Nothing is ever quite what it seems in Japan, as the advertising industry discovered this year.

The country’s business dealings are marked by layers of politeness, an emphasis on trust and the integrity of long-term relationships and, in the advertising industry an almost complete absence of detailed contracts or written agreements. That’s what made recent revelations of incompetence and fraud among TV stations that were systematically overbooking and culling spots from television campaigns so shocking. The fallout has led to cries for reform and fundamental change in the structure and practices of Japan’s giant advertising industry. The tapestry of lies began to unravel last year when Futata Menswear, a retail clothing chain in Fukuoka City began to wonder whether TV spots booked on their local TV station, Fukuoka Broadcasting System (FBS), an affiliate of the NTV network, were in fact transmitted according to plan. Company employees couldn’t recall seeing them often enough and the sales results expected never materialized. True, transmission certificates showed the spots had aired, and they had certainly been invoiced and paid for. Futata’s agency Dentsu Kyushu Inc., could shed no light, so they decided to monitor transmissions themselves and found some spots invariably were invoiced but not broadcast. This June, after an internal investigation, the station apologized, saying that 102 out of Futata’s 536 spots had not been transmitted over a one-year period. Fault was found with an unnamed retired executive, and profound apologies with deeply contrite bows, Japanese-style, ensued. The station undertook to refund the money. And there the matter might normally have ended.

But by this summer, Japan had grown weary of the steady flow of apologies from the nation’s business leaders, bureaucrats and politicians. Admissions of minor fault had all too often preceded revelations of gross negligence, corruption and criminality in banks, securities companies and elite ministries with a depressing regularity. Links between organized crime and the country’s four leading brokerages, plus a major bank, the Dai Ichi Kangyo, had been flushed into the open. Local government officials had been found padding expenses and living high at the public’s expense. An elite bureaucrat in the Ministry of Health had admitted taking bribes. Explosions and fires at nuclear-power plants exposed a history of negligence and cover-up in the nation’s Power Reactor and Nuclear Fuel Development Corp. A major healthcare firm had been shuttered for knowingly distributing AIDS-contaminated blood to hemophiliacs. Traditional assumptions that officialdom was wise, virtuous and honest were giving way to demands for transparency, accountability and public scrutiny.

Against that backdrop, local reporters at Japan’s two leading national dailies, the Yomiuri Shimbun and the Asahi Shimbun, probed the media-buying controversy further. Before long, stories ran in these and other papers quoting unnamed FBS sources admitting that the station had been dropping spots from schedules regularly since 1975. The station lacked the internal controls to manage its airtime inventory. As a result, selling continued even when all spots had been sold. It remains unclear just when FBS management realized they had a problem; however, in May 1996, the issue was discussed internally but left unresolved. "We felt we could not refuse bookings without upsetting advertisers and, even though it was wrong, we did not broadcast some spots," said one FBS executive quoted in the Asahi. In subsequent admissions, the number of missing spots climbed until an investigatory committee found total of 2,433 spots, worth $3.8 million had not been aired between April 1989 and August this year. Incomplete or missing records prevented any assessment of what had happened before 1989. Among the 551 advertisers affected were Coca-Cola, Kodak, American Family Life, Sony, Fuji Film, Hitachi and Asahi Beer. Details of which agencies were affected have not been released. However the extent of the fraud makes it inevitable that Dentsu, Hakuhodo, and most major agencies, including McCann Erickson and J.Walter Thompson would have been affected.

The missed spots accounted for a mere 0.33 percent of the station’s total. While human error might have been forgiven, deliberate fraud and a botched cover-up were not. "Such fraud is not surprising when a TV station tries to get all the commercials it can into a limited time frame," railed the Yomiuri Shimbun. "The management of commercial TV stations ignore the ethics of business," criticized the Shukan Post magazine.

Though asked by the police, agencies declined to file complaints or initiate legal proceedings, according to one senior agency source. "In Japan, there’s shame for all parties involved in any dealings with the police. It stigmatizes guilty and innocent alike. Legal proceedings would also have involved reference to the names of advertisers, which would have been unforgivable," said the source. Agencies were not criticized for this, nor for failing to spot the irregularities themselves. They had followed the rules, abiding by the mores of their own industry and society. Moreover, " agencies tend still to be regarded as sales men for the media rather than marketing partners of their clients," commented Tsuneo Honda, marketing science director of Strategic Planners International, a Tokyo consultancy.

Further investigations revealed that documents commonly taken as proof of transmission throughout the industry were in fact generated before spots were broadcast. Transmission data was only available systematically for the three major TV markets of Tokyo, Osaka and Nagoya. Elsewhere, data was only available where spot checks had been made. Record keeping by TV stations was found to be of variable quality around the country.

"The whole system has been an accident waiting to happen. For decades the industry has operated without the basic safeguards necessary to check the correct execution of TV plans," says Honda.

