Outlined below are the individual items of the reform package,
together with the considerations that led to these recommendation,
classified according to three broad areas of products, markets
and intermediaries. Further details may be found in the annexed
reports by the three Working Parties that looked into these three
areas.
(1) Introduction
A system that allows the supply of a variety of investment vehicles
must be put into place, so that varied and complex requirements
of investors can be met. This will also help enhance the vitality
of firms, as it widens the options available for fund raising.
A framework supporting diversity in financial products is a fundamental
precondition for market revitalization.
(2) Framework for encouraging diverse products
The basic approach should be to eliminate rules that inhibit product
innovation, and to encourage free product development. By the
way of example, deregulation in the bond market have already resulted
in numerous types of products being launched. Yet there are cases
where constraints have emerged in relation to basic laws such
as the Commercial Code and the Criminal Code, thereby making difficult
the use of some products that are commonly seen in overseas markets.
For example:
a. Exemptions from certain articles in the Civil and Commercial
Codes must be granted for Asset Backed Securities to be used more
widely.
b. MTN programs were seldom used domestically due to uncertainties
in the application of certain sections in the Commercial Code.
This issue has been recently resolved, and wider use of MTNs is
now in prospect.
Further efforts should be made to provide legal solutions in such
cases.
(3)Diversity in derivatives products
For OTC equity derivatives to be traded more widely, it must be
made clear that the Criminal Code on gambling will not apply.
Legal issue involved should be clarified to allow undeterred use
of securities related derivatives, and thereby provide an environment
in which broader range of financial innovation can take place.
(4)Developing Investment Trusts
<1>General Direction of Reform
Investment trusts provide an important vehicle that allows diverse
investors access to the securities market, as well as broadening
and deepening the portfolio opportunities for an investor. However,
the share of household savings held in the form of investment
trusts in Japan lags significantly behind the comparable figure
in the United States. Investment trusts should be made more attractive
by enhancing its utility, widening the scope of products, and
broadening the sales channel.
<2>Enhancing the utility and widening the scope of investment trusts
In product development.
a. Introduce the Asset Management Account for Money Management Funds
b. Allow private placement of investment trusts.
c. Consider introduction of Investment Company type funds.
<3>Broadening the sales channel
Allow banks and other financial institutions to sell investment
trusts, in order to make investment trusts more accessible to
the general public and encourage new customers to begin securities
investment.
(5) Enhancing the appeal of shares
<1> Basic viewpoint
Whatever is done in the course of structuring a security to enhance
their marketability, a financial product's appeal will ultimately
reflect the attractiveness of firms and other issuing bodies on
whose performance the product will depend. Financial technology
to tailor and improve investment characteristics will be effective,
only to the extent that those raising capital can employ the capital
effectively, and is willing to return the proceeds from that investment
back to the investors.
<2>Management attentiveness to shareholder interests
Japanese firms have often been criticized, in connection with
their low return on equity and dividend policy that link the dividend
payment to the face value of shares, that their management is
not tuned to shareholder interests. Firms, who manage the capital
that is entrusted to them by shareholders, have the responsibility
to employ capital efficiently and to use profits in a manner most
advantageous to shareholders, be it in the form of dividend payouts
or reinvesting retained profits. In order that shares gain more
appeal, the management of firms need to be more attuned to shareholders'
interests.
<3>Stock options and share buybacks
From this viewpoint, it is desirable that stock options and buyout
of shares, which were given greater flexibility following a legal
initiative in the current session of the Diet, be used effectively.
(6) Review of the Definition of Securities
<1>Widening the scope of securities subject to investor protection
As the range of products offered grows, it is important to ensure
that investor protection rules extend to these new products. To
this end, the definition of security in the Securities and Exchange
Law need to be reviewed to cover new market products that are
newly conceived. It is, however, necessary to determine, separately
for each new category of securities, as to the eligibility and
rules applying to intermediaries of securities that become subject
to the Securities and Exchange Law. It is not always necessary
to limit the handling of these newly defined securities to securities
firms.
<2>Financial services law and other considerations
An argument is sometimes made that the scope of securities in
the Securities and Exchange Law might be broadened in order to
apply investor protection to an even wider range of financial
products. However, since the existing system of investor protection
in the Law is focused on investment instruments that are market-
based, and is constructed around public disclosure and rules demanding
a high standard of fair trading in the market, it would not be
appropriate to broaden the coverage of the Securities and Exchange
Law in its current form, to financial instruments with different
characteristics. As a wider reform of the financial system proceeds
and as greater diversity in intermediaries, investment products
and services occur, there will be a need to rethink what system
of investor protection is desirable, in order to cover those products
and services that are more bilateral than market-based in nature.
The review should have in mind a possible enactment of a law that
applies common rules across all types of market participants (so-called
financial services laws).
(7) Taxation related to securities
The tax system also exerts a large influence on the choice of
financial products and the manner of their transactions, by affecting
the supply cost and return of financial products. In order for
market mechanism to work fully, we believe it to be of utmost
importance that the tax system be neutral across financial products
and transactions. In particular, taxes on secondary market transactions
inhibit market mechanism by increasing transactions cost and thereby
discouraging portfolio adjustment. They may also contribute to
the hollowing out of the domestic market in a world of globalized
transactions. The Securities and Exchange Council urges, in order
to increase market efficiency and enhance global competitiveness
of the Japanese market, that the Securities Transaction Tax and
the Bourse Tax be reviewed, with a view to their abolition in
mind. Furthermore, bearing in mind that numerous variety of financial
products including derivatives will come on to the market, and
in view of the importance of ensuring neutrality in taxation of
financial products and transactions, and also considering the
importance of securing supply of risk capital, the system of taxation
of income arising from financial products, such as interest, dividend
and capital gains, ought to be reviewed.