Saving the Sun: How Wall Street Mavericks Shook Up Japan's Financial World and Made Billions [Reprint ed.] 0060554258, 9780060554255

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h classic tale of East meets West, a subject Tett

in bus'iness as it is in war or romance' Internati onal Herald Tri bune

makes as intriguing

平野

SAVING

the SUN

３ｈ GILLIAN TET丁

RANDOM HOUSE BUSINESS B00KS

Published by Random House Business Books in 2004

ll Copyright @ 2004 by Gillian Tett Gillian Tett has asserted her right under the Copyright, Designs and Patents Act, 1988 to be identified as the author of this work

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First published in the US by HarperBusiness an imprint of HarperCollins Inc. in 2003 Random House Business Books

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CONttENttS Ｉ Ⅸ  Ｗ  ． Ｘ ・ Ｘ

Foreword Prologue Chronology

PART I

1. Samurai

1

Bankers

3

2. Blocked Reform

18

3.

Money Madness

29

4.

TheTrillion-Yen Man

44

5.

The Bubble Bursts

54

6.

Takahashi's Revenge

70

7.

Onogi's Choice

81

I.

The Swiss Gamble

97

9.

Scapegoats and Seeds

113

PART

Contents

II

127 ９ ２ １

Dream

PART

  ６   ６   １

11. "Cowboy/'

  ６   ４   １

10. An American

12.

-

Negotiations

III

13. Yashiro's

183 Dream

185

14. Culture Clash

196

15. The Sogo Shock

208

16. Homma's Death

221

17. The Fight with the FSA

227

18.

Stalemate

238

19.

Success?

250

20.

The Bad Loan Surprise

260

21.

Saving the Sun?

274

Epilogue N

otes

281

29L

Notes on Bad Loans

311

Sources and Bibliography

315

Acknowledgments

3L9

Index

325

NOttE ttO READER

I

he guiding principle in this book has been to produce a namative that

makes the opaque wodd of Japanese banking relativdy accessible to nonJapanese readers. So, in the interests of simplicity, the following approach

hasbeentaken: .

.

'

written in the form that ls most familiar to Americans (nameh with the surname second) rather than their usual

Japanese names have been Japanese usage.

An approximate exchange rate of Y100 to the dollar has been used for most currency conversions. In practice, the rate has fluctuated dramatically in the last two decades, from Yl50 to Y8O, and at time of writing it stood around Y12o to the dollar. Horrever, a rate of Y100 to the dollar gives a rougfu sense of value; the main exception in this narrative occurs

in the immediate posteyar years, when the rate was fixed at Y350 to the dollar.

. .

The bookuses the American definition of trillion, i.e.: one thousandbilhon, and not the old European definition of trillion. The term 'bad loan" has been used in a generic sense to refer to all nonperforming loans; for a detailed discussion about terminology and ways

of measuringbad loans

see

'Notes on Bad Loans," page 311.

FOREWORD In ."..r,t y.r"r, the state of Japan's economy has seemed a riddle wrapped in an enigma to the outside wodd. A decade ago, the country appeared to harae created an extraordinary economic miracle, rebuilding itself with d^?dngryeed after the devasation of World W'ar II to become the second largest economy in the world. Indeed, this 'mirade" was so remarkable that some obserraers were predicting thatJapan would overtake America, as its mighty corporations stormed into Europe and America, stunning com-

petitors with their manufacturing skills-and snapping up trophy asses rangingfrom golf courses to film studios. But in the last few years, this mirade has soured. Since 1990, the economy has stagnated, debt to GDP levels has risen towards 150 percent, deflation has taken hold to a degree nor seen since the 1930s U.S. Depression, and the country's credit ratinghas been downgraded to the same level as Botswana's. Meanwhile, theJapanese banks have become engulfed in a tidal wave of bad loans, on a scale unprecedented in history. The Japanese goveflrment estimates g[a1 this bad loan problem has

or about one trillion dollars, during the last private decade; sector economists put the figure two or three times this. Either way, the problem continues to bubble-which also putsJapan in a reached Y100,000 billion,

grim historical category of its own. For while plenty of other countries have also uperienced banking crises in the past, these have usually been

-

Foreword

-

resolved after a few years. what makesJapan remarkable, alas, is that a

full

thirteefiyeirs after the bubble burst, many of the country's biggest bankswhidr also happen to be some of the largest in the worl&-are still effec' tinely insolnent. But why have these problems developed? Why do they drag on? And

why

has theJapanese government been so

unwilling to do anything about

it?

And-perhaps most important of all--does Japan s experience hold lessons for other countries whidt have also suffered the collapse of an asset bubble or a period of prolonged economic stagnatiou, such as parts of continental Europe, or some of Japan's other ndg[rbors in Asia?

Ttis

boot explores some of these questions, but from a slightly unusual point of view. ln recent years, there have been plenty of academic accounB of what has gone wrong inJapant economy--and what might one day go

rigfrt-from a "top-down" macro economic point of view. Howerrcr, t]ris book tries to explore these issues from a 'bottom'uP", more anecdotal perspecdve, that explains the cultural context and political pressw€s at work in Japan. Above all, it looks et the issue of incatfies.--oc more qpecifically, the fact that the incendves drivingJapanese behavior today are often difierent

from what outsiders from America or Burope might assume to

be

'normall'. To do this, the book naffates the history

of one

qpecific bank

&at

both epitomizes bothJapan s economic problems and the search for a solu' tion to them-the Long Term Credit Banh later renamed Shinsei' This was pillar of Japan's post-war sys' tem. Howerrcr, in 1998 it collapsed, and was subsequently deemed to harrc had an eye-popping $50 billion of bad loans on its bools, mudr of which had not been visible before. The bank was then nationalized and sold to once the ninttr largest bank in the world and

a

new owners. Ttrese were a $ouP of American and European inrrcstors who ried to introduce for.igr management tectrniques as a bold new erperiment in financial reform. And fur many yays, *ris was a revoludonary step. For until the sale of LICB, no foreipers had errer attempted to bash their way so deeply intoJapan's fnancial world, lit alone change the country's hallowed corporate waF.

-

Foreword

-

There are two reasons why this tale is imporant-and not just to banking experts. Firsdy, ttre problems sitting inside theJapanese banls offer a telling insight into the broader issue of whar wenr wrongin the country during the last decade. For unless the country's financial system can be properly fixed, it seems unlikely that the worlds second largest economy will ever be restored to vibrant growth. Secondly, the tale that has unfolded at Shinsei cuts to the heart of a paradox in Japanese culturs Its strange love-hate relationship with the outside wodd. During much of its history Japan has eristed in a state of selfimposed isolation, viewing outsiders with deep suspicion. Yet alongside this xenophobic streals, its periods

of

greatest renaissance

have-

perversely-tended to occur whenJapan has deliberately set out to borrovy ideas from outside, usually as a result of a sudden external "shock". One case of this occurred back in ttre middle of the 19th century, when American warships barged intoJapanese waters for the first time and forced ttre

shogun rulers to open up theif country to the outside world. Ttris triggered an internal revolution that leftJapan $appling to "catch up" with the outside world by mimicking its technology,

with considerable success. lhen, afterJapan lost World lW'ar II, a sirnilar process of "catch up" and "copying" occurred: Within a few short decades, Japan copied manufacturing skills from its American conquerors---+nd rebuilt its economy at top speed. What makes the tale of Shinsei bank interesting is that it echoes these earlier periods of cultural collision, And though it is not yet dear whether

it will deliver such a happy ending, the new forign osrners have arrived at Shinsei at a time when many of Japan's intellecnral elite recognize that something has been gotng wrong in their country---and are searching for solutions to put it right.

The narrative falls into rhree parts. The first section illusrates the rise and fall of Japan's post-war financid system by telling the tale of LiICB-and, in particular, the story of Katsunobu Onogt, ttre last president of LTCB, a man whose life epitomizes the post warJapanese economic $ystem. The second section centers on Tim Collins, an American entrepreneur, who in many ways epitomizes the distinctirrely American approadr to businessand an approach that is the polar opposite of the modus opoaali of men

-

Forewdrd

-

such as Onogi. Collins bashed his way into theJapanese corporate world ba& in 1999,.when he helped to organize a foreign investment consortium

*rat

acquired the collapsed LTCB, and thus set the stage for the creation

of

Shinsei.

The last section focuses on this period, telling the tale via ttre story of Masamoto Yashiro, ttre Japanese businessman appointed to run the new bank He has spent the last three years trying to carYe out a nern, vision of reform-and blend the wildly contrasting Japanese and American approaches to business, inwhat he hopes is gome type of Hegelian dialectic.

Two words of caution. First, I have deliberately focused the book on

individual characters, and these three men in particular, in an attempt to make the opaque wodd of Japanese banking seem a litde more accessible' However, in describing the problems ifl LTCB before 1998, I do not mean to "pic.k on ' Onogi or IJTCB. On the contrary, it should be emphasized that I believe Onogi to be an honorable man, who spent his life trying to defend Japanese values and has become a tragic viairn of the system as a result.

What makes *re history of LTCB so desperately relevant to the situation today is that it epitomizes a Pattern of behavior that was happening at all Japanese banks, induding those that have survived , and, is still contituingto sone degree.If any reader doubts this, they need only glance at the rerrclations ttrat erupted in the autumn of 2003 about the "under-reportingi' of bad loans at Resona,Japan's fifth largestbank-a dismal, ongoing saga that could have been taken suailht from the pages of LTCB. Secondly, this book does not set out to pre$ent any comprehensive

prescription for how to fixJapan's economic problems. Nor does it take

deu

a

stand on the debate that obsesses Namely whether a "solution' toJapan's woes should focus first on supply issues (i.e. structural reform) or demand issues (i.e. monetary policy and/or devaluation andl or the sarrings surplus). Although I believe that eventually some combination of both measures will be needed as part of a

many American economists:

coor,clinated package, the demand issues are largely outside the scope

of

*ris book However, the LTCB tale does ofier a general moral about structural refurm: Namely ttrat if a country continually tries to avoid short-term pain by dinging onto outworn institutions, and refusing to adapt to a changing

-

Foreword

-

world with some "creative destnrction"-to use Schumpetet's famous phrase-this can carry a terrible long-term cost, ,lot just in terms of lost gowth but also shattered lives. tn making ttris point, I do not mean to argue that the only "solutiort'' toJapan's problems is to blindly copy a ruth-

lessly free-market, American approach to business. The events of the last

two years have shown that *rere as

well-and

are

plenty of flaws in *re American system

the Wall street phflosophy sits uneasily

wittr many admirable

Japanese values. Yet, adopting an eatreme free market qfstem is not neces-

sarily the only way for a country to fix a broken banking system or remo\rc dead wood from the corporate world. Sweden, to name

but one example,

6xed its banking woes in the early 1990s partly by government interven-

tion. It is possible to imagine that

a more collectivist, state-driven reform model might be better suited toJapan. Either way, the essential moral of the story of LTCB and Shinsei is this: Whatner system Japan uses to move capital around the economy-

whether it does this by bankers or capital market investors-it needs to find some method of doing this more efectively and flexibly, to let its economy

to changing circumstances, and above all, remorrc dead wood and outworn institutions. By adopting an ostrich-like approach to policy making in the last decade-and refusing to take painful decisions-Japan has adapt

not made the challenges go away Nor has it made *rem

less painfril or

cosdy to deal with. The biggest single lesson from IITCB, in other words, is

that collective policy denial and procrastination can carry a terrible cost, both in terms of wasted resources and human lives. And that is a moral that the leaders of any economy forget at their peril-be it Germany, Britain, America or Japan.

Prologue THE I(ID FROM I(ENTUCI(Y

How dtd aWdfromKntucley enn uphtyngone of theltrgatJapawse banksl

lt b

a qucstion that

-Tim

Tin

dbt of people

mlght wondex

Collins

into seat lC on the ANA flight from New york to Tokyo next to a wizenedJapanese man who had a distinguished air about

CoUi*

eased

him. Since the sixty-nine-year-oldJapanese man was sitting in the first-dass section where tickets cost more than $1O,OOO each, he was also dearly either rich or important---or both.

"Who's thatl" Collins wondered. It was a question that he often asked. For one of Collins's key talents in life was an ability to collect peoples' names and then use them later to his great advantage. It was a skfll that had served him well in the forty-three years since he had been born in the Sou*r, to a family that had once run a

tobacco farm in Kentudry After an eady career in a local auto plant he went to business school before winding up on Wall Street as an investrrent banker

into an expert on corporate restrucnrring. In himself again as an entrepreneur. He created an invest-

and then transforming himself 1995 he reinvented

ment firm called "Ripplewood," named after his familyb old Kentudry tobacco farm, which made a living by buying distressed companies cheaply

restructuring them, and reselling them at

a

profit. Collins liked to describe

-

Prologue

-

ttris as a "private equity' or "restrucnuing" firnd and he would

daim-with

solemn, evangelical zeal-drat his business represented part of the genius of the American capitalist system. For what he maintained was that his fund deaned out dead $rood from the corporate wodd, in a process of "creative

destruction," thus making the American economy more productive and efficient. "I believe in using capital as a catalyst for change," he liked to explain. To Collins's irritation, Ripplewoodwas sometimes also known as a "vulture

firnd," or

a

company that scarrcnged among corporations in distess.

Either way, Ripplewood rapidly exPanded, gobbling up an auto parts company in Texas, an English-muffn maker in Ohio, and a refrigerator manufacturer in lllinois. Another acquisition was a frozen'pie company in Hope, Arkansas. 'itnd I have to Bay, we are the largest employer in Hopel" Collins liked to tell his investors, with a sigtificant chuckle. 'its in Hope, Arkansu." That was Collins's way of lening people knovr he had

based

powerfirl friends in Washington, New York, and London. Hope, Arkansas. As in, the birthplace of Bill Clinton. But,

as

Collins eased into seat 1C on the plane to Tokyo in September

to think bigger than Arkansas---outrageously big, in fact. A few years eadier, when he had been trying to raise funds, Collins had approachedJapan's mighty trading comPany, Mitsubishi Corporation. To his delight, Mitsubishi had taken a large stake in Ripplewood, and 1998, he was starting

Collins had become curious about Japan. There was little in his background that made Tbkyo naftEal destination for Collins. He was a south" ern American boy---or a "kid from Kentuclry," as he liked to say-who believed in the importance of the family, free markets, the Democratic Party and Baptist church. One of his favorite books was Pilgtitns in Theit Owl LmA, the story of how the Protestant ethic had infused American culture. Indeed, Collins had once considered becoming a minister, before he decided that his red talent in

lifr

was making money.

very alien land, it fascinated Collins. From a distance, the place seemed bizarre. Back in the 1980s, like most Americans, Collins had been dazdedbyJapan's polver. But then everything had gone ThoughJapan was

a

badly wrong and for an entire decade Japan's economy had stagnated. Since 1990, more than one quadrl.lllonyen CYl,ooO tr{llion or $10 trillion) of Japan s wealth had been destroyed by the crash; the debt to GDP ratio had

―

Prolo9ue ―

so.ued toward 150 percent, higher than anyq/here else in the industrialized

world, and the banks had become engulfed with more than Y100 trillion of bad loans. This was equivalent to a trillion dollars, a sum as large as the British economy. More baffling still-at least in Collins's eyes-was the way Japan's government had responded. It seemed selfevidendy dear thatJapan desperately needed restrucnrring. It had to remove the excess debt, get rid of

its deadbeat companies, and revamp the business culture. In short, Japan urgendy needed to do on a macro scale the type of "deanup' process that Ripplewood performed whenever Collins purdrased a company. Such a plan may harrc seemed selfevident to Collins, yet theJapanese government had sat on its hands, year after year, seemingly unwilling or

unable to tackle the situation. To Collins, that paralysis seemed not just foolish, but morally wrong. He

betwed-like most Americans-in the con-

cept of action and individual responsibility He also assumed that a key role

of a governrnent wr$ to make its citizens as rich as possible. Yet, Collins was also an opdmist-and opportunist. He could see the great potential proflts lurking in this strange situation inJapan. What was happening inJapan was not unique: Back in the 1970s, for example, American industry had also grown flabby, complacent and panlyzed, creating

economic problems. The American private equity bustress had eventually emerged-and made private equity firms very ridr-from the discovery of ways to redaim exhausted and dilapidated companies. Although the concept of private equity was unknown inJapan and Tokyo had traditionally

been hostile to foreigrr investors

in general, Collins

belie\red that Japan would become the next great theater for the drama of a business turnaround. No economy could stagger on in this type of self-destructirrc limbo forever, he reasoned. And when change came, this could create amaz:rag

opportunities for foreigners. A corporate shake-out was the only way that the economy could be truly saved from its current dedine. Like generations

of American pioneers before him, Collins believed it was time to head west. The plane carrying Collins and his Japanese seaunate made its way

slowly up over the Rodry Mountains, tarreled high above the Alaslsan waste, and began to crawl down over the ocean pa$t the Aleution and Kurile Islands towardJapan, Half an hour before the flight landed in Tokyo, Collins caught the eye of the mysterious Japanese man. "So why are you

-

Prologue

-

going to Tokyo?" Collins asked, with the e4ransive friendliness of an American orrcrseas. '\Mhat do you do?"

