2022

Securities Market in Japan 2022

Securities
Marketin Japan

Securities
Marketin Japan
2022

JAPAN SECURITIES RESEARCH INSTITUTE

2022-表紙（背幅20ミリ）.indd

すべてのページ

2023/06/21

16:51:34

S ecurities
Marketin Japan
2022

JAPAN SECURITIES RESEARCH INSTITUTECopyright © 2022 by Japan Securities Research InstituteAll rights reserved. No Part of this Publication may be
reproduced, in any form or by any means,
without the permission in writing of the publisher.
Published by
Japan Securities Research InstituteTaiyo Life Insurance Nihombashi Building
2-11-2, Nihombashi, Chuo-ku,
Tokyo 103-0027, Japan
Telephone (+81) 3-6225-2326
Facsimile (+81) 3-6265-1552

ISBN 978－4－89032－823－9

The book is a translation of“Illustrated Guide: 2022 Securities Markets in Japan”(prepared by the Japan Securities Research Institute), which was published in Japanese,
into English. It includes quotations from or references to descriptions of laws andregulations such as the Financial Instruments and Exchange Act; however, it is the laws andregulations in Japanese themselves that have legal effect and the translations given herein
are only for your reference. For legal matters, see the laws and regulationsin Japanese described in the official journal.

PREFACE“The Securities Market in Japan: An Illustrated Guide 2022”explains the
structures, functions, history and current status of Japan’s securities markets
in a simple and user-friendly manner. We have been publishing this guide every two years since 2008, with the content revised as appropriate for thosewith an interest in the securities market.
At the time of publication of the previous edition in 2020, it was difficult
to anticipate the global spread of coronavirus (COVID-19) and the enormous
impact it would have on the economy and society. However, it can be said
that the securities market has successfully managed to withstand the various
effects of the pandemic without excessive disruption during this period. On
the other hand, the medium- and long-term challenges facing Japan’s securities markets, such as financial digitalization, cross-sectoral regulation byfunction, reform of exchange market structures, stable asset formation for thegeneral public, corporate governance reform and sustainability issues, are becoming more and more urgent. The basic structure of the 2022 edition is unchanged from the previous edition. However, to accurately reflect changes incircumstances, we have added sections on The Development of Digital Finance, The Revision of TSE Market Segments, and The Stewardship Code(Part 2), as well as a description of new regulations on solicitation of investment in OTC securities. In addition, we have updated the commentary anddata in this book where necessary in light of recent developments.
In addition to“The Securities Market in Japan,”Japan Securities ResearchInstitute also publishes“The Securities Market in the U.S.,”“The Securities
Markets in Europe,”and“The Securities Markets in Asia”every few years.
These contain concise descriptions of the current status and history of securities markets in various countries, and provide a general overview of securities markets across the world.
As with our previous publications, this book was compiled by a group of
specialists, including researchers and research fellows at Japan Securities Research Institute and experts at the Japan Securities Dealers Association(JSDA), the Japan Exchange Group (JPX), Japan Securities Finance (JSF)
and Japan Investment Advisers Association, who took part in writing the sections respectively assigned to them (see page iii for the assignment of writing
tasks). Chiaki Wakazono (Senior Researcher) and Nakako Zushi (Researcher)at Japan Securities Research Institute were responsible for the overall compilation.

It is difficult to predict exactly how securities markets will change postCOVID, but understanding the current status and history of securities andcapital markets is now more important than ever. We sincerely hope that thisbook will be useful for all those who have an interest in this topic.
March 2022

KIICHIROU MASUI
President
Japan Securities Research InstituteCONTENTS
PREFACE ..................................................................................................

