Japan's Financial Services Agency: a Bully and a Manipulator

Tomohiko TANIGUCHI (Fellow, GLOCOM)

Adopted from the March 11, 2002 issue of Nikkei Business with the author's permission.

The row over short-selling of shares between Japan's Financial Services Agency (JFSA) and foreign investment banks hit the headlines in many a newspaper. The government regulator penalized several western firms for their alleged short-selling and suspended their trading licenses for some two weeks. Yet is it only short-selling that has attracted regulatory attention? Clearly not. What has now become obvious is that the selling itself, especially that of bank shares, short or normal, is being checked and oppressed. The Japanese government is now engaged in rigorous market intervention paying little respect to due process of law in a desperate attempt to boost share prices.

Some maintain it is by no means the first time for the government to get involved in a PKO or Price Keeping Operation, which was rather commonplace in the last decade. They are the ones however, who pretend to forget that the government pledged in 1996 to do their utmost to make the Tokyo capital market as free, fair and global as that of London or New York. Others argue that under the extraordinary economic circumstances, which Japan indeed is in, interventionist policies are the lesser evil. Are they ready to legitimatize, it should be asked, that those sanctioned are not allowed even to make their own case vis-à-vis the regulator? "If so", a high-ranking official with the Supervisory Bureau at the JFSA said, "why don't they (sanctioned foreign firms) sue us?" What if you had been told the same back in Stalinist Soviet Russia?

Masajuro Shiokawa, Finance Minister, is well known for his distaste of share selling of any sort. Mirroring this, from the JFSA exited a file with the title "Grandpa Shio", which compiled official documents as regards restricting short-selling. Remember that the regulator was made independent from any outside forces. But that is only in theory. In practice the JFSA and Ministry of Finance (MoF) jointly manage their personnel affairs and the MoF, with no legitimate administrative mandate whatsoever, willingly supports the regulator's operations. Indeed a phone rang at an executive suite at Nomura Securities headquarters one day, the call was from an official with the MoF's Minister's Secretariat. "I heard that you were opposed to our restricting short-sellings, were you not?" the caller said. A classic example of governmental harassment, it has to be said.

Harassment becomes all the more real when one sells bank shares. As soon as the sell-deal is done, the trading desk (be it at a domestic or foreign firm) gets a call from Tokyo Stock Exchange, which in principle acts as a market watchdog for the sake of enhancing fairness of the entire market. But hear what they inquire: "Who are the three biggest customers that placed the sell orders? Are they individuals, trust accounts, or foreigners? Was it a spot trading, margin, or short-selling?"

To reject giving answers like "we can't reveal anything related to our customers' private matters" will only lead the trader to continue to get repeated calls from the TSE each and every time he/she sells bank shares, "sometimes once every hour, or as many as three times a day", a trader with a major Japanese security house reveals. "We have completely lost our appetite to sell bank shares", he added. The TSE as a private entity is responsible for monitoring market transactions. The extent to which they "monitor" bank share trading, however, is indicative of their acting on behalf of the government.

Not all the foreign firms that allegedly violated the rule of short-selling deserve sanctions suspending their licenses for two weeks. A case one might point to is a western firm that simply did not have an advanced computer matching system between the sell-order and actual shares. "Shares did exist. We never attempted to short sell", the managing director insisted, only to know his voice would reach nowhere.

And that was not the end of the story. They tried to explain what really caused the trouble in the affidavit they were supposed to submit. Yet again they came to know the attempt would surely end in vain, for much to their surprise they were forced by the FSA officials to rubberstamp a standardized format of the affidavit. The imposed affidavit, addressed to Shoji Mori, Director General of the JFSA, starts in a solemn manner by saying, "May we humbly state hereafter our views as per your notification of our violating the law and regulations".

It then explains what constitutes the illegal short-selling, followed by a statement that reads "It is true that we have made complying the law and regulations our foremost priority and have kept enhancing our compliance. To be faced with ourselves being sanctioned, may we now offer you our abject apologies".

The affidavit then goes on to assure the regulator that "a further attempt is being put in place already to improve the compliance", and ends with the following request: "Please may we lastly take the liberty to beg for your magnanimity in dealing with the matter". No questions allowed, sign this, period.

The affidavit is to be followed by another written statement as to how the firm is going to change internal compliance operations. Thestatement is called "an improvement plan", and it is this plan that is crucially important for the firm, for unless it is accepted they can expect no institutional investors to place orders with them. What will the JFSA do with this? They simply refuse to receive it until weeks have passed since its initial attempt of submission. Maybe it is just two weeks during which the license is suspended. But in reality, the firm cannot take any orders for as long as well over a month.

Added to this, a well-known financial newsletter published in the US reported that the JFSA would even hint that individual revenues of the firm's highflying executives might well be under the scrutiny of the nation's tax authority. Despite all this intimidation that is an abuse of power, all the sanctioned firms have kept their mouths tightly shut for fear of governmental vengeance.

This is the way in which the much-feared "End-March Crisis" is being contained, which leads one to conclude that future historians may see in Junichiro Koizumi a market destroyer. Tokyo stock market had only 330 billion yen during the fourth quarter of last year that equaled the net amount of purchases by foreigners. That amount was overtaken by the Korean market, which had 390 billion yen. Well, who will buy in a nation that is killing its own market, a market that is essentially of common goods.