"I am retired," theJapanese man ailwered, in perfect English. Prodded, he explained in vague terms that he had once worked in banking and the oil industry-but now was living in London.

'

Collins's mind went into overdrive. AJapanese banker? Who worked

in industry? With foreign connections? Who looked about sixty-nine? Suddenly it dicled and Collins could barely belierre his ludr"

"fou must be Masamoto Yashirol" he dedared. The Japanese man nodded, surprised; he was not used to people recognizing him. "How do you know?" Collins switched on the charm and reacied for a file of papers. Before he had boarded the ANA plane in New York" Collins had asked his friends

on Wall Street and in Washington

if they knew of anyJapanese

business-

men who migtrt be willing to help him bring the gospel of restructuring to Japan. Rick Bradodq the former head of

Citibank-and another "friend' of

Collins-had offered a particularly interesting name: Masamoto Yashiro, the former drairman of Citibank's ourn operations in Japan. The man sounded inuiguing: Yashiro was a close friend of John Reed, the former drairman of Citiburk, and had spent his whole life working for foreign

firms, whidr meant that he was probably well versed wifi the concepts of restructuring and private equity Collins reasoned. However, the elderly Japanese man was also connected to some of the most powerfirl politicians,

businessmen, and bureaucrats in Japan. In fact, Yashiro wils Jo well connected that Collins was uru,ure whether he would be able to persuade Yashiro to talk to hfuit-an unknown American-at all. But now Yashiro was sitting right next to him on the plane, in seat 1A.

Fate--or God-seemed to be on Collins's side. t have been looking for you, looking uaywhnel You have this wolderfrrl reputationl" Jubilandy, Collins waved his files at theJapanese man, pointing out Yashiro's CV Yashiro eyed the American man curiously. It was extremely odd, by Japanese standards, for a stranger to accost somebody on an airplane like this. Japan s culture is reserrred and polite, errerybody acts according to the

twin guidelines of hierarcJry

and harmoqr But Yashiro had spent decades

-

Prologue

-

of his life trying to bridge *re vast culturai gulf that separated America and Japan and he knew Wall Street men were apt to do strange things.

"Why do you want to talk to me?" Yashiro asked. Collins hastily made his pitch. He described what Ripplewood did and explained that he wanted to take its operations to Japan. After all, he pointed out,Japan urgently needed to reform its economy-and the country seemed to be opening up to new ideas and to the outside world. Yashiro, Iike many men of his generation, was feeling rather downhearted about the state of his nation. As a child he had suffered the horrors of World War II and for *re past five decades he had watched wirh immense pride asJapan had rebuilt itself after defeat. But now, in the 1990s, this mirade had lost its magic powers. Yashiro was convinced that the only

way to fix these problems was to introduce radical reform into the corporate wodd by importing fresh ideas, vision, and energy. Lrdeed he beliered that he had a duty to help promote this change. But Yashiro also knew that Japan was a consensus-based culturc. And thus far drange had been

painfully dishearteningly slovl The arrival of some outsiders, Uke this chatty Mr. Collins, could possibly he$ to shake the couney up. It was not such a strange idea. yashiro

knew that Americans had helped trigger change in Japan before. Most Japanese believed that the only reason why the country had embarked on its stunningly successful bout of industrialization in the nineteenth century for example, was because American black warships had sailed across ,1r. pxcific and forced their way into waters, shocking the old Japanese shogun government with their mititary might. The arrival of the American

soldiers trt 1945 had acted as another "shock" that propelled the country toward its postwar economic mirade. Moreover, Yashiro also knew that inside Japan itself there were some intriguing hints of change. Just before he had boarded the plane in New york,

the newspapers had carried the news that Long Term Credit Banh one of the country's most prestigious banla, was on the verge of collapse and the government was coruidering nationalizing the bank before selling it to new owners, perhaps elren Americans. It seemed to be a shocking derrelopment. Yashiro knew LTCB---€nd its president Katsunobu Onogi-relatively well

-

Prologue

-

from his days at Cidbanls; he figured that the bank's history epitomized erierything *rat had gone wrong with fie Japanese colPorate system in recent years. The bank was, after dl, a cofirerstone of the postwar financial world, once the ninth l"tg.tt bank in the world. Just a few years eadier,

it

would have seemed inconceivable that the government should sell it. "Will you have dinner with me?" Collins eagerly asked, as the plane finally landed at Narita airport in Tokyo, after im fourteen-hour journey. Collins deqperately needed aJapanese ally to help hifil lsalizs his dreams' Warily, Yashiro agreed to meet Collins again. He was far from sure that he wanted to work at Ripplewood. But he always loved discussing what was

wrong withJapan's economy-and what could be done to fixit, It's just a dinns; thqeis na commilraent, Yashiro thought.

It was only later that he realized that the plane ride was the starting of one of the suangest financial etferiments ever seen between Tokyo and Wall Street; a journey that would eventually pull Collins and

pofurt

Yashiro into the tangled history of LTCB and deep into the thorny question of what had gone wrong withJapan's banks-and what might be done to

fix them.

CH RONOLOGY 1853:

American warships force their way into Japanese warers triggering the Meiji Restoration.

1897i

The Nippon Kangyo Bankis createdby theJapanese government to helpJapan's "catch up" with the West.

l94l: L945i

Japan enters World War II. Japan is defeated by America and the U.S. military admin-

1952:

isffation takes sqrtrtl. The United States hands power back to aJapanese government. The Ikeda council draws up

a

postnrar financial plan,

induding the creation of the long-term credit bank system. In December the Long Term Credit Bank is created our of part of Nippon Kangyo Banh

1953:. 196l:

Japan's period starts,

of high economic growth-the "mirade"-

LTCB moves to a new headquarters in Otemachi; its business booms.

1968:

Japans economy grows so fast that its ourput of goods and seryices su{passes that of West Germany and every other capitalist country except America.

L973:

The oil shock slows growth; LTCB steps up its overseas expansion.

-

XX‖

Chronology

to cleate a bond market in

1975:

Japanese government starts

1985:

Japan, effectively undermining the old rITCB system. LJfCB draws up a reform plan calling for the bank to move away

fiom traditional lending to new invesunert banking

businesses;

it

is blocked by vested interests.

Ttre yen strengthens after ttre "Plaza accord." Japan's asset price 'bubble" becomes entrenched. 1987:

American stock markets crash; the Bank of Japan cuts

1989:

rates, fueling Japan's bubble. The Nikkei 225 hits a peak of almost 40,000 and Japan's

of world GDP reac-hes 9 percent. LTCB is ranked ninth largest in the world by asset size,

share

with 1990:

a

market capitalization several times that of Citibant"

The Nikkei plunges 40 percent after the Bank of Japan tigltens interest rates at the end of tggg. The real estate market starts

to slip. ft is estirnated that

aO

percent of

bank lending is directly or indirealy linked to real estate. 1993:

L:ICB finally moves to a lavish'tubble era" headquarters

building. The LDP temporar{ly loses power for the first time, amid popular unease wtth the end of the economic mirade; growth slows sharply. 199,:

Government uses public money to l€scue Tlokyo Kyowa

*re first such step inJapan since World War IL The ensuing scandd forces the ITCB president to resigtt. and Anzen,

1996:

MoF inspection

of LTCB finds about

Y4

trillion

($40 bit-

lion) of nonperforming loans (NPLs); this is correred up.

Ryutaro Hashimoto, Japan's prime minister, umeils the'Big Bang" reforms to makc the Tokyo markets "free, fair, and dobal." The Japaaese economy appears to be recorrering. Spring 1997:

Japanese governrnent dghtens fiscal policy, pushing the economy back into recession; Nippon Credit Bank almost

Smmer1997:

Asian financial crisis starts.

collapses

but is rescued.

Au-1997:

Chronology

-

The financial system erperiences its first serious turmoil and Hokkaido Talusholnr, Sanyo Securities, and yamaichi collapse.

Spring l,98:

TheJapanese government cleates its first rescue package for the banks, injecting around y1.8 trillion ($18 bil[on)

into the largest banks; it admits that NpLs harrc reached more than Y60 trillion ($600 billion); a new Financial Summer 1998:

Supervisory Agency is founded ro oversee the banls. The Asian fnancial crisis intensifles; the Americans intervene to support the yen and ask theJapanese government

to rcsolrc the banking problems and bad loans.

Rumors about LTCB's problems trigger a share price collapse.

Autumn 1998:

Americans intensify pressrue for Japan to produce new banking measurcs; Japan finally produces a new y60,000

billion safety net to suppoft the banks. LTCB

collapses and is nationalized, as a gesture of reform. NCB is nation-

alizsd ssar a6ar. Winter 1998:

The gorrcrnment appoints Goldman Sachs to find a new

Spring 1999:

Renault effectively takes contol of Nissan, the first deal of this size seen inJapan's corporate wodd. Alliances accelerate between foreig, and Japanese

ovmer for LTCB.

companles.

Su― er

1999:

Fuji, and DKB announce that they are mergingto create Mizuho, the world's largest bank by asset size. SubseIBJ,

quently, alliances are announced betrnreen Sumitomo and Mitsui (Sumitomo-Mitsui), Bank of Tokyo Mitsubishi and Mitsubishi Tbust (MTFG), Tokai and Sanwa (UqD. This *megabanls." creates

Auturnn

1999:

four Japanese gqvernment announces that LICB is to be sold to the Ripplewood group, using the conffoversial "Put."

Spring 2000:

Ripplewood takes control of LTCB; yashiro is appointed

president. The Nikkei rises above 20,000; foreigner

-

XXIV

Summer 2000:

ChronologY

-

investors buy Y10,000 billion ($100 billion) Japanese shares in hopes of policy reform and economic recovery. The bank changes its name to Shinsei. Sogo asks Shinsei for debt forgiveness; Shinsei gives the loans back to the government, leading to political uproar.

Autumn

2000:

Spring 2001:

NCB is sold to a consortium of Japanese and foreign investors and renamed Aozora' Homma, its president, is found dead. Japan's economy starts to tip into a new Fecession, the

third since

1990.

Deflation becomes entrenched.

Junichiro Koizumi, a self-sryled "reformer," unexPectedly becomes prime minister. Shinsei embarks on a new attemPt to clean up its loan

book This sparks bitter political controversy. Summer 2001:

Relations betrreen the FSA and Shinsei become tense.

The FSA comes under growing international criticism for its failure to recognize the scale of banking problems.

Autumn

2001:

Shinsei is reprimanded by the FSA. Yashiro is dragged into

parliament yet again. Spring 2002:

Summer 2002:

The Nikkei tumbles belorrv 10,000 as hopes fade of poliry change. Fears of a new financial crisis mount, but the Japanese establishment props the markets up' Shinsei starts to make progress in deaning up its loan

book lt unveils net profits of

Y60 billion ($600 million) in

its second year of operations.

Autumn

2002:

The Bank ofJapan unexPectedly announces a plan to buy equities from the banks. The government appoints Heizo Takenaka as Financial Services minister and he launches a new bank reform plan.

Winter 2002:

Takenaka's reforms trigger bitter opposition and are mosdy emasculated. Japan's debt to GDP rises to around 140 percent; its credit rating is downgraded to the same level as Botswana.

Spring 2003:

The Nikkei 225 closes the fiscal year end below 8,000, its lowest level for twenty-one years, intensifring strains in

-

Chronology

-

xxv

the financial system, The four "megabanks" survive by issuing Y2 trillion ($20 billion) in new capiral, but the dilution triggers a collapse in the banks' share prices, worsening their fundamental problems. The government oeates the Industrial Revitalization Corporation, allegedly to "clean up" bad loans. Shinsei's 'put" option runs out. The bank reveals that it has cut its bad loan ratio from 30 percent to 5 percent. It posts net profit of almost yi3 bilSummer

2003:

lion ($530 million), its third year of profitability. Mizuho posts Y2.4 trillion ($24 bi[ion) loss for Fy 2002, a record for Japan's corporate sector, due to falling share prices and bad loan writeoft. The other "megabanls" also record large losses. There is

[tde sigrr of any signifi-

cant decline in the bad loan total. Japan posts its fifth consecutive year

year interest rates hit a record low

of deflation;

ten-

of 0.5 percent. The

Nikkei falls to new twenry-year lows, well below 8,000.

SAVING

the SUN

PART ONE

-

C\aptut

SAMURAI BANI(ERS Af,er the wdr we had o system that disguise

ww

really a type

of

sociali.sm

under thc

of capiulkm. Tluhreaunax direaeil etryhifl& in dwlse way,

and we all accepud

wellfor afew

thn anl worked. together wry

hard.. The system worked

decades.

-Yoshiyuki

Fujisawa, former drairman

of

IBJ

In the evening of June 8, lggg, the Tokyo police telephoned Katsunobu pfggi his house. "Tomorrow we are going to arest you," the cafler

"t

taid fl5litely, "please take care to be readyl" Staging the arrest

so

everything could be done in the proper fashion, the police asked Onogi to suggest a convenient location. Japan is clearly not a cotrntry that leaves room for surprises. Nor was Onogi surprised. As he put down the telephone, part of him felt relieved, He was grateful that the police &d not plan to drag him away in a disorderly fashion. At the age of sixty-three, Onogi had spent his entire l'rfe behaving

with dignity and he had absolutely no intention of going to

prison without being properly attired in the suit and tie that was the badge of aJapanese "salaryman." The possibfity of such shame appdled him.

At the same time, Onogi was terrified, too. Even with the correct dothes-and with

all the perfect etiquette-prison was a frighteningplace.

Onogi had always been an intellectual and methodical man. He wore large,

―

SAVING the SUN―

bookish glasses and an impassive expresslo■ on his square face,broken Only by a tensc har smile that turned down tt the"rners of his mOuth.

Wheneに r

he faced a proЫ eln,he l山 ed to scour hbtory books for answers

and m the weeksleading up to his arrest,Onogl had furtively peeked into booktoresto sec r there was any gunde tO whata ttdle‐

aged man should

do in pHson.

