Seattle -- The myth of Japanese management is under siege. First there was the Recruit scandal, which revealed that top politicians in Japan were being routinely bribed by special interests. Then there were revelations of widespread incompetence in the running and regulation of Japan's nuclear reactors. Now there is the securities scandal.
The Big Four Japanese brokerage firms -- Nomura, Daiwa, Nikko and Yamaichi -- have just admitted that they bailed out, to the tune of $475 million, several important customers who had invested money with them and lost big when the Japanese stock market went down. The brokerage firms also admitted that some of their biggest clients have been representatives of the major crime syndicates in Japan.
Some Japanese observers predict that this time the scandals have been too many, too shocking and too public for the officials involved to void fundamental reform. Other observers take the opposite position. They look at the history of similar incidents and predict that in another year or two everything will return to the status quo ante.
There is a good deal of evidence for both interpretations. But I put my money on those who expect little change.
The rule in Japan appears to be: hide abuses whenever possible. If they become public, acknowledge them, express regret, sacrifice a few scapegoats and then return to business as usual.
To be sure, Nomuragate is more serious than past problems. And, of course, we Americans have plenty of our own examples of corruption. No argument there.
But at least in the United States the offenders were tried, convicted and thrown in the slammer. One could just as readily view them as an example of how the system is capable of reforming itself than as an example of the system's failure. In Japan, however, there has never been a conviction for insider trading. Not one. Although the head of Nomura resigned, he was immediately promoted to vice-chairman. Some punishment.
The larger problem in Japan is both structural and ideological. First, there is no independent regulatory agency. Although the securities firms are theoretically regulated by the Ministry of Finance, in fact they are not. The ministry's primary job is to promote those firms not regulate them. On top of that, there is a common practice in the Ministry of Finance for officials to retire to lucrative jobs in the brokerage houses. Obviously they are TC unlikely to do anything which will jeopardize future employers. We call that conflict of interest. The Japanese call it
"amakudari," descent from heaven.
But there is an ideological dimension as well. Japanese have a Confucian understanding of politics, which means they believe that only a highly educated elite have both the knowledge and the virtue necessary to govern effectively. The system is patriarchal and paternalistic. It assumes that government officials have the same benevolent concern for the people that a father has toward his children. The proper attitude of the people is to trust those in power in the same way that children trust their parents.
The Western democratic tradition, at least in its British and American form, is different. It has cultivated a healthy distrust of those in power, arising out of an acute awareness of the temptation for abuse which power confers. Because we started with different assumptions about human nature, which we take to be more competitive and egoistic than cooperative and altruistic, we devised institutions which were designed to check and balance power, not concentrate it in the hands of the elite.
Most of the time the system in Japan has worked well. Although practice may fall short of the ideal, on balance Japanese society has much to thank its leaders for. They have been honest and capable, and they have guided Japan successfully into the modern world. Unfortunately, Japan has changed in the last few decades, and the world has changed, but the goal of the Japanese leadership has not.
Japan remains a system created to benefit the wealth and power of the state. It is a closed system with privileges based upon the power to serve the system. Foreigners do not serve the system and neither do small investors. Crime syndicates do serve the system, so they get help. Like the leaders of the Tokugawa period in Japan, 1600-1868, leaders in contemporary Japan have become prisoners of the institutions they created.
Even if a new regulatory agency were created, it would still be staffed by people who accomplish things informally, not through institutional or legal channels.
The only thing which will cause lasting reform is an outside threat to the goal of the system itself -- enhancing the wealth and power of the state. When Japanese leaders conclude that Japan's own economic power will suffer unless it brings its financial institutions into line with the rest of the world, there will be real reform. Not before.
Alan Wood teaches Asian history at the University of Washington.