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Accounting for
Accounting for the public the public
interest: a Japanese perspective interest
Norio Sawabe
Graduate School of Economics, Kyoto University, Kyoto, Japan 631
Abstract
Purpose – To expand one’s understanding about how accounting helps to shape, mediate and
constitute the public interest, the private interest, and their relationships.
Design/methodology/approach – An interpretive approach is utilized to analyze the documents
that have both informed and legitimized the Japanese financial regulatory changes since the end of
1970s.
Findings – The paper finds that the concepts of private and public interest, and their relationships
have been mutable in the deployment of accounting rhetoric. The concept of private interest was given
more concrete shape as the market-oriented reform advanced in the name of public interest.
Originality/value – This paper sheds light on the constructing role of accounting in society, which
in turn helps to understand changing conceptualizations of the public interest, the private interest, and
their relationships.
Keywords Public interest, Regulation, Finance, Disclosure
Paper type Conceptual paper

Introduction
This paper aims at analyzing accounting-related rhetoric that is deployed during the
financial regulatory reforms over the last two decades in Japan. This paper analyzes
the changing rhetoric in the official documents issued by an affiliate of the financial
authority, in order to expand our understanding about how accounting helps to shape,
mediate and constitute the public interest, the private interest and their relationships.
An interpretive approach is utilized to analyze the documents that both informed and
legitimized the regulatory changes.
Accounting in the regulatory space mediates not only between those who regulate
and those who are regulated, but also between abstract theories and regulatory
practices (Sawabe and Yamaji, 1999). The regulatory reforms since the 1980s are
usually theoretically informed by neoclassical economic thoughts and ideologically
allied with neo-liberalism (Otake, 1994). The role of accounting is more evident in the
financial regulatory reforms than anywhere else, where individualistic economic
thoughts inspired and legitimated the shift from a paternalistic to a market-oriented
regulatory framework.
The motive of this paper is to highlight the potential for accounting-related rhetoric
to be deployed in the changing Japanese financial regulatory frameworks that impinge
on the relationship between private and public interests. In this paper, rhetoric is
understood as an essential element of our lives that may be used to persuade others Accounting, Auditing &
Accountability Journal
Vol. 18 No. 5, 2005
The author wishes to thank Dean Neu, Christine Cooper, and Cheryl Lehman for friendly and pp. 631-647
q Emerald Group Publishing Limited
very helpful comments on an earlier draft of the paper. Any omissions and errors remain the 0951-3574
author’s own. This work was supported by JSPS KAKENHI (15730220). DOI 10.1108/09513570510620484
AAAJ about the correctness of a particular view of reality (Latour, 1987; Young, 2003,
18,5 pp. 623-5). From this perspective, texts perform actions through rhetoric, as it
encourages certain beliefs and silences others (Young, 2003). Rhetoric acts in this sense.
Cooper (2005, this issue) develops a strong argument for the new turn to the material
for accounting researchers. This paper shows that analyzing the accounting rhetoric in
the financial re-regulation in Japan involves those issues that are about images as well
632 as about the material and the economic.
A limitation of this paper is that it does not analyze how accounting rhetoric was
received by the public. There exist the operational difficulties in conducting such
research, post hoc, that preclude the provision of meaningful, reliable results (Craig and
Amernic, 2004, p.43). Instead, this paper highlights the key accounting-related rhetoric
and the way in which the private and the public interests are structured in the rhetoric.
Fundamentally, there is difficulty inherent in establishing the significances and
meanings of a particular rhetoric, because it is always in the process of being
established. It is receivers and users, not senders and preparers, who find significances
and meanings for themselves. The heterogeneity and diversity of the audience poses a
high hurdle empirically, as well. It can only assumed that a particular way of
understanding “reality” is temporally established until opposing voices are raised from
the implied audience.
This paper is organized as follows. In the next section, the concepts of public
interest in neoclassical economic theory and its limitations are clarified. The latter
point is closely related to the mutable relationship between the private interests and
public interests that are discussed in the later sections. It is followed by the analyses of
accounting-related rhetoric in official documents issued by an affiliate of the Japanese
financial authority. The next section discusses implications of the mutability of the
relationship between private and public interests, in the rhetoric of financial reforms.
Finally, the paper’s concluding comments are presented.

Beyond private-public dichotomy

“Public interest” as a residual concept
Neoclassical economic theory, which has been providing theoretical impetus to the
regulatory reforms in Japan, presupposes that all economic action is the result of
choices made by rational economic agents (Mouck, 2000, p. 270). As an archetype of
rational choice theory, neoclassical economics shares assumptions that are generally
held by rational choice theorists. According to Green and Shapiro (1994, pp. 13-17),
there are four basic sets of assumptions about which there is widespread agreement
among rational choice theorists. These assumptions concern utility maximization, the
structure of preferences, decision making under conditions of uncertainty, and the
centrality of individuals in the explanation of collective outcomes.
