A Current Look At Japans Financial And Political Risk
A global company faces a number of different types of risks-economic, legal, political, and competitive. The nature and severity of such risks are not the same for all countries. A global company is in a position to manage such risks effectively by planning and implementing strategies aimed at diffusing risk. By keeping a breast of news-breaking developments, and not easily forgetting the past, an international company will have the ability to achieve successful use of strategic risk management in the global business environment.
In the past five years, much to their disgrace, Japan has fell victim to numerous financial scandals. In addition, within the past month of April their devoted leader, Prime Minister Keizo Obuchi, suffered a life-threatening stroke. These significant events disturbed the global economy to a great extent and brought a newfound appreciation for global strategic risk management. For those International companies, with operations in Japan, that were able to effectively manage their assets amongst the arising developments were then able to avoid, or limit, risk exposure. For those who were unable to strategically manage their risk exposure the consequences were severe.
In October of 1995 the details of the Japanese banking scandal began to unravel as Toshihide Iguchi’s, an employee of Daiwa Bank, testified to U.S. District Judge Michael Mukasey. Not only did Toshihide Iguchi pleading guilty to covering up $1.1 billion in losses he had incurred Daiwa Bank’s New York operations, he also told of how he had received more than $500,000 in compensation for such a scandalous task. This development astonished the entire world and would prove to almost destroy the once strong reputation of the Japanese banking industry.
He went further in his testimony to implicate that senior executives, at the world’s 13th largest bank, were involved in a conspiracy with him to keep the catastrophe hidden from the U.S. Federal Reserve Board. Toshihide Iguchi’s implications and testimony described how Japanese banks had avoided divulging the true extent of what is believed to over a trillion dollars in bad loans made by the Jusen. The Jusen is a group of 7 Japanese housing and loan companies that were created in 1970 to provide loans to Japanese citizens that wished to purchase homes. These Japanese companies were also accused of loaning the money to real estate speculators that were linked to the infamous “YAKUZA, known by the Japanese for racketeering.
Though five years have gone by the exact value of the bad loans is still not known, it is believed that housing loan companies were crushed in the early 1900’s as bad loans rose to at least $77 billion and accounted for more than 75% of their total portfolio. Daiwa bank and the Ministry of Finance of Japan were accused of waiting too long to notify the U.S. of the losses, for fear that the financial-market anxiety would raise question about the Japanese banking stability. The Japanese answer to the problem was to try and hide the losses using shell companies.
Furthermore, these shell companies are only the tip of the iceberg. According to the Ministry of Finance, the official bad dept of the whole Japanese finance industry was reported at $349 billion, however, expert speculations reach up to 1 trillion. It appears that most the loses were incurred when executives within the Japanese finance industry failed to clear from their books huge amounts of real estate that have lost value when property market of Japan collapsed in the early 1900’s.
The Prime Minister, at the time, Ryutaro Hashimoto originally postponed debates on what had been a no-questions-asked $6.85 billion bailout of the housing-loans companies. However, to help solve the problem the government was forced to spend billions of dollars and 21 Japanese banks were forced to write off an astonishing $106 billion in bad loans. This helped to alleviate most of the pressure on the financial industry, however if it would have failed, the U.S. House Banking Committee and the Fed could have been forced to help in the liquidity crisis of U.S. subsidies of Japan’s banks. This move would have placed the U.S. taxpayers in the inexplicable position of bailing out the Japanese financial institution with taxpayer money.
As the financial institutions of Japan were seeking help, the cost of doing business for Japanese banks rose. Japan’s premium on loans rose from between 0.3% to 0.04% up-to 0.08% almost eliminating the chance of banks receiving international interbank financial aiding. As non-Japanese financial institutions started to become sufficiently alarmed about the Tokyo system’s shortcomings, some became so risk adverse they decided to refuse the loans to Japan’s banks altogether. Cutting off Japan’s credit would no doubt result in a global catastrophe. If Japanese banks were to lose their access to credit, and hence their ability to do business, they would have been forced to sell U.S. securities and bonds. This would have triggered a sell-off in the securities and bond markets, thus raising interest rates and causing inflation and furthermore the destabilization off the U.S. financial system.
Everyone around the world was forced to reassess Japan’s financial management ability and capability to control this particular situation. The developments only increased the distrust of Japanese banks and caused the financial risk of Japan to skyrocket.
In January of 1999 the Japanese finance industry made the worldwide news with yet another scandal. This time however the Japanese banking officials were not concealing the losses of their companies but attempting to bribe officials of Japan’s ministry of finance. A raid of the ministry headquarters lead to two ministry bureaucrats known as “Mof-tan” were arrested for allegedly accepting bribes. These elite men were apart of the ministry of finance’s inspection department. With Japans scandalous banking history, namely the banking scandal of ’95, it is obvious why the banks would feel it necessary to provide incentive for inspectors.
The Mof-tan are responsible for contacts with Japans Ministry of Finance and act as a link between the Ministry of Finance and some of the world’s most powerful banks, also Japanese. The term “Mof-tan” combines the ministry’s acronym with part of the Japanese word “tanto”, meaning “person in charge”. If the banks of Japan were able to persuade the “person in charge” they then would have the ability to change the rules of the game in which they play, and without a doubt these adjustments would work in their favor. This type of scandalous action would not only create an unleveled playing field but eliminated the Japanese method of monitoring and obtaining information about the validity and integrity of Japanese banking policies. The only answer to the problem would be to eliminate the Mof-tan and create a new way to gather information about the MOF’s policies.
