Japan Ponders Securities Watchdog

But Western-style enforcement may not mesh with Japanese capitalism

A DRAMATIC probe into Japan's recent financial scandals began yesterday with public testimony from two fallen kingpins of the tainted securities industry.The testimony, however, was just the opening bell for a debate over whether Japan should create a Western-style enforcement agency, a reform that would move this country farther from its unique style of capitalism. More witnesses from Japan's closed financial world will testify before parliament over the next week. The hearings are an unusual spectacle for Japan, but are judged necessary due to the shame and resentment many Japanese have felt over the level of corruption uncovered. In coming weeks, the ruling Liberal Democratic Party is expected to decide whether to bring an alien institution to Japan: an independent policing agency to watchdog the huge, successful, but now dishonored securities industry. The first witnesses in the parliamentary hearings were Setsuya Tabuchi, former chairman of Nomura Securities Co., and Takuya Iwasaki, former president of Nikko Securities Co. Both men resigned in disgrace last July after their firms, along with other securities firms, were accused of compensating wealthy clients for stock market losses. Both firms also are accused of manipulating stock prices for a gangster. During Thursday's hearings, the two witnesses were hidden from public view while they testified; cameras were barred. Advocates of a securities watchdog agency cite the United States Securities and Exchange Commission as a model. An SEC was introduced into Japan by US officials during the American occupation after World War II, but was dismantled one month after the occupation ended. "In Japan, people do not like open conflict," says Chuo University law professor Takashi Kanai. "A violation is treated with quiet advice, not a lawsuit." A series of securities and banking scandals this summer has raised a basic dilemma: Can Japan keep a system of secretive ties between executives, bureaucrats, and politicians - a system increasingly cited in the West as a reason to put up barriers to Japanese goods and money? "You still have here in Japan a regulatory practice, a management philosophy, that sees the markets as an instrument of government purpose," says Kenneth Courtis, a Tokyo-based economist for Deutsche Bank AG. "A world breeze of liberalism is sweeping from Vladivostok to Vancouver," he adds. "But it stops in Japan." The first day of testimony revealed a common practice in Japan: Government bureaucrats use close ties with business leaders to guide business to success abroad, rather than regulating business wrongdoing. In his testimony, Mr. Tabuchi, who remains an adviser to Nomura, revealed lax attitudes among the managers of the world's largest securities firm: "We now have to ... stress the importance of complying with government notifications and with ethics among our employees."

Mistakes admitted Many of the industry's leaders have admitted mistakes and are calling for more openness in how the Finance Ministry both guides and cajoles the securities market. "We cannot but accept criticism that our country's securities market does not have the fairness and transparency to meet international standards," the Japan Securities Business Association stated in an ethics policy issued after the scandal broke. Still, Association chairman Shogo Watanabe opposes an SEC-type agency for Japan, claiming that it would not fit with Japan's legal or cultural customs. Also, Finance Minister Ryutaro Hashimoto opposes diluting his ministry's power by setting up an independent body. Instead, he wants to beef up present securities law. The popular Mr. Hashimoto, a leading candidate to become prime minister, is under heavy pressure to resign, especially after acknowledging that his ministry knew as far back as 1983 that the securities houses were compensating preferred clients. That practice, although not illegal, was not offered to Japan's 10 million individual investors, who were unprotected during the stock market's 45 percent drop over the past 18 months or after the 1987 crash. Little outcry is heard, however, from small Japanese investors or consumers. International criticism of the scandals has instead been the chief concern for big Japanese manufacturers. These companies fear a rising protectionist sentiment in the US and Europe that contends Japan unfairly uses anticompetitive and pro-Japanese tactics that harm other nation's businesses. As Japanese companies in the US have integrated into the American legal system, they have been forced to take a hard look at their system at home. "Japanese business has been confronted by US regulation," says Mr. Kanai, "and it has opened their eyes." A leading advocate for an SEC-type body is Eiji Suzuki, chairman of the Japan Federation of Employers' Associations and head of a government advisory council on reform. Both bodies under his leadership are expected to recommend some form of an SEC to the prime minister in September. Critics say, however, that such a body stands little chance of being truly independent in a country dominated for 36 years by the conservative Liberal Democratic Party. They point to Japan's Fair Trade Commission which, while modeled on its US counterpart, is regarded as toothless. "The Ministry of Finance is fighting very hard to prevent an SEC in Japan," says Mr. Courtis. "Rather than change the system, it wants us to hold our nose and look the other way." Also, with an economy that has enjoyed the longest period of growth in its modern history, many Japanese leaders ask why they should change the system, regardless of the corruption.

Christmas in July The securities industry has actually benefited from the uncovering of its compensation to big clients, says Courtis, and may save an estimated $9 to $10 billion by not having to pay those clients. "That's a big Christmas present to get in July," he says. The real losers, he says, will be individual taxpayers, who will have to make up the taxes lost when big businesses write off their huge stock market losses. The scandals and the drop in the stock market mark the end of a five-year boom in Japan's securities industry in which it raised $750 billion, equal to the entire economy of Italy.

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