Alas,there was■ o way to bone up on the ordeal ahead.Nor had Onogi's protssional career given him any idea of urhat to expect in jail. Onogi could scarceけ haveimagined thtt he would share the fate of a com‐ mon criminal.Hc had spent his whole life beLc慟 喝 that he was a member of the aliた

,a respectable manwho ddthing rint,according toJapanese

ndeas Ofれ り HC had daved for forty years of hislife in Long Tett Credit Btt one OfJapars most prestigious banks,where he had dsen to become

presidentoNormttSuchservicewouldhaveguaranteedOnogiacodort‐ able retirement.Holdays h Hawati;rounds of gott group trips宙

血 for‐

mer coneagues to Japan's hot springtt the sadsfacdOn of knowing that he had setted his counw wel・

That was how most si9‐ dree‐ year‐ old

Japanesebankers lived.

But somehow it had gonc horribly wrOng for()nOgi.LTCB had col‐

lapsed wim ahnost S,O billion of bad loans,enng onogi and his emp10yees an in a shame that was too much fbr some ofぬ e most senior year_Old TAshi LTCB bankers tO bett A fbw wecks etthet側 け血 ‐

糀

Tl器 膜押

謂鴛胤職緊it: 農 導

imminent:Uchara and the other LTCB managers were accused Of hiding

山にbttrs bad loans.Uchara dedded to co―

it suicide.Once theJapaneSe

believed that the correct way to kin oneser was to slash tte stomach open with four precise s● okes of a sword,letting the gu"spin Out,a method

姉

aS Sttμ れ。 Nov7adays,that was deemed“

Ыoody mess thtt needed commtted雌 dde in the

s“ sh,"since

to be deaned up.Consequenゥ

tt created a

n7hen executives

199os,they usualy hung themselvesin an anony‐

mous hotel― tO spare dlelr fmily“ shoと "Uchtta had always been a sdck‐ ler for etiquette:Hc checked himser into a lde suburban lЮ hanged himett leaving a note bn the table fOr Onogi and山 bankers.It said:``Iam so sorry."

tel and

〕odler LTCB

-

Samurai Bankers

-

Onogt, howerrcr, did not want to kill himself. He considered it his duty to suffer his shame alive-to "endure the unendurable," as theJapanese emperor had descdbed the American conquest after Wodd War II. So, he fixed his mind on cheerfrrl

*rinp.

He reflected on an ltdian fiIm he had

television about a concentration camp in World War II, called Life ls Bea*ifuI. Onogi [ked the title and he desperately tried to corwince himself that lrfe could be beaudful. 'Life is beautifult" he told himself. "Life

just

is

seen on

beautifult"

He also resorted to his favorite mental survival trick He imagined that he was looking down at himself from far outside his ourn body, as if he were an academic writing one of the sweepfurg pieces of history that he loved to read. Onogi had always found that uick comforting. It seemed to put life into perspective; to give a broader dimension to his own, little fate; to give a meaning to the terrible events that had engulfed LTCB. It was, he sometimes admiaed with a dry chuckle,

t

just for 'rcry strange tale-not

him, but forJapan. And it seemed to be getting stranger, with every year that passed.

For Onogi, the LICB story had started almost exactly four

decades earlier,

on April L, lg5g, a time when the pink drerry blossoills were bloomirqg in Tokyo. On ttrat day he turned uP at the banh as a fresh young graduate for his first day at wodc "Onogi Katsunobu herel" he dedared to an ofrcial, with surname first in theJapanese manner. He was wearing a suit and tie backthen as well. But it was an ill-fitting, &eap, darkblue outfit, identical to the suits that all the other new graduate tainees wore. Fourteenyears a bow, using his

earlierJapan s economy had been smashed to pieces in World War II. So the

bank had assumed that ttre new uainees would be too Poor to afford to buy their own suits, since these cost Y30,000 ($84) each, or three months' ,ryerage wages, so thry doled out matdring oudts to the gtaduates for free.

Onogi could have worn his own suit for his first day at wor[ if he had wanted. His ancestors had been "samuraf-literally, "those who serve," or

with a strong code of honot-who served Lord in the Kanazawa region of northwestJapan. DuringJapan's bloody

a privileged warrior dass Maeda

revoludon of ttre mid-nineteenth century, when the country's uaditionai shogun system was overrurned and the samurai disbanded, some of his

―

SAVINC the SUN

―

relatives had fought on the losing side and later committed suicide by sqpicu. But Onogfs father and grandfather had come to Tokyo, and, like

of other ex-samurai, laid dovrn their swords and turned theminto ciyil servants. Onogi's father rose to a senior position in the local

thousands selves

a plot of land in the Aoyama area, later one of the most chic sections of Tokyo, where Onogi was born. During World War II, the family home burned to the ground when

Tokyo gorrcrnment and bought

American B-29 bombers created

a firestorm in Tokyo by dropping incendiary bombs from low level. Onogi, a terrified nine-year-old child, watched the destruction. He never forgot the horror of that night. The family sur-

vived and after the war they retained enough wealth to send him to school

and the elite Tokyo University, where Onogi chose to study agricultural economics. "I was interested in history and before the industrial revolution

inJapan,

was the economy," Onogi later explained. He qpent much of his time playrns tenflis at the university's prestigious Akamon ("Red DooC') dub, named after the traditionalJapaflese gate on campus. Onogi vaguely presumed that after graduation he would work in the gw-

ernment bureaucracy, like his father. But ttre elder Onogi happened to have a former classmate who was ttre president of IITCB, who suggested that Onogi come to the bank instead. Onogi knew litde about banks. Indeed, like much of Japan's elite, he had always considered commerce rather distasteful: The old culture of the samurai reqpected pure, asceric lives. 'At that time theJapanese economy was very stagnant and there were not many jobs around," Onogi said. 'Banks were one of the few places hiring graduates."

Onogi reasoned that bankers and bureaucrats had simflar jobs, since both seemed destined to serve the nation as it recorzered from ttre war. "I was attracted to LICB," he said, -Because it was helping to rebuild industry." Jobs may have been scarce but the Onogis were still better off than most. Just before Onogi satted work, hls proud father took him to the tai-

lor to buy

a

smart new suit.

Yet for his first day of work Onogi wore hls nasty company uniform anyw'ay.Japan wis not a counbry where anybody ever wanted to stick out.

Before World War trJapan had been a counrry riddled with social hierar-

with the divine emperor at *re peah But when the Americans had aken charge, they had tried to impose new concepts of democracy and chy,

-

Samurai Bankers

-

equality. Now everybody wished to appear middle dass. So Onogi arrived at the shabby

buildingnext to Tolryo station wtrere the bankwas located, and

filed obediendy into

a

hall wittr the other, identically dressed new recruits, to

listen to ttreir president, Ivrane Hamaguchi-or Hatnaguchi-s4rnd, "the most revered Hamaguchi"--address them.

If they

had been born a decade eadier,

the men would harrc been conscripted into an army, wearing a uniform with imperial symbols; instead, they were 'hdarymen," dressed identically to fight for Japan's economic power.

"Welcome!" Hamaguchi dedared, in a brief speech that explained that the new bank was noq, dedicated to support the industrial growth of Japan,

"

Gambatte-work hard and overcome!"

'"We understandl We

will work hard!" the graduates dedare4 with

a

deep bow, standing in a neat line. Onogi felt rather excited.

LfCg

was considered a prestigious institution, a pillar

$ystem. The bank uaced lts origins back to the Meiji era

of the economic of the late nine-

teenth cenhrry-a period whenJapan's government had decided to end its previous, self-imposed isoladon from the rest of the world-and was frantically scrambling to industrialize its economy, to "catch up" wittr the West. In the Meiji era,

as

in the post-World War II era, the gormnment embarked

on this task with the same "catch-up" tacticg: It sent young bureaucrats overseas to sildy the foreigners' $ystems, copy the best ideas, and ttren bring thembac-ktoJapan. One of these emissaries, Masayoshi Matsukata, a government bureaucrat, visited Europe and was very impressed by the "Cr6dit Fonciey'' idea in France, whereby specialized banks provided credit to agncuhure and industry When Matsukata was appointed finance minister in the 1890s, he established the 'Nippon Kangyo Bank" to act as aJapanese ver-

sion

of

these "Cr€dit Fonciers." The bank would raise fu"ds by iszuing

bonds, andthen use these funds to make cheap loans to agricuhure and small business ventures. The idea qpread, and soon afterward two morc banks were

created

with similar struchues: Industrial Bank of Japan, and Holkaido

Tahrshoku,

a

smaller regional group.

For four decades, these banks quiedy flourished. They survived the financial turmoil that batteredJapan in the 1920s and the global depression of the 1930s. Later, whenJapan started building an Asian empire, Indusaid

―

SAVINC the SUN―

Bank of Japan played a key role in financing the military industrial complex. Nippon Kangyo Bank developed a large lending presence in theJapanese colony that is novr

modern Taiwan. But afterJapan lost the war in 1945,

IBJ shriveled and Nippon Kangyo Bank was reduced to financing a hotch-

potch of state initiatives, such as providing a Y30 million ($80,000) loan to create brothels to serve the incoming American troops. Many observers prezumed that IBJ and NKB would eventually be dissohrcd, since all the banks' reputations had been so tarnished by their role in V/orld War II.

ln

L952,IBJ and NKB were suddenly girrcn a reprieve. As the Ameri-

can military adminisuation was leaning Japan, Hayato Ikeda, the new finance minister, dedared in parliament one day: "We need to consider new ways of financing our economyl" More specifically, Ikeda called for a council to discuss

a

crucial question: What type of finandd sector should a

newly independent Japan use to rebuild its country? One based around stodrs, bonds, banks----or something else?

The choice was not obvious; Until the 1930s, the Japanese financial $ystem looked similar to the systems in use in the United Kingdom and

United-states at the time/'Companies raised part

of their

finance from

banks, but also tapped the capital markets by issuing bonds and equities,

and investors and other free-market forces played a powerful role in the

in Osaka-historically the commercial center of Japan-there had been a long history of market trading. Then, with the rise of aJapanese miliary government in the 1930s, the arm,y decreed that financial world. Down

most of Japan's financial flows should pass through banks, wlrich were easier to control than anonymous markets, and the freewheeling market culture of Japan's commercial class wilted ln the face of heayF state control. With the defeat and discreditlng of the militarists in World War II, some U.S. oftcials initially wanted to rip apart the bank-centered financial system. Their rationde was simple: The banks had supported the rise

of

the miliary government and shared some of the blame for the war/These reformers had hoped that free capital markets would, in ttrrn, support the

of democracy

in Japan. Howcrrcr, by the time that Ikeda's financial policy council convened in 1952,,'the Americans' initial burst of

development

enthusiasm for free markets and democracy had been replaced by hardnosed strategic concerns. With the United States preoccupied'by its cold

-

Samurai Bankers

-

war n ith the USSR-not to mention the heated fighting in nearby Koreathe American planners shifted their attention from reforming the flnancial and politicd culture of Japan to insuring a reliable source of industrial zupplies,,from a stable Japanese econom)i And lkeda's government believed

that the best way to achieve this was to retain most of the wartime financial conuols,,,Capital was extremely scarce in the '50s ahd Ikeda believed that

it

was essential to channelJapan's scarce financial resoruces to the industries

that could quickly rebuild the economy again. Relying on stock and equity markets $eemed risky, Ikeda argued, since the goverument might have

ferent priorities,from individual investors;

it

dif

would be better to use the

banks to push money around the economy, since this could be cot*olled.

Thus, in the zummer

of

1952, the Ikeda council

decreed--with Amer-

ica's tacit supponjthatbanks, not capital markets, would henceforthbe the

main source of finance in the economy The government did not abolish the idea of capital markets endrelyl The Tokyo Stock Exchange was reopened. But, inJapan, there was a unique function for shares. They werc not usually considered qpeculative or inrrcstrnent instruments, btrt as means for companies to solidifr *reir ties to eadr other through a system of interlocking ownershp,lqse11r11 as "cross shareholding.-'And these ties

linked groups of

companies into specific corporate "families" or "tribes" that were commonly

knovrn as"keir*ru," Into this system, Ikeda's government also mixed the old Meiji era idea "qpecialized' banks---overlaid with legislation similar to the Glass-steagall of act in America.that separated financial fi:nctions into different corporate entities. instead of allowing each bank to offer a range of financial services, sep.uate categories

of financiai institutions were allotted diftrent

tasks.

Brokers were given the task of handling ttre equiry markets; "ciry" banls served consumers, and made short-term loans to large companies; "trust" banks fiocused on asset management services; and 'regional' banLs served

small customers. Meanwhile, Ikeda also created a brand-new category of

bank as his pet idea'to hdp revitalize Japan, called '1ong-term credir banls,".'These banks were authorized to provide long-term investment

to

"specid priority" industrial sectors, such as steel or shipping. In prewar America andJapan companies usually raised these funds by issuing bonds to investors. Hower;er, Ikeda's theory was that a "Long-term credit loans

―

SAVING the SUN

―

bank" should issue bonds iaelf to raise funds hnd then lend this money to companies, like the old Nippon tkngyo Bank---€fiminating the need for corporate bond markets. So, in 1952 each of the banks inJapan was told to choose what type of bank they would become.'Hokkaido Takushoku became a "city' bank and Nippon Kangyo Bank split lnto rwo. Half its staff created a "city' banlr

eventually knoriln as Dai-Ichi thngyo B*ki,"',h" rest formed one of Ikeda's

specializedbanlc, fuith his dose support. Unimaginatively, Ikeda's pet was christened ttre "Long Term Credit Bank" IBJ, too, opted to become a longterm credit bank and a third bank of this type, Nippon Credit Bank (NCB),

tong Tbrm Credit Bank was given some library annex of the Bank of Japan-the best accommoda-

was created a few years later. office qpace in

a

tion available at the time in bomb-flattened Tokyo-and started operations with a few dozen staff just as the new year of tgSz got under watrl It was the frst full year of independence from the American administration-and later known as 'Year One of theJapanese Economic Miracle."

Onogi

qpent the first year

of his

career feeling like a human photocopiel'

The fresh young graduates were usually assigned to a loan departrnent,, where they sat in rorrs quietly shuffling the paperwork necessary to lend money. Onogfs departrnent was called "lending section number thtee,"

whidr served companies making elearical appliances and transport equipment:items in high demand due to the Korean War. The mafir role of the new recruits was to copy loan documents by hand. In America, the task was usually performed with carbon paper; however, Japan was too poor to waste funds on these luxuries. So the bankers sat in rows frantically writing. In winter, tley huddled next to oil stoves or sat under futons because the bank could not afford central heating. In summer, they sweltered in temperatures

of

100 degrees. LTCB, ever the paternal organization, pro-

vided light summer suits, but these fitted

as

badly as the winter

attire-and

itched. Nevertheless, the young LICB bankers had little time

to complain;

UTCB was a cog in a complex financial machine, which effectively converted short-term deposits by Japanese saraers into long-term loans for

industry-at

a gubsidized rate. Throughout the year, ttre three long-term

-

Samurai Bankers

-

credit banks (LTCB, IBJ, and NCB) would issue "debenrures" or a five-year

bond. Then, armed wtth this cash, the banks would extend cheap longterm loans to favored industrial companies.They rarely had any trouble in selling these debentures; The long-term credit banks were the only banks ttrat enjoyed the pr{vilege of issuing these five-year bonds and tlese securities were considered to be effectively government-backed. Moreover, when

other banls bought debentures, the long-term credit banks usually later extended some of this money to the banks' related companies---creating,

in effect, a financial merry-go-round.'The idea was that the long-term credit banks provided btg-tnm funds, supplementing shoft-term finance from otherbanls.

