By Sandra Sugawara
Washington Post Foreign Service
Tuesday, February 17, 1998; Page D01

TOKYO, Feb. 16—Japan's parliament today enacted a $238 billion bank stabilization bill, a key element of the government's effort to revive its teetering economy, but a widening banking scandal here has raised concerns that the plan could be derailed.

Two prominent financial institutions, Sumitomo Bank and the Bank of Tokyo-Mitsubishi, were named in a bribery scandal involving finance ministry inspectors. Other major banks, including Asahi Bank, Dai-Ichi Kangyo Bank and Sawna Bank, already have been named in the probe. The Industrial Bank of Japan also has been linked to a different bribery scandal involving the Japan Highway Public Corp.

In the face of growing public outrage over the scandals, some lawmakers have said that banks involved in the bribery scandal should not get any taxpayer funds. In fact, the six banks under investigation have said they have not decided if they will even ask to participate in the stabilization plan, which is designed to inject billions of dollars into the banking system to enable them to quickly dispose of the $600 billion in bad loans that are crippling Japan's banks.

Thus the scandals could eliminate some of the country's largest banks from the stabilization effort, reducing the program's impact, analysts said. More banks may be named in the scandals, which involved lavish entertainment of bureaucrats, a common industry practice, according to some industry sources. Hiroshi Kurosawa, chairman of Industrial Bank of Japan, told a legislative committee last week, that the bank entertained bureaucrats, not for improper advantages "but because we have been doing so for decades."

"It gets to the point where we're just sort of naming every bank," said James Fiorillo, a Tokyo-based bank analyst with ING Barings. "What is key now is how much will be uncovered with regard to past wrongdoing, and how this could affect the disbursement of public funds."

Analysts warned that if the bank-rescue plan is not effectively implemented, there will be renewed selling of the stocks of financial institutions, and renewed difficulty for banks in raising funds in international money markets. "We potentially see a return to the feverish environment of November, which drove three institutions to fail," Fiorillo said.

The new problems are erupting as Japan, Asia's largest economy, faces increasing pressure to revive its stagnant economy to help Asia recover from its economic crisis. U.S. Commerce Secretary William M. Daley met with a number of Japanese officials today and echoed comments made by a number of other U.S. officials recently, saying Japan must spur domestic growth to help troubled Asian economies recover.

"The message I bring to Japan's leaders is this: The most important contribution Japan can make to restore stability and growth in Asia are to take steps necessary first, to strengthen domestic demand; second, to deregulate Japan's economy; and third, to open up imports," Daley said in a speech to U.S. businesspeople here.

But so far, there is little indication that Japan plans any big move to spur domestic demand. Japan's new economic stimulus package, scheduled to be unveiled Friday by the ruling Liberal Democratic Party, is not expected to have any big public works spending or massive tax cuts, despite earlier hints that it would be a big spending package. Prime Minister Ryutaro Hashimoto, in a speech to parliament, today said he was prepared to take measures to rescue Japan's economy, but also stressed the importance of fiscal reform. He focused on the potential impact of the bank stabilization bill and a recently enacted $15.9 billion income tax cut.

In response, Tokyo stock prices closed lower for a third straight trading session today. The Nikkei index ended at 16,775.52, down 15.49 points, or 0.09 percent from Friday's close. [In morning trading Tuesday in Tokyo, the Nikkei again was fractionally lower.]

Without more stimulus, the parade of bankruptcies and weak consumer spending is expected to continue. Teikoku Databank, a credit research agency here, said today that more than 1,500 bankruptcies were reported last month, a postwar high for the month of January. "Potential bad loans may be increasing," said Naohito Hasegawa, an analyst with Nikko Research Center.

Department store sales in Tokyo fell 5.6 percent in January, after plummeting 6.2 percent in December. Japanese depositors are pulling their money out of weak institutions in record numbers, according to the Nihon Keizai Shimbun, which reported the sale of home safes are skyrocketing.

The two banking measures passed today would allocate $135 billion to strengthen the deposit insurance fund to guarantee deposits. The other law would enable the government to buy $103 billion worth of preferred stocks and subordinated bonds to be issued by banks to boost their capital bases.

Yukiko Ohara, UBS Securities analyst, said the general approach of injecting capital into banks was flawed because it appeared to focus on "resolving the immediate crisis" rather than the industry's long-term structural problems. The plan was proposed after the global financial community lost such confidence in the solvency of Japanese banks late last year that many Japanese banks had to pay extraordinarily high rates to borrow in international money markets or could not get funds at all.

The financial stabilization plan focuses on increasing the capital of banks rather than on setting strict requirements to write down loans and improve profitability, analysts said.

A screening committee, which includes the finance minister, the governor of the Bank of Japan, and other representatives, will evaluate preferred stock proposals submitted by the banks. Sei Nakai, a top banking official in the finance ministry, said that the committee is scheduled to meet Friday to begin setting criteria for evaluating the applications.