No. 22 — June 9, 2000

Feature Article

ECONOMIC PROBLEMS, POLITICAL CHANGES CHALLENGE
JAPAN'S COZY BUSINESS-GOVERNMENT TIES

Barbara Wanner

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Summary

Most observers of Japan's post-1945 transformation from a devastated, war-torn nation into the world's second-largest economic power have attributed this stunning turnaround in large part to the extraordinary level of cooperation between business and government in pursuing the shared goals of growth and prosperity. Analysts variously term the close relationship among corporate Japan, the bureaucracies that regulate big business and the lawmakers who represent these interests as Japan, Inc. or the "iron triangle." While this alliance served Japan well from the 1950s through the 1980s, the bursting of the economic "bubble" at the start of the 1990s and the nation's prolonged recession have both revealed and magnified the system's flaws.

The cozy three-way ties have bred recurrent corruption, as evidenced by a spate of political scandals in the last decade and more recent examples of bureaucratic graft. Equally important if not more so, the iron triangle, which was geared toward taking care of bureaucrats, politicians and business executives alike, rendered Japan incapable of a dynamic response to the fast-changing global economic developments and technological advances of the new millennium. As a consequence, much of corporate Japan now is scrambling to catch up with its major industrial brethren, just as it was in the immediate postwar period.

Following a 1993 rebuke at the polls, in part a reaction to politicians' corrupt ways, lawmakers made a show of cleaning up their side of the triangle by enacting a package of political reforms the following year. In mid-1999, the Diet approved a plan designed to streamline and reorganize the government, ostensibly to liberate business from the bureaucracy's heavy regulatory hand. Also last year, the nation's elected representatives passed a new ethics code for bureaucrats aimed at reducing the potential for bribery and other types of business-government collusion.

Notwithstanding rhetoric about reform and even some action, these changes, in and of themselves, do not seem to have fundamentally altered the conduct of politics or the nature of business-government relations. The Liberal Democratic Party appears to be just as driven by the desire to amass and hold power as it was before the passage of the 1994 reforms, which sought to end money-centered, interest group-driven politics. In fact, in the weeks leading up to the June 25 lower house elections, some prominent LDP lawmakers have actively worked to derail or to defer deregulatory initiatives that would hurt their traditional support groups.

By the same token, some experts have observed strains developing between corporate Japan and its former protectors in the political establishment and the bureaucracy. Business contributions to political parties have sagged since 1994, a trend that the media has attributed to recession-related belt-tightening. However, insiders link these cutbacks to the private sector's rising disillusionment with the LDP's ability to solve the nation's economic problems and to address the increasingly diverse agenda of big business. The twin pressures of recessionary conditions at home and growth and technological advancement abroad have splintered and differentiated corporate Japan's interests and priorities, they say. Concurrently, the same competitive forces have created new requirements in the private sector for information and action that Japan's lumbering bureaucracy cannot provide quickly enough.

Judging by the recent precipitous slide in Prime Minister Yoshiro Mori's approval ratings, voters who participate in the late June lower house elections conceivably could upend the political order, which would add to the pressure on Japan, Inc. However, a good portion of the electorate simply may stay home, turned off by the lack of credible leadership alternatives, while LDP stalwarts as well as committed backers of its governing partners, the New Komeito and the New Conservative Party, flock to the polls to ensure perpetuation of the status quo. Regardless of which party comes out on top, revolutionary change is not about to happen in Japan. The iron triangle eventually must be dismantled if the nation is to remain a world-class competitor, but the bedrock conservatism of the Japanese will slow the reform process.

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Policymaking The "Old Way": Consensus, Connections And A Compact

The typical swirl of activity in and around the hearing room of the powerful House Ways and Means Committee when Congress is in session — which involves a phalanx of lobbyists attempting to press their respective cases on legislators, congressional staff and often administration officials — provides a good representation of business-government relations in the United States. The atmosphere is highly competitive, as individual companies and industry groups seek to further their own agendas, and the tenor of the discussions often is combative. Each side believes that it knows what is best for the private sector and, in turn, for the nation. While legislative action inevitably requires compromises among all the parties concerned, neither side agrees to the final policy product without putting up a good fight. In short, a fundamental antagonism underlies the relationship between American business and government.

The situation in Japan could not be more different. For most of the 20th century, business-government relations were cooperative for various historical, cultural and societal reasons. Although there have been signs in the last few years that the alliance was changing, experts continue to assert that Japan remains a "corporate state in which government works hand-in-glove with large corporations … to ensure their strength and protect their interests over those of consumers, workers or other stakeholders in the system."1

In terms of historical underpinnings, these analysts point out that, in sharp contrast to the U.S. tradition of vigorous antitrust regulation, modern Japanese society never has been uncomfortable with large concentrations of economic power. The prevailing attitude held that strength derived from size and that less competition meant "more" — more wealth, more power and more influence. During the prewar era, in fact, the government actively promoted cartelization and the formation of family-run zaibatsu (financial cliques) as a means of fueling economic modernization by minimizing the disruption caused by intense competition. Although occupation authorities dismantled these groups in an effort to disperse economic power, by 1952, firms basically had reamalgamated to form the keiretsu (corporate groupings) that exist to this day.2

Some commentators further suggest that the Japanese proclivity to place the needs and the desires of the group over individual interests, the related consensus-building approach to decisionmaking and the preference for harmonious rather than competitive relationships provided a social basis for the huge keiretsu and fostered cooperative relations within and among them.3 Perhaps not surprisingly, these very cultural attributes and traditions also brought business and government together as allies rather than as adversaries. Civil servants and elected officials regarded corporate Japan as the engine of the economy, a machine that must be oiled, serviced and generally maintained well if the nation was to advance economically.

Until the 1980s, the government not only provided protection from foreign competition but also offered subsidies, tax breaks and other forms of assistance, particularly to industries that powerful bureaucrats had decided would be "winners." Most experts believe that Japan is the colossus it is today because of the extent to which the country's cadre of civil servants planned and controlled the economy from the 1950s through the 1970s.4

Corporate Japan, in turn, fostered this collaboration through generous campaign contributions, primarily to the pro-business Liberal Democratic Party. With the exception of a brief period in the mid-1990s, the LDP has been in power since the late 1950s, either governing on its own or as the dominant member of a coalition.

