ECONOMY-JAPAN: Anxiety Spreads After Fall of Securities Firm

By Suvendrini Kakuchi Reprint | | Print |

Suvendrini Kakuchi

TOKYO, Nov 26 1997 (IPS) - The closure of Yamaichi Securities Co., Japan’s fourth largest brokerage, has not only shaken confidence in the nation’s financial system but stoked fears about the fate of its postwar economic miracle.

Now, one question often being asked is whether Japan — the world’s second largest economy and Asia’s industrialised power — could be the next casualty of loss of cofidence as financial fires burning in the region threaten to blow its way.

Most analysts agree that Japan is vastly different from the South-east Asian economies, and South Korea, which in recent months have been hit by financial turmoil that spread into wider economic ills.

Unlike Asia’s wobbly tigers, Japan has a current account surplus and is a creditor, not a debtor, nation. It has the world’s second largest reserves at more than 223 billion U.S. dollars, unlike South Korea’s depleted funds.

These arguments make for economic logic. Indeed, Finance Minister Hiroshi Mitsuzuka says Japan’s problems are “completely different and separate” from South-east Asia’s. But critics say Japan cannot afford to rest easy because markets and investor confidence do not always work logically.

As news of Yamaichi’s collapse spread, Japanese spokesman Hiroshi Hashimoto said Japan is “going through a period of adjustment because the markets are demanding that we change”. But “psychology can play a role”, conceded Hashimoto, speaking at the Asia-Pacific Economic Cooperation meetings in Canada.

A financial trader, who asked not to be named, says nervousness prevails in business circles after Yamaichi’s fall. “The shock is tremendous. There is a growing fear that other big names might follow suit.”

Japan is no stranger to bad financial news, having seen hundreds of corporate bankruptcies and huge losses being reported its years of lingering economic recession.

But the Yamaichi collapse stands out as probably the biggest psychological blow to the Japanese, because of the company’s international standing and clout at home. The fact that it came amid Asia’s spreading economic worries helps little.

“The name is synonymous to Japan’s economic miracle. The company, with 100 years of business to its name, seemed invincible. With its fall comes the collapse in our confidence,” said business writer Naoshi Yasuya.

Yamaichi Securities reported 3.2 billion U.S. dollars in revenues last year, but now some 7,500 local employees are out in the cold in a country with virtually no unemployment. The company has 50 other affiliated firms with another 3,500 workers, who are anxious about their future.

Yamaichi announced Monday it was ceasing operations after a century, driven under by bad loans and hidden losses owing to corrupt loan practices. Amid public reports of doubtful practices, banks refused to lend Yamaichi money, forcing it to close.

Yamaichi’s year of losses was marked by a scandal about a payoff to a racketeer and hidden losses of 2.6 billion dollars, owing to its habit of shifting losses on investments from one client to another to help them avoid showing losses.

Financial analysts say the Yamaichi case ought to be wake-up call for Japan’s corporate culture. “The company’s problems reflect the need for widespread change in the way corporations function in Japan,” said Tyoo Gyoten, senior advisor to the Bank of Tokyo.

“But that means a complete overhaul of the pillars of Japan’s economic success,” he said, adding that for decades bureaucrats have run a corporate sector resistant to change and is very much a conformist society.

“An increase in the power of auditors and shareholders means going into forbidden areas, such as changing such corporate customs as the lifetime employment system and sliding wage scale that boosted Japan’s business power through unquestioning loyalty,” Gyoten said.

Critics are seeking greater transparency in the way companies do business, as a means of stopping corruption that is partly responsible for past and present corporate failures.

Control of Japanese companies are pretty much left to their managements, under a system where shareholders and outside scrutiny is held down to a minimum. This worked toward efficiency for management. But when decisions are tainted with favouritism and corruption, the costs may be steep, as the Yamaichi case has exposed.

In April, a survey by the Corporate Auditors Association of Japan found that one-fifth of 1,850 companies it surveyed had been embroiled in at least one scandal or case of improper business practice.

The list included bribery and illustrated the “iron triangle” that Japanese corporate culture is steeped in — the favours-for- favours relationships among senior bureaucrats, business and politicians in lucrative business deals.

Yamaichi began to notch up unlisted losses in the latter half of 1991, by arranging for affiliated firms to buy large clients’ stocks secretly and at a profit in case their stocks fell. Yamaichi President Shohei Nozawa said the company might sue the former management for these illegal activities.

Yamaichi employees are angry and disappointed with the company they have worked so hard for. A worker in his fifties says the decision to halt operations was sudden even though he knew of Yamaichi’s problems. “They did not discuss anything with us and we feel let down. My whole section, which had 21 employees, are worried sick about their future,” he said.

The government is looking into using public funds to protect Yamaichi customers’ deposits — not to save the sinking company. Many analysts in fact view positively the fact that in an over- regulated sector, the government allowed the firm to go under.

But that seems to be of little comfort to Yamaichi customers, who since Tuesday have been storming its offices as early as 4:30 a.m. to pull their money.

“I do not trust the government or anybody else in authority any more,” said a 73-year old man, while standing in line to cancel about 10,000 shares he held with Yamaichi. “My nerves are in tatters as I wonder what to do now.”

Analysts say the Yamaichi collapse should prompt a clean-up of how business works. “Japan was confident during the bubble years and we thought our system was the best,” Gyoten observed. “Our mistake was that we lost our prudence to constantly reflect upon what we were doing.”

He says other Asian countries have also become complacent after decades of economic growth. There, “maladies similar to Japan — fragile financial industry and collaboration between business, bureaucrats and the military — are obvious,” said Gyoten.