‘Japan is f**ked’, says ex-Olympus chief executive Michael Woodford

Michael Woodford doesn’t have much faith in the future of corporate Japan. You can see why.

Regular readers will know much of his story and you can read more on it here and here.

But the essence of it is this. He took a job as chief executive of Olympus. In the first few weeks he discovered extreme financial irregularities – in the form of bizarre mergers and acquisitions to the tune of $1.7bn – at the company. But then when he tried to discuss them with the rest of the board, instead of listening, they fired him. Just like that. It was, as he puts it in his book on the matter, “an eight-minute corporate execution”.

I meet him at the Daiwa Foundation where I am a trustee (if you are interested in Japan, do visit our website www.dajf.org.uk) and he was having a book launch at the end of last month. The first thing he wants to make clear is that he is “deeply pessimistic on Japan”.

That’s not because of the shocking fraud he discovered at Olympus. Instead, it is because of the reaction to that fraud. A month after his dismissal the company’s share price was down 80%; $7bn had disappeared into the ether of the market; and the overseas shareholders were furiously calling for action. They wanted the chairman and his deputy gone and they wanted Woodford back.

Not so the domestic institutional shareholders. They would “not utter one word of criticism of the incumbent board and not one word of support” for Woodford. They knew what had happened. All the information pointing to criminal activity was out there. But still not one of them would “break ranks”.

This kind of thing matters. In the UK, says Woodford, this would be unimaginable: no shareholder would want to be “contaminated” by being complicit in something such as this. The fact is: anyone who thinks that Japan complies with the same rules of capitalism as other capitalistic developed markets? “He’s wrong”.

Woodford had been working in Japan for a long time when all this happened. I ask him if, given his previous experience, the whole thing surprised him. It shocked him, obviously. But was it surprising? Again, it was the reaction that was. He knew Japan was “cosy”, but with the full glare of the international media on Olympus, and him with a new slate of directors ready to go – including “some of Japan’s most famous businessmen” – he really thought the company would find it “intolerable” not to bow to outside pressure and to reinstate him. That they didn’t, tells you that in this regard at least “Japan is unique”.


He also remains stunned by the behaviour of his fellow directors. There were 14 other directors on the board, including three non-execs. They must have surely known what was going on. They claim not to have, but “you could be a child” and still see that you “don’t pay $1bn for  three companies with no turnover”.  The “blind deference” of the board to the chairman in the face of all this is extraordinary.

But the worst of it is that, while Olympus is an extreme case, this isn’t just about a few companies. It’s about Japan as a whole. Look at the report out on Fukushima (the post tsunami nuclear disaster last year). It made it clear that this was a “disaster made in Japan” – made from “blind obedience, hierarchy, unwillingness to challenge”. This is a country “sleepwalking to oblivion”, says Woodford. “The country is f**ked.”

You really think that, I say? “Hmmmm.” What about outside large corporate Japan and the government? Anything good going on there? Woodford concedes that there are some good small and middle-sized family companies in the likes of “ceramics, materials and components”, but that just isn’t enough. The big companies are vital, but thanks to the fact that there are so rarely any mergers or acquisitions in Japan, they are being allowed to slowly go bad. In a normal capitalist set up, if “I’m running a bad company and you’re running a big company… you’ll come and buy me and make me a good company”. In Japan, that doesn’t happen.

Corporate Japan needs new blood – “women, Western blood, Chinese blood… the whole bloody lot”. They need to be less insular, to have hostile takeovers, to have change, to do something about their management class of mediocre bureaucrats. Right now it is impossible to get to the top in Japan if you are “opinionated and strong minded”. Only the mediocre make it.

It isn’t often that an interviewee manages to be quite this much more pessimistic than I am but Woodford is depressing me. Our interview happened before the most recent election (see this week’s MoneyWeek magazine for more on this) but I ask him if he thinks there is a political route out. He does not. No group is “powerful enough” to get through the legislation needed to change things.

Instead his guess is that “the Japanese will continue to plod on in the way they’ve always done”. Then they will have to use inflation to get rid of the debt, and eventually they will see a “massive deterioration in standard of living.” Only a “French-style revolution” would stop the rot. And that just isn’t the Japanese way.

I ask if he would ever take a big job in Japan again. He might. But as he points out “they’d have to be quite brave to ask me.” For the moment he is probably safer in Bournemouth with his nice wife and children, watching his book sales rise (it has been out for a while but is still number 200 on the UK Amazon list) and advising investors in Japan (presumably not to invest). My own – rather more optimistic – thoughts on the political change in Japan last weekend are here.

  • Digby Green

    Yes, well Japan exported most of their jobs to other low cost Asian countries, and the prices of their electronics goods is down to ridiculously low levels.

    So how can they make a profit?
    And how caa Japan pay its way in the world?

