Japanese police have launched an investigation into the financial scandal engulfing Olympus Corp, a newspaper said on Thursday, as a major investor joined increasing calls for a wholesale clean-out of the board.

Olympus Corp\'s President Shuichi Takayama reacts at a news conference in Tokyo, November 8, 2011.

Tokyo Metropolitan Police are investigating the firm\'s concealment of investment losses for possible violation of financial laws, the Yomiuri newspaper said, adding that police had asked Olympus for internal accounting documents and would also question Olympus executives and related officials.

Police would work with markets watchdog the Securities and Exchange Surveillance Commission, which is already investigating, and with Tokyo prosecutors, and swap information with the U.S. markets regulator and the FBI, the paper said.

A police spokesperson declined to comment.

Shares in the once-venerable maker of cameras and medical equipment were untraded with a glut of sell orders more than two hours after the market opened.

Olympus has lost three-quarters of its market value since the scandal broke last month, when sacked chief executive Michael Woodford went public with allegations the company had improperly accounted for $1.5 billion in payments related to mergers and acquisitions.

On Tuesday, Olympus ended weeks of denials and stunned investors by admitting to hiding substantial investment losses for decades and using the unusual payments to assist in the cover-up.

Olympus said the revelation came to light through an independent inquiry it had commissioned, and it blamed three senior executives for the cover-up. Two of those executives were former president Tsuyoshi Kikukawa and ex-vice president Hisashi Mori. Both are still directors.

WHOLESALE CLEAN-OUT

Earlier on Thursday, UK fund manager Baillie Gifford & Co, which says it holds more than 4 percent of Olympus, called on the firm to reinstate Woodford.

"What Olympus needs now is a thorough clean-up and we believe Michael Woodford is the best man for the job," Baillie Gifford partner and its head of developed Asia equities, Elaine Morrison, said in a statement.

"The current management of Olympus has been discredited by its original response to Mr. Woodford\'s allegations and its poor communications with shareholders. We expect all directors or employees linked to this wrongdoing to be dismissed and have their ties to the company severed."

The biggest foreign shareholder, Southeastern Asset Management, which has about 5 percent of the firm, called for an extraordinary meeting of shareholders to sweep out all the remaining directors and its internal-audit board.

Some analysts echoed the call for the board to go but said the firm\'s only future might lie with an eventual buyout.

"The question is, almost whatever they do, the management is going to be in question. They do need to get rid of the entire board," said Nicholas Smith, head of Japan equity strategy at CLSA in Tokyo. But he added that bringing in new management might well not suffice.

"The only way that you really change things in a way that is acceptable to shareholders is that the company gets bought out. And there\'s no lack of possible buyers for it."

M&A experts and market analysts said potential buyers for Olympus, which has 70 percent of the global market for gastro-intestinal endoscopes, would steer clear until the dust settled.

"The camera business is not profitable as a whole, but Olympus has an endoscope share that companies envy. Olympus\' debt load is what could stop them in their tracks," said Fujio Ando, senior managing director at Chibagin Asset Management.

A report from Jiji news agency on Wednesday that creditor banks were considering changing conditions for their loans increased the uncertainty, although a banking source said it was too soon to consider specific action.

"There is a high risk that Olympus will be delisted. At the same time, we also have to watch out for the risk that the company could go bankrupt if its main credit banks decide to stop providing loans," said Ryosuke Okazaki, chief investment officer at ITC Investment Partners Corp.

Okazaki said banks would require Olympus to accept members of banks as observers.

"Even if Olympus clears these hurdles, the company will be a target of a take-over bid," he added. "There is strong possibility some funds are looking for the chance to buy out or take control of the company."

Olympus, founded as a pioneering Japanese manufacturer of microscopes, branched into cameras in the 1930s and two decades later expanded into gastrocameras, which became its mainstay profit earner. The Olympus group employed 39,727 people as of March this year.