Japan has long struggled with corrupt ties between its politicians and businesses. It is said that
they experience one such major scandal every ten years - every time leading to calls for reform.
At the end of the 1980s, Japan experienced one of their most
serious such scandals - the Recruit Scandal.
It touched all of Japan’s political, economic, and social elites. Its widespread nature signaled
a deeply corrupt system - going all the way up to the Prime Minister himself.
In this video, we look at one of Japan's biggest political scandals.
## Scandals
As I mentioned, major political scandals are a recurring story in Japan. In 1955,
71 people - including several powerful members of the ruling Liberal Democratic Party or LDP - were
arrested when it was discovered that they had received payments from shipbuilding companies.
And then in 1976 there was the massive Lockheed scandal. The Americans uncovered evidence that
Lockheed, Northrup and other arms companies had built up a corruption network over the span of 10+
years. This network paid bribes to foreign officials in 15 countries - including Japan.
It was revealed that Lockheed had paid then-Prime Minister Tanaka and other
leading politicians $2 million so that All Nippon Airways should buy 21 of their
L-1011 Tri-star jets. Tanaka was later arrested and charged.
These scandals had all been serious, but few would garner as much fury as the Recruit scandal.
## Recruit Group
On the outside, Recruit Group seemed like an admirable rags-to-riches corporate success.
However, the situation was a bit more nuanced than that.
The company was founded in 1960 by a man named Hiromasa Ezoe. It began
as a three-person advertising agency for the University of Tokyo newspaper.
Starting in 1963, the company pivoted to publishing magazines
with information about job placements and opportunities. Thus the name, Recruit.
Japanese law at the time forbade companies from directly recruiting students.
So four-fifths of Japan's hires back then were found via privately owned job bulletins.
The Ministry of Labor facilitates the other 20%, but exercises broad authority over the
whole sector. So these job bulletins operate at the whim of the ministry.
And if the law changed, then that would significantly impact the business.
For this reason, Recruit had to build "strong relations" with its regulator.
Their general strategy was twofold.
First, they purchased party tickets. The purchase of these fundraising party tickets represented
political contributions for a candidate's individual races. While there were some
concerns about mass purchases of these tickets, they are largely seen as acceptable behavior.
Second, the company contributed sums of money to former ministers of labor.
This set the tone for the company’s future political network building.
## Growth and Cosmos
Ezoe was a relatively young and ambitious man in the Japanese business community. He saw
Recruit as his vehicle towards immense wealth and perhaps even political power beyond that.
Recruit grew with aggressive marketing and a decentralized, high-incentive structure that
gave young managers in their 30s the freedom to generate profits in whatever ways they saw proper.
The company quickly expanded away from its core market into telecommunications,
finance, and then real estate. They started a farming business in the Kagoshima Prefecture,
and then in 1980 opened up a ski resort of all things.
Recruit then started focusing on residential real estate development,
and this did very well. Ezoe believed that residential housing demand would explode
as Japanese people moved out of the rural areas into the cities for work.
Recruit's residential subsidiary was named Recruit Cosmos and they quickly became the
company's most dynamic business arm. In 1985 alone, Cosmos ascended to become the country's
second biggest developer of condominiums - up from ninth place the year before.
From 1983 to 1988 Cosmos grew eight times over
from 42.5 billion yen revenues in 1983 to 350 billion yen in 1988. By then,
the subsidiary was larger than the original Recruit company - which made 269 billion yen.
This growth was funded with torrents of borrowed money. From 1986 to 1988 during the Japanese real
estate bubble, Recruit Cosmos took on over $12 billion worth of debt from ten banks.
## Cosmos
Real estate development is a field that requires the close involvement of the authorities. And
Recruit Cosmos followed the same strategy of its parent company to gain favor over its competitors.
Throughout the 1980s, Cosmos became a heavy contributor to various members
of Japan's political and business elite. This distribution formed the heart of the scandal.
Throughout the 1984-85 period, 1.2 million unlisted Recruit Cosmos shares
were sold to 76 people including politicians,
government bureaucrats, and businessmen. The sale price of these shares were about $9 each,
which then went to as high as $36 when Cosmos listed on the stock exchange two years later.
In the lead up to its IPO, Cosmos issued another 1.7 million shares to friendly companies,
members of the business media and political influencers. The company even issued cheap
loans through its financial subsidiary to make the shares even easier to purchase.
In total, over 100 individuals received shares. This included
Noboru Takeshita - the prime minister at the time when the scandal finally broke.
