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A Big Stink Speeds Up Tokyo's Big Bang (Int'l Edition)

International -- Finance: SCANDALS


Dirty deals let Hashimoto hurry financial deregulation

Even for the scandal-jaded Japanese, this was too much. Since March, tales of illicit payoffs to a gangster by Nomura Securities Co. and Dai-Ichi Kangyo Bank Ltd. have mesmerized the nation. Some 14 executives from both companies have been arrested, and on Jun. 19, former Nomura President Hideo Sakamaki was indicted on criminal charges for allegedly paying hush money to reputed racketeer Ryuichi Koike, who has been charged with illegally receiving profits from the broker. Both men are being held behind bars, and neither has entered a plea or responded to requests for comment.

POLITICAL COVER The crackdown is a rarity in a land where a deep bow and ceremonial resignation usually suffice for corporate wrongdoers. But with Tokyo prosecutors intent on widening their probe of mob ties in the financial industry, the summer will probably bring even more unsavory headlines. That would be bad news for Japanese brokers and bankers, already viewed by ordinary citizens as an overpaid, ethically challenged bunch. But the mess is giving Prime Minister Ryutaro Hashimoto the political cover he needs to speed up his plan to bring Tokyo's laggard financial markets up to global standards by 2001.

The program will mean pain and more foreign competition for local players already beset by an unprecedented banking crisis and stagnant stock market. Such big international competitors as Merrill Lynch, Fidelity Investments, Citibank, and Britain's Mercury Asset Management Group, are already getting ready to grab new business from Hashimoto's plan, dubbed "Big Bang" after former British Prime Minister Margaret Thatcher's program deregulating the City of London.

Hashimoto has little choice but to force competition and reforms on Japan's inefficient financial services companies. To finance the outlays needed to care for a rapidly aging population, the country needs to obtain better returns from its nearly $10 trillion in household savings. What's more, Japan's status as Asia's financial center has been undercut as local institutional investors have bypassed Tokyo for London, where commissions run 40% less than at home.

NO SLACK. Japan's markets have also been hurt by a corporate and regulatory culture that has long tolerated white collar corruption and the pervasive presence of sokaiya, gangsters who specialize in extorting money via shady investment deals or in exchange for not disrupting annual meetings. Only six years ago, Nomura was the center of a separate scandal involving underworld figures. Yet it suffered few sanctions. "Ministry of Finance bureaucrats have always shut their eyes," says Raisuke Miyawaki, a former organized crime investigator with Japan's National Police Agency.

This time around, Hashimoto shows no sign of wanting to cut anyone any slack. One Ministry of Finance official insists that Hashimoto is willing to "apply the law vigorously to whatever crimes" surface during the current probe. Perhaps that's because Hashimoto was forced to resign as Finance Minister following the last Nomura scandal. Since then, he has become more attuned to public sentiment.

That much was clear on Jun. 13, when the Ministry of Finance released a set of reforms that moved up the timetable for the introduction of a host of new products that are common in the West but have been banned at home. Although Japan has permitted trading of stock-index futures for years, in July, the mof will for the first time permit trading of options on 33 big companies including Sony Corp. and Toyota Motor Corp. The mof also plans to ease restrictions on bank accounts overseas, and liberalize rules limiting foreign exchange trading to a handful of lenders.

Authorities also plan to take away the easy money brokers have been making. Despite screams from an overpopulated industry, commissions on stock trades are expected to be deregulated by 1999. That should depress commissions by a third and drive marginal brokers into the ground. Life won't be much easier for banks. Japan will abolish its long separation of commercial, trust, and long-term credit banks, which lend to corporate clients. And the mof will permit commercial and long-term lenders to vie with trust banks and life insurers for a piece of Japan's $2 trillion pension fund market. Already, European and U.S. fund managers have seen their Japanese pension business double, to $63 billion, in the fiscal year ended Mar. 31. "Things are looking pretty good," says Clifford J. Shaw, president of Mercury Asset Management Japan Ltd.

FUNDS WINDFALL. International money managers are hungrily eyeing a potentially huge windfall in mutual funds. With the Tokyo stock market treading water since 1989 despite Wall Street's record-breaking bull run, Japanese investors have socked away only $400 billion in mutual funds. Yet local brokers who dominate the fund business have continued to hit investors with high management fees and commissions, and offer scant disclosure. It's no wonder that the funds "have acquired a terrible image," says Peter E. Fuchs, founder of Weston Partners, a Tokyo-based financial consulting firm.

That might change as more players get into the game. Fidelity has already attracted $400 million for a European small-cap stock fund launched in 1995, and recently came out with a high yield fund investing in dollar-denominated junk bonds. Merrill Lynch and Morgan Stanley Dean Witter are also jumping into the fray. Competition is coming, and the locals have only themselves--and their regulators--to blame.By Brian Bremner in TokyoReturn to top

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