Companies also nurtured ties with the ministries and the agencies that both developed and implemented regulations important to their operations, in part through the so-called amakudari (descent from heaven) tradition. This refers to the placement of retiring bureaucrats in associations or firms in the industries they once regulated. The practice is aimed at improving the hiring company's access to regulatory authorities as well as enhancing the bureaucracy's influence over corporate behavior. In short, big business, the government and political parties formed a compact of sorts — often referred to as the "iron triangle" — designed to protect and further each other's interests.

 

Traditional Lobbying Activities

Japan's constitution gives primary lawmaking powers to members of the Diet. But, in reality, bureaucrats have taken the lead in developing the statutes that they ultimately administer. The phenomenon of what one analyst describes as the "ascendant position" of civil servants vis-a-vis legislators stems from a tradition of bureaucratic dominance in Japan and the related dearth of policy development resources available to most parliamentarians.5

Bureaucrats have served both as the masterminds of most legislation and as the drafters of the specific language. Over time, they developed various strategies to keep the upper hand in the policymaking process. For example, civil servants often wrote legislation that was deliberately vague or difficult to interpret. The resulting lack of transparency gave them greater discretion in implementing rules and regulations. It also necessitated fairly frequent consultations between business and government.

Through this private-public dialogue, bureaucrats developed a better sense of whether some policies would be more effective than others in attaining certain industrial or broader economic goals. For their part, businesspeople gained a better understanding of how officials might implement regulations. Cultivating relations with key government figures also afforded them a chance to affect an outcome more favorable to the interests of their company or industry.6

Thus, unlike in Washington, where Congress is the hub of business lobbying, ministries and agencies, specifically midlevel officials, are the focal point for this activity in Tokyo. According to longtime observers of business-government relations in Japan, companies typically have sought to influence the policymaking process in several ways:7

  • Top-Down Pressure. Through the amakudari system, companies have relied on bureaucrats-turned-executives to open doors and build trust at the kyoku-cho (bureau chief) level in a particular ministry. The National Public Service Law bars bureaucrats for two years after retirement from taking jobs with firms that come under the authority of their former bureaus or divisions. This waiting period may be waived, however, at the request of the retiree's agency. Judging by data gathered in recent years, more often than not, that has been the case.8
  • Bottom-Up Pressure. Private-sector representatives also have used politicians to press their case with a particular ministry or agency. Specifically, they have offered campaign contributions and other benefits (golf outings, for instance) in an effort to develop close ties with members of a particular LDP zoku-giin (policy "tribes").

    Established in the early 1970s by then-Prime Minister Kakuei Tanaka ostensibly to check the power of the bureaucracy and to allow for a stronger Diet voice in policymaking, each zoku-giin has developed a specialized knowledge of the affairs of a particular ministry or agency. The policy support groups then serve as brokers for the industries or the groups affected by the policies of that government organization.

    Presumably, zoku members base their arguments for or against a particular policy or regulation on sound business and economic reasoning. However, politicians very often sweeten their cases by providing notoriously underpaid bureaucrats cash gifts and other amenities to support "life needs," such as costs related to weddings and funerals or tickets to sporting events. These expenses, in turn, are shouldered by business constituents; the zoku member simply serves as a go-between.

  • Business Organizations. Japan's four trade associations — Keidanren (Japan Federation of Economic Organizations), Nikkeiren (Japan Federation of Employers' Associations), Keizai Doyukai (Japan Association of Corporate Executives) and the Japan Chamber of Commerce and Industry — provide yet another way for corporate Japan to push its case for new or revised policies with midlevel bureaucrats. These broad-based trade groups represent the elite corporate view on a wide range of economic policy issues in Japan and, in one analyst's view, comprise the very heart of Japan, Inc.9

With a membership limited to the largest and most powerful domestic corporations as well as trade associations representing key industries, Keidanren far and away is the most influential and prestigious of these groups. Its numerous policy committees delve into issues as wide-ranging as economic and administrative reform, competition policy, taxation, land and housing policies, trade and investment, and corporate behavior. Their meetings often are attended by politicians and bureaucrats. It is through such gatherings that Keidanren conveys its members' positions on key issues to representatives from the other two sides of the iron triangle. In recent years, Keidanren has backstopped this effort by issuing various policy papers.

Keizai Doyukai is considered the second most influential business group. Unlike Keidanren, it was formed to enable the nation's business leaders to gather and discuss corporate issues from a big-picture perspective, not as representatives of their companies' particular interests. Executives from Japan's corporate giants dominate the group — Yotaro Kobayashi, chairman of Fuji Xerox Co., Ltd., is Keizai Doyukai's current chief — although representatives from smaller companies also participate in the meetings.

Nikkeiren distinguishes itself by focusing on labor-management relations and social issues. The Japan Chamber of Commerce and Industry serves as the voice of small and midsize companies. Notwithstanding its limited area of interest, observers say that JCCI has been able to hold its own in broader policy debates.10

  • Industry Associations. Complementing the lobbying efforts of specific businesses, Japan's more than 3,000 industry associations perform various functions both for the companies they represent and for the bureaucracy. These groups not only present industry views on policy matters to bureaucrats and serve as conduits for information between ministries or agencies and companies, but they also often help to carry out the functions of government. Despite its extraordinary power and influence, the central government's bureaucracy is not large in terms of staff and resources. As a result, industry associations have stepped in to develop standards and certification criteria and to collect market data and information about foreign technologies, among other functions.11

    The prominence and the effectiveness of industry associations has enabled — and been enabled by — the high degree of business-government cooperation. The Ministry of International Trade and Industry, for one, has taken advantage of its close working relationships with these groups to convey administrative guidance, a term that broadly refers to the government's nonbinding instructions to companies aimed at fostering (or impeding) the development of certain industries.

  • Academics and Specialists. On occasion, corporate Japan has relied on academicians and other specialists to bolster its case for a policy change or other innovation. Firms typically will underwrite a research project by a recognized expert, usually from a prestigious Japanese university. Corporate flacks often will hype the report to the media in an effort to generate awareness and support for the findings. The final product then is presented to the relevant ministry or agency through any of the above means.
  • Old School Ties. More so than in Western cultures, Japanese society places a premium on building and maintaining relationships. It is a time-consuming process but one the Japanese regard as imperative for creating a foundation of trust between parties. It is no surprise, then, that friendships developed in college often lead to durable and mutually beneficial professional relationships capable of withstanding tough times in the marketplace or in Nagata-cho (Japan's Capitol Hill).12 In fact, once out of school, members of a particular graduating class will make it a point to seek each other out, whether it be to work out a business deal or to lobby the government, because of the tacit understanding that they share a common history.