This meant that LTCB occupied a slighdy unusual position within Japan's colporate structure. Before World War II, this corporate world had been very tribal in natule, dominated by large indusnial conglomerates known x zaibatsu with names such as Mitsui, Mitsubishi, and Sumitomo. After the war, the Americans had briefly tried to break up some of these conglomerates. Howercr, most of theoldzaiba*u had reassembled themselves as corporate "families"-lceirersu-assembled around a bank and operated as tight-knit groups: Mitsubishi companies, for example, would

with other Mitsubishi names, and borrowed money from Mitzubishi Banlc but LTCB was one of the few insdutions ttrat straddled the different kcireuu, partly because it had no keiretsu of its own. It boug[rt shares and lent money to different keketsu and dozens of regional banl$. always deal

Th*, by the time *rat Onogi

started at the banlq LTCB was developing tentacles across ttre entire rystem-whidr could not be easily detadred. After his year as a human photocopier, Onogi moved a notch up the career ladder and became an assistant loan officer, covering a few small

shipping companies.

It made him

a popular man. Week after week, a stream of company officials would visit Onogi and his colleagues at the bank and beg for loans. The lending ofrcers would sift througb the applications and work out whic"h companies would receive fund,c-and which nof.

Their lending decisions depended on two things. First, the bankers knew that they were supposed to be dranneling their loans into companies of 'national importance," which were initially defined by rhe government to be shipbuilders, povrer companies, steel, and coal miningr Later, other

―

SAVINC the SUN ―

manufactuers, such as ciu comPanies, joined this list. Second, the bankers knew they should only give money to comPanies that were 'viable.f' Unlike later generations of American bankers,Japanese bankers did not try

what was 'viable" by looking at the financial returns a spedfic business projeci would produce. Nor did they look at the cost of money over time. Instead, they assumed ttat when they lent to a company,'they

to

assess

created a relationship that would last for a long periodr Thus, they tended

to measure whether a loan was sensible by looking at the enft € comPany, and its funue prospects;'And they considered that a company's prosPects depended not simply ou corporate statistics, but also on social contacts: companies with a web of reliable leeiretsu allies would usually zurvivein the Japanese system, but companies without allies could easily die;. Thus, when theJapanese bankers looked at their money,,they did not change the interest rate to reflect the risk

of different customers,i'cilce it

was the government that set the price of money. Asking weak customers to

pay more for their money.fhan strong cutltomers was considered distasteful. And the concept of trying to use money to make more money, purely

l for its own sake, was also considered rather dlsloydto the national interest Money was seen as a mearu to an end, not an end in itself-and the end was the revival ofJapan.

By

the early 1960s, LICB's business was grow'ing so fast that it morrcd into

a proper head office,

in Otemac.hi, the finandal disuict in cenual Tokyo

near the hallowed Imperial Palacej It was a controversial choice of location.

The site wits next to a shdne dedicated to Taira no Masakado, a Japanese warrior who staged a failed rebellion in 940 and had his head chopped off.' The head had supposedly then flown to Tokyo and was buried on that spot,'

of stone toads, and there were rumors ttrat the site was haunted. Indeed, manyJapanese wene so terrified of Masakado's nengeful spirit that the Ministry of Finance had deliberately relocated its buflding

beneath a statue

hom the site h 1923'anq when American occupation troops subse' quendy uied to build a car park on the spot, they were forced to drop their plans. LTCB did not appear to be entirely immune from the legend either.

"*"y

Soon after the move to Otemachi, serrcral senior officials diedi-and local staff promptly blamed ttre bank leaders for failing to honor vtasakadd fn

-

Samurai Bankers

-

IICB ahvays took care to perform the proper rituals in front of the stone toads. Still, some bankers remained uneasy. *Ttrere is a t4tdri-curse--on our banh" they muttered, whenercr any trouble hit, As ftr as Onogi could initially see, however, IITCB was going from subsequent years,

strength to strength. Japan s industrial "army" was booming on a diet of cheap bank finance, import barriers, and artificially weak yenTthat had been fi;ed by the outgoingAmerican administration ar

a

mere Y360 to the

dollar.,'The economy was growing at a dizzy ten percent a year. By 1963

LICB alone had poured severd hundred billions of yen worth of funds into domestic manufacturing companies,$uch as Toyota, Toray, Kawasaki Steel, Tiokyo Electric Power, Bridgestone, and Toshiba+-names that would tBetter soon become corporate giantsr still, LICB was starting to help some of these companies to look out, oversea$.,iAt the start of the 1960s, for example, Toyota approached LTCn,isking for the bank's help The carmaker wanted to purchase an American automatic assembly line,"since the best equipment in the world for making cars at thar rilne was found in the United States. f,oyota did not have access to dollars because the government had impbsed capital controls--and although the company had asked American banks for a loan, the foreigners had haughtily brushed

off

the request.'Most American businessmen considered{that Japan was too underdeveloped to make cars and too poor not to be considered a credit rishlrfcs-with the Ministry of Finance support-backed a loan applicationifor Toyota with the American Exim Bank, the first of this kind.i Toyota eventually got its assembly line, and started producing a new model of car, dubbed the "Fublica," because it was intended to be a car for the "public,'1' and American-sounding names were considered chic.r For years afterward, when LTCB bankers saw a model pottering alongl they would proudly declare:r/'That's one of oar cars! It's made with American technology!'f

'

Shortly after this success

witl

across to Onogi's desk and asked:,

Toyota,,a senior manager wandered i'Do you want to go to a university to

learn Englisht",'The senior LfCb managers had reeli'ed,'that if their dients were looking overseas, the bank needed men who spoke languages and who understood l;.oluir gaijht-foreigners-worked. Onogi jumped at the chance. Back in the late nineteenth cennrry and early

―

SAVING the SUN

―

twentieth cenilry, elite Japanese had often traveled overseas to absorb forergn ideas: bnogi's own grandfather, for example, had studied at the University of Michigan.'However, between the early 1930s and late

. Onogr was keen to prize it oPen again, since-like many men of his generation-he had a vague hope that the horron of Wodd War II could be wiped away with a newly "internationaf' stance, He eagerly agreed to learn English at universty in Tokyo and then wa$ sent on a raining course at Midland BanL a Bddsh institution, in London..,the idea was for Onogi to learn the strange ways of foreign bankers and bring their skills back to as Matsukaa, the finance minister of the 1880s, had tried to pnch gaiJin ideas in the Meiji era. Other young LTCB bankers were also being sent off wi*r similar magpie missions io leam financial skills ln America, France, and Germany,r--jut asJapanese manufacturers, like Toy-

Japan-just

ota, were trying to copy foreigir technical practices,'

On。 」adoК d England.Thoun d■ e winging 1960s weК n∝ an enttBサ easy time to beJapanese in London. SomeJapanese bankers were warned not to visit the northern town of Newcasde because many local men had died at the hands of Japanese in World War II, and it was feared itrat the local population might try to take nevenge. Luckily Onogi lived in the southern colurty of Surrey, and spent his frie time visiting concert halh, ahrays ruslring out before the fitwle

He liked the culture of

to catchthe

last train home

Britisi merchant banking.

Ir,

from London.

,o*. *"yr,

the City

of

London fek strangely comfortable tohim*or -or. .o*foltable than the aggressive world of Wall Street he later saw. British banking was a small, club, dominated by men with aristocratic backgrounds, who considered it most distasteful to talk in public about money and-as inJapan-

"liqu.y

valued politeness, understatement, and tea.,

Onogi followed his training course dt Midland Bank with an internship at MHL, ; British merchant bank owned by the American bank Manufachrrers Hanover., There, he earned himself the nickname "Nobby," since Katsunobu was far too difficult for the British to remember../Onogi badly wanted to fit in. ""I was very nervous, since like any young man I

-

Samurai Bankers

-

wanted to be accepted by the club,"jOnogi recdled. FBut *re members of MHL were rrcry kindr{t was perhaps the most exciting erperience of my

)'outh.';"

lhen, LTCB decided to

establish a branctr ofrce

in London,'and

appointed Onogi to work in thauTactfully, some of his colleagues hinted that it was tirne for him to find a wiftiso Onogi, ever dutiful, rushed to complyTElite families in Japan traditionally had arranged marr{ages, so

Onogi was introduced to a woman who would make a suitable banker's wife: Yasuko.l'1'he courtship did not go entirely to plan/Onogi had pre-

wrap up with Yasuko in a few days, but she-like many women in postnrarJapan-was not quite as conformist as . her future husband.. Her generation had watched HolVwood films and sumed that he could

read American books, and had developed disdncdy "modern" ideas about

romance. Yasuko insisted on meeting Onogi severd times,to chec-k him

out. Onogi was taken aback by her need to get acquaiflted,tecause it $,as delaying the process. Ar a young 'salaryman' serving his banh he reckoned that he had little time to wastei Eventually the young couple married and setded in a smart flat fur Chelsea, a location that Onogi had identified* from careful research-as ttre part of London where bankercwerc suyposed to live.,j

As always, Onogi wanted to make sure'that he followed all the social rules quite correctly. Years later, Onogi conduded'that his stay in Chelsea had been the happiest time of his life. The young Onogis forged a happy marriage and

quickly had two daughters.,'they went out of their way to culdvate British friends, reveling in their freedom from the LTCB headquarters and ttre

rigid hierarchy of the corporate culture in Japan"' Back in Tokyo, bankers were expected to dedicate their lives to ttre banh,they arrived eady in the

morning, left late at night, and spent most evenings and weekends socializing with their colleaguesiwives saw their husbands only rarely-and even at home, the hierarchies of the offi.ce often intruded. Many of the unmarried young ITCB bankers in Tiokyo lived in communal dormitories owned

fh. .o*p*y provided qpecial flats for families as well, like army barraiks.'There the women interacted intensively, according to their

by the banh

―

husbands'

diftrent

SAVING the SUN

―

statuses. Some women loved this warm "family" feel-

ing. lndeed, many of the wirrcs had worked for LTCB

as

well, since large

companies inJapan deliberately hired secretaries who would make suitable wives for their "salarymen," and senior officials arranged marriages for jun'

ior colleagues. Hovrever, for anybody who stepped out of line, the atrnosphere could be oppressive.

But London was different.'There the Onogis lived apart from their colleagues. They soctalized as a couple, since in England wives were not expected to stay meekly hidden.'Yasuko, who had a bubbly character, quic-kly learned

to

speak better Bnglish than her husband and started

voicing opinions in public. She was delighted that her husband was not forced to spend every evening playing mahjong and drinking salee with his colleagues. Onogi also had plenty of free time to indulge his hobbies. Unusually for aJapanese man, he learned to cook some European dishes. He also feverishly read boolc, often in Bnglish.,lndeed, back in university his prdfessors had suggested that he become an academic, since he seemed more of a thinker than a doer.,'ih London, Onogi happily roamed

around secondhand bookshops, devouring European and American works by Weber, the German political scientist, John Milton, the English author, and Charles Lamb, the English essayist who had written about ttre dangers of financial speculation and asset bubbles backin nineteenth-

centuryLondon.:l Work also seemed exciting. Onogi's main job at the London branch was lending money toJapanese trading and shipping companies, who were starting to erpand enthusiastically overseas..Onogi's second mandate was

to

deveJop ties

with local bankers.,"Back in the mid-1960s, when Onogi had

first arrived in London, most of ttre European and American ban}s had been utterly pamonizirig toward LTCB.lJapan was considered to be backward and imporarished, and its financial system was isolated from the outside world by postnar capital controls,'By the mid-1970s, American and European bankers had slowly realized that something extraordinary was

unfolding inJapan: Companies like Toyota were uporting their cars; the economy was booming;Japan was no longer an impoverished starc. On the

contrary, some of the companies and banks seemed almost rich. Suddenly,

-

Samurai Bankers

-

names like LTCB not only commanded interest, but also a modicum

of

respect.

.We

felt so excited about what we had achieved!" Onogi recalled, two .We decades later. all felt very proud." Just three decades after its terrible defeat, Japan was back

bankers.'

on the world stage, together with its samurai

Chaptuz

-

-

BLOCI(ED REFORM It is truc that all the main

rcosons

haw disoppeared , . . brt we

h,ape

for creating the long-terrn ctedit banks resorrcu which we thlnk shouW

be used

tohelp the economy.

-Mamoru In the late job

as a

Sakai, LTCB president, in 1985

1970s,

Onogi was sent back to Tokyo. First he was given

a

general manager in the international section. Soon after, he moved

to the corporate planning deparunent, a distinct honor, since corporate planning was usually the most powerfi.rl department in Japanese comPanies. 'Young Onogisan looks as if he is heading to the top!" some of his colleagues began to say

with

a

mix of admiration and envy. Japanese soci-

ety placed harmony and consensus at the peak of its pantheon of virtues. But that didn't eliminate the universal human tendency toward gossip, resentrlent, and competition. Onogi himself was not without his own inner strife. Privately he harbored tvringes of unease about the state of llTCB. Soon after he arrived back at the banh he was asked to produce a new memo for the senior management outlining the correct strategy for LfCB's international operations. In some ways, the bank seemed to be in a stronger position than ever before. The bank was awash with cash. Customers were scrambling to purchase the bank's debentures, and its loan bookwas at record levels, generating

-

Blocked Reform

-

a rising level of interest income. All around the banh the Japanese economy as a whole was booming. Between 1913 and 1920 the country had

more than tripledits lwel of GDP per worker from $3,500 to $11,500-the fastest pace of growth that a major economy had ever seen. It was as if Japan had leapt from the I 990 ecoaomic lerrcl of lndia to 1 990 South Korra,

just a decade or so's time. Better sdll, grow*r had continued, albeit at a slighdy slower rate, through the 1970s. By dre end of rhe 1970s, Japan's in

GDP per capita had reached 66 percent of America's; in 1955 it had been 21 percent. AndJapan was beginning to aspire to American living standards as

welt Japanese households were filled with shiny new televisions, refrigerators and tape players. LTCB's industrial dients were becoming corporate giants, churning out products at a dazzlingqpeed, and selling them to the rest of the world. The little 'publica" car Toyoa had built with LTCB zup-

port now

seemed pass6 and cheap. Toyota was not only using American machinery to build cars forJapan, it was also starting to selling cars into

Americaixelf. The pupil was c-hallenging rhe master at irs oqm game, Yet, this very success also contained a dangerous risk for LTCB. Dur-

ing the 1950s and 1970s, banklending inJapan had surged by about 11 per-

of GDP growth, a trend that was likely to continue, eqpecially when companies Lke Toyota were making such big profits by the late 1970s that they were cash rich-meaning that they no longer needed to borrow as much money from the bank.Japanese cent a year, slighdy higher than the pace

1e3

companies were also becoming strong enough to contemplate-for the first time-raising money overseas, in international capital markets. This

meant that they no longer needed the financial bottle-feeding of the old, selfl endosed Ikeda system.

