Japan---yet another kakistocracy update....

["Ian Murray" <seamus2001@xxxxxxxxx>]

< http://www.feer.com >
The Yakuza Recession

SOMETIME DURING Japan's annual cherry-blossom festival last April, one
of Tokyo's top private economists held a meeting that would
reverberate across the Pacific and trigger alarm bells at the highest
levels in Washington. At his office in a glass skyscraper in central
Tokyo, he spoke with a veteran investment banker and colleague who
also happened to be friends with Paul O'Neill, the United States
Treasury Secretary. The economist, an American, and the investment
banker, also American, were discussing a matter long the subject of
innuendo: Japanese organized crime-the yakuza-and its role in the
bad-debt crisis that is primarily responsible for keeping Japan in
recession.

The economist spoke with urgency because in the previous year a small
cadre of former FBI agents and other U.S. lawmen had uncovered a
pattern of collusion between the banks and corporations that dominate
the Japanese economy and yakuza gangsters that might even make a
Russian oligarch blush. What is more, the economist said, those links
suggested that the yakuza, far from being just a motley band of pimps,
drug pushers, gamblers and extortionists-with only a peripheral role
in their nation's multibillion dollar banking crisis-were in fact one
of the most significant obstacles to its resolution. After returning
to the U.S., the investment banker wasted no time outlining to his
friend O'Neill the details of what retired police chief Raisuke
Miyawaki has dubbed the "yakuza recession."

Neither Miyawaki nor any other credible commentator suggests that
deflation, policy blunders, political inertia and a whole range of
other factors haven't contributed to Japan's decade-long stagnation.
All the same, Miyawaki, a Tokyo University Law School graduate, former
spokesman for Prime Minister Yasuhiro Nakasone and former head of the
National Police Agency's organized crime division, estimates that up
to 50% of the bad debts held by Japanese banks could be impossible to
recover because they involve organized crime and corrupt politicians.
"I watched this develop in front of my eyes before I retired" in the
1980s, he says. "The key issue today is that a substantial portion of
the existing bad loans cannot be recovered solely by bankers because
the original loans involved politicians, bankers and yakuza."

No less troublesome, former U.S. law-enforcement officials now working
for U.S. financial institutions in Japan worry that the yakuza might
try to parlay their grip on the world's second-largest economy into a
global presence. Already, some former U.S. lawmen believe, the yakuza
could have ploughed as much as $50 billion into U.S. financial markets
alone.

Although many Japanese politicians, police officers and other
government officials scoff politely at Miyawaki's assertions, the
results of the investigations headed by the former U.S. lawmen-now
working full time on due-diligence investigations for U.S. investment
banks in Japan-make compelling reading.

Starting in the late 1990s, U.S. investors began aggressively buying
assets from cash-strapped Japanese companies. To date, they have spent
at least $15 billion on everything from golf courses, theme parks and
property to car, chemical and pharmaceutical companies and pachinko
pinball-machine parlours. High-profile American deals in Japan include
the giant Ford Motor Co.'s takeover of Mazda Motor Corp.

Banking-industry insiders say some U.S. investors took stakes in
enterprises that turned out to have ties to the yakuza. Earlier this
year, for instance, the Tokyo office of U.S. institutional investor
Lonestar was besieged by Japanese right-wing extremists after it
bought Eventail, a golf-course management company with ties to the
yakuza. An employee in Tokyo for the U.S. fund declined to comment.
However, a Tokyo-based property analyst familiar with the incident
says the company is "pretty cavalier" in its approach to business
risks in Japan. "Maybe they see a chance to make so much money, so
fast, that they can return to the United States before they encounter
really serious trouble," he says.

In stark contrast, blue-chip U.S. investment banks leery of hurting
their reputations have taken the unusual step of supplementing the
accountants who do much of their due-diligence investigations with
former FBI agents and other U.S. law-enforcement officials. These
days, some U.S. financial institutions examine three to four deals a
week for possible yakuza involvement; all told, in the past two years
alone, they have used electronic databases, private investigators and
contacts in the Japanese police, government and underworld to conduct
at least 600 such investigations.

Many of the former U.S. law-enforcement agents who headed those probes
were familiar with the yakuza from their days of public service. But
even so, what they uncovered left them intrigued, amused and in some
cases shocked.

To begin with, they found yakuza active in literally every sector of
the Japanese economy; not only in areas such as construction,
entertainment and trucking that have long been suspected of heavy
yakuza involvement, but in everything from chemicals to hospitals. "In
many ways it's easier for yakuza to operate hospitals," says a former
FBI agent who has overseen investigations into 300 Japanese companies
on behalf of a major U.S. investment bank. "Nobody expects them to be
in that kind of business."

