NEWS ANALYSIS : Brokerage Scandals Shake Faith in Japan’s Watchdogs

Day after sweltering day, Japanese observe in disbelief as their media assault them with new disclosures of financial scandal, including revelations that giant brokerage houses compensated large clients for stock market losses while maintaining ties with reputed gangsters.

In the latest disclosure, Nihon Keizai Shimbun, Japan’s largest business daily, today provided enough new grist for the scandal mill to last months when it published a list of 187 cases in which individuals and companies received compensation for stock losses.

The disclosures are likely to strengthen doubts among a public already cynical about the endless parade of gray-suited bankers and brokers bowing deeply and making apologies, but receiving little in the way of punishment.

“They should throw them all in jail for 10 years,” one taxi driver mumbled angrily after hearing breaking news on the radio.

The disclosures also are likely to intensify serious questions being raised about how Japan regulates its financial markets--the world’s largest and most influential along with those of the United States.

With growing evidence that Japan’s financial system has been working to benefit Establishment organizations, Japanese academics, business leaders and politicians are asking whether Japan’s elite bureaucrats can really be depended upon to rule the nation fairly and with the interests of the common citizen in mind--as the public had previously believed. Bureaucrats in the Finance Ministry, which oversees the nation’s financial industries, are too close to the companies they are supposed to regulate, and Japan lacks any true independent watchdog agency, critics say.

“It is as if you have the role of the lawyer and the prosecutor being played by the same person,” said Kiichi Miyazawa, a former finance minister and now leading member of the ruling Liberal Democratic Party.

Miyazawa is one of a growing number of politicians--including Prime Minister Toshiki Kaifu and Finance Minister Ryutaro Hashimoto--who have recently begun calling for reform in the financial system in an effort to bring it more in line with the systems of other industrialized nations.

Those looking for major reforms, however, are likely to be disappointed. In Japan, new laws are drafted by the Cabinet ministries, and Finance Ministry bureaucrats will bitterly fight any major changes that will weaken their authority, experts say.

Japan’s political leaders will be careful about how far they push any investigation for fear it could lead to new revelations that many high-ranking politicians were involved in questionable dealings, experts say. Such disclosures could hurt the Liberal Democratic Party’s chances in next year’s elections for seats in the nation’s upper house of Parliament. A drawn-out scandal would also further depress Japanese stock prices and possibly trigger a major financial crisis.

Some Japanese officials, for their part, argue that while their financial system has its shortcomings, it generally works and is superior to the U.S. system.

“Japan has in most cases been very successful,” said Tadao Chino, the Finance Ministry’s new vice minister of international affairs. “In the U.S., the number of banks has been decreasing by 200 a year, but in Japan we haven’t had a bank failure since 1942.”

The latest scandals are more important than past scandals--such as those involving Lockheed Corp. and the Japanese Recruit company, which contributed to the resignations of Japanese prime ministers--because they reflect inherent problems in Japan’s way of running its government.

“They reveal the degree to which the system is not subject to the rule of law,” said Chalmers Johnson, a professor at UC San Diego. “The bureaucrats aren’t accountable to anybody.”

There are growing calls inside and outside Japan for the creation of a watchdog institution--like the U.S. Securities and Exchange Commission--that would be separate from the Finance Ministry and therefore better able to police Japan’s financial system.

The Finance Ministry has built up its power and authority in part because it is widely regarded as being composed of the nation’s elite, with a strong sense of the national interest. Recent scandals have damaged that reputation.

Most damaging to the average citizen’s belief in a fair system were disclosures that Japan’s largest securities firms paid their best customers, including big electronics companies such as Hitachi, more than $1 billion to cover stock market losses. The ministry knew of the practice as early as 1989 and received a full report detailing the payments in March, 1990.

Beyond using verbal gyosei shido (administrative guidance) to suggest that the securities firms halt the practice, the ministry did little to crack down.

Revelations that Nomura Securities and Nikko Securities lent hundreds of millions of dollars to help a gangster buy shares in Tokyu Corp., which Nomura then pushed up, also reveal how the ministry has been soft about controlling what appears to many to be insider trading.

Because bureaucrats often join securities companies once they leave government (a process called amakudari , or descent from heaven, referring to their lofty rank) and are wined and dined by the brokerages, the bureaucrats are reluctant to deal with the companies too harshly, critics say.

Many of the scandals have revealed the extent to which established financial institutions--the backbone of the nation’s capitalist system--gave Japan’s shady world of gangsters, land developers and speculators better access to financial resources than they gave to individuals and small businesses.

Yoshihiko Kawamura was sent by giant Sumitomo Bank to become president of Itoman and turn around that textiles-trading company. Last week, he was arrested with five others on charges that they used a complex scheme involving trades in overpriced art and investments in golf courses to defraud Itoman of hundreds of millions of dollars.

Some observers believe that the Finance Ministry leaked the information that led to many of these scandals for its own reasons. Intoxicated with success during the go-go years of stock and land inflation in the 1980s, companies such as Nomura had stopped heeding ministry directives.

The scandals, these critics charge, enabled the ministry to humiliate the institutions and bring them back under its control. The ministry, according to this argument, also wanted to squeeze out of the system some of the more shady elements of the financial markets.

Japanese politicians don’t normally like to challenge their bureaucrats, but there is some evidence that they may be feeling pressure from U.S. and British leaders to move toward a more acceptable financial arrangement.

Kaifu, along with the Liberal Democratic Party’s secretary general, Keizo Obuchi, has called for the establishment of a watchdog institution similar to the SEC.

If history is any judge, the ministry will draft vague laws that allow a maximum of interpretation and therefore give the agency broad discretionary powers. But if the scandals are pursued and more damaging details are revealed, the ministry may be under pressure for more serious reform.

Secret Payments

Among 187 customers that Japan’s top four brokerage houses compensated for stock market losses were: * Matsushita: $31 million

* Hitachi: $21.7 million

* Toyota: $16.2 million

* Nissan: $11.8 million