Moreover, Japanese industry giants and the more powerful bureaucracies — the Ministry of Finance, the Ministry of Foreign Affairs and MITI — all actively recruit from the nation's top schools. Not surprisingly, members of the Tokyo University graduating class of 1965, for example, can be found in top positions in business, government and politics. As everyone knows, when the name of the game is access and influence, a former classmate always will enjoy the inside track. Few people have any compunctions about exploiting old school ties to further their corporate interests or satisfy their political needs.

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Recurrent Graft, Economic Problems Shape Reform Initiatives

While credited with rebuilding a devastated nation and propelling it to new economic heights, Japan, Inc. nevertheless had a dark side. With its emphasis on cooperation and insider ties, the iron- triangle arrangement bred recurrent corruption in both politics and the bureaucracy. Former University of California political scientist Chalmers Johnson has gone so far as to describe the system as "so corrupt that it seem[s] beyond reform."13

 

Business As Usual

Mr. Johnson zeros in on the zoku-giin as the agents for much of the graft that has pervaded Japan. Given the money-centered nature of electoral campaigns,14 politicians always are starved for cash. The policy tribes quickly found that they could attach a price to their brokering efforts on behalf of companies. Rather than lobby ministries and agencies for regulatory changes, zoku-giin helped businesses get around the rules in return for bribes. But to aid companies this way, the policy tribes had to pay off key civil servants. As observed by Mr. Johnson, the zoku-giin "tended both to corrupt the bureaucracy and to be corrupted by the companies the bureaucracy was charged with supervising."15

The apparent absence of any stigma attached to this behavior astounds many American observers. Although technically illegal, acts of bribery, insider trading and the offering of such payoffs as extravagant meals, entertainment or the use of resort facilities came to be accepted as part of the system. "Corruption in Japan is in a sense legitimized by its systematic perpetration," according to Karel van Wolferen, another noted commentator on Japanese business and government. "It is so highly organized and has become so much a part of the extra-legal ways of the Japanese system on so many levels, that most citizens … do not recognize it for what it is," he continues.16

 

Busted

This is not to suggest, however, that politicians and government officials never get caught with their hands in the cookie jar or escape paying a steep price for their apparent greed. Mr. Tanaka, the force behind the zoku-giin, was toppled by his own creation. The former LDP kingpin was convicted in 1983 of accepting bribes from Lockheed Corp. in return for influencing the Ministry of Transport and All Nippon Airways Co., Ltd. to purchase Lockheed aircraft.

Another scandal that brought down a government, the Recruit Co., Ltd. influence-peddling affair of the late 1980s, embroiled senior LDP officials and key bureaucrats in allegations of bribery and insider trading. This instance of graft so enraged the public that voters retaliated against the Liberal Democrats in the July 1989 upper house elections, costing the ruling party control of that chamber for the first time in its 34 years in power. Then-Prime Minister Noboru Takeshita and his Finance minister, Kiichi Miyazawa, were forced to resign to accept responsibility for the debacle.17

Historical accounts might show that the catalyst for the events that culminated in the LDP's devastating losses in the July 1993 lower house elections may well have been the revelation that one of the ruling party's most influential members, Shin Kanemaru, had received hundreds of millions of yen in unreported political contributions from a company with connections to a crime syndicate. Coming barely three years after the Recruit affair, the admission by the former LDP vice president that he knowingly had violated the Political Funds Control Law by accepting ¥500 million ($4.5 million at ¥110=$1.00) from Tokyo Sagawa Kyubin Co., Ltd. suggested that ruling party politicians held themselves above the law and enjoyed the money and the other perquisites of a privileged class.18

Bureaucrats, too, have had their comeuppance. The Finance Ministry, regarded as the most powerful of the bureaucracies and staffed by the cream of the crop from Japan's leading universities, was knocked from its pedestal in January 1998 when the Tokyo Prosecutor's Office swooped down on headquarters to arrest two Banking Bureau officials on charges of accepting bribes from commercial banks. This case precipitated a series of top-level resignations as well as the suicide of a midlevel official. Equally significant, the MOF scandal revealed that even such key players in the banking industry as Bank of Tokyo-Mitsubishi, Ltd. and Sumitomo Bank, Ltd. were not above currying favor with selected civil servants.19

Later that year, the Japan Defense Agency also was the target of a probe by the zealous Tokyo Prosecutor's Office. Investigators uncovered evidence of bill-padding by one affiliate and two subsidiaries of computer giant NEC Corp. These companies then attempted to negotiate a reduction in their repayment of overcharges by providing amakudari posts for retiring JDA officials. In the end, several senior JDA officials were forced to resign, as was NEC Chairman Tadahiro Sekimoto, who, after nearly 20 years in the upper reaches of the corporate world, left the company in disgrace.

What set this scandal apart from the MOF affair — and suggested that the public was less willing to look the other way — was the decision by upper house legislators to censure then-JDA Director General Fukushiro Nukaga. Although it was a nonbinding action, Mr. Nukaga had little choice but to resign his cabinet post in disgrace (see JEI Report No. 41B, October 30, 1998).

Yet old habits die hard, particularly when they are ingrained. The NEC scandal apparently was not enough to scare the living daylights out of certain money-hungry career defense officials. Last year, JDA was ensnared in a bid-rigging scam aimed at protecting the shipbuilding units of Japan's titans of heavy industry (see JEI Report No. 43B, November 12, 1999).

 

Public Outcry Intensifies

William Farrell, a former president of the American Chamber of Commerce in Japan, shares the view of Messrs. Johnson and van Wolferen that corruption is an integral aspect of iron-triangle relationships. However, he points out that the Japanese public seems to be more willing to tolerate graft when the economy is humming along and everyone feels secure.20

This may explain in part why voters lashed out at the LDP following the Recruit and the Tokyo Sagawa/Kanemaru scandals. With the economy showing signs of serious problems in the early 1990s, these bribery scandals reinforced the growing perception that the LDP was out of touch with the economic realities of the average person. Corporate Japan was lining the pockets of key figures in Nagata-cho and in the bureaucracy to secure certain benefits, while the employees of the bribers were becoming more concerned about job security. Not surprisingly, worried Japanese began to regard the iron triangle as an unfair arrangement that benefited only an elite coterie of businessmen, politicians and civil servants.

