Summary of the Olympus drama and the Japanese Economic Fate

No one would disagree that the Olympus drama has spiraled out of control. Some weeks ago Michael Woodford was fired from the company management for forcing an investigation of the company by releasing to media internal documents about investments that appeared to have gone wrong and demanding the entire board to resign. Since then the company has appointed an outside panel to investigate a hidden loss involving some USD687million, which had been paid as fees for acquiring British medical equipment maker Gyrus. This intriguing payout has invited joint investigation efforts by the FBI and SEC.

Olympus was also acquiring companies with little to do with their own business. They include a facial cream maker named Humalabo and a plastic container manufacturer News Chef. Credit agency Tokyo Shoko Research reported that both had not made money before being acquired. The external panel investigating Olympus losses reported that these acquisitions may be used to mask entrenched investment failures originating from the 1990s.

The scale of the Olympus fraud could turn out to be of behemoth size in the end. The anticipation of such has already unnerved investor confidence in the company and the wider Japanese equities market. The poor corporate governance displayed within Olympus is closely entwined with the economic fate of Japan. Japan’s economic stagnancy today was partly caused by lax accounting standards in the private sector from the bubbly late 1980s. Accounting reports for many Japanese companies during the early 1990s still used outdated but better-looking figures from late 1980s which poorly reflected reality. It wasn’t until the mid-1990s when the government stepped in to rectify the practice and admitted that Japan was entering long-term economic stagnation. Two decades have been lost in Japan but issues of corporate governance have seen little improvement to date.

Olympus stock fell from 1300 to 600 Yen from 11/2 to 11/9. Intriguingly, Nomura stock also fell 15 percent on November 8 alone in Tokyo. Investors suspect that Nomura was somehow involved in the Olympus rout. 

The Dealbook New York Times round-up can be found here. 

Bloomberg's report on Olympus, Nomura and the Japanese market can be found here.