When the real estate subsidiary went public, most of the buyers quickly offloaded their positions.
The original 76 buyers netted about $8 million profit or about $21.3 million in 2022 dollars.
## The Buyers
The stock handout was carefully targeted. First, it was done in a way that gave the senior
politicians air cover. For instance, it was not Takeshita who bought the stocks, but his aides.
In a future hearing, Ezoe would say "It embarrasses me to think
how indiscriminately I gave them out". But the distributions reflected careful consideration
and intimate knowledge of Japan's political landscape - across all parties.
The more influential the figure was, the more shares they got.
The former Vice Minister of Education got 3,000 shares,
while the more powerful former Deputy Minister got 10,000. A former Prime
Minister got just 2,000 shares, while the PM at the time Nakasone got 25,000-29,000 shares.
## Benefits
In return, Recruit received sizable benefits in its real estate and education businesses.
For instance, 7,000 shares to the Minister of Agriculture and Forestry
in return for releasing a forest from the protected woodlands list.
Recruit also issued shares to a former chairman of Nippon Telegraph and Telephone - Hisashi
Shinto - as well as cushy retirement jobs to 13 senior company managers.
In return, NTT allowed Recruit to jump the line in receiving profitable contract benefits
like the resale of supercomputer rental time and certain semiconductors.
I should note that Ezoe also received a compensatory backrub
from his friend Shinto. He was allowed to purchase 20,000 NTT shares from the
first tranche during the company’s stock privatization, netting a handsome profit.
## The Scandal Breaks
The scandal broke in 1988, and like with many such scandals in history,
it came about randomly. In June 1988, some reporters for the Asahi Shimbun - a
newspaper - working out of a small district office in Kawasaki City discovered a small story.
The deputy mayor of Kawasaki issued a special permit for Recruit to build
a 20-story building on prime land near the Kawasaki Techtopia area.
In return, the mayor got about 100 million yen in stock.
The senior editors of the Asahi Shimbun - which actually holds a reputation for
being relatively critical of the government - killed the story.
They then took great efforts to warn off their own reporters from digging further.
They correctly smelled real trouble and who wants that, right?
Well, the Japanese Communist Party sure does! Their primary news organ
Shimbun Akahata - literally meaning "newspaper red flag" - has long been
a bit of a troublemaker. And they caught wind of the story.
So in July 1988, the Akahata published the names
of the 76 elites who received Recruit Cosmos shares.
The next day, one of the named stock recipients - the president of Japan's
Wall Street Journal - resigned from his position. Soon after two other
recipients - members of the business media and classmates of Ezoe - resigned too.
Opposition party members started calling for investigations. And here,
Cosmos erred in trying to cover up the damage.
If you want to bribe someone to shut up, make sure that nobody sees you doing it.
In August 1988, Hiroshi Matsubara - a senior director of Cosmos - visited the home of an
opposition party leader - Yanosuke Narasaki. There, Matsubara offered Narasaki 5 and then 10
million yen - packed up in a box of chocolates - to quietly stop talking about the Recruit matter.
This interaction was secretly filmed and then publicly broadcast by the national news service
NHK a month later. Matsubara was arrested and sent to jail for bribery. The scandal had
already been spawning headlines for a while, but around then it really started picking up steam.
## Fallout
When news came out, observers were surprised that Recruit's
stock sales had been so extensive - even touching the bureaucracy and NTT.
The bureaucrats had up until now been very highly regarded
as selfless managers of the Japanese economy.
And NTT then was worth $250 billion, perhaps the most valuable company in the world at the time.
Despite this, however, ultimately the Recruit scandal shouldn't have been a big thing.
But it just happened to come about at the wrong time.
In late 1988, the LDP decided that they needed to address Japan's then-burgeoning public debt. Once
at 4% of GNP in 1970, it had swollen to 40% in 1988. The Japanese government budget was
now growing at a very high rate, especially when it came to foreign aid and defense.
So to pay for all this, the LDP proposed a new 3% consumption tax,
which would come into effect in April of the next year and be very unpopular.
The process to pass the law was long and drawn out. The opposition boycotted the Diet and impeded
voting on the tax bill unless the PM and the LDP answered for their role in the Recruit scandal.
The LDP had a legislative majority but could not force the bill through without inflaming public
opinion yet further. So they and the opposition went back and forth for what seemed like forever.
The final deal was a vote in exchange for a special prosecutor team to investigate and
3 witnesses summoned to testify. BUT the media would not be present at the testimony and the
legal requirements for perjury were modified - requiring a two-thirds vote rather than 50% vote.