i

CHAPTER I The Securities Market and the National Economy
1. What Is a Security? ....................................................................
1
2. Corporate Financing...................................................................
3
3. The Securities Market and Public Finance ................................
5
4. Financial Assets Held by the Household Sector ........................
8
5. Investment Behavior of Foreigners(Inbound Securities Investment) ................................................ 10
6. Development of digital finance .................................................. 13
CHAPTER II The History of the Japanese Securities Market
1. The Securities Market in the Prewar Period .............................. 16
2. The Period of Postwar Economic Rehabilitation (1945－54) ... 18
3. The Securities Market during the First Period of Rapid
Economic Growth (1955－64) .................................................. 21
4. The Securities Market during the Second Period of Rapid
Economic Growth (1965－74) .................................................. 24
5. Measures Taken to Cope with the Oil Crisis (1975－84) .......... 27
6. Developments before and after the Economic Bubble(1985－89) ................................................................................. 29
7. The Reform of the Financial System after the Stock Market
Scandals (1990－95).................................................................. 32
8. The Debate on, and Enforcement of, the Act on Revision, etc. of
Related Acts for the Financial System Reform (1996－2000) ... 34
9. Developments Since the Big Bang (2001－2008) ..................... 37
10. Changes after the Lehman Shock (2008 onwards) .................... 39
CHAPTER III The Stock Primary Market
1. New Issues of Stocks in the Primary Market .............................
2. Forms of Issuing New Shares ....................................................
3. Procedures for Issuing New Shares ...........................................
4. The Current State of the New Issue Market...............................
5. New Share Underwriting ...........................................................
6. Private Equity Market ................................................................

42
44
46
48
51
53

iv

Contents

CHAPTER IV The Stock Secondary Market
1. The Structure of the Stock Secondary Market ...........................
2. Transaction Size of the Stock Secondary Market ......................
3. The Structure of Share Ownership .............................................
4. Stock Prices and Indicators for Investment (1) ..........................
5. Stock Prices and Indicators for Investment (2) ..........................
6. Stock Prices and Indicators for Investment (3) ..........................
7. Stock Prices and Indicators for Investment (4) ..........................
8. The Margin Trading System (1) .................................................
9. The Margin Trading System (2) .................................................
10. Diversification of the Securities Trading System ......................
CHAPTER V New Issues of Bonds in the Primary Market
1. Types of Bonds ..........................................................................
2. Issuing Status of Bonds..............................................................
3. Methods of Issuing Public Bonds ..............................................
4. Methods of Issuing Corporate Bonds ........................................
5. Credit-Rating Agencies and Rating of Bonds ............................
6. Corporate Bond Management ....................................................
7. Corporate Bonds with Subscription Rights/Warrants andStructured Bonds........................................................................

56
58
60
62
64
66
68
70
72
74
78
80
82
85
87
89
92

CHAPTER VI The Secondary Markets for Bonds
1. Trading of Bonds ....................................................................... 94
2. Participants in the Secondary Bond Market............................... 95
3. Over-the-counter Bond Transactions ......................................... 98
4. Reference Statistical Prices (Yields) for OTC Bond
Transactions (1).......................................................................... 101
5. Reference Statistical Prices (Yields) for OTC Bond
Transactions (2).......................................................................... 103
6. Reporting & Announcement System of Corporate Bond
Trading ....................................................................................... 106
7. Book-Entry Transfer System for Bonds..................................... 108
8. Bond Yield and Terms of Issuance............................................. 111
9. Gensaki Market for Bonds (1) ................................................... 113
10. Gensaki Market for Bonds (2) ................................................... 115
11. Bond Lending............................................................................. 117
CHAPTER VII Investment Trusts
1. Overview .................................................................................... 120
2. History of Investment Trusts...................................................... 122
3. Forms of Investment Trusts ....................................................... 124

Contents

4.
5.
6.
7.
8.
9.
10.

v

Investment Trust Products.......................................................... 126
Sale of Investment Trusts ........................................................... 129
Investment Management of Investment Trusts .......................... 131
Customer Base of Investment Trusts ......................................... 134
Disclosure of Investment Trusts................................................. 136
Services and Products Based on Investment Trusts ................... 139
Foreign Investment Trusts.......................................................... 141

