1. Financial Futures Transactions
(1) Basic Approach
a. As financial liberalization and internationalization progress, interest rates and exchange rate risk have increased more than ever. Financial futures transactions are useful vehicles to achieve optimum risk-sharing through transactions between participants who have different risk preferences. From such a viewpoint, the financial futures market was established at the Tokyo International Financial Futures Exchange in 1989. Since then, the environment for financial futures transactions has been maintained and the amount of transactions in Japan has been steadily expanding.
However, some problems have also been noted, such as huge concentration
of transactions on only one financial futures product, insufficient
foundation for transactions, etcetera, inadequate investor protection
in cases of financial futures brokers' failure, and so forth.
On the other hand, recently, vitalization of financial futures
transactions has been aggressively pursued in foreign financial
futures markets: various products have been listed, trading hours
have been extended, and several markets have linked together.
Under such circumstances, the decline of the comparative position
of Japan's market is feared, and therefore, it is necessary to
quickly address how to strengthen Japan's market's competitiveness
and make it an attractive market for both domestic and foreign
investors.
b. As to the role of Japan's financial futures market, it should
provide attractive yen-denominated products with high liquidity
as the mother market of the yen. Because Tokyo's business hours
are located between the US and Europe's, Tokyo should be an international
market that can be compared with the New York and London markets.
To achieve this, it is necessary to establish a convenient and
useful market for foreign and domestic investors by improving
both its quality and quantity, as well as by providing a better
environment for transactions.
(2) Vitalization of the Market
A convenient and useful market must be, first of all, one in which investors are able to freely conduct transactions in high liquidity market that satisfy their needs. Although developing new products involves high risks, and many products have been listed and abolished in foreign markets, it is necessary to develop and list new products aggressively, with due attention to the costs, to precisely respond to the various foreign and domestic investor needs, and thereby establish an active market. From this viewpoint, we expect that the spread transactions system on short-term Japanese yen interest rate futures will be introduced in 1998. This is currently under consideration by the Tokyo International Financial Futures Exchange.
The linkage with foreign markets, and the flexible extension of
business hours, should also be considered, as those measures would
vitalize financial futures transactions in Japan's market.
(3) Preparing the Environment for Financial Futures Transactions
a. To promote an accessible and useful market for both domestic
and foreign investors, it is also an important task to improve
the environment of financial futures transactions to meet international
standards. Although the Tokyo International Financial Futures
Exchange has addressed this matter by adopting efficient measures
for the calculation of margins first among other domestic exchanges,
we expect them to introduce internationally standardized transactional
measures, as soon as possible, that will allow for further diversified
transactions.
b. The failure of Baring Brothers, Ltd. in 1995, exposed the
inadequacy of Japan's measures for investor protection regarding
financial futures transactions. That is, in Japan, the investor
protection system has not been fully established, by which customers'
assets, such as margin requirements, must be kept in separate
accounts and also be safeguarded under the Bankruptcy Law. This
may cause unpredictable losses to investors when financial futures
dealers, etcetera, fail. In order to enhance the credibility
of Japan's market and attract many investors, completing adequate
investor protection should be considered promptly.
c. Reducing transaction costs is also an essential matter to
establish an attractive market. Transaction costs are affected
by various factors, such as differences in language. As to consignment
fees, the direct costs of transactions, in the Tokyo International
Financial Futures Exchange Market, are priced at about an internationally
competitive level. However, as to the transaction tax that is
imposed on futures and options transactions on the financial futures
exchanges, there are some remarks that it has been an obstacle
to lowering transaction costs to an internationally competitive
level. The imposition of the tax should be reconsidered, including
its abolishment, in the context of appropriate taxation on derivatives
transactions.
2. The Short-term Money Market
(1) Basic Approach
a. Japan's short-term money market has come to contain various
kinds of markets, CDs were initially introduced in 1979, and then
Uncollateralized Calls, TBs, CPs, and so on. Market improvements,
such as betterment of market practices, has also been initiated.
