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Leaders Warn Stock Scandal’s Damage Could Spread Beyond Japan

July 28, 1991

TOKYO (AP) _ Prime Minister Toshiki Kaifu and Finance Minister Ryutaro Hashimoto both warned that unless confidence is restored in the scandal-ridden stock market, the weak market could touch companies around the world.

Speaking at a meeting of their governing Liberal Democratic Party, both urged scandal-plagued brokerages on Sunday to voluntarily identify the major clients to whom they paid compensation for stock market losses.

Hashimoto also said Sunday he planned to ask lawmakers to outlaw the practice of compensation for stock market losses. Currently, such compensation is not illegal in Japan unless promised in advance. But it violated Finance Ministry guidelines, and angered investors who were not compensated.

Hashimoto said brokerages’ voluntary disclosure of the names of the compensated clients would help regain public confidence in the securities industry. If lawmakers order disclosure, the public will believe the industry lacks the ability to clean itself up, he said.

Hashimoto said that capital is generally in short supply around the world and companies might have trouble raising money in Japan if the market remains unstable.

Buyers have been scarce in the Japanese markets lately. Lower stock prices mean companies selling new stock might not be able to get as much money for their shares.

Hashimoto’s ministry has come under strong criticism for lax supervision of the securities industry. However, he has gotten an unusual vote of confidence from Treasury Secretary Nicholas F. Brady.

The New York Times, in Sunday’s editions, quoted Brady saying he was alarmed at signs that Hashimoto’s political future was threatened by the scandal. Brady was quoted as expressing support for Hashimoto.

On Sunday, the Kyodo News Service quoted unidentified securities industries officials as saying that faced with the prospect of an order from parliament, the securities firms involved in the scandal would disclose some of the compensation recipients this week.

Japan’s big four securities firms - Nomura, Nikko, Daiwa and Yamaichi securities - reported to the Finance Ministry last week that they paid $933 million in compensation to favored clients between September 1988 and March 1990.

Stock trading has been in the doldrums in recent weeks as the market awaited further disclosures in the scandal. Although the Tokyo Stock Exchange’s main index has climbed nearly 3.6 percent over the last four trading days, mainly on news of declining interest rates, volume has been thin.

The Finance Industry also has been shaken by allegations that employees at three major banks have issued fake certificates of deposit that later were used as collateral to obtain loans.

″I’m worried that public trust in financial institutions will be betrayed if such incidents continue to occur,″ Hashimoto told reporters on Friday.

The remarks of Kaifu and Hashimoto, at the party meeting in Karuizawa, 100 miles northwest of Tokyo, were carried in Japanese television and press reports and verified with officials present at the meeting.

Opposition parties were angered at the Liberal Democratic Party’s refusal to summon officials from two of four securities firms involved to testify at a parliamentary hearing Thursday. Some opposition politicians have said they believe governing party officials were linked to the compensation deals.

Nomura Securities, the world’s largest brokerage, also is being investigated to see whether it violated securities laws by manipulating the price of Tokyu Corp., a major railway company.

Susumu Ishii, a former underworld boss, bought millions of Tokyu shares through Nomura before they shot up in price in the last three months of 1989.

Nomura and Nikko Securities allegedly arranged loans for Ishii’s stock purchases.

The nationally circulated newspaper Mainichi Shimbun said Saturday that police had found that gangsters affiliated with Ishii’s group had threatened directors of Tokyu, demanding that they buy back Ishii’s shares in the company for $1.4 billion - four times their market price.

A Tokyo police official said police have not announced such a case.

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