NO. 3 — January 23, 1998


Feature Article



Last year's scandals linking executives of major Japanese firms with sokaiya (corporate extortionists) revived public debate about Japan's approach to corporate governance. The speculative "bubble economy" of the late 1980s had raised questions about the adequacy of companies' systems of checks and balances and highlighted a deterioration of corporate ethics. In the early 1990s, the government and the business community attempted to crack down on executive malfeasance and mismanagement through new laws, beefed-up internal oversight functions and reinvigorated corporate codes of conduct. These reforms apparently were not very effective — or not implemented effectively — judging by the December 1997 guilty plea of a racketeer who admitted to extorting the equivalent of more than $100 million from the country's four largest brokerage houses and a major bank.

The unprecedented scope of last year's sokaiya scandals — nearly two dozen senior executives from 10 companies have been arrested so far — prompted renewed calls from both cabinet members and leading business organizations to corporate Japan urging it to sever ties with sokaiya. The Diet followed suit in late 1997, passing legislation that imposes stiffer penalties on corporate extortionists. As part of a broader examination of the management practices that gave rise to the egregious conduct, government leaders and business executives are considering various measures aimed at improving the disclosure of information to shareholders, providing more rigorous scrutiny of company expenditures and altering the responsibilities and the makeup of corporate boards of directors.

Although a few companies already have taken steps to create a more transparent management system, experts doubt that sweeping reforms in corporate practices will occur overnight because of the depth of the vested interests in the status quo. At a minimum, full implementation of Big Bang financial reforms and increased involvement by domestic and foreign institutional investors will be necessary to push the rest of corporate Japan to higher standards of accountability.

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Weekly Review

Yen Dropped Against Dollar, Rose Against Asian Currencies In 1997 by Douglas Ostrom

Last year marked a change in the yen's relationship with the currencies of Japan's Asian trading partners. Previously, the value of most Asian currencies tended to be tied to that of the dollar. As such, they moved up or down together with the American currency against the yen. In 1997, however, this pattern was broken. Asian currencies lost ground against the yen, which, in turn, depreciated vis-a-vis the dollar.


Finance Ministry's New Bad-Debt Numbers CloudNot ClearThe Picture by Jon Choy

In an effort to counter doubts about the fundamental health of the nation's financial system, Ministry of Finance officials have released a new survey of banks' loan portfolios. The results paint a far less flattering picture than data announced just a few months ago, but the bottom line remains that banks as a group basically are sound. Not surprisingly, investors reacted skeptically and negatively to the new numbers, pushing Japanese stock prices down across the board. MOF and the ruling Liberal Democratic Party are rushing to find ways to stem the erosion of investor confidence, but many observers have characterized the measures unveiled so far as "gimmickry." With the economy's future course in doubt, LDP leaders, MOF policymakers and bank executives are seeking ways to reverse the negative trend of developments. Many analysts fear, however, that because of the rapidly approaching end of the fiscal year and the midyear elections for the Diet's upper house, vested interests will try to slap a Band-Aid on the bad-loan problem rather than seek a real, long-term cure that might be economically and politically painful.


Hashimoto Opens Challenging Diet Session by Barbara Wanner

Faced with both domestic and international pressure to boost Japan's stalled economy, Prime Minister Ryutaro Hashimoto opened this year's 150-day regular Diet session January 12 by vowing to do his utmost to stabilize Japan's financial system and jump-start the economy. "It is my strong resolve to prevent a financial and economic panic sparked by Japan, to stabilize the financial system, which is the artery of the economy, and to regain confidence in the future of the economy," Mr. Hashimoto told the assembled legislators.


White House Calls For Greater IMF Funding; Will Congress Answer? by Eric Altbach

With Asian markets still beset by a crisis of confidence, the Clinton administration has begun to argue the case for strong U.S. global leadership to a jittery world and a skeptical Congress. In what was viewed as an important policy address, Secretary of State Madeleine K. Albright told the Washington, D.C.-based Center for National Policy January 13 that the White House places top priority on seeking congressional cooperation for additional funding for the International Monetary Fund and the United Nations. Simultaneously, Deputy Secretary of the Treasury Lawrence Summers and Secretary of Defense William Cohen were in Asia reassuring leaders there that the United States would continue to play a constructive economic and security role in the region. These efforts are part of a broader White House strategy to demonstrate a U.S. commitment to help Asia recover from its continuing economic troubles. However, Capitol Hill's early criticism of the IMF-led bailouts of Thailand, Indonesia and South Korea may signal a tough road ahead for President Clinton's foreign economic policy agenda.

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