The document summarizes recent developments in Japan's capital markets and the efforts of the Financial Services Agency of Japan to reform and strengthen the market. Some key points include:
- Japan has over 4,500 companies listed on its exchanges, though the market capitalization is smaller than markets in the US and Europe.
- The FSA implemented a new program in 2002 to enhance investor access and protection, promote fair markets, and encourage securitization.
- New rules have strengthened corporate governance, auditing standards, and disclosure requirements for public companies.
- The accounting standards board is working to align Japanese standards with international standards.
- Rules for securities analysts were strengthened in 2003 to ensure independence and prevent conflicts of interest.
The document summarizes recent developments in Japan's capital markets and the efforts of the Financial Services Agency of Japan to reform and strengthen the market. Some key points include:
- Japan has over 4,500 companies listed on its exchanges, though the market capitalization is smaller than markets in the US and Europe.
- The FSA implemented a new program in 2002 to enhance investor access and protection, promote fair markets, and encourage securitization.
- New rules have strengthened corporate governance, auditing standards, and disclosure requirements for public companies.
- The accounting standards board is working to align Japanese standards with international standards.
- Rules for securities analysts were strengthened in 2003 to ensure independence and prevent conflicts of interest.
The document summarizes recent developments in Japan's capital markets and the efforts of the Financial Services Agency of Japan to reform and strengthen the market. Some key points include:
- Japan has over 4,500 companies listed on its exchanges, though the market capitalization is smaller than markets in the US and Europe.
- The FSA implemented a new program in 2002 to enhance investor access and protection, promote fair markets, and encourage securitization.
- New rules have strengthened corporate governance, auditing standards, and disclosure requirements for public companies.
- The accounting standards board is working to align Japanese standards with international standards.
- Rules for securities analysts were strengthened in 2003 to ensure independence and prevent conflicts of interest.
The document summarizes recent developments in Japan's capital markets and the efforts of the Financial Services Agency of Japan to reform and strengthen the market. Some key points include:
- Japan has over 4,500 companies listed on its exchanges, though the market capitalization is smaller than markets in the US and Europe.
- The FSA implemented a new program in 2002 to enhance investor access and protection, promote fair markets, and encourage securitization.
- New rules have strengthened corporate governance, auditing standards, and disclosure requirements for public companies.
- The accounting standards board is working to align Japanese standards with international standards.
- Rules for securities analysts were strengthened in 2003 to ensure independence and prevent conflicts of interest.
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Japans Capital Markets and the FSA
Financial Services Agency (FSA), Japan November 2003
I. Japans Capital markets A Comparative View (1)
1. Number of companies with equity shares listed 2003 (September) Zone Jasdaq Other stock exchanges* TOTAL NYSE US Nasdaq Amex TOTAL London Stock Exchange (exclude AIM from domestic)
* includes FSA registered companies ** Major European markets *** Euronext includes Amsterdam, Brussels, Lisbon, and Paris figures
I. Japans Capital markets A Comparative View (2)
2. Market Valuation ( million US$ ) Country JAPAN JASDAQ NYSE USA NASDAQ London Stock Exchange EUROPE Deutsche Brse Euronext 2,644,452 2,110,604 841,460 1,742,107 108,635 10,114,737 Market Tokyo Stock Exchange Market Valuation 2,746,471
At the end of September, 2003
II. New Comprehensive Program for Promoting Securities Markets Reform (August 6, 2002) (1) Recent Market Developments Index (points) 1800 1600 1400 1200 1000 800 600 400 200 0 0 500 1,500 1,000
Tokyo Stock Exchange
Trading Volume of the Tokyo Stock Exchange NIKKEI225 ( x 10 point )
II. New Comprehensive Program for Promoting Securities Markets Reform (August 6, 2002) (2) Composition of Individual Financial Assets ni st n emts ev n I %11 latipaC stisopeD dna hsaC dna ecna rusnI noisne P %03 %21 %31 srehtO %11 skcotS %81 ni stnemtse vnI l atip aC %61 stisopeD dn a hs aC %45 srehtO %8 ni stnemtse vnI
Others 11%
Stocks 12% sts ur T t n emts ev n I
Japan
US Priorities : Shift toward market finance
Further promotion of securities markets with participation of a wide range of investors
New Comprehensive Program
%4
stsurT tnemtse vnI
dn a ecn arusnI
noisne P
%92
stsurT tnemtse vnI
l atip aC skcotS %4 %2 %3
Cash and Deposits 34%
Insurance and Pension 28%
Germany
II. New Comprehensive Program for Promoting Securities Markets Reform (August 6, 2002) (3) 1. Enhancing access to securities markets for investors Expanding the securities marketing channels (e.g. introduction of independent contractors, sales of certain securities through banks) Developing environment for reliable investment trust and investment advisor services Promoting investor education programs Tax measures that promote active participation by investors
2. Establishment of fair and transparent securities markets investors can invest with confidence Strengthening the organization and function of the Securities and Exchange Surveillance Commission (SESC) Enhancing accounting and auditing system Ensuring fair transactions in securities markets Enhancing disclosure Strengthening corporate governance 6
II. New Comprehensive Program for Promoting Securities Markets Reform (August 6, 2002) (4) 3. Establishment of efficient and competitive securities markets Reviewing rules on stock exchanges, OTC markets and private offering markets Promoting reform of the securities settlement system Promoting securitization
III Comprehensive Revision of the Certified Public Accountants Law in Japan
Schedule The Diet (the Japanese legislature) passed the bill to comprehensively revise the CPA Law on May 30. The amendment will become effective in April 2004. (New CPA examinations will start in 2006.)
