Japan’s horrifying crop of data falsification is also encouraging

Some years ago I was allowed into the inner sanctum of Japan Steel Works: a closely guarded operation in the northern island of Hokkaido that forges some of the largest metal ingots on Earth. 

As you might expect from a company that was founded over a century ago by buccaneering British arms manufacturers, employs a gargantuan lathe and produces both swords and reactor cores, there was much to gawp at. Including, it turns out, a 600-tonne fib, a grimy glimpse of institutionalised untruth and a key moment for ESG investment.

The leviathan before me was a solid-steel turbine shaft used in both thermal and nuclear plants — a single component weighing roughly the same as 46 double-decker buses and now, years later, among many under suspicion after JSW stunningly admitted earlier this month to almost a quarter century of falsifying inspection data on these and other products.

The admission naturally hurt JSW’s shares. But the pain was dulled by a harvest of similar jaw-droppers from corporate Japan since last year. It is both horrifying and, in some ways, encouraging. Toyota, the textiles giant Toray and a large Hitachi car parts subsidiary are among those that have recently acknowledged years of data falsification in a game of confessional one-downsmanship. In most instances, the admitted fakery dates back at least two decades, drenching once rock-solid reputations in the light of calculated fraudulence, blooding a new crop of CEOs in gory crisis management and raising the usual questions about how much more bad news could be out there. 

And these scandals are mere understudies to the current megastar of malfeasance, Mitsubishi Electric. In late April, and after many months of dripping word of faked inspection reports on other products (elevators, car parts, robots, road toll machinery) into the market, the industrial icon said it had engaged in fake testing on industrial transformers over four decades.

Last week, Mitsubishi updated investors on its still incomplete investigation and revealed that cheating had been going on at well over half of its Japanese factories. Crucially, noted the lawyer in charge of the probe, there were many staff who saw absolutely no problem with it. 

Inevitably, when large numbers of people in different companies, and across multiple generations appear to have been institutionally convinced that wrong is right, the search for common factors intensifies. Many — particularly the companies involved — grasp hardest for some cultural explanation in the hope this is fixable.

Often, these are plausible. One consistent feature of the Japanese data falsification scandals, note credit analysts at Moody’s, is that none have yet been connected with any serious safety or performance issues. That, in itself, is revealing: in many cases, it seems, companies are cheating on tests for products where the customers have demanded standards that are, in effect, impossibly high.

Another favourite excuse of the moment, cited by several companies to justify years of data-fiddling, is to blame insufficient staffing in the quality testing departments. It has a weaselly ring: the more closely associated corporate Japan’s staffing issues become with the national demographic crisis, the easier the exoneration. 

Intriguingly, though, it is quite difficult to cite many uniquely Japanese causes of these scandals. The competitive environment that creates the pressure to cheat applies as strongly elsewhere and, say analysts, has both provably and anecdotally produced the same effects in Europe, the US and others. 

A key difference, though, relates to the timing. The current crop of Japanese data falsification scandals (there was another in 2017-18) has emerged from a distinct new phase in the evolution of the country’s shareholder capitalism. Companies are under ever greater pressure to relate symptoms like these to the broader pathology of corporate governance and are less able to ignore the voices of investors demanding they do so. These scandals are being brought to light by whistleblowers whose stories, once possibly suppressible, are now given voice by companies’ ESG commitments.

It is fashionable — not to say extremely tempting — to declare Japan’s progress on governance reform stalled. Many see a recidivist jungle quickly reclaiming a just-cleared path. Certainly the buzz has diminished. But things were always going to reach a point where the whizz-bang victories of share buybacks and independent board appointments gave way to a slower territorial claim over corporate behaviour. Scandals, especially those bursting in from decades past, suggest that is now happening.


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