|

Bridging corruption and legitimacy: amakudari

by

An American prosecutor once told me this joke:

Three elite government officials become friends on the conference circuit. One is from a developed Western nation, another from a developing nation, the last from a Third World basket case. When a conference is held in the developed nation, that official hosts a dinner at his home, a fine three-story house in a prestigious neighborhood with a four-car garage and an outdoor pool.

The other two officials can’t help asking how he can afford such a home on a government salary. He leads them to his study on the top floor and points to the river, asking, “Do you see that toll bridge over there?” His friends nod. “Well,” he whispers, “10 percent of everything comes to me.”

Soon there is a symposium in the developing country and that official plays host. His home is palatial, with an indoor pool, tennis courts and servants’ quarters. When pressed to explain, he takes his friends to the roof balcony, points to a bridge across the harbor and says, “See that? Well, 20 percent of everything comes to me.”

Sometime later there is an aid conference in the Third World country, and yet another dinner. That official has a home that is a palace, with guard towers and a helipad. His friends are flabbergasted. “We just sat through an aid conference about why your country is a basket case. How can you afford this?!” they ask.

He takes them up to the highest guard tower and points at the horizon. “Do you see a bridge over there?” His friends squint but shake their heads, saying, “No, we can’t.” Their host grins widely and says, “Here, 100 percent of everything comes to me.”

That is the joke as it was told to me. When I tell it, I add a fourth official, from Japan. The last conference is hosted in Japan, and the punchline is, “When they stepped off the plane, there were bridges everywhere.”

The Japanese official would not live in a palace but might enjoy the use of heavily subsidized, even free housing at a government complex in a fashionable neighborhood. He wouldn’t need to skim bridge tolls or extort envelopes of cash; if he was a good team player, his ministry would feather his nest for him completely legally.

He could expect a hefty lump-sum retirement payment, a good pension and a series of post-retirement jobs at a galaxy of quasi-public corporations, foundations, educational institutions or even in the private sector. These jobs would come with a generous salary (typically set to be comparable with his government salary) as well as more lump-sum retirement payments after a few years’ service. These positions would keep him gainfully employed at least until his 70s, and would leave him with more than enough cash to live out the remainder of his years in comfort.

As he rose through the ranks of elite bureaucrats, a managerial problem he might encounter would be how to generate a steady supply of post-retirement jobs for his colleagues — both his fellow high fliers (many of whom would need to be eased out before mandatory retirement age) as well as the rank and file. Fortunately, he would be in a position to make laws and steer policy appropriately, despite widespread populist bashing by elected politicians and broad public disdain for this deeply entrenched Japanese practice known as amakudari (literally, “descent from heaven”).

Transparency International gives Japan high marks for honest government. In the organization’s 2014 Corruption Perceptions Index, Japan tied with Belgium at 15 out of the 175 countries surveyed, with its government ranked as “very clean.” That said, using the powers of government to systematically stockpile assets and opportunities for the benefit of specific subgroups of public servants may not qualify as “corruption,” as the term is commonly understood, but perhaps it should: This sort of “soft looting” of the public fisc can be done on a grander scale and may have a greater warping influence on the economy than a few bent officials.

The closest corollary might be America’s so-called military-industrial complex. In Japan it is just “the complex,” reaching into almost every aspect of civil and economic life, quietly taking its cut in the form of higher prices, obscure but lucrative monopolies and seemingly bizarre regulations.

It also involves lots of concrete. Japan is covered with bridges, airports, harbors and other infrastructure of questionable utility — Ibaraki Airport opened in 2010 with virtually no airlines wanting to fly there. Yet even white-elephant projects help support a different infrastructure: the quasi-public corporations charged with operating them.

Amakudari and all that comes with it tends to make things in Japan more complicated and expensive than they should be. Moreover, because they tend to involve subtly ring-fencing economic opportunities for the benefit of ex-bureaucrats in their 50s and 60s, Japan’s amakudari systems necessarily mean fewer options for aspiring newcomers — young people and private-sector entrepreneurs, for example.

One manifestation of this deeply rooted structural problem can be seen in the national balance sheet. Japan’s national debt is massive, but few people ever look at the asset side of the ledger. Such a thing may not even have existed until recently: According to Kaetsu University economist Yoichi Takahashi, he prepared the first national balance sheet just a couple of decades ago when he was a Ministry of Finance official.

The balance sheet for fiscal 2013 shows Japan having debts of ¥1.143 quadrillion. It’s a big number, but the asset side is too: ¥652 trillion. According to Takahashi’s 2013 book “Nihon wa Sekai Ichii no Seifu Shisan Taikoku” (“Japan as the World’s Top Government Asset Superpower”), this figure puts Japan at the top of the league in terms of government-controlled assets.

Having been paid for by taxpayers, these assets theoretically belong to the Japanese nation. In practice, though, most fall under the jurisdiction of a particular ministry or agency, either directly or through special administrative corporations or even ostensibly private entities that are in reality ministry tributaries (and amakudari destinations).