The last assumption, about the centrality of individuals, clearly demarcates the
individualist ontology of rational choice theorization. For rational choice theorists,
collective action is nothing more than the action of individuals when they choose to
accomplish purposes collectively, rather than individually (Buchanan and Tullock,
1962, p. 13). Basic theoretical building blocks in the study of social sciences for rational
choice theorists are individual preference orderings and individual choices among
alternatives (Riker and Ordeshook, 1973, pp. 78-9). Within the framing of rational
choice theorization, consistent generalization in the social sciences is possible only Accounting for
when the central propositions are about rational decisions by individuals (Riker, 1990, the public
p. 171).
Methodological individualism of neoclassical economic theory requires one to interest
analytically decompose social phenomena into individual rational choices. Individual
rational choices reflect an agent’s preferences and individuals are naturally endowed
with preferences. Social outcome is understood as the result of individual actions 633
motivated by private interest, in the neoclassical framing.
If this type of theoretical framing is rigidly applied, “public interest” has no
independent conceptual status. Public interest is no more than the sum of “private
interests.” However, it should be possible to differentiate theory from what theory
intends to explain, i.e. reality, unless one takes an extreme methodological individualist
position, so that there is a methodological possibility that something theoretically
unexplained remains. Public interest becomes a residual concept in this case. When it is
observed that a particular collective feature of society can be easily decomposed into
individual utility maximizing, then that which remains to be explained may be called
“public interest.”
This is a rather negative and passive characterization of “public interest.”
Nevertheless, this residual conceptualization of “public interest” has the potential to
find the limits of the dominant neo-liberal ideology behind Japanese regulatory reforms
since the 1980s. At the end of the analysis of the changing accounting rhetoric, it will
be clear that a concept of public interest shapes a form of private interest. This
contradictory finding, that something conceptually residual actually creates something
conceptually essential and fundamental, indicates a limit of the neoclassical economic
approach based upon methodological individualism.

Collective dimensions of private interest

The residual conceptualization of “public interest” is partly a result of the dichotomy
between public interest and private interest, required by methodological individualism.
However, there is no a priori reason to believe that the dichotomy has a firm universal
foundation. On the contrary, interesting cases are found when private interest and
public interest are intertwined.
The dichotomy between private and public is nowhere more starkly revealed than
in the definitions of private and public goods, in neoclassical economics. Private goods
are defined as those that are held and consumed individually, while public goods are
those whose consumption and enjoyment by one citizen does not affect the quantity
available to others (Samuelson, 1954, 1955). Excludability and rivalry constitute
private goods. A typical example of a private good is a loaf of bread, while a typical
public good is public education. Private goods are best produced and consumed under
the market mechanism. The state and other non-profit organizations are more
appropriate for the provision of public goods. The economist’s distinction between
private and public goods has profound roots in Western society that are traceable back
to the Bible (Hirschman, 1998, pp. 14-17). The private sphere and public sphere are
conceptually divided, due to the basic characteristics of goods.
There are criticisms that the private-public dichotomy is often too easily taken for
granted and obscures the intertwined relationship between the two spheres. Recently,
AAAJ the open source software development projects caught the attention of various
18,5 academic disciplines because they are economically successful, and at the same time,
they cannot be easily explained in terms of selfish interest maximizations (von Hippel
and von Krogh, 2003a, b; Lerner and Tirole, 2002).
Simmel (1910) discussed the collective dimensions of what seems wholly private. He
refers to the social institution of the meal. Consumption of food and drink is a private
634 activity. However, since consumption of food and drink is a primitive physiological
fact that is an absolutely general human characteristic, it becomes a communal action.
The exclusive self-seeking of eating is transformed into the frequent experience of
being together, and into the habit of joining in a common purpose (i.e. commensality).
Drawing on insights provided by Simmel and Hirschman, one can develop an
argument that links the banquet and the emergence of Athenian democracy
(Hirschman, 1998, pp. 21-5)[1].
In the analysis of civic traditions in modern Italy, Putnum (1993) also points out that
private interest in civic society is civilized private interest. It is wholly inadequate to
neglect the motivational effects of private interest for the well-functioning of any
society. At the same time, the private interests of citizens are not myopically selfish
ones. The subjective private interest of citizens is constantly reflected through
objective private interest that is defined in a broad context of the civic society. Private
interest is not myopic but enlightened and sensitive to a neighbor’s interest (Putnum,
1993, chap. 4). This is where the role of rhetoric as an art of persuasion comes in. As
Lehman (2005, this issue) argues, identity is a cultural fiction produced and sustained
by dominant discursive practices in which accounting rhetoric is deployed.
Once it is recognized that private interest and public interest may not be
independent from each other, and that it is we ourselves who constitute the public, it
could be argued that public interest sometimes resides in individual preferences. The
enlightened preferences of individuals demonstrate a limitation of the atomistic
approach of rational choice theory. Private interest and preferences of individuals are
not situated in a vacuum, but are embedded in historical time and space. Individual
identity is produced and maintained through discursive practices (Lehman, 2005, this
issue). There are complex interactions between private and public interest.