CHAPTER VIII The Derivatives Market
1. Futures Trading .......................................................................... 144
2. Bond Futures Trading ................................................................ 146
3. Stock Index Futures Trading ...................................................... 148
4. Financial Futures Trading .......................................................... 150
5. Options Trading ......................................................................... 152
6. Bond Options Trading ................................................................ 154
7. Stock Index Options Trading ..................................................... 156
8. Securities Options Trading......................................................... 158
9. OTC Derivatives Trading........................................................... 160
10. Credit Derivatives Trading......................................................... 162
CHAPTER IX The Securitized Products Market
1. What Is a Securitized Product? .................................................. 165
2. Basic Mechanism of Issuing Securitized Products .................... 167
3. Description of Major Securitized Products ................................ 168
4. The Size of the Market ............................................................... 171
5. Primary Market for Securitized Products .................................. 173
6. Secondary Market for Securitized Products .............................. 175
7. Primary and Secondary Markets for the Beneficiary
Certificates of Real Estate Investment Trusts ............................ 177
8. Listed Infrastructure Funds ........................................................ 180
9. Risks and Credit Enhancement of Securitized Products ............ 182
10. The Enactment of Securitization-Related Laws ........................ 183
CHAPTER X Financial Instruments Exchange, etc. (1)1. The Function of the Financial Instruments Exchanges .............. 187
2. Footsteps of Markets .................................................................. 189
3. Review of TSE market segment................................................. 191
4. Initial Listing System ................................................................. 193
5. Listing Administration Systems ................................................. 196
6. The Corporate Governance Code............................................... 199
7. The Stock Trading System (1) ................................................... 201
8. The Stock Trading System (2) ................................................... 203

vi

Contents

9.
10.
11.
12.

The Clearing and Settlement System (1) ................................... 205
The Clearing and Settlement System (2) ................................... 207
The Book-Entry Transfer System for Stocks, Etc. .................... 209
Computerized Trading and Clearing Systems of the Financial
Instruments Exchange (Stock Exchange) (1) ............................. 211
13. Computerized Trading and Clearing Systems of the Financial
Instruments Exchange (Stock Exchange) (2) ............................. 213
CHAPTER XI Financial Instruments Exchange, etc. (2)1. An Outline of the OTC Stock Market ........................................ 216
2. OTC Securities, Etc. .................................................................. 218
3. OTC securities transactions for the purpose of transferring
management control, etc. ........................................................... 220
4. Equity Crowdfunding (1) ........................................................... 221
5. Equity Crowdfunding (2) ........................................................... 224
6. Shareholders Community (1) ..................................................... 226
7. Shareholders Community (2) ..................................................... 228
8. TOKYO PRO Market ................................................................ 230
9. Market Making Scheme in the ETF Market .............................. 232
CHAPTER XII Financial Instruments Business (Securities Business)
1. Overview of Financial Instruments Business Operators(Securities Companies) (1) ........................................................ 235
2. Overview of Financial Instruments Business Operators(Securities Companies) (2) ........................................................ 237
3. Overview of Financial Instruments Business Operators(Securities Companies) (3) ........................................................ 240
4. Securities Businesses (1)—The Principal Businesses (1) .......... 243
5. Securities Businesses (2)—The Principal Businesses (2) .......... 245
6. Securities Businesses (3)—Incidental Business, Concurrent
Business, and Other Businesses ................................................. 248
7. Income and Expenditure of Financial Instruments Business
Operators (Securities Companies) ............................................. 250
8. Financial Condition of Financial Instruments Business
Operators (Securities Companies) ............................................. 253
9. Financial Instruments Firms Associations (1)............................ 256
10. Financial Instruments Firms Associations (2)............................ 259
11. Investor Protection Fund ............................................................ 262
12. Securities Operations of Financial Institutions .......................... 265
13. Competition Structure of the Securities Industry....................... 268

Contents

vii

CHAPTER XIII Asset Management Service
1. Management of Individual Financial Assets .............................. 271
2. Pension Fund Management ........................................................ 273
3. Asset Management of Trust Banks ............................................ 275
4. Asset Management of Life Insurance Companies ..................... 277
5. Asset Management of Discretionary Asset Management
Companies.................................................................................. 279
6. Asset Management of Investment Trusts ................................... 281
7. Stewardship Code (1)................................................................. 283
8. Stewardship Code (2)................................................................. 284
CHAPTER XIV Securities Taxation
1. Transitions in Securities Taxation (1) ........................................ 287
2. Transitions in Securities Taxation (2) ........................................ 289
3. Taxation of Interest .................................................................... 291
4. Taxation of Dividends ................................................................ 294
5. Adjustment of Double Taxation Relating to Dividends ............. 296
6. Capital Gains Taxation ............................................................... 298
7. The Angel Taxation System ....................................................... 300
8. NISA .......................................................................................... 303
9. Taxation of Nonresidents ........................................................... 305
10. Tax Treatment of New Products ................................................ 307
11. Tax Treatment of Pension-Type Products .................................. 309
CHAPTER XV Prohibited and Regulated Acts of Securities Trading
1. Outline..........................................................................................312
2. Regulation of Market Manipulation.............................................314
3. Prohibited and Regulated Acts of Corporate Insiders ..................316
4. Regulations on the Conduct of Financial Instruments Business
Operators (Securities Companies) ............................................. 318
5. Other Regulated Acts—Information Disclosure to Ensure
Fairness of Transactions............................................................. 320
CHAPTER XVI
1.
2.
3.
4.

