Daiwa executives arrested

The Japanese "gangster pay-off" scandal escalated yesterday as Hiromitsu Sogame, former vice-president of Tokyo-based brokerage Daiwa Securities, was arrested along with three other Daiwa senior officials.

Senior executives at all of Japan's "Big Four" brokerages - Daiwa, Nomura, Nikko and Yamaichi - have now been arrested in connection with alleged illegal payments to Japanese racketeers, known as sokaiya. Besides the broking houses, several other leading financial institutions, including Dai-Ichi Kangyo Bank, have been caught up in the scandal.

"This is threatening to destroy the international credibility of the entire Japanese economy," said Kanezo Muraoka, chief cabinet secretary, in an address to Japanese business leaders yesterday.

Until recently, the scandal was thought to be confined to the financial community. But recent revelations that Mitsubishi, the car maker, and Toshiba, the giant electronics company, had made payments to alleged racketeers showed that the influence of the sokaiya was more widespread than originally thought.

Sokaiya are extortionists who extract money from companies in return for not disrupting shareholders' meetings. Payments to sokaiya have been illegal in Japan since 1983.

The Japanese media have alleged that several top Japanese firms have channelled money to extortionists via payments for beach houses rented from a sokaiya-associated firm. Hitachi, the electronics group, last week admitted that it had made payments of this type.

The scandal has begun to impact upon the financial health of leading Japanese companies. Moody's Investor Service, the credit rating agency, warned yesterday that Yamaichi Securities' bond ratings could be downgraded. Moody's is conducting a review of Yamaichi.

"The review will consider the long-term implications of the illegal payments scandal involving Yamaichi., and the diminished likelihood of government support for the firm in the case of financial distress", Moody's added.