At the same time, almost half of the deals that crossed the desks of
the former U.S. agents featured significant yakuza involvement. That
doesn't mean yakuza control one of every two Japanese companies.
However, a former agent says, it indicates that nearly half the
companies that hold the key to resolving Japan's bad-debt crisis-that
is, nearly half of Japan's most heavily indebted enterprises-probably
are working with, have strong ties to or are controlled outright by
gangsters. Between them, the former agent estimates, these companies
borrowed $300 billion-400 billion from Japanese banks and funnelled as
much as half of it to yakuza mobsters-substantially complicating the
resolution of Japan's banking malaise.

"It was that first chunk, which couldn't be addressed, that stuffed up
the banking system," and caused a credit crunch, another former agent
says. "This had a follow-on effect on other borrowers who were not
mob-connected but couldn't get bank financing and ended up going
bust."

Contrary to the former agents' initial expectations, it was the
bankers who first approached the yakuza and got Japan into its
lingering financial mess-and not the other way round. For the four
decades following the end of World War II, Japanese bankers funnelled
the nation's savings into industries considered crucial for Japan's
economy to catch up with the West's. The bankers lent money at the
behest of the Japanese bureaucrats in charge of government policy,
without checking the financial health of their borrowers, and at
below-market interest rates. The banks' loan margins were pitiful. But
bureaucrats ensured they earned steady profits by shielding them from
competition and letting them charge high fees for retail banking.

Suddenly, in the 1980s, the banks' biggest borrowers started to look
elsewhere for money. By then, Toyota, Sony, Honda and the like could
borrow more cheaply in international capital markets than at home.
Faced with a drop-off in business, Japanese banks began aggressively
courting new borrowers. In particular, says Manabu Miyazaki, a
best-selling author who has also run for national office and whose
father was a gangster boss, the banks pushed money on mobsters to
sustain the growth of their loan portfolios.

Of course, it wasn't a one-way street. Once word spread that banks
would lend money even to criminals, underworld figures were quick to
take advantage. To Japan's at least 78,000 yakuza, it was an
opportunity to shift away from the illegal gambling, prostitution,
drugs, street peddling and protection rackets that had been their
mainstays for four centuries, and enter legitimate businesses. By the
time the bankers started to wonder whether they'd ever get their money
back from their shiny new customers, they had already extended them
billions in loans and it was too late.

Often, the banks lent to kigyo shatei, or front companies for yakuza
organizations. Earlier this year, one U.S. financial institution
investigated a Japanese bank looking for a foreign partner. While the
bank didn't have a reputation for involvement with the yakuza,
investigators discovered it had advanced as much as 80% of its $1
billion in outstanding loans to companies that were either related to
or fronts for the yakuza.

In some of the more memorable instances of banking malfeasance,
however, Japanese financiers handed money directly to major underworld
bosses. For nearly a decade until his death in 1991, Susumu Ishii, the
head of the Inagawakai, Japan's third-largest crime syndicate, was
widely considered the boss of bosses of the Japanese underworld. All
the same, 12 companies, including affiliates of Nomura Securities and
Nikko Securities, lent him at least ¥38.4 billion (about $300 million
at the current exchange rate). All told, the former U.S. lawmen say,
the yakuza may have pulled the biggest financial scam in history.

Where is all that money? Clearly, some of it ended up in supposedly
mob-free sectors of Japan's economy such as hospitals and health care.
But arguably the bulk was invested in stocks and property. Miyazaki,
the writer and gangster boss's son, insists financial institutions
related to securities companies pushed stocks and property on yakuza
borrowers especially vigorously. In 1999 a government-funded study by
the Housing Loan Administration Corp. found that of 116
construction-related loans it examined in detail, 42% involved
organized crime. Typically, says Miyazaki, financiers persuaded yakuza
to buy stocks and property at inflated prices by paying them
commissions up front and promising to find buyers willing to buy the
assets at even higher prices. "Normal people wouldn't get involved in
such schemes, so the banks grew reliant on the yakuza," Miyazaki says.
As long as prices continued to climb, everybody was happy. Lenders
watched their asset bases and profits rise, while gangsters grew rich
pocketing commissions and capital gains.

Then Japan's bubble burst. In the early 1990s, when it dawned on
people that Japan was suffering unsustainable asset-price inflation,
investors willing to chase prices even higher suddenly disappeared.
Against expectations, scores of gangsters found themselves stuck with
stocks and property plummeting in value by the day, and massive debts
they were unable to repay. Some yakuza solved their dilemma in
accordance with an old underworld maxim: okane wa nai, kubi wa nai;
you have no money, you have no neck. "I have three relatives and
friends who committed suicide because of bankers," Miyazaki says. Many
more, though, simply refused to meet their debts or hand over the
properties they had used as collateral.

