A Clash of Cultures Inflates The Daiwa Bank Scandal
Yoshimasa Nishimura, the top banking regulator at Japan's Ministry of Finance, recently recalled his empathy for US officials during the savings-and-loan crisis of the late 1980s.
Mr. Nishimura said he thought at the time that if such a thing ever were to happen in Japan, it would be good for the institutions to fail at "intervals," in order to forestall panic among depositors and investors.
Nishimura himself is probably the object of other regulators' empathy these days, because he has come under mounting criticism for delaying widespread knowledge of Daiwa Bank's $1.1 billion trading loss. Among the people that Nishimura kept in the dark were US banking authorities. What happened in New York last week was seen in Tokyo over the weekend as a kind of revenge for Nishimura's slowness.
On Thursday, US regulators revoked Daiwa's US banking license and federal prosecutors announced a list of charges they will file against the bank. The bank and some of its current and former executives will be arraigned Nov. 9.
In September, the bank announced that a trader had amassed $1.1 billion worth of unreported losses in the 1980s and early 1990s. US prosecutors allege that the bank first tried to cover up the scandal, which Daiwa executives deny.
Nishimura acknowledges that ongoing crises at other Japanese financial institutions may have influenced his thinking when he was first informed about Daiwa's troubles in early August. But he says he was following Japanese regulatory practice in asking the bank to investigate the matter and report back.
It took several weeks for the bank to do so, and it wasn't until Sept. 18 that US authorities were told of the scandal.
The episode is an example of the clash of cultures provoked by the Daiwa affair. If the scandal had been confined to Japan, in all likelihood the matter would have been settled with a few resignations and some closed-door reprimands by Japan's Ministry of Finance. A few top executives have already stepped down as a result of the scandal.
But US officials are not enforcing the banking regulations subtly. Regulators have given Daiwa 90 days to sell or close its US operations and prosecutors are now looking to convict executives of fraud. The case is very public, and the potential punishments are heavy.
Japan's regulators do not work this way mainly because this country's economy is structured differently. The ministry and Japan's banks are said to constitute a mura or village, a tight-knit community that some observers call collusive and anti-competitive.
"The [financial] establishment, the older generation," says Toru Nakakita, an economist at Tokyo's Toyo University, "takes it for granted that even if there is misbehavior or there are crimes committed, they should be resolved ... inside the community. It doesn't put a priority on disclosure or on upholding global standards or rules.''
"[Japanese regulators] were under the impression" says Haruo Shimada, an economist at Keio University in Tokyo, "that this was a serious scandal but one that could be settled within the circle."
THE US actions were greeted with shock in Japan and have quickly become part of the debate over deregulation and liberalization of this economy. Mr. Shimada, among others, has repeatedly argued that Japan's dependence on other countries - as a source of raw materials and as a market for exports - requires the country to embrace the kind of free-market institutions that dominate the global economy.
Japanese bureaucrats respond that their economy is successful precisely because it is not given over to the free market. A rigorous but meritocratic educational system feeds the best and brightest graduates into government, and these officials are then empowered to run the economy in a benevolent way.
The recession of the past four years has given the upper hand to the reformers, who have made much of the failings of the Ministry of Finance, the pinnacle of the Japan's bureaucratic hierarchy. The missteps over Daiwa are proof, say the critics, that collusive, closed-door regulatory practice cannot continue if Japanese companies are to win the confidence and support of consumers and governments overseas.