Japan's uncertain political transition began in July 1993, when the conservative Liberal Democratic Party (LDP) -- in power since 1955 -- was replaced by a fragile multiparty coalition. Under Prime Minister Morihiro Hosokawa, the coalition faced turmoil in April 1994, when Hosokawa resigned abruptly amid a personal financial scandal. Then-deputy prime minister/foreign minister Tsutomu Hata succeeded, but only at the head of a minority government as the Social Democratic Party (SDP), a key coalition partner, quit the coalition. Though beset by its own internal squabbles, the LDP remained the single largest party in Japan's bicameral Diet, or parliament. In late June, Hata was forced to resign under threat of an LDP-led no-confidence motion.

Japan's banking sector currently is carrying between $400 billion and $800 billion in non-performing loans that threaten the solvency of certain financial institutions and weaken the Japanese financial system. This problem is of interest to the United States because the stability of Japan's banking system affects the health of that nation's economy, its rate of economic growth, and international capital flows. This, in turn, may affect American exports to, imports from, and investments in Japan. It also has affected Japanese investments in the United States and may affect the resolution of issues being negotiated or recently agreed to with that nation under the Framework Talks.