Japan Needs Much Stronger Watchdog Over Securities : Scandal: What happens in Japan can have worldwide effects, pointing out the need for independent oversight.

Japan’s securities scandal seems to be continuously unfolding. The heart of the matter is the compensation paid by major securities firms to their large corporate clients to cover stock losses. Although such practices are apparently confined to the Japanese market, Americans should not regard this matter as simply a distasteful episode in a faraway country. It must be taken more seriously, as though it would affect the American economy and those elsewhere in the world.

Any favoritism among Japanese firms, whether in manufacturing or in securities, constitutes an unfair practice that tends to work against newcomers or outsiders, including American investors in Japan. And since Japan is the largest creditor nation and net capital exporter in the world, distortions resulting from shady, unfair practices on the part of Japanese securities firms are bound to have adverse effects on the health of the global capital market. As the United States has now become more dependent on imported capital than ever before, Americans have every reason to be concerned about distortions and imperfections in the world’s largest capital exporting nation.

What should be done? A logical step would be to suggest that the Japanese strengthen the power of independent bodies to oversee the securities market in Japan, just as American trade negotiators have admonished their Japanese counterparts to give Japan’s Fair Trade Commission more authority and power to check unfair business practices. The problem is that as far as securities are concerned, there is no such independent body as the American Securities and Exchange Commission in Japan. The Ministry of Finance regulates and fosters the financial and securities industries and is also supposed to check and ensure fairness in the Japanese securities market.

The fact that the finance minister has accepted a temporary pay cut in connection with the current scandal implies that the Ministry of Finance failed to act properly. The only reasonable thing then is to replace part of the ministry’s power with a version of the SEC, independent of the traditional ministry/securities-industry complex. Such an institutional reform in Japan would make it easier for the American SEC to cooperate with Japan to ensure efficiency and fairness in the global capital market for all investors.