Washington International Law Journal


Dan W. Puchniak


Two of the most prominent Japanese corporate governance scholars, Professors Miwa and Ramseyer (“M&R”), have recently published numerous articles and a book setting out their contrarian free-market theory of Japanese corporate governance. According to their theory, contemporary Japanese corporate governance is, and always has been, driven by free-market forces and not government incentives. M&R’s theory is enchanting in its simplicity and universality, as it uses standard economic theory to provide a single, and seemingly logical, solution to a myriad of complex legal, institutional, historical and cultural conundrums that have challenged observers of Japanese corporate governance for decades. Unfortunately, M&R’s theory is also incorrect. This article demonstrates why and by doing so provides evidence against the broader convergence theory that looms large in the comparative corporate governance literature. M&R’s theory fails to explain the systematic lending of trillions of yen by Japanese banks to “loser firms,” at below-market interest rates, to rescue them from bankruptcy, throughout the lost decade (1990 - 2003). According to M&R’s free-market theory, lending to loser firms at below-market rates is not a rational, optimal, or credible governance strategy. Therefore, to claim that such behavior systematically occurred in Japan’s banking system for over a decade would be to create a myth. A myth it is not. Empirical and case study evidence demonstrates that Japanese banks did in fact systematically lend trillions of yen to loser firms at below-market interest rates to rescue them from bankruptcy. This paper reveals the matrix of institutional incentives that made it a rational strategy for Japanese bank managers to engage in such seemingly irrational behavior. The result is that unique institutional incentives, and not universal free-market forces, drove Japanese corporate governance—which is weighty evidence against the broader corporate governance convergence theory.

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