Photo: Andy Clarke/Flickr
More than a year after the tsunami and the Fukushima Daiichi nuclear disaster that accompanied it, a Japanese parliamentary report has concluded that the catastrophic meltdown was “man made.” The 10-member investigatory commission contended that the incident could have been prevented if not for certain Japanese cultural characteristics. In a recent Financial Times article, Japan expert and Columbia professor Gerald Curtis called that conclusion “the ultimate cop-out,” going on to claim that politics, not culture, were to blame.I’m inclined to agree with him, but in certain instances — like insider trading — Japanese culture is a fantastic enabler for bad behaviour.
Take the general response to the recent crackdown on insider trading in Japan; nobody’s surprised that illegal activity is widespread, they’re surprised that the authorities care. Until very recently, insider trading in Japan was about as serious an offence as jaywalking. In one widely-cited example from 2010, a bank was caught red-handed using insider information and fined only about $600.
Under such circumstances, the word “crackdown” hardly seems appropriate. Japan’s Financial Services Agency (FSA) has made inquiries about operations at 12 major banks, including Goldman Sachs, Deutsche Bank, and Citigroup, but based on the agency’s recent track record, it’s doubtful that anything serious will be turned up. AIJ Investment Advisors and Olympus each hid their illegal dealings from the FSA for a decade; it might be time for enforcers to try a new approach. Regardless of what the investigation finds, punitive measures remain slight.
The Japanese need look no further than the US for pointers on how best to deal with insider trading. In a high-profile federal case that ended in June, Indian-American businessman Rajat Gupta was convicted on three counts of securities fraud and one count of conspiracy. Gupta, who had previously held top positions at Goldman Sachs and McKinsey & Co., could face up to 25 years in prison when he’s sentenced in October.
Mr. Gupta’s actions are not currently considered to be illegal in Japan, where only those who initiate trades based on acquired insider information can be prosecuted. If you possess privileged information, you have every right to tell whomever you please. Even if they get caught insider trading and reveal their sources, you’re off the hook entirely.
What’s wrong with that? Some economists — Milton Friedman, for example — have suggested that insider trading is a good thing; that it drives market efficiency up and stamps out asymmetrical information. In Japan, however, the results have been mostly negative.
Widespread leaks have caused increased prevalence of short-selling in Japan’s markets. The consequences have been so severe that many companies report difficulty raising funds following their public offerings. A Bloomberg investigation revealed that the top 10 Japanese stock issuers in 2010 lost around 10 per cent of their value in the three months before public offering announcements, compared with just 0.2 per cent for the market as a whole. The same investigation estimated a total market value loss of approximately ￥800 billion. Insider trading is having a profoundly negative impact on Japan’s economic performance, and culture is a big part of it.
Individuals can be blamed for their handling of the Fukushima Daiichi nuclear disaster; insufficient preparation, poor decision making and shirking of responsibilities caused the calamitous meltdown and can thus be judged as bad behaviour. People engaged in insider trading have no notion that what they’re doing is wrong. There are no significant precedents of punitive action to deter them from continuing their ‘illegal’ activities, and the authorities are ill-suited to provide one.
Just like the US government’s effort to combat web piracy in the early 2000s, this is a case of too little, too late. Insider trading is such a universally accepted part of Japan’s business culture that the FSA cannot hope to prosecute every suspect and will likely resort to making a few examples. Who will be targeted and how severe the punishment will be remains to be seen, but not much can be expected unless drastic policy changes are made.