The Information Disclosure System and Investor
Protection
The Information Disclosure System in the Securities Market ... 323
Disclosure of Corporate Affairs under the Financial
Instruments and Exchange Act................................................... 325
Other Disclosures to Be Made under the Financial Instruments
and Exchange Act ...................................................................... 327
Timely Disclosure System of Financial Instruments Exchanges(Stock Exchanges) ..................................................................... 329

viii

Contents

5. Ensuring the Appropriateness of Information Disclosure .......... 329
6. Recent Moves of Information Disclosure .................................. 332
CHAPTER XVII The Securities Regulatory System
1. Financial Instruments and Exchange Act ................................... 336
2. Other Laws and Regulations Related to the Securities Market... 338
3. Organization of the Securities Regulatory System .................... 341
4. Law Enforcement by the Financial Services Agency ................ 344
5. The Securities and Exchange Surveillance Commission ........... 346
6. Self-Regulatory Organizations................................................... 348
7. International Organization for Securities Regulation ................ 351
APPENDIX

Chronology of Events Related to Securities(1870−2021) .................................................................... 354

CHAPTER I
The Securities Market and the National Economy

1. What Is a Security?
The financial markets provide a marketplace through which funds are channeled from sectors with idle cash (lenders) to cash-short sectors (borrowers),
and the types of financing arranged on these markets are divided in terms ofintermediaries into indirect and direct financing. Indirect financing means aform of transaction in which a financial institution acquires a primary security (due bills and notes, etc.) from a borrower with a fund raised by issuing anindirect security (certificates of deposit and insurance policies, etc.). In direct
financing, a borrower raises funds by issuing a primary security (equity anddebt securities, etc.) to lenders through a market intermediary. The marketplace on which direct financing is arranged is the securities market, and it isdivided into a primary market (where securities are issued and distributed)
and a secondary market (where securities are bought and sold).
Generally, the term“security”refers to instruments that give their legal
holders the rights to money or other property. They are designed to facilitate
the assignment of such rights and have the characteristic of combining rights
and certificates. More specifically, securities are issued in various forms,
such as stocks and bonds issued by business corporations; notes, checks, andbills of lading; government securities issued by national governments; andmunicipal bonds issued by local public bodies. Of these, securities traded in
the securities markets are called“securities under the Financial Instruments
and Exchange Act (FIEA),”as defined in Paragraphs 1 and 2, Article 2 ofthat law. Paragraph 1 defines securities whose interests are represented by securities or certificates that are physically issued as listed in the table on theright.
Paragraph 2 of Article 2 sets forth the definition of deemed securities. In
the former part of the paragraph rights presented by securities that are listed
in the preceding paragraph are deemed to be securities by themselves in cases
where no physical certificates are issued. The latter part of the paragraph thengoes on to define deemed securities as rights other than those represented by
securities or certificates. The scope of the definition has been substantially2Chap. I The Securities Market and the National Economy

Table I-1.

The Definition of Securities under the Provisions of Paragraphs
2-1 and 2-2 of FIEA

