains from loose monetary policy while depositors get stung by super-low interest rates does not play well.
Sadly, Fukui looks unlikely to step down, and has accepted a slap on the wrist with a pay cut for the next six months. This is not enough. There will be a fresh start in the country's politics as Koizumi steps down in September. It would be good for Japan if Fukui did the same.
Jason Miks is a Tokyo-based writer and Assistant Editor at the Center for International Relations.