Insider Trading, Japanese Style : The prime minister offers a bold, and necessary, reform program

Japanese Prime Minister Toshiki Kaifu’s promise to enact tough new securities laws is a bold effort to bring reform to Tokyo’s scandal-ridden financial markets. Ceremonious resignations and apologies are not enough to paste over this scandal--a deplorable affair of under-the-table payoffs to favored clients, bogus stock trades and gangster influence.

Certainly New York and London have had their share of insider-trading scandals. Now Tokyo--long known as an exclusive and incestuous club of Japanese businesses, banks and securities houses--is reeling under the embarrassing disclosures of the last month, disclosures that reinforce the notion that small investors do not enjoy fair treatment in Japan.

The prime minister deplored the stock and bank scandal on Monday at the opening of a two-month special legislative session. He said “improprieties” by banks and securities houses had “undermined general investor trust worldwide in the integrity of our stock markets.” Kaifu will introduce legislation soon to prohibit undue compensation and increase inspections of securities houses. Separately, his Administrative Reform Council, an advisory group, is studying other recommendations, including creating an independent watchdog organization.

Keeping reform initiatives separate from the Finance Ministry is prudent. The ministry, which is responsible for financial markets and banks, has been criticized as being too lax in its policing efforts and too cozy with business, brokerages and banks. Finance Minister Ryutaro Hashimoto, who had his eye on becoming prime minister, admitted Saturday that his secretary had helped three people borrow $10 million from a bank without collateral. Now the betting is for Hashimoto to resign, but he insists he will stay to institute reform measures.

The Finance Ministry may talk the reform game but its actions so far speak otherwise. It has not prosecuted any brokerages. Nobuhiko Matsuno, head of the Securities Bureau, reiterated the ministry’s coolness toward widespread calls for a Japanese version of the U.S. Securities and Exchange Commission. To his credit, Kaifu recognizes the status quo needs change.