Paragraph 2-1 Securities
1. Government securities
2. Municipal bond securities
3. Bonds issued by special public corporations
4. Specified corporate bonds as provided for in the Act on the Liquidation of Assets
5. Corporate bonds
6. Subscription certificates issued by special public corporations
7. Preferred shares as provided for in the Law Concerning Preferred Shares in Cooperative Financial
Institutions
8. Preferred subscription certificates or new preferred subscription rights certificates as provided forin the Act on the Liquidation of Assets
9. Stock certificates or subscription right/warrant certificates
10. Beneficiary certificates of investment trusts or foreign investment trusts
11. Investment certificates or bonds issued by investment corporations, investment equity subscription
rights certificates or investment certificates issued by foreign investment corporations
12. Beneficiary certificates of loan trusts
13. Beneficiary certificates of special-purpose trusts as provided for in the Act on the Liquidation ofAssets
14. Beneficiary certificates of certificate-issuing trusts as provided for in the Trust Law
15. Commercial paper
16. Mortgage securities
17. Foreign securities: foreign certificates that have the attributes of any type of securities as defined in
Items 1 through 9 and Items 12 through 16 hereof
18. Beneficiary certificates of foreign loan claims trusts
19. (Financial) options securities or certificates
20. Foreign depository securities or receipts
21. Securities or certificates designated by government ordinanceParagraph 2-2 Deemed Securities(General description of the former clause)Interests represented by securities that are listed in the preceding paragraph in cases where no physicalcertificates are issued(Latter clause)
1. Beneficiary interests in trusts
2. Beneficiary interests in foreign trusts
3. Partnership interests in general or limited partnership companies (gomei gaisha or goshi gaisha),as designated by government ordinance, or interests in limited liabilities companies (godo gaisha)
4. Partnership interests in foreign corporations, with the attributes of interests defined in any of thepreceding items
5. Interests in collective investment schemes as comprehensively defined
6. Interests in foreign collective investment schemes
7. Other interests as designated by government ordinanceSource: Based on Toshiro Ueyanagi, Yutaka Ishitoya, and Takeo Sakurai, Shin Kin’
yu Shohin Torihiki-ho
Handobukku, Nippon Hyoronsha, 2006, and Etsuro Kuronuma, Kin’
yu Shohin Torihiki-ho Nyumon, Nihon Keizai Shimbun, 2006, and the Financial Instruments and Exchange Act as listed in
e-Gov’
s legal data service.

Chap. I The Securities Market and the National Economy

3

widened compared with that of the former law, and, specifically, there arecomprehensive provisions in Item (v) of the paragraph for the FIEA to be applicable to various types of collective investment vehicles, or funds. In addition to securities, the FIEA applies to derivatives trading in domestic financial instruments exchanges, over-the-counter markets and foreign markets.
The electronically recorded transferable rights added to Article 2, paragraph 3 of the Act are the rights of each paragraph of Article 2 represented inproperty value that can be transferred using an electronic platform under
Article 2, and are included in the category of Paragraph (1) Securities. In addition, by a Cabinet Office Ordinance, property values including deemed securities, etc. that are transferred by means of an electronic platform are defined as Electronically Recorded Transferable Rights to Be Indicated on
Securities, etc.
2. Corporate Financing
The term“business corporation”(excluding financial service institutions)means economic entities whose objective is to make a profit from such activities as the production and sale of goods or services. Business corporations
invest funds in real assets (such as facilities and products in inventories) tocarry out production and marketing activities on a continuing basis. Businesscorporations raise the necessary funds by various means.
Funds raised by business corporations are divided into internal funds(those generated in the ordinary course of the production and sale of goods orservices) and external funds (those raised from external sources), according
to the method employed to raise them. Technically, internal reserves and depreciation charges are included in internal funds. They are considered themost stable means of corporate financing as corporations are not required to
repay the principal of, or pay interest or dividends on, such funds. In actuality, however, business corporations cannot meet their funding requirementswith internal funds alone, and most of the requirements have to rely on external funds. External funds are divided into three categories of loans, equity
and corporate bond, according to the method employed to raise them. Loansare obtained primarily from banking institutions. This method of raisingfunds is termed“indirect financing.”Business corporations issue equity shareat the time of their incorporation, and issue additional equity shares (an increase of capital) to finance the expansion of their production capacity or forother purposes. As business corporations are not required to repay the principal thus raised, or pay interest thereon, the proceeds from the issuance of equity shares constitute the most stable form of funds among external funds. As
is the case with equity shares, corporate bonds are also an instrument for rais-

4Chap. I The Securities Market and the National Economy

Chart I-1.
Internal funds

Corporate Financing

Internal reserves
Depreciation
Borrowing
Equity shares

External funds

Corporate bonds

Straight bonds
Corporate bonds with equity warrant
Structured bonds

Foreign currency bonds
CP (short-term corporate bonds)
Note: Internal reserves refer to a company’s after-tax income less any dividends and officers’bonuses.
Depreciation charges are recognized as the economic benefits of tangible fixed assets, such asbuildings and machinery, that are consumed each year and recorded as expenses. In other words,
they are reserves for facility replacement.

