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Japan's inside-trading `tradition' under attack

By Tetsuo JimboSpecial to The Christian Science Monitor / September 13, 1988



Tokyo

Most Japanese who invest in stocks do not hesitate to admit they have engaged in insider trading. Such trading has not been tightly controlled by Japanese government regulators and prosecutors, as it is in the United States.

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Just last week in the US, for example, Drexel Burnham Lambert Group Inc. and the head of its high-yield bond department were charged with misusing inside information.

Insider trading without guilt

But in Japan, where the word ``fairness'' only recently appeared in the stock market's rule book, insider trading has been widely practiced with little or no guilt.

Naoko Kamimura is one of many who were led to the stock market through insider trading. The 24-year-old airline stewardess never dreamed of making money in stocks until recently, when a salesman from a local brokerage called her. He recommended an Osaka-based machinery company stock, she says, because he had inside information guaranteeing the share price would rise.

``I did not understand the meaning of the information, but it sounded reasonable,'' says Ms. Kamimura. So she took money that she had sitting in a low-interest savings account and bought 1,000 shares of the company for 68,000 yen ($451). To her delight, the share price soared by nearly 40 percent in less than a month.

Like Kamimura, many investors in Japan say they would have no idea of what to buy if they had no inside information to make a decision. And many brokers say that, for competitive reasons, they cannot make recommendations to customers without inside information.

But foreign investors, whose presence in Japan is rapidly increasing, complain that the market is unfair to outsiders who can't play the game according to the peculiar Japanese rules.

Scandals lead to crackdown

To accommodate the huge Japanese stock market to Western standards of fair play, Japanese authorities are starting a crackdown on inside trading.

``Five years ago,'' says Michio Katsumata, a spokesman for Nomura Securities, ``it was unthinkable that the Finance Ministry would change its securities law only to prevent the well-accepted practice of insider trading. But today, we hear the name of [the] prime minister's secretary as part of insider trading story. Definitely something is changing here.''

Analysts, economists, and some investors say the revelation of a series of stock-related scandals in recent months and the hasty implementation of more-stringent legislation reflect a new direction.

Still, defenders of the current system, especially veteran investors and securities company officials, argue that traditions in the Japanese stock market are deeply rooted. Simply tightening rules and revealing violations, they say, won't bring a genuine change.

Concern about insider trading hardly existed in Japan until last September, when Osaka-based Hanshin Sogo Bank sold off a large holding of Tateho Chemical Company shares, shortly before the latter announced a huge loss in bond-futures trading.

Securities regulators in Osaka later disclosed that Tateho had notified the bank, which was its creditor, about the loss prior to the public announcement. Despite a public outcry and news-media criticism, neither party faced criminal charges, because the action did not violate existing securities legislation.

So in February a revised securities law was introduced in the Diet, Japan's parliament. On a visit to Tokyo earlier this year, David Ruder, chairman of the US Securities and Exchange Commission, said that the new Japanese law ``covers 98 percent of what we cover in the United States.''

The new law was intended to satisfy public demands for tougher control on unfair trading and to show foreign governments, especially the US, that the Finance Ministry is determined to lift its ethical standards.

In June, the country was shaken by a major scandal involving aides to top politicians - including associates of Prime Minister Noboru Takeshita and Finance Minister Kiichi Miyazawa. The government officials allegedly made a huge profit, ranging from 25 million yen to 100 million yen ($188,000 to $752,000), through dubious trading of unlisted stocks.