BAFIN
GROUP 1 – JAPAN
DRAFT
INTRODUCTION:
Economy
Japan has a market economy in which the prices of goods and services are determined in a free
price system. Japan is a member of the Asia-Pacific Economic Cooperation (APEC) and the Trans-Pacific
Partnership (TPP).
What is APEC?
The Asia-Pacific Economic Cooperation (APEC) is a regional economic forum established in 1989 to leverage the growing
interdependence of the Asia-Pacific. APEC's 21 members aim to create greater prosperity for the people of the region by promoting
balanced, inclusive, sustainable, innovative and secure growth and by accelerating regional economic integration.
What is TPP?
The TPP was a massive trade agreement signed by twelve Pacific Rim countries, including the United States, that together comprised
40 percent of the global economy.
Japanese economy is the fourth-largest in the world based on its GDP. It had grew rapidly and
was far from 1990s wherein they experienced stagnation in their country.
MODULE 1: All About Currency
Japanese Yen
The official Japanese currency is the Japanese yen, represented by the currency code JPY and the
currency symbol, ¥.
Locally in Japan, yen is pronounced “en” in Japanese and often accompanied by its kanji, 円, in
everyday use.
Currency Exchange Rate
Denominations
Coins
1 yen (ichi-en) - Silvery-white in hue with rounded corners. The lightest and smallest of the six
coins, made entirely of aluminum. Occasionally used as weights since it weighs precisely one
gram. The only coin from Japan that, with precise placement, can float on water. A young tree is
featured on the front of the current design to represent Japan's robust development.
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GROUP 1 – JAPAN
DRAFT
• 5 yen (go-en) - It is gold in hue, with rounded corners, and a central hole. The current front
design features a rice stalk, a gear, and the sea as symbols of Japan's industry, agriculture, and
fisheries, respectively. The two leaf buds on the reverse of the present design stand both
democracy and forestry in Japan. It is the only coin without a numerical representation of its
monetary worth.
• 10 yen (jū-en) - The hue bronze, which is 95% copper, has smooth edges. Features the Ho-o-do
(Byodo) in Phoenix Hall on the front. The coin's back features the evergreen tree. The ridged-
edged 10 yen coins, sometimes referred to as giza-jyuu, are extremely uncommon and valuable
collectibles because they were only produced for seven years (1951–1958).
• 50 yen (gojū-en) - Featuring a central hole, ridged edges, and a silver color. The coin's front
features three images of chrysanthemums.
• 100 yen (hyaku-en) - Ribbed edges and a silver color. The front is now designed with sakura
blossoms. To commemorate different occasions, there are several 100 yen coins with limited
edition designs.
• 500 yen (gohyaku-en) - Light gold color, ridged edges. The largest and heaviest of six Japanese
coins, features paulownia in the front design, tachibana and bamboo leaves on the reverse.
Limited edition designs are available for commemoration and are often used to refer to affordable
goods.
Banknotes
• 1,000 yen (sen-en) - Blue ink is used to print the design. The image of Hideyo Noguchi, a
bacteriologist renowned for his ground-breaking studies on syphilis and yellow fever, is featured
on the front of the current denomination. The current banknote's reverse side depicts Lake
Motosu and Mount Fuji, with cherry blossoms on either side.
• 5,000 yen (gosen-en) - Purple ink is used to print the design. The first well-known Japanese
female author, Ichiyo Higuchi, is featured on the front as it is designed now. The back's current
design is based on Ogata Korin's painting "Kakitsubata-zu," which features iris.
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GROUP 1 – JAPAN
DRAFT
• 10,000 yen (ichiman-en) - Brown printing is used for the design. The founder of Keio
University, Fukuzawa Yukichi, is depicted on the front of the current banknote. The Byodo-in
phoenix statue is featured on the back.
MODULE 2: Financial System
Japan's financial system has been maintaining stability on the whole. Japanese banks have sufficient
capital bases to perform financial intermediation activities appropriately even amid the global tightening
of financial conditions and the resultant various types of stress. They also have stable funding bases,
especially small, sticky retail deposits. Even after uncertainty over the financial sectors in the United
States and Europe heightened in March 2023, Japan's financial system has been sound and resilient.