With alarm bells ringing, the Japan Advertising Agencies Association (JAAA) and the National Association of Commercial Broadcasters (NACB) announced they would examine the conduct of other stations. This move prompted another broadcaster, Hokuriku Hoso (MRO), a member of the TBS network, to announce in July that it had detected discrepancies on checking its own records. It, too, had oversold airtime capacity and initially admitted to cutting 2,409 spots of 202 advertisers from June 1996 to June 1997, a figure that was later increased to 4,146 (worth $4.2 million) for 1992-97. But the similarities with FBS ended there. Advertisers in Fukuoka suffered roughly in proportion to their total volume of spot advertising, "but with MRO, some suffered more than others. There was deliberate intent to cut some advertisers rather than others," says Kimio Arai, president and CEO of third-ranked Tokyu Agency. In fact, at least one agency had spotted MRO discrepancies a year earlier. The matter had been settled privately and MRO paid an agreed penalty. Thereafter it clipped spots from campaigns to compensate for the money it had been forced to pay out. "They should have eliminated the problem, instead they just carried on with a policy of fraud and deception," says Arai, an outspoken reformer.

Damage-control operations moved into full swing. Trade associations agreed a format for compensation—the price paid for unaired spots plus a penalty equivalent to the full rate-card costs (sources say in some companies advertising managers refused to accept compensation, preferring not to draw attention to the lack of oversight). The NACB undertook to set standards for record keeping and require stations to retain full records for 10 years. Seminars would be held covering ethics and business procedures. FBS and MRO were suspended from both their networks and the NACB. Management at both stations will be stepping down. Regulators at the Ministry of Posts and Telecommunications reprimanded both stations and issued written warnings, widely interpreted both as a sign that licenses would be revoked if there was further malpractice and that the industry would be more severely regulated if it couldn’t clean up its act. One certain outcome is that monitoring will improve. The 52 JAAA members who account for the bulk of television buying in Japan are to jointly sponsor a nationwide monitoring service to check compliance by TV stations. This October, Dentsu affiliate Video Research Co., partly owned by the TV networks, will extend its own monitoring services from the three major markets to cover transmissions of all 114 local affiliates of the major networks round-the-clock, and provide computerized records for inspection. A further 12 independent stations will be monitored on request. Separately, Tokyu and a number of other agencies are setting up their own independent monitoring systems.

This October, a joint JAAA/NACB committee will start auditing the records of all stations to check for irregularities, a procedure that could take up to a year to complete. The truth is out there.

Case closed? Not quite. Many feel the overbooking scandal was but a symptom of a much more fundamental illness. "There’s a malaise surrounding Japan’s advertising industry," says Arai. "I feel the lack of transparency in dealings with the media in Japan helped create a climate where such malpractice could occur and continue undetected for so long. These events point up the need for major reform," Arai adds. Tokyu has publicly adopted a stance of complete transparency, a topic many Japanese agencies decline to discuss openly.

Mark Gault, managing director of McCann-Erickson in Japan, agrees: "A better monitoring system is necessary but not sufficient to render the level of accountability clients increasingly demand. We need a root-to-branch transparent reform in the media buying process."

At issue are traditional practices: for many Japanese agencies to conceal the prices actually paid for space and time; for media to operate discriminatory pricing policies that benefit favored agencies or advertisers. "Such unresolved issues hang over the client-agency-media relationships like a threatening cloud," says Tim Solomon, president of Ogilvy & Mather Japan.

Arai traces the problems to a taboo subject at the core of Japan’s $48 billion advertising industry. "Handling competitive clients, in the manner that Dentsu does, limits free and fair competition not only in the advertising industry, but more widely in business generally. Such practices are a restraint on the competition that builds a healthy industry. We must fight to attain global standards in Japan," he says. As an outside observer, Toshio Yamaki, professor of advertising at Tokyo Keizai University agrees: "Japan’s ad industry does not reach global standards. It needs a major earthquake to change it."

To talk of ‘Global standards’ bespeaks heresy for Japan’s TV networks who cling rigidly to procedures that reach back to the early days of television. There is more amiss than the nature of transmission certificates and basic business procedures. The networks’ attitude to peoplemeter-based TV ratings, a measure widely used across Asia, the USA, and Europe, is another example of obdurate resistance to change. Believing, rightly, that data about individual viewership allows TV advertisers to be discriminating in their buying, the networks refuse to allow peoplemeter data to be used in buying negotiations. Instead the only standard they accept is a measurement of household viewership rating that indicates little more than whether anyone at home has a TV set switched on.

But back to monitoring. Just when it seemed safe to go back into the water, this September, Hyogo FM, a radio station in Kobe City, said it was disciplining staff following the discovery that 104 commercials had not been aired on behalf of a local pharmacy over a 12-month period.