Aftermath of a Scandal : Japanese Company’s Story Reflects Ties Between Business, Political Practices

By American standards, Hiromasa Ezoe would have been considered a success story. But by Japanese standards, and his own, his successes weren’t enough.

Ezoe, born in a lower-class background in class-conscious Japan, founded Recruit Co. with an initial investment of $1,400 in 1960, while still in his 20s. Starting out by simply publishing a single news sheet that advertised jobs for students, the company grew enormously under his direction until more than 25 years later it had become a giant information, computer and real estate conglomerate with annual sales of close to $4 billion.

But in Japan, guiding a fast-growing young business isn’t sufficient to win influence and acceptance in that nation’s tight inner circle of high-ranking government and business decision-makers. Ezoe has been charged with secretly lavishing such leaders with gifts and low-priced stock, winning himself appointments to several government advisory boards.

Disclosures of these influence-buying arrangements have resulted in the biggest political scandal to hit Japan since former Prime Minister Kakuei Tanaka was convicted in 1983 on charges of taking bribes from Lockheed Corp. in the early 1970s. Prime Minister Noboru Takeshita’s announcement this week that he would resign made him the latest in a series of top officials--including three Cabinet members--to step down in disgrace. Ezoe earlier had resigned as Recruit chairman, facing multiple charges of bribery. A dozen others have been arrested and charged, including a prominent Japanese businessman and two former vice ministers.

The Recruit scandal is not just a rags-to-riches story of an ambitious Japanese entrepreneur whose lust for influence brought down an entire administration. It is a dramatic illustration of the tight relations between government and business in Japan, and how politicians depend on businesses to provide money and assets to fuel that nation’s expensive political system.

The scandal is remarkable not so much because influence buying was attempted. Indeed, such practices are widespread and tolerated. But, rather, it is because the alleged bribes were done on such a large scale, with so many high-ranking officials, and were exposed so widely by a Japanese print and broadcast media that has let previous instances go by largely unreported.

“The funny thing is that this caused such a fuss . . . because it is standard operating procedure,” said Clyde V. Prestowitz Jr., senior associate at the Carnegie Endowment in Washington and former counselor for Japan affairs at the Commerce Department.

“It is generally accepted knowledge in Japan by Japanese and American scholars that Japanese politicians receive monies in ways that would be unacceptable in American politics,” said Richard L. Drobnick, director of USC’s International Business Education and Research Program.

Influence buying of the type practiced by Recruit is commonplace, experts say, in part because gift giving--with the hope of receiving future good will and possible favors in return--is ingrained into Japanese traditions.

Also, industrial policy is highly centralized, with businesses requiring a great deal of guidance from government officials on industrial policy and regulation.

“To expand your business activities in Japan, it’s important to work closely with government officials much more so than in the United States,” said Saburo Oto, audit partner in the Japanese practice of the accounting firm of Touche Ross.

Funding from businesses also is considered necessary for politicians to operate. Japanese elected officials, unlike their American counterparts, are expected to raise money not only to finance campaigns and support other politicians, but also to pay their staffs, run their office and entertain constituents and others.

Costly Customs

In addition, Japanese politicians also are expected to attend and bring gifts to numerous weddings, funerals and other activities of constituents in their home districts, the result of much tighter relationships than American politicians are accustomed to, said Jack Lewis, an associate professor of international business at USC.

“It’s very costly compared to what is done in the United States,” Lewis said.

A law enacted after the Tanaka-Lockheed scandal that set limits on corporate contributions forced the ruling Liberal Democratic Party to reach beyond established companies to new firms like Recruit for contributions.

And with tight relations forged between established business and government leaders, breaking into such inner circles is tough for young up-and-coming business leaders. It is made even tougher because one party, the LDP, still dominates Japanese politics, and leaders of its various factions form a clubby inner circle of Japan’s leading decision makers. Couple that with the industrial dominance of a few giant, decades-old conglomerates and trading companies like Mitsubishi, Sony, Toyota and Mitsui.

