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Monday, June 16, 2003

JAPANESE PERSPECTIVES

Stocks won't recover unless regulators get serious about oversight


Tokyo share prices are on shaky ground. While the Nikkei 225 Stock Average has managed to recover from the deep slump it was in from March to mid-May, spending the whole time below 8,000 but trading in the upper half of the 7,000 range -- the key index remains far below 14,000, the level it was at when Prime Minister Junichiro Koizumi took office in April 2001.

On May 14, the government came up with a 13-point package of measures for structurally reforming and revitalizing the stock market. The proposed steps include moving up the date when corporate employee pension funds can start returning the pension assets being managed on the government's behalf, raising the upper limit on contributions allowable under the defined-contribution pension scheme, and reforming the securities tax. Efforts are now under way to put those measures into force.

The ruling coalition compiled its own batch of emergency financial and economic measures on May 6. A group of Liberal Democratic Party lawmakers led by Lower House Representative Koji Omi, in a bid to increase individual participation in the stock market, launched a campaign called "Buy Japan's Tomorrow," under which it urged the prime minister and his Cabinet to invest in stocks and the public to follow suit. In Japan, individual investors account for a much lower portion of the market action than in other industrialized nations. Given that Japanese firms are accelerating efforts to unwind cross-held shares, expectations are high that individual shareholders will surpass them as the key players in the market. The lawmakers' campaign seems very timely.

One issue I hope the lawmakers will focus their energy on is building people's trust in securities. If the general public tends to have a shady image of the Japanese stock market, it is partly because of the the practices being followed by securities firms. But the more fundamental problem is that the nation lacks either the capability or the willpower to properly monitor market activity.

The Securities and Exchange Surveillance Commission has a staff of only 265, which is equivalent to a mere 8 percent of the 3,285 people employed by the U.S. Securities and Exchange Commission. In fiscal 2002, the SESC had an annual budget of only $23.33 million, or 5.3 percent of the SEC's $437.9 million budget.

The government needs to make clear that it is ready to launch an immediate investigation whenever it discovers possible unlawful conduct detrimental to the healthy development of the market. It also has to disclose the results of the investigation and seek public judgment on whether the matter has been properly handled by the SESC.

In order to make the stock market more trustworthy and successfully encourage more individuals to invest, the government must first establish a system -- complete with full capability and willpower -- that can be used to monitor stock market activity.

Yoshio Nakamura is a senior managing director of Nippon Keidanren.


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