The regulatory reforms that took place during the last two decades in Japan provide
examples where private interest and the identity of the depositor are molded by
changing public interest at the institutional level. In the following section, the residual
concept of public interest is utilized in order to untangle the intertwined relationship
between public interest and private interest in the rhetoric of regulatory reforms.

The rhetoric of reform: mandatory financial disclosure of banks

The postwar Japanese financial regulatory framework, until the middle of the 1990s,
was characterized as a “convoy system” (Aoki et al., 1994). In the convoy system, the
weakest financial institutions were allowed to survive profitably, because various
kinds of regulations effectively curtailed market competition. The convoy system has
been clumsily but systematically dismantled since the 1970s in the name of financial
liberalization, which culminated in the Japanese Financial Big Bang toward the end of
the century (Ministry of Finance, 1997). The process of financial liberalization has been
accompanied by the implementation of another set of regulations that are more
“friendly to the market mechanism.” Financial liberalization is actually financial Accounting for
re-regulation (Sawabe, 2002). the public
Banks have been subject to special mandatory financial disclosure rules. The
purpose of the present paper is to investigate the rhetoric that has been used to justify interest
the changing mandatory disclosure of banks, rather than to scrutinize the changes in
the disclosure requirements themselves.
Recommendation reports prepared by the Financial System Research Council 635
(FSRC) were chose as the source of accounting-related rhetoric in this paper. The
Financial System Research Council is a consultative body founded by the Financial
System Research Council Foundation Act of 1956. The first clause of the act declares
that the primary aim of the council is to carry out research on important issues
regarding the improvement of the financial system and to advise the Finance Minister.
Upon request from the Finance Minister, the FSRC discusses and prepares
recommendation reports that are submitted to the Finance Minister. Examples of
financial system reforms realized by the FSRC recommendations are the introduction
of the deposit insurance system in 1971, the amendment of the banking law in 1981,
and the reintroduction of capital adequacy regulations in 1986.
The FSRC reports were selected for two reasons. Firstly, because the FSRC is the
established institution whose policy recommendations frame the regulatory changes
that followed. They provide the frame of reference with which details of regulations are
politically debated. The implied audience of the recommendations is those who have
non-negligible interests in the regulatory changes, such as financial institutions and
their advocates; nevertheless, reports are delivered in a universalistic style open to the
public. Secondly, the recommendation reports are unique, officially prepared artifacts
that act to summarize the preparation processes that involve various kinds of
participants. Although the text keeps a universalistic style that shows the FSRC’s
desire to be seen as neutral and technical, each recommendation report inevitably takes
a particular point of view about the significance of various events that occurred during
the preparation process and reflects the points of compromise that are found to be
adequate among the members of the FSRC.
Since the 1970s, there have been three major FSRC reports that recommended
changes in the mandatory disclosure requirements of banks. These were issued in
1979, 1985 and 1995. Each of the three FSRC reports was intended to persuade the
audience to change the existing regulations. In the following subsections, what Meyer
and Rowan (1977) call rational myths that tie ends of changes in the regulations and
the means of regulations are extracted from the texts. It will be shown that the
rationale provided by FSRC reports reflect institutional rather than technical
environments (Scott, 1998, pp.138-139).

1979 report: in search of the balance between the social responsibility and the efficiency
of banks
In May 1975, the Finance Minister asked the FSRC for advice about the improvement
of the banking law and other related laws[2]. It was just after the first oil crisis, and
extraordinary inflation hit the Japanese economy severely. Banks were repeatedly
criticized as financially supporting the anti-social behavior of businesses that
aggravated the inflationary economy.
AAAJ Against this background, it was argued that banks ought to have public character
18,5 and, thus, they were obliged to fulfill their social responsibility. The Japanese Diet
responded to these social responsibility arguments and asked the FSRC to clarify what
the social responsibility of banks was (Seki, 1979, p. 6; Tate, 1988, p. 4).
It took more than four years for the Financial Research Council to draw a conclusion
for the 1979 recommendation. By the time the Council reached its conclusion, the
636 criticism against banks had already abated; instead, the demand for efficiency became
the point of dispute. Thus, the 1979 report attempted to balance the social
responsibility and efficiency arguments. This concern to balance the social
responsibility and efficiency of banks is reflected in the amendment of the banking
law in 1981. It introduced the object clause, which states that it is important to find the
right balance between social responsibility and the nature of private profit-seeking
enterprise of banks (Seki, 1979, p. 7; Tate, 1988, p. 5).
In the 1979 recommendation, it is stated that “while maintaining the stability, banks
should execute public functions appropriately and fully by responding to the needs of
the economy and society” (FSRC, 1979, p. 36). The report argued that the realization of
efficient and fair allocation of funds by banks could not be obtained solely by the
utilization of the market mechanism, even though it is, in principle, the competitive
force in the market that contributes most to attaining such a goal. The pursuit of the
efficiency of individual banks had to be balanced with the social fairness and overall
macro-economic performance of the nation: “Financial institutions should not only
pursue their managerial efficiency alone, but perform their functions in accordance
with the overall macro economic and social fairness viewpoints” (Seki, 1979, p. 7).
