Just as foreign investor interest in the Japanese stock market has picked up, old fears have reawakened over the level of insider trading ahead of deals.
In late 2010, Atsushi Saito, the Tokyo Stock Exchange president, pledged a purge on insider trading, saying he could not "bear the capital market to be dirty".
But more than a year on, bankers, fund managers and other market participants say suspicious trading ahead of deals is all too common and further regulatory reform is needed in the world's second-biggest equity market.
High-profile crackdowns on insider trading seen in the US and UK in the wake of the financial crisis have not been mirrored in Japan. Last month an asset manager was fined for insider trading in the first sanction following a probe into suspicious trades ahead of public offerings two years ago, and last week SMBC Nikko Securities was ordered to improve its business by Japan's financial regulator, after it found sales staff disclosed sensitive information. But such examples of punishment for market abuses are rare.
Recent share price moves in SCSK Corp are an example of the kind of activity that alarms many investors in Japan.
After the market closed on Monday February 6, the IT services company announced a secondary offering -- now completed -- in which its second-biggest shareholder would sell most of its 12 per cent stake. The news triggered a 6 per cent fall in SCSK's share price the following day, on trading volumes about 25 times greater than the previous month's average.
What was unusual was that the shares had dipped as much as 6 per cent the previous Friday, on volumes almost five times greater than normal. Only twice in the previous five years had the stock seen more volume in a single day, according to Bloomberg data. SCSK, listed on the TSE's first section with a market capitalisation of Y132bn ($1.6bn), had made no public disclosures. The shares, now trading at Y1,227, closed at Y1,269 on the day before the trading volumes rose.
The deal's bookrunner, Deutsche Bank, declined to comment, as did Nomura, joint underwriter with Deutsche. SCSK said it recognised that volumes and volatility were high on February 3, but declined to comment further.
According to market participants, the most plausible explanation for the increased activity is that potential buyers of the stock sounded out by people with knowledge of the deal did not behave as they should have. They say the sequence of events seems to reinforce Japan's reputation as a market in which small numbers of investors routinely profit from inside information.
"On every [equity] deal, someone takes a leak in the pool," says one head of capital markets at an investment bank in Tokyo. "It's immensely frustrating."
Japanese regulators are aware of the problem, but market participants question the effectiveness of their remedies.
They say that the penalty recommended last month by the Securities and Exchange Surveillance Commission may be harsher than the headline fine of Y50,000, as the institution in question -- Chuo Mitsui Asset Trust and Banking, now merged into Sumitomo Mitsui Trust Bank -- could find itself excluded from managing public money for a while. Chuo Mitsui's fine related to trading on inside information that Inpex, an oil & gas explorer and producer, would raise funds in a share issue.
But for hedge funds, the fine may be less of a deterrent than an incentive, says one Tokyo-based fund manager. "Every fund in the world should get over here: for a few hundred dollars you can make an exceptional amount."
Other measures to improve the share-allocation process are welcome, say analysts. In December, for example, the Financial Services Agency implemented new regulations for investors shorting shares after an offering -- that is, selling borrowed shares in hope of making a profit by buying the stock back later at a cheaper price to return to the lender.
The new rules will bar traders from covering their shorts after an offering with new stock. That brings Japan in line with international standards but may not put an end to investors putting on short positions synthetically, through derivatives, or simply using multiple accounts.
"It is an honours system. Investors can say they are not short, but there is no way of checking," says one fund manager.
What Japan needs, say market participants, is an overhaul of its equity capital-raising system. There is no need, for example, to mandate a two-week fundraising period for equity issues, when deals can be done in just a few days.
Another improvement -- now under consideration by the Japan Securities Dealers Association, a self-regulatory body -- would be to allow companies to see the book of investors as it is being developed, so that boards can focus on building long-term, diversified and committed shareholder bases.
Meanwhile, leaks should be punished more severely, says one Tokyo-based executive at a global asset manager, noting that the FSA's securities division is expected to rule soon on the Chuo Mitsui and SMBC Nikko cases.
"As is, the system benefits brokers and hedge funds who are short. Everyone else is a loser."
