Since being established in August of last year, the Committee for Advancement of Financial System and Services has been holding discussions regarding the necessary steps for the vitalization of the financial system, based on financial intermediation and the progression and improvement of the diversification payment system and focusing on the problem of the financial institutions' management and organization.
Further, after reconvening in October 1996, a wide ranging examination was carried out on the financial service hoped for in the 21st century, specifically, what type of financial system will satisfy the diversified needs of the end user of financial services.
In the midst of this, the Minister of Finance received direction from the Prime Minister that the financial market reform plan be solidified as quickly as possible and implemented by the year 2001. All related advisory councils were requested by the Minister of Finance to vigorously pursue examinations, and the discussions in these councils are progressing.
To contribute as a reference in future examination of financial
market reforms, together with the discussions of the council members
to date and as items demanding examination into the financial
market reform plan, the following items are indicators of the
type of issues that can be considered at the present time.
(1) The present condition and issues of Japan's financial institutions
and financial market
As a new development in Japanese finance, higher weight will be placed on the risk intermediation function of these financial institutions possessing developed information and communications technology which makes possible derivatives, and other complex financial techniques which are promoted by such technology. Further, concerning financial institutions future payment facilities, the possibility of unprecedented reform has appeared through various projects such as electronic money and electronic payment.
As the nature of financial institutions change, as we approach the 21st century, conditions require that character of management also develops.
On the other hand, the bad loan problem negatively impacts the vitalization of financial institutions, and is to be avoided at all costs in the 21st century. Also, it is necessary to consistently work to quickly and decisively resolve bad loan problems.
The Japanese financial system must offer the holders of surplus capital the opportunity to more advantageously utilize their assets such as the 1200 trillion in private assets. It is very important that financial institutions, in addition to considering how to perform their capital intermediation functions more efficiently manage the use of the people's assets.
Also, with the intensification of international competition in finance, Japan's financial market is pressing ahead with globalization, it has become a matter of urgent business to make things easier to use for foreign and domestic users.
In connection with this, it has been pointed out that in regard to international competition, especially concerning product development power, Japan's financial institutions are lagging behind. However, it has been noted that regulation stifles creativity and innovation as well as removing sense of urgency by clients and financial institutions to develop under the current banking system.
Further, against the backdrop of Japanese financial institutions' lack of growth in international competitive power due to the fact that regulations and the accounting systems, tax systems, and legal systems governing Japan's domestic financial institutions are completely different from their foreign counterparts. Moreover, there are also problems in language, the difference of the culture of industries (including business systems problems, personnel matters, wage structures and areas where domestic institutions have less competitive power than their foreign counterparts.
On the other hand, financial institutions that place importance
upon retail business, and financial institutions closely connected
with their community, particularly those targeting needs of mid
and small size industries in which access to the capital market
is limited, are experiencing greater business demand. Related
to this, as many enterprise, particularly new ones, have little
strength in their real property collateral, it is difficult to
properly finance their business growth.
(2) The necessary course of the Financial Market Reforms
With the development of borderless economic activity, competition involved in finance has taken on the character of competition between the financial systems of all countries, and in the advancement of a Global Standard, the markets that fall behind in this dynamic will be left out of the international scene. This is not limited only to international competition, but also results in the decline in convenience to the domestic user, along with the loss of profits in the Japanese economy. There is also the phenomena of capital outflow to foreign financial markets. It should be understood that market reforms do not only effect finance, but also the entire the Japanese market. From this point of view, these reforms should also be seen as improvements in the legal and tax systems.
These reforms are not based upon the idea of the Japanese financial market catching up with the standards of New York and London, rather the goal should be to use this opportunity to become a front runner. It is necessary to examine, concretely, just what sort of market should be aimed for. With that, it was pointed out that what is meant by "global standards" is not "same as the rest of the world", but rather, should it not mean "Let's aim for a market equipped with the appeal and vitality to be able to compete with the world"?
Three points that can be considered as specific policies for Financial Systems Reformation are; (1) The allocation of various financial intermediary services (the deregulation and diversification of businesses, products, and organizations, and technological innovations), (2) Development based on market functions (disclosure, accounting system, client protection rules, etc.), (3) The security of soundness of financial systems (security and safety of the payment systems, appropriate capital and pertinent risk control).
Further discussions concerning finance should be aimed at individual institutions and businesses, rather than at business forms. For example, instead of thinking of a specific business and bearer of that business as a whole, after judging the requisites and qualities needed for that business or facility, it can be considered that, the party able to fulfill obligation will the responsible party. Further, it was indicated that, for example, it is possible to consider the division of regulation of wholesale businesses which deal with customers well versed in finances, and retail businesses which deal with a wide range of customers, some of whom are not so knowledgeable. In this way, thinking ahead about the form of regulations, making separate changes in the regulations of businesses and institutions most likely become a subject of examination.
As for bank management, it is felt that since there will
continue to be surplus fund into the future, with ever increasing
advancement of direct fund raising, banks will not be bound to
the traditional concept centered on deposit/loan businesses. With
the specialization of respective fields of expertise, emphasis
should be placed upon the improvement of quality and the betterment
of management efficiency and product developmental powers. In
order to make management with these type of features possible,
it is necessary to make system adjustments allowing for the expansion
of the level of freedom of choice.