In the 1979 recommendation, banks were requested “to grasp the gist of social needs
in an exact manner and to independently respond to such social needs from a long-term
perspective” (FSRC, 1979, p. 38). Improved disclosure practices of banks were
understood as “measures to apprehend social needs” (FSRC, 1979, p. 60).
A peculiar feature of the report was that it specifically requested the legalization of
the disclosure of banks’ fund management operations in order to show that financial
intermediation by banks was carried out in a manner that was appropriate for the long
term goals of society in general (FSRC, 1979, pp. 38, 60-1, 65). This emphasis upon
long-term public interest was partly a response to the criticism against banks in the
mid-1970s. Banks were severely criticized, as they provided funds for land speculation
that were regarded as socially unacceptable greed at the time, and were linked to the
anti-social activities of business corporations (FSRC, 1979, p. 38).
The report emphasized that there are limitations in the market mechanism. The
notion of market failure was used as a justification of regulations. However, the report
was hesitant in legalizing direct regulations on banks’ business activities. Mandatory
Disclosure was introduced as an alternative to the direct regulations. It is stated that
“instead of legalizing any regulations concerning lending activities of banks to a
certain sector of the economy, the balance between the demands from the society and
the profit seeking nature of banks should be sought by banks themselves. Banks
should correct their own behavior independently by disclosing financial information
(to the general public)” (FSRC, 1979, p. 60-1).
The 1979 report argued that “disclosing their own behavior and its consequences to
the nation for their assessment is a very effective measure to promote individual efforts
of banks to correct their own behavior” (FSRC, 1979, p. 60). It seemed that the nation Accounting for
and the general public were the assumed users of the disclosed information in the the public
report[3].
The rhetoric of the 1979 report clearly shows that the “public interest” of the nation interest
supersedes the “private interest” of banks. As for the mandatory disclosure of banks, it
is the public in a collective form that is assumed to be the user of information. It is the
public in general that should watch banks’ activity, by using disclosure information in 637
the interest of society. The private interest of banks is regarded as a necessary evil,
while the market failure type of argument is used to justify the regulations. At this
stage, the public interest is not a mere residual of private interest but holds an
independent conceptual status.

1985 report: keeping discipline in the liberalized financial system

The “convoy system” of the financial sector in Japan had a set of institutional
arrangements that enabled the administrative bodies and the Ministry of Finance
(MOF), as the core, to effectively limit the potential for market forces to penetrate and
to destabilize the orderly financial system. The most explicit barriers to competition
were anti-competitive regulations, such as foreign exchange controls, regulated
interest rates, the separation of banking and security businesses, and so on. With these
regulations, there were virtually no bank failures until the 1990s. However, most of
those anti-competitive regulations have been demolished since 1980s[4].
In 1984, a report by the “Joint Japan-U.S. Ad Hoc Group On Yen/Dollar Exchange
Rate, Financial And Capital Market Issues” (put in caps) was published. The report set
the basic agenda for the Japanese financial liberalization in the latter half of the 1980s
(Nishimura, 1999, p. 62). Internationalization of finance and the large quantity of
government bonds issued after the oil crises were the basic economic forces that urged
financial liberalization.
The 1985 FSRC recommendation was part of the response to the 1984 report. The
aim of the 1985 recommendation was to find the means by which to maintain an
orderly financial system in the era of financial liberalization (FSRC, 1985, p. 38).
The role of mandatory disclosure became more prominent in the 1985
recommendation than in the 1979 recommendation. Financial disclosure
requirements of banks are one of the major devices to maintain stability in a
financial system that exists within a changing regulatory environment. The newly
expected role of disclosure in the 1985 recommendation was “the promotion of banks’
efforts to improve their own soundness.” The report stated that “it is appropriate to
make good use of financial disclosure as a means to promote the independent efforts of
banks to improve soundness, in view that financial institutions are expected to correct
not only their business reality but also their own financial conditions by disclosing the
substance of their management” (FSRC, 1985, p. 47)[5]. Thus, it was “desirable to
improve the level of disclosure about the soundness of financial institutions as well as
about fund management operations” (FSRC, 1985, p. 47).
Although it was not explicitly asserted, the fundamental concept underlying the
report seemed to be that of market discipline. When the 1985 recommendation referred
to the role of capital adequacy in the liberalized financial system, it stated that “ the
strengthening of bank’s own capital is necessary to improve the ability of banks to
AAAJ bear increased risk (due to the financial liberalization) on their own responsibility of
18,5 financial institutions” (FSRC, 1985, p. 43, parenthesis added). The recommendation
also proposed that the capital market mechanism be used to allocate funds among
banks: “It is desirable that more funds are allocated to the most efficient financial
institutions through the capital market mechanism” (FSRC, 1985, p. 45)[6].
