The week’s shocks began last Monday, when Yoshihisa Tabuchi, the president of Nomura Securities Co., Japan’s heavyweight financial company, resigned. Two sets of allegations forced him out. The first was that his firm had commercial ties to the yakuza Japan’s version of the mob - and had done them special favors like manipulating stocks they owned and financing their fees for golf-club applications. The second charge sounded less dramatic but was in fact more damaging: that in 1987 and 1990, the firm effectively promised some institutional investors to repay any losses they might suffer while their assets were under Nomura’s care, and that it had actually made some reimbursements. Charges of protecting big customers also pushed out Takuya Iwasaki, the president of Nikko Securities Co., another immense securities firm. By the end of the week, Japan’s stock market had dropped by 3 percent, partly because small investors stampeded out of the market.
The Nomura-Nikko fiasco was turning into the financial world’s version of the Recruit political scandal, which two years ago cost Prime Minister Noboru Takeshita his job. It raised many of the same questions in Japan about a system in which powerful corporate and political interests seem to take care of each other while the little guy gets stuck with the bill. And it rekindled familiar doubts about whether the average citizen has any redress against abuses of power - and whether anything, once the ritual resignations have taken place, really changes. Overseas, meanwhile, the news simply intensified the perception that Japan is a closed club. Critics argue that despite its internationalist rhetoric, Japan continues to rely on collusive business practices that keep foreign competitors out while helping Japanese companies pursue markets abroad.
Whether foreign or Japanese, outsiders found a lot to be angry about. The beneficiaries of Nomura’s customer service are huge investors, including a government pension fund. Nomura’s president, Tabuchi, never admitted any guilt, even while resigning. Instead, he deepened the scandal. Responding to an angry shareholder’s question at Nomura’s annual meeting last Thursday, Tabuchi said the compensation scheme was not a violation of the country’s securities code because Nomura had spoken to the Ministry of Finance beforehand and the ministry “had approved it.” Finance Minister Ryutaro Hashimoto, a rising power in Japan’s ruling Liberal Democratic Party, had explicitly denied such suggestions all week. Tabuchi’s replacement as president, Hideo Sakamaki, rushed to make peace with a ministry that has the power to make Nomura’s life miserable. Sakamaki said the company had not spoken to the finance ministry about the compensation schemes beforehand, but only “after” they had been implemented.
Prime Minister Toshiki Kaifu last week ordered Hashimoto to “deal with this problem sternly.” It was politically imperative that he seem to be doing something, because small investors and Nomura’s own shareholders were seething. They were all too aware that any money given to yakuza members or large institutional shareholders didn’t come from thin air. “If they’ve got money to lend to gangsters, why don’t they give that money to us as [higher] dividends?” asked one furious Nomura shareholder after the annual meeting. Their anger was fueled by widespread cynicism that the finance ministry had been unaware of Nomura and Nikko’s transgressions. The job of major government ministries in the postwar era has been to protect and promote the interest of the industries they are overseeing, not just to “regulate” them. As Akio Mikuni, president of Mikuni & Co., an independent Tokyo bond-rating agency, puts it: “In the United States the regulators are theoretically supposed to be like cops standing on street corners policing traffic. In Japan, the regulators are in a patrol car with the light flashing on the top, leading the charge through red lights.”
Nowhere are the tight links more evident than in the phenomenon called amakudari - descent from heaven. This is Japan’s version of Washington’s revolving door, but the movement from government into industry is much more systematic and widespread than it is in the United States. The Ministry of Finance, for example, has a department responsible for helping place former officials in the financial-services industry; more than 280 high-ranking finance-ministry officials have made the “descent” in the last five years. American-style worries about conflicts of interest hardly exist. To the contrary, the Japanese believe it’s essential to a harmonious, no-surprises relationship between government and business, ensuring stability and helping to keep big problems (like the U.S. savings and loan mess) from occurring too often.
In fact, the Nomura scandal may have broken precisely because of a determination to prevent further surprises. Takao Hotta, director of the Securities Companies Division in the finance ministry, confirmed to NEWSWEEK that one of the ministry’s main concerns about the scandal was that the big brokerages might have made more compensation agreements than they could handle in a bear market. “The soundness of the industry was a factor,” Hotta admitted.
