Tazaki Aiko, age sixty-two, was a typical victim. The law prohibits banks from selling insurance, but they got around it as follows: In 1989, a salesman from Mitsubishi Bank began paying Tazaki visits, warning her about the high inheritance tax her family would face. Soon she received a call from someone at Meiji Life Insurance (one of the Mitsubishi keiretsu group of companies), offering her a variable insurance policy Tazaki bought, and seven years later she faced eviction from her home.

Altogether, insurers issued 1.2 million such policies, leading to the public's loss of trillions of yen. In many cases, bankers and insurance-company salesmen were present together at the time the contract was signed. Victims have filed hundreds of lawsuits, and some of the plaintiffs have committed suicide. «Suicide is a tempting idea, because the longer you live the larger your debts grow. That is the nature of the insurance,» says Oishi Satoru, the secretary for a plaintiffs' group. Yet to date, despite the damage done to the public, neither MOF nor the courts have punished a single bank or insurance official.

A system that favors gangster-ridden loan sharks as the established means of consumer credit, allows banks and insurance companies to practice financial scams with impunity, rewards savers with near-zero interest rates, and punishes debtors with interest rates of 40 percent and higher – it doesn't take an expert economist to predict what this will do to public savings over time.

Nor is the damage limited to individuals. When economists measure «public savings,» they tend to concentrate on how much individual savers put in the banks, and overlook endowed trusts and charitable foundations. Japan s Ministry of Finance, intent on ensuring that labor and money go straight to manufacturing corporations, has discouraged charitable giving and volunteerism. Almost no tax deductions are allowed on charitable gifts, and severe hurdles have made establishing nonprofit foundations extremely difficult.

Yet trusts and foundations represent national wealth in a very real sense. In the United States, by 1998 there were more than 1.5 million nonprofit foundations with annual revenues of $621 billion, accounting for more than 6 percent of the GDP. Nonprofit organizations are so important that they make up their own sector of the economy, known as the «independent sector,» which employs 10.2 million workers. Assets from these foundations are the fuel used to fire start-up companies and boost the capitalization of the stock market. The proceeds fund schools, hospitals, libraries, and myriad other institutions. The IRS grants about $12 billion in tax exemptions to foundations annually, and an additional $18 billion to individuals as charitable contributions-a total of $30 billion. That $30 billion makes up part of America's overall savings, even if it does not belong to individuals or companies.

In Japan, charitable giving is negligible. It stems from the lack of a philanthropic tradition, an undeveloped legal structure to regulate the work of nonprofit organizations, and tax disincentives. Only in 1998 did the government pass a law making civic groups eligible for nonprofit status, but the law provided no tax benefits either to the organizations themselves or to the people giving to them. For the foreseeable future, the lion's share of nonprofit endowment will continue to lie in tokushu hojin and koeki hojin established as amakudari nests for retired bureaucrats and feeding off government money. They are parasites on the national wealth, not contributors to it.

Canny fund managers in the United States have multiplied their funds' assets at fantastic rates. Yale University's assets rose from $3.9 billion in 1996 to $7.2 billion in 1998, while Harvard's rose from $9.1 to $13.3 billion during the same period, the two universities enjoying three-year returns on investments of 84.6 percent and 94.9 percent, respectively. Although these years were a bumper season for the stock market, and endowments do far less well in slow periods, foundation endowments grew tremendously during the 1990s. Meanwhile, Japan's foundations, their money invested in bank accounts earning no interest and in stocks making no yields, withered on the vine. By 1997, the assets of the twenty largest U.S. foundations came to twenty-two times the assets of Japan's twenty largest.

The difference between the United States and Japan is further underscored by the existence of something like the American Cancer Society, which in 1998 had more than two million volunteers, dispensed more than $100 million for research, and had assets of $1.1 billion. There is no private organization in Japan that functions on a scale remotely like this. By the beginning of the twenty-first century, total assets of American nonprofit groups could be estimated as approaching $2 trillion – a hoard of savings that Japan couldn't begin to match. And the difference lies not only in dollars in the bank but in a legal infrastructure and the expertise of millions of people in managing such funds.

