Chapter 51a – Scandals – Japanese Style


A Japanese propensity, which someone once described as phenomenalism, is part of the same collectivist picture. People focus solely on the phenomenon put before their eyes, without bothering to seek out the reasons for it, or its consequences. 

Japan’s many bogus scandals provide examples. The media will focus in for days, even weeks, on some reformist accused of breaking the rules, or laws, without any  consideration of the reasons why it may have been necessary to break those rules or laws, or even whether rules or laws may have been broken. 

The public rely on what Japan’s giddy media tell them. From then on any action by the person under the media searchlight draws suspicions.

1. The Recruit ‘Scandal’ 

The so-called Recruit scandal was one such example, with the media and then the public quite uninterested in the background to that unique and highly progressive firm’s activities in trying to force reforms in Japan’s education and employment policies. 

The demonising began when some media person thought he/she had a scoop with the fact that  

Ezoe, the Recruit owner – a man of humble origins who had been able to pas the difficult exams to enter the prestigious Tokyo University – had distributed IPO shares to some politicians and others with whom the company had relations. This was supposed to be a form of bribery, for which the company should be punished.

The recipients had paid for the shares. But in Bubble years IPO shares were supposed to jump in price immediately after the IPO had finished.  This increase, if it had occurred, was supposed to be the bribe.

To anyone who knew the Japanese stock-market it was not much of scoop. Usually the securities companies decided to whom the IPO shares should be distributed. It was a great source of corruption since the securities companies often favoured the gangsters and other ungodly persons on their people to be favoured list. Ezoe had decided to bypass this process  by making sure the shares went to more respectable politicians and others he favoured. 

It was not much of a scoop.  But since the media said it was a scoop, it was a scoop and for months after media had great fun digging out the names of all those who had received the IPO shares and having them pilloried as having received corrupt favours.

They went on to dig out all of Ezoe’s other unusual dealings and condemn them as corrupt, even when they had been done for the good of Japan rather than for Recruit. – for example, the purchase of some difficult to use Cray computers to help ease US-Japan trade frictions, trying to bring some order to enterprise recruitment of university graduates (something badly needed by universities throughout Japan), opening resorts in neglected areas of Japan and so on.

The irrationality reached a point where the unique and unusual, Hiromasa Ezoe, and a personal friend of my family,* was driven to suicide.

One of his very worthwhile reforms – promotion of women to senior positions, for example, still remains overlooked.

* he had sought me out to give a lecture to his staff because I had criticised one to Tokyo’s territorial complaints against Russia. He liked to connect with people who went against the conventional wisdom.

No Searching for Reasons 

There is little or no searching for the reasons behind these so-called ‘scandals.’ The media are often too happy to say they are scandals and leave it at that. A gullible audience believes them, and punishes the alleged culprit.

Complicated explanations are not welcomed. 

The message – do not try to change Japan too radically – cannot have been lost on other entrepreneurs. 

It is a major reason why the Japan of recent years has begun to lose the traction of immediate postwar years when the clammy hand of conservative convention was still weak.

It is Japanese particularism at its worst.

2. The Olympus ‘Scandal’

The so-called Olympus scandal which I also saw from the inside thanks to a family connection was more complex but equally damaging. The alleged misdeeds had been forced on the company by the feckless policies of the Koizumi (2001-06) administration. 

There too we saw the same phenomenalistic irrationality at work.

It began in the pre-Bubble years.The government was looking for ways to revive an economy hit by ‘endaka fukyo’ – the recession caused by the excessively high value of the yen making Japanese exports difficult and Japanese imports easy.

So prime minister Koizumi aided by his business whiz-kid and weak economist, Takenaka Heizo, hit on the brilliant idea of encouraging firms to buy and develop land as a stimulus to the economy. 

Ideally they could build resorts on the land they had bought (most were bound to fail when the speculative party was over). 

Nor did it matter if they had no plan for developing the land. They could just buy. They were bound to make a profit.

The popular mantra ‘Japan can make machines but it cannot make land’ was working overtime.

