The latest Tokyo stock scandal continues to cook. The revelations of funny-money business among Japan's Big Four brokerage houses and their major clients have already rocked the international markets--and Japan's image. Perhaps now Tokyo will initiate true reforms to bring its capital market--the world's second-largest--more in line with established worldwide financial practices.
The inbred nature of Japan's financial markets has long accommodated blatant cronyism and favoritism that unfairly shut out foreign brokers and companies. In effect, Japanese brokerages compensated selected clients for millions of dollars of securities losses. That backdoor guarantee belied the notion that Japan's cozy and exclusive financial markets had changed much.
The inequities of the system reached new highs--or lows--with the admission by Nomura Securities Co. and Nikko Securities Co. that they had secretly reimbursed $464 million in losses to favored clients--and even knowingly financed a gangster. Daiwa Securities Co. and Yamaichi Securities Co. have since admitted making similar reimbursements. And the tally of payoffs is rising. The presidents of Nomura and Nikko resigned in taking responsibility, but they remain vice chairmen, making people wonder whether the resignations will make any real difference.
Now the powerful Japanese Finance Ministry is considering punishing the firms, according to Nihon Keizai Shimbun, Japan's leading financial daily. The newspaper reported that the ministry may ask the four big brokerages to voluntarily refrain from soliciting business from corporate clients for a time. That would be a slap on the wrist, perhaps a hurtful one but hardly the harbinger of serious reform.
The latest scandal highlights Tokyo's agonizing but ineffective attempts at financial reform in the three years since the Recruit Co. insider-trading and influence-peddling scandal prompted the ouster of Noboru Takeshita as prime minister. Efforts have concentrated on eliminating the insider dealing that helped prick the Tokyo stock market bubble of the late 1980s. But the reforms have been ambiguous. For example, brokerages may be forbidden to make promises to cover losses to clients, but compensation is not illegal if an actual promise is not made beforehand.
One way to let some cleansing sunlight into Japanese financial markets would be to provide greater access for foreign institutions. The long-term credibility of its financial markets is at stake--both with Japan's own, now-irate small investors and international investors, too.