Tokyo Exchange Now Charting a Global Course
They defy New York skeptics who predicted a catastrophic crash and scandals that in other markets would undermine investor confidence. And they defy such orthodox measurements as corporate profits, dividends and price-earnings ratios.
The Tokyo Stock Exchange and Japanese brokerage houses, which now dwarf their former big brothers in New York, just keep rolling along, accumulating assets that analysts here warn will increasingly make themselves felt--unpleasantly--in New York.
A rash of recent stock scandals stirred up a hornet’s nest in Parliament for Prime Minister Noboru Takeshita. But in Kabutocho, Japan’s Wall Street, they brought only momentary shudders--and still higher prices.
On April 7, when the Nikkei Dow stock average recovered all of the 21.1% loss that it suffered in the aftermath of last October’s Black Monday crash in New York and set a new record of 26,769.22, brokers at one securities firm exploded in elation.
“At last, we’ve achieved independence from the United States!” they were shouting, according to Toshio Fukuhara, an investment banker.
Since then, Kabutocho, flush with its $3.2-trillion aggregate value of listed stocks, has begun charting its own course--brassy, confident and independent of the New York Stock Exchange with its smaller $2.44-trillion aggregate value. Prices here have continued to rise while markets in other major economic capitals still reel from the effects of last October’s panic. Although he warned that an increase in interest rates could damage the market, at least temporarily, Keiji Yasuda, general manager of the international department of the New Japan Securities Co., predicted that by year-end the Nikkei Dow average will reach 31,000, up 10% from the current level.
Even a reform that Takeshita is trying to enact that will subject individual shareholders to capital gains taxes for the first time will drive prices up, not down, Yasuda forecasts.
All corporate investors pay capital gains taxes, but only individual investors who engage in frequent trades are required to pay the tax. Takeshita’s reform package would compel everyone to pay, removing the present restraint, he predicted.
Few other restraints exist. In July, for example, the market did not skip a beat when a major scandal broke over disclosure that shares in Recruit-Cosmos, a real estate concern with $1.7 billion in sales, were made available to a select group of 76 influential leaders before quadrupling in value as they were listed for over-the-counter trading. The recipients included Takeshita and his predecessor, former Prime Minister Yasuhiro Nakasone, although both claimed that their secretaries carried out the transactions on their own.
Many Differences
The investors violated no laws, but the transactions brought a storm of protest for allowing insiders to reap tax-free windfall profits of as much as $804,615.
“All companies . . . (conduct) distributions to relatives and connections . . . when they list their stocks,” said Michio Watanabe, chairman of the ruling Liberal Democratic Party’s Policy Board whose son received and sold Recruit-Cosmos stock. It’s nothing more than an ordinary “commercial transaction,” he said.
Aside from the lack of restraints, there are other differences that a foreign investor must get used to. The boom, which has boosted stock prices to 69 times earnings per share, has helped turn foreign investors--accustomed to the New York Stock Exchange’s 15-to-1 price-earnings ratios--into bears here. Foreigners now hold only 3.6% of Tokyo’s stocks, compared to a peak of 8.6% in 1983.
Japanese, however, have become more bullish than ever.
In 1987, they took over first place from the British as the world’s largest net purchasers of stocks, according to the New York investment firm of Salomon Bros.
Led by Nomura Securities, which, by itself, is capitalized at more than all the securities firms on Wall Street, Japan’s giants, analysts here warn, are beefing themselves up with ever-increasing assets earned through Kabutocho’s machinations to flex their muscles on Wall Street.
Should Be Concerned
One foreign securities analyst, who is a longtime resident and who asked not to be identified by name, predicted that the New York Stock Exchange would, like the U.S. Treasury bond market, become a “slave” to Japanese capital. The result, he warned, will “sleezify Wall Street.”
“It’s going to change the way Americans invest. It will change the character of the U.S. stock market,” he said.
Seijiro Watanabe, a former prosecutor now in private practice representing investors in securities fraud cases, said the American securities industry should be concerned about Kabutocho’s standards. Japanese securities houses, he said, gain a tremendous competitive advantage in amassing capital through profits reaped in an environment of lax regulation, giving them power to take over financial firms and enter markets abroad. The result, he said, erodes the level playing field that tight regulation in the United States attempts to preserve for investors.
In 1986, U.S. authorities signed an agreement with Japan’s Finance Ministry to swap information on securities fraud, beginning a subtle, unofficial push for tighter controls that was reinforced by a visit here last January by David S. Ruder, chairman of the U.S. Securities and Exchange Commission.
Upward Pressure
The Tokyo stock boom is propped up by strength and is not a purely speculative bubble, as many foreign investors have asserted, sometimes with an air of petulance.
Yasuda, of New Japan Securities, rebuts the argument that high price-earnings ratios reflect poor fundamentals. Corporate earnings, he said, are generally understated because financial statements do not usually reveal earnings of subsidiaries. If adjusted to reflect consolidated results and U.S.-style depreciation schedules, Japanese price-earnings ratios would be cut to around 20 to 1, far closer to Wall Street standards, he added.