At the same time, the internal mechanism of the system that had ini-

tidly supported LTCB-and the other long-term credit banks-was starting to crumble. The price of money, in the first few years after World W'ar II, had dways been carefully controlled under a rigid plan set by the bureaucrats, not the markets. The anchor for this system was the Bank of Japan's discount rate. The banks lent money at a prime lending rate, fixed

at a precise gap above the Bank of Japan interest rate. And the long-term credit banks sold their debentures to *re retail and regional banks at an interest rate that was always 90 basis points lower than long-term prime

―

SAVINC the SUN―

lending rate-regatdless of how many buyers wanted bonds. Depositors who placed money with banks were paid an interest rate set a litde lower than the lending rate. It was such a precise pattem, the bankers often called it the "four-and-a-half-utani-mats" system (yo-jo-ha.n-uike).ln aJapanege

of sizes, but none were smaller than four to rhe uumi rush mats used on floors. The

house, rooms came in a variety

and a

hdf

tatarnis, referring

meaphor was meant to con/ey the tiny margins between borrowing and lending, especially since the rush mats were out in a precise pattern on the floor.

ahrirays a

regular size and laid

Though rigidly endosed and tiSdy controlled, the system wgrked relathrely smoothly, like a well-calibrated engine. With interest rates determined politically and rot by the lavvs of supply and demand, *re system ensured the bank

a

profitable spread on any lending.

But what would happen, Onogi wondered, if lending stopped grow' ing? Or the price of moneywas no longer 6xed? tn the middle of the 1970s the Japanese govetnment took the fust steps tovrard creating a bond market. Starting tn 1975, the Ministry of Finance began issuing Japanese government bonds to fund the national

deficit. With this dre Ministry allowed the interest rates in the secondary market to float and be set by investor demand. Later still in ttre late 1970s, the gorrernment grcw even more comfortable with the rule of financial markets andbegan topermit moreJapanese companies to issue bonds and removed a few more interest rate conuols. Suddenly part of the system for

pricing money was aot fixed: a small, dissonant element had been inuoduced into the system, like a piece of grit in a machine. Japanese bankers discovered that the lines on the tatami mat could *o*. arrd although this "free-market" element was.still very small, it threatened to wear away at the balance in the system, undermining ttre banks' spreads. Worse, rf com-

panies could greet their long-term financing needs by issuing bonds, they

wouldn't need traditional banks. LTCB, Iike the other long-term credit banks, was becoming redundant. 'You know, I thinlr we are rather an artifidal

ba*,"

Onogi sarted to tell to some of his friends. "I am really not sure

how long we can continue like this."

It

nerrer occurred

to Onogi that it might be sensible to abolish the

bafllL Banls and bureaucracies were consider€d sacred in Japan and the

-

Blocked Reform

-

concept of voluntarlly letting an institution drc---or allowing free market competition to kill it ofi-was an alien one. lnstead, Onogi looked for ways that LICB could change its role and he seardred for new ideas overseas. During his London yenrs, Onogi hadseen that companies often raised

money by issuing bonds, rather than just borrowing from banls. Merchant banks-such as the MHL, where the young 'Nobby" had done an internshi5usually -organized the issue and trade of these bonds. What had really -cauglrt Onogi's attention, though, was that these merchant banks had not always dedt in bonds: A few decades eadier they had poUded loans for British trade and industry like LTCB. But as ttre markets developed-and the British economy matured-the merchant banks had dranged. Following their dients, the banks carved out a new niche, gradually {noving from traditional lgnding into capital markets. It seemed obvious that LTCB should do the same thing. Indeed, it seemed compelli',g to Onogi that allJapanese banks should be moving from state-protected lending to market-based banking.

The Ikeda financial system had worked very well for three decades after the war, but novr the country had outgrown this developmental model. It needed to mot/e forward-and the banls needed to adapt wirh the economy, moving into the capital markets. "I think we ought to .We become like a merchant banlq" Onogi dedared to his colleagues. should be aJapanese rrcrsion of a British merchant bank!" Onogi was by no means the only banker expressing desire for .h*g.. Many of the other young sdarymen at LTCB, pardculady those who had also traveled o\rerseas, could also see thatJapan was outgrowing the old lkeda system. "Everyone was awafe that there was a structural change under way in corporate financing, from long-term bank loans to the capital markets," Onogi later recalled, Similar sentiments were being voiced even inside the mighty Industrial Bank of Japan-a barrL that considered itself the "older brothey'' of the long-term credit banks, since it was the largest and most prestigious of the three. Nobody ever stood up and shouted in public that something was going Wong. But like thousands of droplets of moisture stealthily forming a doud, a consensus was formiag in corners of LTCB. So, as the 1980s got under way, the bank threw itself into the task

of

―

SAVING the SuN―

changing its business strategy.Just like the Meiji government, LTCB slarted by sending young bankers abroad on missions to study how American and European banhs had come to be in their contemporary form. Onogi [ked

*re British merdrant bank model; other young LfCB bankers preferred to look at American examples.J. P. Morgan was one bank that triggered interest, since it had also had a commercial banking fxckground with strong go\rernment linls, but nanaged to nrrn itself into an investrnent bank. Bankers Tfust was another fascinating model, since

it had started life in

custody services but later become a powerhouse in derivatirres and other capital markets products.

Intrigued by its research, LTCB started looking for ways to morre into the capital markets, by trading bonds or ppviding strucnred finance. The Ministry of Finance did not permit the bank to get involved in bond or equity business iruideJapan; however, there were fewer restrictions outside

LICB fuery up plans to create a small "merchant banking group" charged with developing some new business lines, zuch as bond uading,

Japan. So

advisory worh and strucftred finance. It started to copy the business of curency swaps that was being developed by groups zuch as Salomon Bro*ters and Bankers Tbust over on Wall Street. Getting involrrcd in some-

thing like curency swaps demanded a huge intellectual leap in strategic thinking and daily management. LTCB bankers had grown up with the idea that the price of money was neatly set along precise lines-and the bank's business insrle Japan was still based on th.at concept. The business of sqraps wirs based on the concept that the price of money was completely

fluid, and set exdusively by investor demand. It seemed difficult to imagine hovr the inexperienced LTCB bankers were going to recondle these two different systems. But the bankers who became involved in the trading business skirted over the contradictions and diligently set about

of their education of

tryingto learn about

experience,

swaps. Theypresumed that

if

Japanese manufacturers like Tqlota were able to copy American technology, reproduce it effectively-and then qhallenge the Americans at their ovrn game-Japanese bankers should try to perform the same tricl wi*l

financial techniques the Americans had pioneered.

Tfading forays were just the beginning. By 1984, LTCB was ready to pursue the biggest reform initiative it had eve-l conceived. In that year, the

-

Blocked Reform

-

senior management decided to draq/ up a new srategic plan fior the banh and appointed a young banker called Mario Mizukami to head the team.

Mizukamiwas just tno years older than Onogi and the two men knew each other well. They were both keen tennis players and their mothers had been college friends. But that's where the similarities ended. Mizukami was very different man. Indeed, his personality was a sharp contrast to most Japanese bankers: He had the rare abitty to be a marrcrick---or, to put it a

more accwately, an irability to accept the consensus. Mizukami blamed this "trait" on his childhood. He came from a relatively prosperous family, who leftJapan to live in Latin America during the 1930s.

His family did not stay long in Latin America, returning toJapan at

the start of World War II. Nonetleless, Mizukami was born in Brazil, and his pioneering p.uents decided not to give their son a uaditionalJapanese name but ttre local, Pornrguese name

of "Mario" instead.

This always made bim stand out. TheJapanese write ttreir first names wittr Chinese draracters calTed kat[t, wi*r specific pictograms designated for every indigenous word, "Mario," however, did not have any characters that nanually matched his

o'vvn

name, since it was not traditiondlyJapanese.

Although he used kanji to qpell the name phonetically as "Ma"-"Ri"-'O," it looked odd to Japanese eyer-and his sense of isolation and defiance was reinforced when he was evacuated as a young boy from Tokyo during World War II, and sent to live alone among strangers. Deqpite this'trandicap," Mizukami was bright-and rich----enough to

attend a prestigious high school and Tokyo Unirzersity And after he joined LICB in 1956, he quickly rose through the ranls. His keen intelllgence was harnessed to a burning

ambition-not to mention

the patronage of Binsuke

Sugiura, the man who ruled LTCB during most of the 1970s and early 1980s

with

an iron fist. Oy chance, Sugiura and Mizukami had attended the same

high school in Tokyo,

seryeral decades apart----a

bond that was extremely

important in corporateJapan. And Sugiura saw echoes of his own character in Mizukami. The president was an overbearing, strong character, who had had the good fortune to build his career during the chaos of the postwar decade, when-for a bdef period-strong-minded draracters thrived in Japan. Admiring Mizukami's strength of personality, Sugiura was convinced that Mizukami should become president of LTCB one day

24

as

―

SAVING the SUN―

Not e'veryone shared this optimism; Mizukami became controversial his career flourished. He wore stylish ties to work He was outspoker

Most shodring of all, inJapanese eyes, Mizukami would not cater to the consensus. "TheJapanese ttrink that wa is very important. I don t necessarily disagree, at least if wa means discussing thingr with people-and acknowledging that there can be different points of view: But some people think that w4 means that you can never rock the boat and that you must always silendy accept the con$eruus view to maintain a peace. I don't agree

witlr tlrat idea of wo at alll" From time to tirne, Mizukami's friends would quiedy suggest he keep

a

lower profile. "Hare respect for harmonyl" they

would say Onogi was considered a perfect example of how a noble Japanese banker shoull behave, Gende with his colleagues, unfailingly courteous and humble, Onogi never displayed his emodons in public. He ahrays tried

to maintain consensus and harmony. Most of the IITCB bankers considered

that *re popular Onogi-not Mizukami-seemed the perfect mafl to become a future president.

Ercn with their

differences inpersonalities, both Mizukami and Onogi were

in brpad agneement on the bank's stategic direction, away from traditional banking-and tovrard the capitd markets. Any corporate plan produced by Mizukami was likely to be

a

darion call br reform. And when Mizukami did

finally release a co{porate strategy plan in the qpring of 1985, ir did nor disap

point. tt had not actually been written by him: tnstea4 much of the legwork had been done by Takashi Ue,hara, an aloof but forceful character who was

renowned for his exremely hard work, helped by Koji Hirao, anottrcr young

reformer. Otheryoungbankers were also seconded to help, from numerous departrnene, in ttre interest of creating "consensus." But with Mizukami in charge, the plan had taken on an unexpectedly radical

tinr It bhrndy dedared

that the financial dimate and economy inJapan had become dangerously distorted. Ttre pace of economic growth in the 1960s and 1970s had been so dra-

matic that *re financial system had never caught up. It was still stuck in systerns desigrred for the capital-starved tgsOs. '"There is [nour] a c-hronic savzurplus in the private sector," coupled with a "chronic (urcnt eccount

inp

surplus" and "growingpublic sectorbudget deficit," the LICB plan said.

-

Blocked Reform

-

This meant the role of banks had to change. Instead of simply channeling consumer savhgs to industry through simple loans, banks needed to

offer more advanced financial products. "In *re old fixed interest rate system, a bank made more profits by being as big as possible---and a large size meant that the management was judged well," it said. "But during the pro-

of deregulation and internationalization, we can no longer assume that just being big will mean receiving more profit . . . and when the process

cess

of deregulation is oraer, profitability, not

size, will be the important

measure of performance." Thus the bank should move away

*from

a

focus

on maintaining market share to increasing income by meeting our clients'

new financing needs--and an aggressive approach to entering new high

gowttr markets." Specifically, the bank needed to develop a corporate finance arm, project finance, derivativeo, and securities operations. It also needed to change its employment culture. "In the future personnel will be evaluated based on adriercment. We will move from dareloping generalists to qpecialists and there will be a radical charg. in compensation which will reflect individual adrievement and a flatter management struchre." Mizukami knew these ideas were revolutionary. tjICB had entirely the wrong staff to run an investrnent bant and by social conrrention, the bank was not allowed to sack its staff. Like allJapanese companies, men at LICB were ranfted according to what year they hadjoined, not their skills. Nevertheless, Mizukami insisted that LTCB needed to try to smbs466 thls bold vision of radical ctrange-otherwise it would lose its raison d'€tre. "We have no timp to waste," he insisted.

Tne

ptan quickly came under attack. Although other banls were dis-

cussing similar ideas, none had presented reform in such a bold, stark way and as 1985 wore on, voices inside LICB started to complain that Mizukami's

reform ideas were simply too radical to be tolerated. There wits conserunr that tiTCB needed to carve out a new business niche. But it was ridiculous, some

of the LTCB bankers objected, to expect

LITCB

to abandon tradi-

tional lending overnight. The critics rarely confronted Mizukami direcdy, since that would have been considered

too

un-Japanese. Instead, gossip

swirled around the bank stealthily shaping the group consensus into a new

direction-and whenever Mizukami tried

to confront the criticism, it

―

SAVINC the SuN―

melted away in a mist of polite apology He felt like one

of the

ancient

samurai, lunging at his enemy, only to see the foe vanish into thin air, orrer and over again. "I always ttrink it is important to have a debate when people disagree," Mzukami later fumed. "But what used to annoy me at lJrCB was

that nobody would criticize me to my face-always just behind my back"" As the tension rose, a rift developed within the bank When LTCB had been founded in the 1950s, the employees had seemed as homogeneous as an army. But when the bank had expanded o\rerseas in the 1960s 1970s, LTCB became divided into trnro distinct camps. One was the "internationalists," which induded men zuch as Flhao, Uehara, and Onogi,

and

who had worked werseas, studied the principles of Anglo-Saxon corporate finance, and beteved thatJapan's banking system needed to catch up with

the rest of ttre world. The other was the "domestic" tribe, or men who had forged their whole career inside Japan, making loans to Japanese companies in the maditional vra/-over endless cups of green tea, building complex relationships of trust, recording it all on piles of handwritten paper, and occasionally skirmishing wirh rhe yakua, Japan's ubiquitous groups of gangsters. The brigltest of the yourg LJTCB staff were often internationalists, since working overseas had been popular for top recruits, but

it was

the traditionalists who dominated the top lerrels of management. The "internationalists" often felt frustrated with their domestic colleagues, whom they considered hopelessly out of date. The domestic wing of the bank was equally irritated with *re "internationalists," whom they considered "frivolous." "They harrc gone American!" the traditionalists mocked. "They're not reallyJapanese anymore!" The traditionalists seemed to harrc the Ministry

of Finance on their

side. The Ministry was staffed with men who were generally bright in an academic sense-and thus could see that reform was needed. They knew as

Mizukami that imbalances were developing in the Japanese economy and financial system, and that banlcs like LTCB were losing their core business. Moreover, from the early tlAOs onward, the American governmerf had been badgering the Japanese to start deregulating its financial system-to give greater freedom forWall Street firms. Yet the Minisry was unwilling to reform in a hurry. The bureaucrats deriv,ed much of their

well

as

power from their ability to manipulate the financial flows in the Japanese

-

Blocked Reform

-

economy, and they did not particularly want to alienate their orrn power. The mandarins could see that radical reform was likely to prove highly

controversial-andJapanese bureaucrats hated public controrrcrsy Though the bankers were lobbying for change, brokers like Nomura andYamaichi

were lobbying to block the banks from the capital markets. The brokers had strong backing from politicians, partly because politicians supplemented their income by receiving stock tips and bribes from the brokers. These raested financial interests meant that many senior offidals in the rul-

ing Liberal Democratic Party.stongly opposed any measune which would damage the brokers--and *re Ministry conduded that it could not reform the banking system without unleashing full-scale civil war in the financial

world. So the Minisnry's compromise was to introduce reform-but at a snail's pace, In the early 1980s the bureaucrats promised to deregulate the interest rate regime (to placate the Americans) andlet the banks move into the capital marhets oyerseds (to placate the banks). But it blocked the banks' requests to move into the capital markets at home or implement any rapid or radical financial reform (to placate the brokers).

