A $1.2 billion accounting scandal at Toshiba tightens the screws on Japan Inc. Firms are already under huge pressure to show they are better-run and more profitable, as part of Prime Minister Shinzo Abe's wider economic reforms. Now they will have to work even harder to prove that overhauls are not just cosmetic.
Late on July 20, Toshiba said outside investigators had found profits had been overstated by nearly 152 billion yen ($1.2 billion) from 2008 to 2014. It will probably also have to write down the value of its assets by a similar amount - JP Morgan analysts expect a further 150 billion yen of impairment charges, and suggest the total damage could cut shareholders' equity by more than 300 billion yen.
This is by no means the end. Toshiba's future leadership, scope, capital structure and profitability are all unclear. But it is an important milestone in one of Japan's worst accounting scandals since the turmoil at Olympus, the maker of cameras and medical devices.
It is risky to conclude too much from a single crisis: unhappy companies are unhappy in their own ways. Here investigators highlight a culture where subordinates could not defy superiors. That seems to have held especially true in the years after the Fukushima disaster, which weighed badly on Toshiba's nuclear business.
Nonetheless, that one of Japan's corporate heavyweights could go so far astray is shocking. Other firms will feel the fallout. Everyone from local politicians to overseas hedge funds are already pushing companies to streamline, lift miserable returns on equity, and revamp all-too-homogenous boards.
Toshiba shows the trappings of reform can be misleading. It already boasted a Western-style audit committee, several outside directors, and a whistle-blower scheme. None of those measures were sufficient. And, if anything, Toshiba's leaders were too desperate in their determination to please the market.
Global investors have bought into the Abe story and already hold considerably more Japanese stocks than their benchmarks would require. It's a cheap market with world-beating underlying businesses. To stick it out, they also need to be satisfied that financial reporting and board oversight are up to scratch, and that reforms will deliver real, positive change.