People also were losing confidence in the conventional wisdom that the bureaucracy's close relations with business always produced sound policies. The Finance Ministry scandal seemed to substantiate a view that had been developing at the grass roots that, in truth, these once-vaunted mandarins were no better than anyone else — particularly when it came to managing the economy.

Even before the Tokyo Prosecutor's Office stormed MOF headquarters, the ministry was under fire for pursuing policies that encouraged the speculative "bubble economy" of the late 1980s. Taxpayers also were angry at having to foot the ¥685 billion ($6.2 billion) bill to clean up the mess caused by the failure of seven jusen (housing loan companies) — especially after MOF admitted that it had known for years that the jusen were in trouble but still had done nothing (see JEI Report No. 24B, June 28, 1996).

The bankruptcies in 1997 of several major financial institutions raised further questions about the Finance Ministry's supervisory capabilities. And, MOF's dogged adherence to an austere fiscal policy and its unwavering support for a consumption tax increase in April 1997 — policies that many analysts have argued derailed a nascent recovery — may have permanently tarnished its public image.

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Political Reform

Ever the quintessential politicians, LDP lawmakers want to be reelected and, thus, are constantly assessing their prospects in the next polls. Ruling party leaders realized after the LDP's loss of the upper house in July 1989 that if their party was to remain in the driver's seat, they needed to clean up their side of the triangle. The government of Prime Minister Toshiki Kaifu vowed to tighten campaign finance laws and to reform the multiseat electoral system then in place for the lower house to get at the root causes of the Recruit scandal.

In the ensuing three years, however, the ruling party failed to pass any political reform initiative. It took the cumulative impact of Mr. Kanemaru's downfall, the splintering of the LDP and voters' rebuke of the ruling party in the July 1993 lower house elections to drive home the point that the system had to be changed. Not surprisingly, the government that took office after those polls — an unprecedented coalition of seven non-LDP parties led by Morihiro Hosokawa, a onetime LDP upper house member and a former governor of Kumamoto prefecture — made reform of the electoral system, revisions to campaign finance laws and administrative reform central planks of its platform. Mr. Hosokawa, in fact, vowed to break up the iron triangle, which he referred to as a "hotbed of political corruption."21

Six months after assuming the helm, the "reform prime minister," as Mr. Hosokawa was called, delivered on his promise to enact political reform legislation. The bills generally were aimed at reducing the importance of money in electoral campaigns by limiting corporate contributions to each politician's fund-raising body and providing annual government subsidies to political parties. Toward this end, the package dismantled the lower house's 130 multiseat districts, establishing instead 300 single-seat constituencies and 200 seats awarded to parties according to their proportional share of the total vote. The new system of first-past-the-post races would demand that candidates differentiate themselves based on their policy positions, the drafters of the legislation believed. They also argued that the combined single-seat/proportional-seat electoral framework would allow for greater rotation of the party in power — in short, the LDP no longer could control the government for years on end.22

In practice, however, the reforms have not fundamentally altered the conduct of politics or otherwise changed the political landscape in Japan. While during the past six years, politicians have switched parties like players in a game of musical chairs, these shifting alliances have been driven more by the desire to amass and hold power than by the goal of joining hands with ideologically like-minded individuals.

The LDP's June 1994 decision to align with its longtime political foe, the Social Democratic Party of Japan, and with the left-leaning New Sakigake Party for the purpose of once again governing Japan provided the most striking example of an opportunistic union. Former Prime Minister Keizo Obuchi faced similar criticism when he invited the centrist New Komeito to join the LDP and the right-wing Liberal Party in the ruling coalition last October. Critics charged that the late premier wanted the Buddhist-backed party on board only for its numbers so that the LDP-led government could dominate both Diet houses (see JEI Report No. 39B, October 15, 1999).

Just as important, the new laws have not made running for office any less expensive. In fact, they have had the opposite effect. The decline in contributions to parties from corporate and other support groups has forced candidates in single-seat races to amass their own war chests. In addition, the small size of the 300 single-seat districts compared to the old 130 multiseat constituencies made politics more parochial.23

Another paradox of the single-seat electoral system is that, rather that propel systemic reform, it actually has retarded the process. Given the financial and other demands of mounting this type of race, LDP candidates, in particular, have had to pander to status quo-prone companies and industries that are stalwart supporters because they know these groups can guarantee a bloc of votes.24

 

Bureaucratic Ethics

The jury is still out concerning efforts to clean up the bureaucracy. In reaction to the MOF scandal, the Diet in August 1999 enacted legislation that prevents civil servants from accepting "excessive hospitality and gifts from corporate or other sources." Specifically, the bill requires bureaucrats holding positions of assistant division chief and higher to file reports if they receive gifts or entertainment worth ¥5,000 ($45) or more. Noncompliance is punishable under the National Public Service Law.25

While this law may discourage the sort of behavior that brought down some of the supposedly best and brightest at MOF, legislators failed to address the corruption-breeding amakudari tradition that was a key element of the JDA-NEC scandal. Robert Orr, a former vice president of the American Chamber of Commerce in Japan, has lambasted amakudari, arguing that it has unduly extended the hand of government into the operations of the marketplace. This practice has made it "extremely difficult to perceive" where the private sector ends and the government begins, he has argued.26

The National Personnel Authority has pushed for tighter restrictions on postministry employment for retiring bureaucrats, such as prohibiting retirees from accepting jobs with firms under the jurisdiction of any part of their former ministry. NPA also has proposed that ex-bureaucrats not be allowed to hold corporate directorships for two years after their government service. Even if enacted, these changes would be meaningless if a retiree's ministry requested a waiver, as often is the case now.

 

Administrative Reform

Along with initiatives aimed at addressing the potential for corruption, policymakers and legislators also have sought to reform the central government's administrative structure. Again, the nation's economic problems provided the impetus for this effort. Just as the bursting of the bubble made the recurrence of graft untenable to the public, so, too, did businesses begin to question whether Japan's relatively closed, state-dominated system was in their best interests.

