‘Nikkei previews’ spur complaints of edge in Tokyo

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Lucky guesses, or something more?

The quarterly results season in Japan, which reached its peak last week, has been notable for the re-emergence of a notorious feature of the world's second-biggest equity market: companies' results trailed days in advance on the pages of the Nikkei newspaper.

In some countries this might have authorities muttering about disclosure violations, or a lack of equal access to price-sensitive information.

But in Japan, regulators seem to have turned a blind eye to the "Nikkei previews", allowing stories to appear and then, within a few hours, letting companies put out rote statements saying the stories are not based on anything they have announced.

By then, however, the market has reacted, as the numbers seen by the 2.8 million readers of Japan's biggest business title are rarely wrong.

"It's absolutely assumed that if you try to run against it, you'll get your face ripped off," says Nicholas Smith of CLSA in Tokyo.

Last week GungHo Online Entertainment disclosed sparkling results for the six months to December, thanks largely to its hit smartphone game Puzzles & Dragons.

Yet the record numbers – operating profit of Y53.8 billion ($520 million) on sales of Y94.3 billion – had been outlined in a story six days earlier, when the Nikkei said they were likely to be "about Y50 billion" and "about Y93 billion" respectively.

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More shares in GungHo were traded on the day of the Nikkei story than on July 30, the day following the after-hours release of the results. Volumes on July 23 were more than 50 percent higher than the previous 15-day average.

GungHo issued the standard response on July 23 and later told the Financial Times the Nikkei story appeared to be based on "guesswork".

The Nikkei declined to comment on its editorial policy other than to say its reporting was carried out "appropriately".

Some say the previews are a harmless hallmark of a free press. So widespread is the practice, they argue, that market participants have simply grown used to it.

But others say the practice hurts Japan at a time when the government is keen to sustain the new-found interest of foreign investors. Such reports give an unfair advantage to readers of the Nikkei, they say, while putting non-Japanese readers at a disadvantage.

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Last year the Nikkei announced it would no longer supply instant English translations of stories to its 364,000 online subscribers. But given that between 60 and 70 percent of trading in Tokyo stocks is by foreigners, the effect of publishing earnings previews in the local language only is akin to "insider trading", says Mr Smith of CLSA.

In the case of Canon, the market impact appeared even greater. On July 11 a Nikkei story said the company had probably sold enough photocopiers to boost quarterly operating profit to Y110 billion. That forecast compared with analysts' consensus of Y90 billion and the shares jumped 2.4 percent on their highest daily trading volumes since February.

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Two weeks later official results revealed operating profit of Y110.5 billion. The shares sank a little the following day, on volumes less than half those of July 11.

"If the Nikkei reporters are guessing, they really should be super-analysts," says one observer.

Canon said Nikkei journalists visited its executives "far more" than other media, and that the article in question contained assumptions "most likely based on information gathered through these regular interviews".

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Japan Exchange Group, operator of the Tokyo Stock Exchange, declined to comment on individual press reports, and said it had no comment on the "news-gathering methods" employed by the media.

A government-sponsored report to be published this week on short-termism in markets, which some have likened to the UK's Kay Review , is expected to draw attention to the previews problem, according to a person familiar with the situation.

"Do we care? Yes, absolutely," says David Smith, Singapore-based head of corporate governance at Aberdeen Asset Management Asia. "It's a fairly basic tenet of a well-functioning market that price-sensitive information should be made available equally and contemporaneously among all market participants."