Recruit Scandal Surfaces in Japan

Illegal and unethical stock deals between leaders of Japan’s Recruit Company and officials high in the Japanese government caused a scandal that rocked the Liberal Democratic Party.

Summary of Event

The Liberal Democratic Party (LDP) governed Japan from 1955 into the 1990’s. During nearly four decades in power, the party provided Japan with its prime ministers, most cabinet members, and majorities in the Diet (the Japanese parliament). Japanese voters recognized that throughout these years the LDP took political credit for having presided over Japan’s remarkable and, in many respects, unprecedented economic growth and technological changes. Japan’s population attained an affluence rivaling that of any other country. Recruit Company scandal
Liberal Democratic Party (Japan)
Insider trading
[kw]Recruit Scandal Surfaces in Japan (Oct., 1988)
[kw]Scandal Surfaces in Japan, Recruit (Oct., 1988)
[kw]Japan, Recruit Scandal Surfaces in (Oct., 1988)
Recruit Company scandal
Liberal Democratic Party (Japan)
Insider trading
[g]East Asia;Oct., 1988: Recruit Scandal Surfaces in Japan[06920]
[g]Japan;Oct., 1988: Recruit Scandal Surfaces in Japan[06920]
[c]Business and labor;Oct., 1988: Recruit Scandal Surfaces in Japan[06920]
[c]Crime and scandal;Oct., 1988: Recruit Scandal Surfaces in Japan[06920]
[c]Banking and finance;Oct., 1988: Recruit Scandal Surfaces in Japan[06920]
Ezoe, Hiromasa
Tatsumi, Masao
Narazaki, Yanosuke
Morita, Ko
Miyazawa, Kiichi
Hasegawa, Takashi
Takaishi, Kunio
Takeshita, Noboru
Nakasone, Yasuhiro
Shinto, Hisashi

The ascent to power of the LDP was founded on intimate relationships between government and party officials on one hand and leaders of Japan’s business and financial communities on the other. Collusive arrangements that included business financing of LDP politicians characterized governmental and business ties. These arrangements represented a continuation of cultural understandings that predated World War II, American occupation, and the drafting of a presumably democratic Japanese constitution.

In company with many foreign observers, Japanese political opponents of the LDP, some of whom sprang from within the party’s own ranks and others of whom were socialists or communists, had long feared the consequences of the LDP’s longevity in power. The LDP’s sharpest critics decried the Japan governed by the party as a pseudodemocracy. As the LDP’s leadership aged, critics became increasingly concerned about the prevalence and the dangers of endemic corruption.

Because Japan’s economy operated under a considerable number of governmental regulations and because politicians were always in need of funds, clandestine deals between businesspeople hoping to work around governmental regulations and importunate politicians worried about funding their next elections had marked the entire career of the LDP. Examples of corruption are numerous. In 1948, prior to the LDP’s governance, bribes that passed from a leading chemical firm to a Japanese foreign minister had resulted in the Showa Denko scandal. In 1954, seventy-one government officials were arrested in connection with a shipbuilding scandal.

In 1978-1979, reports issued by the U.S. Securities and Exchange Commission indicated that the McDonnell Douglas Corporation McDonnell Douglas[Macdonnell Douglas] and the Grumman Aircraft Engineering Corporation Grumman Aircraft Engineering Corporation had bought the influence of Japanese officials, hoping to secure favor for sales of their products. In 1979, the KDD affair erupted after the exposure of extensive irregularities and bribes to officials of the Ministry of Posts and Telecommunications. Between 1974 and 1989, there were revelations that the Lockheed Aircraft Corporation Lockheed Aircraft Corporation had long paid a Japanese “fixer” to facilitate sales in Japan of Lockheed aircraft, notably its TriStar, by passing money to key government officials and businesspeople. Revelations in the late 1980’s about the Social Democratic Party’s involvement in the Pachinko affair meant that the LDP (which was also implicated) no longer monopolized political-business corruption.

Such was the context within which the Recruit scandal unraveled. The Recruit Company was founded in 1960 by Hiromasa Ezoe to sell information about employment, housing, and real estate. It soon began publishing an employment magazine for college students as well as ancillary books about colleges and universities for the enlightenment of high school students. By the mid-1980’s, the company had entered into telecommunication networking, buying two of Nippon Telegraph and Telephone (NTT) Corporation’s supercomputers.

Recruit had prospered since its inception. In 1987, it claimed twenty-seven subsidiaries, sixty-two hundred employees, and sales of 350 billion yen. Nearly 35 percent of company stock was held by a subsidiary, Recruit Cosmos Company; its founder, Ezoe, held 4.5 million shares. Other major stockholders included the vast majority of Japan’s trust banks and city banks.

