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By Root 1103 0

search of Web and newspaper databases and more than a dozen e-mails to Web masters and college offices at Tokyo, Keio, Waseda, and Doshisha universities drew a complete blank. However, even without hard figures to go by, any visitor to a Japanese college can see visible evidence – in substandard libraries and run-down facilities – of the beggaring of the universities as a result of low capital returns. In 1995, in the wake of the subway poisonings by the fanatical religious group Aum Shinrikyo, commentators marveled that Aum was able to recruit elite scientists from leading universities, and its facilities were much better. Trying to explain a piece of Aum machinery before a television audience, a professor would say, «Well, the one at my university is ten years old, and not nearly as sophisticated as Aum's, but you can get the idea.»

One of the myths of the financial world is that the United States is a model of laissez-faire capitalism and Japan is highly, even overly regulated. Nothing could be further from the truth. In the United States, regulations elaborated and enforced by legions of busy lawyers hem in transactions on every side, with rules punishing insider trading and mandating disclosure, liability laws protecting investors, and myriad other devices functioning to make the market more transparent and efficient (and at the same time, of course, enriching the lawyers). It is Japan that is unregulated. Where the Federal Reserve has between 7,000 and 8,000 banking inspectors, the Ministry of Finance had only 400 to 600, and, according to Richard Koo, a senior economist at the Nomura Research Institute, «Of that, only 200 are considered any good.» Lack of financial supervision became such a scandal that the Diet removed this function from the Ministry of Finance in the late 1990s, creating a new Financial Supervisory Agency (to become the Financial Services Agency in January 2001). The new agency, however, has only 310 inspectors, most of whom hail from its inept predecessors. The U.S. Securities and Exchange Commission employs 3,000 inspectors, versus about 200 in Tokyo and Osaka, whose work is mostly perfunctory. In Japan's financial world, gangster payoffs, insider trading, juggled books, defrauding of old people by insurance companies and banks, under-the-table payments to bureaucrats, usurious interest, special accounts for officials and politicians at securities houses – anything goes. It's wild and woolly out there.

In place of regulation, the Ministry of Finance has drawn rigid boundaries around Japan's financial world in an attempt to limit its range. Rather than clean the sharks out of the lagoon, the ministry chose a smaller lagoon. Circling round and round inside their little universe, MOF officials neglected to learn the new techniques of wealth creation that are redefining finance elsewhere in the world.

MOF is dragging its feet in legalizing derivatives, and the red tape for granting stock options to employees of start-up firms is so lengthy that so far only a handful of companies have applied for permits to do so. In any case, it takes an average of thirty years to list on the Tokyo Stock Exchange, so stock options are not much of an incentive. Pension-fund management, at the leading edge of financial sophistication outside Japan, is only in its most primitive stages, and MOF is still in a position to order managers to buy nonproductive stocks and low-yield government bonds. With rules of disclosure nearly nonexistent, investors lack confidence in listed firms and, as a result, the over-the-counter market languished.

To put it simply, Japan failed to develop mature financial markets – and the expertise that goes along with them. This means that money does not make money. Another way of putting it is that Japan has very low productivity of capital. It is one of the oddest paradoxes of modern Japan that in a nation seen worldwide as a paradigm of «capitalism,» the bureaucrats in charge basically distrust money This may result from the fact that in the early postwar years Japan's bureaucrats found