Insider-Trading Scandal Rocks Japanese Government Summary

  • Last updated on November 11, 2022

Japan was scandalized when it learned that an upstart Tokyo company, Recruit, had offered, in exchange for political favors, inexpensive stock to seventeen members of parliament, civil servants, businessmen, a publisher, and two university professors. Because many beneficiaries were tied to the ruling Liberal Democratic Party, the scandal contributed to the party’s temporary loss of power in 1993.

Summary of Event

In postwar Japan, the relationship between politicians and business has been cozy, but the extent to which the Recruit Company tried to develop this relationship shocked the Japanese public. To most, it looked like Recruit’s chairman, Hiromasa Ezoe, overstepped the boundaries of public decency. [kw]Insider-Trading Scandal Rocks Japanese Government (June, 1988-June, 1989) Shinto, Hisashi Yoshinaga, Yusuke Insider trading;in Japan[Japan] Recruit scandal Ezoe, Hiromasa Takeshita, Noboru Miyazawa, Kiichi Shinto, Hisashi Yoshinaga, Yusuke Insider trading;in Japan[Japan] Recruit scandal Ezoe, Hiromasa Takeshita, Noboru Miyazawa, Kiichi [g]Asia;June, 1988-June, 1989: Insider-Trading Scandal Rocks Japanese Government[02350] [g]Japan;June, 1988-June, 1989: Insider-Trading Scandal Rocks Japanese Government[02350] [c]Corruption;June, 1988-June, 1989: Insider-Trading Scandal Rocks Japanese Government[02350] [c]Business;June, 1988-June, 1989: Insider-Trading Scandal Rocks Japanese Government[02350] [c]Government;June, 1988-June, 1989: Insider-Trading Scandal Rocks Japanese Government[02350] [c]Politics;June, 1988-June, 1989: Insider-Trading Scandal Rocks Japanese Government[02350] [c]Banking and finance;June, 1988-June, 1989: Insider-Trading Scandal Rocks Japanese Government[02350]

In Japan, it is legal to make offers as gifts to select people, such as politicians, to buy shares before a company goes public. It is against the law, however, to give gifts in direct exchange for political favors. Thus, when the scandal broke, a big issue, apart from the moral outrage at a company making cleverly disguised gifts to public leaders, including two university professors, was the question of whether the law had been broken—whether politicians and civil servants had been Bribery;Japanese politicians bribed.

Ezoe founded Recruit, a communications and publishing company, in 1960. His business idea was to help the government place college graduates in their first jobs. His annual Recruit Book listed employment opportunities and his Recruit Shingaku Book provided high school graduates with information about choosing the right college. As his company grew, Ezoe branched out into real estate and founded Recruit Cosmos Company in 1964. Later, he developed his own telecommunications business. During the mid-1980’s, legal changes threatened Recruit’s publishing business. At the same time, Recruit bought two American Cray supercomputers from Nippon Telephone and Telegraph Company (NTT) and profitably used them for high-speed computing.

Hiromasa Ezoe.

(Hulton Archive/Getty Images)

The Recruit scandal broke in June, 1988. Later investigations revealed that, beginning in October, 1984, and culminating on September 30, 1986, Recruit had offered 159 influential Japanese politicians, civil servants, businessmen, newspaper publishers, and academics the opportunity to buy shares in its subsidiary, Recruit Cosmos. This offer was made before the company would go public on the stock exchange. The price per share was three thousand yen, about twenty dollars in 1986. In order for the beneficiaries to buy the shares, another subsidiary of Recruit, First Finance Company, gave them advantageous credit, financing with two billion yen (about thirteen million dollars) the purchase of about 666,666 shares. After Recruit Cosmos went public during the hot phase of Japan’s bubble economy in late 1986, the value of the shares doubled. The scandal fully erupted in July, 1988, when seventy-six beneficiaries sold their shares.

In August and September, 1988, Recruit secretly offered five million yen ($32,500) to Yanosuke Narazaki, a member of the Diet, Japan’s parliament, to stop his investigation of the scandal. Instead of accepting the bribe of Recruit’s front man, Hiroshi Matsubara, Narazaki Video evidence videotaped the bribery attempts. On September 8, Yusuke Yoshinaga, chief prosecutor of the Tokyo district, launched his investigation.

With a police investigation and a special committee of the Diet looking for culprits, the Recruit scandal made headlines in Japan in the fall of 1988. Ezoe resigned as chairman of Recruit and checked into a hospital in October. He was soon questioned by a Diet delegation.

Bowing to public pressure, and with the scandal at full force in November, Recruit provided to the Diet a list of all who had bought company shares early. The results shocked the public, because it was confirmed that seventeen members of the Diet as well had bought and sold Recruit shares. Even though five of them were members of opposition parties, the majority belonged to the ruling Liberal Democratic Party (LDP). Public pressure mounted, and the LDP government was faced with a crisis of public confidence.

Finance Minister Kiichi Miyazawa, a rising star of the LDP, resigned when it was confirmed that he had bought ten thousand shares of Recruit Cosmos stock. The justice minister and his immediate replacement resigned as well. Also in December, Hisashi Shinto, chairman of NTT, resigned over the buying and selling to Recruit of two Cray supercomputers. Because the government held a stake in NTT, Shinto was considered a public servant. The Japanese found it especially distasteful that esteemed civil servants such as Shinto were part of the Recruit scandal.

