May 19, 2008
Financial Services Agency

FSA publishes the first progress report on its efforts toward "better regulation"

1. Optimal combination of rules-based and principles-based supervisory approaches. The principles-based supervision encourages voluntary efforts by financial firms in line with explicitly stated principles, thereby ensuring the maximum freedom of business management. To this end, the FSA agreed with the relevant parties on the fourteen "Principles in the Financial Industry" in April 2008, which will constitute the cornerstones of principles-based supervision.
2. Timely recognition of priority issues and effective response. In rapidly changing financial markets, it is important to take a proactive approach in which we promptly identify areas where potential risks exist, and allocate our resources effectively to these areas so as to address such significant issues. In the period covered by the progress report, for example, the FSA allocated administrative resources intensively to measures for responding to the market turmoil caused by the subprime mortgage problem in the United States, in recognition of the depth and magnitude of the problem.
3. Encouraging voluntary efforts by financial firms and placing greater emphasis on providing them with incentives. Incentive-compatible approaches have already been incorporated to a significant extent in the FSA's regulatory framework, including Basel II that was implemented in Japan ahead of most of other countries. The Financial Inspection Rating System, which came into full effect in January 2008, also provides financial firms with incentives for voluntary efforts.
4. Improving the transparency and predictability of regulatory actions. Pursuing fair and transparent financial regulation and supervision has been one of our core principles of conduct since the FSA's predecessor, the Financial Supervisory Agency, was established in 1998. In this context, the FSA has compiled and published collections of cases in which supervisory action was taken; conducted a review of the no-action letter system; and compiled FAQs (frequently-asked questions) regarding interpretation of laws and regulations.

1. Enhancing dialogue with financial institutions, for example by increasing opportunities for exchange of views with the financial industry, including foreign business organizations.
2. Enhancing dissemination of information, through active use of lectures, speeches, interviews, and contribution of articles. Dissemination of information in English has also been enhanced, including on the FSA website.
3. Strengthening cooperation with foreign authorities, including by contribution to international debate on the subprime mortgage problem at international fora, and by strengthened multilateral and bilateral framework for cooperation.
4. Enhancing research functions to promptly grasp market developments, exemplified by the establishment of the Market Analysis Office in February 2008 in light of the growing impact of global economic and market developments on Japan's financial system.
5. Redoubling efforts for human resource development, including through provision of intensive staff training as well as recruitment of experts and personnel exchanges with the private sector.