Although executives in the past often complained about the bureaucracy's myriad rules and regulations, they did not gripe too loudly since, thanks to the iron-triangle compact, their companies most often derived important benefits from this regime. With the dogged slowdown of the 1990s and increased foreign competition at home and abroad, a growing number of business leaders came to regard government regulation as braking the nation's recovery and limiting corporate Japan's competitive potential.27

Mr. Hosokawa made administrative reform a national priority when he became prime minister in 1993. He appointed a commission headed by Gaishi Hiraiwa, a former Keidanren chairman, to develop broad principles for the government's reorganization as well as for the economy's deregulation. The Hiraiwa panel issued two reports that, among other recommendations, proposed that more than 500 regulations be eliminated. Not surprisingly, bureaucratic resistance kept these reforms from ever getting off the ground. Civil servants were loath to accept changes that would reduce their power or alter long-established practices that had yielded good results in the past. Even though the economy was in the tank and Japan was falling behind in key technologies, ministry doyens still insisted that they knew better than elected officials or corporate leaders how to run the economy.

Against an increasingly problematic economic backdrop, the Diet in mid-1998 endorsed then-Prime Minister Ryutaro Hashimoto's grand scheme to reorganize and streamline the central government bureaucracy. However, this plan encountered immediate resistance from the LDP and interest groups and generated objections from bureaucrats, forcing Mr. Obuchi to revisit the issue in 1999. At midyear, the legislature approved a compromise arrangement that will take effect in January 2001 (see JEI Report No. 27B, July 16, 1999). Under it, the existing 22 ministries and agencies will be folded into 13 bureaucracies. A Cabinet Office and a Cabinet Secretariat will be set up to strengthen the policymaking capabilities of the prime minister and other cabinet members. The number of ministers will be capped at 17, and the central government payroll will be reduced by 25 percent over 10 years. Last November, the Obuchi cabinet approved and forwarded to the Diet the more than 60 bills required to establish a legal framework for the new bureaucratic structure.

Notwithstanding the ambitiousness of the plan and politicians' rhetoric promising a more responsive, capable executive branch, not a few observers from the business and academic worlds are skeptical that the new organization really will change the way the bureaucracy operates or lead to the dismantling of the insidious iron triangle. Specifically, some critics have argued that while the number of bureaucracies will be cut, the resulting superministries may end up wielding more power that their predecessors.28

Others claim that the restructuring will not change the way the government works, either in terms of regulation or spending. Moreover, administrative reform provides no guarantee that a leaner bureaucracy will engage in more transparent decisionmaking or be responsive to the needs of consumers and other nonbusiness interests. Finally, administrative reform does not address the collusive and often corrupting role played by the LDP zoku-giin. These groups remain alive and well, which means continued opportunities for pork-barrel spending and other initiatives that address narrow constituent needs. In sum, while bureaucrats may find themselves occupying different offices early next year, the relocations will not necessarily alter the way they perform their jobs.

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Business Reevaluates Relationship With Government

Despite the rhetoric about the need to reform Japanese politics, overhaul the bureaucracy and deregulate the economy, too many individuals, interest groups and industries still have a vested interest in maintaining the status quo — at least judging by the disappointing impact of the electoral changes and the uncertainties about the effectiveness of administrative reform. However, experts do discern important changes on the business side of the triangle that, over time, may alter the dynamics of executives' relationships with politicians and bureaucrats.

The twin forces of a long economic downturn and a fast-changing global economy have splintered and differentiated corporate Japan's interests and priorities, these Japan watchers say. They argue that the policy consensus within the business community has eroded. At the same time, the need for information and action exceeds what the old, closed arrangement can provide business in a timely manner.29 In one analyst's view, economic forces rather than politics may be the true agents of change.30

 

Political Contributions

The opportunistic maneuvering and party realignments that have produced six governments in the past seven years but that have failed to significantly open the economy or orchestrate a sustainable recovery apparently have shaken corporate Japan's confidence in its political allies, particularly the LDP. Political contributions to all major parties declined steadily from 1996 to 1998, according to official data (see Table 1).
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Table 1: Political Contributions, 1996-98

(in thousands of yen)

Industry Source

1996

1997

1998

Real Estate/Construction

¥473,650

¥338,294

¥301,714

85.5%

-28.6%

-10.8%

Motor Vehicles

409,800

412,800

270,200

1.2%

0.7%

-34.5%

Electronics/Communications

327,320

306,840

221,920

12.8%

-6.3%

-27.7%

Metals

317,000

133,000

152,000

144.8%

-58.0

14.3%

Trading Companies

149,700

73,200

67,200

n.a.

-51.1%

-8.2%

Oil

112,500

105,000

105,000

-8.8%

-6.7%

0.0%

Securities Companies

103,390

72,450

65,760

-11.7%

-29.9%

-9.2%

Glass

55,000

50,000

45,000

61.8%

-9.1%

-10.0%

Chemicals

50,000

45,000

40,000

66.7%

-10

-11.1%

Banks

35,000

35,000

35,000

0.0%

0.0%

0.0%

Transportation

21,000

0

0

n.a.

--

--

Insurance

0

0

0

--

--

--

Pharmaceuticals

0

0

0

--

--

--

Shipbuilding

0

24,000

0

--

100.0%

--

Machinery

0

0

0

--

--

--

Labor Associations

40,000

0

0

-72.6%

--

--

Others

91,998

79,436

113,036

170.3%

-13.7%

42.3%

Total

2,186,358

1,675,020

1,416,830

-21.7%

-23.4%

-15.4%

Source: Ministry of Home Affairs

The media has attributed the drop-off to recession-related money problems. However, political observers maintain that corporate leaders have some serious doubts about whether the LDP has what it takes to solve the nation's economic problems.31 Admittedly, during the 1998 banking crisis, younger politicians from the LDP and the Democratic Party of Japan, the largest opposition group, distinguished themselves by crafting a bank-rescue plan and a package of financial reform bills. Their efforts demonstrated that elected officials, indeed, possess the expertise and the wherewithal to develop policy independently of ministry mandarins.32 Unfortunately, the hidebound, seniority-based nature of party politics makes it unlikely that these Young Turks will assume leadership roles in the near term.

