Slowly, Japan’s Bank Reforms Gain Currency

Change comes hard in a country where after-hours entertainment has long been considered part of the job.

At the august Bank of Japan, an institution so mysterious and prestigious it was nicknamed “The Vatican,” regulators once thought nothing of accepting golfing excursions, gifts and $800 geisha dinners from the banks they supervised. This wasn’t considered corruption; it was how Japan Inc. did business.

Last week, a brave Bank of Japan official agreed to meet reporters for lunch to discuss the wrenching cultural changes afoot at the country’s scandal-tainted central bank. Ninety-eight of his colleagues had just been reprimanded for having been “overly entertained”; one senior central banker had been arrested for leaking confidential information to a commercial bank; and the official’s own office had been raided by prosecutors who carted off the name cards of thousands of his business contacts.

The official argued that recession, the advent of fierce foreign competition, newly litigious shareholders, public outrage and a forthcoming freedom-of-information law will force the world’s No. 2 economy to change its secretive, collusive ways.

Then he insisted on paying for his $14 lunch.

After-Hours Meals Are Big Business

After a full year of escalating corruption scandals, skeptics still maintain that the new focus on ethics will prove merely cosmetic.

“The Bank of Japan decided to punish itself to stop prosecutors from pursuing the scandal any further,” said Takamitsu Sawa, director of the Institute of Economic Research at Kyoto University. “This kind of damage control has been done over and over in our society. This is something that foreigners can never understand. It only works in Japan.”

But optimists say that Japan’s economic woes are now so dire that reform is finally possible. “We must change, and now is our chance,” said Kimihiro Masamura, an economics professor at Senshu University in Kawasaki.

Japanese firms spend more each year on wining and dining than the nation spends on defense. According to the Yomiuri newspaper, companies have recently spent $42 billion a year on entertainment--1% of the gross domestic product.

Skeptics say that no amount of standing on a soapbox about ethics can alter the fundamental Japanese social ethic that reveres personal contact. This country hates to do business on the telephone. The indirect nature of polite speech makes it hard to get to the point, and the cramped, dingy offices in which most bureaucrats toil are not conducive to talking turkey.

It is only during informal talks over sake and sashimi, proponents claim, that lifelong bureaucrats who have no experience in the business world get a frank briefing on the markets over which they wield enormous power.

The entertainment imperative “reflects Japanese culture and custom,” said Toshihiro Kiribuchi, a former Finance Ministry official who is now a senior advisor to electronic-component manufacturer Omron Corp. “It’s not good or bad. It’s just outdated.”

Banking Officials Feeling the Heat

Crusading prosecutors are trying to bring Japanese mores into line with Western standards. In addition to the senior official at the Bank of Japan, they have arrested two others at the Finance Ministry--another of the most prestigious institutions in the nation--on corruption charges. More arrests are expected.

The Bank of Japan--this country’s equivalent of the U.S. Federal Reserve System--sets monetary policy, including interest rates. While the Finance Ministry wields a stronger hand in regulating banks, the Bank of Japan assesses banks’ risks and lends them the cash needed for daily operations. Those two functions give central bank officials tremendous clout--and make them worth cultivating.

Back when Masayuki Ishii joined the Bank of Japan in 1972, each of the three banks he supervised used to treat him and his boss to twice-a-month evenings called “little splashes”--$100-per-person dinners with free taxi rides home. Every three months, Ishii recalled, came the “big splash,” when they would sup on Japanese delicacies while being flattered by geishas. The tab could easily hit $800 a head, paid by the banks, of course, said Ishii, who quit 12 years ago and now runs his own consulting firm.

For banks that dared flout the Bank of Japan’s “guidance,” the institution had a punishment known as yakitori, or “grilled chicken.” That meant withholding credit so that at the end of a quarter, an unwise bank would find itself short of its legal capital requirement. The bank president would have to come bow and beg the central bank for a bailout, and credit would be granted only at the last possible minute. “Their clothes would be singed,” Ishii said.

Now, it’s the regulators whose gray suits are getting uncomfortably hot. Media reports say prosecutors are investigating an additional six Finance Ministry officials, who allegedly accepted more than $23,000 each in entertainment. One of the officials whose dining habits are under scrutiny was responsible for recommending to Emperor Akihito the names of bank chairmen to be decorated with coveted imperial honors, Ishii said.

The New Standard: Zero Entertainment

Sourceless reports in the Japanese press say prosecutors are also probing the possibility of more extensive leaks of Bank of Japan secrets--including lucrative tips about when the central bank would intervene in the yen-dollar exchange market. Unnamed bank officials have been quoted as saying that such leaks have been occurring for years. These reports could not be confirmed, however, and the Bank of Japan declined an interview request for this article.

