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Paper scandal points to shortcomings of Japan Inc

TOKYO, Jan 18 (Reuters) - Corporate scandal after scandal dominated headlines in Japan last year and so far 2008 is no different, as major paper makers admit paper sold as recycled was not really recycled.

The misdeeds coming to light -- including a string of food scandals -- has shocked consumers and detracts from Japan’s attractiveness for institutional investors.

It shows how tough economic times have encouraged firms to take short cuts, analysts say, but it also underscores greater willingness by the government to tighten rules and crack down on such scandals.

“The goal posts have shifted in terms of regulation, monitoring and whistleblowers,” said Darrel Whitten, managing director of Investor Networks.

The latest scandal involves New Year greeting cards, which Japanese send by the billion each year. Nippon Paper Group Inc 3893.T and Oji Paper Co Ltd 3861.T admitted this week that cards they had sold as being recycled paper had almost no recycled content -- and the practice had been going on for more than a decade.

While that may have shocked consumers who thought they were being environmentally responsible in their choice of card, the real pain has been felt by investors in the two firms.

Nippon Paper shares have tumbled 13 percent and Oji paper shares 6 percent in the past two days, despite analysts seeing little long-term effect on earnings.

Oji put the problem down to its marketing team agreeing to ratios of recycled paper without checking whether its production side had the capability to make them.

“Once we had accepted the orders, we lost the opportunity to fix the ratio. The problems got buried and overlooked in daily operations,” Oji President Kazuhisa Shinoda told reporters.

Corporate governance is a relatively new concept in Japan, the world’s second-largest economy.

It ranks 38th out of 49 nations, lagging behind South Africa, Venezuela and Peru, according to GovernanceMetrics International, a corporate governance ratings agency.

The scandals come on top of what analysts see as insular management styles in Japan and an insufficient number of outside directors.

Japan's Nikkei benchmark average .N225 was the worst performing index among among major stock markets in 2007.

Restructuring and economic malaise in the late 1990s and early 2000s, as well as the erosion of Japan’s lifetime employment system weakened employee loyalty, giving rise to whistleblowers as well as making consumers more outspoken.

The paper scandal, which has enveloped other major domestic paper makers, was revealed by a whistleblower, said TV broadcaster TBS which broke the news.

It follows cases where firms sold food past its expiry date -- mostly by small firms but also affecting McDonald's Japan 2702.Q, which said some of its stores may have done so.

Staffing agency Goodwill Group Inc 4723.T suspended on Friday all its branch operations for several months -- a government penalty for breaching employment regulations when it sent out temporary workers out. It also withdrew from nursing care services last year after it inflated staff numbers.

Other high-profile scandals last year included the failure of Japan’s biggest English language school chain Nova, after fraudulent advertising.

“There have been so many scandals, I guess there are worries about what industry is going to be next,” said Takeo Omura, a corporate governance analyst at the Daiwa Institute of Research.

While big Japanese exporters have done well in recent years, competition with Asian neighbours has hurt many other Japanese firms. Those without big global operations have been hit the hardest.

“The domestic types are in a fight for survival. They are in shrinking markets and some of them have cut corners,” Whitten said.

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