Moreover, insiders note that the ruling party's internal decisionmaking process is in disarray, in part because of the lack of strong leadership from the top.33 None of Japan's prime ministers in the past seven years has possessed the clout or the will to force through reforms that would have challenged stalwart support groups. The fact that different ministry bureaus and divisions, sensing that their days of omnipotence are waning, also have been pressuring the LDP from different directions in an effort to retain the upper hand on certain policy matters has contributed further to the policymaking confusion and paralysis.34

Moreover, the differentiation of Japanese corporate interests has rendered obsolete the LDP's old formula of crafting proposals that address the broad business spectrum. Given the collision of multiple agendas, the end result, in one analyst's words, is "lowest common denominator policymaking." The lack of substance and weak political leadership not only have created strains between the ruling party and its business supporters, but these realities also have compelled companies regardless of industry to hang on to the money previously earmarked for political coffers.35

 

Cross-Cutting Issues

Corporate Japan's attempt to adapt to new economic conditions also does not lend itself to traditional lobbying activities. The issues that now are important to companies, particularly those representing what has come to be known as the "new economy," are more cross-cutting in nature. For example, policies related to Internet development and use fall under the jurisdiction of at least five ministries: the Ministry of Posts and Telecommunications, MITI, MOF, the Ministry of Construction and the Ministry of Agriculture, Forestry and Fisheries.

As a consequence, companies are finding the amakudari tradition to be far too limiting. Having access to one ministry no longer is sufficient. For the same reason, the zoku-giin will become less important to forward-looking businesses. Moreover, high technology start-ups are not sure what politicians can offer them so they have been reluctant to follow the lead of more traditional companies in building alliances with elected officials.36 Some observers speculate that as the system adjusts to the changing economic environment, it may outgrow at least some of the features that foster graft.

The differentiation of corporate interests also has had a dramatic impact on the lobbying activities of business organizations and industry groups. According to one analyst, Keidanren's influence has waned in recent years, primarily because it has had difficulty forging a consensus among its members.37 Moreover, small groups of companies now often band together to press their specific (usually narrower) agendas. This trend has created more of a business lobbying free-for-all — a dramatic contrast to Keidanren's prebubble heyday when everyone was reading from the same page.

Other experts note that the group's 1994 decision to end contributions to political parties also has hampered its lobbying efforts. Although still a highly regarded organization, most observers concur that Keidanren had no choice but to adapt in order to deal with the representational challenges created by changes in the business and economic landscapes.

Keidanren's exploration of a merger with Nikkeiren represents one such adaptation, they add. Insiders point out that the two groups have nearly identical memberships. Moreover, in recent years, Keidanren has become more active on labor-related matters, while Nikkeiren branched out into macroeconomic and corporate issues. Their union is a natural, according to these observers.

The leading business organization also took a hard look at its lobbying tactics. Recognizing that Keidanren undeniably had lost leverage by discontinuing political donations, the group's leaders embraced a new strategy aimed at both fostering and taking advantage of the shift in policymaking responsibility to the political side of the triangle. In addition to the emergence of policy-savvy younger politicians, cabinet officials now are required to field policy-related questions on the Diet floor. Previously, the most senior bureaucrats in a ministry were on the front line. Moreover, as part of the administrative reform process, the number of parliamentary vice minister positions will increase. These jobs also are held by political appointees.

Keidanren therefore has decided to devote more staff time and resources to drafting legislative proposals and preparing supporting arguments for key Diet members — a practice similar to that of most Washington lobbyists. Unlike the closed, clubby ways of Japan, Inc., the emphasis now will be on providing a service rather than money.

 

Information Needs

Global economic developments have made information rather than cash the more valued currency in corporate Japan.38 For that matter, this resource is coveted by politicians, bureaucrats and almost everyone else these days. The quest for relevant knowledge, however, is further undermining bureaucratic influence over policymaking and business activities. The civil servants that companies previously paid off for important market and regulatory-related information no longer possess what business leaders need.

Increasingly, forward-looking Japanese companies are probing foreign firms or other domestic companies for the answers they seek. According to Andrew Saidel, who has worked extensively with American companies that have operations in Japan, Keidanren chose Pfizer Inc. to participate in its study group on health-care reform over a leading Japanese pharmaceutical manufacturer because the American drug giant brought a global perspective to issues concerning pharmaceutical innovation, pricing policy and clinical development.

Similarly, such U.S. firms as Oracle Corp., PSINet Inc. and WorldCom, Inc. enjoy ready access to leading Japanese executives and policymakers because they have vast global experience and broad insight into communications infrastructure and the development of the Internet.39 This information shortfall as well as the resistance of Nippon Telegraph and Telephone Corp., which dominates domestic communications services, to cutting its internationally high prices have put Japan at least three years behind the United States in information technology, according to conventional wisdom.

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"Domestic" Reluctance

This is not to suggest, however, that corporate Japan is undergoing revolutionary change. In reality, the shifts in business-government relations have been taking place incrementally. They will continue at that pace. As Mr. Farrell observes, "the acculturation process and the way institutions have evolved as a reflection of those traditions hinder the Japanese government or private sector from moving boldly or swiftly."40 Put another way, the iron triangle may be loosening up a bit, but it remains intact.

Mr. Farrell further notes that many Japanese chief executive officers, particularly those in domestically focused, highly regulated industries, have been unwilling to institute sweeping changes within their own organizations. Given their plodding, traditional approach to management, these business leaders are having problems guiding their companies' adjustment to the IT revolution and global economic developments. "If there is a lack of bold political leadership in Japan, the problem is also pronounced within the corporate sector," he writes.41 The LDP's leading money contributors continue to be construction companies — the principal beneficiaries of LDP-led governments' pump-priming public works projects — as well as the steel and automotive producers of the "old economy" (see Table 2).
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Table 2: Examples of Political Contributions in 1998

(in thousands of yen)

Company

Liberal Democratic Party

Democratic Party of Japan

Liberal Party

Total

Toyota Motor Corp.

¥56,300

¥9,100

0

¥65,400

NEC Corp.

40,000

0

0

40,000

Toda Corp. (construction)

32,500

1,110

¥660

34,270

Nissan Motor Co., Ltd.

30,900

3,200

0

34,100

Taisei Corp. (construction)

27,970

1,990

1,190

31,150

Tosa Shimizu Hospital

30,000

0

0

30,000

Nippon Steel Corp.

30,000

0

0

30,000

Industry Group





Japan Iron and Steel Federation

90,000

0

7,000

97,000

Japan Automobile Manufacturers Association, Inc.

