The prosecution of Horie, and of other lawbreakers such as the former president of Seibu Railway, Yoshiaki Tsutsumi, who was one of Japan’s most connected and celebrated business leaders until convicted of security law violations last year, has brought some reassurance that Japan’s markets are becoming more transparent and accountable. But the government–and the private sector–must do more along these lines.

As investors who have been following the case are well aware, Livedoor’s strategy was to take some common practices to extremes, exploiting regulatory loopholes. For example, when a company executes a stock split, Japanese law requires that the old shares be physically exchanged for the new ones. This removes them from circulation for a short time, creating a scarcity that inflates prices; Livedoor exploited the artificial run-up in prices by announcing acquisitions financed with stock involving the split shares. In another case, Livedoor made a hostile bid for a radio network and amassed a 35 percent stake in after-hours trading as a way around a rule that requires investors to disclose holdings when they reach 5 percent. These practices raised questions about the sufficiency of Japanese market oversight. The country’s Securities and Exchange Surveillance Commission employs less than 10 percent of the 3,800 staff working at its counterpart in the United States.

By shining a light in the dark corners of Japan’s financial markets, Horie has drawn attention to the fact that its rules and monitoring systems are inadequate. Considering the government’s embarrassment and newfound sense of urgency, investors should expect it to propose a series of reforms in regulations, institutions, oversight and transparency.

Archaic management practices and quirky corporate structures leave man [Japanese] companies vulnerable to hostile bids.

However, it is equally important (although little discussed in Japan right now) that private sector watchdogs, those who help shape corporate behavior–shareholders in Japanese companies, corporate boards, the news media and so on–take on greater responsibility for the oversight and maintenance of this enormous economy. Archaic management practices and quirky corporate structures leave many companies vulnerable to hostile bids. It is encouraging that many of them are now scrambling to bolster their defenses. Unfortunately, most boards of directors function as nominal rubber stamps, with many directorships acting as little more than sinecures for well-connected bureaucrats or retiring senior executives. In the foreign banking community, there is widespread skepticism about the independence and vigilance of directors and the overall quality of management systems, especially in second-tier firms.

While the press once lionized Horie, it now resembles a vigilante lynching gang, demonstrating as much enthusiasm for bringing him down as it did for building him up. There has been precious little media mea culpa about its inability to see through his deceptions. The media, through its own failure, was complicit in this scandal.

Nor has there been much reflection in the media on the other financial scandals involving blue-chip firms in recent years, which makes it seem that Livedoor’s offenses are a product of recent reform and deregulation. This is not the case. While the media has become more aggressive in exposing corporate wrongdoing, there remains a sense that it does so reactively and selectively. The slew of scandals involving top banks, brokerages and blue-chip firms since the mid-1990s suggests a wider pattern of abuses, negligence and lax supervision that the media has failed to unearth.

Since the end of 2001, the government has enacted a series of judicial reforms that are transforming the role of Japan’s courts. Already Japan has established 68 new law schools, with the goal of doubling the number of lawyers by 2010; mandated speedier trials; and created a citizen judge system and an Intellectual Property Rights Court. Nevertheless, this is little consolation to Japanese investors, who look on in envy as U.S. courts award massive damages to plaintiffs in class-action suits against Enron’s officers and directors, investment banks, law firms and others involved. Japanese law does not provide for this type of recompense.

The Livedoor legacy will accelerate the passage of overdue reforms, which will serve the nation’s collective interests and those of investors. But for the Japanese business and markets to thrive, this transformation needs to cut deeply into every corner of the country’s economic structure and be supported by reforms within businesses themselves and by a more aggressive media.

Art by Matt Mahurin.

Jeff Kingston is director of Asian Studies at Temple University Japan and author of the book Japan’s Quiet Transformation: Social Change and Civil Society in the 21st Century.