The 1985 recommendation set two objectives of mandatory disclosure: one related
638 to social responsibility and the other to the soundness of individual banks. The former
is clearly related to public interest that cannot be dissolved into the private interest of
individuals. The soundness of individual banks seemed to be connected to private
interest in two stages.
The first stage concerning the soundness of individual banks is related to the
private interest of banks themselves. It is in each bank’s interest to maintain its own
soundness. The second stage is concerned with the external stakeholders of banks.
There are two distinct sets of stakeholders who have their own private interest in
maintaining the soundness of banks.
On the one hand, there are investors in the capital market who provide risk capital
to banks. They are willing to take a risk as a part of investment. As far as the capital
market and investors are concerned, it is reasonable to assume that the market
disciplines banks so that soundness of banks is improved in general[7].
On the other hand, there are depositors whose deposits are protected by the deposit
insurance system. In the 1985 recommendation, depositors were mentioned as potential
users of disclosed information. Depositors are expected to use disclosed financial
information for their decision making. It was also stated that financial data should be
supplemented by verbal explanations, so that disclosed information should be easy to
comprehend, even for ordinary depositors (FSRC, 1985, p. 48).
There were no economic incentives for the ordinary depositors to make use of
disclosed financial information for their depositing decisions, because the same report
proposed to raise the maximum amount of deposit insured by the deposit insurance
system, from 3 million yen (approx. US$27,000) to 10 million yen (approx.
US$90,000)[8]. In essence, the report argued that depositors in general should be
covered by the deposit insurance system. Since financial liberalization made it more
likely to have situations where deposit insurance may be utilized, the significance of
the deposit insurance would become higher than before, as a psychological bulwark for
the general public[9].
When virtually all the deposit is covered by the deposit insurance system, there are
no economic incentives for the depositors to bear the cost of obtaining, interpreting,
and making decisions with the disclosed information of banks[10].
The market discipline type of argument remained implicit in the 1985 report, even
though the ends-means relationship behind the rhetoric seemed to correspond to
market discipline, as far as the capital market and investors as users of information
were concerned. However, the rhetoric that dealt with depositors and their use of
disclosed information was very confused and inconsistent. On the contrary, the social
responsibility of banks and accompanying social disclosure to the general public are
very clearly laid down in the report and remained as the main rhetoric intended to
legitimize mandatory disclosure.
1995 recommendation: the injection of public money Accounting for
The so-called “bubble years” in Japan ended at the beginning of the 1990s. The the public
Japanese economy had been struggling to overcome the aftereffects of the euphoria of
the 1980s. At the heart of the sluggish economy, there had been deflationary pressure
interest
generated from the bad loan problems. In the latter half of the 1980s, the banking sector
financed real estate related businesses. The net increase in loans amounted to about
100 trillion yen and caused real-estate prices to soar; subsequently, many of these 639
performed poorly in the 1990s (Ministry of Finance, 1993).
The 1995 FSRC recommendation is entitled “Measures to Stabilize the Financial
System: Establishing a New Financial System Based on Market Discipline “ (FSRC,
1995). Unlike the other two FSRC recommendations, the 1995 recommendation was
prepared in haste. The other two recommendations took several years to complete,
while it took only six months for the FSRC to prepare the 1995 recommendation.
In January 1995, the Bank of Japan and other private financial institutions
established the Tokyo Kyodo Bank to subsume two failed credit cooperatives in
Tokyo – Tokyo Kyowa credit cooperatives and Anzen credit cooperatives. The failure
of several other small financial institutions followed. The MOF was capable of
mediating the acquisition of failed or troubled banks by others, without using public
funds at that stage.
However, when the so-called “Jusen Mondai” (the Jusen Housing Loan Companies
Problem) rose to the surface later in 1995, private financial institutions showed
hesitation in rescuing troubled non-banks. The Jusen Housing Loan Companies were
established around 1970 by city banks, regional banks, trust banks, life insurance
companies, and other financial institutions. In the 1980s, banks, many of them mother
companies for the Jusen Housing Loan Companies, expanded their own housing loan
businesses[11]. Consequently, the Jusen Housing Loan Companies, which borrowed
money from those banks, were deprived of their main source of profit, which forced
them to find other business opportunities. Thus, the Jusen Housing Loan Companies
started to invest heavily in real estate and real estate-related businesses. Those new
businesses performed well because of the bull market conditions throughout the 1980s.
However, land prices started to decline drastically in 1991.
The Jusen Housing Loan Companies were non-banks, i.e. they were not a part of the
payment system. Theoretically, their failure was unlikely to lead to any systemic risk.
Institutionally, they were not members of a deposit insurance system. There were no
reasons, either theoretically or institutionally, for the government to intervene in the
fate of the Jusen Housing Loan Companies. However, the provision of public funds
became a major political agenda by the end of 1995. A number of agricultural financial
institutions lent a large amount of money to the Jusen Housing Loan Companies.
