[Financial
System]Japanese Big Bang
January 2000
An efficient and competitive financial sector is absolutely essential for the vitality of the Japanese economy in the 21st century. The Financial System Reform, “Japanese Big Bang,” was commenced in November 1996 under the three principles of “free, fair and global,” aiming to rebuild the Japanese financial market into an international market comparable to the New York and London markets.
As the first step, the revised Foreign Exchange Law was changed to totally liberalize cross- border transactions in April 1998. Then, the Financial System Reform Law, a package of revisions of laws including the Banking Law, the Securities and Exchange Law, and the Insurance Business Law, that were required to implement the Financial System Reform, was enforced in December 1998. Almost all measures were already implemented as follows.
- First, the means of asset management were improved, including the introduction of new investment trusts and over-the-counter sales of investment trusts by banks and other financial institutions, and full liberalization of dealings in securities derivatives. Over-the-counter sales of investment trusts by banks and other financial institutions are steadily expanding, and the total volume of investment trusts managed by banks and other financial institutions has reached 1,789 billion yen as of September 1999.
- Second, efforts were made to provide attractive services through vital intermediary activities, such as promoting entry of banks, securities companies and insurance companies into each other’s business, switching from the licensing system to a registration system for securities companies, liberalizing cross-border capital transactions and foreign exchange business, fully liberalizing brokerage commissions, and eliminating the obligation to use premium rates set by the non-life insurance rating organization. Since switching to a registration system, many new securities companies including foreign ones have been established. (32 companies have been newly registered during 13 months starting from December 1998.) Furthermore, the full liberalization of brokerage commissions has led to expansion of trading of securities through the internet (online trading).
- Third, diversified markets and channels for fund raising were created by abolishing the requirements to trade stocks only through stock exchanges, and introducing proprietary trading systems (electronic trading systems). The Tokyo Stock Exchange established a new market for promising start-ups, so called Mothers (Market of High Growth and Emerging Stocks), in November 1999, and there is a plan to establish NASDAQ Japan stock market at the Osaka Stock Exchange in June 2000.
- Fourth, a framework for reliable trading was established by improving the disclosure system, setting up fair trading rules, such as stricter insider trading control, and protecting customers in times of failure of financial institutions. Since the accounting period ending March 1999, financial institutions are required by law to disclose information on their non-performing assets on a consolidated base according to standards equivalent to the ones set by the Securities and Exchange Commission of the United States, with possible penalties for non-compliance.
Such an extensive reform within a few years time is certainly unprecedented in any country.
Based on the results of the Financial System Reforms implemented so far, and with a view to establishing a legal system that applies to financial institutions across the board rather than by type of business category of financial institutions, we now intend to submit the following bills to the Diet.
- First, as the framework for new rules, which covers a wide range of financial transactions, collective investment schemes will be developed to offer diversified investment products, such as real estate funds, and the obligation of financial service providers to explain the products to customers will be made clear and enforceable in order to protect customers.
- Second, an electronic disclosure system will be introduced for securities transaction reports, etc. Moreover, the Financial System Council is now studying reorganizing stock exchanges and financial futures exchanges into joint-stock companies.
In order to promote the Financial System Reform, it is essential to ensure the stability of the financial system. To this end, the Financial Function Early Strengthening Law and the Financial Revitalization Law were enforced in October 1998, providing credit guarantees by the government of up to 25 trillion yen and 18 trillion yen respectively, in addition to the 17 trillion yen already appropriated for the full protection of deposits.
Fiscal measures to increase the amount appropriated for the full protection of deposits from 17 trillion yen to 23 trillion yen are planned. It was also agreed in December 1999 to extend the special measures to fully protect deposits by one year until the end of March 2002, as a matter of prudence.
As a result of the financial system reform as well as ongoing restructuring, the Japanese financial sector has entered a new era of competition; from the competition within the same field of business to the one that transcends the business field and national borders. In these circumstances, reorganization of the financial sector through mergers and establishment of holding companies are rapidly promoted and foreign institutions are increasingly penetrating into the Japanese market. The inward foreign direct investment in the financial and insurance sectors almost tripled to reach the record high in FY1998. It is expected that efficiency and profitability of financial institutions will improve, allowing them to make new strategic investments for financial innovations, and thus offering advanced and diversified financial services to customers.