Japan's inside-trading `tradition' under attack

Most Japanese who invest in stocks do not hesitate to admit they have engaged in insider trading. Such trading has not been tightly controlled by Japanese government regulators and prosecutors, as it is in the United States.

Just last week in the US, for example, Drexel Burnham Lambert Group Inc. and the head of its high-yield bond department were charged with misusing inside information.

Insider trading without guilt

But in Japan, where the word ``fairness'' only recently appeared in the stock market's rule book, insider trading has been widely practiced with little or no guilt.

Naoko Kamimura is one of many who were led to the stock market through insider trading. The 24-year-old airline stewardess never dreamed of making money in stocks until recently, when a salesman from a local brokerage called her. He recommended an Osaka-based machinery company stock, she says, because he had inside information guaranteeing the share price would rise.

``I did not understand the meaning of the information, but it sounded reasonable,'' says Ms. Kamimura. So she took money that she had sitting in a low-interest savings account and bought 1,000 shares of the company for 68,000 yen ($451). To her delight, the share price soared by nearly 40 percent in less than a month.

Like Kamimura, many investors in Japan say they would have no idea of what to buy if they had no inside information to make a decision. And many brokers say that, for competitive reasons, they cannot make recommendations to customers without inside information.

But foreign investors, whose presence in Japan is rapidly increasing, complain that the market is unfair to outsiders who can't play the game according to the peculiar Japanese rules.

Scandals lead to crackdown

To accommodate the huge Japanese stock market to Western standards of fair play, Japanese authorities are starting a crackdown on inside trading.

``Five years ago,'' says Michio Katsumata, a spokesman for Nomura Securities, ``it was unthinkable that the Finance Ministry would change its securities law only to prevent the well-accepted practice of insider trading. But today, we hear the name of [the] prime minister's secretary as part of insider trading story. Definitely something is changing here.''

Analysts, economists, and some investors say the revelation of a series of stock-related scandals in recent months and the hasty implementation of more-stringent legislation reflect a new direction.

Still, defenders of the current system, especially veteran investors and securities company officials, argue that traditions in the Japanese stock market are deeply rooted. Simply tightening rules and revealing violations, they say, won't bring a genuine change.

Concern about insider trading hardly existed in Japan until last September, when Osaka-based Hanshin Sogo Bank sold off a large holding of Tateho Chemical Company shares, shortly before the latter announced a huge loss in bond-futures trading.

Securities regulators in Osaka later disclosed that Tateho had notified the bank, which was its creditor, about the loss prior to the public announcement. Despite a public outcry and news-media criticism, neither party faced criminal charges, because the action did not violate existing securities legislation.

So in February a revised securities law was introduced in the Diet, Japan's parliament. On a visit to Tokyo earlier this year, David Ruder, chairman of the US Securities and Exchange Commission, said that the new Japanese law ``covers 98 percent of what we cover in the United States.''

The new law was intended to satisfy public demands for tougher control on unfair trading and to show foreign governments, especially the US, that the Finance Ministry is determined to lift its ethical standards.

In June, the country was shaken by a major scandal involving aides to top politicians - including associates of Prime Minister Noboru Takeshita and Finance Minister Kiichi Miyazawa. The government officials allegedly made a huge profit, ranging from 25 million yen to 100 million yen ($188,000 to $752,000), through dubious trading of unlisted stocks.

The scandal was dubbed ``Recruit-gate'' after Recruit Cosmos Co., a Tokyo real estate concern. Dramatically undervalued shares of Recruit Cosmos were handed to politicians. They allegedly made large profits by selling after public trading of the shares began.

Then came another bombshell. The share price of Sankyo Seiki Manufacturing, a precision machinery company, skyrocketed a few days before the public learned that Nippon Steel Company, the world's largest steelmaker, was acquiring a large stake in Sankyo.

Unusually thorough investigation by the Finance Ministry and the Tokyo Stock Exchange revealed as many as 100 employees of both companies had knowledge of the acquisition and bought a large number of Sankyo shares as early as a week before the public announcement of the deal.

This spate of scandals prompted the Finance Ministry to speed up its timetable. The ministry advanced by more than two months the implementation of part of the Revised Securities and Exchange Law, which passed the Diet in May. A provision enlarging the investigatory function of the Finance Ministry, for instance, took effect late last month rather than on the original October deadline.

Brokerages have begun to take action, too. Giant Nomura Securities, for instance, announced it will build a ``Chinese wall'' to block the flow of information between its corporate financing and retail brokerage sections. Nikko Securities announced a tough rule to prohibit its executives from trading stocks.

Securities, banking, and insurance associations have all introduced guidelines to prevent inside trading. The Tokyo Stock Exchange has asked its member companies to streamline the disclosure process and asked for the prompt release of corporate information that may affect share prices.

Keisuke Matsuura, a private investment consultant who has followed the Japanese market more than 30 years, says ``Recruit-gate,'' with its links to top political aides, was itself a sign of change.

``Behind-the-door dealings like these were routinely practiced,'' Mr. Matsuura says. ``But it was unthinkable five years ago that such a case would be revealed with real names.''

Still, many market participants believe traditions and customs won't change simply by setting up new rules.

Tradition dies hard

``The mentality of the investors and stock brokers has to be changed drastically if insider trading is to be stopped,'' says Matsuura.

Hiroshi Itakura, a professor at Nihon University and an expert on securities laws, says the new law and various measures by companies themselves are almost meaningless unless they are intended to establish the concept of insider trading as a wrong activity.

``The majority of people are unconsciously indulging themselves in insider trading without knowing what it is,'' he says. ``Many investors do not know any other form of investment than insider trading.''

Many analysts point out that even the new measures have too many loopholes. For example, they say, Nikko Securities' new rule prohibiting executives from dealing with stocks does not take their family members into account.

``In Japan, no salesmen buy stocks under their own name,'' says Keiichi Nishida, an analyst at Kidder, Peabody's Tokyo office.

Interviews with brokers and officials at securities firms, who spoke only on condition of anonymity, show how hard it will be to change the tradition of insider trading.

One senior official of a major securities firm, for instance, says the Japanese market is already fair.

``The stock market reflects the country's characteristics, and the Japanese stock market is formed in a way which is best suited for the Japanese people,'' he notes. ``So if foreign investors want to win in Japan, they have to learn the Japanese way - as we had to learn their way when we entered their market - instead of demanding we change our custom.''

Another senior official at a major securities firm claims insider trading in the Western sense is not necessarily insider trading in Japan.

``If everyone who participates in market activities is more less a beneficiary of insider information, do you call it unfair?'' he asks. ``If so, I'd like to know who are outsiders. Outsiders in the Japanese stock market are those who have nothing to do with the stock market.''