Japan blames foreign banks for stock woes By Emiko Terazono and Arkady Ostrovsky Published: March 20 2001 23:10GMT | Last Updated: March 21 2001 20:09GMT

Foreign banks that trade derivatives in Japan are once again in the line of fire.

As Japanese investors suffer the consequences of the global equity market turmoil, foreign banks are being blamed for depressing the prices of Japanese stocks. The allegations concern a derivative product linked to the Nikkei index which is being sold by large foreign banks.

An investor who buys an equity-linked bond is paid high interest (5 per cent, for example) and is promised the principal back as long as Nikkei index stays within a certain range throughout the life of the bond. However, if the index falls below a certain point, the investor loses some of the principal.

Observers say it is in the interest of foreign banks which sold these bonds to push the Nikkei down to avoid paying out millions of yen to investors. Hakuo Yanagisawa, financial services minister, earlier this month said: "Equity derivatives products have been accelerating the decline [in Japan's stock market]."

The Securities and Exchange Surveillance Commission, the regulator, has already asked some foreign brokerages for information about their trading of equity-linked bonds.

Last month the SESC found that traders at UBS Warburg Securities and Commerz Securities had been manipulating share prices to avoid making multi-million yen payments on exchangeable bonds. UBS subsequently said it had removed the trader responsible from that activity. SESC revealed that traders at both houses had driven share prices of individual companies down by placing a series of "lower-limit or no-limit" orders.

Foreign brokerages, meanwhile, point out that leading Japanese brokers and banks also arrange and distribute these products.

"The Japanese media are positioning it as a foreign [led phenomenon]," says one European trading house. "If anything is vaguely derivative or structured, it's linked to foreigners."

This is not the first time that foreigners have been made the scapegoat in Japan. In the early 1990s, the Japanese media blamed a "Jewish conspiracy" for bursting the share price "bubble" of the late 1980s. A few years later foreigners were blamed for triggering stock market volatility by trading futures. In 1998, fingers were pointed at foreign hedge funds for the plunge in banking stocks.

However, Sally Wilkinson, chief economist, at Daiwa SBCM Europe in London, says one of the main pressures on equity prices comes from Japanese financial institutions themselves, which have been selling their equity holdings ahead of new accounting rules being introduced on April 1.

Fears about Japanese banks' non-performing loans and hidden losses on equity holdings have triggered concerns about the stability of the financial system which in turn has weakened the banking stock prices further. This is compounded by the political paralysis which has damaged confidence in Japanese equity. http://markets.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3C0CN7KKC&live=true&tagid=ZZZR4COD20C&subheading=asia%20pacific%20equities

-- Carl Jenkins (somewherepress@aol.com), March 22, 2001