Saturday and Sunday are normally quiet days at Japan's hulking, gray stone Ministry of Finance. But not the weekend of June 22 and 23.

Rocked by leaked news reports that their firms had financed a major underworld figure and secretly covered $464 million in losses by favored clients, top executives from Nomura Securities Co. and Nikko Securities Co. shuttled back and forth to the ministry to try to placate furious bureaucrats. But as Sunday dawned, it became clear that apologies weren't nearly enough.

The shocker came the next morning. Hastily calling a 9 a.m. board meeting, Nomura President Yoshihisa Tabuchi, 59, said he was quitting as head of the world's largest securities house to "accept ultimate responsibility." Then Nikko President Takura Iwasaki, 62, followed suit across town. Says a Nikko director: "It was the price we had to pay to restore our credibility."

CRONYISM. With the 1988 Recruit Co. insider-trading affair that toppled the government of Prime Minister Noboru Takeshita barely put to rest, the latest scandal offers fresh evidence that the bureaucrats still have a long way to go to clean up the inbred Japanese markets. Involving widespread cronyism and under-the-table favors, the scandal also demonstrates that many of the barriers discouraging U. S. and other foreign banks, brokers, and manufacturers from doing business in Japan still stand in the face of international pressure.

But if only for domestic reasons, the bureaucrats feel they must get tough. They are attempting to end the stock manipulation and real estate speculation that helped create a financial "bubble" in Japanese markets in the late 1980s. Finance Minister Ryutaro Hashimoto and Bank of Japan Governor Yasushi Mieno, two of the government's most powerful figures, are helping orchestrate a surprisingly tough, rolling crackdown against shady operators and a handful of established financial institutions that fuel them with money. Nomura and Nikko were merely the latest in a series of targets.

Japan's top regulators believe that failing to wipe out 1980s-style speculative excesses would undermine the very soul of Japan Inc.: the $3 trillion stock market that has provided a constant stream of cheap capital to a host of Japanese giants for more than 40 years. Ultimately, they worry that too much speculation and funny-money games could undermine Japan's competitiveness in manufacturing.

To accomplish their ends, the regulators are prepared to inflict pain. Mieno's constant attacks on stock and property speculators, combined with his relentless high-interest-rate stand, have helped push the Nikkei average down 40% since the begining of 1990. With banks offering about 8% on risk-free certificates of deposit, Japanese investors have little incentive to plunge into stocks. If the scandals escalate, says Christopher M. Mitchinson, a managing director at Salomon Brothers International Ltd., the Nikkei could even slip another 2,000 points during the coming months. "It could be a long, hot summer," he says.

Even if the market holds fast, Japan's bureaucrats are still willing to see some of the nation's top banks and brokers suffer a global plunge in credibility as a result of their efforts. But whatever the outcome, bureaucrats and financial sources contend, the market and its big players will end up on a firmer footing over the long haul if the excesses are finally kept under control. "They are moving in the right direction," says Gilbert de Botton, a London-based money manager and longtime Japan-watcher. "This is going to reinforce confidence."

A LONG JOB. Restoring confidence is key to the Finance Ministry's long-standing public objective of gradually deregulating Japan's financial markets and opening them to greater participation by Western financial institutions. While Japan's bureaucrats are eager to make the financial markets more efficient, they still want to remain firmly in control. So the bureaucrats are likely to proceed with a careful market liberalization. Failure to do so could invite foreign retaliation against Japanese banks, brokers, and insurers, which have invested billions in expansion overseas.

The housecleaning at home may drag on for years, however. Analysts and traders speculate that Japan's huge trust banks and life insurers, which manage hundreds of billions of dollars' worth of stocks and bonds, may be the next targets. These sources say the bureaucrats want to determine whether any of the institutions acted illegally to boost returns for favored customers.

To be sure, some skeptics maintain that the crackdown is little more than a shadow play, another Japanese attempt to impress outsiders without making real changes. Both Tabuchi and Iwasaki, for instance, will remain with their firms as vice-chairmen and probably will continue to exert influence behind the scenes. "This will be history in a couple of months," smirks one Western banker in Tokyo. And some critics contend that meaningful reforms never will be implemented as long as the hidebound keiretsu system links big banks, brokers, and manufacturers in tightly knit corporate families.

Yet as the number of embarrassing disclosures mounts, more and more skeptics are coming to believe that bureaucrats are serious about wringing excesses out of the financial system, even if the reforms fall short of creating a full-fledged Western-style market.

The regulators' crackdown does appear to reflect a change in government and public attitudes. For decades, the Finance Ministry tolerated stock manipulation, greenmail, covert reimbursement of trading losses, and other shady deals. It was one thing during the easy-money 1980s, when the big brokers were widely admired as the symbols of Japan's new wealth. But the blatant speculation of the late 1980s, with the Nikkei stock average soaring 500% and real estate prices exploding, proved too much even for the Japanese.