Major Points
Enhancing auditor oversight - Quality control review by the JICPA will be monitored and reviewed by the CPA and Auditing Oversight Board ("CPAAOB"), an independent third-party board established within the FSA. - The CPAAOB will have the authority to inspect CPAs and audit firms.
Strengthening auditor independence - Strengthening regulation on provision of non-audit services - Requirement of rotation of partners Reviewing CPAs examinations - Simplification of the present system of CPA examination, providing greater access to potential applicants and professionals 8
IV. Enhancement of Corporate Governance
(1) Enhancement of Corporate Statutory Auditors System Legally separate and independent body from the board of directors Enhancement of the system Increase in the required number of outside corporate statutory auditors (one at least half, effective in May 2005)
Strengthening the requirement for the definition of an outside corporate statutory auditor (no director or employee relationship for preceding 5 years no director or employee relationship, effective in May 2005)
Extending the term of office of corporate statutory auditors (3 years 4 years, effective in May 2002)
(2) Introduction of an Option of the Committees System including nomination, audit and compensation committees for large corporations (effective in April 2003) Each of the three committees is to consist of three or more directors, and in each committee a majority shall be outside directors. (3) Freedom of choice between these two options by large corporations competition between governance systems 9
Board of Corporate Statutory Auditors
Shareholders Board of Corporate Statutory Auditors at least 50% shall be outside auditors (effective May 2005) Each Corporate Statutory Auditor s m r i f t i d u a d n a s r o t id u a y r o t u t a t s e ta r op r o c , s r o t c e r id f o l a s s i m s i d r o t n e m t n i op p A
Duty of Care and Loyalty
Oversight of performance of duties of directors
Representative director(s) Management directors
Employees
f o t n e m t ni o p p A
e vi t a t n es e r p e R
Direction
) s ( r o t c e ri D
Decision on administrative affairs of the company
Board of Directors
Oversight
Audit firms (Source : Ministry of Justice, etc)
10
s n o it a r e n u m eR n o n o i s i c e D )sro tcerid
)srotcerid edistuo eb llahs ytiro jam a(
s m r i f ti d u a d n a s r o t c e riD f o l ass i msiD r o t n e m t ni o p p A
y tl a yo L d n a e r a C f o y t uD
Duty of Care and Loyalty
Nomination Committee
e e t ti m m o C n oi t as n e p m o C Audit firms
Audit Committee
Board of Directors
Shareholders
Audit Committee
Oversight
edis tuo eb llahs ytiro j am a(
Representative Executive Officer(s)
Exective Officers
Employees Executive Officers
(Source : Ministry of Justice, etc.)
11
ytir o ht ua t n em ega nam l a i t n a t sb u s g n i t a g e l e D / s r e c i f f o e v i t u c e xE f o l a s s i m s i D d n a t n e m t n i opp A /
)srotce rid
edistuo eb ll ahs yti ro jam a(
g n i t e e m s r ed l o h e r a h S o t s r o t c e r iD f o n o i ta n i m oN
V. Developments of Internationally Consistent Accounting and Auditing Standards (1)
1. Development of internationally consistent accounting standards Major Accounting Standards Reviews Consolidated Financial Statements Consolidated Cash Flow Statements Research and Development Costs Interim Consolidated Financial Statements Retirement Benefits Deferred Taxes Fair Value Accounting of Financial Instruments Foreign Currency Transactions and Financial Statements Impairment of Fixed Assets Business Combination Status Revised June 1997 Issued March 1998 Issued March 1998 Issued March 1998 Issued June 1998 Issued October 1998 Issued January 1999 Revised October 1999 Issued August 2002 Issued October 31, 2003 Implemented for financial statements beginning on or after April 1, 1999 April 1, 1999 April 1, 1999 April 1, 1999 April 1, 2000 April 1, 1999 April 1, 2000 April 1, 2000 April 1, 2003 (voluntary basis) April 1, 2005 April 1, 2006 12
V. Developments of Internationally Consistent Accounting and Auditing Standards (2)
2. Activities by the Accounting Standards Board of Japan (ASBJ : private accounting standards setting board established in July 2001) Debt-equity swap Stock options (under consideration) 3. New Auditing Standards (effective in March 2003) Risk approach Internal control Going concern assumption 13
VI. Strengthening Disclosure System
(1) Strengthening Disclosure System (effective in April 2003) Enhanced disclosure of governance-related information such matters as internal control system, risk control system, directors compensation, and audit fees Enhanced disclosure of business risk information Enhancement disclosure of MD&A (Managements Discussion and Analysis)
(2) Introduction of Quarterly Disclosure System by Stock Exchanges
Quarterly disclosure system already implemented in the markets for emerging corporations Schedule of introduction of quarterly disclosure system in the large markets (such as Sections I and II of the Tokyo Stock Exchange (TSE) and the JASDAQ ) Mandatory disclosure of "quarterly overview" to the listed companies from April 2003 Guidelines published by the study committee at Tokyo Stock Exchange to prepare for the quarterly disclosure of financial and operational information from April 2004. 14