However, vigilance against tail risks continues to be warranted. The period of stress may be prolonged
further with continuing monetary tightening by central banks and the resultant concerns about a
slowdown in foreign economies. Uncertainty about future developments is similarly noted in financial
and capital markets. From a long-term perspective, if banks' core profitability were to stagnate and capital
accumulation were to stall, financial intermediation could be impaired due to a decline in loss-absorbing
capacity, or vulnerabilities in the financial system could increase through excessive search for yield. To
ensure the stability of Japan's financial system, it is necessary to examine these risks of contraction and
overheating in the financial system and address potential vulnerabilities appropriately.
Japan’s financial structure includes several elements such as financial institutions, commercial banks,
trust banks, government-based financial organizations, and the Post office.
commercial banks: provides medium-term financing to enterprises, individuals, and the government.
● Trust banks: provides a safe place for the funds from trusts and pension schemes.
● Policies-oriented governmental financial institutes: such as Japan Bank for International
Cooperation and Development Bank of Japan: provide loans to particular industries.
● Japan Post Bank: The largest deposits float within the country
Insurance is an equally important aspect in Japan as it accounts for the world’s largest market of life
insurance and a very active non life insurance sector.
● Life Insurance: more than any other country on the earth, Japan possesses the largest life
insurance market of great scope in depth. Life insurance firms are also important players in other
markets, as they invest heavily in the global market.
● Non-Life Insurance: This portion includes fire, marine and some other insurance as well.
MODULE 3: Financial Markets
A stock exchange, often referred to as a securities exchange facilitates a country's financial system
through the buying and selling of securities, such as shares of stock, bonds, and other financial
instruments. Its main goal is to offer an organized, fair, and transparent marketplace between investors
and companies in which to interact and thereby contribute to the country's economic growth and
development.
It has significant stock exchanges in Japan include:
● Nagoya Stock Exchange (NSE): This exchange is based in Nagoya, Japan, and ranks as the
second biggest in the country. It was founded in 1886 and has mainly targeted companies in the
Chubu region and focused on their listings.
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GROUP 1 – JAPAN
DRAFT
● Osaka Exchange (OSE): Formerly known as Osaka Securities Exchange, in 2013 it merged with
Tokyo Stock Exchange to form Japan Exchange Group, however, now primarily involved with
derivatives trade.
● Fukuoka Stock Exchange (FSE): Regional exchange for the smaller companies in the Fukuoka
region.
● Sapporo Securities Exchange (SSE): The other local exchange mainly serving the Hokkaido
region firms.
Even the smallest of these exchanges play a very important role in facilitating the trade for regional and
smaller companies. They provide investors with a wide range of choices in participating in Japan's
dynamic financial landscape.
Japan has an elaborate code of regulations and ethical procedures governing market activities to balance
fair and transparent trading practices and investor protection. Several codes of ethics are adopted by
financial institutions.
Financial Instruments and Exchange Act (FIEA): The primary legislation which outlines key
regulations for securities markets. The following are under the regulations of Financial Instruments and
Exchange Act.
● Article 166 FIEA, Insider Trading: This article governs prohibition on trading based on inside
information that is material and non-public in nature and impacts corporate insiders as well as
tippees.
● Market Manipulation: The FIEA prohibits several forms of market manipulations concerning
the dissemination of false or misleading information, including spreading false or misleading
information, spoofing, and wash trading.
● Corporate Disclosure: Listed companies are required to give prompt and accurate material
information. Such would include financial statements, any other significant business
developments, and other matters affecting investors' decisions
● Penalties: Violators of the FIEA face severe penalties that range between fines and
imprisonment.
Professional organizations, such as the Japan Securities Dealers Association (JSDA) and the Japan
Investment Advisers Association (JIAA), also have codes of ethics for their members. These codes
emphasize principles like:
● Integrity: Members must carry out their business activities with integrity and honesty.
