On 21 December 2007, Japan's Financial Services Agency ("FSA") published its "Plan for Strengthening the Competitiveness of Japan's Financial and Capital Markets" (the "Plan"). This followed a cabinet decision of 19 June 2007, that instructed the FSA to develop and deliver such a plan by the end of the year. As always in Japan, it is hard to determine whether the initial impetus for reform was political or principally bureaucratic in origin, nevertheless the need to resurrect Tokyo as a major capital market appears clear. Moreover, the involvement of Yoshimi Watanabe (Minister of State for Financial Services and Administrative Reform), a renowned fighter, ought to accelerate the passage of new legislation through the Diet.
In addition, the Plan appears to be timely, particularly to domestic Japanese eyes. The current discomfort of many Western financial firms as a result of the sub-prime loan crisis could assist Japanese financial groups in rebuilding some of their previous global market share as they seem to have emerged relatively unscathed. They have also have a renewed capacity to expand their appetite for risk as the domestic bad debt write-offs of the 1990s are now behind them. Certainly, the changes envisaged by the Plan should result in a regulatory environment in Japan that is more friendly to larger, integrated financial groups, particularly those of domestic origin.
- Details of the Plan can be accessed via the FSA's website1 and incorporate measures to strengthen competitiveness in the following four policy areas:
- Creation of vibrant markets investors can have confidence in – particularly diversification of ETF funds and alliances between financial and commodity exchanges.
- Business environment that vitalises the financial services industry and promotes competition – see detail below.
- Improving the regulatory environment ("better regulation") – see detail below.
- Improving the broader environment surrounding the markets – these include developing internationally competitive human resources specializing in finance, law, accounting etc. and improving the urban infrastructure suitable for an international financial sector.
Several of these points are worn old themes previously played by MOF and FSA and will take many years to realize: for example, redevelopment of the Marunouchi financial district to make it attractive to domestic and international investment banks. However, legislation can be delivered more quickly and regulatory practices and enforcement could also be altered relatively fast.
"Bills to be introduced to Diet promptly" in three areas
The Plan envisages three legislative changes in "business environment", although it is too early to know exactly what the legislation will deliver. In the words of the Plan, "Bills are to be introduced to the Diet promptly" in the following areas:
1 . Revamp of the firewall regulation among banking, securities and insurance businesses – principally this is to involve lifting the ban on "interlocking officers and employees" and a relaxation of the restrictions on the sharing of undisclosed corporate customer information between banking and securities businesses.
2. Broadening the scope of businesses permitted to banking and insurance groups – permitting commodities dealing, Islamic finance, emission trading, equity holdings for the purpose of corporate restructuring etc.
3 . Encouraging financial firms to manage conflicts of interest effectively – unfortunately, at this stage no meaningful detail is available about what this Bill might contain. Such reforms, particularly those related to firewalls, could well increase the freedom of action of all large participants in Japanese financial markets. However, the primary goal of MOF and the FSA in pushing for these changes would seem to be to facilitate the development of larger Japanese integrated banking/securities and insurance holding companies by means of a lighter regulatory touch. The separation of such streams of business has been steadily being eroded over recent years so that Japanese investment banks and broadly-based financial groups can re-emerge.
The other change of note concerns an improved regulatory environment by means of "better regulation" (which is also the term used in the Japanese language version). The modish profusion of borrowed English language phrases such as "rule-based", "principle-based", "forward-looking approach" etc. cannot disguise the fact that this change in policy has already been announced by the FSA over the last few months (see the previous issue of this newsletter). Nevertheless, the willingness of the FSA to justify its regulatory actions and pursue greater dialogue with industry participants is encouraging for the regulated in Japan. The Plan (and recent associated announcements) promise to translate more FSA manuals and materials into English, hold symposia to explain the FSA's approach, improve access and cooperate with overseas regulators amongst others.
But delivery could be hampered by political instability
A cynical reading of the Plan would be that it is largely old wine in new bottles (served up to satisfy the Cabinet's request of June 2007) and that the proposed regulatory changes are merely bureaucratic responses to domestic lobbyists asking to make the life of Japan's nascent investment banks easier (weaker firewalls, more freedom to pursue new business areas) – making the larger goal of achieving an internationally competitive financial sector in Japan risible. Our view is that the bureaucratic and political desire to strengthen the competitiveness of Japan's capital market is genuine as Tokyo continues to slip down global rankings of important and attractive financial centres. For that reason, the development of "better regulation" and the final delivery of reform Bills to the Diet during 2008 will need to be watched for regulatory impacts.
The passage of the proposed Bills, which might result in significant regulatory change, is, of course, hard to predict in the current political environment. Prime Minister Fukuda might reshuffle the Cabinet (we note that Minister Watanabe was inherited from Prime Minister Abe). The government is also severely hampered by the split Diet. However, the regulatory and other changes suggested are not, in principle, politically contentious and would appear to be being promoted by the bureaucracy. Given their bureaucratic origin, they are likely to be on the policy agenda of whichever government comes to power in 2008 and 2009.