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Japan's Bankrupt Bankers

A timid bureaucracy in a once-admired industry has driven bad debt to historic levels, another symptom of the nation's aversion to change.


TOKYO — Mizuho Holdings Inc., the world's largest bank, was launched with great fanfare from the merger of three smaller financial institutions April 1. Branches were cleaned up, stationery ordered and the Fuji, Dai-Ichi Kangyo and Industrial Bank of Japan logos replaced by new blue-and-red Mizuho signs.

Somewhere along the way, however, the new management forgot about the customers.

What became known as the April Fools' Day fiasco began when Japanese clients sidled up to Mizuho ATMs and 7,000 of the spiffed-up machines crashed. By the time matters were sorted out weeks later, 30,000 customers had been double-billed for utility charges and 2.5 million transactions had gone awry.

The subsequent investigation, parliamentary hearings and media scrutiny only reinforced what most already knew: A banking industry once feared and admired around the world has lost its way in the midst of bickering, internal problems and insular thinking.

Japan's poor bank management--with a huge assist from government regulators--has driven the country's bad debt to historic levels, worsening its decade-long deflationary slide and adding to its economic misery. Japan has repeatedly denied the size and scope of its bad-debt mess--officially pegged at $227 billion for major city and trust banks. Outsiders say the real number could be several times worse.

Even this late in the game, most experts say, decisive action could turn the banking industry around within several painful years.

"But our fear is how much else is going on that we don't know about," said James Fiorillo, bank analyst with ING Barings. "There's a lack of accountability throughout the system, which is ultimately more the fault of regulators and politicians than bankers."

When it comes to Japanese banking, forget all the mantras about the customer being king, said Hamao Yokota, who was pressured to leave his job at a regional bank several years ago after he published his expose "Diary of an Outlaw Banker." The real kings in Japan traditionally are the bureaucrats, he said.

"Branch managers face their butts toward the customers and their noses toward headquarters, which in turn faces the ministry," Yokota said. "People in the branches have been treated like stupid cows, with anyone who questions the official line transferred to a toilet-cleaning company or other subsidiary."

The highly regulated nature of the industry has left it wrapped up in its own little world, responding to its own logic and staffed by senior managers without courage, vision or a sense of crisis, said Norboru Yanai, a management consultant and former board member of Long-Term Credit Bank.

"Managers have never really had to manage, since everything traditionally depended on Finance Ministry approval," he said. "It sounds unbelievable, but they still don't know how serious a situation they're in."

Because of a seniority system that is only starting to unravel, promotions go to those skilled at mediating among internal factions and who don't rock the boat, insiders say. Speaking out or aggressively pushing ideas can derail a career.

After writing about his bank, Yokota was given a backbreaking job delivering hundreds of 42-pound bags of coins each day to racetracks. He soon got the point and quit.

The lack of independent election committees means that bank presidents tend to choose successors like themselves. This, coupled with an emphasis on loyalty, means that many of the same people who fueled the bad-debt problems a decade ago as mid-level managers now are running the banks.

"It becomes very difficult for them to tackle the problem because basically they don't want to admit their mistakes," Yanai said. "They're hoping some divine wind will come along and blow the whole problem away, allowing them to survive."

Japan's near-zero interest rates further discourage disclosure by making the short-term cost of delay appear relatively small. For politicians, bureaucrats and bank executives in Japan's shame-based culture, there is little upside to acknowledging or admitting mistakes because someone would then have to take responsibility.

"Bank managers already know they're bankrupt, but they don't want to commit [career] suicide," said Michiyasu Hirao, director and head of global economic studies at Mitsui Global Strategy Studies Institute. "A bad quality about the Japanese is they tend to postpone problems."

When problems do come out, they frequently spark a hunt for scapegoats, a practice that discourages anyone from admitting past mistakes. In 1998 and 1999 top executives at bankrupt Yamaichi Securities and Long-Term Credit Bank weren't merely fired. Several also were arrested on criminal charges and jailed for practices generally sanctioned or even required by the bureaucrats. Bankers say this sent a powerful message: Hide your problems at almost any cost rather than come clean.

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