As prosecutor Yoshinaga’s investigation into Recruit continued, Ezoe, along with three Recruit executives, was arrested while still in the hospital on February 13, 1989. The four were put in a bleak jail to break their silence. In another stunning move, the public witnessed the scandalous spectacle of Yoshinaga’s officers arresting a top businessman and civil servant, former NTT chairman Shinto, and his secretary, Kozo Murata, on March 6. The public was outraged by the time the scandal included Prime Minister Takeshita. In March, Takeshita admitted to gifts of 151 million yen ($1.4 million) from Recruit. Because he gave no special favors, Takeshita insisted, this acceptance of gifts was not criminal. However, on April 22, his office admitted that his secretary, Ihei Aoki, had received a loan of fifty million yen ($460,000) from Recruit that he later repaid in small installments, and that Aoki had been entrusted with twenty million yen from an unreported (which was illegal) thirty million yen fund-raiser for Takeshita. One day after Takeshita announced that he would resign, Aoki committed suicide.

On June 12, a few days after the resignation of Takeshita, prosecutor Yoshinaga issued his final report on the scandal. Ezoe and four other Recruit executives were indicted for bribery. Three officials were indicted for accepting bribes, and three executives of NTT, including former chairman Shinto, were charged with violating the NTT Public Corporation Law by accepting bribes. Two other high-level public servants were indicted for taking bribes in relation to their official duties. NTT’s Murata was charged with violating the Securities Exchange Law. Three high-ranking secretaries of LDP politicians were indicted for transgressing the Political Funds Control Law. The person who tried to bribe Diet member Narazaki, Hiroshi Matsubara, already had been sentenced for attempted bribery. Significantly, while all those indicted would be found guilty and given suspended jail sentences, all leading politicians escaped legal punishment.

Ezoe’s trial began in December, 1989, required 322 sessions, and lasted fifteen years. On March 4, 2003, the Tokyo district court found Ezoe guilty of bribing politicians and civil servants, based on the sale of 53,000 Recruit Cosmos shares that could be traced to illegal actions. Ezoe received a sentence of three years, suspended for five years. At his sentencing, he apologized to the Japanese people for having caused moral outrage.

Impact

Immediately after the Recruit scandal reached its height with Prime Minister Takeshita’s resignation, the LDP was punished by scandalized voters. In Niigata Prefecture in June, 1989, a Socialist housewife decidedly beat the LDP candidate for by-elections to the Upper House, and the LDP lost seats in the July 2 Tokyo municipal elections. On July 23, for the first time after World War II, the LDP lost its majority in the Upper House.

Despite these initial setbacks, however, the LDP maintained its crucial control of the Lower House of parliament, and pushed through the election of its prime ministers throughout the early 1990’s. When Miyazawa, whom the Recruit scandal had forced out as finance minister, became prime minister on November 5, 1991, it looked as if the LDP had weathered the storm. However, the combined forces of the Recruit scandal, an unpopular new sales tax, Japan’s economic crisis of 1990, and two further scandals tainting the LDP, finally caused the party to lose power in the 1993 elections. For the first time since it was founded in 1955, the stunned LDP did not rule Japan, punished by voters alienated by its scandalous affairs.

Intimations of political change proved premature. By 1994, the LDP joined the government again, and on January 11, 1996, Ryutaro Hashimoto became LDP prime minister. To some observers it looked like the Japanese electorate did not mind the connection of business and politics revealed by the Recruit scandal. After all, the system that made politicians and others accept Recruit shares also included a politician’s customary requirement to make gifts for weddings and funerals of the constituents, and to push through public projects benefiting a home district. In the end, the LDP survived the scandal. Shinto, Hisashi Yoshinaga, Yusuke Insider trading;in Japan[Japan] Recruit scandal Ezoe, Hiromasa Takeshita, Noboru Miyazawa, Kiichi

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Bowen, Roger. Japan’s Dysfunctional Democracy. Armonk, N.Y.: M. E. Sharpe, 2003. Argues that the postwar Japanese system is scandal-prone by Western standards because cash-strapped politicians need means to bestow favors on constituents. Also argues that the Recruit scandal did little to change the ruling party’s power in the long run.
  • citation-type="booksimple"

    xlink:type="simple">Christensen, Ray. Ending the LDP Hegemony. Honolulu: University of Hawaii Press, 2000. Chapter two credits the Recruit scandal with helping to make the ruling party lose power temporarily because of its unwillingness to enact real reform.
  • citation-type="booksimple"

    xlink:type="simple">Herzog, Peter. Japan’s Pseudo-Democracy. Sandgate, England: Japan Library, 1993. Detailed discussion of the Recruit scandal. Places event in the context of the dark side of Japanese postwar politics. Critical of Takeshita’s government’s ties to Recruit.
  • citation-type="booksimple"

    xlink:type="simple">Taro, Yayama. “The Recruit Scandal: Learning from the Causes of Corruption.” Journal of Japanese Studies 16, no. 1 (1990): 93-114. Surprisingly sympathetic account that blames the foundation of the Japanese political system rather than individuals caught up in the scandal. Warns that media hype and prosecutorial zeal may do more harm than good.

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