A Current Look at Japans Financial and Political Risk

A global company faces a number of different types of risks-economic, legal, political, and competitive. The nature and severity of such risks are not the same for all countries. A global company is in a position to manage such risks effectively by planning and implementing strategies aimed at diffusing risk. By keeping a breast of news-breaking developments, and not easily forgetting the past, an international company will have the ability to achieve successful use of strategic risk management in the global business environment.

In the past five years, much to their disgrace, Japan has fell victim to numerous financial scandals. In addition, within the past month of April their devoted leader, Prime Minister Keizo Obuchi, suffered a life-threatening stroke. These significant events disturbed the global economy to a great extent and brought a newfound appreciation for global strategic risk management. For those International companies, with operations in Japan, that were able to effectively manage their assets amongst the arising developments were then able to avoid, or limit, risk exposure. For those who were unable to strategically manage their risk exposure the consequences were severe.

In October of 1995 the details of the Japanese banking scandal began to unravel as Toshihide Iguchiís, an employee of Daiwa Bank, testified to U.S. District Judge Michael Mukasey. Not only did Toshihide Iguchi pleading guilty to covering up $1.1 billion in losses he had incurred Daiwa Bankís New York operations, he also told of how he had received more than $500,000 in compensation for such a scandalous task. This development astonished the entire world and would prove to almost destroy the once strong reputation of the Japanese banking industry.

He went further in his testimony to implicate that senior executives, at the worldís 13th largest bank, were involved in a conspiracy with him to keep the catastrophe hidden from the U.S. Federal Reserve Board. Toshihide Iguchiís implications and testimony described how Japanese banks had avoided divulging the true extent of what is believed to over a trillion dollars in bad loans made by the Jusen. The Jusen is a group of 7 Japanese housing and loan companies that were created in 1970 to provide loans to Japanese citizens that wished to purchase homes. These Japanese companies were also accused of loaning the money to real estate speculators that were linked to the infamous "YAKUZA, known by the Japanese for racketeering.

Though five years have gone by the exact value of the bad loans is still not known, it is believed that housing loan companies were crushed in the early 1900ís as bad loans rose to at least $77 billion and accounted for more than 75% of their total portfolio. Daiwa bank and the Ministry of Finance of Japan were accused of waiting too long to notify the U.S. of the losses, for fear that the financial-market anxiety would raise question about the Japanese banking stability. The Japanese answer to the problem was to try and hide the losses using shell companies.

Furthermore, these shell companies are only the tip of the iceberg. According to the Ministry of Finance, the official bad dept of the whole Japanese finance industry was reported at $349 billion, however, expert speculations reach up to 1 trillion. It appears that most the loses were incurred when executives within the Japanese finance industry failed to clear from their books huge amounts of real estate that have lost value when property market of Japan collapsed in the early 1900ís.

The Prime Minister, at the time, Ryutaro Hashimoto originally postponed debates on what had been a no-questions-asked $6.85 billion bailout of the housing-loans companies. However, to help solve the problem the government was forced to spend billions of dollars and 21 Japanese banks were forced to write off an astonishing $106 billion in bad loans. This helped to alleviate most of the pressure on the financial industry, however if it would have failed, the U.S. House Banking Committee and the Fed could have been forced to help in the liquidity crisis of U.S. subsidies of Japanís banks. This move would have placed the U.S. taxpayers in the inexplicable position of bailing out the Japanese financial institution with taxpayer money.

As the financial institutions of Japan were seeking help, the cost of doing business for Japanese banks