The result was the disastrous Bubble of the late eighties that set the economy back for another thirty years.

Cameras, not Land Development

Olympus was caught up in this insane thinking. Like most large Japanese firms in those days

it had been sitting on large accumulated profits. 

Normally the use of those funds for speculative land buying would have been frowned upon.  But thanks to the Koizumi-Takenaka wisdom, they could help the economy recover by any amount of speculative land purchasing.

And since other firms were doing the same, prices escalated and there were profits to be gained simply by sitting on the land – until the moment of truth arrived in 1991.  

Post-Moment of Truth

After Bubble collapse dozens, if not hundreds, of firms were left with the problem of selling the land they had bought with the encouragement of bizarre Koizumi-Takenaka scheme for economic recovery.

That was not easy. 

Prices literally were falling by the  hour.

Olympus had no idea how to extricate itself, other than the scheme called tobashi, literally ‘jumping’ but for some reason was called ‘flying’ in the English-language media.

Tobashi today is defined by Wikipedia as a financial fraud through creative accounting where a client’s losses are hidden by an investment firm by shifting them between the portfolios of other (genuine or fake) clients. 

But it those days it was not called a ‘financial fraud’.

It was seen as the only way for the banks and securities companies to get land speculation losses off the books of client companies. 

Without ‘tobashi’ the scale of economic collapse in Japan would have been horrendous.

Tobashi – a ‘crime.’?   

But ‘tobashi’, while messy, made sense.  All speculative collapses have an end. Eventually the collapse of land prices in Japan would reach a level where buying land was bound to be profitable.

Eventually there would be a day when buyers would return.  The economy could recover. ‘Tobashi’ would hasten the arrival of that day by softening the initial price collapse.

After the recovery the land could be sold.

But that day was not allowed to arrive.  Mr Takenaka and his friends suddenly discovered (with help of US friends also) that tobashi was a financial crime.

In future all land holdings would have to exposed and priced at something called ‘mark to market’ i.e. would have to be priced at the prices of the market of that day. 

And since the prices of land were already at close to bottom (and would have recovered if given time but time was not given), land prices resumed their collapse and the accounts of many firms showed massive deficits pushing firms into bankruptcy. 

For Japan, and the world, the collapse of Olympus would have been a tragedy of immense proportions. Olympus is not just a maker of well-known hand cameras.  It also makes the camera that can be inserted into the human body to detect early signs of illnesses – cancer, polyps and so on. 

It has saved millions of lives around the world as a result. It too had to be saved.

And to be saved it could not rely on the government that had already created its problems.  It had to rely on shady brokers who could promise hidden ‘tobashi’ and other gimmicks to disguise land prices on its books. 

Enter Mr Woodford

To navigate its way through all these problems the firm decided to appoint a foreigner as  company president for six months, and then as chief executive officer.

The idea was that since Woodford knew no Japanese and not much about accounting they could continue their efforts to disguise their problems of disposing of land assets, then valued at more than 4 billion USD. 

The idea was a failure. Inevitably Woodford would start to ask questions, and when he did they had to ask him to leave.

But he was not going to leave quietly.

He leaked his story to several English-language financial journals.  Sharing Woodford’s ignorance of what had actually been going on they set out to expose this ‘biggest Japanese financial scandal in history.’

Meanwhile Woodford set about making a small (large) fortune for himself by suing for wrongful dismissal and then getting onto the lucrative business lecture circuit with his tearful tales of how he was dismissed for his gaijin bravery in trying to expose the deep corruption in Japanese financial reporting.

The ignorant Western media loved the story.  According to the Wall Street Journal, Woodford had single-handedly exposed “one of the biggest and longest-running loss-hiding arrangements in Japanese corporate history”.

The Financial Times was so excited it started to run its own lecture circuit on how it too had helped expose this ‘biggest scandal in Japanese history.’  Whistle-blowers with the bravery of Woodford were needed. 

Eventually the fuss died down. Fortunately Olympus had the reserves needed to tide itself over this ’scandal.’  The world would be a much poorer place otherwise.