For

a

while, the reformers at LTCB tried to igrore these constraints,

pressing ahead with their investnent banking plans. Onogi was appointed to run a new "merchant banking group." Hirao, the coauthor of the reform

plan, was sent to New Yorlg where he ttuew himself into developing the capital markets capabilities of L[CB. He oversaw the purchase of a stake in Peer's, an American mergers and acquisitions house, and then bought Greenwich Capital, a primary bond dealer. Onogis dream was drat these operations would act as a platform for the bankto learnhow the capital markets worked overceas. Then these skills could eventually be easily imported back intoJapan. 'IJV'e could not qeate many profits because of all the regula-

tions," Onogi admitted. "Hovrever, we were corrvinced that we had lots of capable staff-and so that when we were given a chance to use these skills inJapan, we would harrc a good start."

ln

reality, the momentum behind Mizukami's dream was rapidly dis,

srpating largely because of the Finance Ministry's curbs and politicians' resistaflce to change. "Since the Ministry regulation still separated banking and securities business," Onogi explained later, "the future of investrnent

―

SAVING the SUN

―

banking still lay rrcry much in ttre Ministry's hands, rather than anything I-jTCB could do." And this played directly into ttre hands of traditionalists at the banlq who pointed out as tlme passed, that it was impossible to make

money from investrnent banking

More importandy they daimed that there was a much more profitable new niche developing in Japan: real estate. By late 1985, a striking shift was taking place in the Japanese economy. Aooss *re country the price of real estate and stock market shares was stardrg to spiral upward tourard a dassic asset price bubble. As thfu occurred, a new category of red estate borrourer appeared who was positinely eaga for cash-and seemed

more than wiling to replace the old industrial companies *rat had been LICB's bread-and-butter dients. Suddenly ieal estate seemed lilce the answer to all the bank's ptoblems.

fitoptn3

MON EY MADN ESS -

Back around 1986 and. 1987,

pra*itally etayonz inJaponwu cowinced

that the economy worW cottiwte heading up and up indefiniuly. This ?eriad that lost

sd,r,

wa

a

ttuny peopb so intoxbotedby the economic bubble that they

tlvir pw,ters of rattonal jutgwent.

-Masamoto

Yashiro

In the late 1980s, Koji Hirao

was working in LTCB's office in New

York when aJapanese businessman called to see him. The man introduced

himself

as

the head of a small company called EIE and announced that he

wanted to build a hotel. His name was Harunori Takahashi.

"It will be the best hotel that New York has ever seen!" Takahashi said

with ebullience. "The very best!" Hirao knew that he was supposed to feel thrilled to have someone walk into his ofice asking for a big loan. Three decades earlier, theJapanese economy had been reeling from its World War II defeat. But by 1986, or when Hirao was posted to work in New York-after helping to draft the conroversial 1985 reform plan-Japan was quickly becoming recognized as the new global economic king. Now American boo}stores were fllled with titles ltke Japan a Number One, or Yett: Japan's New Financial hnpirel that predicted that the comparatively tiny island nation would soon overuke the United States as the world's economic engine, In that time, too,

一

SAVING the SUN―

LITCB had been awarded the highest possible recogpition from America's financid community. The bank had received a 'triple-A' rating from both Standard and Poor's and Moody's, the two main American rating agencies. "We are a six-A bank!" LTCB staff liked to tell each other with outsized pride. Better still, the bank was starting to make its mark beyond Japan with a significant presence on Wall Street It was drawing up plans to

acquire Greenwidr Capital, the bond dealer, and was earning a reputation

for being one of the more sophisticated capital market players among Japanese banhs.

Moreover, closing a ded with EIE could be a great coup for

tle

New York office, boosting its reputation arcn higher. EIE was one of

it had been almost entirely unknown a few years eadier, the company had ridden on the back of IITCB's favorite business customers. Although

Japan's real estate boom, gobbling up properties across the world, to build

a hotel and leisure empire. Stretching from Tokyo through Hong Kong, Sydney and Milan to Los Angeles and across to Fiji, Takahashi's empire had

an enormous appetite for borrowed cash. It was a prized dient. Which meant that LTCB was happily scrambling for EIE business--and bankers would win accolades for any new deals. Yet something about Takahashi made Hirao uneasy. The man did not bok odd. He wore neat, discreet dothes and had a slight physique, topped

by

a

bland, inscrutable face and weak chin. Takahashi's nondescript appear-

ance was matdred by

"n "rry

demeanor when

it

came to details. He was

very vague about his plans for his New York hotel. He said that he wanted

to borrow about $350 million. The only other information he would give was that he had alrcady selected the site in central Manhattan, between Park and Madlson Avenueg on presdgious 57th Sueet-a place New Yorl*

of the Four Seasons hotd. 'Tlave you got a project manager for your hotellP' LICB staff asked.

ers would eventually know as the location

'i{n accountant?" Takahashi ignored the question. "I have got an architectl" he said triumphantly. And it was a triumph. Takahashi had hired L M. Pei, one of the most prestigious architects of the day, who had just finished working on an extension for the Louwe. But this was little comfort to Hirao, nor was the

fact ttrat Pei was alrcady draning up extravagant plans for the 57th Street

hotel, induding

a design

Money Madness

-

that called for the edifi.ce to be dad in a rare lime-

stone that was particularly pricey. With the appearance of an obelislq Takahashi's hotel would be a monument to himself and his company.

"'But what about a project manager?" bankers persisted, trying to get

the elder man to discuss the financial controls ou his audadous vision. Thkahashi shrugged.

I(novring Takahashi's importance to the bank, Hhao dosed the meet-

ing and handed Takahashi's sketchy ideas to his junior staf for furttrer investigation. During his time in New Yort Hirao had seen that American finance worked on dlfferent principles from Japanese banking. American bankers used a rigorous system of credit analysis to decide when to make loans---and when not. Hirao had deliberately built a project finance team that would employ the same tools by hiring a group of Americans with the relevant experience, and using these to train some promising young LTCB staff who had studied at business sdrools in America. Armed wittr its phalanx of analysm, UICB had even been bold enough to turn don'n a loan request from Dondd Trump, ttre hotel, condominium, and gambling magnate, because the Americans thought that Thump's business projecdons were not profitable enough.

Unfortunately, the EIE numbers looked far odder than Tfump's. Takahashi had said that he wanted to build a hotel wittr about 400 rooms at

of $350 million. The junior LTCB staf in the New York office calculated *rat the maximum viable inraesunent in a hotel *rat size on that site would only be $150 million. 'Perhaps we have got the project mixed up with something else?" suggested some of the young LTCB bankers. They chedred: No, they were told. Takahashi was planning to spend a cost

$350

million. The bankers in New York puzzled orrer the figures again. Then

they head that the LTCB headquarters had approrad Takahashis plans, igroring their cash flow analysis. 'This is crazy," one of the bankers dedare4 as

he took the long flight back toJapan. "We have to tell Tokyo that this proj-

ect cannot pay."

When he arrived, the banker found the Tokyo headquarters of LTCB quite was insistent: "Give Takahashi as much money as he wants!" It was ridiculous to worry about cash flows or rates of return, the bank's executhrcs told him. That was the type of thing rhatAmqbans did! And nonnr, the

―

SAVINC the SUN―

LIICB bankers in Tokyo pointed out, Americans were writing books saying that *reJapanese way of doingbusiness

wzul

nolv the best in the wodd!

Peeved, Hirao and his New York colleagues put some LICB bankers

onto the project to oversee costs. "Those ctezy EIE men are ordering expensive limousines to uavel just a blockl" he carped. But his complaining

had litde effect. As the project was announced, Takahashi swept into town again, trailing limousines, and threw a lavish party for the press at the Rainbovr Room, on the fifty-sixth floor of Rockefeller Center in New York The location of the party was symbolic. Rockefeller Center had recently fallen under the conuol of Mitsubishi Estate, in a blatant new display of Japan's rising economic power. As the hotel ncse, so did the costs. By 1989 the 57th Street hotel was projected to cost considerably more than $400 mil-

lion. It was the most erpensive hotel New lbrk had eler seen. Having worked on Mizukami's strategic plan for LTCB--and joined *re bank at a time vrhen bants faced a capital shorage and diqpensed their money with

carc-the sigtrt of the qpendthift Takahashis cdebrations was particularly galling. Hirao had learned much from America's emphasis on analysis and iwestig'ation and the hotel magnate seemed too suspicious to ualst. But he was powerless to keep it under control. Hirao sat meekly in the audience at

the Rainbovr Room, wtrile drampagne flowed, and nervously wondered nfiatwas going on.

If rtir"o had known anything have been e\nen

about Takahashi s bacJqground, he would more concerned. For EIE had pardy sprung from a side of

diftrent from the official, stufly world of LTCB. Hirao had grown up imbued with the ideas of the "samurai' bankers-a place

Japan that was very

where men diligently sacrificed their lives to rebuild the country from the war, cooperating with eadr other in an orderly financial $ystem. Tlutharmonious world of hardworking salarymen at large companies, howerrcr, had only ever represented a small part of the post'nar system. Underneath a mofe brutal demimonde of small-time entreprtneurs, naked capitdist competition, and gangster violence. The Japanese

this orderly surface was

government did everything it could to avoid showing this second world to outsiders, since it contradicted the country's ofrcid image. Nonetheless, these two sides of Japan were both authenticallyJapanese and, as much as

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Money Madness

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they tried to gloss over it, their coexistence was no coincidence. The story of EIE, which pardy qprung from this second side, shows this dearly. The origins of Electronics and Industrial Enterprises, as ttre comPany was originally hrovrn, went back to L947, During dre dtaos of those early postwaryears,

a

powerfirlJapanese family called Goh apparently decided to

create EIE to import cassette tapes from the American market. Using the Goh famills powerful political connections, EIE won

a

license to distribute

the tapes inJapan from 3M, the American conglomerate.A tiny operation,

the business initially had just five employees, apparendy lead by Yuriko Goh, a wealthy Japanese woman who made frequent rips to the United Sates. In the 1960s, the Goh family gave its blessing to a maverick inventor called Yoshiro Nakamatsu, who took control BIE into

a

of the company and turned

large import business. Nakamatsu increased the staff to 350, won

distribution contracts with U.S. companies, such as Grand Magrretics, and floated the company on the second section of the Tokyo Stock Exdrange. Nakamatsu also started importing video equipmdnt from America and became acquainted with a man the EIE staff always referred to as "the older Takahashf'-who was working at a television station at the time.

In the middle of the 1970s, almost out of the blue, ttre older Takahashi launched a hostile takeover

of EIE. ln theory this type of

takeover

bid was not zupposed to happen in Japan. The postwar financial system presumed that the main role of equities was to enable members of the keirasu and banks to hold large stakes in each other's enterprise. [t was unheard of for large companies to launch hostile attacks on each other. Yet beneath the bank-based web of large companies-thekeiretst-there w.ul a ruthlessly competitive world of small companies vying for a leg up in the

of corporate life, but operators with litde respect for

system. Foreigners only saw ttre polite, tidy world

with a host of scrapPy the law: Thus, though most shares on the Tokyo Stock Exchange were locked up in the hands of passive banks sdth ketretsu ties or other dependent companies, a group of small-time companies aud speculators existed who regarded equity as a tool for gambling or extortion---or both. Unable to curb the instinct of ruthless, free competition, ttre gwernment had inadvertendy pushed it to the margins of society. The tightly ennvined polidcal and gangster worlds had an edge over the law in the stock market.

Japanese contended

34

SAVING the SUN

―

―

Nakamatsu tried to stop the hostile raid on EIE-and a court eventually ruled that *re takeover was illegal-but he quickly gave up the fight. Some EIE staff belieraed that Takahashi's funds came from a well-known

*the

stock market speculator, whom they referred to as strange lwasawasan." "Takatrashi was a bad man---s verf very bad man," Nakamatsu con-

duded. "They robbed me of my company and I didnt have a drance." If ttre story ended there, the qpeculation might have amounted to little more *ran bitterness and frusuation. But then events took an even

murkier turn. The older Takahashi died and Iwasawa completely vanished. Iwasavra's family initially daimed that lwasawa was dead as well. Yet, in the

early 1990s-+r a full fifteen years after his supposed'deattr-Iwasavra's family unerpectedly staged a funeral for him, attended by some leading politicians. local journalists zuqpected that Iwasawa had been hiding fiom his creditors during the interrrening years.

The only thing that was crystd clear was that EIE was controlled by Harunori Takahashi, son of the "older Takahashi"-and, by a happy coincidence, also *re son-in-laqr

of the mysterious Iwasawa. Taking charge at

the start of the 1980s, the younger Takahashi, then in his late thirries, set up operations in a small office in the Ginza, the entertainment and shopping

center of Tokyo. Therc was no elevator to his ofrce and guests who wanted to visit him had to dimb up four narrory flights of stairs, to find a tiny poky room, where a few staff worked on cheap, gunmetal gray desks. During the day, the sound of children shrieking could be heard in the ofrce through an open window that ovedooked a school. At night, the distria became a neon jungle, surrounded by sushi restaurants, geisha bars, yaktrza haunts, and sex dubs.

During this period, Takahashi liked to describe EIE as an import business specialiaing in electronics

products-and it

seemed to be doing well.

With the yen rising in strength against the dollar throughout the late 1970s and early 1980s, the cost of American imports was drastically reduced. "I got very ludry at EIE," 1a[fi61f liked to tell journalists years later. "I took o'ver the business when the yen was one level, and within a few months

it

had scengthened sharply and so our profits were going through the roof.

What was the secret of my success? Luck-like anywhere in business. Not abilityt Luck, luds luck!"

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Money Madness

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His frankness didnt mean Takahashi was humble. He dearly felt destined for greater things. Regardless of the unusual history of EIE, Takahashi

had access to some of the inner citadels of the Japanese establishment. While he was a drild, Takahashi's family had managed to send him to the prestigious Keio primary school, an elite establishment beloved byJapan's leading political and industrial families. He got expelled from Keio in his teens ficr adolescent pranks, but somehow won a place to the elite Keio University, from which he graduated tn 1964. For the following decade he worked atJapan Airlines (JAL), a company filled with the sons of aristocrats and politicians and a traditional grooming ground for high office in Japan. ATJAL he earned the nidmame waranori, or joker, before leantng the

company in the late 1970s, apparently to work at EIE. This badqground had given Takahashi a veneer of reqpectability. It also

of powerfrrl friends. One of these was Shintaro Abe, a senior politician in the ruling Liberal Democratic Party, nicknamed

gave him plenty

'the kingmaker'because of his legendary ability to control events behindthe scenes.

Another friend was Ichiro Ozavra,

a

man who would later become a

of the LDP and be hailed as a 'reformet'' by the American government. Toshio Yamagudri, a future labor minister, was also a good friend. Another acquaintance was Seichi bta, ** who would still be serving in leader

"

the senior echelons of the ruling Liberd Democratic Party in 2003. By the early 1980s, Takahashi had decided to act on his ambitions and expand *re business of EIE. He harbored dreams of becoming an entrepre-

neur and a business tycoon, like the Tzutsumi brothers, who contolled a hotel, retail, and transport empire. Takahashi realized that he could not do

that by simply focusing on electronic imports-and real estate seemed a much more lucrative business. So, in the middle of the 1980s, Takahashi dedared that he was going to fiffn EIE into a real estate group and announced that he would give up drinking alcohol-a most unusual move inJapan-to concentrate on becoming a successful entrepreneur. "I cannot let alcohol doud my mind!" he told his friends. "If you are a samurai warrior about to face tds enemies, you would not drink sake the night before!"