Ezoe’s influence with government officials had grown with his own extraordinary wealth. His intimate connections extended into Japan’s leading educational foundation, the Institute for Higher Education, which Ezoe substantially funded. His connections also reached into Tokyo, Waseda, and Kyoto universities, the Toyota Motor Corporation, the Sony Corporation, and newspaper boardrooms. In addition, Ezoe furthered his business interests through his close relationships with the ministries of labor, education, and telecommunications. Ezoe sat on various councils and committees of these ministries.

Through Recruit’s subsidiary, Recruit Cosmos Company, shares of stock were offered to select persons before they were made available publicly. This action, designed to augment goodwill for Ezoe’s company, laid the groundwork for scandal. The favored recipients of these stock shares could count on the value of their holdings rising rapidly after the stock entered the public market. Simply put, in September of 1986, more than one hundred major political figures, government officials, academics, and businesspeople were allowed to make tremendous profits as a result of Recruit Cosmos insider stock purchases. A reasonable surmise was that Recruit Company targeted these stock recipients in hopes of buying influence with them.

The scandal was precipitated by Recruit’s attempts to offer shares to Kawasaki city officials to ensure the company’s participation in that city’s urban development project and by Recruit’s efforts to persuade Yanosuke Narazaki, a member of the Diet, not to investigate the company. Recruit’s actions were imputed variously to the company’s financial difficulties and to the pressures of increased competition. In any event, Communist Party spokespersons made specific charges in October, 1988, naming a number of politicians, government officials, educational leaders, banking and financial executives, and newspaper executives as purchasers or recipients of substantial amounts of Recruit stock shares.

Evidence buttressing the Communists’ allegations had accumulated during July and August of 1988. Official investigations followed, one launched by the Tokyo District Public Prosecutor’s Office in November, 1988, and another by a special Diet committee shortly afterward. These inquiries prompted alleged corruptionists to declare their innocence, deny illegal practices, and, in some instances, resign to avoid embarrassing their parties or their offices. The exposures continued through indictments and the filing of a final report on the Recruit affair by the Budget Committee of the Diet’s Lower House in June, 1989.


Amid allegations, public apologies, confessions, interrogations, and continuing official inquiries, the LDP celebrated its fiftieth anniversary on January 31, 1989. By that time, a substantial majority of the Japanese electorate had repudiated the LDP and its leadership. Japanese voters in a general sense had been aware of corruption and venality in the LDP for decades. Nevertheless, because the party had presided over unparalleled economic growth and a period of increasing national and individual prosperity, voters sublimated their suspicions and shied away from open criticism of LDP leadership.

By the close of the 1980’s, weaknesses had emerged in what appeared to have been almost flawless economic performance. Japan had begun experiencing economic recessions. Critics predicted that decades of progress could end at any time, as the economy was no longer structurally sound. Stiffening overseas competition, signs of instability in the country’s financial institutions, problems stemming from a huge trade surplus, foreign criticism of Japan’s unfair business practices, and Japan’s failure to assume an international role commensurate with the nation’s affluence all helped deflate voter confidence in the aging LDP leaders. These factors, coupled with a constellation of scandals during the late 1980’s, drove 85 percent of the electorate to disapprove of the LDP at the polls. For LDP politicians, revelations erupting from Recruit investigations could hardly have been worse news.

In the fall of 1988, various government ministers became implicated in the scandal. Exposed as a recipient of ten thousand Recruit Cosmos shares, Finance Minister Kiichi Miyazawa resigned, although he still denied any guilt. In short order, Minister of Justice Takashi Hasegawa, along with Ken Harada, director-general of the Economic Planning Agency, also resigned. A release of Recruit Cosmos files to the Diet further indicated that nine members of former prime minister Yasuhiro Nakasone’s cabinet and four members of Prime Minister Noboru Takeshita’s cabinet had made Recruit stock purchases. Ezoe testified to the Diet that he had personally chosen the insiders. He disavowed any intention of seeking favors from them and assured Diet members that he had promised them no rewards. Claiming lengthy personal friendships with the former vice minister of education, Kunio Takaishi, and former vice minister of labor, Takaishi Kato, Ezoe publicly voiced his regret regarding their involvement in the affair.

Members of the Socialist Party as well as the Democratic Socialist Party had also purchased Recruit shares, along with a former minister of labor and the speaker of the Diet’s House of Representatives, who eventually resigned in June, 1989. LDP government officials were not singular in their Recruit stock purchases, but because of his enormous political power, both as a former prime minister and as one of Japan’s most influential political figures, Yasuhiro Nakasone soon became a center of the Recruit scandal.