  • Robert H Siddell Jr

    Too bad; Japan ate our lunch for quite awhile; but liberalism/affirmative action has done the same to our public schools/fed-state-local governments/mass media/unions/finance/FEMA-FBI-CIA and the DoD (I was an officer and applied to work in intelligence but the recruiter said, “You were rejected because you think for yourself; we only want people who follow orders”. Hello (Nuremberg/Nazis/Commies)! The US is also F’d.

  • Fundador

    @ Mr Siddell. It was ever thus. Actual intelligence (in the form of original thinking and speaking) and bureaucracy are antithetic. The so-called intelligence services are a contradiction in terms, as are indeed most government organs. Try getting into the UK Treasury if you are not a toe-the-line monetarist apparatchik. Kow-towing mandarins are the reason Gordon the Moron was able to bulldoze such a destructive swathe for so many years. I once made the mistake of accepting a job for a company for whom I had acted as an independent management consultant. That was their way of sidelining me while they got on with their corporate games of snakes and ladders. Needless to add, I left. The Japanese made their money from doing what the Americans did more efficiently. That done, they lost their way because they have no culture of leadership or innovation. Mr Woodford is quite right – new blood (hopefully not literally) is required.

  • Defend Jprobe

    More Japan bashing by number 1 loser, m woodford

    Japan being a mostly export market has obviously been effected by the Yens rising strength..
    the 2009 US recession and current euro crisis also has also had an impact because there is naturally going to be less demand for goods. Corporations are taking less risks because of this, less risks means less innovation a spiral which is hard to break from in Japan.

  • Patriot

    Mr. Woodford is spot on.
    Though I never approved of his tactics, Mr. Woodford clearly defines the culture of Japan Inc. Mr. J Probe clearly has some issues, while I have enjoyed Japanese products over the years, the business model and the corporate culture of Japan I have seen first hand at Olympus lends itself to pure mediocrity. Good people leave for better jobs because Olympus would rather promote weak minded people. People with opposing views who are intelligent and capable are sidelined and villified, the ideas they give are stolen and used while they are made to suffer in crappy jobs with crappy managers that have no real expertise in the market. Every year you take ethics training, and every year you see management violate these ethical guidelines. Its about time someone put Japan Inc umder the microscope, and the US version is about the same if not worse. Shame on you, shame on J probe as he clearly is either clueless or culpable.

  • Peter

    Quite funny that moneyweek is running this article considering it has spent the last 6 months talking up Japan! One conversation appears to have changed Merryn’s entire investment strategy?

  • asian

    I think you are wrong about Japan. Its been overtaken by Korea in electronics and its lack of innovation and desire to tackle the underlying structure will pull it down. Couple this with its friendly relations with its neighbor, debt and demographics and you can see they have a dull future. Roche has set out the financial hurdles very well on Bloomberg.
    I do love visting the place.

  • J

    Japan is totally corrupt, like many Asian nations. They just cover it up better in Japan. Usually.

  • Boris MacDonut

    #11 J is correct. Japan is corrupt and by and large incompetently run……but it is still as rich as ninepence.

  • Boris Waiter

    That’s right Japan is corrupt and badly run and espouses Communist principles in many ways like the Chinese. Yet it is still quite wealthy and has an extremely successful social structure, one of the world’s best education systems, the world’s best railway, the world’s best postal service, etc. etc. It does everything wrong (according to conventional economic theory) and yet still keeps on flying high in the league tables of social success. Makes you wonder if conventional economic theory is wrong?

  • John Braintree

    ” ”blind obedience, hierarchy, unwillingness to challenge’. This is a country ‘sleepwalking to oblivion’ “

    Are not these the same characteristics that possessed the Japanese leading up to World War II ? ? ?

  • Mike

    This didn’t surprise me when it happened. I worked in Tokyo for 6 years and this kind of fraud and embezzlement is endemic in Japan. It may be a rich and successful capitalist country but it’s still Asia and doesn’t work along the same lines as other more transparent capitalist nations. The culture of ‘everything can be bought’ is still apparent, from parents buying their kids way through university to bosses using company funds as a personal piggy bank. Corruption in the country is utterly rife.

  • Hogwild

    Non-linearity of debts is a major issue for Japan. When debts are 20/25 times tax revenue you either default or inflate, or both! This issue has not been written about. Debt to GDP ratio is 240%. They have 1 Quadrillion (1million billion) and pay out 10Trillion in interest, and this represents 25% of their tax revenues. Much of their debt was refinanced at lower and lower rates. With interest rates close to zero, if you try and inflate away the debts the implied rates of interest along the swaps curve begin to balloon. Swaps will move several 100 % causing interest expense to grow exponentially, at the same time as tax revenues rise in linear fashion.
    For any heavily indebted country, moving to an inflationary bias will finish them off, forcing hyperinflation or default.

