Could Japan be the Canary?

I learned while studying Economics at University that employment at government agencies in Japan was highly sought after by graduates of Japan’s elite universities. There was, as I learned, great respect for professional government bureaucrats and they took their job seriously. This was not something I thought possible after being raised in the US. In the US we have bad government at every level. If anyone questions the fact we are a second world nation with big guns would only have to learn about our system of government and it’s blatant ineptitude and disrespect for it’s citizens.

Because of this, I find what happens in the Japanese financial world intriguing when it comes to regulatory or legal action. I feel when a Japanese government agency like The Securities and Exchange Surveillance Commission (SESC) makes a move it is noteworthy. I learn a great deal about what financial institutions are doing that is illegal by watching how Japan moves to fine or punish them when they have done wrong. I like Japan’s system of censuring businesses for wrong doing by actually shutting them down for probationary periods or all together if they have proven to commit repeated egregious illegal acts.

However, by watching how Japanese companies operate over the years I have also learned that these government agencies operate not strictly on legal means. They operate also in typical Japanese fashion in that they seek to maintain the Japanese status quo and enforce cultural ideology along with or by selectively applying legal rules.

The two high profile individual cases in 2006 have multi faceted reasons behind them. Both are similar in that high profile individually successful business men that have broken all “cultural” and “social” norms on the conduct of business have been taken down in high profile cases based on “legal” circumstances. However, reading about these cases and knowing basic history of Japanese business practice, they have done nothing technically punished in the past. What they have done is broken the “code of conduct” acceptable by the Japanese elite.

There have been cases of selective enforcement of laws in Japan in the past to obtain specific objectives. Notably, the various fines and punishments dished out in February 2002 to halt the ramped short selling in the market (as was the case globally at the time) so the Nikkei index could recover enough by 31 March, the end of the fiscal year in Japan, to keep the books of major banking institutions from becoming technically insolvent. (Banks in Japan show very large proportions of their capital as stock.)

It is a dangerous path the SESC is taking right now. Much has been written on why it took over a dozen years to “fix” the pathetic state of Japanese banking after the collapse of their markets in 1989. Within the last 5 years or so private equity money and hedge funds have commanded enormous amounts of money and are beginning to dictate business decisions around the world. Whether this is right or wrong, Japan’s recent high profile arrests, although obviously done to send a strong message to the world about Japanese tolerance for this new world reality, is more likely to hurt Japan’s capital markets over the long term than help them and could put Japanese finance another 10 years behind the curve if successful.

For now, let’s say, learn what you can from the moves by the SESC for on the flip side, they could open the window into what the world will be dealing with very shortly.