View from Tokyo: Brokers take to conspiracy theory

'JEWISH capital controlling stock market and targeting Japanese enterprises' screamed the headline in this week's edition of Shukan Post, a sensationalist weekly magazine aimed at salarymen that has a circulation of more than 750,000. In a four- page feature astonishingly close to the type of anti-Jewish propaganda put out by Adolf Hitler's stooges in the 1930s, the Shukan Post attempts to persuade its readers that a full-scale Jewish conspiracy that aims to undermine the Japanese economy is being played out in Tokyo's financial markets.

The secret weapon of this Jewish conspiracy, according to the magazine, is arbitrage trading on the Tokyo Stock Exchange, which is depressing share prices with the long-term goal of destroying 'the strong financial structure of Japan'. Serious economists and market watchers are unlikely to believe such superficial, racist hysteria. Declining corporate profits, a Bank of Japan- induced liquidity squeeze, bad debts and rising bankruptcies as the country struggles out of the bubble economy and its unparalleled splurge of collective greed are more sensible explanations for the market's fall. The Nikkei 225 stock average closed down at 16,717 yesterday, after rallying from a six- year low of below 16,000 at the beginning of the week.

But the Shukan Post article is just the most extreme of a series of theories that attempt to shift the blame for the stock market's fall on to foreigners. Common to all these scapegoat explanations is the dreaded foreign expertise in arbitrage trading.

As the Shukan Post would have it, the revenge of Jewish capital is a two-part strategy: first weaken the Tokyo stock market, then come in and swallow up Japanese companies that have become vulnerable to takeovers. The strategy dates back to 1985, when Japan began to 'confront Jewish capital in the car and computer industries'. As Japanese companies purchased the Rockefeller Center and big Hollywood film studios, 'Jewish capital lost face'.

So, according to the analysis, 'Jewish people launched a campaign to destroy the strong financial structure of Japan with arbitrage and futures contracts'. Leading this campaign are Salomon Brothers and Morgan Stanley, which are fronts for shadowy Jewish forces and particularly the Rothschild family. To drive the point home there is a photograph of Baron Rothschild at the top of the article.

Arbitrageurs have come under heavy attack in Tokyo in the past six months - largely because the most successful of them are foreigners, and because the Japanese securities companies do not have sufficient technical expertise to mimic them. As the cash market on the Tokyo exchange has plummeted, foreign houses, particularly Morgan Stanley and Salomon Brothers, have turned to derivatives to increase their profits.

The favoured tactic has been to exploit short-term price differentials between Nikkei 225 index futures contracts on the Osaka exchange and the underlying share prices of the companies on the Tokyo exchange. Much of this trading is done with the help of sophisticated computer programs developed for similar trading on Wall Street.

This trading gave a substantial boost to earnings for the American firms, and three of the top five securities companies in Japan in the last fiscal year were American, much to the dismay of their Japanese competitors. Only Nomura earned more than Salomon Brothers last year, followed by Goldman Sachs (US), Daiwa (Japan) and Morgan Stanley (US).

With 11 of the top 13 Japanese securities firms reporting losses this year, there is growing resentment at the success of the Americans. Apart from the racist paroxysms in the Shukan Post, the US brokerages have been targeted by a series of negative articles, even in the most respected of financial journals.

On the seamy side, they have also been receiving a string of hate mail and anonymous faxes. These messages accuse the firms of plotting to send stock prices lower and of causing suicides by desperate investors. 'Foreigners, employees of foreign firms, get the hell out of Japan. Let there be no more of these evil contrivances,' warned one letter. The fact that in the past year all the top Japanese securities firms have been involved in market-manipulation scandals is conveniently overlooked.

But concern over the allegedly destabilising effects of futures trading has spread even to the sober Ministry of Finance and the Tokyo Stock Exchange. The most serious charge against the arbitrageurs is that they are causing wide swings in the share values of smaller firms that are included in the Nikkei 225 average. There is some talk of changing the basis of calculating the index, possibly by giving more weighting to more expensive shares. This would make it more difficult for arbitrageurs to buy into the market.

In an attempt to curb the futures business in March, the Osaka exchange was persuaded to double commission rates charged on the Nikkei 225 index futures contract. However, this had little success, particularly because the same contract is traded in Singapore, which is just one hour's time difference from Tokyo. An approach to the Singaporean authorities to get them to raise their commissions was quickly rebuffed.

A month later the National Tax Administration Agency conducted a surprise audit on arbitrage activity of foreign firms, and the tax agency said it was considering revising regulations on the taxation of arbitrage profits. If such a revision is implemented it appears that profits would be taxed retroactively. Although some of the Japanese securities firms have also begun their own arbitrage operations, particularly Nomura and Nikko Securities, they were not involved in the sudden audit.

At the bottom of all the fuss over foreign arbitrageurs is a more fundamental unease felt by Japanese financial firms and the authorities at the opening up of Tokyo's financial markets to outside competition. In the good old days the Tokyo exchange was run by the big four Japanese brokers, with Nomura at the helm. Fixed commissions and undiscriminating investors allowed the brokers to push whatever stocks they fancied, and the exchange was more like a casino where the odds were rigged to give payouts to everyone who played.

But since the market began its downward spiral in 1990 the real world has rudely intruded on the cosy old cartel system. As late as 1988 foreign brokers had only 3 per cent of the entire market - by April of this year the foreign share had risen to 20 per cent. Call it a Jewish conspiracy, black ships from overseas or simply foreigners exploiting their own expertise - Tokyo's markets have been opened up too much to turn the clock back, and Tokyo's brokers will have to go through the same painful self-examination as, in another field, US and European car makers are doing in the face of hyper- efficient Japanese competition.