VII. Strengthening of the JSDA Rule on Securities Analysts
The JSDA introduced the rule on securities analysts in January 2002. In response to the recent global developments, the JSDA strengthened the rule on January 15, 2003 (effective in April 2003). 1) Research independence Securities analysts must be institutionally independent from the investment banking departments. Especially, securities analysts compensation should not be linked to the performance of the investment banking businesses. 2) Disclosure of conflicts of interest Member firms are required to disclose any conflicts of interest situation of themselves and their research analysts in relation to subject companies. 3) Prohibition of the pre-disclosure to the subject company Member firms are prohibited to disclose research reports to subject companies before their publications. 4) Review process of the research report Member firms are required to establish review processes which ensures integrity and objectivity of research reports. 5) Strict control of information Information obtained through research processes is required to be appropriately controlled. 6) Maintenance requirement of the research reports Members are required to maintain research reports for 3 years after their publications. 15
VIII. International Development of Securities Exchanges(1) 1. Schedule
December 2002 Report by the First Subcommittee of the Financial System Council titled Promotion of Securities Markets Reform (Report) March 14, 2003 A bill for amending the Securities and Exchange Law was submitted to the current regular Diet Session based on the Report. May 23, 2003 April 2004 The Diet passed the bill. The amendment will be effective. 16
VIII. International Development of Securities Exchanges(2)
2. Domestic installment of terminals by overseas securities exchanges (1) Previous response by the FSA Case by case response to requests for installing terminals in Japan by overseas securities exchanges (2) Proposals by the Report (which are included in the bill) Enactment of definite rules from the viewpoint of investors protections and ensuring transparency, properly considering international developments Requiring approval by the FSA, but not requiring licensing for opening of a securities market if required rules are met Establishment of rules Overseas securities exchanges which shall be recognized as being subject to proper regulations and supervisions by overseas securities regulators and as proper self-regulatory organizations for ensuring fairness of transactions and protecting investors Framework of exchange of information between the FSA and overseas securities regulators Monitoring requirements such as reporting requirement of trading volumes and being subject to supervisory actions by the FSA 17
VIII. International Development of Securities
3. Overseas development of Japanese securities exchanges (Remote Membership and Cross Membership) Allowing membership of Japanese exchanges to overseas securities companies without requiring establishment of a branch in Japan Requirement for the membership Framework of exchange of information including MOUs between the FSA and overseas securities regulators Framework of cooperation on provision of information between Japanese securities exchanges and overseas securities exchanges Appointment of a representative in Japan Monitoring requirements such as reporting, and supervisory actions
Exchange(3)
4. Development for Alliances and Consolidations of securities exchanges at home and abroad Abolition of the current prohibition of having more than 5% of voting powers of Japanese securities exchanges New prohibition of having a majority of voting powers and new requirement for approval of having in principle 20% or more of voting powers of Japanese securities exchanges Allowing an establishment of a securities exchange holding company 18
IX. Reforming Japanese Securities Settlement System (1)
First Step (2001) The Law regarding Transfer Settlement of Short Term Bond - Dematerialization of Commercial Papers (CPs) The Law Revising the Law concerning Depository and Book entry for share certificates - Demutualization of Central Depositary
Second Step (2002)
The Law regarding the revision of relevant laws relating to the development of security market infrastructure in accordance with the reform of securities settlement system - Dematerialization of Corporate Bonds, Government Bonds, etc
Third Step (2003)
- Dematerialization of Shares, etc (in preparation) 19
IX. Reforming Japanese Securities Settlement System (2)
The policy targets to be realized under settlement system reform Scope covered by the Law regarding Transfer Settlement of Short Term Bond
Reduction of Settlement Risk Realization of new book-entry
system based on paperlessRevision of Civil/Commercial Code in lieu of the current security transaction laws.) Secure the finality of settlement
Efficient Settlement Operation Demutualizing Central Securities
Depositories
Implementation of multi layer for
account structure
legislation for the settlement system Prevention of the operational risk
arising from recording errors. Realization of legal framework for Clearing Organization across various type of securities. handling common benefit coordination with legislation for escrow deposit
