The arrest of Japan's most popular startup star has highlighted a startling weakness here: The world's second largest economy has no independent body that regulates its stock market.
The alleged antics of Livedoor Co Chief Executive Takafumi Horie involving stock swaps and dubious inflation of shares would never have gotten as far as they have if Japan had the equivalent of the US Securities and Exchange Commission, analysts say.
Beyond sparking a sell-off in Japanese stocks, the probe is raising serious questions about the nation's shoddy system for checking on such aggressive entrepreneurial tactics that became the hallmark of Internet company Livedoor and are slowly spreading in a globalizing Japan.
The public was stunned when public prosecutors, who wield immense power in Japan and rarely carry out raids without evidence for criminal charges, marched into the offices of Livedoor last Monday.
Horie and three other Livedoor executives were arrested by prosecutors on Monday on charges of securities law violations. Prosecutors said they were suspected of spreading false information, including covering up of losses at subsidiaries, to falsely boost share prices.
"Preventive action should have come earlier," before it blew up into a criminal case, said Etsuro Kuronuma, professor of law at Waseda University in Tokyo.
But for that, "a total overhaul of the legal system is needed," he said.
Kuronuma and other experts say "Livedoor shock," as the Japanese media have dubbed the debacle, could be exactly what this nation needs to create a regulatory body like the US' SEC.
Japan's closest equivalent to the SEC is a section in the government called the Financial Services Agency, which had taken no action against Livedoor, although its stock splits, hostile takeover attempts and other aggressive ways were widely known.
Opposition politicians have been quick to seize the opportunity to attack the nation's shaky regulatory system.
"The responsibilities lie heavy with the Financial Services Agency, the agency's panel overseeing stock exchanges and other authorities that let Livedoor's window-dressing go unchecked," Seiji Maehara, leader of top opposition Democratic Party, said in a statement after the arrest.
Experts say Japanese laws simply haven't kept up with the times.
Takeovers and stock splits -- both Livedoor's trademark schemes -- have been rare in Japan, and the borderline between what's legal and illegal has yet to be clearly defined.
The costs of falling behind have been great for Japan.
The benchmark for the Japanese stock market has tumbled 6.7 percent since the start of last week, and the Tokyo Stock Exchange has been forced to shorten trading sessions because it has been overwhelmed with trading volume, hurting its credibility as a world-class bourse.
The top business daily Nihon Keizai Shimbun blamed the Japanese government for having allowed the rise of Horie -- as well as his fall from grace -- by letting possibly dubious practices go unchecked.
Japan must get busy setting up "a Japanese version of the SEC" and do some soul-searching about how to monitor the behavior of listed companies and foster a fair market, without having to rely solely on prosecutors, the paper said on Monday in a front-page commentary.
Meanwhile, Livedoor said yesterday it has replaced Horie as its president.