(3) Points to consider in the advancement of reforms
In the future, in advancing the continued disposal of remaining bad loan issues, through facilitating bold competition, and the introduction of prompt corrective action, it is inevitable that under the selective process of market principles, ineffective financial institutions will die out or reform. Together with this, in order to make it possible for all financial institutions to adequately handle the changes accompanying these reforms, it is necessary to provide a full range deregulation, as soon as possible, and to elucidate the steps to realize this within the desired time frame. Also in carrying out measures to secure stability, operations must be performed with methods that are highly transparent and abide by market principles.
Further, it was pointed out that it is important that reforms be advanced not in a step-by-step fashion, but rather in one fell swoop.
The viewpoints considered at the time of the previous reform such as the views of the user's, internationality , and maintenance of financial order, be part of these reforms as well. Along with this point, it was indicated that there should be emphasis placed upon the idea of discussing these reforms from clearly defined such as viewpoints that are of end users, and regulation, and business issues.
Also, from the perspective of maintaining financial order, there was an opinion expressed that it is necessary to consider the bad loan problem when thinking about the speed and process of reforms, as well as fairness in competitive terms.
An opinion was also aired that a joint council should be formed to jointly examine reforms in the banking, securities and insurance within areas, the set period of time, as there are items that can not be sufficiently considered through the usual advisory councils discussions.
Further, before beginning discussions on the entry into new businesses, there was an opinion expressed that discussing expanding the range of respective markets, and invigorating competition, should be considered discussing what should be done to promote competition in the banking world.
In regard to postal savings and other public finances, it
is necessary to continually improve them and respond to fluctuations
in social-economic situations. However, since this problem for
the financial system, it is felt that it would be difficult to
carry out examination of these matters only with the Financial
System Research Council. This council must quickly research matters
concerning the resolution of urgent problems in the sphere of
private finance to help carry out the vitalization of the finance
market. Concerning this point, there were opinions stating that,
to obtain practical results from these reforms, it may be necessary
to also examine these problems, in a separate newly established
The following points are raised as examples of items which seem necessary to be considered for inclusion in the plan for financial market reform.
Examination of the detailed content of systems in regard
to those particular items recognized to be materialized promptly
will be pushed forward in parallel with examination of the whole
plan. Some of the items raised are under discussion in other related
study groups or have been already given general direction by the
Financial System Research Council with scheduled to be examined
at working level. There may be additional items in the future,
Authorization for establishing bank holding companies
As for authorizing bank holding companies, it has been decided
that certain measures should be taken prior to the revised Anti-Monopoly
Act takes effect. Therefore, it is necessary to examine this
subject, paying close attention to those aspects of the Act's
revision that would authorize holding companies in general. This
is now underway.
Abolition of regulations for specialization of banking industry
Regulations for specialization of banking industry have to
be abolished in line with the general direction that was suggested
by the FSRC at the time of the former financial system reform
Extending the scope of business which banks are permitted to directly engage in(dealings in security-related derivatives, over-the-counter sales of mutual funds and insurance, dealings in new kinds of securities such as Asset Backed Securities)
It is appropriate to study the subject from the viewpoint
of the end-user's benefit given the changing economic and financial
circumstances, although attention should be given to ensuring
sound management of banks.
Revision of the range of activities of separated subsidiaries and related fire wall restrictions
The range of activities of subsidiaries of banks, trust companies
and security companies must be revised, with due respect to the
development since the financial system reform, including market
conditions, and the possible effects on the soundness of management
of such companies and other financial institutions. Fire wall
restrictions in general, and the scope of trust business of regional
banks, should also be revised.
Loan sales and securitization
Since the needs for loan securitization, as a means for fund
raising and risk management, has been growing, it is appropriate
to study the expected role of financial institutions, and to consider
the ways to diversify the means of loan sales and securitization,
and to set up the framework for issuing Asset Backed Securities.
Electronic money and Electronic money transfer
For the proper development of electronic money and electronic
money transfer systems, it is necessary to study the matters concerning
to the security of the systems, qualifications of operators, consumer
protection, harmonization of the systems with relevant laws, rules,
and regulations, effects on monetary policies, problems with international
transactions, and so on. It is also necessary to prepare the
framework for those systems, as well as to examine the security
of the settlement systems and its future.
Financial futures exchange
To make Japan's financial futures exchange more user-friendly
and active, such subjects as the maintenance of infrastructure
and globalization of the market, should be addressed.
Maintenance of the short-term money market
For the purpose of making Japan's short-term money market
more efficient and transparent, it is appropriate to consider
measures for the improvement of the market by reviewing the marketability
of products, business customs, and the behavior of suppliers.
The role of regional financial institutions
Although the role of regional financial institutions should
be for community development, and the enhancement of their functions,
was discussed at the FSRC in 1990, the subject, such as how to
improve regional financial institutions' function of delivering
information to a community, should be discussed.
As nonbank-banks' influence on Japan's financial system is
increasing, it has become necessary to consider their permissible
fund raising avenues and the necessary regulatory systems, with
due regard to coordination with the regulatory structure of other
Customer and consumer protection
To cope with advanced and diversified financial services,
it is necessary to consider the proper system for customer and
consumer protection, such as establishing a model of behavior.
Introduction of Prompt Corrective Action (PCA)
To implement PCA, in April 1998, which will facilitate the
sound management of financial institutions, the details of PCA,
such as the criteria for its initiation and the concrete enforcement
measures, should be established as soon as possible.
Necessary improvement in existing systems which relate to financial market reform
The risk monitoring and supervisory systems, accounting system,
and other regulatory systems that relates to the financial market
reform must be reviewed.
[About the financial system reformation (The Japanese version of the Big Bang)]