The Accounting Standards Board of Japan (ASBJ) published ''Tentative Solution on Accounting for Deferred Assets'' and ''Accounting Standards for Financial Instruments'' on August 11, 2006, and ''Accounting Standards for Measurement of Inventories'' on July 5, 2006.

In conjunction with the publication of these new accounting standards, etc., the cabinet office ordinance regarding the amendment of the Regulations on Terminology, Format and Preparation Method of Financial Statements, etc. (''Regulations on Financial Statements'') (Cabinet Office Ordinance No.88) was promulgated on December 26, 2006.

1. Amendment of Provisions on Scope of Deferred Assets, etc.

(1) Stock Issuing Expenses

''Tentative Solution on Accounting for Deferred Assets'' (practical solutions report) allows treasury stock disposal expenses--which previously could not be accounted for as deferred assets--to be accounted for as deferred assets on the grounds that new stock-issuing expenses and treasury stock disposal expenses have the same characteristics as expenses incurred in financial activities, such as financing activities that involve stock issuance, and that the invitation procedures for new stock issuance and treasury stock disposal must now comply with the same regulations under the Company Law. Also, new stock issuing expenses and treasury stock disposal expenses are now both to be treated as stock issuing expenses on the grounds that they have similar characteristics.

In response to the establishment of the practical solutions report, ''new stock issuing expenses'' was renamed ''stock issuing expenses'' in the Regulations on Financial Statements, etc., and the definition was amended to effectively cover treasury stock disposal expenses.

(2) Debenture Discount and Expenses

''Accounting Standards for Financial Instruments'' were amended in response to the Corporate Calculation Regulations, allowing debentures in cases where the amount of revenue differs from the amount of debt to be valued at a fair price as of the end of the fiscal year. With respect to the amount of issued debentures declared on the balance sheet, the amended Accounting Standards state that the difference between the amount of revenue and the amount of debt must be calculated based on the amortized cost method (which involves adjusting the difference from the book value each year by a certain method until the redemption period), and as such the provision on debenture discount and expenses was deleted.

Following this amendment, debenture discount and expenses was deleted from the section on deferred assets in the Regulations on Financial Statements, etc.

2. Amendment of Provisions on Valuation and Indication of Inventory Assets

The section entitled ''Accounting Standards for Measurement of Inventories'' divides inventory assets into (1) inventory assets owned for sales purposes and (2) inventory assets owned for the purpose of profiting from fluctuations in market prices (trading purposes), and lay down separate provisions for these two categories.

(1) For inventory assets owned for sales purposes (''inventory assets for sales purposes''), the statute requiring selection of either the cost accounting method or the lower-of-cost-or-market-value method has been abolished. It is now required that the book value to the net sale price be reduced if the profitability of inventory assets deteriorates. (2) For inventory assets owned for the purpose of profiting from fluctuations in the market price (trading purposes) (''inventory assets for trading purposes''), a process to reflect the fluctuations in market price in the financial statements has been introduced, and a process for a year-end declaration of valuation gains has been approved. However, valuation gains or losses must be declared as a component of sales.

In response to the establishment of the new Accounting Standards, no separate provisions have been established for inventory assets in accordance to the purpose of ownership, and the existing provisions that permitted the lower-of-cost-or-market-value standard were deleted from the Regulations on Financial Statements, etc. Moreover, new provisions were established (1) for inventory assets for sales purposes, requiring, as a general rule, that the reduction in book value be indicated as a cost of sales item, and (2) for inventory assets for trading purposes, requiring, as a general rule, that the aforementioned assets be indicated as a sales component .

3. Application Period

(1) Provisions on Changes to the Scope of Deferred Assets, etc.

These provisions are applicable to (consolidated) financial statements and interim (consolidated) financial statements presented in securities registration statements, securities reports and semiannual reports for the fiscal year (including the consolidated accounting year) and the interim (consolidated) accounting period ending September 30, 2006 or later submitted on or after the enforcement date of the Cabinet Office Ordinance (December 26, 2006).

(2) Provisions on Valuation and Indication of Inventory Assets

The provisions are applicable to (consolidated) financial statements for the fiscal year (including the consolidated accounting period) commencing April 1, 2008 or later.