Consequently, Japan's short-term money market is increasing its
size and becoming a more efficient and transparent place in which
interest arbitrage functions smoothly.
b. However, it is said that Japan's short-term money markets have some problems, such as -
A. insufficient capacity as an indicator, as compared to the US and UK markets.
B. impaired efficiency due to Japan's unique systems and market practices.
C. inadequate security for the money settlement systems.
To develop Japan's financial market as a whole to become an international
market in the twenty-first century, to the same extent as that
of New York and London, it is necessary to make the short-term
money market securer, more efficient, and larger in size, by solving
the above problems.
(2) Increasing Market Capacity
a. The short-term money market, in which market participants
are able to finance and make investments in any amount at any
time, must have a sufficient volume of transactions, therefore
the ability to set adequate interest rates and prices according
to transaction periods and participants' creditworthiness is necessary.
To this end, it is required that interest rates and prices are
fixed according to the transaction periods in a smooth and transparent
manner in the core product's market, and that those interest rates
and prices be indicators for other markets.
b. From the viewpoint of establishing an indicator of the core
market products, expanding the market for short-term government-securities,
which is characteristically credible and uniform, as in the US,
is an important task. Some have argued that the TB market should
be enlarged, and that the current procedure for issuing FBs should
be revised. However, as to the revision of the procedure for
issuing FBs, this should also be examined from the viewpoint of
the national treasury system and the public finance system. In
addition, considering the fact that LIBOR has become the UK's
interest rate indicator, it is also important to make the yen-TIBOR
(Tokyo Interbank Offered Rate) such an effective indicator. To
achieve this, we expect that market participants will promote
the vitalization of transactions, other than overnight call market
transactions.
(3) Improving Efficiency in the Short-term Money Market
a. Although interest rates and prices are fixed according to transaction periods and each participant's creditworthiness, under an efficient financial market theory, in reality, they are affected by several factors, such as the legal framework for products, market practices, taxation systems, and so on. To establish accessible and useful markets for both foreign and domestic investors, it is necessary to thoroughly refine, from the viewpoint of improving efficiency and accommodating international standards, the legal framework for products, market practices, taxation systems, etcetera.
As to matters concerning market practices, the necessity of refining
several subjects, such as promissory notes and calculation methods
for interest rates in call transactions, the way of transacting
money in cash-collateralized loan transactions of bonds, etcetera,
was pointed out in light of international harmonization. We expect
market participants to promptly address this subject.
b. The taxation system greatly affects interest rates and market
prices, and consequently, the development of the short-term money
market, where funds are financed and invested for short periods.
Therefore, in examining the financial-related taxation system,
as part of this financial system reform, positive consideration
should be given to improve the efficiency of short-term money
market, with due attention to the impartiality of taxation.
(4) Improving the Market's Security
Currently, most transactions in the short-term money market are settled by the designated-time gross settlement system through BOJ-NET. Although this system is superior in efficiency, the risk is pointed out that one participant's default may cause systemic malfunction. Considering that many developed countries have adopted RTGS (Real Time Gross Settlement) as the settlement system through the central bank to minimize settlement risk, it is necessary that Japan positively advance consideration to introduce RTGS, within this century, for the improvement of the short-term money market's security, as well as for international harmonization.
However, on the other hand, the introduction of RTGS will have
considerable effects on the current transaction practices in the
short-term money market, because market participants will have
to prepare required amounts of funds for each transaction. Therefore,
in considering this matter, there should be careful attention
not to prevent smooth transactional operations, nor to impose
heavy burdens on market participants, and concrete proposals for
its smooth introduction should be considered, and market participants'
opinions taken into account. At the same time, positive effort
by market participants is expected toward constructing a new,
orderly system for transactions.
3. The Accounting System
Enhancing banks' information disclosure is essential for improving the transparency of banks' management and promoting their autonomous control through market discipline, as well as setting the foundation for the establishment of depositors' acceptance of responsibility. To achieve this, it is necessary to appropriately improve the accounting system, in line with the transformation of the economy and society, and the internationalization of the financial market, so that banks will make financial statements that show the exact state of their management.