T"Un"rni'r timing was impeccable. Just as he was looking to qpread his wingr in the mid-1980s, Japan was embarking on an extraordinary real

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SAVING the SUN

―

estate boom. Precisely what triggered this mania remains an issue of some

dispute among economists. Nonetheless,

it

was a sfmptom

of the

same

underlying problem that dogged LTCB: namely, gorrernment failure to accept the need for stnrcnrral change. By the 1980s tlree decades of highqpeed grourth had leftJapanese consumers and indusry extremely rich. To a

layman's eye, this tidal wave of wealth initially seemed like a dream come

true. But too mudr wealth can be

a

double-edged sword. A nation

s

money

only has value for future generations if the current generation can find a way to imrest ityroductbte$, either at home or overseiu. lnJapan's case, this was becoming increasingly difrcult to do. The 1952 financial system was designed to fund domestic industryr Howerier, after three decades of rapid economic growth, the country was already awash with factories and industrial investment projects and-as the banks knew to their cost-Japan's traditional manufacturing companies had limited need for cash insideJapan. Textbookeconomics would suggest that one solution to this problem

would be to take the money outside Japan. This happened to a cerrain extent. Life insurance companies and banl$ bought foreigr instruments, such as U.S. Tbeasury bonds, helping to fnance the massive U.S. deficit. However, ordinary Japanese savers could not export their cash so freely, due to foreign exchange controls. And ttrere was little incentive for them to keep pouring dl their funds into the banks, since the banks paid a pitifirlly low rate of interest-also due to the postwar conuols. So,

as

time passed,

consumers and companies started to look for other places to put their cash;

two obvious oudets were the stock market and real estate sector. From 1981'onward, the price of land started to creep up. Then, as investors conduded that these rising prices in the real estate markets made land a good investment, they poured nflore money into the sector, pushing prices even

higher-and attracting more funds. A similar pattern was at work

ir

the stock market. As the Nikkei 225

rose, it became ludicrously cheap for companies to issue shares, so they did

that on

a massive scale.

Then, since they could not find anywhere to invest

the cash, they too, poured it into real estate. And since real estate prices were rising, this appeared to increase the value of these companies, which pushed shares even high"r in a self-reinforcing spiral. Government policy fanned the flames. In September 1985 policy

leaders

of the Group of

Money Madness

-

Seven industrialized countries gathered

in the

Plaza Hotel in New York and agreed that the yen should be strengthened against the dollar. After the Plaza meeting, the currency surged from Y240

to the dollar to Y150, effectively doublingJapan's spending power in international terms, and creating the impression that there was even ?flore excess money inJapan. Then the Bank ofJapan added to the frenzy: under strong pressure from the Americans,

it

crrt interest rates repeatedly

in an attempt

to boost domestic demand in Japan and offset *re potential damage of a weak yen. It was like pouring kerosene onto a fire. Suddenly real estate prices were spiralinghigher and higher. And thousands of companies were rushing to join the party, flush wi*r dreap cash.

It was in this overheated

atrnosphere that Takahashi started searc-hing for

ways to lsalizs his real estate ambitions. He knew that he could not work alone. So he recruited a couple of additional allies. One of these was Bungo

jovial Japanese in his forties, who had previously worked as a university professor. Ishizaki met Ttrkahashi through LDP politicians and agreed to become a consultant to EIE. llre other new employee was lwao Ishizaki,

a

Nomoto, a small, nerdy-looking man in his twenties. Nomoto had been a medical student in the early 1980s, but had dropped out of his training when he realized that he could not stand the siglrt of blood. Again, it was LDP politicians who introduced Nomoto to EIE.

Neither Ishizaki, Nomoto, nor Takahashi knew anything about the real estate business. Indeed, when Nomoto first arrived at EIE he was unsure hovr to operate a calculator. Still they were hardly worried: By 1985, there were thousands of other small companies opringing up to take advantage of the nascent property bubble and most of these knew as httle about real estate as EIE. Takahashi appointed Ishizaki, who had grown up in America and spoke fluent English, as his main international "fixer" for future real estate deals. Nomoto was told to look after the accounts. "The idea was *rat Takahashi would pick properties, Ishizaki would negotiate, and I would do the logisdcs," Nomoto later explained.

Then Takahashi hunted for some deals. Though he was keen to buy properry inJapan, he had a hunch that since he was outside the Japanese mainstream corporate world, it might first be easier to break into the market

―

overseas, Through friends sale

in the U.S.-run

PaciGc

SAVINC the SUN

一

of friends, he heard that a Hyatt hotel was for protectorate of Saipan. It is usud in ttre hotel

industry for the owners of a hotel to be entirely separate from the company that actudly runs it on a day-to-day basis, In this case, the hotel was managed by *re Hyatt group but the real estate was owned by a group of Chinese--and the Chinese wanted

to sell. Takahashi got in toudl with

Hong Kong and Shanghai Banking Corp. (HSBC), the Hong Kong-based bank that had been appointed to manage the sale, and indicated that he was interested in bidding. Then he made contact with LTCB, and asked them

if

they would fund the project, LiTCB was keen. The bank knew Takahashi slightly since it had lent

Y100 million ($1 million) to EIE in the early 1980s to finance the import business. The uaditional bankers at LTCB were eager to get involved in

real estate deals and Takahashi also had one feature that made him very attractive to the LTCB bankers: In comparison to most of the upstart red estate inrrcstors that were emerging inJapan, he looked fairly respectable. Takahashi had studied at Keio. He was not overly ostentatious. He also

had a very distant family link to Binsuke Sugiura, the former LICB president. Most important of all, Takahashi had dose ties to powerfrrl politicians. "LfCB was dying to get into real estate and they loved Takahashi because he seemed posh," Ishizaki later said. "They couldn't wait to sink *reir fangs into him." Perhaps more surprisingly, HSBC also seemed interested in Takahashi. The Saipan project fell into the orbit of a man calledJohn Bond, then a senior figure in HSBC's Asian inrrcstrnent banking operations (tut who would later rise to become executive chaitman of the entire bank). Bond and the other HSBC bankers did not know very much about EIE, but

wi*r

sudr a potential gold mine in fees awaiting anyone who did business with these cash-rich Asian entrepreneurs, they did not wish to ask too many questions. 'John Bond of HSBC was always very helpful, and very friendly to us," Ishizaki recalled later. "But then, so was bnrerybody else." BIE quickly bought the Saipan hotel for Y30 billion ($300 million),

with funds from LICB and HSBC. Takahashi was thrilled-and promptly decided to change the name of the company to EIE International. "We thought people might get confused with our old name," Ishizaki later

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Money Madness

-

explained. "They might wonder why we were buying hotels." Then Takahashi and Ishizaki started looking for more hotels, via the Hyatt network"

The hotel managers wene eager to help. They discoveredthat the jovial exprofessor shared a taste wlth some of the Hyatt managers for visiting Asian sex bars. lshizaki was soon boncling with the Hyatt men over joyful,

drunken evenings and enthusiastically comparing notes on the girls-and potential real estate deals. Eventually, the Hyatt managers told EIE that there was another Hyatt

hotel for sale down in Sydney Takahashi and Ishizaki flew to Ausudia and the Hyatt managers arranged for local prosdtutes to visit their room that

night a. a "welcome" gift from the hotel. To Ishizaki's disappointrnent, however, Takahashi sent the girls away. "Takahashi was ne\rcr a terribly horny man," Ishizaki conduded later. "Of course, he had gidfriends, and he used to look after them, but not many He was too ambitious and serious about his business."

The next day Takahashi asked to be taken on a tour of Sydney As they wete cnrising along the waterfront, Takahashi stopped the limousine.

"Lookl" He pointed his finger at a magnificent skyscraper facing the sparkling blue waters of the Sydney harbor and the city's futuristic opera house. "Look at that hotell" The tower bore the large, impressive logo: The

.We

should bay tlut hotel. It is much better! It has a much better location than the Hyatt," Takahashi dedared. Ishizaki peered at it. "But you have never been to Sydney, so hornr do Regent Hotel.

you know? We don't even know if it is for sale, or what type of hotel it isl" "Ishi!" Takahashi reproached him. "Bvrything is for sale, somehow, Ishi. It is

a

grcat hotel. Go and find out ryho owns it."

Ishizaki wandered into the lobby and asked a bellboy vrho owned the

hotel, and whether he could buy it. The bellboy looked blank But Ishizaki ascertained that the managers of the hotel were the Regent Hotel Group, based up in Hong Kong, while the owners were a consortium of Chinese entr€preneurs. The Chinese owners indicated ttrat they were willing to sell the hotel-at a rrcry high price. Ishizaki was unsure vrhether the bank would agree. Howwer, when he asked LTCB for a new loan, the bankers barely blinked. Instead, the LTCB bankers demanded that this arne they shouldbe the main lender to EIE on the deal, since they did not want to let

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SAVING the SUN

―

HSBC grab too much business. They were more interested in winning the deal, in other words, than worrying about the price.

LfCS'r attitude reflected

some peculiarities about the wayJapanese banks

did business. In most countries today, when banks lend money for corporate inrrcstrnent they pay close attention to the likely cashflow of

a

project.

What banls want to know is whether a company will be able to pay the loan back out of a future str€am of earnings. In Japan during the 1980s, however, the banks only ever cared about one thing: collateral, or the asset ttrat a company could sell to repay

a

loan,

if it ever faced a crunch. And the

only collateral that mattered-at least in the eyes of bankers-was land. Forby 1985, banls like LTCB had come to the condusion that landwas an almost fail-safe store of wealth; its value could only svet increase, Land had always been a highly valued commodity inJapanese culture, because most

of the population had traditionally been employed in agricukure and the supply of good farming land was severely limited by the mountainous terrain. Moreorrer, most Japanese had only ever knovrn a wodd where land prices ahrays rose. Property prices had risen every single year since World War II, except in 1973, rhe year of the oil shock- Given this, the bankers reasoned that there was litde risk in lending to real estate projects, as long

were usually backed by propefty as collateral. If a client ever ran into trouble, the bank could simply sell the land at a high profit to repay as these

the loan.

A fewJapanese bankers suqpected that this equadon mig[rt not work that in places such as Saipan or Sydney, property

overseas. They knew

prices had actually gone up and dovrn in recent years, rather than always

increasing. Yet most Japanese bankers looked at the rest of the world through the prism of their Japanese experience, and presumed that *re Japanese re'verence for

long

as a

prestigious real estate was

a

universal affair. Thus, as

dercloper had some red e$tate to ofier, the banks were willing to

it seemed posi*rcly $ezy not to act. As the of overseas real estate was dropping dramati-

lend. Indeed, to theJapanese, yen rose in value, the price

cally in yen terms. It was as if Europe, Asia, and America were holding a halfprice sale. Suddenly,Japanese investors could purdrase a large house in

-

Money Madness

41

-

a flat in London, or a golf course in America, for a s,um of money that could barely buy an apartment in Tolqro.

Hawail,

T.n"Urti

loved his new Sydney hotel. The Regent brand was lavish,

giamorous---and oozed international prestige. Japan was becoming obsessed a "Regent" hotel now seemed

with brand names, and to Takehashi, owning

to be far more exciting than owning a mere "Hyatt' or 'Tlilton," Indeed,

it

was so exciting that Takahashi decided he wanted more: He asked Ishizaki

to find out if EIE could buy all the Regent hotels in the world. By a happy coincidence, the man who had created the Regent hotel group lived in Hong Kong-and was morc than willing to tdh He was an

American called Bob Burns, who was blessedwith gende blue eyes and the affable rnanner of the perfect host. He had come to *re Pacific region two decades eadier as the general manager of the Kahala Hilton in Hawaii. There, he had diqplayed an early flair for public relations by offering free lodging to Yasunari l(awabata, theJapanese Nobel Prize-winning author.

The move immediately suckcd in

wave of Japanese tourists to the Flilton hotel, dramatically boosdng hotel reyenues, and Burne's reputation in the a

region. In 1970 Burns left the Hilton group and formed a joint venture with Tokyu, aJapanese railway andhotel company But Burns found it frustrating to work for a Japanese group. "The burcaucracy was just awful," he remembers. He qplit wittr Tokyu, and created his own

*Regent"

hotel man-

of Hong Kong. The group won prestigious management contacts across the world, and in 1984 Bums bought the revered Dorchester Hotel in London, backed by a agement company, whose flagship hotd was in the heart

loanfromHSBC. By 1985, Burns was looking for new innestors for his Regent group, since he had quarreled with two of his origind partners. By another happy

coincidence, HSBC'sJohn Bond knew Burns well. Indeed, Bond sat on the

board

of

Regenr, since the bank orrned a 5 percent stake. When Bond

heard that Burns was looking for more investors for the Regent group, the name EIE cropped up.

It

seemed to be a match made in heaven. Takahashi-and LTCBwere keen to buy into a prestigious hotel group. Burrx, for his part, was

―

SAVING the SUN

―

thrilled by the proqpect of dealing with a partner with plenty of cash. In most cofirers of the hotel industry, a natural tension exists bet'ween the companies that ovrn *re hotels and the managers who run them on a dayto-day basis. Owners ahrays want to limit costs; managers hope to create the most fabulous environment possible by spending the owneCs money. Burns was a man who adored luxury, and he spotted that LTCB and EIE did not seem to worry about mundane details such as short-term profits. Burns also liked Takahashi personally. He found it difficult to communicate with him, since Takahashi spoke rrcry limited English, but what Burns could see, seemed charming, "Ishizaki was a

real gendeman," Burns conduded.

a

bit wild. Takahashi was

"lhere didnt seem to be a single dis-

honest bone in his bodyl" Best of all, since BIE knew relatively litde about hotels or real estate, Burns reckoned that Takatrashi was likely to accept his advice about which hotels should be

So,

in

1987 Takahashi

built-and which not. stake in the Regent hotel

took a 30 percent

management gtoup. Burns did not want to sell the entire Regent grouP to EIE, because he still considered it his 'taby," thus he retained a 55 percent stake fur the managernent group,

with HSBC holding the remaining

5 per-

cent. Howe\rcr, Burns agreed that he would help EIE to acquire more hotels

to be ovmed by Takahashi-but run by Regent, It seemed

On

a glorious sunny day in the autumn

of

1987,

a

perfect deal.

when the skies were

cobalt blue and the leaves vivid rc4 Burns took Takahashi to visit New York TheJapanese man had never been to New York" So Burns accomPanied Takahashi to the top of a building on 57th Street, where they gazed down on Manhattan. "That's Fifih Avenuel That's the Bmpire State Buildingl That's Park Avenue!" Burns erplained, polnting out the key landmarks. "So what can we do here, Burns-san?" Takahashi asked. "t want a

hotd." "Well, you have to think about this fke the Girwal" Burns cautioned. "It is going to be very expensivel" Burns knew that a friend of his, Bill Zeckendorfl a prominent American real estate developer, had assembled 25 ,o0o square feet of vacant prop-

erty on 57th Street between Madison and Park Averrues. Burns dso knew that when Zeckendorf saw EIE coming, he would raise the price. By 1987

-

Money Madness

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43

American real estate olilners had realized that theJapanese were so keen to buy overseas properties that they could get away with adding 10 percentor even 50 percent-to a deal. Burns also passionately believed that *le site could produce an extraordinary hotel. He had spoken about the site to the architect I. M. Pei, and Pei had suggested building a tall, limestone torrer. Takahashi might sometimes be vague on the details of his projects, but Burns knew ettactly what Regent was doing. Burns created his hotels with armies of project managers. Every lampshade, showerhead, bedcover, and cudery set was planned with military precision. The hotels he created were pricey; but luxury did not come cheap, And the hotel Burns was planning for Manhattan would be truly lavish;

a

legendary masterpiece.