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Auditing work is becoming more complicated and sophisticated nowadays, in line with the increasingly diversified, complex and globalized scope of corporate activities. On the other hand, incidents that could undermine the credibility of audits have arisen, such as scandals involving audits conducted by Certified Public Accountants (CPAs), which have once again highlighted the importance of organized audits.

Based on such critical awareness, the Subcommittee on the Certified Public Accountant System of the Financial System Council had been deliberating on the approach to the CPA system and auditing firms since April 2006, and on December 22 compiled a report entitled ''Improvement and Enhancement of the System of Certified Public Accountants and Auditing Firms.''

The main recommendations made in the report are as follows.

1. Enhancement of Auditing Firms' Quality Control, Governance and Disclosure Systems

(1) Ensuring appropriate development and operation of business management framework in auditing firms

The respective roles of the following staff at auditing firms should be clarified:

(2) Expansion of scope of employee qualifications at auditing firms to include non-CPAs

(3) Ensuring transparency of auditing firms themselves by requiring disclosure of information

2. Enhancement of Independence and Status of Auditors

(1) Development of Rules to Enhance Independence, etc.

(2) Development of an Appropriate Framework for the Selection of Auditors, Determination of Audit Fees, etc.

3. Review of Approach to Supervision and Responsibilities with Respect to Auditing Firms, etc.

(1) Diversification of Administrative Actions (Currently, there are three types: warning; suspension of operations; and order of dissolution)

(2) Introduction of financial measures to prevent breaches

(3) Introduction of a system for auditing firms in the form of limited liability framework

(Requirements include establishment of: i) registration system, ii) minimum capital, iii) disclosure of financial documents, and iv) deposit of guarantee money, mandatory insurance, etc.)

(4) Permission for the Certified Public Accountants and Auditing Oversight Board (CPAAOB) to request reporting and conduct inspections with respect to auditing firms, etc. without waiting for a quality control review from the JICPA if deemed necessary for quality control purposes

(5) Introduction of notification (registration), inspection and supervision with respect to foreign auditing firms

In consideration of the recommendations stated in this report, the FSA plans to submit a bill for the amendment of the Certified Public Accountant Law at the ordinary session of the Diet.

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With the enactment of the Financial Instruments and Exchange Law on June 7, 2006, an internal control-reporting scheme is slated to be introduced for business years beginning on or after April 1, 2008, under which listed companies will be required to have the management evaluate and auditors audit the effectiveness of internal controls to be described in their financial reports.

On the subject of standards for the implementation of evaluation by the management and audits by auditors under the internal control-reporting scheme, the Business Accounting Council Subcommittee on Internal Controls (chaired by Professor Shinji Hatta, Aoyama Gakuin University) put together a list of proposed standards, which it unveiled to the public in December 2005. As many subsequently expressed a desire that practical guidelines should be developed, something to assist in the process of applying the standards in practice (hereinafter referred to as ''practice guidelines''), we decided to set up a working group (chaired by Professor Takashi Hashimoto, Aoyama Gakuin University) under the Subcommittee on Internal Controls, which working group subsequently examined proposed practice guidelines with the participation of accounting professionals etc., and then released practice guidelines in the form of a draft on November 21, 2006 to solicit public comment (the designated period for comment solicitation was until December 20, 2006).

In consideration of the comments on the draft for public comment, we are planning on further examining the proposals to have them established as standards and practice guidelines, respectively.

Practice guidelines indicate that which should serve as a set of standards developed from a perspective of steps to be taken in practice, granted that a necessary form of internal controls differs from company to company according to the particulars of their environment or their characteristics and should therefore be developed by each company in reliance on its own ingenuity. We have also examined the situation in the U.S., where a similar scheme has already been introduced. Taking into account a view held by some that, as a result of a very conservative approach applied, companies in the U.S. were incurring excessive cost burdens, attention was paid in developing the practice guidelines proposed here in Japan so as to create guidelines that are as specific as possible, so that an overly heavy-handed approach does not ensue and so that internal controls can be formulated, evaluated and audited efficiently and effectively, while the effectiveness of the scheme is ensured at the same time.

