Just a decade ago, many Americans worried that "Japan, Inc." was an invincible economic juggernaut poised to conquer their country. No longer: Japan’s ongoing financial crisis has exposed the invincibility as a myth. And the condition of Japan’s financial institutions is far worse than many analysts realize, contends Dattel, a former managing director at the Tokyo branch of Salomon Brothers, a U.S. investment bank.

"Non-performing" loans, in excess of $400 billion, may not be the financial system’s most serious problem. Tightly controlled by the powerful—and secretive—Ministry of Finance, Japan’s banks and other financial institutions, Dattel says, "are, in effect, ossified government bureaucracies," with regulated franchises in the world’s second-largest economy. They "have proved themselves incapable of allocating capital efficiently, investing the country’s enormous savings, or recycling its trade surplus."

Japan’s economy is two-thirds the size of America’s, and its financial system is a consolidated one, with only 150 banks (compared with 13,000 U.S. banks) and only 21 life insurance companies (compared with America’s 2,000).

The companies are poorly managed. The practice of rotating employees to new jobs about every three years has exalted the generalist at the expense of the technical specialists who are vital to integrating advanced technology into the financial system. It also has encouraged employees to focus their attention on bureaucratic skills rather than business, Dattel says. Their acknowledged lack of managerial skills was not overcome, as many analysts once expected it would be, by "buying" expertise from foreigners. "The Japanese cultural obsession with Japan’s uniqueness and self-sufficiency" made that extremely difficult, he says. For example, "no Japanese bank has substantive American senior management in its U.S. operations."

Excessive centralization throughout the Japanese financial system, he argues, is another serious flaw, which has encouraged "duplication of effort, wasteful political struggles, and defective risk-monitoring systems." By avoiding individual and departmental accountability, Nemawashi, the much-admired Japanese consensus-building technique, has made proper evaluation of proposed financial transactions difficult.

There has been much talk of reform in recent years, Dattel says, but very little significant action. "While many of Japan’s manufacturing and distribution companies are effectively adjusting to the competitive environment of the 1990s, Japan’s rigid financial system appears impervious to change."

"Cultural Captivity: Japan’s Crippled Financial System" by Eugene Dattel, in World Policy Journal (Spring 1996), World Policy Institute, New School for Social Research, 65 Fifth Ave., Ste. 413, New York, N.Y. 10003.