85,100

9,100

0

94,200

Japan Electrical Manufacturers' Association

70,000

0

0

70,000

Association of Tokyo Stock Exchange Regular Members

65,760

0

0

65,760

Petroleum Association of Japan

60,000

0

0

60,000

Cement Association of Japan

45,000

0

0

45,000

Japan Petrochemical Industry Association

45,000

0

0

45,000

Japan Chemical Fibers Association

40,000

0

0

40,000

Real Estate Companies Association of Japan

37,500

0

0

37,500

National Association of Shinkin Banks

35,000

0

0

35,000

Japan Department Stores Association

35,000

0

0

35,000

Source: Ministry of Home Affairs

Recent developments provide an illustration. NTT has been fighting efforts to open up the Japanese communications market to increased competition from both domestic and foreign carriers by slashing the fees charged rivals to connect with its local access networks. Its chief bureaucratic ally and protector, MPT, in effect has been carrying NTT's banner in highly contentious negotiations with the United States over the so-called interconnection issue.

The two sides are at an impasse over the extent to which these fees will be reduced and the timetable for implementation. MPT has held out for a 22.5 percent reduction phased in over four years, arguing that anything greater or faster would result in such steep revenue losses for the communications giant's two regional services providers that they would be forced to raise basic subscriber fees, lay off workers or both. The U.S. team is demanding a 41.1 percent reduction by the end of 2000 after originally pressing for a cut on the order of 50 percent by yearend. In recent discussions, though, Washington has sought to split the difference, proposing a two-year phase-in of the 22.5 percent decline, followed by full implementation of the 41.1 percent cut.

Japan is so dug in that most observers doubt that negotiators will reach a settlement of the interconnection issue before the late July summit of the leaders of the Group of Seven industrial nations plus Russia — a stalemate that inevitably will cast a shadow over the event hosted by Tokyo on Okinawa. Moreover, by refusing to meet the challenge of stiffer competition, NTT and MPT are all but guaranteeing that the fight will move to the World Trade Organization, as the United States has threatened (see JEI Report No. 19B, May 12, 2000).

Politicians have not necessarily changed their stripes either. Eyeing the upcoming lower house elections, a number of old-guard LDP members formed a special anti-reform group in the Diet to fight deregulatory initiatives that would hurt their support bases. The most notable member of the caucus is Prime Minister Yoshiro Mori.42 Although he vowed in his early April policy address to push bold structural reforms, it is no surprise that few specifics were mentioned.

As the 2000 regular Diet session drew to a close, this LDP group scrambled to water down or defer a number of deregulation proposals. To protect the owners of mom-and-pop stores, a reliable support base at election time, the anti-reformers fought efforts to deregulate the retailing of alcohol, now restricted to licensed shops. They argued that this change would lead to the domestic dumping of alcoholic beverages.

They also waged a battle on behalf of taxi operators, another longtime constituency. A bill removing the Ministry of Transport's supply-demand adjustment oversight of this industry was watered down by a provision that would allow "emergency adjustment measures" to temporarily restrict new entries and fleet expansions in areas where there is "conspicuous oversupply."43 Responding to pressure from the Japan Medical Association, the LDP also agreed to put off "for further discussion" a proposal that would ease medical insurance regulations. Experts say that the LDP's fight against broader and/or faster deregulation will continue given the changes underway in business-government relations and politicians' increasing insecurities about their support bases.44

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Outlook: Lower House Elections May Cause More Uncertainty

Japanese voters will go to the polls June 25 to elect their lower house representatives. The outcome of this voting is significant because the House of Representatives has the final say in selecting the prime minister, passing the budget and ratifying treaties. In other words, the party or parties that control this chamber govern Japan. Although there currently are 500 lower house members (see Table 3), candidates will vie for only 480 seats. This past February, the Diet enacted a bill that reduces the number of proportional representation seats by 20; these will be the first elections under the new plan (see JEI Report No. 5B, February 4, 2000).
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Table 3: Party Membership in the Diet, June 2, 2000

Lower
House

Upper
House

Ruling Parties

aa Liberal Democratic Party

267

104

aa New Komeito

48

24

aa New Conservative Party

21

6

Opposition Parties

aa Democratic Party of Japan

96

57

aa Japan Communist Party

26

23

aa Social Democratic Party of Japan

13

14

aa Liberal Party

18

0

aa Independents/Minor Parties

10

20

Vacancies

1

0

Total

500

252

Source: Kyodo News Wire Service, June 2, 2000.

The outlook for the LDP and its governing partners is far from rosy, notwithstanding their efforts to protect key constituencies by braking the deregulation drive and providing other help. Mr. Mori's approval ratings took a nosedive in mid-May in reaction to his controversial description of Japan as a "divine nation centering on the emperor" and the LDP's blatant attempt to play on voters' sympathies for the deceased Mr. Obuchi by scheduling the elections on his birthday, among other reasons (see JEI Report No. 21B, May 26, 2000).

Indeed, the LDP may take some hits (see JEI Report No. 22B, June 9, 2000). But the losses will not be so steep that the Liberal Democrats will lose control of the government. In all likelihood, the LDP, the New Komeito and the New Conservative Party will secure at least 241 seats in the new 480-member lower house. Although turned off by Mr. Mori's xenophobic remarks and questionable leadership acumen, disaffected voters probably will stay home rather than "vote the bums out," as is the practice in the United States and other democracies. This behavior is influenced by a national psyche that is apprehensive about dramatic change and, relatedly, the opposition's inability to portray itself as a credible leadership alternative. The projected outcome suggests that the new government will represent more of the same, both in terms of policies and personalities, although it probably will be weaker and more vulnerable than the current triparty coalition.

Japan's leading companies in old-economy industries no doubt will be heartened by this result because they will not feel as pressured to change their ways. The traditional triangular approach to lobbying will continue to serve their purposes. But more forward-looking, globally oriented businesses probably will be frustrated by a leadership arrangement that promises more muddling through. These companies presumably will continue to look outside the bureaucracy and the political world for the information, resources and answers that they need to advance and compete effectively at home and abroad.

