An extract from The International Capital Markets Review, 11th Edition


i Structure of financial laws and regulations in Japan

The Financial Instruments and Exchange Act (FIEA)2 and the Cabinet Order and Cabinet Office Ordinances thereunder are the most basic and important direct regulations on capital markets in Japan. The FIEA regulates financial instruments business and financial transactions, including securities offerings and distributions, for the purpose of maintaining the fairness of capital markets, protecting investors and developing the economy. There are no overarching laws that regulate all financial institutions, which means that each type of institution is regulated separately. For example, banks are regulated by the Banking Act,3 securities firms and investment managers are regulated by the FIEA, and insurance companies are regulated by the Insurance Business Act.4 The FIEA is still important, however, even for financial institutions that are regulated by laws other than the FIEA, because those laws may refer to provisions of the FIEA that are then applied to these institutions mutatis mutandis. As a result, these institutions are, in effect, also regulated by the principles of the FIEA in many respects; for example, when conducting securities and derivatives transactions.

There are several other laws and regulations, such as the Commodity Derivatives Act,5 the Act on Investment Trusts and Investment Corporations,6 the Limited Partnership Act for Investment,7 the Act on Securitisation of Assets,8 the Trust Act,9 the Payment Services Act (PSA)10 and the Companies Act,11 which specifically govern certain types of financial transactions, including derivatives transactions, securitisations, structured products, investment funds, trusts and partnerships.

ii The role of regulatory and supervisory agencies and the central bank in the Japanese capital markets

The Financial Services Agency (FSA) is responsible for, inter alia, ensuring the stability of the Japanese financial system, developing the financial industry, protecting investors and carrying out surveillance of securities transactions. The FSA delegates powers relating to securities registration to local finance bureaus (LFBs) and powers relating to daily market surveillance, inspections of financial instruments firms, inspections of disclosure documents and relevant activities to the Securities and Exchange Surveillance Commission (SESC).

The commodity derivatives business is regulated by either the Ministry of Economy, Trade and Industry (METI) or the Ministry of Agriculture, Forestry and Fisheries (or both), depending on the type of underlying commodity.

The Bank of Japan, which is the country's central bank, is independent of the government, including the FSA, as is the case with central banks in many other jurisdictions. Its mission mainly focuses on the implementation of monetary policy and treasury and government securities-related operations.

Additionally, there are several self-regulatory organisations whose membership consists of financial institutions. Among them, the Japan Securities Dealers Association (JSDA) is the most representative and important organisation in the Japanese capital markets. It promotes sound business development and protects investors by ensuring that securities transactions by its members are conducted fairly and smoothly.

iii Financial dispute resolution

Several options exist for resolving financial disputes in Japan: judiciary proceedings in court, arbitration procedures at an arbitral tribunal and financial alternative dispute resolution (financial ADR) procedures.

Usually, a party to a financial transaction is able to sue the counterparty in court, and once a court procedure is chosen, the parties will be entitled to a judgment by a district court and two instances of appeal to the High Court and the Supreme Court.

Alternatively, a party may elect arbitral institutions, including the Japan Commercial Arbitration Association or the International Chamber of Commerce, for arbitral awards that are deemed to be final and binding by the courts. Japan is a member of both the ICSID Convention and the New York Convention, and Japan's Arbitration Act12 is based on the UNCITRAL Model Law.

In addition to court and arbitral procedures, an investor may seek settlement of a financial dispute by choosing the financial ADR procedure, which is a simplified and expeditious resolution system.

iv Scope of jurisdiction

In general, it is believed that Japanese laws and regulations do not apply to activities by foreign companies outside Japan as the scope of jurisdiction should be limited to Japanese territory. With respect to cross-border cases, however, there is no provision that specifies the extent of the application of financial laws and regulations, and the scope of the powers of regulatory authorities is still open to interpretation. Even so, it is almost always the case that Japanese laws and regulations apply when a foreign company solicits an investor who resides in Japan, even from outside Japan (see Section II.i).

In practice, the FSA maintains close and constant contact with the regulators of foreign countries. Financial institutions should pay careful attention to the relevant overseas regulations as well as the Japanese regulations when conducting cross-border transactions.