● Professionalism: Members shall carry on their activities with utmost responsibility, so as to
maintain high standards of professional conduct.
● Client Focus: Members must put first the interests of their clients.
● Compliance with Laws and Regulations: The member must comply fully and in every aspect
with all the applicable laws and regulations.
MODULE 4: Money Markets, Banks, & Investments
Money Markets in Japan
The money market in Japan serves as a vital component of the country's financial system, facilitating the
short-term borrowing and lending of funds. It is characterized by its high liquidity and a sophisticated
network of market participants, including banks, financial institutions, and corporations.
Bank of Japan
The Bank of Japan (BOJ) plays a crucial role in the Japanese money market. It conducts monetary policy
operations to influence interest rates and liquidity conditions in the market.
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GROUP 1 – JAPAN
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Banks actively participate in the secondary market for CP and BAs, buying and selling these instruments
to provide liquidity and facilitate trading. They also provide market-making services, ensuring a
continuous flow of transactions and maintaining price stability.
The Role of Banks in the Japanese Money Market
Banks are central players in the Japanese money market, acting as both participants and facilitators in this
short-term debt market. Their activities are essential for the smooth functioning of the market and
contribute to the overall stability of the financial system.
Examples of Banks in Japan
● Mitsubishi UFJ Financial Group (MUFG): MUFG is one of the largest comprehensive
financial groups in the world which offers a range of financial services, including commercial
banking, trust banking, securities, and credit cards. The bank has a presence in more than 50
countries, and operates a network of around 2,300 locations in Japan.
● Sumitomo Mitsui Financial Group (SMFG): SMFG is a major financial institution in Japan
that provides a variety of financial products and services to both individuals and businesses. The
group comprises Sumitomo Mitsui Banking Corporation, SMBC Nikko Securities, Sumitomo
Mitsui Finance and Leasing Company, and several other companies.
● Mizuho Financial Group: Mizuho is one of the three so-called Japanese “megabanks” (along
with MUFG and SMFG). Mizuho offers services in retail banking, corporate banking, and
investment banking, in addition to asset management and private banking. Mizuho has a
significant presence both in Japan and overseas with about 500 offices inside and outside Japan.
MODULE 5: Mortgage Market & Derivatives
MORTGAGE
Mortgages in Japan are a common way for people to finance home purchases. While foreigners can buy
property, getting a mortgage can be more challenging, especially without permanent residency.
Interest Rates and Loan Terms
Interest rates vary depending on the loan type, lender, and borrower's creditworthiness. Variable-rate
loans are often tied to the Bank of Japan's (BOJ) prime lending rate, while fixed-rate loans are influenced
by yields on 10-year government bonds. Loan terms can extend up to 35 years, although this may vary
based on age and other factors.
Borrower Qualifications for Mortgages in Japan
Securing a mortgage in Japan, especially as a foreigner, requires meeting specific eligibility criteria.
Application Process of mortgages
Involves pre-approval, loan application, evaluation, approval, disbursement, and settlement.
Key Considerations for Foreign Borrowers
● Permanent Residency: Obtaining permanent residency significantly improves your chances of
securing a mortgage.
● Guarantor: Having a Japanese citizen or permanent resident as a guarantor may be required.
● Deposit: Foreign borrowers may need a larger deposit compared to Japanese citizens.
● Language Proficiency: Some lenders may require a certain level of Japanese language
proficiency.
Mortgage Market
BAFIN
GROUP 1 – JAPAN
DRAFT
The Japanese mortgage market is a dynamic and evolving sector, shaped by factors such as interest rate
trends, real estate prices, and government policies. This analysis will delve into the key characteristics of
the market, exploring its size, lending institutions, loan origination standards, interest rate types, and
recent trends.
Types of Mortgage Loans offered in Japan
● Fixed-Rate Mortgages (全期間固定型, zen-kikan kotei gata): These loans provide predictable
monthly payments with a fixed interest rate throughout the loan term. They offer stability but may
have higher initial rates.
● Variable-Rate Mortgages (変動金利型, hendo kinri gata): These loans have a fluctuating
interest rate adjusted every six months, potentially offering lower initial payments but with less
predictable monthly costs.
