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Kobe Steel sold Japan defense contractors suspect parts: ministry

Scandalized supplier drags down automakers, other customers in stock market

TOKYO -- The Japanese government confirmed Tuesday that members of the nation's defense industry used parts procured from Kobe Steel that may have had inflated data regarding their quality in a cheating scandal linked to products ranging from cars to trains to rockets.

Kobe Steel altered inspection certificates to falsely show that certain aluminum and copper components satisfied client specifications under strength and other headings, the company acknowledged Sunday. The steelmaker said the suspect components had been supplied to more than 200 customers, but had yet to specify which companies or industries.

However, the Ministry of Economy, Trade and Industry told reporters Tuesday that Mitsubishi Heavy Industries, Kawasaki Heavy Industries, Subaru and IHI have used Kobe Steel's aluminum products. Those four companies are major players in Japan's defense industry.

The ministry has asked these groups to cooperate in a probe being launched against Kobe Steel. The four reportedly are conducting internal safety investigations as well. METI said it had not confirmed whether any suspect components have been used in nuclear power plants.

Meanwhile, the transport ministry has told automakers, along with aircraft parts manufacturers such as Mitsubishi Heavy and Kawasaki Heavy, to check the status and safety of Kobe Steel-supplied components. Boeing and other leading aircraft makers procure core components from these Japanese suppliers. The ministry also is working with international aviation authorities to gather data regarding the safety of planes flying in Japanese airspace.

Market impact

Kobe Steel shares took a beating in the first session after the data scandal broke. Circuit-breaker rules halted trading for the company Tuesday after it lost 300 yen, or nearly 22%. The stock closed at 1,068 yen.

Nissan Motor, Mitsubishi Heavy, IHI and other Kobe Steel customers also saw their shares sink even as the Nikkei Stock Average gained 0.6% on the day.

"We're going to watch closely to see whether automakers and other major clients seek recalls," said Kazuhisa Mori, an analyst for JPMorgan Securities Japan.

Atsushi Yamaguchi, an SMBC Nikko Securities analyst, said: "If recalls are issued for structural components, such as automobile suspensions, the impact on earnings will be significant."

The group "betrayed the trust of its clients, and it lost orders 10-20 years down the road," reckoned Keiju Kurosaka, analyst for Mitsubishi UFJ Morgan Stanley Securities.

Kobe Steel bonds plunged in Tuesday's fixed-income market, where the company has 176 billion yen ($1.56 billion) worth of debt floating. A 10-year bond issued in 2015 broke below par, or 100 yen, to stand at 92 yen, down from 101.45 yen Friday, according to prices quoted by the Japan Securities Dealers Association. 

Regional banks and other Japanese financial institutions reportedly sold Kobe Steel debt at a loss, worrying about the scandal's impact not only on the steelmaker's short-term earnings but also on its longer-term prospects. Premiums for credit default swaps on Kobe Steel rose sharply.


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