At a news conference announcing the 98 reprimands, Masaru Hayami, the central bank governor, who was appointed last month to clean up the mess, said, “I feel that self-discipline gradually crumbled, and we failed to reinforce it with harsher rules.” The new ethics standard at the central bank is zero entertainment.

It isn’t just public servants who are feeling the heat; many banks that once sponsored bureaucratic whoopee have banned it. And once-sleepy shareholders are now seeking reimbursement of misspent corporate money.

Last month, a group called Shareholders’ Ombudsman threatened to sue Sumitomo Bank unless it repaid the $15,000 that prosecutors documented had been spent entertaining Finance Ministry officials.

In the past, attempts by the shareholder group to recover corporate payoffs to racketeers were met with stonewalling, although it finally prevailed after lengthy lawsuits. This time around, Sumitomo wrote back within a month to say its directors had banned all entertainment of public officials and would repay the $15,000.

Although it was merely a fraction of what he believes was actually spent, Koji Morioka, a Shareholders’ Ombudsman founder, said it’s the principle that counts. His next target is the huge Dai-Ichi Kangyo Bank, which burst into the headlines earlier this year with the revelation that it had treated a Finance Ministry official--now under arrest--to expensive evenings at a no-pan shabu-shabu restaurant, where the waitresses wore no panties.

Fear of such humiliating publicity gives recession-battered banks a not entirely unwelcome excuse to slash entertainment budgets. “Banks now cannot afford to ignore public sentiment, since they don’t want to lose depositors,” Morioka said. “They seem to be improving their attitude, but we cannot really see how they will change.”

The expense-account chill can be seen in the subdued bars and clubs of the Ginza, where revelers pay from $150 to $400 to drink while being chatted up by hostesses. In a recent spread in the Asahi newspaper on the entertainment crunch, a Ginza bar hostess complained of the worst turnout in more than a decade.

“There’s so much screaming about entertainment corruption that even people who aren’t public servants don’t feel like coming,” she said.

Anemic spending has led to layoffs of some of the hostesses, the Asahi reported, as strapped businesses decide that the cost of promoting the vaunted Japanese “harmony” among employees and customers is now a luxury.

‘Transparency’ Is the Word at Central Bank

Parliament is also cracking down with a new ethics bill. The ruling Liberal Democratic Party has proposed a bill requiring mid-level public servants to report to their superiors any gifts or entertainment worth more than $39--a pittance in pricey Japan. The opposition wants an even more drastic $15 limit, with criminal penalties for violators.

However, while imposing much tougher standards on bureaucrats, the Liberal Democrats have balked at overhauling Japan’s notoriously corrupt political campaign financing system. Talks between the Liberal Democrats and their parliamentary allies broke down earlier this week amid charges that the Liberal Democrats had no intention of accepting meaningful reforms.

Some say the bureaucrats’ ethics codes will cease to be honored as soon as the current scandals blow over. Many believe that it is unfair to allow prosecutors to pounce on bureaucrats who were never given rules for how cozy was too cozy.

“All the standards are very murky and applied retroactively, so a lot of unfairness is happening,” said the central bank official who bought his own lunch. That is why the new Bank of Japan leadership decided to punish the 98 officials--one out of every six top executives--who had been the biggest recipients of corporate largess but released the names of only five of them, he said.

As part of a new “transparency”--Japan’s buzzword du jour--the central bank is posting its policy board minutes on the Internet. And under a law that took effect April 1, the institution for the first time has truly independent outside directors with a real voice on monetary policy. Two even disagreed, in front of journalists, on the direction interest rates should go--a previously unthinkable spectacle.

Such steps reduce the need for financial firms to try to pry inside information from the once-sphinx-like central bank. But success depends on meaningful deregulation.

“It was worth corrupting officials because there was special treatment and classified information [to be had],” the lunching Bank of Japan official said. “But if you change the system and make it more transparent, the incentive for corruption will be much less.”

Until now, only prosecutors could probe such institutions as the central bank and the Finance Ministry--and until this year, they had never set foot inside either. But this spring, passage of the new information disclosure law is expected to open the national government to public scrutiny. Anti-corruption activists have successfully used local disclosure laws to force city halls to reveal their spending, leading to a sharp drop in entertainment expenses.

Such laws could crimp bureaucrats’ overweening powers--a major theme of the opposition Democratic Party.

“I am disgusted . . . at the power of bureaucrats. They run the country, and that is not good for Japan,” said Yoshio Terasawa, a parliament member who formerly ran Nomura Securities in New York.

Japan does not have a market economy, he said. “Yes, we adopted capitalism, but with a planned economy . . . a bureaucrat-regulated economy.”

But what will bon vivant regulators do with their evenings if they are not being feted by supplicants?

“Maybe they’ll be home watching TV more with their wives,” the Bank of Japan official said.