For months, Nakasone refused to testify before a House committee, publicly denying in the meantime that he was in any way implicated. Nakasone acknowledged that his secretaries and employees of his support group, however, had bought Recruit shares. Nakasone, in addition, had been instrumental in placing Recruit president Ezoe on Japan’s Tax Council and had paved the way for Ezoe’s purchase of two supercomputers, thanks to legwork by Hisashi Shinto, chairman of NTT. Both of these actions occurred during 1986 and 1987. Nakasone, as his critics observed, was no stranger to scandal. He had figured prominently in the Lockheed scandal and in questionable deals for raising election money that had begun in the 1970’s.

The Recruit affair proved to be the worst such scandal in postwar Japanese history. Criminal indictments were filed against thirteen prominent figures, and summary orders were issued against four more. Ezoe and five Recruit executives were indicted for bribery. Three NTT executives, Shinto among them, were indicted. Prime Minister Takeshita promised to resign after his budget was settled. Although embarrassed by the scandal, Nakasone remained free of indictment.

As a result of the Recruit scandal, the LDP suffered heavily in Japan’s 1989 elections. The party lost its majority in the Diet, but LDP bosses Nakasone, Yoshinari Abe, and Takeshita retained their grip. Their mutual agreements produced the short-lived prime ministership of Toshiki Kaifu. Their agreement subsequently placed Kiichi Miyazawa, who had been deeply involved in the scandal, in the prime minister’s office as Kaifu’s successor in 1990.

LDP leaders justified taking Recruit money and other political donations as essential financial assistance for political campaigning. The party pledged itself to reform the long-prevalent scheme of political contributions, along with the electoral system and Japan’s main political institutions. In April, 1989, the LDP published a series of proposals. Critics noted that the reforms were largely in the hands of those who required reforming.

Japanese voters pointed the way to change by decisively repudiating LDP leadership. Sosuke Uno, a man without factional support of his own, replaced Takeshita as prime minister. Uno promulgated a series of guidelines governing the behavior of his cabinet members in an effort to preclude their personal and financial relationships with businesspeople. The structural web involving exchanges of political and business favors and influence, however, had by 1991 become deeply rooted in Japanese public life. Critics abroad thought it anomalous that one of the world’s foremost industrial and financial powers should continue to be governed through such backward political chicanery as still more scandals were unearthed. Others believed that the LDP’s power monopoly had been broken and that real reform efforts were under way. Recruit Company scandal
Liberal Democratic Party (Japan)
Insider trading

Further Reading

  • Bowen, Roger W. Japan’s Dysfunctional Democracy: The Liberal Democratic Party and Structural Corruption. Armonk, N.Y.: M. E. Sharpe, 2003. Brief study of the effects of corruption on Japan’s democracy includes discussion of the Recruit scandal.
  • Flanagan, Scott C., et al. The Japanese Voter. New Haven, Conn.: Yale University Press, 1991. Collection of scholarly essays examines Japanese political culture. Part 1 and evaluations of changes under way in 1989-1990 presented in chapter 11 are relevant to the Recruit scandal.
  • Herzog, Peter J. Japan’s Pseudo-Democracy. New York: New York University Press, 1993. Dense, detailed work is scathingly critical of Japan’s government and politics. Chapter 7 richly recounts major scandals, including that involving Recruit.
  • Hrebenar, Ronald J. Japan’s New Party System. 3d ed. Boulder, Colo.: Westview Press, 2000. Examines political attitudes and election laws in Japan. Chapter 3 discusses the Recruit scandal. Includes bibliography and index.
  • “Japan’s Chance for Change.” Economist 325 (November 21, 1992): 12-13. Presents observations on the LDP, scandals, and Japan’s most serious recession. Concludes that the combination of factors could produce reform and revitalization of Japanese politics.
  • “Japan’s Subtle Change.” Economist 328 (July 24, 1993): 12. Comments on the LDP’s losses in the July 18, 1993, general election, which still left the LDP larger than its rivals. Argues that Japan’s recession undermined the LDP’s hold over businesspeople and voters.
  • Kernell, Samuel, ed. Parallel Politics: Economic Policymaking in Japan and the United States. Washington, D.C.: Brookings Institution, 1991. Collection of objective scholarly essays compares the political and business cultures in the United States and Japan. Includes tables and index.
  • Wood, Christopher. The Bubble Economy. New York: Atlantic Monthly Press, 1992. Provides expert analysis of manifest weaknesses in Japan’s economy, particularly when compared with the American economy. Presents detailed reportage of Japan’s 1980’s boom and 1990’s depression as well as excellent discussion of the shakiness of the nation’s financial institutions, interrelations of business and politics, and scandals. Places the Recruit scandal in context.

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