Latent real estate assets, kept on the books at far below market price, also boost the worth of Japanese companies worth, he added.
Japan’s customs and its present economic structure have created the framework for a market in which prices have nowhere to go but up.
With a national trade surplus that reached $96 billion last year, companies and institutions are flush with excess cash for investment on the Tokyo Stock Exchange. And, with the abolition of tax exemptions on savings accounts that went into effect April 1, more individuals are joining the crowd. The National Securities Exchange Council announced July 29 that holdings of individual shareholders rose to 26.8%, up 0.7%, in fiscal 1987--the first increase in 12 years.
Back in 1950, they accounted for 69% of the total, or close to the present ratio on the New York Stock Exchange. But they plunged as prewar zaibatsu (financial cliques) regrouped through cross-holdings of stock and declined further as large companies, led by Toyota, started rounding up “stable stockholders” in the mid-1960s to fend off foreign takeover bids.
‘Stable Shareholders’
Shares of major corporations owned by such stable stockholders as banks, insurance firms and other companies rose from 41.8% in 1965 to 60.8% in 1975 as Japan lifted controls on foreign investment. Now, they stand at 66.3%.
Theoretically, all stocks in New York change hands completely every three years, at the most, but nearly 70% of stocks in Tokyo never change hands.
“Stable shareholders” have become such a fixture here that virtually no firm would dream of issuing new stock without them. One firm that did--Avon of the United States--found its share price plummeting after being listed on the Tokyo Stock Exchange.
Thus, an aura of collusion pervades Kabutocho. Foreign observers are disturbed most of all by the market manipulation--or the expectation of it--that bolsters rather than diminishes investor confidence.
The daily whipsaw of individual share prices is believed to be easily controlled by companies investing in their own stock through secret accounts, by cartels of fund managers, by big brokerages pushing particular issues in aggressive sales campaigns and by clandestine speculator groups.
So-called political stocks are assumed to be manipulated to provide significant revenue for Japanese politicians, as in the case of Recruit-Cosmos.
Whether such questionable activities are in fact behind price rises, the assumption that a conspiracy is going on is enough to drive investment fervor.
Brokerages Take Lead
Brokerages often take the lead directly. Tokyo Stock Exchange authorities, for example, found that between Feb. 29 and April 2 this year, corporations, individuals and foreigners were all net sellers but that 34 leading Japanese brokerages were net buyers, purchasing more stocks for their own accounts than those three categories of investors combined sold off.
“Eighty percent of the price movement on the first section of the market (where major firms are listed) is man-made every day,” the longtime foreign analyst said. “On the second section (where smaller companies are listed) it is 90%, and on the over-the-counter market, it’s nearly 100%.”
Indeed, “if manipulation stopped, the market would crash,” he said.
Critics accuse Finance Ministry regulators of condoning manipulation, and they point to lax enforcement of Japan’s Securities and Exchange Act. Instead of policing the market and prosecuting violators in the aggressive manner of the SEC in the United States, regulators look the other way or issue mild, confidential warnings, Watanabe, the former prosecutor, charged.
Likened to Casino
“The stock market is a casino,” he said. “There’s no morality, and no protection for the small investor.”
While authorities have been zealous in prosecuting stock-related tax evasion, only a handful of cases have been taken to court involving violations of the securities law during the past 40 years. Only one person has ever been jailed for securities fraud, and he was a Korean national.
Recent scandals, however, have brought pressure upon both the Finance Ministry and the Tokyo Stock Exchange for reform.
Last September, a small bank sold 337,000 shares of stock in a chemical manufacturing firm the day before the company disclosed that it had lost $200 million speculating in bond futures. The government did not punish anyone. But it did revise the law on insider trading, spurring brokerage houses, banks and other institutional investors to announce in-house reforms.
Yet, suspicions of major insider trading emerged once again last month as the price of Sankyo Seiki Manufacturing rose sharply in heavy trading just days before Nippon Steel announced that it planned to acquire an 18% stake in the electronics company.
Authorities, Japanese newspapers reported, later revealed that more than 10 employees of Nippon Steel had bought shares in Sankyo Seiki shortly before the tie-up was disclosed publicly. As an investigation continued, officials promised to implement a portion of the new anti-insider law Oct. 1, instead of waiting until next year, as they had planned.
Meanwhile, share price manipulation, which analysts say is far more prevalent here than insider trading because of the relatively low incidence of corporate takeovers, also came into the spotlight.
New Controls Studied
In June, a company president was arrested on charges of evading payment of $13.8 million in taxes on $19.2 million that he allegedly earned by manipulating the shares of three other companies. The executive is also suspected of making questionable political donations.
Now, the same Finance Ministry advisory body that drafted the revisions of the insider trading law has been ordered to study new controls on price manipulation.
Some critics accuse the Finance Ministry itself of manipulation in a broad sense.