As with the proposed standards, the proposed practice guidelines are composed of three parts: formulation, evaluation, and audits, each of internal controls.

The following matters can be cited as salient features of the respective parts:

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Following the release by the Business Accounting Council Audit Subcommittee of the document entitled ''Establishing Quarterly Review Standards (Draft for Public Comment)'' on November 21, 2006, we solicited comments from the broad range of people, from the general public up, concluding on December 20.

The development leading up to the creation and public release of the Standards (Draft for Public Comment) is explained below:

Rapid changes that companies have experienced in recent years in their management environment have also demonstrated to us that business performance etc. can, as a result, also change significantly over a short period of time. Under such circumstances, disclosing information concerning business performance etc. to investors in a quicker and more timely fashion is essential, and companies are also expected to maintain internal practices whereby they keep track of information concerning business performance etc. in a timelier fashion and conduct appropriate management of their businesses accordingly.

This prompted discussion of the introduction of a quarterly reporting scheme under the auspices of the Securities Exchange Law, which subsequently took shape as new requirements under the Financial Instruments and Exchange Law, enacted in June 2006. Under this system, listed companies etc. will be required to submit quarterly reports for business years starting on or after April 1, 2008, and quarterly financial statements to appear in such reports must be audited and attested by a certified public accountant or auditing firm.

On the subject of audit attestations provided by certified public accountant or auditing firm to quarterly financial statements, the Business Accounting Council made the decision during its general assembly in January 2005 to develop quarterly review standards, an idea which the Council had been examining since September of the same year. Quarterly reports, which inherently necessitate timeliness and speed, need to be submitted by the date, as specified by government ordinance, within 45 days from the end of the quarterly accounting period. For that reason, simplified accounting procedures are permitted in some areas, and quarterly review procedures that consist mainly of inquiry and analysis are also slated for introduction with respect to audits for this purpose.

While timeliness and speed are thus required of quarterly reports, another challenge will be ensuring the reliability of audits. As the compilation of quarterly reviews is based on audits of annual financial statements, it is hoped these, implemented in proper concert with annual financial statement audits, should heighten the level of effectiveness of audits. More specifically, any quarterly review plan must be formulated in consideration of an understanding of the audited company and its operating environment, including internal controls, taken into consideration in the annual financial statement audits, as well as in consideration of any risks in regards to material false statements based on that understanding. It is therefore necessary that any important observations etc. during annual financial statement audits should be examined in the course of the quarterly review process as well and that quarterly review results should also be appropriately reflected in annual audit plans.

Taking into consideration the comments received, the Subcommittee will proceed to deliberate on the issue with a view to putting together a final version of the standards.

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1. Introduction

The following is a brief explanation of the organization, staffing and budget relating to the Financial Services Agency (FSA), based on the Japanese government's draft budget for the fiscal year ending on March 31, 2008, approved by the Cabinet on December 24, 2006.

Approval has been granted for the development of the structures outlined below and a budget totaling approximately 22.1 billion yen, with a view in particular to enhancing market surveillance functions, promoting consumer protection measures, etc. and responding to the privatization of postal services, in order for the FSA to protect financial services customers and enable them to perform transactions securely and with peace of mind.

2. Organization and Staffing

(1) Enhancement of Market Surveillance Functions (41 staff members)

• 1) In consideration of the expansion of the scope of regulations associated with the enforcement of the Financial Instruments and Exchange Law, the securities market surveillance framework will be dramatically enhanced, with the appointment of two deputy secretaries general of the Executive Bureau of the Securities and Exchange Surveillance Commission (SESC) and the development of a supervisory framework.
• 2) The framework for the planning and devising of ever-changing markets and corporate disclosure systems will be enhanced.

(2) Promotion of Consumer Protection Measures, etc. (9 staff members)

The inspection and supervision framework aimed at protecting customers in the money lending industry and the counseling framework for financial services users will be enhanced. The framework for planning and devising systems to promote consumer protection measures, etc. will also be strengthened.