It's difficult to compare university-endowment growths, since Japanese university endowments are one of the nation's great secrets – a textbook case of how hard it is to find accurate information in Japan. In the summer of 2000, an extensive search of Web and newspaper databases and more than a dozen e-mails to Web masters and college offices at Tokyo, Keio, Waseda, and Doshisha universities drew a complete blank. However, even without hard figures to go by, any visitor to a Japanese college can see visible evidence – in substandard libraries and run-down facilities – of the beggaring of the universities as a result of low capital returns. In 1995, in the wake of the subway poisonings by the fanatical religious group Aum Shinrikyo, commentators marveled that Aum was able to recruit elite scientists from leading universities, and its facilities were much better. Trying to explain a piece of Aum machinery before a television audience, a professor would say, «Well, the one at my university is ten years old, and not nearly as sophisticated as Aum's, but you can get the idea.»

One of the myths of the financial world is that the United States is a model of laissez-faire capitalism and Japan is highly, even overly regulated. Nothing could be further from the truth. In the United States, regulations elaborated and enforced by legions of busy lawyers hem in transactions on every side, with rules punishing insider trading and mandating disclosure, liability laws protecting investors, and myriad other devices functioning to make the market more transparent and efficient (and at the same time, of course, enriching the lawyers). It is Japan that is unregulated. Where the Federal Reserve has between 7,000 and 8,000 banking inspectors, the Ministry of Finance had only 400 to 600, and, according to Richard Koo, a senior economist at the Nomura Research Institute, «Of that, only 200 are considered any good.» Lack of financial supervision became such a scandal that the Diet removed this function from the Ministry of Finance in the late 1990s, creating a new Financial Supervisory Agency (to become the Financial Services Agency in January 2001). The new agency, however, has only 310 inspectors, most of whom hail from its inept predecessors. The U.S. Securities and Exchange Commission employs 3,000 inspectors, versus about 200 in Tokyo and Osaka, whose work is mostly perfunctory. In Japan's financial world, gangster payoffs, insider trading, juggled books, defrauding of old people by insurance companies and banks, under-the-table payments to bureaucrats, usurious interest, special accounts for officials and politicians at securities houses – anything goes. It's wild and woolly out there.

In place of regulation, the Ministry of Finance has drawn rigid boundaries around Japan's financial world in an attempt to limit its range. Rather than clean the sharks out of the lagoon, the ministry chose a smaller lagoon. Circling round and round inside their little universe, MOF officials neglected to learn the new techniques of wealth creation that are redefining finance elsewhere in the world.

MOF is dragging its feet in legalizing derivatives, and the red tape for granting stock options to employees of start-up firms is so lengthy that so far only a handful of companies have applied for permits to do so. In any case, it takes an average of thirty years to list on the Tokyo Stock Exchange, so stock options are not much of an incentive. Pension-fund management, at the leading edge of financial sophistication outside Japan, is only in its most primitive stages, and MOF is still in a position to order managers to buy nonproductive stocks and low-yield government bonds. With rules of disclosure nearly nonexistent, investors lack confidence in listed firms and, as a result, the over-the-counter market languished.

To put it simply, Japan failed to develop mature financial markets – and the expertise that goes along with them. This means that money does not make money. Another way of putting it is that Japan has very low productivity of capital. It is one of the oddest paradoxes of modern Japan that in a nation seen worldwide as a paradigm of «capitalism,» the bureaucrats in charge basically distrust money This may result from the fact that in the early postwar years Japan's bureaucrats found keiretsu banks effective (and controllable), and in time the Ministry of Finance became addicted to a system. One might say that MOF's love of the system is far greater than its interest in financial health.

Japan's low capital productivity begs another comparison with ancient Sparta. Plutarch writes that Lycurgus, the founder of Sparta, ordained that Spartans must use iron money. Given that iron was of so little value and yet so heavy, the best people could do was lay up stocks of it in their closets. After a while, they ceased to have much interest in acquiring wealth and instead devoted themselves to military glory. Plutarch points out that «being iron, it was scarcely portable, neither, if they should take the means to export it, would it pass amongst the other Greeks, who ridiculed it... For the rich had no advantage here over the poor, as their wealth and abundance had no road to come abroad by but were shut up at home doing nothing.»

Japan has stored up a huge pile of savings, but the money is iron, shut up at home doing nothing, and the nation is paying the price, with the Tokyo Stock Exchange stagnant for a full decade, a crumbling welfare system, and securities firms that lack the expertise to compete abroad. In this there is a valuable lesson in what really constitutes culture and tradition. Entrenched Asian elites are very fond of appealing to hallowed «Asian values» as a means of clinging to power. MOF's distrust of the free use and flow of money would seem to have all the sanction of Japan's tradition of control by elite officials. On the other hand, it's important to realize that for all its bureaucratic background, Japan also has a freewheeling mercantile history. Distrust of the free flow of money is actually something new, an aspect of Japanese tradition that was relatively minor until after World War II.