By no means does Mr. Mori have a lock on reelection. Some pundits predict that he will be bounced, even if the LDP comes fairly close to securing its 229-seat target. In any event, Mr. Mori's successor is unlikely to abandon the ruling party's preference for relying on fiscal stimulus to fuel the nascent recovery while tackling deregulation and the massive government debt "later." While frustrating and incomprehen-sible to Americans who regard this approach as tantamount to digging a grave, such a prospect may not be all that disturbing to most Japanese. According to some experts, no consensus exists among either the elites or the public about the form that change should take.45 Under these circumstances, business-government relations will continue to evolve — but only incrementally.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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Notes
aaa

1aa William R. Farrell, Crisis and Opportunity in a Changing Japan (Westport, Connecticut: Quorum Books, 1999), p. 114. Return to Text

2aa Ibid., p. 112. See also Douglas Ostrom, "The Keiretsu System: Cracking Or Crumbling?" JEI Report No. 14A, April 7, 2000, for an analysis of the impact of global economic developments on keiretsu. Return to Text

3aa Ibid., p. 11. Return to Text

4aa Alan Rix, "Bureaucracy and Political Change in Japan," in J.A.A. Stockwin et al. (eds.), Dynamic and Immobilist Politics in Japan (Honolulu, Hawaii: University of Hawaii Press, 1989), p. 71. Return to Text

5aa Chalmers Johnson, Japan: Who Governs? The Rise Of The Developmental State (New York, New York: W.W. Norton & Co., 1995), p. 40. Return to Text

6aa See Barbara Wanner, "Financial Scandals Renew Focus On Bureaucratic Power," JEI Report No. 9A, March 6, 1998, for a discussion of the bureaucracy's central role in the policymaking process. Return to Text

7aa Interview with Andrew Saidel, Dynamic Strategies Asia, Leesburg, Virginia, May 17, 2000. Return to Text

8aa A February 1998 Ministry of Finance report submitted to the lower house's Finance Committee indicated that 164 former MOF bureaucrats held jobs as executives or auditors at 128 financial institutions in 1997. The document, however, did not include data on former officials who had taken up advisory positions with financial institutions. This omission suggests that the number of former MOF civil servants who had landed private-sector jobs actually was much higher. See "Amakudari List Reveals Collusion," The Japan Times, February 18, 1998, p. 2. Return to Text

9aa Farrell, op. cit., p. 122. Return to Text

10aa Farrell, op. cit., p. 127. Return to Text

11aa Farrell, op. cit., p. 128. Return to Text

12aa Camille Schuster and Michael Copeland, Global Business: Planning for Sales and Negotiations (Orlando, Florida: The Dryden Press, Harcourt Brace College Publishers, 1996), pp. 160-162. Return to Text

13aa Johnson, op. cit., p. 211. Return to Text

14aa The lower house electoral system that was in place from 1925 to 1994, under which up to five lawmakers were elected to represent each of 130 districts, required candidates to mount extraordinarily expensive campaigns because members of the same party often competed against each other. The emphasis was on the personality of the politician and his or her ability to deliver pork or other benefits rather than on the party's platform or ideas. Thus, a candidate had little choice but to engage in aggressive fund-raising activities in order to set himself or herself apart from the pack. For some politicians, that pursuit led to creative measures that pushed — or even exceeded — the legal limits. Return to Text

15aa Johnson, op. cit., p. 211. Return to Text

16aa Karl van Wolferen, The Enigma of Japanese Power (New York, New York: Alfred A. Knopf, 1989), p. 136. Return to Text

17aa See Barbara Wanner, "Japanese Politics: A New Era?" JEI Report No. 32A, August 18, 1989, for an analysis of the impact of the Recruit scandal and other issues on the July 1989 upper house elections. Return to Text

18aa See Barbara Wanner, "Japanese Politics Enters New Era Of Non-LDP Rule," JEI Report No. 33A, September 3, 1993, for an analysis of the July 1993 lower house elections. Return to Text

19aa Wanner (1998), op. cit., p. 3. Return to Text

20aa Farrell, op. cit., p. 130. Return to Text

21aa Wanner (1993), op. cit., p. 11. Return to Text

22aa See Barbara Wanner, "Political Reform Passage Sets Stage For Shifting Alliances," JEI Report No. 8A, February 25, 1994. Return to Text

23aa See Barbara Wanner, "Lower House Elections Fail To Meet Expectations Of Change," JEI Report No. 41A, November 1, 1996. Return to Text

24aa Saidel, op. cit. Return to Text

25aa "Party Deals Clear Way For 'Ethics' Bill," Asahi Shimbun, August 5, 1999. Available at http://www. asahi. com/english/english.html. Return to Text

26aa Robert Orr, "Japan's Bureaucrats Weave A Choking Web," The Nikkei Weekly, August 19, 1996, p. 6. Return to Text

27aa See Jon Choy, "Administrative Reform In Japan: Tokyo Confronts Downsizing," JEI Report No. 9A, March 7, 1997, for a discussion of the evolution of the national debate on how to transform the government. Return to Text

28aa Farrell, op. cit., p. 164. Return to Text

29aa Saidel, op. cit. Return to Text

30aa Farrell, op. cit., p. 153. Return to Text

31aa Saidel, op. cit. Return to Text

32aa See Barbara Wanner, "Survival Tactics Take Precedence In Japan Politics; Leadership Founders," JEI Report No. 45A, December 4, 1998. Return to Text

33aa Andrew Saidel, "The Business of Politics, The Politics of Business in Japan: Key Trends in a Changing Environment," in Library of Congress, Change in Japan: Implications for U.S. Interests (Washington, D.C.: December 2, 1999), p. 24. Return to Text

34aa Ibid., p. 23. Return to Text

35aa Ibid., p. 24. Return to Text

36aa Ibid., p. 28. Return to Text

37aa Ibid., p. 27. Return to Text

38aa Saidel (2000), op. cit. Return to Text

39aa Saidel (1999), op. cit. Return to Text

40aa Farrell, op. cit., p. 189. Return to Text

41aa Farrell, op. cit., pp. 165-166. Return to Text

42aa Former LDP Secretary General Yoshiro Mori was elected in early April to succeed Mr. Obuchi, who had suffered a stroke (see JEI Report No. 21B, May 26, 2000). Return to Text

43aa Isaya Shimizu and Hitomi Sugisaki, "Is Deregulation Falling Victim To Politics?" The Nikkei Weekly, May 1, 2000, p. 6. Return to Text

44aa Saidel (2000), op. cit. Return to Text

45aa Farrell, op. cit., p. 150. Return to Text

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

Top aaaa Issue Index aaaa 2000 Archive Index aaaa Subscriber Area aaaa Home