When Japanese bankers started to push their recalcitrant new customers
to follow the letter of their loan agreements they had no idea what to
expect: After all, for years they had dealt almost solely with
legitimate companies, many of them household names worldwide. It
didn't take long for the bankers to figure things out. In 1993, a
killer gunned down the vice-president in charge of collecting bad
loans at Hanwa Bank in Wakayama Prefecture east of Osaka. The
following year another professional assassin shot and killed the
vice-president in charge of bad-debt collection at Sumitomo Bank in
Nagoya.

In addition, since 1997, seven ranking Japanese officials
investigating banking industry irregularities or about to testify
about Japan's bad-debt woes have died under mysterious circumstances.
Most recently, in September 2000, Tadao Honma, a former director of
the Bank of Japan, was found dead in a hotel room in Osaka. Two weeks
earlier the 60-year-old had become president of Nippon Credit Bank, a
bankrupt bank that had lent to Japanese gangsters. Although Honma had
been examining some of those loans in the days before he died, and the
hotel guest next door heard fighting in Honma's room, police judged
his death a suicide by asphyxiation and did not conduct an autopsy.

In the wake of those killings and suspicious deaths, Japanese bankers
greet advice to accelerate the clean-up of their bad debts by asking
to whom they should turn for protection from organized crime. "The
banks are still afraid of foreclosing on some companies because they
are afraid of what the yakuza will do to them," says Robert Whiting,
the author of Tokyo Underworld and an expert on Japanese organized
crime. "On top of that there are a lot of LDP [the ruling Liberal
Democratic Party] guys involved in this whole mess."

ALARMING CONFLICTS OF INTEREST
Perhaps more alarming than the scope of gangster activity in Japan is
that widespread corruption and conflicts of interest among
politicians, bureaucrats and the rest of the nation's ruling elite
could prolong the resolution of Japan's bad-debt crisis for another
decade. Many Japanese politicians are reluctant to address the
yakuza's role in the bad-debt crisis because they rely on gangsters
for help raising campaign funds and fending off intra-party rivals.
"There's not a single Diet member who doesn't know his local yakuza
boss," says the secretary to a senior member of Prime Minister
Junichiro Koizumi's LDP.

In 1999, for instance, LDP power-broker Eichi Nakao was arrested for
taking bribes from Wakachiku Construction in Tokyo in exchange for
funnelling public-works contracts to the company. Under questioning,
the former construction minister admitted to taking ¥20 million in
cash and a check for ¥10 million. In many ways Nakao's arrest was
unexceptional. Since the start of the "yakuza recession" quite
literally scores of Japanese politicians have been embarrassed by
allegations of or arrested for taking kickbacks, including 10 fingered
last month for rigging public-works spending contracts in return for
some ¥100 million in bribes. But what set Nakao's arrest apart is that
the man who introduced him to Wakachiku was Heo Young-joong, a
Korean-Japanese businessman who was also a leading figure in the
40,000-strong Yamaguchi Gumi, Japan's biggest organized crime
syndicate. A former U.S. lawman who has investigated scores of
Japanese companies describes the ties between politicians, big
business and yakuza as "breathtaking."

The bureaucrats who draft and implement most Japanese laws and the
police officers who enforce them face their own conflicts of interest.
To begin with, bureaucrats are paid poorly compared with their peers
in the private sector. More important, when a bureaucrat snags the top
job in a Japanese ministry, his seniors and contemporaries must
resign, symbolically handing over absolute power. For many bureaucrats
that means looking for work in their early 50s. In the end, most join
the companies and semi-governmental agencies they once oversaw, a
practice known as amakudari, or descent from heaven. "Over time,"
notes Chalmers Johnson, an American political scientist, "the
continued practice of amakudari contributed to serious corruption."

Likewise, on retirement Japan's poorly paid police officers often take
jobs at the companies they once investigated. These officers
frequently end up as security guards in yakuza-dominated businesses in
various industries, such as construction and shipping. And because
patrolmen know years in advance that they'll need such sinecures, the
temptation to treat the yakuza with kid gloves has brought about
dozens of bribery scandals over the past decade. Says a former FBI
agent: "The goal of the police in Japan is to manage and control
organized crime, not eradicate it." Japan's public prosecutors and
judges have been caught or implicated in a web of corruption scandals
as well.

