4th-Largest Brokerage Company in Japan Fails

TOKYO — Crushed by soaring debt, a slumping stock market and a racketeer payoff scandal, Yamaichi Securities, Japan’s fourth-largest brokerage firm, announced today that it will shut down.

It is the largest Japanese corporate failure since World War II.

Reaffirming the Japanese government’s increasingly tough, market-oriented stance, Finance Minister Hiroshi Mitsuzuka said the brokerage will be allowed to go under. But he pledged that Yamaichi’s investors will be protected, and he called for calm in the international markets.

Analysts saw the de facto bankruptcy of the 100-year-old brokerage firm as proof that Japanese authorities intend to stick to their policy of “Big Bang” deregulation of the financial services industry, allowing market forces to decide corporate fates.

“Capitalism is coming to Japan,” said Jesper Koll, vice president of J.P. Morgan Securities Asia in Tokyo. “It used to be that there was this explicit guarantee that the public sector would bail you out. Now the guarantee is that [only] the depositors will be protected.”

Yamaichi is the fourth Japanese financial service company to be allowed to fail since spring, following Nissan Mutual Life Insurance; Sanyo Securities, a medium-sized brokerage; and Hokkaido Takushoku, a commercial bank that went belly-up a week ago.

“The market is getting closer to global standards, which will wipe out weakened institutions mercilessly,” declared the Nikkei newspaper, Japan’s leading financial daily. “Yamaichi crashed as a result.”

At a news conference at the Tokyo Stock Exchange this morning, Yamaichi executives bowed deeply to the company’s customers, as well as to the employees--many of whom reportedly learned that their brokerage was planning to close down only by reading Sunday’s newspapers.

“We don’t know how to apologize,” said Yamaichi President Shohei Nozawa. He said that while the firm would no longer accept new business, it would stay open so that customers can withdraw their investments. As of March, Yamaichi had about 82,000 customers, although the number is believed to have fallen. The brokerage was handling $190 billion of client assets as of September.

Employees outside Yamaichi’s headquarters in downtown Tokyo called the top management’s actions “unforgivable.”

“They are as guilty as 10,000 deaths,” one angry employee told NHK television.

Another employee, who had not yet been notified by the company of the shutdown, asked reporters, “Is it really true?”

Although the Japanese market has been roiled by the crises in Southeast Asian currencies and markets and particularly by South Korea’s deep financial woes, Yamaichi’s problems are seen as stemming from domestic financial problems and corporate mismanagement.

Yamaichi’s image and customer base were badly damaged in 1991, when a scandal over illegal financial favors for special corporate clients began eroding customer confidence and cutting into profits, especially in the firm’s lucrative corporate section.

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Last summer, Yamaichi burst into the headlines again over payoffs to sokaiya, the corporate racketeers who extort money in exchange for ensuring short and noncombative annual shareholder meetings. Eleven top executives, including the Yamaichi chairman and the president, were ousted.

But Yamaichi’s efforts to right itself faltered, and Moody’s Investors Service on Friday downgraded the firm’s debt to junk-bond status. Its bank creditors, saddled with huge bad debts of their own and wary that the Big Bang deregulation would make Yamaichi’s debt even more vulnerable, refused to extend the brokerage more credit.

That refusal marks a sharp departure from the old “convoy system” of financing in which banks, under pressure from the Finance Ministry, would keep sinking companies afloat.

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By Sunday, the Japanese media were reporting that Yamaichi, with its capital base and stock price shrinking, would have no choice but to seek voluntary closure, throwing 7,500 employees out of work.

Though a shock to Japan’s risk-averse business culture, the Yamaichi failure did not come as a surprise.

“Everyone knew this would happen but kept procrastinating about doing anything,” said Eiichi Koguchi, an accountant.

Koll of J.P. Morgan described the brokerage collapse as a “very healthy” disciplinary tonic for the Japanese financial industry, and he predicted little fallout in the world financial markets from Yamaichi’s estimated $24 billion in liabilities.

The battered Hong Kong stock market rose slightly this morning, possibly taking heart from Bank of Japan Gov. Yasuo Matsushita, who said the central bank would provide “whatever funds are necessary” to reimburse Yamaichi’s investors and close down its overseas operations smoothly.

Today is a national holiday in Japan, but authorities clearly intend to head off any jitters that could hit Wall Street or the Tokyo markets that reopen Tuesday. Prime Minister Ryutaro Hashimoto, on his way to the Asia-Pacific Economic Cooperation summit meeting in Vancouver, Canada, said today that he had instructed the Finance Ministry to take measures to maintain stability in the financial system.

However, the real extent of Yamaichi’s problems is still emerging. Mitsuzuka, the finance minister, said today that Yamaichi’s hidden debt could amount to an additional $2.1 billion, while the Japanese media reported that the real figure could be even higher. The brokerage is suspected of engaging in tobashi, the practice of illegally compensating favored clients for their losses.

The Asahi newspaper reported today that Yamaichi had set up offshore paper companies, including one in the Cayman Islands, in order to conceal its tobashi debt from Finance Ministry regulators. Mitsuzuka said he had learned of the off-the-books debt only last week.

Yamaichi is estimated to have handled between 4% and 6% of all Japanese securities transactions. Its rivals--including U.S. firms Goldman Sachs and Merrill Lynch, which have been eating away at its business for months--will begin scrambling to grab as much of that market share as possible.

“In order for there to be winners, we need the losers to actually drop out of the race,” Koll said. “This bankruptcy underscores the opportunity that is created by Big Bang.”

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Etsuko Kawase in The Times’ Tokyo Bureau contributed to this report.