Scandal Rocks Japanese Economy

The former president of Japan’s largest brokerage was arrested Friday on suspicion of approving illegal payoffs to racketeers, and the prime minister warned the widening scandal could jolt the securities industry.

The arrest of Hideo Sakamaki, who resigned as president of Nomura Securities Co. two months ago, sent stocks tumbling on the Tokyo Stock Exchange.

The benchmark Nikkei Stock Average lost 243.42 points, or 1.20 percent.

Prime Minister Ryutaro Hashimoto said the scandal could have a “severe” effect on the securities industry.

Finance Ministry officials told the Japanese media they planned to impose stiff penalties on Nomura, including a temporary suspension of business operations.

The scandal, linking top businesses to mobsters, also has touched DaiIchi Kangyo Bank, a major commercial bank. It is suspected of providing loans for stock purchases to Ryuichi Koike, an alleged racketeer who was arrested earlier this month.

Racketeers known as “sokaiya” extort payments by threatening to disrupt shareholders’ meetings by shouting angry questions or at times throwing bottles at the podium.

Sakamaki testified in Parliament earlier this week that he had met Koike. But he denied knowing about any illegal payoffs, which, according to Japanese media reports, amounted to 38 million yen ($326,000).

Nomura’s new president, Junichi Ujiie, said Sakamaki’s arrest “is extremely serious and regrettable.” But he denied the company as a whole was involved in the scandal. Three other Nomura executives were arrested earlier this month.

Sakamaki took over as Nomura’s president promising to clean up the brokerage after a 1991 scandal, which involved payoffs to favored major clients. No Nomura official was arrested in that scandal.

Sakamaki’s arrest is a blow to the financial sector at a time it is trying to undergo reform to become more competitive in international business.

But Nomura’s problems could benefit foreign brokerages trying to expand their presence in the Japanese market. Nomura has already lost some major clients, including local governments.

Japanese business leaders said the credibility of corporate ethics had been shattered.

“I truly feel a sense of crisis,” Toyota Motor Chairman Shoichiro Toyoda told reporters.

Toyoda said he feared bureaucrats would exploit the scandal to tighten regulations.

Recently, sokaiya-payoff scandals have hit Ajinomoto Co., a major food company, and Takashimaya Co., a well-known department store chain.

In 1994, an executive of Fuji Photo Film Co. was slashed to death outside his Tokyo home, allegedly by sokaiya angry that he hadn’t paid up.

Sokaiya are the main reason why most Japanese companies hold their annual shareholders’ meeting on the same day, in hopes of thinning out the ranks of the estimated 1,000 sokaiya.