● Combination Mortgages (固定金利期間選択型, kotei-kinri kikan sentaku gata): These loans
combine fixed and variable rates, offering a balance between stability and potential cost savings.
● Flat 35 Mortgages (フラット35, furatto sanju-go): Government-backed loans with low fixed
interest rates for up to 35 years, offering affordability and long-term stability.
Other Mortgage Types:
● Public Mortgages: Offered by local municipalities to support affordable housing.
● Investment Property Loans: Designed for purchasing properties for rental income, with stricter
criteria and higher rates.
DERIVATIVES
Historical Context and Evolution of Derivatives in Japan
The Japanese derivatives market has undergone significant evolution over the years, driven by legislative
changes and market trends:
● 1980: The amendment to the Foreign Exchange and Foreign Trade Act allowed Japanese parties
to engage in cross-border transactions without prior government approval, significantly impacting
the development of the derivatives market.
● 1998: The Act on Close-Out Netting of Specified Financial Transactions conducted by financial
institutions was enacted, providing legal certainty and supporting the growth of the derivatives
market.
● 2006: The Securities and Exchange Act was renamed as the FIEA, integrating the regulation of
over-the-counter (OTC) financial derivatives transactions under this act.
● 2008: Following the global financial crisis, the G20-initiated over-the-counter (OTC) derivative
regulatory reforms were implemented under the Financial Instruments and Exchange Act (FIEA),
including mandatory clearing, trade execution, trade data reporting, and margin requirements for
uncleared derivatives.
● 2014: An amendment to the Commodities Futures and Exchange Act (CFEA) brought electricity
derivatives under regulation.
● 2019: An amendment to the Financial Instruments and Exchange Act (FIEA) brought crypto-
asset derivatives under regulation.
● 2022: The term "crypto-assets etc." was defined in the Financial Instruments and Exchange Act
(FIEA) to include certain electronic payment instruments, further expanding the scope of
regulated derivatives.
Derivatives
Derivatives in Japan are financial instruments whose value is derived from an underlying asset, such as
interest rates, foreign exchange, equities, commodities, or even crypto-assets. They are used by investors
and businesses to manage risk, speculate on price movements, and enhance investment strategies.
The Japanese derivatives market is regulated by two main pieces of legislation: the Financial Instruments
and Exchange Act (FIEA) for financial derivatives and the Commodities Futures and Exchange Act
(CFEA) for commodity derivatives. The Financial Services Agency of Japan (JFSA) is responsible for
regulating both non-commodity and commodity derivatives.
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GROUP 1 – JAPAN
DRAFT
● Financial Instruments and Exchange Act (FIEA): This act regulates over-the-counter (OTC)
derivatives transactions falling under the definition of OTC financial derivatives transactions,
which include derivatives referencing financial instruments such as interest rates, foreign
exchange (FX), equity, credit, electronic payment instruments, or crypto-assets.
● Commodities Futures and Exchange Act (CFEA): This act regulates OTC derivatives
transactions falling under the definition of OTC commodity derivatives transactions, which
include derivatives referencing commodities such as oil, gas, electricity, precious metals, and
agricultural products.
● The Financial Services Agency of Japan (JFSA) is responsible for regulating non-commodity
derivatives and commodity derivatives listed on a financial instruments exchange market under
the FIEA. The Ministry of Economy, Trade and Industry (METI) and the Ministry of Agriculture,
Forestry and Fisheries (MAFF) regulate commodity derivatives under the CFEA.
Types of Derivatives in Japan
The Japanese derivatives market features a variety of instruments for both institutional and individual investors:
1. Exchange-Traded Derivatives:
● Futures: Contracts to buy or sell an asset at a set price on a future date, traded on exchanges like Osaka Exchange (OSE) and Tokyo
Financial Exchange (TFX).
● Options: Give the holder the right to buy or sell an asset at a specified price within a timeframe, also traded on exchanges.
