Commentary: Tokyo's Rigged Markets Need Revolution, Not Reform

Prime Minister Ryutaro Hashimoto was livid. At a press conference, he was queried about the new scandal at Nomura Securities Co. Nomura traders had pumped up the price of a stock so an investor with mob connections could profit. The money involved is small, less than $600,000. But what outraged Hashimoto is that Nomura, Japan's most powerful securities firm by far, had played ball with the yakuza before, when it helped a mob boss make a stock killing in 1991. "Why do such things keep happening?" Hashimoto demanded.

No doubt Hashimoto was genuinely irate, but he shouldn't be surprised. He knows why. These scams keep happening because they are part of the system--and because no one in government has made a serious effort to punish wrongdoers. "Corruption is endemic," said R. Taggart Murphy, an independent financial analyst. "These things will continue until you get a revolution." The scandal underscores the need for Hashimoto's proposed financial reforms. But if this reform fails, many foreign institutions and individual Japanese will avoid a market they suspect is rigged.

Nomura will not escape censure entirely. It faces criminal charges, and President Hideo Sakamaki will resign, along with the directors who oversaw the illegal trading. Many major Japanese and foreign institutions, including the California Public Employees' Retirement System pension fund, have suspended business with Nomura. Its shares have fallen over 11% since the scandal broke on Mar. 6.

Yet if the past is any guide, very little will change. Look at what has happened since 1991. Then, Nomura's top two execs, Chairman Setsuya Tabuchi and President Yoshihisa Tabuchi (no relation), resigned. But Nomura kept its hammerlock on the business, and the self-imposed penance proved largely ceremonial. By 1995, the Tabuchis' rehabilitation was complete, and they returned to the board.

Just as important, authorities have done little to curb the sokaiya, racketeers with yakuza links who meddle in the markets and extort payments in exchange for not disrupting shareholder meetings. They are allegedly part of the latest scandal. "Dealing with the sokaiya is a daily occurrence," says an ex-Nomura staffer.

Scams aren't unique to Japan. But at least on Wall Street, many have suffered mightily for their missteps. John H. Gutfreund, ex-chairman of Salomon Brothers Inc., and two other top execs paid $40 million to settle a lawsuit after the firm's 1991 Treasury-auction scandal. Drexel Burnham Lambert Inc. disintegrated under the pressure of a government probe. Regulators closed Daiwa Bank Ltd.'s New York branch last year and fined it $340 million for hiding $1 billion in bond-trading losses.

TAX BONUS. In contrast, Japan's Security & Exchange Surveillance Commission is thinly staffed and has nothing like the clout of Washington's Securities & Exchange Commission. And local law treats many offenses lightly. If committed in Japan, Daiwa's deception would have drawn a fine of less than $8,500. Daiwa even talked Tokyo tax authorities into letting it claim the U.S. fine as a loss. That ruling should lower its 1996 taxes by more than $100 million.

Much tougher oversight is needed as Japan approaches a redrawing of its financial markets. In 1998, the business barriers between banks and brokerages should fall, along with commissions on large-lot stock trading. So foreign firms could lure away clients who don't like Nomura's prices or trading practices.

With deregulation coming, the ruling party proposes to set up a new watchdog agency to replace the SESC. This group would be separate from the Finance Ministry, which has long put the interests of the financial sector before those of the investing public. But ex-MOF staffers are expected to run it, and it will have no added powers or expanded staff to prosecute financial crimes.

That's hardly the kind of body that can root out mob influence and ensure market transparency. Then again, that may be the point: Set up a weak commission that just pretends to police the markets. If that's the case, Hashimoto's deregulation won't create the modern capital markets Japan needs. And soon, another Prime Minister will wonder aloud why scandal is rocking the securities business.

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