I. BACKGROUND AND OBJECTIVES

Dynamic innovations in communications, information and financial technologies, together with globalization of capital markets, have freed financial transactions from physical and geographical constraints, and have dramatically enhanced the functioning of capital markets. This in turn has resulted in improved investment opportunities, even at the household level, and in greater flow of funds to emerging industries, thus playing an important role in helping industrial economies regain their dynamism.

With a rapid aging of the population, Japan needs to raise the return on the Y1200 trillion of household financial assets. Ensuring an adequate source of capital for the next generation of key industries is an important goal. As an economy that generates a significant portion of global savings, Japan also needs to meet its international responsibility by ensuring that these savings are channeled effectively to the rest of the world, including to developing countries.

The financial system needs to function efficiently if these objectives are to be met. The role of the securities market is particularly important, as the market is uniquely suited for risk-taking and risk-diversification.

Globally, there have been large reforms in securities markets around the world. By contrast, in Japan, in the boom-and-bust of the financial bubble during the past decade, innovation in the securities market had slowed. As a result, the market is not living up to its full potential, so that the possible hollowing out of the Japanese market is a source of concern. There is an urgent need to make the Japanese market more attractive and competitive internationally, to reconstruct a dynamic capital market, and thereby to allow investors and issuers to enjoy the full benefits of an advanced capital market.

Without a radical and comprehensive reform of the securities market, the Japanese securities market has little prospect of becoming an attractive, international market, and will ultimately put Japan's economic growth and a wider international acceptance of the yen at risk.

The comprehensive revision of the Foreign Exchange Law enacted in May, provides Japanese investors and firms the freedom of access to markets worldwide, and is a front-runner in the overall reform of the financial system. With this foreign exchange liberalization, Japanese markets will be truly integrated into the global market. This in mind, the reform of the securities market aims to place the Japanese market on par with major financial markets worldwide, by ensuring that the Japanese market can freely generate and employ innovations in financial instruments and transactions. The reform also needs to make every effort to make the market as fair and transparent as possible, so that domestic retail investors and foreign users of the Japanese market may approach the market with confidence. Furthermore, the reform must also increase the freedom of Japanese intermediaries, so that they may offer better services and

compete effectively in the global marketplace.


[Next Page]

[Table of Contents]