"Don't worry about it being expensive, Burns-san!" Takahashi said. '.I am slue the banks will help. They ahrays help." Burns belierred him.

- *ropt*+ TH E TRILLION-YEN MAN Despite allthe

yaise and allthe citictsm, Takdhashiwas

o

persottwlw

symbolizedhis ero.

-Toshio

Yamagucli, labor ministo and friend of Takahashi

s

the LTCB bankers were feeling so self'confident that they had decided it was time to erect a new monument to their on'n prestige. Back in the 1960s, when LTCB had built its first headquarters in Otemachi, a plain, seven-story building had seemed respectable. By the

By the late

1980s,

to feel the Otemachi building too shabby for an internationally prestigious bank. So, in the late t980s the LICB managers started planning to create a lavish neq twenty'story 1980s, however, the LTCB management started

tower, over in a prestigious spot near the Imperial Palace. It was designed as an architectural jewel, complete with a cosdy l0O-foot-high glass atrium, high-ceilinged meeting halls, and white marble in the reception, Indeed, the price tag was projected to be Y50 billion or more ($500 million). Nobody objected, or even considered the plans odd. Yet, as Onogi watchedJapan's

wild real

estate party get even wilder,

he sometimes felt uneasy. This was flot because he feared an imminent crash. Onogi, like almost everybody else inJapan, assumed that real estate values would continue to rise indefinitely and dong with them the economy would continue to expand. No. Onogi's problem was that he had litde

―

The Trilllon‐

Yen Man―

taste for the nouveau riche culture the real estate bubble engendered. His generation had grown up with a sober, ascetic work ethic. Not for him was

the new Tokyo of desigrrer clothes, jewelry shops, and restaurants that could charge as much as $500 a head for dinner or sprinkled gold leaf on their sushi. Onogi liked to think of himsef as a chfld of the Meiji Restoration, afl elite intellecnral who made it his mission in life to embrace international ideas and place his counrry on the world stage through its intellect and technological skill. He dreamed of aJapan that could hold its own in internadonal finance, an equd to the blue-chip Wall Street names or snooty British merchant banks. Instead of gawping at the riches of TokFo, or acknowledging the existence of Japan's swamp of corruption, he threw himseLf into the usk of developing LTCB's operations in London and NewYork Yet, by the late 1980s

it was becoming harder for Onogi to entirely

ignore what was going on insideJapan. He had been appointed a managlng

director 6f 3hs fenL, in the summer of lgg7, and given the post of head of corporate planning, replacing the maverick Mizukami. The highly prestigious post meant that it was Onogi who had the difficult task of drawing up the next strategic plan oudining the bank's future direction togerher

with

a team

of other

LTCB bankers. But Onogi'was torn orrer what that

plan should say Part of his conundrum was that rhe 1985 plan had dearly stated that it made no sense for LTCB to keep expanding its traditional loan business. Yet, between 1985 and 1988 the bank's essets had grown from Yl8.4 trillion toY22.6 trillion ($184 billion to $226 billion), largely due to a massive increase in real estate-related loans. If Onogi stuck to his original reform ideas, he would have to call on the bankers to cut the loan book Or he could take notice qf ths exfansion of real estate lending and perform a complete U-turn in the next strategy paper by endorsing it. Personally, Onogi still firmly believed in reform and the principles

of

the 1985 plan. Intellecarally he knew that in the long term, LTCB had to find a new business as an investment bank, rather than just relying on traditional lending. But Onogi was also haunted by his respect for wa, or group harmony. As land prices rose ever highex all theJapanese banks were becoming obsessed with real estate. Moreover, the real estate business appeared to be delivering high

profits-while inaestrnent banking

was losing

―

SAVING the SUN ―

money, because it was hobbled by dre Ministry was not the type

of man to defi the

of Finance's rules. Onogi

consensus by suggesting that LTCB

stop real estate lending.

Onogi decided to back the wa.In 1989, when the bank finally publshed the sixttr strategic plan, this dedared that IITCB should dt*lop innestment banking in the long term, but focus or corporate lending as its main business in the short term. It also called on the bank to develop a new So,

focus on making small- and medium-sized company loans, and take advantage of new oppornrnities in real estate.

In later years, Onogi vehemendy denied that this sixth plan was a reversal. He preferred to call it at ampkfration of the original plan. "We were still so constrained in the investment banking business that we simply

could not rely on that to generate enough profits straightaway," Onogi later explained. 'And until the investrnent banking became stonger, we had to create profits another way, because we w€re losing our large eaditiond corporate borrowers." But though Onogi may have been satisfied with that face-saving logic, the "domestic tribe" at the bank sensed victory. Real estate was now deemed more important than reform. And the emboldened "domesdc tribe" moved to press its advantage: LTCB restructured its loan departrnents and, for the first dme, placed ttre credit conuol

ofrcers under the authority of the loan promotion business. The move, whidr was being made at many other banks as well, removed checks from the system. In the old days, if a jr.rnior officer had wanted to make a loan to an industrial dient, he had to first get his plans rrctted by a &fferent, credit

control department. Now,

if

a loan officer wanted to supply cash

to a real

estate developbr, he could simply rubber-stamp the loan himself. As long as a customer had some property---{r simply plans to buy

property-LTcB

was ready to lend. So was errery otherJapanese bank"

Years later, Nomoto at EIE sometimes tried to work out how much money EIE borrowed during this heady period. He reckoned that he had persottal$ handled about $4 billion in deals between 1986 and 1990. But he stressed that was only a rough estimate, and just covered the internetional *We were doing deals so operations, which were about hdf the group. fast," Nomoto explained. "V/e hardly had time to add them up." To make

it

―

The Tril:ion‐

Yen Man―

47

easier to find hotels, Takahashi bought a Falconjet so that he could travel around the world quickly Then, he decided that a Fdcon was too modesr, so he added a Bolurg7z7 to his collection as well. Burns, uiho often accompanied Takahashi on these shopping trips, disliked the plane. "It was a strange

thing," he grumbled later. "It leaked petrol. Once we almost got suanded in Burma because it ran out of fueI." So eventually Takahashi leased a third, more reliable plane; a Boeing 737. As they careered around the world, Takahashi jumped on whatever real estate he liked. He snapped up *re Regent Beverly Wilshire in Los Angeles, the Regent hotels in Bangkob Bali, and Milan, a Hyatt hotel in

Guam, a floating hotel in the Australian Barrier Reefi the luxury Sanctuary Cove resort in Queensland, Australia, and the Landmark Hotel in London. To this he also added tvi,o more Hyatt hotels in Australia, three Tahiti hoters run by the Beadr-comber group, and an entire island in Fiji. '"W.e took all the

in the F{i government for a ride in our planes and showed them a rcally goodtimet" Ishizaki later chuckled, pleased ro have become a Malcolm Forbes-like plutocrat. "I think that was why we got the island . . . the planes were very useful like that. We considered the planes a cabinet members

capitalist tool." Sated on hotel and luxury properties, Takahashi decided to dirrcrsi$. Dourn in Sydn.y, Takahashi met Alan Bond, the Australian derreloper, who perzuaded EIB to inrrcst in a private Australian university that Alan Bond

was founding for his own grandiose puq)oses, called "Bond Unirrcrsity,, As a bonus, EIE also purchased a stake in the Bond Center, a large Hong Kong

shopping and office complex. Lacking the steadfast zupport of aJapanese bank, Bond went bankrupt in the late l980s and was eventually jailed for fraud in Australia. Loyal or oppornrnistic, Takahashi obligingty took over the entire shopping center and universiry. Oil was EIE's next interest. h 1988 Takahashi and Ishizaki flew across to vietnam, where some lucrative new oil fields had recently been discovered. The local Vietnamese officials had never seen a private corporate jet before and were so thrilled by Takahashi's arrival that they insisted on coming aboard to stamp the passports. As they lounged in the jet's leather seats, Takahashi plied them with Chlteau Lafite wine and Dom pErignon cham-

pape. 'That went down very well

because Vieoram had been a French

―

SAVING the SUN一

colony, so they had a taste for French labels," Ishizaki later explained. Takahashi's idea to do that . .

.

'It

was

he was a genius at that tyPe of thing."

Impressed, the local governor invited Takahashi and Ishizaki for dinner, where Takahashi presented him with an eotire case

of Dom P6rigton

champagne and tactfrrlly posed his question: Would the Vietnamese sell

him the concession rights to an oil field?

The Viemamese governor looked doubtfrrl. The world's

largest

American, European, andJapanese oil companies were already scrambling to buy a stake in that oilfield. "What we really need is a five-star hotel," the governor hedged. "'We need that before we sell the oil rights."

'Fine. We will ptovide a five-star hotel in six months," Takahashi replied. "If we do that, will you sell us the oil concession?o' The Vietnamese laughed. "Do you downs really thinkwe are dumb-you cfirnot do a five' star hotel in six months!" the govemor declared. "But if you can' you get ttre oil."

What the Viebramese hadn't considered was that among Takahashi

s

hotel treasures acquired over the years of his shopping sPree was a giant barge decked out as a floating five-star hotel moored on the Australian Bar' rier Reef not too far from Vietnam. Back in Australia, Takahashi's lawyers pointed out that *re floating hotel was collaterd to a bank loan and that sailing his collateral out of Ausualian waters was illegal and would nullifr the loan. With so much to gain from delivering the promised five-star hotel, Takahashi simply ignored his lawyers. Soon after the ship moored.in Vietnamese waters, the Metnamese granted EIE the rights to develop a group of oil fields.

*t

deals piled up, the LfCB bankers became increasingly excited' Ever since the bankhadbeen foundedtnlgS2, the staffhad suffered an inferiority complex with respect to Industrid Bank of Japan. IBJ was the so-called

Ao

'tig bro*rer" of LTCB,

and tended to grab all ttre best and most presti' gious industrial dients. Thaditionally, if there were an international oil deal to back it would be IBJ that financed it. Not', LTCB reveled in errening the score. And pride of place went beyond simPly taking a piece of IBJ's pie; the LTCB bankers started to ooze with national self'confidence, fired up

with the belief that the banls were no\r carrying the message of Japan's

― The Tri‖ lon‐ Yen

Man

―

industrial might out into *re wider world. They remembered only too deady that four decades earlier their nation had been defeated by America;

now Japanese were gobbling up trophy sites across the world, even in America. It felt very sweet. Flush with the heady excitement of this new "mission," it seemed almost drurlish for a bank to worry about dull iszues sudl as the rates of return. The bankers had never worried about returns vrhen drey were e',gaged in their national mission of rebuilding Japanese industry; why should thry do so now that they were projectingJapan's power on tlre world sage? 'The banks never really questioned our hotel plans," recalled Nomoto, who hadtle taskof zubmittingwrittenprojections whenever EIE askedfor a

new loan from LTCB. "Half the time they would just take our plans," Ishizaki said with a laugh, 'rip the corcr off, photocopyit, and pass it around as their plan. Thry were just so eager to give us cash, they didn't care." The otherJapanese banls werr no different. These banks usually preftrred to operate as a team, since it reinforced the sense of community. The New York hotel on 57th Sueet, for example, was bac-ked not only by IJTCB,

but also by Mitsubishi Thust, Mitsui Trust, Ashikaga Bank, and Sumitomo Tbust. Hov/ever, none of those banks ever challenged EIE's numbers either. Instead their main concern was to find out whetherBlBl:prd;rr.ore deals that they could finance. "The bankers would ask me thinp like: 'Are you sure you only want to borrow $100 million? How about $125 mjllion?"' Nomoto said.

"'What about building And

as

some hotels in Africa?'"

the qpending grew wilder, prices became crazier by the day. At

the begiruring of the decade, the value of real estate inJapan was about the

same as land in America. By the end times larger than the value

of

of the decade it had become four

U.S. land---+ven

thoughJapan's population

half the size of the United States. Brokers reckoned that the plot of land under the Imperial Palace in Tokyo alone had the same value as the whole of California. Or Canada. Meanwhile, outside Japan, some Ameriwas only

can brokers estimated *rat Japanese companies had acquired about twothirds of the value of real estate in Manhattan. Mitsui Real Estate had spent $610 million to buy the

Eson building in New York, even though the

building was initiaily valued at just $375 million. Mitsubishi Real Esate bought Rockefeller Center in New York for $850 million, at its time a

―

SAVING the SUN―

record deal in New York" Japanese companies were also spending lavishly on other trophies: Sony acquired Columbia Picnrres for $3.4 billion. Matsushia paid $5.e billion for MCA. Yasuda Fire and Marine paid $39 million a single Van Gogh painting.

for

Ao S*t r scurried around looking for more

Regent hotels to develop

with

EIE, the American hoteter sometimes reflected that this bank behavior was a litde odd. When hard-nosed Chinese bankers had financed his Regent hotels in the past, they quibbled about every penny TheJapanese, by contrast, offered a stream of blank chedss. "I thought the Japanese banls were just taking a long-term perspective on things," Burns later said, explaining why he never wasted much time pondering the Japanese motives. "There were all these American business books saying *rat the Japanese businessmen were very long term in their views, and people thought that was a good thing." Hovrever, Burns comforted himself with

the thought that Takahashi was not at all unusuall There were hundreds

of

other companies sudr as EIE. And Burns himself was not the only foreigner drinking from this stange financial well With the same sharp eye for a deal that had driven American traders toJapan in the nineteenth century, foreigr iff/Estrnent bankers were falling over themselves to find ways

to exploit this new Japanese trend.

Lines

of Americans, decked out in

expensine suits, were flying out to liokyo and then dimbing the four flights

of stairs to reach EIE's shabby office in the Ginza. They batded with each other to gain a seat on the EIE plane, to show Takahashi new projects. They pitched ever more exotic ideas, aware that theJapanese were willing to snap up properties wittrout any of the usual hard-nosed bargaining so common in America. Morgan Stanley, for example, often worked with Burns. The head of itsJapanese real estate team inJapan, an American called Bill Kahane, had

had the

luck-or extraordinary wisdom-to

get invohrcd in real estate in

the early 1980s, and by the late 1980s had established himself as a key wheeler and dealer in this worl{ cutting lucrative deds wittr companies sudr as EIE.

*Sometimes

you are just in the right place at the right time,"

Kahane said in retroqpect. "It was crazy-the market was so frothy Once EIE got involved in bidding for this piece of dht in Hawaii. It was

a

working

― The T‖

￨lion‐

Ven Man―

catde ranch, about 1,100 acres, but Takahashi wanted to build a hotel. was appraised at $20 million, but in the end Takahashi bought

it for

It

$150

million --and there were t'rvo otherJapanese bids at that level. Everyone [at Morgan Stanleyl thought I was a genius." Occasionally Kahane would wonder who was exploiting whom. "The problem with theJapanese was ttrat they were so ruffieasoned," Kahane said.

"They were juvatib." He comforted himself with the knowledge that Japan's financial and political establishment deady knew what was going on. "These companies [ke EIE were like surrogates. I am convinced that they were created because the banks wanted to get into red estate and the

not control the btrgtuittts:'t companies. In that just EIE was an inrrcntion of the system. I knew two dozen companies

banks knew that they could sense,

like EIE and the one unifying factor was that none of them knew anything about real estate."

And Takahashi's own lifesryle illustrated this broader Japanese sup port, Between his hotel-hunting trips, Takahashi sometimes invlted Burns or Kahane to dinner in Tokyo to "diqplay him to his powerfrrl friends. He would artange an evening meal in his favorite ryotei----ttadtdonalJapanese rcstaruatriln the Tokyo district of Ahasaka. Geisha girls would entertain the guesm as *rey sat on the chopstid