The banks were all accused of lavishly entertaining MOF officials with diversified forms of “red light district entertainment”. It appears that in the midst of their enjoyment they released classified information on approaching inspections, mainly inspections due to the banking scandal in 1995.
Naotaka Saeki, chairman of the Federation of Bankers Associations of Japan and also a former MOF-tan himself, stated that as Japan’s financial deregulation advanced the need for such liaisons was diminishing. For an additional twist, Saeki was the current president of the Sanwa Bank Ltd, who along with Sumitomo Bank ltd, Asahi Bank Ltd, Dai-Ichi Kangyo Bank Ltd, Bank of Tokyo Mitsubishi Ltd, and the collapsed Hokkaido Takushoku Bank Ltd. were all involved with the in this very same bribery case.
The chairman of the Federation of Bankers Associations of Japan and president of Sanwa Bank Ltd, Naotaka Saeki, was proposing a remedy to the same problem that his management caused. He went even further to say that he did not see the wining and dining as bribes because the entertainment was customary in Japan business. He was later forced to resign from both positions amongst the allegations. Next the Bank of Tokyo, Mitsubishi Ltd, reported that president Satoru Kishi chose to resign in February of 1999 and like was also forced to resign as the appointed chairman of the Federation of Bankers’ Associations of Japan that replaced Naotaka Saeki. In addition, the ministry answered the allegations and developments in the case as the finance minister Hiroshi Mitsuzucka was forced to step down from office. However, replacement of top executives will not guarantee that the unethical practices of the Japanese financial industry will ever end.
On April 3, 2000 the Japanese Prime Minister Keizo Obuchi suffered a stroke and entered intensive care in a Juntendo University Hospital, a downtown Tokyo hospital. After graduation from Waseda University, A 26-year-old Obuchi began his career when he inherited, as is custom, the seat in Japan’s powerful House of Parliament from his father. Keizo Obuchi has had more than 30 years experience in politics, first serving, as a Cabinet official in 1979, and in 1993 became the Liberal Democratic Party’s secretary-general. In addition, Obuchi became the Prime Minister of Japan in 1995 and has struggled to bring Japan’s economy back on track. The 62-year-old Obuchi provided Japan with a record economic stimulus plan, including public works and tax breaks this bailout for Japanese banks in 1999. Obuchi made a lasting impression on Japan and it’s economy. He faced a deep recession, record high bankruptcies, rising unemployment and a financial sector paralyzed by up to 1 trillion in bad dept.
Obuchi’s hospitalization, if prolonged, is Obuchi is credited with the recovery of the world’s 2nd largest economy from over a 10-year slump. Not expected to have an instantaneous impact on the spending plan goes without mentioning the designed to fuel Japan’s economy through recovery. Obuchi became ill in the midst of dealing with the breakup of his coalition. Although the ruling coalition has broken up the Liberal Democratic Party is not expected to loose any of its majority power within the Japanese Parliament. Furthermore, Obuchi’s reputation has been tarnished with recent polls showing a decline in support for his Cabinet.
Shortly after Obuchi’s stroke the Chief Cabinet Secretary Mikio Aoki was appointed caretaker prime minister and went right to work. However, on April 4, 2000, as an end to Obuchi illness was not seen in the near future the Parliament began discussions on who might permanently replace Obuchi as the prime Minister. Ruling politicians are in a hurry to appoint a successor to Obuchi, which must be approved by parliament, as current events in Japan and other pressing issues need to be dealt with quickly. Yoshiro Mori, a strong participant in the Liberal Democratic Party, was speculated to be the first runner up to the Prime Minister thrown.
As expected, Yoshiro Mori was elected on April 5, 2000 and sworn in as the 55th Prime Minister of Japan. He had received 335 of the 488 votes cast in Japan’s Lower House, and 137 of 244 ballots cast in the upper house. Although Mori lacks expertise in international policies he has a diverse experience within the Cabinet, for example, education, construction, and even with a lack in experience he was head of International trade and Industry. Mori was holding the secretary-general chair of the party, which is second-in-command, and also holds similar views and policies as Obuchi, so when elected little is expected to change in the plans of the Japanese Government. Few people believe that the transfer of power will have any major effects on Japan’s current position, and Mori vowed not to shake up the Japanese Cabinet and to continue with Obuchi’s economic plan. “My biggest responsibility is to continue economic revitalization … making the utmost efforts to set the Japanese economy securely on the path of growth,” Mori told reporters.
Bibliography
SOURCES
1. Time Magazine
October 30, 1995 Volume 146, No. 18
2. Time Magazine
April 8, 1996 Volume 147, No 15
3. Scandal lands Japan banks’ go-betweens in a tight spot
4. Japan scandal may claim another top banker
CNN.com ASIANOW:
5. Japans PM suffers stroke, replacement announced
6. Japanese PM Obuchi remains in coma, Cabinet expected to resign
7. Japan’s Parliament elects Mori as prime minister
8. Mori begins dealing with Japan’s business
