Japan Ponders Securities Watchdog but Western-Style Enforcement May Not Mesh with Japanese Capitalism

Article excerpt

A DRAMATIC probe into Japan's recent financial scandals began yesterday with public testimony from two fallen kingpins of the tainted securities industry.

The testimony, however, was just the opening bell for a debate over whether Japan should create a Western-style enforcement agency, a reform that would move this country farther from its unique style of capitalism.

More witnesses from Japan's closed financial world will testify before parliament over the next week. The hearings are an unusual spectacle for Japan, but are judged necessary due to the shame and resentment many Japanese have felt over the level of corruption uncovered.

In coming weeks, the ruling Liberal Democratic Party is expected to decide whether to bring an alien institution to Japan: an independent policing agency to watchdog the huge, successful, but now dishonored securities industry.

The first witnesses in the parliamentary hearings were Setsuya Tabuchi, former chairman of Nomura Securities Co., and Takuya Iwasaki, former president of Nikko Securities Co. Both men resigned in disgrace last July after their firms, along with other securities firms, were accused of compensating wealthy clients for stock market losses. Both firms also are accused of manipulating stock prices for a gangster.

During Thursday's hearings, the two witnesses were hidden from public view while they testified; cameras were barred.

Advocates of a securities watchdog agency cite the United States Securities and Exchange Commission as a model. An SEC was introduced into Japan by US officials during the American occupation after World War II, but was dismantled one month after the occupation ended.

"In Japan, people do not like open conflict," says Chuo University law professor Takashi Kanai. "A violation is treated with quiet advice, not a lawsuit."

A series of securities and banking scandals this summer has raised a basic dilemma: Can Japan keep a system of secretive ties between executives, bureaucrats, and politicians - a system increasingly cited in the West as a reason to put up barriers to Japanese goods and money?

"You still have here in Japan a regulatory practice, a management philosophy, that sees the markets as an instrument of government purpose," says Kenneth Courtis, a Tokyo-based economist for Deutsche Bank AG.

"A world breeze of liberalism is sweeping from Vladivostok to Vancouver," he adds. "But it stops in Japan."

The first day of testimony revealed a common practice in Japan: Government bureaucrats use close ties with business leaders to guide business to success abroad, rather than regulating business wrongdoing.

In his testimony, Mr. Tabuchi, who remains an adviser to Nomura, revealed lax attitudes among the managers of the world's largest securities firm: "We now have to ... stress the importance of complying with government notifications and with ethics among our employees." Mistakes admitted

Many of the industry's leaders have admitted mistakes and are calling for more openness in how the Finance Ministry both guides and cajoles the securities market.

"We cannot but accept criticism that our country's securities market does not have the fairness and transparency to meet international standards," the Japan Securities Business Association stated in an ethics policy issued after the scandal broke. …