2. Over-the-Counter (OTC) Derivatives:
● Swaps: Involve cash flow exchanges based on predetermined formulas, including interest rate and currency swaps, typically traded
bilaterally.
● Forwards: Similar to futures but privately negotiated, obligating parties to transact at a set price on a future date.
● Contracts for Difference (CFDs): Allow speculation on asset price movements without ownership, popular among retail investors.
3. Emerging Asset Classes:
● Crypto-Asset Derivatives: Regulated but not yet available on exchanges.
● Carbon Credit Derivatives: Trading opportunities exist in a carbon credit market for J-credits, though regulations are still evolving.
4. Asset Classes:
The most commonly traded underlying assets for OTC derivatives in Japan, based on notional amounts, are:
● Interest Rates: The most prevalent OTC derivatives in Japan.
● Foreign Exchange (FX): Widely traded, reflecting Japan's global currency role.
● Credit: Used to manage credit risk, especially in corporate bonds.
● Equity: Gaining popularity as the stock market grows.
MODULE 6:
FINANCIAL MARKET IN JAPAN
The flow of capital enables the businesses to grow and build with wealth. This capital needs to be
facilitated to ensure that they will flow properly in the business. This duty is compounded by the
Financial Markets. In financial markets, investors, whether individual or institutional, banks, brokers, and
regulatory bodies are trading financial assets such as stocks, currencies, commodities, and bonds.
JAPAN EXCHANGE GROUP
The main financial market in Japan is the Japan Exchange Group (JPX), based in Tokyo, Japan. It is
considered as the largest stock exchange group in Asia. JPX facilitates the financial assets of Japan which
boasts a good market capitalization of 4.48 trillion U.S Dollars. The Japan Exchange Group (JPX) aims to
provide reliable venues in listing the securities and derivatives instruments for market users. It also
provides clear and safe transactions through a central counterparty and conducts trading management to
maintain the integrity of the markets. JPX carries out efforts to ensure that markets are reliable and makes
greater convenience to all users.
History of JPX
The establishment of JPX had a big effect on Japan's Financial History. Integrate operations and develop
effectiveness for increasing the competitiveness of Japan with other global exchanges are the strategic
action that was aimed in the merger.
BAFIN
GROUP 1 – JAPAN
DRAFT
Before JPX, there were two big exchange companies, namely the Tokyo Stock Exchange (TSE) and
Osaka Securities Exchange (OSE). These two had a big role in Japan's financial markets. They both
started in the year 1878 and had an individual task in charge of which made them successful.
Tokyo Stock Exchange (TSE) was the largest stock exchange in Japan. It hosts the majority of Japan's
publicly traded companies which led to it being the central equity marketplace of Japan. In terms of
derivatives markets, Osaka Securities Exchange (OSE) is in charge, which is why it was named the
birthplace of futures trading in Japan. Despite their individual successes, both exchanges faced challenges
in the form of increasing global competition and a changing financial landscape. These challenges
eventually led to discussions about a potential merger.
The merging of TSE and OSE was held on January 1, 2013 which established a new group named as
Japan Exchange Group or known for its abbreviation of JPX. TSE enables the JPX to have a large portion
of the total liquidity. There are 750 Million conducted trades yearly because of more than 3,500
companies being listed on the TSE. Then OSE became an exclusively digital marketplace, which allows
market users to participate in the derivatives markets of Japan online. Additionally, JPX has a subsidiary
known as Japan Exchange Regulation which is the self-regulatory body that manages the integrity of the
marketplace and oversees the two merged companies. The newly formed Japan Exchange Group became
the largest stock exchange group in Asia and also the third-largest in the world, after NYSE Euronext and
NASDAQ OMX. The merger of TSE AND OSE allowed hybridization of operations that greatly
enhanced the efficiency and competitiveness of Japan's financial system.
In the present, the Japan Exchange Group is the leading participant in the global trading scene, listing
some of the largest and most popular companies in Japan and the world.
Size of the market of Japan
Total value outstanding of Japan
The table indicates the total value outstanding of Japan during the year 2019-2024. For the years 2019-
2023, total value outstanding has been increasing then at the year 2024, it was decreased.