As high interest rates have pummeled the stock market, hard-hit small investors have started to rail against their brokers' favors to big clients. That has made it politically easier for Japan's top regulators to discipline errant banks and brokers. "The commitment by the Finance Ministry to clean up the market is real," says Nikko Executive Vice-President Yasuo Kanzaki. "It will continue."

So far, officials can claim some noteworthy successes. Their campaign traces its roots back to the Recruit affair, in which the employment agency's former chairman, Hiromasa Ezoe, sought to curry favor with leading politicians by giving them inside information on a new issue of an affiliate's shares. Since then, the Finance Ministry has enacted an insider-trading law. And investigations over the past year have forced several top figures out of the executive suite.

Sumitomo Bank Chairman Ichiro Isoda quit last October after admitting that one of his branch managers had illegally diverted deposits to Mitsuhiro Kotani, a politically influential speculator now on trial for stock manipulation. Isoda's resignation, and that of Fuji Bank Chairman Taizo Hashida, was also tied to the collapse of Itoman Co., a textile company that borrowed $6.5 billion for a disastrous real estate acquisition binge. The bureaucrats have also gone after brokers other than Nomura and Nikko. Yamichi Securities Co. was fined in 1990 for hiding payments to clients from tax authorities. Daiwa Securities Co. admitted paying clients $90 million to compensate them for losses last year.

Even though Hashimoto and Bank of Japan's Mieno continue to excoriate speculators, experts say the bureaucrats are not out to crush the securities houses completely. Analysts estimate that payments to cover clients' losses may have cost brokers as much as $9 billion since the stock market peaked. In forcing a halt to such practices, "the Finance Ministry did the brokers a favor," says Deutsche Bank's Tokyo-based economist, Kenneth S. Courtis.

They need one badly. Even without their payoff woes, the brokers are having a hard time. With the Nikkei languishing, Tokyo trading volume has dropped to a third of its precrash pace. The slowdown pushed the four biggest brokers' earnings down 70% in the fiscal year ended Mar. 31, the worst drop in 15 years. In the past year, the industry has pared its payroll by 7%, or 11,840 employees. What's worse, as the market has fallen, the brokers' most lucrative corporate accounts have evaporated. In the boom years, insurers and trust banks kept as much as $250 billion in spare funds with stockbrokers. Confident the market would keep rising, the brokers improperly guaranteed customers fat profits in advance in return for the right to invest the funds as they chose.

PRESSURE. In Tokyo's roaring bull market, covering the occasional trading loss was usually a snap. But the game began to wind down in 1989. First, the Finance Ministry tried to limit profit guarantees through a loosely worded law--with little effect. Then, the ministry pressured brokers to discontinue the accounts altogether. By April, 1990, with the Nikkei already down 23% from its peak, brokers had sold off all but $29 billion worth of the funds' assets. But this spring, with the market down another 15% and corporations preparing to close their books for the fiscal year, customers started pressing brokers to make good on their profit guarantees. Many did, figuring that the bureaucrats would not object.

But the brokers classified the payments as trading losses or business expenses in a bid to reduce their taxes. That angered the ministry's taxation agency, which saw the move as an attempt to evade taxes. The agency started drumming up public support by leaking stories to the press that characterized the brokers as tax cheats. Then came an unattributed report in one of Japan's major dailies that Nikko and Nomura channeled funds to Susumu Ishii, the retired kingpin of a major yakuza crime group, by purchasing golf memberships worth $29 million. That sparked the fire storm that forced the presidents of Nomura and Nikko from their jobs.

Despite the surprise resignations, even the limited change that Japan's bureaucrats have in mind will come slowly to Kabuto-cho, Tokyo's Wall Street. Nomura's new president, Hideo Sakamaki, has been Tabuchi's right-hand man for the past several years, serving as the broker's liaison with the Finance Ministry and playing a key role in realizing Tabuchi's dream of becoming a global investment banker. Like Sakamaki, Nikko's new president, Kichiro Takao, is a low-key veteran administrator with an appetite for international business.

DEAD SET. The crackdown won't immediately change the Tokyo market's unique style, either. Even in the face of increased regulatory pressure, brokers still appear to be manipulating--or "ramping"--stocks. On May 16, Nomura underwrote a $100 million bond issue for Tokai Kogyo, a construction company. Attached to the bonds were warrants convertible into Tokai stock. Over the next month, although the Nikkei fell 3.8%, a wave of buying pushed Tokai Kogyo shares up 41%. That meant that anyone buying the bonds and warrants at the initial offer stood to reap an immense windfall. Nomura accounted for about a third of the Tokai purchases. But officials deny ramping the stock.

It will take time to root out such entrenched practices. But the Finance Ministry is dead set on its goal of winning more global credibility for Japan's markets. That will require putting a lid on payoffs, ramping, insider trading, and other offenses. "The real problem is that unfair conditions existed in the securities market," Hashimoto said shortly after the latest scandal broke. "Japan should tackle the problem for its own good." If Hashimoto is true to his word, the cleanup at Nomura and Nikko will hardly be the regulators' last hurrah.

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