Japan’s commitment to deregulation and market liberalization may be put to the test as the government and the business community respond to the misconduct of Nomura Securities Co. and other scandal-tainted firms, observers say.

Both have in the past been slow to punish scandal-tainted companies but must now take an uncompromising stance against Nomura if their pledges to create a fair, competitive market are to be believed, they said. The Nomura case, in which transaction profits are suspected of having been illegally channeled to a firm with links to a corporate racketeer, could not have come at a worse time for the government’s efforts to push ahead with a “Big Bang” of financial system reforms, they pointed out.

Ju-ichi Yamanaka, senior institutional economist at NLI Research Institute, said the incident went against all the basic principles envisioned by the Big Bang, which advocates a free, fair and global Tokyo market. “The problem is that the accountability of Japanese securities firms remains unclear and that the idea that ‘anything goes’ is still strong,” he said.

But from a global viewpoint, the irregularities in Japan are being increasingly highlighted, he said, adding that securities firms will need to pay greater attention to the market, rather than authorities, if the Big Bang indeed becomes a reality. Jiro Ushio, chairman of the Japan Association of Corporate Executives (Keizai Doyukai), said it is dangerous to further liberalize the Japanese markets without clarifying rules and increasing the transparency of corporate activities. “In Japan, business leaders tend to be criticized if they do not defend the companies in the community,” Ushio said. “But I think we have to get used to accusing fellow companies that lack morals.”

Ushio said it is such a pity to hear the news of Nomura and Ajinomoto when the business community is actively calling for deregulation and an increase in the private sector’s role in the Japanese economy. Ajinomoto Co. is alleged to have offered money to “sokaiya” racketeers. The reason why Japan is so slow to reform itself is because it has been, and still is in some ways, very dependent on the murky triangle formed by bureaucrats, politicians and business, he said.

In general, while Keidanren and executives at other financial institutions are quick to decry the Nomura incident, they seem so far to be reluctant to take stern steps against the brokerage, apparently waiting for authorities to draw first blood.

Finance Minister Hiroshi Mitsuzuka has promised severe action against Nomura once its probes have been concluded, but Finance Ministry officials remain relatively calm over the whole affair. “The incident won’t lead to a collapse of Tokyo’s stock market,” a high-ranking official at the ministry’s Securities Bureau said. “But I cannot deny that it hurt one main objective of the Big Bang, which was to encourage individual investors to enter the market,” he said.

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