“In Japan, they have strong ideas about who’s on the inside and who’s on the outside,” Lewis said. “If you are on the outside, like (Recruit founder) Ezoe, you don’t have much of a chance” unless you buy your way in with gifts.

That is what Ezoe is accused of trying to do. Recruit’s diversification into information services, computer leasing and real estate investment gained him a high profile in Tokyo’s business establishment. But he still lacked important government contacts and influence that would help him rise further.

Some Japan experts say Recruit’s actions may have gone by unnoticed and tolerated had it not been done on such a large scale -- and had politicians not initially tried to cover it up by denying involvement. An aide to Takeshita, for example, had received a $381,000 loan from Recruit that, while not illegal in Japan, damaged Takeshita’s political standing because he failed to mention it when explaining his involvement with Recruit before parliament earlier this month.

Huge Profits for Many

All in all, about 150 politicians, bureaucrats and business leaders are believed to have bought directly or indirectly discounted shares in Recruit Cosmos, a property subsidiary, between 1984 and 1986. The company sold its stock to the public in October, 1986, generating huge profits of as much as twice what recipients paid.

Ezoe also gave Recruit Cosmos shares to prominent businessmen like Hisashi Shinto, chairman of Nippon Telegraph & Telephone, the world’s largest company. Ezoe hoped that Shinto would help Recruit enter lucrative computer and telecommunications businesses. NTT subsequently helped Recruit obtain two giant supercomputers from an American company, Cray Research.

“The rise of the company was so spectacular, and the amount of money thrown around so great, it was the Japanese equivalent of the Michael Milken case in the United States,” said Frank Gibney, president of the Pacific Basin Institute, a Santa Barbara think tank, noting the case of the American “junk bond” king recently indicted for securities violations.

“They (Recruit) exceeded the norm, it was just too flagrant,” Gibney said.

NTT’s Shinto resigned last year. Prosecutors charged him in February with taking a bribe in connection with about $80,000 in stock received from Recruit.

First details about the Recruit scandal were revealed last July by Asahi Shimbun, a leading Japanese newspaper often critical of the government.

The scandal soon became a television spectacle, capped by the remarkable instance of Hiroshi Matsubara, an aide to Recruit Chairman Ezoe, being videotaped trying to bribe an opposition member of the Diet, Japan’s parliament, with cash so that he would not ask too many questions in an investigation. The videotape was shown on national television.

“The energy with which the media went after Recruit is possible because it is an outsider,” said Gerald L. Curtis, director of the East Asian Institute at Columbia University. “It’s hard to imagine that a mainstream Sumitomo or Mitsubishi would get that attention.”

News of the influence buying enraged some Japanese already dissatisfied with the government in general and Takeshita in particular, whose popularity ratings have plummeted to less than 5% in part because of his support of an unpopular 3% consumption tax.

Japanese workers also are harboring growing resentments about how so little of Japan’s growing international wealth has trickled down to the average worker, who still cannot afford to buy his own home or apartment. Thus they resented top government and business leaders using their influence to profit on stock deals.

“This is part of a consumers’ revolt, it just took a different form,” said Gibney of the Pacific Basin Institute.

Whether the scandal will result in significant reforms remains to be seen, but some experts are pessimistic that the system of influence peddling will die completely.

“For there to be change, there will have to be a way to finance Japanese politics that is not dependent on big business,” said former Commerce official Prestowitz. Also, he said, there may have to be changes in such things as the tradition of politicians attending weddings and funerals, and of the close relationship between business and government.

Such changes, he said, are so fundamental that they are unlikely in the near future.

Pat Steinhoff, director of the Center for Japanese Studies at the University of Hawaii, said she expects big Japanese companies will be even more careful in how they make political contributions.

“The older and more established companies are sort of snickering that this upstart company was so crude it got caught,” Steinhoff said. “It will add to the finesse of how big companies give money.”

Times Staff Writer Nancy Yoshihara in Honolulu contributed to this story.