Unlike most of the other financial institutions, agricultural financial institutions are
not supervised by the MOF but by the Ministry of Agriculture and Fisheries. This
jurisdictional difference and the political power of agricultural financial institutions,
which were part of the electoral power base of the ruling Liberal Democratic party,
were said to have complicated the resolution of the Jusen Housing Loan Companies
(Nishimura, 1999, p. 147-9). The 136th session of the Diet that commenced on January
22, 1996 is sometimes referred as “Jusen Kokkai (the Jusen Housing Loan Companies
AAAJ Diet),” where use of public funds, in the amount of 6850 billion yen, was approved for
18,5 the resolution of the troubled Jusen Housing Loan Companies.
The 1995 recommendation was prepared to pave the road for bad debt settlements
with public funds. The structure of the report showed that the majority of the report
dealt with the disposition of failed financial institutions.
The prominence of disclosure in the 1995 recommendation is much greater than in
640 the two prior reports. Mandatory disclosure takes the primary position in the section
discussing measures to maintain the stability of financial institutions. This may
indicate that improving the level of financial disclosure is considered a prerequisite for
a public fund to be committed to bad debt settlements.
The report states that “disclosure is very significant in improving the transparency
of a financial institution’s management, promoting self-correction of management by
market discipline, and urging prompt bad debt settlement. And, it is also important as
a foundation to establish the principle of own responsibility of depositors” (FSRC, 1995,
p. 11). Disclosure is like a panacea in the 1995 recommendation.
The report aims at “establishing a transparent financial system on the basis of
market discipline exercised upon the principle of own responsibility” (FSRC, 1995, p. 4).
The underlying logic is apparently identical to that of neoclassical economic theory.
When the market system is composed of independent rational economic agents,
decentralized decisions made by market participants are fully reflected through the
market mechanism, which results in the optimal social outcome. One of the
prerequisites for such a story to hold true is perfect information. Disclosure is a
measure to make the reality closer to the ideal.
The meaning of the establishment of own responsibility of depositors is, however,
not so easy to comprehend as it may seem at first glance. Prior to this report, each
depositor is insured up to 10 million yen by the deposit insurance system. Any deposits
above 10 million yen are exposed to the credit risk of the bank where the depositors’
money is kept. Depositors are certainly subject to the principle of own responsibility in
this sense.
A twist of the 1995 report was that it contended that the deposit insurance system
should insure all kinds of deposits and other liabilities of banks without a ceiling[12].
The report effectively voided the principle of own responsibility of depositors in the
name of extraordinary and exceptional measures (Naito, 1996, pp. 6-8). The
recommendation argued that “the conditions for payoff (as the disposition measures)
are not met yet, because (a) disclosure is in the process of improvement, yet it is not
prepared well enough for the depositors to take their own responsibility; and because
(b) financial institutions that hold bad debt and credit are easily thrown into crisis”
(FSRC, 1995, p. 12).
These exceptional measures to protect all deposits and other financial instruments
issued by banks effectively promoted the welfare of the rich and the powerful. Bank
bonds issued by long-term credit banks are anonymous and so notorious for political
scandal that a chief secretary of the LDP took advantage of them to evade income tax
(Tateishi, 1999). Those who are rich enough to use this kind of financial instrument
benefited from the extraordinary measures at the sacrifice of tax payers’ money. The
accounting rhetoric that emphasized the responsibility of ordinary depositors diverted
the attention of the public from the material consequences of the extraordinary
measures, and effectively silenced the voice of the public against the measures that Accounting for
resulted in widening economic inequality (Sawabe, 2000, pp. 49-50). the public
The report hoped that when the process of improving disclosure practices was
completed and bad debt problems were dissolved, the new financial system based on interest
market discipline and the own responsibility of depositors would be realized[13].
Disclosure, then, is a necessary condition for the principle of own responsibility of
depositors to hold. The rhetoric of mandatory disclosure was firmly coupled with the 641
principle of own responsibility of depositors in the 1995 recommendation.
However, the logic that ties the financial disclosure requirements and the own
responsibility of individuals was inverted in the 1995 recommendation. Improvement
of disclosure should have been a necessary condition for the own responsibility of
individuals to hold. It was now understood as a sufficient condition for such a claim to
materialize. It was required for depositors to bear their own responsibility and act
accordingly, because the mandatory financial disclosure practices were improved.
However illogical it was, this inversion of logic seemed to have obtained a certain
appeal with the public.
At a public lecture just before the 1995 recommendation was publicized, a chairman
of a leading cooperative (Shinkin) Bank convinced an audience that “hereafter
depositors should regard deposits as loans to financial institutions.” “Depositors must
inspect the business policy and financial position of financial institutions thoroughly. If
depositors neglected their duty, they have to bear the consequences of their own
responsibility” (Nihonkeizai Shinbun, 1995). An essentially similar message appeared
in various forms of mass media at the time. An extreme case could be found in a
brochure issued by the Bankers Association of Japan. The brochure was aimed at
educating depositors to be able to comprehend and analyze the contents of financial
information disclosed by banks (Federation of Bankers Association Japan, 1995, p. 4).
