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On June 17, 2009, the Financial System Council's Study Group on the Internationalization of Japanese Financial and Capital Markets (chaired by Kazuhito Ikeo, Professor, Faculty of Economics, Keio University) compiled the “Report by the Financial System Council's Study Group on the Internationalization of Japanese Financial and Capital Markets: Toward Stronger Corporate Governance of Publicly Listed Companies.”

The study group adopted a perspective that, in considering the desired form of financial and capital markets in Japan, it is important that high quality management interested in shareholders, investors and other stakeholders be attained through the enhancement of the corporate governance of listed companies. With an aim of strengthening corporate governance, the study group convened eight times from October 2008 to discuss a wide range of issues, including:

• Issues relating to listed companies raising additional capital, such as the response to capital increases through third-party share issuances;
• Structural aspects of corporate governance, such as the structure of boards of directors; and
• Issues relating to investors exercising their voting rights, such as effecting governance through the exercise of voting rights.

The “Report by the Financial System Council's Study Group on the Internationalization of Japanese Financial and Capital Markets: Toward Stronger Corporate Governance of Publicly Listed Companies” summarizes the results of the discussions of the study group.
The Financial Services Agency, in cooperation with the stock exchanges and other bodies, will fully consider the details of the report, and will take urgent action, including the development and improvement of relevant systems.

« Outline of the report »

Ο Issues relating to listed companies raising additional capital, such as the response to capital increases through third-party share issuances

One of the reasons why deep concerns have been expressed by domestic and foreign investors alike about the corporate governance of listed companies in Japan is that there appears to be no end to instances where the interests of minority shareholders are severely undermined when companies raise additional capital from the market. The strengthening of governance in connection with the capital policies of listed companies has become a pressing issue, and from the perspective of ensuring fairness and transparency in connection with raising new capital from the market, the following types of measures should be taken:

• With respect to capital increases through third-party share issuances, enhance the disclosure of how the funds will be used and the identity of those third parties; and in cases where it will result in the control of existing shareholders being considerably diluted, ensure due processes are carried out, such as examinations being conducted by the stock exchange and opinions being expressed by persons independent of management;
• With respect to the issuance of moving strike convertible bonds (MSCBs), enhance disclosure related to the reasonableness of their issuance terms and to the exercise of conversion rights following their issuance.

Ο Structural aspects of corporate governance, such as the structure of the board of directors

In considering the desired form of corporate governance among listed companies in Japan, one very important aspect is the governance structure of directors, auditors and so forth. Strong interest on this issue has been shown by domestic and foreign investors alike. From the perspective that it is important to attain high quality management among listed companies in Japan and to secure the confidence of investors, the following types of measures should be taken:

• Stock exchanges should present the notion of appointing highly independent outside directors and having them cooperate closely with the board of auditors, etc. as a model suitable for the majority of listed companies; and
• Based on this, listed companies should disclose the details of their respective governance systems and the reasons for selecting a particular system.

Ο Issues relating to investors exercising their voting rights, such as effecting governance through the exercise of voting rights

In order to improve the governance of listed companies through the market, in conjunction with the efforts on the part of companies, it is important that shareholders and investors also actively monitor management. Based on this perspective, the following types of measures should be taken:

• Prepare and publish guidelines relating to the exercise of voting rights by institutional investors; and establish industry rules relating to the disclosure of total voting rights exercised; and
• Listed companies should disclosure the ballot results for each proposal at shareholder meetings.

*For further details, please refer to the Publication of the “Report by the Financial System Council's Study Group on the Internationalization of Japanese Financial and Capital Markets” (June 17, 2009 ) in the “Press Releases” section of the FSA website.

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[Topics]

Following announcements by major banks, etc. of their financial results for FY2008, the FSA compiled the figures, etc. announced by the respective banks and released this on May 29, 2009. Below is a summary of the financial results of the major banks, etc. for FY 2008.

1. Status of profit

Net core business profits, which represent profits from the core banking operations of the major banks, etc., totaled 2.7 trillion yen in the fiscal year ended March 2009, down 0.6 trillion yen from the fiscal year ended March 2008. Although there were improvements in interest income on the back of increases in outstanding loans, the decrease in total net core business profits appears to have been caused by such factors as declines in fee revenues, such as for the sale of investment trusts, due to the deterioration of market conditions.

2. Status of financial soundness

The non-performing loan ratio of major banks, etc. stood at 1.7% in the fiscal year ended March 2009, up 0.3 percentage points from the fiscal year ended March 2008.

Their capital adequacy ratio stood at 12.4%, up 0.1 percentage points from the fiscal year ended March 2008. Despite the banks' net losses and unrealized losses on securities, the slight increase appears to have been mainly due to the policies implemented by each of the banks to increase their equity capital.

As shown above, although the major banks, etc. recorded a net loss due to the effects of increases in credit-related expenses and increases in the write-down of stock holdings, we believe that their financial health remains sound given the sufficient level of their capital adequacy ratios.

Figure 1

*For further details, please refer to FY2008 Financial Results of Major Banks, etc. «based on preliminary announcements» (May 29, 2009) in the “Press Releases” section of the FSA website.

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Following announcements by regional banks of their financial results for FY2008, the FSA compiled the figures, etc. announced by the respective banks and released this on May 29, 2009. Below is a summary of the financial results of the regional banks for FY 2008.

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On June 2, 2009, the Financial Services Agency (FSA) summarized and published the exposures of Japanese deposit-taking institutions to subprime-related products and to securitized products based on the leading practices summarized in the FSF report.

As of March 31, 2009, subprime-related products held by all Japanese deposit-taking institutions totaled 449 billion yen (down 116 billion yen compared to December 31, 2008), and the cumulative total of their valuation losses and realized losses amounted to 1,094 billion yen (1,053 billion yen as of December 31, 2008).

Meanwhile, as of March 31, 2009, their total exposure to securitized products stood at 18,483 billion yen (down 925 billion yen compared to December 31, 2008), and the cumulative total of their valuation losses and realized losses amounted to 3,302 billion yen (1,053 billion yen as of December 31, 2008). Since the end of December 2008, the cumulative total of the valuation losses and realized losses on all securitized products increased by approximately 64 billion yen.

While there appear to be a range of overlapping factors underlying why overall losses on securitized products remained generally constant, it seems that one of the main drivers was the fact that some financial institutions have changed the way they measure fair value as a result of last year's revisions to the accounting standards pertaining to securities.

Since September 2007, the FSA has used a uniform set of standards to publish the exposures of Japanese deposit-taking institutions to subprime-related products and securitized products.* We believe that efforts like this help promote a precise understanding of how the turmoil in the global financial markets (triggered by the subprime mortgage problem) is impacting on Japan's financial system through securitized products.

The FSA will continue its efforts to publish information, and we will continue to make environmental improvements so that the public can more easily access the current state of the Japanese financial system and the approaches to financial administration.

*As for exposures to securitized products based on the leading practices summarized in the FSF report, the FSA started survey and publication with the exposures as of the end of March 2008.

*For further details, please refer to Exposures of Japanese deposit-taking institutions to subprime-related products and securitized products based on the leading practices summarized in the FSF report (June 2, 2009) in the “Press Releases” section of the FSA website.

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