Observation:
● Japan's bank loans increase from the year 2019 to 2023 but by the year 2024, it was decreased
from 680.0 to 6.24.2
● The country's international debt securities was remain stable relatively over the years but by
2024, it decreased and ended at 1.30
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GROUP 1 – JAPAN
DRAFT
● Similar to international debt securities, the domestic debt securities decreased to 1.30.
● For the Equities, Nikkei 225 states an alteration that made a significant increase in 2024.
In the Year 2024, Japan's total value outstanding decreased which made the country to reduced debt
burden, improved credit rating, increased investor confidence, and lower interest rate.
ADD’T:
TRENDS AND CHALLENGES OF JAPAN'S MONEY MARKET DURING THE PANDEMIC
The COVID-19 pandemic had a notable impact on Japan's money market, leading to various trends and challenges:
Trends:
● Increased Yen Demand: The yen surged as a safe-haven currency during the pandemic, benefiting exporters but potentially harming
importers.
● Ultra-Low Interest Rates Persist: The Bank of Japan (BOJ) maintained its ultra-low interest rate policy to stimulate the economy,
which contributed to low yields and affected the profitability of financial institutions.
● Government Intervention: The Japanese government implemented fiscal and monetary measures to provide liquidity to businesses
and individuals, complicating the BOJ's management of the money market.
Challenges:
● Economic Uncertainty: Global economic instability made it difficult for investors to assess risk, potentially discouraging borrowing
and lending activities.
● Deflationary Pressures: Reduced consumer spending and business activity heightened concerns about deflation, complicating the
challenges associated with low interest rates and hindering economic recovery.
● Financial Instability: The prolonged low interest rates and quantitative easing might have created vulnerabilities in the financial
system, leading to potential future instability.
JAPAN'S MORTGAGE MARKET DURING THE PANDEMIC
The COVID-19 pandemic brought about a complex situation for Japan's mortgage market, marked by both positive and negative trends:
Positive Trends:
● Increased Demand for Housing: Despite the pandemic's economic impact, demand for housing in Japan remained relatively strong,
particularly in major urban areas. This was driven by factors like a desire for more spacious living arrangements and a shift towards
remote work.
● Low Interest Rates: The Bank of Japan (BOJ) maintained its ultra-low interest rate policy throughout the pandemic, making
mortgages more affordable for borrowers. This contributed to a surge in mortgage lending by private financial institutions.
Challenges:
● Economic Uncertainty: The pandemic's impact on the global economy created significant uncertainty, making it challenging for
investors to assess risk and make investment decisions. This uncertainty potentially discouraged borrowing and lending activities in
the mortgage market.
● Rising Interest Rates: While interest rates remained low during the pandemic, the BOJ's recent shift towards a less accommodative
monetary policy has led to a rise in interest rates. This has made mortgages more expensive, potentially impacting demand and
slowing down the market.
● Declining Household Numbers: Japan's aging population and declining birth rates have led to a decrease in household numbers,
which could potentially impact the long-term demand for housing and mortgages.
JAPAN INFLATION
In the graph provided by the World Bank Organization, inflation in Japan has risen, to be sure. In the years 2015 to 2023, it can be seen that there
are years with high inflation rates and there are also years with low rates.
BAFIN
GROUP 1 – JAPAN
DRAFT
Then in the year 2023, the rate ended high. By August 2024 the rate had increased to 3.0%, against an estimated average of between 2.6% in
December 2023.
Behind this rise of inflation are the several factors that are attributed. Electricity prices which increased to 26.2% compared to the previous year is
one of the significant factors. Moreover, the cost for food went up by 3.6% and also the cost of gas increased by 11.1%. These factor's rates rose
due to the end of subsidies for energy in May 2024.
Additionally, by August 2024, the core inflation rate that excludes volatile items like energy and fresh food, hit a peak of 2.8% in six months.
This means that there are underlying inflationary pressures that building up in the economy
Overall, the increase of Japan's inflation rate states that the country is experiencing high prices of products and services which can have an effect
on its citizens' purchasing power.
