Another Reason to Avoid Japanese Stocks: Street Whispers

NEW YORK ( TheStreet) -- Not satisfied with draining profits, Japan's top corporations are struggling to keep their confidential quarterly financial results from being leaked.

It may be time to question whether those leaks -- coupled with highly publicized fraud at camera-giant Olympus and an insider trading crisis at Nomura Holdings ( NMR) -- are symptoms of an increasingly unhealthy investing climate in Japan.

On Tuesday, Japanese newswire Kyodo was able to get a hold of Panasonic's ( PC) second quarter profit figures well ahead of the electronics maker's earnings scheduled for later in the day. Citing anonymous sources, Kyodo reported that Panasonic, one of Japan's largest and most recognizable companies, had turned to a net profit of 10 billion yen - its first quarter in the black since December 2010.

The report went on attribute the profit to a cut in two plant operations and a restructuring of headcount in Panasonic's flat-panel TV and semiconductor units, citing the unnamed sources, who also confirmed that the company would maintain its full-year revenue and profit forecasts. By market cap, Panasonic is larger than rivals Sony ( SNE) and Toshiba ( TOSBF) and the report sent Japan's electronics manufacturers higher.

"The media report is not on any official announcements by Panasonic," said the company, in response to the leaked financial information. As it turned out, Panasonic reported a profit of 12.8 billion yen, and maintained its fiscal 2013 outlook.

But Panasonic is not alone in struggling to contain its earnings information, a piece of financial information that is considered sacred ground, even in a business press that celebrates and competes for leaked information on mergers, initial public offerings and management change from a usually anonymous cohort of corporate insiders, bankers and consultants.

Bloomberg obtained Nomura Holdings fourth quarter earnings roughly two days before they were set to be announced on April 27 and reported that trading gains had propelled the bank to a 50% increase in year-over-year net income to 18 billion yen, citing two unnamed sources. The news pushed Nomura shares nearly 2% higher, however, the sources also told Bloomberg that the earnings figure was 'preliminary' and could change when the company's board met later in the week.

When Nomura formally announced earnings later in the week, the company reported a fourth quarter profit of 22.1 billion yen, roughly a 23% higher than the Bloomberg report containing leaked figures.

Earnings leaks from anonymous sources are a step beyond the M&A and management leaks that cross trading screens daily. Breaking merger or corporate news, sourced anonymously, often partially reflects eventual facts because they are subject to quick change. With earnings, there is no need for such uncertainty.

Bloomberg has been able to get an early hold on the earnings of companies as large as Disney ( DIS) in recent years by guessing a predictable URL for a release; however, corporations have now mostly plugged that hole.

In the case of Japan, the issue of actual leaks may be a symptom of a bigger worry for equity investors, even if economic woes cut sharply at markets in the past 20 years. Nomura, the largest brokerage in Japan, admitted on Tuesday to instances where it's employees leaked confidential initial public offering plans to investors and offered a revamp of its controls in an effort to stave off a stiff regulatory penalties.

"Nomura sincerely apologizes to our customers and all parties concerned for the trouble we have caused," said Nomura in a statement, which also noted that the bank would enhance its internal controls "to regain the trust of the public." In late July, Nomura replaced longtime chief executive Kenichi Watanabe with Koji Nagai, as the three-month probe into IPO leaks and insider trading hit a boiling point.

The recent black eye to Nomura, and it and Panasonic's recent earnings leaks add to an already suffering reputation for Japanese corporations, financial transparency and management.

In 2011, Michael Woodford, the first non-Japanese chief executive Olympus - and one of a handful of foreign CEO's in Japan -- uncovered a web of accounting fraud and bribery at the camera maker. Woodford was quickly fired by Olympus for initiating an internal inquiry and took to the global business press, notably the Financial Times, to detail the fraud and bribery charges.

This year Japanese authorities arrested seven former Olympus executives, including the company's former chairman after investigating Woodford's fraud allegations. Olympus shares have fallen nearly 50% in the last 12 months, even after tripling from lows when it faced the prospect of being delisted.

Although Japanese equities suffer from headwinds like a strong currency, weak present demand for electronics and hardware components, and the lingering impact of a devastating 2011 earthquake - in addition to longer lasting economic issues - its time investors take a close look at whether rampant leaked information is also eroding confidence in the Japan's stock markets.

For more on corporate malfeasance, see details on a bank rate fixing inquiry and the insider trading conviction of Rajat Gupta, a former Goldman Sachs board director.

-- Written by Antoine Gara in New York

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