Japan Gets Tough on Back-Room Financial Dealings

TOKYO — The scam allegedly run by Ryuichi Koike, 54, the gangster-investor at the center of a widening scandal here, exploited unique traditions of Japan’s financial world. And his fall may presage its reform.

Koike and his younger brother started getting big loans from Dai-Ichi Kangyo Bank, Japan’s third-largest, in the 1980s, according to prosecutors and Japanese media. Koike used some of that money to buy 300,000 shares in Nomura Securities Co., Japan’s top brokerage. He also opened a trading account at the firm.

The account reportedly lost $2.8 million, yet Nomura treated Koike as a VIP. Following a practice of favoring key clients--common in Japan until banned in 1992--Nomura illegally reimbursed Koike for his entire loss and gave him an extra $340,000 for good measure, the firm’s new president, Junichi Ujiie, admitted last month.

Now the recent arrests of Koike, his brother and 15 executives from the bank and brokerage are bringing intense pressure to reduce the heavy role of favoritism and back-room manipulation in Japan’s financial system.

Some see the tough penalties imposed this week on the two firms as a key step toward reform. The sanctions against Nomura and Dai-Ichi Kangyo, which also acted illegally in its dealings with Koike, are the harshest ever given to major financial institutions.

The firms were ordered to suspend several key operations for the rest of the year. In Nomura’s case, that means no trading stocks on its own account, and for Dai-Ichi Kangyo, it includes no new loans other than housing loans.

Meanwhile, a raid Wednesday on Yamaichi Securities Co., another big brokerage suspected of illegal payoffs to Koike, showed that this scandal still has legs.

The ongoing crackdown, some analysts say, is the strongest sign yet that Japanese authorities are serious about implementing Prime Minister Ryutaro Hashimoto’s proposed “Big Bang” financial reforms, which aim to liberalize Tokyo’s financial markets to make them comparable to those of London and New York by 2001.

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In announcing his plans in November, Hashimoto said his goal is to make Japan’s markets “free, fair and global”--an implicit acknowledgment that currently they are not.

“This is a very, very strong indication that the Ministry of Finance and the Ministry of Justice--the very top of Japan Inc.--are dead serious about forcing ‘Big Bang’ deregulation and forcing Japanese companies to work on a globally accepted standard,” said Jesper Koll, vice president of J.P. Morgan Securities Asia Ltd.

“The cleanup right now is a necessary precondition for the ‘Big Bang’ to succeed,” Koll added. “Involvement with racketeers and payoffs is neither free nor fair nor in line with a global standard.”

If successful, the planned liberalization may reduce corruption, force Japanese firms to streamline their operations, create new business opportunities for foreign firms and give ordinary Japanese citizens more attractive options for their investments.

One cause of scandals such as the Koike affair, analysts say, is that brokerages are so heavily regulated that they can’t compete through such means as offering services more cheaply. Instead, firms battle by offering various kinds of “sweetheart deals” that benefit rich or powerful clients--and that sometimes are illegal.

“Securities firms don’t worry about ‘junk customers,’ but they treat VIP customers really well,” noted Hiroshi Yamamura, chief economist at NLI Research Institute.

Koike is usually referred to by the Japanese media as a sokaiya--a corporate racketeer. Sokaiya generally purchase stocks of a firm, then extort money by threatening to reveal embarrassing information at stockholder meetings. Sometimes firms hire one sokaiya group to act as security guards, preventing other sokaiya from causing trouble.

Sokaiya became powerful in the 1960s, when companies used them to suppress legitimate citizens’ movements that used shareholders meetings to air issues such as pollution, said Koji Morioka, a professor of economics at Kansai University who has specialized in the study of sokaiya. They have learned to play either side of the fence, threatening or defending management depending on which is more lucrative.

Koike’s connections date to Yoshio Kodama, the key broker acting for then-Prime Minister Kakuei Tanaka when Tanaka was getting payoffs from Lockheed Corp. in the mid-1970s, which erupted into the biggest scandal of that era.

Liberalizing Japan’s financial markets can help clean up corruption, Koll said, because under a tightly regulated system, decisions are often made “on the basis of relationships and favors,” while “in a free, fair and global market, it’s the price mechanism.”

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Under the “Big Bang,” small-time investors should enjoy a more level playing field and more attractive options. Foreigners will start selling mutual funds in Japan and partnering with banks to compete with brokerages, which may launch price wars.

The current scandals may even end up benefiting Nomura and Dai-Ichi Kangyo, some analysts say, by rejuvenating their leadership with younger managers more attuned to global trends.

* Etsuko Kawase of The Times’ Tokyo bureau contributed to this report.