Financial Sector

January 2004

The Japan Business Federation (Nippon Keidanren) will call on the Financial Services Authority of the U.K. to allow Japanese companies to continue using Japanese accounting standards in Europe in 2005 and further. The European Union is reviewing to require that all corporations issuing stocks and bonds in European markets adopt international accounting standards beginning in 2005. Nippon Keidanren and more than 20 Japanese firms will jointly send a letter of request to the British FSA. In line with the EU's plan, the British FSA has announced its intention to require that all companies listed on the London Stock Exchange use either international or U.S. accounting standards. Japan's Financial Services Agency has already asked its U.K. counterpart to accept Japanese accounting standards in 2005 and beyond. There are concerns that Japanese companies that stick to the Japanese standards will be driven out of European capital markets if the use of international accounting standards becomes mandatory. Nippon Keidanren believes that persuading the British FSA, which holds sway over market policy in Europe, to accept Japan's request will give it bargaining power over negotiations with the EU. Nevertheless, the lack of confidence in Japanese accounting and auditing practices runs deep in the global community, according to British FSA. Next month, Tokyo plans to send a negotiating team to the British FSA and the European Commission. (January 30, the Nihon Keizai Shimbun)

The Financial Services Agency plans to approve foreign companies listed on Japanese stock exchanges to disclose their financial and other pertinent statements in English, hoping to amend relevant laws and regulations to be effective for fiscal 2006. Currently, such information must be disclosed in Japanese. By easing the burden of translating financial statements and other reports, the agency hopes to attract foreign firms to the exchanges. The legislation and regulations governing the stock exchanges have specific rules on form and vocabulary for listed firms' financial statements, which have been required to be in Japanese to protect domestic investors who cannot read English. Currently, the Tokyo Stock Exchange partially accepts documents in English when a company applies for listing on the exchange. But after listing, the firm must disclose information in Japanese, leading to additional costs to remain listed. There were 125 foreign firms listed on the TSE in both 1991 and 1992. But many companies pulled out after the bursting of the bubble economy in the early 1990s, and there were only 32 foreign firms listed in 2003. (January 28, the Nihon Keizai Shimbun)

The Bank of Japan (BOJ) loosens monetary grip further over foreign exchange concerns. BOJ policy-making panel decided to further ease its monetary grip in a surprise move; the central bank is concerned that the yen's upward trend against the dollar many undermine the nation's export-driven economic recovery. The Policy Board decided to expand its target for the outstanding balance of deposits in current accounts by private financial institutions at the central bank to a range of Y30-Y35 trillion from the current Y27-Y32 trillion. BOJ last decided to inject additional liquidity into the financial system in October. The 9-member board agreed to relax the rules under which the central bank buys asset-backed securities to improve financing conditions from small and midsize companies. The central bank said that further monetary easing was intended to reaffirm its policy stance to overcome deflation and ensure a continued recovery, citing persistent structural problems, such as excessive debts, expected slides in consumer prices, and the yen's strength against the dollar. Developments in financial and foreign exchange markets and their impact warrant monitoring, indicating the bank was concerned that the yen's rise from current 3-year highs could derail the recovery. According to the analysts, the easing would have a limited impact on the economy and financial markets. (January 21, the Kyodo News, the Daily Yomiuri, the Nihon Keizai Shimbun)

The government plans to liberalize trust business. Three types of trust services which operation currently is limited to financial institutions will be opened to other businesses under a new registration system, according to a bill to revise the trust business law. The government will drastically improve and expand the trust system, in which property owners entrust the management of their property rights to a third party, to strengthen the quality of trust-related services through intensified competition. With the revision, the range of properties that can be entrusted will be expanded including intellectual property, such as patent rights and copyrights, offering business new ways to raise funds. It will be the first full-scale revision of the law since it was enacted in 1922. Under the existing law, properties that can be entrusted are limited to money, securities, money claims, and movable and immovable assets. Under the revised law, it will be possible to put any property into trust as long as its economic value can be appraised. Companies dealing with trust services will still need a license. But three types of trust services will be introduced under a registration system. This will enable start-up firms to procure capital by setting up a trust based on their patents. Firms managing the revenues of companies, artists and authors from patent rights and copyrights will be able to use the trust system. Life and non-life insurance firms and securities companies may move into the trust contract agency business. After the revision trust services will be allowed to include academic institutions licensing technology to private companies. Major businesses and other firms will be able to establish trust companies to manage the patent rights of group companies under a notification system. The Financial Services Agency is considering a Y100 million minimum capital requirement for companies entering the market for the full range of trust services. A Y50 million requirement is anticipated for those mainly engaged in property management. (January 14, the Yomiuri Shimbun)

The Bank of Japan (BOJ) intends to ease the rules under which the central bank can purchase asset-backed securities. The central bank began buying the securities last July as part of its monetary relaxation policy, with purchases now totaling some Y250 billion, only one-quarter the maximum authorized amount of Y1 trillion. The current rules require that 50% of the securities purchased by the BOJ be backed by the assets of small and midsize firms. The BOJ wants to increase the share of securities backed by the assets of large companies and also wants to name the financial institutions. This is a measure to make it easier for more institutions to sell this type of security. The purpose is to nurture the development of a market for asset-backed securities and facilitate companies to raise funds. The proposed rule changes will be on the agenda for discussion when the BOJ Policy Board convenes on Jan. 19-20. Asset-backed securities are based on account receivables and claims against outstanding loans, among others. They have yet to become popular among ordinary investors, so the BOJ has decided to intervene to energize the market. But the central bank's actual purchases fall far below the targeted amount, as the existing rules obligate the BOJ to buy securities issued by smaller firms, most of which are sold in small lots. The BOJ originally set the percentage of required purchases of smaller-firm securities at a high level to assist their business operations, so moves to lower the percentage could draw criticism. According to BOJ, purchasing more securities issued by large companies would expedite the growth of the overall securities market, a result that would benefit smaller firms. (January 11, the Nihon Keizai Shimbun)