Japan’s prosecutors recently threw the chairman of Nissan Motor Co., one of the country’s largest auto manufacturers, into a jail cell. Carlos Ghosn, a Brazilian-born executive with French and Lebanese citizenship, has been accused of falsifying financial reports and hiding $44 million of personal income.

As my Bloomberg Opinion colleague Joe Nocera explains, Ghosn is unlikely to receive anything resembling justice. Officially, under Japanese law, a suspect can be held and questioned for 23 days without being charged. During this time he can be interrogated for as long as eight hours a day with no lawyer present. Unofficially, the holding period is much longer, because after the 23 days are up, the police can just re-arrest you for an additional crime and start the clock over again — Ghosn has already been re-arrested. Eventually, like almost all suspects in Japan, he will probably be forced to sign a confession, regardless of whether he is guilty.

Many will take this as a sign of Japanese xenophobia — Japan Inc. bringing down a foreigner who got too powerful. But Japan often does similar things to native-born executives. A decade ago, internet entrepreneur Takafumi Horie was sent to prison for insider trading (though he continued to assert his innocence). Around the same time, Yoshiaki Tsutsumi, a railroad and hotel magnate, pleaded guilty and was jailed for fraud.

To some, this might sound like justice — holding corporate executives accountable for white-collar crime is good. The problem is that Japan’s justice system is focused on forcing confessions, not on determining whether a suspect engaged in wrongdoing. This inevitably leads to miscarriages of justice. In 2008, a Japanese court reversed a lower court’s ruling and declared that three Japanese bank executives hadn’t broken the law. But their wrongful conviction had come almost a decade earlier — by the time they were exonerated, the three were old men, their lives and careers ruined. Two other executives had already committed suicide when the bank came under investigation. Such suicides are not uncommon.

And most of the people unfairly imprisoned by Japan’s unfair and arbitrary justice system are not high or mighty. Most of the people who are intimidated (or beaten) into signing false confessions by the Japanese police are simple blue-collar citizens who were arrested and charged because the police and prosecutors needed someone to blame for a crime. Japan’s fabled 99 percent conviction rate isn’t anything to brag about — it’s a sign that the rule of law is sacrificed to the desire to maintain the appearance of order.

This antiquated, barbarous system almost certainly has negative consequences for Japan’s economy. Rule of law — not simply keeping order, but determining guilt or innocence systematically and fairly — is extremely important for any economic system.

First of all, Japan’s lack of rule of law almost certainly makes companies less efficient. Because police and prosecutors are so determined — and so easily able — to convict anyone who gets accused of a crime, executives tend to avoid making tough but necessary economic decisions. For example, Nocera notes that Ghosn was arrested just as he was planning to merge Nissan with Renault. The merger was opposed by Nissan Chief Executive Officer Hiroto Saikawa, whom Ghosn had reportedly planned to fire. Saikawa denounced Ghosn immediately after his arrest, raising suspicions that the whole thing is just a corporate coup.

Second, Japan’s weak rule of law discourages entrepreneurship. A young businessman has the choice of either striking out on his own and trying to build a new company, or taking the safe path and working his way up through the ranks as a salaryman.

But if success simply paints a target on an entrepreneur’s back, the risk will be so high that few will start businesses — no one wants to end up like Horie.

Third, weak rule of law deters highly skilled non-Japanese from wanting to work in Japan. For years, under the leadership of Prime Minister Shinzo Abe, Japan has been liberalizing its immigration laws. But so far, the vast majority of its immigrants have been low-skilled workers rather than the highly productive professionals, businesspeople and entrepreneurs that the leadership would like. Part of this is due to Japan’s relatively low white-collar salaries and rigid hiring system. But part of it might be that elite non-Japanese feel uneasy about living under the threat of an unfair, arbitrary justice system that could turn them from professionals to prisoners at any moment.

Japan thus needs to embrace the rule of law in order to strengthen its economy. Some of its leaders understand this, and have been taking steps in this direction. Former Prime Minister Junichiro Koizumi, Abe’s mentor, did take one important step in this direction when he introduced the lay judge system in the 2000s. More recently, under Abe, the Diet passed a law requiring recording of police interrogations for severe crimes and introducing a plea-bargain system.

But more is needed to move away from the coercive-confession system. The first step is to change the law governing the 23-day holding period. Suspects should be given the right to have a lawyer with them at all times, and to be able to refuse questioning. Judges should be directed to deny most police requests for long holding periods, and suspects should be allowed to post bail. All police interrogations should be recorded, not just those involving serious crimes. Additionally, suspects who are exonerated should have the right to sue for wrongful arrest in civil court and receive substantial damages.

These legal changes would inevitably lead to cultural changes — prosecutors would learn to build cases rather than relying on confessions, and police would learn to gather evidence rather than simply rounding up the usual suspects.

Under the Abe administration, Japan has been making strides toward reforming its corporate system. But if those modernization efforts are to succeed, the legal and criminal justice system must be reformed as well. No modern economy can afford to skimp on the rule of law.

Noah Smith is a Bloomberg columnist.

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