Politics, am I right?
## Public Fury
All the while, the Japanese people were watching this slow-motion political car crash.
Whipped up by the mass media - by now going all in on the story - they became infuriated.
Rich Japanese were buying golf club memberships and expensive houses.
Ordinary people on the other hand had to watch house prices double year over year,
and were struggling to make ends meet. A struggle that just got harder with the new 3% tax.
Japan's farmers - the LDP's backbone - were mad at the party for allowing
increased agricultural imports.
Urban and suburban Japanese living in cramped apartments and watching everyone else get rich
from soaring stock markets and real estate got mad too.
It is important to note that Recruit sold shares to members of the opposition parties too.
But the LDP had been in charge since 1955, so they took the brunt of the public's anger.
## Prosecutor
As I mentioned earlier, the political deal to pass the consumption tax allowed for the appointment of
an autonomous team led by a special prosecutor. For that role, they chose Yusuke Yoshinaga.
A decade prior, Yoshinaga had led the team prosecuting the Lockheed scandal.
Receiving little help from the police, Yoshinaga fought off a huge media frenzy
and malicious rumors about his character. He was very competent
and cleaner than ultrapure water rated for the 7 nanometer process node.
To secure confessions, he arrested and interrogated lower-ranked figures in
the scandal and worked his way up. For others, he would carefully leak things
to the media - allowing the ensuing public furor to force a resignation.
The first guy to break was the Minister of Finance Kiichi Miyazawa - who received
10,000 shares. Miyazawa idiotically received the shares in his own name.
Then it was the NTT chairman Shinto, who received shares through an assistant
but then transferred some of his profits into his
personal accounts - damning him. Shinto and an aide were arrested in March 1989.
Shinto's career had been long and distinguished. His work for NTT was a mighty achievement.
It transitioned the company from a slow-footed state owned enterprise
to an actual company with things like competitive bidding on its contracts,
cutting costs on procured items like fax machines by almost half.
Shinto helped NTT shed 50,000 jobs and become a world-beating company.
Its privatization share sale to public would net the Japanese government billions of dollars.
But that legacy will be tainted by his involvement in this scandal.
Resignations from 20+ government officials including three cabinet ministers would follow.
Slowly, drip by drip, like a poison.
## End
Throughout 1989, Prime Minister Takeshita saw his approval ratings decline.
First diving below 30%. And then 20%, and then finally a stunning 3.9% by mid-April 1989.
To be fair. This brutal decline probably more had to do with the profoundly unpopular
consumption tax - which finally took effect in April. But the Recruit Scandal lingered
like the stench of a dead woodchuck under the porch.
Suddenly, the LDP started losing elections in areas previously considered to be safe.
First, a seat in Fukuoka in February. Then another in Chiba and then Miyagi. Dissent started rumbling
inside the Party, demanding Takeshita's resignation and subsequent political reform.
First from moderate Diet members, and then from a coalition of governors and mayors.
And then finally the businesses spoke up. In April,
the chairman of Keizai Doyukai - an association of executives - called for the PM's resignation.
Prime Minister Takeshita had earned $1.1 million in profits from his role in the scandal.
At first he denied it, saying that it was his assistants. Then he backtracked
and admitted guilt and in late April, Takeshita resigned his post and dissolved his government.
The next day, Takeshita's close friend and senior aide for 30 years,
Ihei Aoki committed suicide. Aoki had negotiated the Recruit loans on Takeshita's behalf.
The LDP bumbled for over a month, trying to find a successor.
They found one in Sosuke Uno - nicknamed inside the Party as "Mr. Clean". At least,
until his mistress started talking to the media - leaving him to resign just two months later.
## Conclusion
Recruit itself finally went public a few years ago. It is today one of the biggest job search
websites in the world - running brands like Indeed and Glassdoor. They are now
a competent, multi-billion dollar business.
Though I like that their corporate history just acts like as if the scandal never happened.
Yup, the most significant event of 1987 was their new Supercomputer Research Institute.
Looking back at it now, the Recruit scandal gave the Japanese public an
unpleasant look at the inner workings of their politics.
It probably shouldn't have been so shocking, yet like with most social phenomena
it intertwined with the circumstances to be the wrong thing at the worst time.
Notable political scandals followed in 1991, 1993, 1993 again, 1997, 1998, and so on. None were too
serious, and the LDP remains the governing party today. Much like it has mostly been since 1955.