Japan entered 2006 with the hope of continuing on its path of economic recovery and stabilization, which had restarted in 2005. With the prospect of cutting its budget deficit (6.4 percent of its GDP), pulling back from deflation and gradually decreasing government participation in the economy, the New Year was anticipated to bring unconventional changes.
And so it did.
On Jan. 17, 2006 the world watched as the Japanese stock market plummeted - its biggest one-day decline in almost two years. In the following days, the Nikkei share average fell by almost three percent. The market lost an estimated 400 billion in US dollars.
Japan's high ambitions for the new year were crushed by a company that ironically embodied the very change Japan was setting out to create in 2006. Though there might have been other factors contributing to the decline, such as worries about the increasing value of the yuan, higher oil prices and the rapid growth of the US economy, the crisis was mainly triggered by a sudden investigation of the Internet company Livedoor.
The company was being investigated to see if it falsely inflated its profit figures for 2004 in an effort to boost its stock prices. Prosecutors raided the Web site portal's office on Jan. 16 because it was suspected of violating security regulations. Following the raid, Livedoor shareholders and other investors began flooding the Tokyo stock exchange with sell orders. Overwhelmed by the sudden sell-off rush, the stock market was forced to shut down 20 minutes prior to closing time to avoid overwhelming its computerized trading system.
It is not that Japan will have any troubles bouncing back from the crash. Livedoor, after all, is not Enron: its market value is less than 6 billion US dollars, and its revenue last year was less than $100 million. The company is too small for its downfall to have caused extensive economic damage. Nevertheless, the Livedoor investigation and the subsequent stock market crash do not just represent a tale of momentary economic panic and loss.
Japan is the second-largest economy in the world, but it seems as it has only now started to slowly live up to its status. In a time that is supposed to mark transformation and change, an unconventional company such as Livedoor that does not shy away from challenging traditional business policies represents the "new way" in Japanese economics. Now that faith in Livedoor has been shaken, many hope the same will not happen to the new economic policies the company set out to create.
Takafumie Horie, CEO of Livedoor, has been heralded as the champion of reform in Japanese business. Along with his flagrant personality and fashion sense (he prefers T-shirts to suits), his way of doing business opposes everything that corporate Japan traditionally stands for.
A hostile bid for a media takeover of Nippon Broadcasting, a merger with Fuji television and finally an attempt to run for the Japanese parliament brought him the admiration of Japanese investors and businesses alike. He has inspired a new investment culture and more confident consumer spending.
Since Horie seems to have done all of this through playing against the rules, however, his "new way" might soon lose all credibility.
Following the Livedoor investigation, prosecutors might begin to look more closely into accounting statements for other companies as well. If similar scams were to come to light, the future of the Japanese economy might no longer look so bright.
For the past two or three years, many start-up companies have risen to great heights in Japan. The possibility that many more scandals might follow is not improbable. In this event, the long-lasting effects of the Livedoor scam might not solely be symbolic of decreased faith in progressive economic policies, but also of strong financial losses for Japan.
Beyond its many negative implications, the Livedoor incident also teaches an important lesson. As Japan shifts towards a more Westernized free-market economy, this will necessitate more transparent and rigorous business regulations.
Currently, Japan is showing signs of positive economic growth. In fact, for the first time since 1997, Japan's 11 regional economies are all expanding simultaneously. Consumers and businesses have already proved themselves ready for a new Japan. All that is lacking are the policies and rules ensuring that they will not be let down.