Such shenanigans might sound like sweet fodder for aggressive young
reporters. But not in Japan, where most of the mainstream journalists
covering the bankers, politicians, bureaucrats and police officers who
bear the greatest responsibility for the yakuza recession-and are also
their nation's only hope of resolving it-are reluctant to criticize
their sources within the establishment. "The Japanese media,
especially newspapers and television, studiously avoid reporting about
the relationship between yakuza and the bad loans," says Miyawaki, the
former lawman, "because they're just a mouthpiece for the
establishment."

An award-winning journalist at a major Japanese newspaper estimates
that when he covered the Japanese Treasury, he reported less than a
10th of what he knew, paying no attention in print to the
horse-trading behind the allocation of the government's annual budget.
Moreover, in August last year Takeshi Gomi, the president of the
Kokkai Times, a daily that covers the Japanese parliament and
politics, admitted to taking money from government officials. Twice a
year for the past 20 years, Gomi said, he had pocketed between
¥500,000 and ¥2 million.

When Miyawaki first minted the moniker "yakuza recession" in 1992, he
predicted it "would continue a long time into the future." While
successive Japanese governments dismissed him as ill-informed, Japan's
bad debts grew and its stagnation lingered. Today, Japan's bad debts
are less a mountain than a Himalayan peak. The government has little
to say on the issue that sounds convincing. But independent banking
analysts estimate bad debts run to between $800 billion and twice that
figure. Miyawaki thinks even the higher independent estimate might be
too low. Either way, Japan's bad-debt fiasco dwarfs the $150 billion
Savings and Loan crisis in the U.S. in the 1980s. In the Japanese
fiscal year ending March 31, Japan's four biggest banking groups alone
expect to lose ¥1.6 trillion. Amid rumours that a major banking crisis
is imminent, starting last month officials in Tokyo began to openly
discuss a second bailout in three years for the ailing banking
industry. "We will not let an economic crisis occur in February or
March," Taku Yamasaki, secretary-general of the LDP said in late
December. "We will take emergency measures when necessary."

At the same time, earlier piecemeal attempts to kick-start its economy
and rescue its banks have helped saddle Japan with a national debt of
some ¥650 trillion, equivalent to 130% of its GDP, earning it the
unwelcome sobriquet "the Italy of Asia." On December 4 Moody's
Investors Service became the third international debt-rating agency to
cut Japan's sovereign-debt rating in three weeks, leaving it ranked on
a par with-no coincidence here-Italy.

The state of Japan's finances and more than 600 due-diligence
investigations conducted by former U.S. law-enforcement officials on
behalf of U.S. investment banks might seem to have vindicated
Miyawaki's assessment of Japan's woes. Yet the meticulous,
self-effacing former law-enforcement official takes little pleasure in
this. Instead, he travels the world encouraging foreign investors
schooled in the fundamentals of risk management to take charge of
Japan's financial system. Foreigners, Miyawaki said in a lecture at
the Japan Society in New York in November, should "buy the big, stupid
Japanese banks that lent large sums to the yakuza during the bubble
era, because as you can see the executives running them today don't
have the ability to restore Japan's banks to soundness."

Others, by contrast, worry about what the yakuza's role in Japan's
banking fiasco might mean for the rest of the world. The U.S.
government, in its latest International Crime Threat Assessment,
described the yakuza as one of "the world's largest and most powerful
criminal syndicates," and singled out the Inagawakai for laundering
money in the United States.

The former U.S. lawmen see good reason to worry. "I think the yakuza
have enough invested in the U.S. market that if they took it out it
would really cause a problem," says a former FBI agent. "The yakuza
have their own investment bankers and accountants and lawyers that
they have sponsored, educated and use. They know how to keep a low
profile and generate profits in a tough economy. The yakuza are
suffering from the recession as much as anyone and are looking for
alternative sources of income all the time. The financial markets
offer more and more options that will make them more of a global
problem if we are not careful."


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THE YAKUZA

The elaborately tattooed yakuza date to the 16th century, when
unemployed samurai formed gangs and turned to banditry. Today Japan
has 78,000 yakuza-literally, "good for nothing"-who play a role in
practically every facet of Japan's economy and society. They live by a
samurai-like code of loyalty, and to show penance for breaking it they
cut off their fingertips. In the past, errant yakuza favoured swords
for this. Nowadays, some try to lessen the pain by using a hammer and
chisel.


THE COST OF BAD DEBT

No one knows the true size of Japan's bad debts. One estimate, by U.S.
investment bank Goldman Sachs, puts it at ¥237 trillion, or 39% of all
corporate loans. But everyone agrees the crisis is deepening as Japan
slides further into recession. Worse, many loans are collateralized
with properties still valued at unrealistic "bubble economy" prices,
meaning the write-offs needed will be far greater than the banks or
the government admit. The only solution, believe many analysts, is a
fresh injection of public money, dwarfing 1999's bailout of ¥7.5
trillion.