For example, the largest shareholder listed on the books of Japan Tobacco Inc., the TSE-traded giant whose roots go back to when the government monopolized tobacco (and salt) is not “Japan,” but the minister of finance. Not coincidentally, it is also a well-known Finance Ministry retirement destination; in fact, former JT presidents have been ex-Finance people, until that sort of blatant amakudari apparently started to look bad. Now a lot of amakudari into the private sector seems to be accomplished through more discreet “consultancy” roles (though there is a still publicly listed bank whose president has traditionally been an ex-Finance person).

Awareness of this regulatory agenda helps reveal the outlines of a process whereby massive amounts of wealth are systematically transferred from the general treasury and warehoused under the jurisdiction of a particular ministry or other national government agency. These assets then become part of a fiercely protected bureaucratic domain within a system of regulation so vertically integrated that some ministries have their own proprietary forms of financial institution, gambling, corporate entities, accounting rules and even legal professions.

On its Web page, the Finance Ministry carefully explains that most of the assets on the national balance sheet are of a type that cannot be sold to reduce the national debt. This may well be true of things like tidal barriers; however, the ministry’s views on the subject are hardly neutral, since it has reportedly been pushing hardest for the unpopular consumption tax increases that make talk of asset sales unnecessary. Tax hikes are unpopular with politicians but it is the Finance Ministry that makes the budget, and more tax revenue means more power for it to wield over the other ministries, as well as Diet members looking to please voters with road projects and other pork. By contrast, asset sales would just shrink ministry domains with no offsetting benefit.

And some government assets are quite valuable, including vast real estate holdings, often in prime locations. The National Printing Bureau (the NPB, a Finance entity), for example, maintains a factory of questionable necessity near the Hotel Okura in central Tokyo.

Some of the entities controlling these assets are even profitable and accumulate even more assets. In addition to real estate, the NPB has managed to accumulate a reserve for employee retirement payments of approximately ¥75 billion for its 4,200 workers — an order of magnitude larger than those typically established by private companies (which can’t look to taxpayers to make up any shortfall). The Japan Arts Council, an education ministry special corporation that operates the National Theater and other “National” venues, has a portfolio of investment securities worth ¥57 billion on top of ¥5 billion in cash and another ¥8 billion in time deposits. Public criticism has resulted in some of these entities being required to contribute a portion of their excess funds to the national treasury, though why they need to retain any surplus at all at a time of massive tax hikes is a mystery.

It’s not just about money either. Establishing these systems and ensuring they appear to play at least a nominal role in something requires intrusive laws and regulations.

If you want to import butter, the law requires you to go through the Agriculture & Livestock Industries Corp., a Ministry of Agriculture, Forestry and Fisheries entity. In addition to about ¥200 billion in government subsidies, in 2013 it generated a tidy ¥8 billion just from reselling imported dairy products. Its 10 board members (mostly from MAFF) received compensation that totaled an amount equal to almost 30 percent of what it paid to its 234 employees combined.

Or take gambling. Horse racing — MAFF’s version of the vice — is monopolized by the Japan Racing Association. Capitalized by the taxpayers to the tune of almost ¥5 billion, it has accumulated a surplus of over ¥1 trillion (including a vast portfolio of investment securities), in part by the highly profitable practice of giving stingier payouts than in other countries where people play the ponies.

Arguably, printing and many other functions performed by these captive entities could be outsourced to the private sector. They often are anyway, but only after a government intermediary takes its cut.

Ironically, in order to justify their continued existence, some entities are seeking to diversify, bringing them into competition with private sector. Development banks are moving into blue-chip corporate lending, and the decline in the use of coins domestically has led Japan Mint (another Finance Ministry entity) to seek business overseas, in 2012 winning a bid to make coins for the Bangladeshi government (which, incidentally, Transparency International rates as highly corrupt).

In addition to warping markets and regulations, these massive taxpayer-funded institutions also stifle rational debate about policy because many people — policy-making bureaucrats in particular — doubtless prefer not to talk about some aspects of what their policies are actually about. Sometimes, however, they can be surprisingly shameless; in July 2004 representatives from the Ministry of Justice and the Supreme Court appeared before a legislative committee to argue (unsuccessfully) in favor of a new category of “quasi-lawyer” license that would be available to ex-ministry officials and summary court judges, most of whom have not passed the bar exam. Insofar as the bar exam is essentially what the government uses to limit the number of young new lawyers who can join the profession every year, a willingness to go to bat for more older lawyers is a good indicator of bureaucratic priorities.

Unsurprisingly, the many Japanese people who understand the cancerous nature of amakudari rightly greet new policies with a healthy dose of skepticism. For example, recent proposals that reckless cyclists should be forced to undergo remedial training, the same way car drivers do, reek of jobs for superannuated cops rather than anything about public safety.

One implication of the proposed Trans-Pacific Partnership free trade deal is that it would likely make these cozy arrangements untenable when subject to international scrutiny. So perhaps reports of Japanese foot-dragging on the pact involve interests more powerful than farmers in headbands shouting about rice.

