From The Editor

Back to Contents of Issue: August 2002
by Bruce Rutledge
THE US IS IN the midst of a corporate governance crisis that is bound to affect Japan. As I write this, WorldCom, the second-largest US long-distance provider, is crumbling under the weight of its executives' greed. Japan should take note, because this is not just another corporate collapse. This is insatiable greed of Enronesque proportions and it is shaking the confidence of individual investors who have long believed in the sanctity of the New York Stock Exchange and Nasdaq, who felt that the American system, for all its faults, was at least more transparent than systems elsewhere. But the cynical manipulation of the bottom line at Enron, WorldCom and elsewhere, and the seeming complicity of the people charged with keeping the system transparent -- accountants and auditors, for example -- has shattered any illusions that an investor can trust the markets. The lesson learned is that capitalism unchecked leads to crime.

Couple these corporate collapses with cases of brokerage analysts hyping stocks, and you have a crisis of confidence among US investors. Americans have allowed the rules to be broken in a naive hope that their system will continue to grow and thrive on into eternity. But now they are beginning to see, as one UK newspaper put it, that the "greed is good" era is over. Mothers and fathers don't know whether to trust the markets, investors with too much money are avoiding the stock market and bidding up real estate prices in places like San Francisco despite the bleak job market there. Any thoughts of a quick US recovery are pipe dreams -- the Americans have a lot of sorting out to do.

But one thing is sure -- the days of the chief executive as superhero are over. Jack Welch, former CEO of General Electric, put out his autobiography just after the September 11 attacks on New York last year. People scoffed it up, eager to find a hero. But after hundreds of hours of TV footage showing one CEO after another lying about their company's stock then cashing in their chips just before the company goes under, or using company money to line their Manhattan apartments with rare art, who is left to believe the slick-talking CEO these days? Now he or she is more of a liability, raising the eyebrows of jaded investors wondering what this guy has to hide.

Even the rating agencies have not been immune to this breakdown in the system. Both Moody's Investor Services and Standard & Poor's rated Enron at investment grade up to five days before the company collapsed. They've been hit with a barrage of criticism ever since. That's why the rating agencies' message on Japan can be easily dismissed by some, including Tokyo Governor Shintaro Ishihara. Ishihara and others see conspiracies in the works and frankly, who can blame them considering the actions of US corporations lately?

But there's no conspiracy at work here. In our Economic Bondage story that begins on page 24, we look at the arguments of credit rating agencies and government officials. Does Japan really deserve to be rated on a par with countries lacking its economic strength? Should it be lumped with Cyprus, Poland, Israel? The government obviously doesn't think so, but the Western rating agencies have some compelling arguments to make. They are very aware of the fact that, in the words of Mike Petit, managing director and chief credit officer for the Asia Pacific region at S&P, "If our ratings are not credible, or if people don't understand the ratings, we do lose credibility." That's why they go to great lengths to explain their argument, which dumbed down to a few words, goes like this: The Japanese government is horribly addicted to debt.



Both Moody's and S&P make a distinction between Japan's economic power and its government. Both say Japan is a strong economy with huge potential. But both also say that that potential is being smothered by a frightening over-reliance on the thing that graces our cover this month: Japanese government bonds, or JGBs.

If American corporate culture has a problem with the uncontrolled avarice of its executive class, the Japanese suffer from the insatiable appetite for debt that its government has. The bottom line is that the government sucks up funds that would otherwise go to banks or other investments, leaving the domestic financial sector all the weaker. But that's just one side of the story. Japan's rating agencies still give the country triple A ratings. Is that warranted? Read this month's cover story and reach your own decisions.

Also, this month, we return to biotechnology, this time via the chimpanzee. Sara Harris, who did our cover story on the biotech boom in October 2001, brings us an interesting read in Man and Ape -- Two of a Kind beginning on page 18. Harris explains that Japanese biotech labs, looking for a new project after the human genome work, turned to the chimp genome because of its scientific importance, but also because the US hesitated to take the lead out of potential religious conflict -- or at least that's the view of Stanford professor Lee Silver.

The chimp genome is not only difficult to map, it is difficult to manage. Chimpanzees, being an endangered species and being just a few evolutionary steps away from humans, are high on the list of priorities among animal rights groups. That means the scientists work knowing the animal rights groups are in the shadows. But some of the companies involved in the research seem less than forthcoming. The fact that this project is still partially veiled in secrecy makes us think there must be something interesting afoot.

Our third feature this month is about small firms that learned early how to make money out of other people's throwaways (The Recycling Champs, page 30). Yaeko Mitsumori introduces us to companies that have figured out how to turn a healthy profit taking care of garbage, electrical appliances and gases. Some of these companies are pre-IPO and worth a look by investors because this market is definitely set to grow in the next decade or so.

Plus we have the really important stuff, like a piece on a Japanese Beatles cover band that is all the rage in Kansai, a dog with a David Beckham haircut and soccer playing robots. We hope you enjoy this month's look at Japan.

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