  • John Robinson

    In the 1950’s Japans products were ridiculed but move on 20years and by the 70s Japan appeared to be the only country to have seriously studied quality systems. While the West may have written the books on quality it was the Japanese who put it all into practice. Though sheer determination they made good products better in every industry they operated. To further help their fledling industries they may have adopted protectionist policies in some obscure ways but no more so than any country in their position would have done. So post war they quickly moved from being an also ran to becoming world leader in many manufacturing industries. Demand for their products have grown not because of price but because of quality.
    Now like Britain, Japan must find a new road forward but at least they have the culture, the skills and a recent history of achievement to help them forward.
    F***d,?? No, I don’t think so.

  • asian

    Japanese are excellent in many things and they still have world class companies but the issue here is the corporate culture which is opaque and follows confician/east asian philosophy. Look up PWC Japan , there are many cases and even more probably still hidden.
    The koreans have caught up and the chinese want to do the same. The many changes in govt, debt, lack of direction mean that they arent a good bet. The west isnt much better but its creativity and ability to reinvent itself is far better.

  • Atters

    I read the various comments with interest. Take note of the ex employees comments of which I am one. They are all accurate – the Japanese’s primary concern is for the well fare of the company – not returns to shareholders. When will the market realize this fact? Given the numerous cross holdings within corporate Japan, the executive are primarily concerned about saving face and avoiding detremental issues which may affect their sister companies. Its like the mafia -its all about the family. No executive or board will put the interests of the shareholders above its employees, associated companies, suppliers etc. In a capitilistic world the practise has caught up with them. One of Saxo’s outrageous predictions for 2013 – Japanese electronic firms get nationalized.

  • Le Brit

    The answer is simple locate the whole of Japan plc in the UK where there is innovation, questioning, common sense and fair play. Then you will have a world beater a le Nissan and Toyota which are going great guns with Japanese/British products.
    Could MW stop tipping Japan I am fed up of reading that this year is the year of the rising sun.

  • asian

    Lots of emotion here for a race which has little.
    I cant comment on woodford but the mere fact he spent most his career with Olympus means that hes not some guy who was parachuted in and got culture shock.
    The japanese are insular and dont need to be told to avoid foreigners.
    Japan caught up to the west and now does not know which way to go. If you had gone by the hysteria on the 1980’s Japan would have surpassed the USA, alas that was not the case.
    In the end Korea and the new asian countries will advance and japan inc will decline further.
    Also, unfortunately, China will eventually run up against japan in a bad way.

  • bkeswick

    I’m sure Mr Woodford has a point. Japan, like any other nation, has problems of their own. But in the grand scheme of things they are better equiped than most countries including us in the UK to deal with their macro-ecnomic issues, and even in their worst case senario it will take a very long time to play out in the market.

    The modern day evaluation of a country is done by evaluating their system – both implementation and enforcement. Very important, of course. But I do know from my own experience that the “quality” of the people at grassroots – if I may put it that way – is a significantly more important factor. I know this perspective is a lost art over here where we blame the system for everything, but “good lay people” is a much more potent force than the system of governance.

    Somebody remarked earlier that we’re more “innovative” over here. I would say we’re more rushed and impatient. It is just another way, not necessarily better over long term.

  • Shahrin Sodhi

    Dear Merryn,

    I am Shahrin Sodhi, Executive Director of MeLearn Global, a professional business conference organizer in Kuala Lumpur, Malaysia. I am currently organizing a Corporate Governance Symposium next April here in Malaysia and I am wanting to invite Mr Michael Woodford as a speaker. As I understand you have recently met him, could you please assist me with providing his contact details; email or contact number as I have tried to search for his contacts but to no avail.

    Awaiting your soonest reply. Thank you.

  • Shahrin Sodhi

    My contact details are: shahrin.sodhi@melearn-global.com.

  • JimW

    Am wondering if Michael Woodfords experience at Olympus has colored his views of Japan the country.

    If we took that view then we would think of banks in the UK as f**ked when its really certain individuals who bought on the problem at RBS and HBOS, as individuals did at Olympus.

    Or am I being too generous?

  • Canadaman

    I am a retired business consultant specializing in Japan. Mr. Woodford is spot on with his pessimistic views and comments. It is a cultural thing.
    The Japanese institutions might have been thinking” Who is this foreigner who is telling us this and rocking the boat for no reason? We will not pay attention to him. We trust Kikukawa. He is Japanese.”
    As for the promotion of women, gender equality in the workplace will never happen. It is the culture.
    Another weakness, is the difficulty of firing people. It is extremely difficult to fire people in Japan. So they just keep them on payroll. Many a time, I have seen good contract workers let go, instead of the incompetent full time employees. How much money is wasted on this? Only God knows. I could go on forever.

  • PRW

    Please let me know how to contact Mr. Woodford via email.
    Thank you

  • samscum

    love all the semi racist foreigners criticizing Japan here. Japan’s economy is one of the biggest on the planet, yet we have people from nations with 1/10 the GDP of Japan criticising her for its so called f**ked and flawed business practices, hypocrites