Colin P.A. Jones is a professor at Doshisha Law School in Kyoto. Law of the Land appears in print on the second Monday Community Page of every month. Your comments: community@japantimes.co.jp

  • DR Jensen

    You forgot to mention that each of those post-retirement jobs for senior bureaucrats offers a large lump-sum retirement payout after only a few years of “work.”

    You also forgot to mention that lump-sum retirement/severance payments are taxed at an extremely low rate (about 5%).

    When you put the two together, what you have is senior bureaucrats giving themselves a large and steady stream of income that is largely untaxed.

    Surprise, surprise. The people in charge of taxes set up a system that makes themselves the largest beneficiaries.

  • Hendrix

    Very good article, sums up Japan in a nutshell.

  • Steve Jackman

    Colin raises a really good point about corruption in Japan. I’m always amazed at how well Japan does in global rankings of corruption, since I find Japan to be much more corrupt than these rankings would lead one to believe. I think one reason for this is that even though there is widespread corruption in Japan, it takes different forms than what people outside Japan are used to when they think of corruption in other countries around the world. Unfortunately, they are using the wrong yardstick to measure corruption in Japan, so it goes undetected. It’s akin to using a sensor which is designed to detect dangerous carbon dioxide to check for the presence of radon gas. Of course, the senor will be worthless in this case.

    Another reason is that Japan is an extremely closed society and hence very few foreigners really know what goes on inside the black box called Japan. Just because corruption in Japan is veiled under many layers of secrecy does not mean it is not a serious problem.

    Just as an example, the judicial system in Japan is extremely corrupt and opaque. I know of a well know lawyer who was reluctant to represent a foreign litigant in a civil case against a powerful Japanese party. The reason for his reluctance was that he had represented a client in another case, where the other party was represented in the same court by the same lawyer as the lawyer representing the other party in this case. Based on this experience, he was confident that this particular lawyer had a “special relationship” with the judge who was going to be hearing this case, so he did not think that there was any chance of the foreign litigant in this case getting a fair trial from the same judge. I look forward to when Colin takes on corruption in the Japanese judicial system in one of his columns here and exposes it for what it is.

  • tisho

    The amakudari and any form of corruption is a result of gov. bureaucracy, regulations/restrictions and overall big government with a lot of power. All people defend their own self interests, that includes entire industries and politicians. The gov. bureaucracy creates incentives for industries and businesses to want to bribe politicians in order to get the laws they want, that benefits them. Politicians in return have an interest in getting elected into power, so they do whatever is necessary to do that, which means they impose tariffs and other restrictions on foreign businesses in order to help domestic ones beneficial, which in return creates monopolies for the domestic market which then leads politicians to impose even more restrictions/regulations over domestic businesses which in return leads businesses to bribe even more politicians in order to save themselves from all that excessive intervention that is a big obstacle for companies. The situation is pretty much the same in the US with some exceptions that the US market is more open so there is more competition than in Japan, but still the companies are too regulated. The only solution for this system is to limit the power the government has. If the gov. has no power to safe companies, or to regulate/restrict or intervene, then there’s not going to be any incentive for anybody to want to bribe politicians, everything will be decided by the free market. The economist Thomas Sowell once said – if the ordinary people had understanding of even basic economics, the gov. would’ve never been able to do what they did with wall street, there would’ve never been any crises.

  • GBR48

    Excellent piece. This is a fundamental component of the uniquely Japanese way of using regulations, customs, public money and a good deal of legalised feather-bedding to fix how everything works in a certain way, ad infinitum. Designed to prevent change, such a system is poisonous to a nation living in a changing world. It would only work in a closed system (and would still be fairly toxic even then). But Japan isn’t a closed system: it is still subject to external economic and social forces and to the domestic consequences of foreign influences and fashions. And the system is failing. However many lumps of public money are handed out and clever financial shenanigans take place, the system is rotten at its core, and in a slow, terminal decline.

    The cost is huge, domestically, as it kills commercial and economic dynamism, prevents fair competition and all but outlaws natural processes of change within Japan, enforcing ossification across the board, under the guise of stability and tradition. Designed to protect Japan as a snapshot in time, born from a myth of the past and a desire never to change in the future, it is slowly killing the nation.

    It really punishes young people who want to do something different or new, as there is no avenue for them, except in entirely new industries. In the 80s, the computer industry. Today, the Internet. Online young Japanese entrepreneurs, coders and app writers can create a virtual life outside the Japanese ‘snow globe’ and shake off enough of the restrictions that would prevent them from attempting such activities offline.

    For many of the rest, trapped in the web of official bureaucracy and paperwork, hemmed in by organised crime and social customs, forced to walk the path mapped out for them from High School, it must be suffocating.

    It’s a physical embodiment of Japan’s fear of change, but it’s no way to run a country. And you don’t become an honest society by simply legalising and institutionalising inherently corrupt practises.

  • Steve Jackman

    You’re absolutely right. I’m sure perception will eventually catch up with reality and it’s just a matter of time before people realize the extent of institutionalized corruption in Japan.

  • http://w-p.biz Daren Afshar

    Another great read, Colin. Thanks.

  • http://w-p.biz Daren Afshar

    Another great read, Colin. Thanks.