Japanese Regulators Get Tough on Finance Firms

Japan’s canine superstar, Ku-chan the Chihuahua, is out of work.

Until last month, Ku-chan was the white-whiskered poster dog for Aiful Corp., a consumer loan company that used the Chihuahua’s cuteness to tap the Japanese soft spot for saccharine characters.

In TV ads that charmed evening audiences, the dog’s beleaguered, middle-aged owner used Aiful’s easy-to-borrow cash to indulge Ku-chan’s whims for everything from snowboards to beach vacations.

But financial regulators discovered that behind the sweet image, some of Aiful’s collectors were illegally squeezing people who were slow to repay their loans.

It is one of many abuses that are getting new and intense scrutiny throughout Japan by financial regulators in the last several months.

Aiful would swamp clients with phone calls at all hours and harass relatives. Angry clients have alleged that employees even burst into hospital rooms to take cash from the bedsides of dying patients.

So in May, regulators forced all of Aiful’s 1,700 outlets to suspend operations for three days. Ku-chan was yanked from the air and has not returned. A shamed Aiful even felt compelled to decline a marketing industry award honoring the commercials.

The suspension of Japan’s biggest consumer loan company was more evidence that regulators here are cracking down on the financial industry, which many see as riddled with malfeasance and weighted in favor of insiders. The last few months have been marked by dramatic, televised arrests of two of the country’s most celebrated businessmen, as well as a slew of smaller scandals linked to some of the biggest businesses on the financial landscape.

The sudden baring of regulatory teeth originally prompted suggestions that Japan’s conservative business establishment, offended by all the easy money being made and the ostentatious manner in which it was being spent, were trying to bludgeon an emerging generation of cocky uber-capitalists back into line.

But increasingly, there is a sense that instead of marking a retreat to the old ways of crony capitalism, the crackdown represents a legitimate attempt by Japanese regulators to impose order on a financial system badly in need of some. Many contend that the problem is not that some people are raking in huge sums, it’s that they are doing it in a system that lacks modernized rules.

“You can judge a society by the kind of scandals it throws up, and the corruption in financial institutions is a drastic change for Japan,” said Tatsuhiro Ishikawa, a former head of the special investigations unit of the powerful Tokyo district prosecutors office. “But this is not a matter of the establishment fighting back. It’s the opposite.

“People don’t mind other people making profits as long as everyone follows the rules.”

Prime Minister Junichiro Koizumi’s tenure in office has been marked by a push to deregulate Japan’s stuffy markets and open the country to the demands of global capital.

It is a direction applauded by many investors and economists, who argued that Japan needed to attract more foreign investors and unlock its savings culture to put idle capital to work.

The result has been an explosion of financial products and institutions to sell them. But it has also meant a dramatic rise in consumer debt and produced a culture of nouveau riche capitalists who broke with tradition by flaunting their lavish lifestyles.

That in turn has stirred the uneasy feeling that Japan’s traditional egalitarian values are giving way to the harsher -- and foreign -- divisions between economic winners and losers. Fear of social inequality has become a strident political theme in recent months.

Some say the regulators’ enthusiasm has risen to match that sentiment.

“The Tokyo prosecutors’ office has always been careful not to get out in front of the public mood,” Ishikawa said. “They respond if they see something happening.”

Enforcement has claimed prominent scalps. Observers say it is typical of Japanese regulators and police prosecutors to go after high-profile targets and Aiful, with annual sales of $4.8 billion, fits the bill. Yoshitaka Fukuda, its president, was Japan’s second-richest man in 2005, according to Forbes Asia. A drastic fall in Aiful’s profit and stock price has caused his net worth to fall to $2.8 billion and placed him 12th in this year’s ranking.

Former prosecutor Ishikawa says the Tokyo district office has always operated under an ethic of wanting to catch the biggest fish.

“The dream of all prosecutors is to handle the big scandals,” he said, dismissing suggestions that the office has been used as a tool of the Japanese establishment.

Indeed, the scandal wave has swamped some of Japan’s best-known executives. Takefumi Horie, seen as Japan’s first punk rock businessman, will go to court next month to answer charges that he doctored the books at Livedoor Co., his path-breaking Internet company. And Yoshiaki Murakami, whose investment fund unnerved the establishment with its aggressive shareholder activism, has been charged with insider trading -- and admitted it on national TV.

But the troubles go far beyond the apparent transgressions of upstarts like Horie and Murakami or the loan company that hired Ku-chan. In recent weeks, the Financial Services Agency, which monitors financial institutions, has made headlines by penalizing a major bank and a top accounting firm.

After reviewing four years of transactions, it ordered Sumitomo Mitsui Banking Corp., the country’s third-largest bank group, to stop selling certain interest-rate derivative products for six months. The bank had made purchases of the derivatives a condition for extending loans.

And the FSA ordered auditors ChuoAoyama PricewaterhouseCoopers -- which counts such blue-chip companies as Toyota and Sony as clients -- to suspend business for two months after three of its accountants admitted certifying the books of a company that was hiding losses.

Ethical questions are also being asked of Bank of Japan Gov. Toshihiko Fukui, who revealed this month that he had been an early investor in Murakami’s fund. Fukui also continued to sit on several corporate boards after joining the bank. Although he hasn’t been accused of doing anything illegal, the revelations underscored the absence of ethical guidelines for his post.

The combination of scandals, large and small, have sent jitters through the Japanese stock market, which stumbled in recent weeks after being one of the world’s best performers last year. And it has aroused suspicions about the reliability of Japan’s corporate books, among both foreign investors and the increasing number of non-professional market players in Japan.

“The Japanese market is actually freer than the U.S. market,” said Tatsuo Uemura, a Waseda University professor of corporate law and capital markets. “We have introduced excess freedom, while the overall legal environment is not well established. So boundary-pushing trades are being conducted.”

Critics say a muscular securities regime is needed to supervise equities. Horie, Murakami and others exploited openings such as after-hours trading that operated under little legal supervision. It is not enough to leave investigations to prosecutors in the Tokyo district office, who have the harder task of trying to prove a criminal case instead of a securities violation.

Most observers believe the government has no choice but to respond to the clamor to clean up the financial industry.

“We have been appealing to the government for years to do something about this, but they were never serious until this discussion began about the discrepancies of the market system,” said Kenji Utsonomiya, a Tokyo lawyer who has led a long legal fight against what he calls the rapacious practices of loan companies. “All this talk about a gap between rich and poor meant the government has started to think we need to enforce regulations to ease people’s minds.”

The opprobrium has mounted as the loan industry prospers by borrowing for free under Japan’s zero interest rate policy and lending it out to desperate clients at up to 29.2%, the legal limit for lending with the borrower’s consent.

The companies have made it simple to borrow money, with customers able to take out loans up to almost $5,000 from automated screening machines that dispense cash from busy railway stations.

Critics say the easy cash has wreaked social havoc. Too many people are borrowing money just for daily living expenses, they lament, driving their debt up to overwhelming scale. Utsonomiya says records show that as many as 8,000 of Japan’s annual 30,000-plus suicides are related to despair over personal finances.

“I never fell for Ku-chan,” he said. “Because I know the reality. I’ve seen the harm behind the commercials.”