Does it really matter that organized crime is firmly entrenched in the Japanese economy and society?
Because Japan is the world’s third largest economy and is in most respects, an attractive and safe society and a stable place to do business, Westerners tend to downplay – if not ignore – yakuza influence and attendant risks. However, consider everything already noted in this series and ask if it would matter if it were being said about the United States and the Sicilian Mafia. It would.
There are many reasons why Yakuza influence matters in Japan.
First, from an economic and societal perspective:
Organized crime puts a straitjacket on the entire economy. Japan’s experience during and after the Bubble Era of the 1980s and early 1990s is illustrative. When the bubble finally burst and initial efforts were made to clean up the furyosaiken (non-performing real estate loans that played a large part in inflating the bubble), it was discovered that a considerable percentage of the money had been lent to yakuza and their affiliated companies, and there were also plenty of corrupt politician and bankers involved.
The high-profile murders of two bankers charged with collecting the loans ensured no serious effort would be made to address the bad loan problem. Arguably, failure by the government to address this in the early stages had a snowball effect and was the proximate cause of two decades of economic stagnation.
Next, yakuza encroachment and displacement of legitimate business – being difficult or impossible to regulate or tax – provides recurring and (and expanding) income sources that further strengthen underworld power and political influence.
And, the yakuza do not pay taxes on much of their income anyway – or they only pay what they want. This deprives the government of revenue that might be used for more productive things, such as increased defense spending or to eliminate high-school fees for all Japanese students or to support struggling single mothers.
Organized crime payoffs and fraud are also a tax on business. Yakuza payoffs connected with a single Tokyo real estate redevelopment project in the late 2000s were over US$200 million (although another major real estate project in Roppongi around that time reportedly only needed to make a bargain basement payment of US$35 million to yakuza to ensure things went smoothly). Such payoffs still happen.
These payoffs definitely divert corporate funds away from more productive uses. The approximately US$1 billion that Olympus paid to the yakuza, reportedly out of fear of blackmail, could have been better spent on research and development or hiring engineers – or even paid out as shareholder dividends.
Moreover, when the yakuza get involved in a business, ordinary citizens suffer – and sometimes, a lot of them suffer. In one notable example, in 2012, a financial firm, AIJ, that handled pension plans for thousands of small- and medium-sized companies went bust – and at least US$1 billion disappeared. This affected several million people (when employees and family members are included) who were counting on those pensions.
The investment fund was established and run by former executives of a prominent Japanese financial firm – but reportedly with an assist from members of the yakuza. So much for the notion of yakuza being Robin Hoods looking out for defenseless “little people” – or being an innocuous curiosity with little effect on anything important.
Further compounding the problem, yakuza involvement in public works projects and natural disaster recovery work massively inflates costs – once again reducing the amount of money that government can allocate to more productive endeavors that benefit regular citizens and the nation writ large.
The Fukushima nuclear cleanup effort and the larger Tohoku recovery operation after 2011’s 3/11 earthquake and tsunami – totaling well over US$200 billion – are reported to have had extensive yakuza involvement. And, while a few yakuza have been arrested for illegal labor dispatch, for the most part they are allowed to operate in the nuclear industry unchecked.
According to some estimates, 10-20%of Japan’s public works budget goes to the yakuza. This is perhaps US$50 billion a year that could be put to better use. One example from the not too distant past was a white elephant regional airport construction project – costing billions of dollars – that was reportedly done in league with, and for the benefit of, a prominent yakuza boss. And, construction of another airport, Kansai International, was reportedly a massive money sump for organized crime.
Even government efforts to bolster Japanese businesses have been hijacked by organized crime. As one example, in the early 2000s, a Japanese Government scheme to support small and mid-sized companies by providing a US$2 billion support fund turned out to be a bonanza for yakuza. One gangster described how he created a “company” and applied for assistance. In short order, he walked away with US$1 million. Not bad work if one can get it.
The yakuza also perpetuate business inefficiencies, with Japan’s construction industry being a prime example. And, organized crime effectively excludes foreign and domestic competition from certain industries – thus preventing more efficient and less expensive operations.
A former US government expert on transnational organized crime commented: “Undoubtedly, the most insidious and troubling aspect of the keizai yakuza is the simple fact their capacity to threaten violence (or at least use their brand or reputation for violence) affords them a decisive competitive advantage over all other economic actors. This skews economic decision making in their favor and against the interests of all others, including legitimate investors, and can and likely does significantly distort the overall market, at least in the sectors in which they have sway.”
Yakuza machinations distort and corrupt financial markets and can make Japan less attractive as an investment target. Even local Japanese are often distrustful of financial markets – eventually figuring out the game is too often rigged. Why invest when yakuza will always make profits on their “investments” – at your expense? And, Japan exports its yakuza problem as organized crime is empowered to operate in foreign financial markets.
Another outcome of rampant organized crime influence is that a proper legal system does not develop. Yakuza effectively serve as a dispute settling mechanism in the business world and even in civil society. Groundbreaking research by an American academic some years ago made a compelling case that the yakuza fill a role that lawyers play in the United States.
One expert has noted that in part of southern Japan, nearly every company of a certain scale has yakuza on retainer – to handle trouble with customers, other companies and even Japanese authorities.
From the aforementioned, one might reasonably argue that the yakuza have to a degree subverted the Japanese state. No longer do the government and its laws guarantee economic exchanges.
Unfortunately, but perhaps not surprisingly, prosecutors become tainted, and law enforcement is sometimes corrupted and/or demoralized. Indeed, anecdotal evidence suggests that when a company hires former prosecutors or senior police officials as “advisors,” as often as not it is trying to hide something.
Another outgrowth of yakuza clout is that the broader citizenry becomes skeptical – and, sometimes, regards public institutions and their elected representatives as organized crime accomplices. Indeed, in western Japan there are actual yakuza serving on the council of one town.
Yakuza are also active in the worker dispatch business, and sometimes, play a role in helping companies keep labor unions cooperative. According to one researcher, the Japanese government’s firm support for the temp staff/labor dispatch industry in which organized crime is deeply involved has seriously harmed Japanese society. He notes that, contrary to foreigners’ impressions of lifetime employment in Japan, currently 38% of Japanese workers are temp workers – in low-paying positions, with few prospects and unable to get married, much less have and raise children.
And, it gets worse, as unchecked organized crime allows crimes such as human trafficking, child pornography and drug dealing to flourish. Traditionally, North Korea has been the main source of methamphetamines – Japan’s drug of choice – but in recent times, China and the Mexican cartels working with the Yyakuza have become the main suppliers of the drug.
Precursor chemicals to manufacture illegal drugs have also been sent from Japan to Afghanistan, with direct Yakuza involvement. “Safe” Japan also has a stolen vehicle problem – with luxury automobiles and even construction equipment being stolen and shipped overseas to the Middle East, Europe and the Russian far-east.
Grant Newsham, a retired US Marine Corps officer, former US diplomat and former Tokyo security chief for a major global investment bank, currently is a senior research fellow at the Japan Forum for Strategic Studies and the Center for Security Policy. Here we are republishing as a five-part series a paper of his that originally appeared in the Journal of Financial Crime.