Scandal in Japan
Rumours that the Yamaichi Securities Company was in deep trouble had circulated around the Tokyo stock exchange for years. But yesterday's revelation that the brokerage was on the brink of collapse still came as a shock in some quarters. It caused nervousness in international markets, but failed to affect local sentiment which appeared to be more concentrated on the cake rush than on possible repercussions in the SAR.
Although damaged by the scandal in July when the Yamaichi group was found to be making illegal payments to sokaiya corporate racketeers, the country's fourth largest brokerage firm was wrongly believed to have weathered the storm. But clients responded by withdrawing an estimated US$200 billion of assets, and the death blow was struck through the practice of concealing huge debts by transferring them to dummy companies or to other accounts.
The episode once again highlights the necessity for restructuring many of Asia's diverse financial systems.
The source of the crisis may vary between countries, but the fundamental weakness common to all is lack of discipline and effective regulatory measures. Years of papering over the cracks have brought many economies to what can now be seen as inevitable breakdown. The challenge throughout the region is to introduce long overdue reforms before further damage is done.
Only strict regulation, disclosure and transparency will protect markets and uphold investor confidence. Nothing deters shareholders so forcefully as hints of shady dealing, and if this monumental financial failure compels the Japanese Government to clean out the Augean stables of the country's financial institutions, so much the better.
There may be worse to come, if other companies have similar problems, but the cure demands that the weakest and any with dubious trading practices must go to the wall.
In part, the collapse of Yamaichi Securities is precipitated by Japanese plans to liberalise financial institutions in readiness for a 'big bang' next year. The need to follow the same practices as London and New York meant the central bank could no longer step in to prop up ailing companies, and this is a healthy portent for the future. Public money had to be used to protect clients, and as part of a damage limitation exercise, but for no other reason.
Handled skilfully, this episode could be the catalyst the world's second largest economy has long needed, but it also has the potential to send shockwaves around the world.