From a rational depositor’s point of view, there is no reason to accept increased
responsibility, even if the level of financial disclosure is improved. A rational depositor,
as preferring lower risk with the same return, should choose a fully insured bank
deposit with little disclosure of financial information over a partly insured one with
improved disclosure, given that the costs associated with the use of disclosed
information are non-negligible. However, many educated depositors seem to be
convinced by the rhetoric of own responsibility fostered by improved disclosure
practices[14].
The re-conceptualization of disclosure requirements, and the actual improvement of
financial disclosure practices that followed, seem to have exercised pedagogical power
over depositors. The rhetoric of disclosure redefines the social identity of deposits and
depositors. Deposits are now understood as one of many financial instruments
available to investors. Depositors have become investors who are no different from any
other investors that should calculate a risk and return profile of their alternative
investment opportunities. They have to decide carefully the amount of deposit for each
type of investment in their financial portfolio. In order to do so, they are obliged to
utilize the available information thoroughly.
The rhetoric of the 1995 report illustrates how the private interest of depositors is
redefined in the name of public interest, i.e. well-functioning financial system. The
twist is that private interests are molded by regulatory reform, even though the
AAAJ theoretical foundation of the rhetoric assumes the primacy of private interest over the
18,5 social structure, methodologically. This paper started from a definition of public
interest as a residual of private interests, and concluded by exposing the fact that
private interests are produced and maintained by public interest. This contradictory
finding indicates a limit of the neoclassical economics approach based upon
methodological individualism. The role of accounting rhetoric is found in the
642 production and maintenance of a form of private interest, which methodological
individualism takes as a given, under the name of public interest.

Concluding comments
In the 1990s, Japan mirrored the complacence of the 1980s, and deprecated its way of
doing business. Trust-oriented long-term relationships were not only old-fashioned,
but unprofitable. Mutual-shareholdings were no longer risk-reducing, but became the
source of risk. Lifetime employment, which used to improve employees’ dedication to a
business, became a symbol of management incompetence and organizational slack.
The changing attitudes of individuals towards collectivities, such as business
enterprises, epitomized the dramatic reversal of the self-images of Japanese businesses.
Using Hirschman’s terms (Hirschman, 1970), ideas of how individuals ought to be in
relation to collectivities shifted from “loyalty” to “exit.” In other words, anonymous
relationships in the market should prevail over the community spirit.
The other side of the coin was the promotion of individualism. The demise of a
communal spirit was apparently coupled with the primacy of the private. During the
1990s in Japan, there were various sorts of campaigns that intended to establish “the
principle of own responsibility” of individuals in society. One of the means used in such
a campaign was the financial disclosure regulations of banks. Individuals could not
assume own responsibility unless they knew what they would do and what they would
get. The rhetoric was that improved financial disclosure of banks to the general public
realizes greater self-determination and own responsibility.
The change in the rhetoric of disclosure may have a dual role in this transformation.
A very explicit role is the part disclosure should play in the idealized financial system.
In the ideal situation, publicly disclosed information is thoroughly utilized by market
participants to reach equilibrium. Mandatory disclosure is a means by which to make
the reality close to perfect information, and that is a prerequisite of a perfect
competitive market. In the ideal, improved public disclosure enables the freedom of
choice of individuals, even though that freedom does not allow any alternative choice
to the one that rationality demands.
There is an implicit role of disclosure in this process of transformation. Enhanced
public disclosure requirements have a pedagogical function. The new disclosure
requirements outdate an existing set of knowledge and practices that were associated
with the main bank system, by introducing novel sets of knowledge and belief[15]. The
rhetoric of financial disclosure requirements propagated in the 1995 FSRC report, and
subsequent improved disclosure practices that actually took place, may have
functioned pedagogically to the extent that the social identities of depositors are
transformed to something similar to those of rational investors.
The novel rhetoric of financial disclosure requirements voices that individuals have
to change in order for regulatory change to succeed. Each time a novel philosophy
behind the public disclosure policy in the 1995 FSRC report is repeated, it acts as a Accounting for
message that the system should transform. It is not only the system that changes in the the public
transformation, but also the elements of the system that change as well. This role of the
disclosure requirements in the transformation process might have a rather coercive interest
effect, though the mechanism itself is based on the normative and the mimetic behavior
of each individual client and depositor of banks. Ironically, each individual depositor is
expected to choose the best bank by using the disclosed information, although there are 643
no economic incentives to do so. The stronger the message for the depositor to change
and to resume responsibility identical to that of investors, the more effective it is that
attention of the public is diverted from the crude economic reality of re-regulations that
benefit the rich and the powerful.

