JIN-169 -- Amid Market Woes, Financial Authorities Get Tough

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J@pan Inc Magazine Presents:
T H E J @ P A N I N C N E W S L E T T E R
Commentary on the week's business and technology news
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Issue No. 169
Wednesday, February 20, 2002
Tokyo

CONTENTS

++ Viewpoint: Amid Market Woes, Financial Authorities Get Tough
++ Noteworthy News
- Japanese Brokerages Feel Pinch as Moody's Lowers Their Ratings
- Bill Gates to Hit Tokyo Streets for Xbox Launch
- Convenience Store Odds and Ends
++ Events

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++ VIEWPOINT: Amid Market Woes, Financial Authorities Get Tough

"Japan is becoming a place for gambling." That's what the Japanese
press reported Finance Minister Masajuro Shiokawa as saying on
February 8 in reference to news that securities firms had violated
rules on short-selling. Japanese financial authorities have been
cracking down hard on short-selling equities recently, making
standards tougher and penalties for illegal behavior harsher.
(Short-sellers sell a security they don't own in the hopes of buying
it back at a lower price; it's a perfectly legal trading strategy,
although certain rules must be observed.)

Shiokawa's comment came a few days after Japan's financial watchdog,
the Financial Services Agency (FSA), announced that it would suspend
Morgan Stanley Japan from all stock trading on its own accounts for
five weeks from February 4. The action was based on a finding by the
Securities and Exchange Surveillance Commission (SESC) that the
company violated regulations on short-selling and created "an
artificial market." On the same day, the FSA announced tougher
guidelines on short-selling that are closer to those used in the US.

Morgan Stanley was further penalized by the securities exchanges. The
Tokyo Stock Exchange (TSE), the Osaka Stock Exchange (OSE) and Japan
Securities Dealers Associations told the company on February 15 to
pay a total of 121 million yen in fines for breaching the regulations
-- one of the biggest fines since the Nomura Securities scandal of
1997, when the leading Japanese brokerage was punished for paying
hush money to a racketeer.

The punishments by the exchanges and the FSA are bound to "harm
(Morgan Stanley's) reputation seriously," one financial executive in
Tokyo said on condition of anonymity. The suspension may also hit the
US-based brokerage's bottom line because it won't be able to use its
own accounts to hedge positions for five weeks.

Morgan Stanley is not the only one punished for short-selling:
Goldman Sachs was also suspended from trading stocks on its own
accounts from December 25 to January 11.

Takeo Takahashi, the SESC chairman, seems dead set on cracking down
on rule breakers and sweeping away securities crimes. And who could
take issue with that? Both Japanese and foreign investors want to see
the Japanese equities markets become cleaner and more trustworthy.

But the system for deciding penalties is cloudy at best. TSE fined
Morgan Stanley 15 million yen for breaching regulations on
short-selling and another 20 million yen for creating "an artificial
market." Both fines were records for their categories. The Tokyo
exchange fined Tokyo Mitsubishi Securities 14 million yen last year
for the same violation of creating "an artificial market." What
gives?

Officials at the TSE and OSE say penalty amounts are decided by their
disciplinary bodies. "Why are the fines levied on Mitsubishi and
Morgan Stanley different even though the charge is the same," I asked
a TSE official. "Are there any rules about how much you can fine a
brokerage in each category?" He declined to disclose details, saying
only that penalties depend on "the seriousness of the matter." Then
he said that Morgan Stanley's case is more severe than Tokyo
Mitsubishi's because the US-based brokerage was charged with
violating the rules in two separate categories and the company turned
a profit by breaking the rules. I asked him how it was decided that
Morgan Stanley turned a profit on the deals. He just said decisions
are made by the exchange's disciplinary body.

Morgan Stanley was hit with record fines by the OSE as well. The
Osaka exchange levied a 70 million yen fine on the US-based
brokerage, topping the 53 million yen fine levied on Kokusai
Securities last year for several charges including lying to
inspectors (the TSE also fined Kokusai 56 million yen). Before the
Kokusai case, the OSE's penalties were rarely more than several
million yen. I asked them if the fines are tied to anything. The OSE
official said fines are decided on "the importance of the matter
concerned."

The recent decisions against Morgan Stanley and Goldman Sachs show a
new resolve among Japan's financial authorities to clamp down on
wrongdoing in the markets. Let's just hope that the authorities make
their decision processes more transparent so that investors can be
assured that penalties are being doled out even-handedly.

