BUSINESSWEEK ONLINE : JUNE 14, 1999 ISSUE
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INTERNATIONAL -- ASIAN BUSINESS

Commentary: Don't Kill All the Lawyers--Send Them to Japan (int'l edition)


This may seem unkind to suggest. Okay, it's a little sadistic. But Japan needs more lawyers--an army of them. That's right, in-your-face sharpies willing to haul executives and bankers before a judge for a bit of bloodletting. This is anathema in a nation that values harmony. But at this point in Japan's struggle to emerge from recession, without more lawyers you can forget about shareholder activism, financial reform, and corporate restructuring having much impact.

Here's why: Amazingly, Japan only has roughly 16,800 licensed lawyers, vs. 900,000 in the U.S. This at a time when demands on the legal system are exploding. Take Japan's bankruptcy courts. There were some 100,000 personal and corporate bankruptcy filings last year, a 40% jump. Yet there are maybe 300 specialists familiar with Japan's bankruptcy code.

A shortage of judges has created a backlog of cases. Those that do get heard take up to five years to resolve. Some judges are so overwhelmed that they don't have time to read up on a case before they pound the gavel, slowing things down even more as attorneys explain the key issues. Japan can't find enough attorneys to serve as trustees in debt workouts and corporate receiverships. And the pressure isn't going to let up. ''I don't believe the Japanese economic crisis is going to end for another two or three years,'' says Shozo Miyake, a noted bankruptcy attorney.

SINGLE SCHOOL. Japanese laws have compounded the quandary of how to clean up the crippled banking sector. For example, numerous creditors can hold liens and claims on the same piece of property in Japan. Yet just one dissenting lien holder can prevent the sale of an asset. Little wonder that securitization--the bulk sale of real estate assets into tradable securities--hasn't taken off in Japan. In the U.S. it helped resolve the thrift crisis.

A properly staffed and more efficient legal system could sort out these conflicts and set the stage for the sale of distressed assets to global investors. That would allow Japanese banks to clear dud loans off their books and get back on their feet before the government's $500 billion bank bailout and guarantees on customer deposits end in April, 2001. More lawyers are also needed to handle loan collection, shareholder disputes, and the sale of assets acquired during Corporate Japan's spending splurge in the 1980s.

Japan has purposely kept the judiciary in check with skimpy budgets and just one state-sanctioned law school: the Legal Training & Research Institute. For starters, undergraduate law students must pass one of the toughest bar exams in the world. It takes the average student five tries to succeed, and only one attempt is allowed in a year. Then aspirants must pass muster in interviews with the school's examiners before they can enroll. The Tokyo-based institute now can handle about 1,000 students per graduating class.

After that grind, those who go on to be attorneys aren't interested in making the process any easier for newcomers. Scarcity, after all, enables them to draw higher fees. Yet tell that to a working stiff who perhaps was cheated on an insurance claim and can't afford a lawyer because fees are outrageously high. And it's no wonder that some unsavory companies use yakuza gangs as ''mediators'' to chase down a debt or rough up a potential claimant.

The Nichibenren, Japan's federation of bar associations, has also kept foreign firms at bay. They can't form partnerships with Japanese firms, for instance. Robert F. Grondine, a partner with White & Case in Tokyo, doubts Japanese economic reform is manageable unless more domestic and foreign lawyers play a big role. Japan is trying to get there ''on the same old bus it has been using for the last 50 years,'' he says.

True, the corporate demand for quality legal services is forcing the government to increase its judicial budget and streamline its bankruptcy code. There's even talk of creating a U.S.-style network of law schools. But what's really needed is a change in mind-set. Yes, litigation is messy and expensive. And the excesses of the U.S. legal system aren't worth emulating.

But legal conflict creates winners and losers, sets precedents, and discloses sensitive information about ill deeds to the public. Punitive damages help deter crooks and corporate malfeasance. Maybe, just maybe, a terrible injustice to the little guy gets undone. For Japan's economic overhaul to work, it needs a deep and sophisticated judiciary. And if you think I'm nuts, well, sue me.

By Brian Bremner

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