By publicly slamming Nomura and Nikko and saying such arrangements are now banned, the bureaucrats created a storm–but they also freed the brokers from whatever similar obligations they may have incurred. The industry has acknowledged around $450 million worth of such deals, “but we don’t really know whether the extent of it is $450 million or $450 billion, do we?” says one senior foreign banker in Tokyo. And now we never will–something for which the securities houses, despite the loss of their presidents, must be grateful.
The scandal also had repercussions for U.S. and European business people and regulators. Financial markets, more than any other, have become global and interdependent, and late last week both the SEC in Washington and Britain’s Treasury Ministry expressed concern that a loss of confidence in a giant firm like Nomura could roil their own markets. Investment bankers and some foreign regulators argued that the debacle in Japan dramatized the need for an international web of securities regulations–including strictly enforced deterrents against abuses. “Global markets require a global set of rules that are on the table for everyone to see, and Japan is the odd man out right now,” said one Western official in Tokyo.
Last week’s disclosures shook business-people who have been trying to penetrate the Japanese market. They have been told by Tokyo officials that the country has dismantled virtually all its formal trade barriers and that all foreign companies need to do is compete harder. The stock scandal shows that, in the securities business at least, those assurances are nonsense. Not only did Nomura and Nikko make $253.6 million in investor guarantees; Japan’s two other megafirms, Daiwa Securities and Yamaichi Securities, admitted a year ago to having similar arrangements. For foreign competitors, the issue is obvious. “Imagine,” one foreign investment banker said sarcastically last week, “how hard we would have to try to get some of that institutional money Nomura was managing.”
The answer is that it would hardly have been worth trying. For one thing, no foreign investment bank is big enough to afford the potential liabilities that come with such guarantees. And besides, in the headquarter countries of most of Nomura’s biggest foreign competitors such arrangements are outright illegal.
If Japan’s recent history is a guide, the building anger at home and abroad is unlikely to lead to fundamental change. The Recruit political scandal and the public’s outrage over a 3 percent consumption tax drove former prime minister Takeshita’s approval rating to 3 percent and then drove him from office. Today, the 3 percent tax remains in place, and Takeshita seems poised either to name the next prime minister or assume the office again himself. The stock scandal, predicts Robert Zielinski, senior analyst at Jardine Fleming Securities in Tokyo, will follow a similar pattern: “Ritual suicide, then back to business as usual.”
Why? The Japanese simply don’t see a need for drastic change. The repayment-guarantee schemes are the kind of blatant nontariff barrier that the United States has been trying to address in the so-called Structural Impediment Initiative talks for the past two years. It’s no fluke that SII hasn’t gone very far. As with civil servants’ “descent from heaven,” where many foreign critics see a problem, many Japanese see success. Their country has been able to achieve its coveted stability - steady economic growth, no unemployment, low inflation - through a system that intentionally minimizes risk to the main engines of that success: the big corporations. It does so, as Zielinski argues, “by socializing risk” - a vaguely academic phrase that basically means protecting the biggest players even if the little players suffer.
For Japan, the benefits of such trade-offs are clear. In Nomura’s case, retail customers may fume about the guarantees to large investors. But such deals have supplied the capital for the firm’s worldwide expansion, which has created thousands of jobs and generated hundreds of millions of yen in taxes. There are similar trade-offs large and small throughout Japan’s economy.
Neither Americans nor Europeans could replicate Japan’s system even if they wanted to. Much of it would be politically intolerable in less group-oriented societies. And as the still-unfolding scandal demonstrates, even the Japanese rebel at least a little when the bias toward the large and the powerful is too brazen. “Change comes in Japan but it comes glacially,” says Mikuni. “You have to understand, just the fact that these things came out at all is significant. In the United States you are used to people going to jail for this kind of thing. But here, 20 years ago, we would have never heard about any of this.” Now Nomura and Nikko, at least, will hear about it for quite a while.
