Japan Restricts Business Deals of 4 Brokerages : Securities: Critics call the order to curtail business for four days a slap on the wrist.

In spite of earlier threats to crack down on brokerages after widespread scandals in the industry, Japan’s Ministry of Finance announced Monday a series of measures that observers say amount to little more than a light slap on the wrist.

The Ministry of Finance ordered the “Big Four” brokerages--Nomura Securities, Daiwa Securities, Nikko Securities and Yamaichi Securities--to refrain from doing business with corporate clients for four days and advised the companies to punish executives involved in the misdeeds.

The announcement was accompanied by disclosures that the four large brokers spent nearly $900 million to cover the losses of their largest corporate clients, almost double what had been previously reported. Two of the companies, Nomura and Nikko, also loaned money to a gangster to help him buy shares in a stock Nomura later pushed up.

Finance Minister Ryutaro Hashimoto said at a press conference Monday that as a result of the order, the four brokerage houses would have to virtually suspend business for four days. Hashimoto said the punishment was harsher than it appeared because it was for the brokerage houses’ “lack of ethics,” not because they had broken any laws.

Although the measure was the longest ban ever imposed by the Ministry of Finance on the securities houses (the ministry had previously imposed a three-day ban), market observers say the absence of harsher punishment demonstrates how difficult it is for the ministry to come down hard on the companies it regulates.

“They (the Ministry of Finance officials) don’t appear to be serious about reforming the securities business,” said Hiroshi Okumura, an economist at Ryukoku University and an expert on stock market regulation. He and other leading Japanese critics are calling on Japan to form a separate regulatory body more like America’s Securities Exchange Commission.

With market trading already so thin, the brokerage firms are unlikely to lose business, said Taek Chong, a manager at Schroder Securities Japan Ltd. Chong noted that the big brokers could easily pass on business to their smaller subsidiary brokerage companies.

Top executives of the four firms took the punishment in stride and appeared at press conferences to bow their heads in apology. They also announced forced resignations and pay cuts for executives involved in the scandals.

Nomura said it would dismiss two executives and reduce the salaries of its president and vice chairman for one year. Nikko said two executives would be forced to resign and 17 employees would be disciplined. Yamaichi said it would cut the salaries of six executives, including its chairman and president, by 20% over a three-month period. Daiwa said it would cut the pay of its top three executives by 10% for a three-month period. The presidents of Nikko and Nomura had previously resigned their posts because of the scandal.

More painful to the big brokerage firms may be the side effects of the spreading scandal. Five prefectures and seven cities have decided to cut their ties with the big houses temporarily, including Yokohama and Kobe. Tokyu Corp., a railroad company whose stock was the subject of speculation and a Nomura push, has announced that it will no longer use the Big Four to underwrite its securities.

Separately, the Tokyo Stock Exchange said it had decided to fine Nomura and Nikko $36,200 each and Yamaichi and Daiwa $21,700 each for actions that shook investor faith in the securities industry.

Indeed, the biggest punishment for the brokers is likely to be a prolonged weakness in the stock market. The Nikkei closed the morning session today down 412.25 points, or 1.9%. Share prices had fallen by 8% on thin trading on the five previous trading days. On Monday alone, share prices fell 722 points, or 3.17%, to close at 22,176, a more than six-month low.

“This is something that could last for six months,” said Chong of Schroder. He said market participants are afraid further disclosures could keep damaging the market.

There are widespread rumors that investigations will soon reveal that Japan’s large trust banks were also involved in covering the losses of their customers, much like the big brokers. The Ministry of Finance also revealed Monday that other brokerage houses beyond the Big Four were involved in unethical practices but said names would not be revealed pending an investigation.

The Ministry of Finance has announced a directive banning brokerages from operating special accounts in which they make investments on behalf of their customers. It was in these accounts that the brokerage firms reportedly promised fixed returns to customers and felt compelled to cover customer losses when they couldn’t reach the targets. Critics say the compensation scheme gives the impression there is a double standard at work, since small investors aren’t covered for their losses.

The Ministry directive, however, will help the brokerage houses by enabling them to close discretionary accounts without fulfilling commitments to cover customer losses, commitments that could total billions of dollars beyond what has already been paid.

“This order gives brokerage houses a way out of fulfilling those commitments,” said Okumura of Ryukoku University.