Notes
1. From ancient Greece to the Renaissance, the antonym of public life was vita contemplantiva,
i.e. contemplative life (Arendt, 1958). Public life was identical to vita active, i.e. active life. It
is only recently with the rise of commerce and industry in the seventeenth and eighteenth
centuries that another type of active life, that aims directly at the production and
accumulation of private wealth, is discovered. In the same period, the idea that the pursuit of
one’s private, material interest is a legitimate form of human conduct (Hirschman, 1982, p. 7).
2. The previous banking law was enacted in 1927.
3. Although the report attached great importance to the disclosure of financial information,
there existed a clear limit of disclosure, as far as the scope of disclosure went. General and
comprehensive disclosure was encouraged on a voluntary basis (FSRC, 1979, p. 61).
However, the same report gave provisos on the scope of disclosure requirements. “It is
inappropriate to require disclosure about: information that might endanger an orderly
financial system; information that might damage the privacy and confidentiality of clients;
information that might result in an unjust disadvantage concerning the bank’s management;
and information that might impose excessive disclosure costs on banks. The Federation of
Bankers Association Japan objected to the mandatory disclosure of the fund management
operation (The Federation of Bankers Association Japan, 1979, p. 32). In the 1981 amendment
of the banking law, provisions on disclosure requirements became admonitory instead of
mandatory (Yoshida, 1997, p. 137). During the political process of the amendment of the
banking law that followed the 1979 report, several important changes were made from the
initial draft that reflected the report with accuracy. Inter-business regulations between
banking and securities business were a major issue that complicated the process. See
Inoguchi and Iwai (1987) on this point.
4. Most of the foreign exchange control was removed in the 1979 amendment of the Foreign
Exchange Law, and the little that remained was completely demolished by the amendment
of the Foreign Exchange Control Law in 1998. Loan interest rate regulations were liberalized
long before and deposit interest rate regulations had been abandoned since 1985 and were
completely liberalized by 1994. Division of the financial sector by businesses was the major
issue in the 1979 FSRC recommendation. It was decided to abolish the regulation on the
division of financial services with the announcement of the so-called Japanese Financial Big
Bang initiated in 1996 (Nishimura, 1999, p. 60).
5. Business reality here refers primarily to the lending activities of banks.
6. The MOF had discouraged new equity issue by banks with the fear that it might bring a
lower retention rate (Aizawa and Sera, 1988).
AAAJ 7. However, there existed provisos concerning the scope of the disclosure requirements in the
1985 recommendation, as was the case with the 1979 report. In other words, as far as
18,5 banking regulatory environments were concerned, the notion of full disclosure of
information as a way of curbing management’s power to run banks in their own interest was
missing in Japan. For the full disclosure philosophy, and particularly the Berle-Dodd debate,
see Macintosh (1999).
644 8. Exchange rates between US dollars and Japanese Yen changed drastically since 1985. In
September 1985, there was a G5 meeting where Finance ministers of G5 countries, i.e.
France, Germany, Japan, USA and UK, gathered at the Plaza hotel in New York. At the
meeting, the so-called Plaza Accord was reached in which US dollars were systematically
depreciated against other major countries’ currencies. Consequently, Japanese yen
appreciated from 200 yen to 120 yen per dollar within two years following the accord.
9. Minority opinions about the raise of the maximum insured amount in the deposit system
were explicitly described in the 1985 recommendation: “There are opinions that are against
the raise of the maximum insured amount, concerned about the prevention of moral hazard
and about the principle of the own responsibility of depositors” (FSRC, 1985, pp. 50-1).
10. Exceptions are those clients of banks whose accounts are held for the settlements of business
transactions.
11. For the Jusen Housing Loan Companies, see Nishimura (1999)
12. The recommendation was provisional for the period of five years until the end of fiscal year
2001.
13. Whether the rational behavior of depositors with full utilization of disclosed information
would lead to the stabilization of the financial system is very problematic (Crockett, 1997).
14. The mechanism through which redefined private interest is accepted by individuals is
beyond the task of the current paper. It is only suggested that the tacit knowing process
described by M. Polanyi (1958, 1966) tells that it is only through the subjugation to the
authority that a person is able to learn what he/she did not know before. Trust and loyalty to
the master is core to the tacit learning process of an apprentice. An insight provided by a
tacit knowing process is that those who are innocent and least knowledgeable are most likely
to be affected by the pedagogical process. If this holds also for the case presented in this
paper, the learning process inspired by the changing rhetoric of financial disclosure is more
likely to be based on mimetic mechanism fostered by the socially created
taken-for-grantedness of new reality. Those who have grounded knowledge and those
who have direct stakes in the financial businesses are immunized by their own knowledge
and reality and are least likely to be affected. It is suggested that the isomorphic
identification processes typically affect those who do not have much direct interest in,
knowledge about, and prior experience of the agenda, which is quite consistent with the
observation that those disinterested parties are the most loyal and easily re-identified
themselves with the changing financial system.
15. For the pedagogical function of accounting, especially that of business planning, see Oakes
et al. (1998).

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