Hey Scorsese, Japan's Yakuza Has a Story for You: William Pesek

Commentary by William Pesek

Sept. 10 (Bloomberg) -- Far from the neon lights and glitz of Tokyo, the western Japanese prefecture of Fukuoka doesn't seem an obvious sight for a backlash against mobsters.

About 600 residents of Kurume last month asked a local court to block an organized-crime group from using office buildings in the city. It's the first such action by the public and how things turn out could say much about the international standing of the second-biggest economy.

What does the yakuza have to do with Japan's economy? Quite a bit, according to an Aug. 20 report by the National Police Agency.

First reported by the London-based newspaper the Times, the report found that the yakuza's switch from old-fashioned crime such as drugs and prostitution to financial markets is accelerating. It called the phenomenon a ``disease that will shake the foundations of the economy.''

The yakuza has been switching gears for years. Even after the bubble years of the 1980s ended badly, mobsters prospered from the untold billions of dollars worth of construction projects funded by the government to create jobs.

In recent years, there have been fewer crackdowns on bid- rigging and less public-works spending. Even for legitimate companies there have been fewer building projects to go around. The dynamic squeezed the mobsters much the way it did Japanese households. Globalization also forced gangsters to adapt.

Evolving Yakuza

Slowly but surely, anti-gang laws that Japan passed in 1992 have made it harder for the yakuza to operate in broad daylight. The changes created unprecedented competition. Gangland violence increased. The biggest crime groups survived, many smaller ones didn't. Thriving nowadays means being more creative.

That's just what yakuza crime syndicates have done. The biggest concern is that the yakuza is in the midst of a widespread assault on Japan's financial markets, becoming aggressive traders and manipulators of Japanese shares.

The theory is that the yakuza employs as many as 1,000 supposedly legitimate front companies and takes big positions in undervalued stocks of other enterprises, which have no idea they have acquired de facto mob connections. The yakuza is acting more like private-equity firms than small-time loan sharks of old.

Hey, Scorsese

All this may sound more like a Martin Scorsese script than serious economic analysis. In fact, Scorsese is known to have more than a passing interest in the yakuza, which would seem an ideal next challenge for the director of ``Goodfellas'' and ``The Departed.''

A few years back, movie enthusiasts in Japan buzzed about press reports that Scorsese might direct a big-screen version of Robert Whiting's 2000 gangster book ``Tokyo Underworld.''

If Scorsese is still interested, Japan has a tale for him.

As Japan risks sliding into a recession, overseas investors are wondering what happened to its long-awaited recovery. Bulls rushed into Japanese stocks in the early 2000s expecting great things as deflation was replaced by stable growth. These days, optimism is in short supply.

There are many explanations for Japan's malaise: too great a reliance on exports, households lacking enough confidence to save less and spend more, weak productivity and relentless competition from China, India and the rest of developing Asia.

Does the yakuza deserve a mention here? Anyone who dismisses this out of hand forgets the mobsters' role in prolonging Japan's bad-loan crisis of the 1990s. Loans linked even tangentially to the criminal underworld were virtually impossible to collect.

Out of Control

There's now little doubt about the yakuza's infiltration of other parts of Japan's financial system. When the government is putting out reports on crime syndicates broadening their fund- raising methods to stock trading, real estate, consumer finance and other areas, it's a sign the problem is out of control.

Robert Feldman, head of economic research at Morgan Stanley in Tokyo, put it well in a report last year: ``The influence of organized crime in both political and corporate/financial circles remains a barrier to an efficient economy and efficient financial markets. The loser has been Japan's competitiveness. It seems unreasonable to expect foreign companies and investors to expand activity in Japan while the issues with organized crime remain so troubling.''

The government needs to clamp down more aggressively on the workings of the 80,000 or so known yakuza, says Jake Adelstein, a former police reporter at the Yomiuri Shimbun newspaper. In the absence of stronger action, it's falling to stock-exchange officials in cities such as Osaka to investigate which companies might be infiltrated by mobsters.

Economic Setback

Adelstein says there might be 600 ``yakuza-connected companies.'' Any move to delist a company -- or companies -- may spook foreign investors and hurt the broader market. That would be another setback for Japan's economy at a time when it's trying to attract more overseas capital.

``Not to mince words, but the Japanese laws for dealing with organized crime suck -- they're just terrible,'' Adelstein, author of the new book ``Tokyo Vice: An American Reporter on the Police Beat in Japan'' told Bloomberg Television on Sept. 3. As the mobsters evolve and the public gets wiser to the dangers they pose, the police aren't keeping up.

The only consolation is that with Japan's broadest stock barometer down 19 percent this year, yakuza investments may not be doing very well.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net