(3) Response to the Privatization of Postal Services (12 staff members)

In order to conduct supervision in a precise fashion with respect to the postal savings bank and the postal insurance company subject to supervision by the FSA under the Japan Post Privatization Law, an inspection and supervision framework geared towards the postal savings bank and the postal insurance company will be developed, featuring the newly-established position of Deputy Commissioner (in charge of supervision of postal savings and insurance).

[Breakdown]

(Note) ''Planned Reduction, Transfer, etc.'' in the Planning and Coordination Bureau includes planned reduction as well as transfers, reductions, etc. associated with the handover of the Financial Intelligence Unit (FIU) to the National Police Agency.

3. Budget

(1) A budget totaling approximately 22.1 billion yen has been approved, including expenses associated with moving into the new office building.

(2) For the continued assurance of stability in the financial system, 48 trillion yen has been approved in the form of government guarantees earmarked for the Deposit Insurance Corporation of Japan (DICJ).

[Reference] Government Guarantees for Deposit Insurance Corporation of Japan (DICJ)

(Unit: trillion yen)

Summary of FSA Budget for FY2007

(Rough Estimate Approved)

(Reference)

(Unit: million yen, %)

(Note) Figures may not be consistent with each other as each figure has been rounded off to the nearest million yen.

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[China]

Financial Services Minister Yuji Yamamoto visited China from December 26 to 28, 2006, where he met with Mr. Zhou Xiaochuan, Governor of the People's Bank of China, Mr. Liu Mingkang, Chairman of the China Banking Regulatory Commission (CBRC), Mr. Shang Fulin, Chairman of the China Securities Regulatory Commission (CSRC) and Mr. Li Kemu, Vice Chairman of the China Insurance Regulatory Commission (CIRC).

In a series of meetings, they agreed to further strengthen the cooperative relationship between Japanese and Chinese financial supervisory authorities, in response to finance-related reciprocal cooperation being declared a priority area at the recently held Japan-China summit meeting.

Furthermore, the Chinese side provided an explanation on the progress in the financial sector reforms currently underway in China, and the two sides exchanged opinions on making further improvements to the business environment in regards to private enterprise and other matters of consequence to the respective financial sectors of Japan and China.

Minister Yamamoto believes it is extremely important that this latest visit be used as a launching pad to deepen reciprocal cooperation and strengthen the relationship of trust between the financial authorities of the two countries, including holding working-level discussions on a regular basis.

Minister Yamamoto's visit to China:
Meeting with Mr. Liu Mingkang, Chairman of the China Banking Regulatory Commission (CBRC)

[UK and USA]

Minister Yamamoto visited the UK and the USA from January 7 to 14, 2007.

In the UK, he met with Mr. Mervyn King, Governor of the Bank of England, Sir Callum McCarthy, Chairman of the Financial Services Authority and other such officials. He also inspected education and training facilities focused on educating young people and met interested parties in relation to the ''Challenge Again'' initiative. In the United States, he met Mr. Ben S. Bernanke, Chairman of the Federal Reserve Board (FRB), Mr. Christopher Cox, Chairman of the Securities and Exchange Commission (SEC), and Mr. Timothy F. Geithner, President of the Federal Reserve Bank of New York.

During this series of meetings, they exchanged opinions on the policy direction that Japan should pursue in the future and other matters with a view to improving the international competitiveness of the Japanese financial market. They also agreed to further deepen the collaboration between the financial authorities, amid the progress of globalization.

In consideration of the Minister's latest visit to these countries, the Financial Services Agency (FSA) recognizes the importance of promoting the trend from savings to investments more decisively and further improving the appeal of Japanese financial and capital markets in its capacity as an international financial center, through exchanges of views with financial authorities, market players and other parties within the rubric of the world's two biggest international financial centers. Accordingly, the FSA will establish a study group in the Financial System Council (provisional name: ''Study Group on Globalization of Japanese Financial and Capital Markets'') to examine policy measures with a view to building an internationally attractive market.

The Minister's trip was extremely fruitful in that he was able to hear directly from the financial authorities of- and market players in the UK and the United States--the two biggest international financial centers--and thereby enhance ties and dialogues therewith.

Minister Yamamoto's visit to the USA:
Joint Press Conference with Mr. Christopher Cox, Chairman of the Securities and Exchange Commission (SEC)

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