Japan Inc. tries to clean up after `cleaning up,' but sleuths are alert

It's sometimes called Japan Inc. It's sometimes described as one big cozy family business residing on the industrious archipelago. Politicians, manufacturers, financiers, and employees all pull together for Japan's advancement. They all play together in the Ginza District after hours. They throw business to each other.

And they quietly look the other way when a questionable gift is given, a product's price is fixed, a stock is manipulated, or a bit of inside information is passed along.

But things are changing in Japan - in part because of an unfolding financial scandal and in part because of intensifying pressure from the United States and Europe.

First, there's the financial scandal. The Japanese call it ``Recruitgate'' after Recruit Cosmos, a small communications company with a real estate subsidiary. This subsidiary apparently made its stock available to key politicians and business leaders on a basis that enabled them to make handsome profits later. Backs were scratched, deals consummated, it's said.

Although many financial observers early on thought the scandal would be contained, that does not appear to be the case. The Japanese public prosecutor's office has been unusually zealous in tracking down leads in this influence-peddling case. The financial press has also been uncharacteristically energetic in ferreting out new information.

Recruitgate's biggest casualties so far have been Japan's minister of finance, Kiichi Miyazawa, and the chairman of Nippon Telegraph & Telephone, Hisashi Shinto. Both men resigned in the past month because of inconsistencies in their explanations about their connections with the Recruit Cosmos stock deals. Many more businessmen and politicians have been implicated.

The Japanese market is rife with insider trading, sweetheart deals, and other activities that are illegal elsewhere. As a financial insider told Euromoney magazine recently: ``Recruit is a newcomer and its methods were a bit crude. Old-established companies do this sort of thing with far more money and with far more subtlety.''

A cleanup now appears to be under way. Recruitgate and a series of insider-trading scandals involving companies such as Nippon Steel have prompted dozens of corporations to enact tougher in-house controls to restrict stock trading.

But Japan's ``insider-prone corporate culture will not be changed simply through internal reform by individual companies,'' Yoshiaki Yamauchi of Arthur Andersen & Co. in Tokyo told the Japan Economic Journal recently. Tougher enforcement is needed, he said.

Cracking down is somewhat tricky at the moment, however. With the sky-high prices of Japanese stocks, there is a danger that a thorough rooting out could cause a crisis of faith in the stock market. Of course, for wrongdoers no time is ever convenient to be exposed. And the Japanese press and public are becoming less tolerant of shady financial dealings. Since the years of pulling together have paid off, Japanese are feeling more and more that they have arrived and are beginning to look at improving their society. That means a more ethical political and business life.

There's another factor in all this: Japan's growing international role. A nation that is now in the forefront of international finance has a certain noblesse oblige. Its one-time benefactor, the United States, is beginning to hold it to a higher standards of behavior than, say, a hard-scrabble developing nation.

At the private level, US institutional investors such as mutual funds and pension funds have a stake in standardization of rules and a level playing field in major financial markets. A mutual fund that analyzes a portfolio of Japanese stocks wants to be sure that it is investing based on a fair analysis of a company's fundamental value and market potential.

In fact, money managers have a legal obligation to act with such prudence. Although they might applaud a run-up of a chosen stock, on balance they don't like to be surprised by manipulation. It can as easily go against them as for them. When big financial malfeasance was uncovered in Hong Kong late last year, for instance, institutional investors backed off until they were assured that the rascals were gone and new laws made the market at least comprehensible.

Japan is also being pressured at the official level.

Watchdogs such as the US Securities and Exchange Commission and the British Department of Trade and Industry are aiding each other in tracking down international financial frauds and insider trading. For the past two years, Japan's Ministry of Finance has been exchanging information on suspected insider trading with these overseas regulators. And in recent months, spurred on by the Recruitgate affair, the Japanese Diet has adopted a set of tougher insider-trading laws.

For Japan Inc., these are changes long overdue.

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