As part of this financial system reform, the consolidated financial
statement system and the accounting standard for financial products,
etcetera, has been under consideration as subjects for international
harmonization at the Business Accounting Council. The Council
made a report, titled "The Opinion Report Concerning the
Revision of the Consolidated Financial Statement System",
in June 1997. Examination of other issues is also going on in
the Council.
4. Protecting Users
(1) Basic Approach
As diversified and sophisticated financial services will be provided due to this financial system reform, it becomes necessary to prepare the system so that ordinary users, with little professional knowledge, are able to safely enjoy such services.
Basically, users of financial institutions participate as one party to a contract under the freedom of contract principle, and are required to act according to the principle of taking responsibility. However, as an individual user's financial knowledge and ability to bear the burden of losses are limited, they are not in an equal position with financial institutions, such as banks and Non-banks. If all financial contracts are left totally unregulated, and all participants have to settle any troubles through court actions, individual users would suffer severe disadvantages, such as legal costs.
Therefore, it is necessary to examine user-protection rules in
order to enable financial institutions' users to enter into contracts
without fear.
(2) Matters Concerning Consumer Credit
a. Consumer Protection for Loans by Banks and Other Depository Institutions
From the viewpoint of protecting individual users, there are problems
in the current regulations, both in methods and content: regulations
primarily take the form of administrative notices; and, there
are some unregulated issues, such as the lack of a duty to supply
copies of agreements to customers. The necessary measures should
be taken to regulate banks' business conduct that relates to consumer
loans.
b. Consumer Protection for Non-bank Lenders and Sales Finance Businesses
In Japan, the Regulatory Law for Loan Business and the Sales Finance Law are addressed to specific business categories or forms of loans, they do not horizontally regulate all types of consumer loan businesses. For this reason, consumer loan businesses are subject to different or no regulations, depending on their legal category or the form of loans they make.
As the expansion of the consumer credit market is expected, in
order to properly protect consumers, it is necessary to refine
the above laws and make them consistent.
c. Protecting Consumer Credit Information
It was pointed out that effective measures for the protection of consumer credit information is necessary, considering current problems, such as increasing bankruptcies from multiple debt and information leakage from credit reporting agencies.
This issue is now under the consideration of the Conference for
the Protection and Use of Individuals' Credit Information, a study
group held by the Ministry of Finance and the Ministry of International
Trade and Industry. Necessary measures should be taken regarding
conclusions of the conference.
d. Tasks for the Future
Necessary measures for consumer credit protection should be fixed
within the financial year 1997, and implemented promptly. In
examining those measures, as it is desirable to impose the same
regulations on the same types of business; e.g. the consumer credit
business, we recommend that a horizontal regulatory system that
is imposed to all categories of consumer credit business, like
integrated consumer credit acts in the US and in Europe, be considered.
(3) Credit, ATM, and Other Card Businesses
As to such card businesses, there is the danger of unauthorized
use. Since it is inappropriate to leave the matter to principles
of freedom of contract, rules for the card business should be
considered.
(4) Contracts with Banks
There has been criticism of the uniform contracts of banks, such
as copies not always being delivered to customers, and some provisions
being unilateral or unclear. Banks should explore how uniform
contracts for bank transactions and consumer credit can be refined,
and take necessary steps, at least within the financial year 1998,
by which equity for users is established and the meaning of agreements
is made clear and easy for users to understand.
(5) User Protection for Non-deposit Products Sold by Banks
It is probable that non-deposit products that carry risks will be sold by banks and other depository institutions, as the financial system reform progresses. Therefore, it is necessary to establish rules, within the financial year 1997, by which banks must explain the nature of each product, etcetera, to prevent users' misunderstanding of deposits and other products.
As mentioned before, we recommend consideration of horizontal
rules that would be imposed on all market participants, as the
financial system reform progresses. The conduct of business rules
for the protection of users of non-deposit products are expected
to be included in the horizontal rules mentioned above.
(6) Dispute and Complaint Resolution
It is necessary to establish a reliable private sector scheme
to settle users' complaints and disputes swiftly, before resorting
to court action. Consideration should be given promptly to this
subject by businesses concerned, including refining existing complaint
and dispute settlement systems.