A Big Stink Speeds Up Tokyo's Big Bang

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 June 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 behind bars, and neither has entered a plea or responded to requests for comment.

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.

MORE PAIN. 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.

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. 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.

BAN EASED. That much was clear on June 13, when the Ministry of Finance released a set of reforms moving up the timetable for the introduction of new products that are common in the West but have been banned at home. Although Japan has allowed 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.

Despite screams from an overpopulated industry, commissions on stock trades are expected to be deregulated by 1999. 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.

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 have continued to hit investors with high management fees and scant disclosure. 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 has also brought out a fund investing in dollar-denominated junk bonds. Merrill Lynch and Morgan Stanley Dean Witter are also jumping into the fray. Competition is coming. The locals have only themselves--and regulators--to blame.

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