General Committee: Summary of Discussions

I. Status Quo and Problems in Japanese Securities Market

1. The question of what form the Japanese securities market ought to take has now risen to the fore. The market has developed along with the Japanese economy, and it has played an important role in the economy. As a result of changes in economic and social environment, however, people expect more of the securities market. Can the market answer such expectations? The securities market as a whole is required to execute reforms over the medium term looking to the 21st century, rather than focusing upon the vitalization of present market transactions.

2. The Japanese financial and capital market has emphasized the role of distributing funds effectively and in concentration to key industries. The market, however, has entered a stage where the emphasis should be changed. As the percentage of elderly persons within the general population increases, individual financial assets now total as much as 1,200 trillion yen. Financial and capital markets now have to work to ensure that assets are invested more effectively. At the same time, the maturation of the economy has made it more important to provide funds to various new industries comprising positive risk burden in funding. In addition, because of the huge accumulation of financial assets in Japan, the Japanese market now has to play a greater role in the effective distribution of funds from a global point of view.

3. Such a role cannot be fulfilled under the traditional Japanese system of indirect financing based upon bank loans and deposits. It is assumed that the securities market, which could effectively perform the functions of risk management and distribution, could satisfy financial intermediary needs of the new era. Today's Japanese securities market, however, is far from such a desirable condition. In other words, deposits and savings continue to account for far larger share of financial assets than that of the vastly smaller share accounted for by individuals investors. Borrowing continues to play an important role in business funding. In addition, participation by overseas investors and companies in the Japanese market is restricted.

4. The major causes of such problems do not lie in the history of economic development or Japanese culture. Instead, these problems may be attributed to the framework of the securities market and the attitudes of the people who work there. There is criticism that both the legal and the administrative frameworks for regulating the securities market have served as to hinder market professionals from exercising originality and assuming responsibility. It has also been pointed out that the accounting, taxation, and legal systems that constitute the market infrastructure, unlike those in other major financial centers, have not been designed to promote product development or transactions. Those who comprise the market have behaved themselves in accordance with economic rationality under the framework of preventive regulations and the existing system infrastructure, which has made the market what it is today. The following problems have surfaced, however, due to changes in environment of the Japanese securities market.

(1) As for securities exchanges and the over-the-counter market, it may be necessary to reduce the various transaction costs to be paid by users and make transaction services more attractive and convenient for users in accordance with their changing needs.

(2) Intermediaries (securities companies and asset management companies) may not have made sufficient efforts to provide unique and original services. They may be able to encourage investors to utilize the securities market more actively, by marketing attitudes that attach more importance to to the views of investors.

(3) May individual investors have partially pursued short-term capital gains or not fully understood the principle of self-responsibility? It may be necessary to make the principle of self-responsibility generally known. It may also be necessary to increase the investor base by transforming the securities market into something that the average person can more easily understand and by creating a climate that allows long-term stock holding.

(4) The ability of institutional investors and fund managers to manage assets is now being called into question. Futhermore, the attitudes of these institutional investors and fund managers which lead them to follow the lead of others may have impeded the offering of a variety of unique products. This may be one of the factors hindering smooth price formation in the market.

(5) Issuing companies may be required to adopt an attitude towards marketing that attaches greater importance to stockholders and investors. It is important that the issuing of security faithfully reflect the market conditions, performance of the company and its rating. Issuing companies may need to consider these matters more fully.

Mutual holding of stocks by companies and banks based on non-financial motives is economically reasonable in the traditional framework. Such activities, however, affect stock price formation, creating doubts as to the market value of stocks as financial assets and corporate governance. This, as a consequence, may have negatively affected the willingness of real investors, including individuals, to invest in stocks.

5. Globalization of the economy and finance and the advances in telecommunications and information technologies have freed capital transactions from geographical and physical restrictions, creating new possibilities. At the same time, such changes have intensified international competition in pursuit of lower costs and higher added value. International competition between markets makes it possible for the need for the procurement and management of funds to be satisfied in overseas markets. The Japanese securities market, however, must not be deindustrialized because it is difficult for individuals and small companies to obtain direct access to overseas markets, and the deindustrialization of the industry might impede the availability of information on finance and securities transactions and lead to unemployment in the financial and securities industries. To make the market a convenient, attractive, and competitive one that satisfies international standards will contribute to effective investment of abundant Japanese financial assets in the Japanese market and the development and growth of new industries.

6. Problems with the Japanese securities market arise from a wide variety of causes. To allow the future securities market to meet the needs of the people in the 21st century, it will be necessary to introduce drastic and comprehensive reforms. Such reforms should start with the transformation of the traditional framework of regulations, including administration, which should be followed by changes in the awareness and behavior of market users, intermediaries and operators.

7. The securities market is a common asset of the people. The climate which makes people look askance upon stockholders conflicts with the essence of the securities market. This view of the securities market and the problems surrounding it make it difficult to tell what are the causes and what are the results of problems. In any case, it is desirable that everyone concerned should endeavor to cultivate the securities market as an important national asset. Accordingly, efforts should be made in terms of reforms to revitalize the market and to make it easier for the average person to utilize. At the same time, care must be taken not to harm benefits to not only direct users but also people at large by unfair practices or conflicts of interest. We must always remain aware that it is the nation as a whole which is the final beneficiary of the market.

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