-- Sumie Kawakami

Sources:
"Financial Authorities Pack a Punch" from 12/01 issue
http://www.japaninc.com/article.php?articleID=534

"A New Sheriff's in Town," interview of SESC's Takeo Takahashi, 12/01
http://www.japaninc.com/article.php?articleID=648

"The FSA Jargon Department" from 12/01 issue
http://www.japaninc.com/article.php?articleID=647

Press release from Morgan Stanley
http://www.morganstanley.co.jp/pc/index_e.html

Press release from the TSE
http://www.tse.or.jp/news/200202/020215_d.html

FSA revisions on rules on short-selling
http://www.fsa.go.jp/news/newsj/13/syouken/f-20020208-2.html

FSA order against Morgan Stanley
http://www.fsa.go.jp/news/newse/e20020201-1.html

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++ NOTEWORTHY NEWS
(Long URLs may break across two lines, so copy and paste to your browser.)

** Japanese brokerages feel pinch as Moody's lowers their ratings

Extract: Moody's Investors Service decided to lower credit ratings
for Japan's second and third biggest brokerages Tuesday, leaving them
one rank above junk status, according to press reports. Nikko Cordial
and Daiwa Securities Group now have unsecured senior debt ratings of
Baa3, which the Financial Times points out is on a par with the
midsize General Bank of Greece. The lowered ratings especially hits
Daiwa because it is planning to list its stock on the New York Stock
Exchange later this year.

From the Financial Times
http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3A6KJIVXC

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** Bill Gates to Hit Tokyo Streets for Xbox Launch

Extract: Microsoft is pulling out all the stops for its Xbox launch
in Japan this Friday. The US-based company is holding events all week
to hype its game console, has been advertising heavily on TV, and is
sending Bill Gates to speak at events in Tokyo on the day of the
launch. Xbox beat many analysts' predictions when it rolled out in
North America in November; so far it has sold more than 1.5 million
consoles, according to the New York Times. But the Japan market is a
different animal. Microsoft has lined up 12 software titles for
release on the date, and these could prove to be the make-or-break
for Xbox's first weekend in Japan as Japanese gamers are notoriously
picky about the games they play. The company is hoping for a strong
launch to build enthusiasm for its March 14 launch in Europe.

A side note: the Nihon Keizai Shimbun, Japan's leading daily business
newspaper, reported on Tuesday that Xbox consoles sold in Japan are
not American-made; they're built in Mexico by Singapore-headquartered
Flectronics International.

"Xbox Courts Japan" from 09/01 issue
http://www.japaninc.com/article.php?articleID=10

From Microsoft (in Japanese)
http://xbox.jp/experience/index.html

From the International Herald Tribune
http://www.iht.com/articles/48552.htm

** Convenience Store Odds and Ends

Extract: Japan's convenience stores, or konbini, as they are
affectionately called, are a hotbed of experimentation. It seems you
can't go a week without seeing a new service being offered by one
chain or another. Here's a couple of the latest:

Konbini giant Lawson and camera maker Konica announced Tuesday that
they will jointly launch digital photo services. Lawson's site
@LAWSON will be connected with Konica's 50 development factories, so
users can sign in through the Net to get their digital photos
developed. Prints will be delivered to a nearby Lawson store three
days after the order. Customers can also get their prints digitized
and stored on a CD or on the Net.

Also, McDonald's Japan announced that it would take steps to look a
little more like a konbini by offering e-shopping in its restaurants.
Diners in specially selected stores would be able to buy tickets to
events, shop for clothes online and do other sorts of teleshopping
while wolfing down their Big Mac sets from this summer. The system is
to be tested by employees from April.
The Asahi Shimbun quoted McDonald's Japan president Den Fujita as
saying, "I believe the profits generated by this new business will
eventually surpass those of our core food operations."

JIN No. 164, Viewpoint: The Ever-Evolving Convenience Store
http://www.japaninc.com/newsletters/index.html?list=jin&issue=164

McDonald's news from Asahi Shimbun
http://www.asahi.com/english/business/K2002021400388.html

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STAFF
Written by Bruce Rutledge (bruce@japaninc.com) and Sumie Kawakami
(sumie@japaninc.com)

Edited by J Mark Lytle (mark@japaninc.com)

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