ing funds from the capital markets, and issuers have to redeem them on or bya predetermined date of redemption and pay a definite rate of interest on
them. Corporate bonds are largely divided into straight bonds (SB), corporate
bonds with subscription rights/warrants, and structured bonds (see Chapter V
regarding corporate bonds with subscription rights/warrants and structured
bonds). The issuance of equity shares or corporate bonds is recognized as ameans of raising funds by the“direct financing”method.
A survey of changes that have occurred in the amount of funds raised bycompanies from external sources as a percentage of the outstanding balanceof financial debts shows that bank borrowings have tended to decrease. Thistendency was triggered by the fact that following the liberalization and internationalization of the financial markets, businesses have actively sought toraise funds by selling new shares and corporate bonds on the market. Since
the 2000s, funds raised through the issue of securities have outpaced thoseobtained through bank borrowings, and direct finance has become the mainstay of corporate financing structure in Japan. The total amount of funds
raised has increased substantially, with the exception of a sharp drop in 2008as a result of the Global Financial Crisis, and securities have accounted forabout 60% of total funds raised. In particular, the proportion of funds raisedby equities has been over 50% in recent years. On the other hand, the amountraised through corporate bonds has been increasing, due to monetary easing
in response to the pandemic.
With the enhancement of stock market for startups and the deregulation of
the corporate bond market creating a fund-raising route through the capitalChap. I The Securities Market and the National Economy

Table I-2.

5

Percentage of Funds Raised and Invested by the Corporate Sector(balances at fiscal year-end)
1980

1985

1990

1995

2000

2005

2010

2014

2016

2018

2019

2020

Management
Cash and demand deposits
Time deposits
CDs
TrustsInvestment trusts
Securities(equity shares)(debt securities)
Inter-business credits
Others

10.0
14.5
0.1
1.3
0.1
15.7
13.5
2.2
45.5
12.7

7.6
14.8
1.2
1.4
0.6
25.9
23.5
2.3
35.2
13.2

6.6
12.8
1.1
0.7
0.2
30.9
28.1
2.8
30.5
17.2

9.1
10.8
2.6
1.3
0.4
24.2
22.6
1.6
35.3
16.3

13.3
7.7
3.3
0.3
1.0
22.9
19.6
3.3
33.5
18.2

15.5
4.1
1.5
0.3
0.7
36.4
33.4
3.0
24.4
17.1

18.4
6.3
1.8
0.3
1.8
19.4
16.3
3.1
27.1
24.9

15.4
5.0
1.3
0.3
0.5
32.1
30.2
1.9
20.2
25.2

14.8
6.0
1.5
0.4
1.2
32.3
30.3
2.0
19.4
24.4

15.9
4.3
1.2
0.5
0.1
34.3
32.4
1.9
20.1
23.5

17.8
5.5
1.2
0.5
0.1
30.5
28.3
2.2
19.3
25.1

19.2
5.4
1.3
0.6
0.2
31.9
29.5
2.3
17.1
24.4

Total

312.4 483.5 835.7 783.2 738.9 950.3 792.6 1,110.9 1,146.1 1,192.0 1,139.6 1,229.6

Financing
Borrowing
Securities(equity shares)(corporate bonds)(foreign currency bonds)(CPs)
Inter-business credits
Others

42.2
27.1
23.1
2.2
1.8
－
24.3
6.4

Total

477.4 760.6 1,358.7 1,351.7 1,198.0 1,421.8 1,056.7 1,521.3 1,658.8 1,748.5 1,598.8 1,871.5

39.5
38.1
33.9
2.6
1.6
－
17.0
5.5

36.5
43.1
37.3
2.3
2.6
0.8
14.6
5.8

40.2
38.6
32.7
3.8
1.5
0.6
15.4
5.8

36.2
42.0
35.2
5.3
0.6
0.9
16.2
5.6

22.4
58.2
52.9
4.1
0.8
0.4
12.8
6.6

31.3
42.5
35.2
5.8
0.8
0.7
15.4
10.8

22.7
58.1
52.9
3.8
1.0
0.4
11.1
8.1

24.4
54.8
50.0
3.6
1.1
0.1
11.9
8.9

23.6
58.2
53.3
3.9
0.7
0.2
12.2
6.0

26.4
54.8
49.2
4.4
0.7
0.5
12.1
6.7

24.5
60.0
54.7
4.4
0.6
0.3
9.8
5.7

Notes: 1. In percentages and trillions of yen.
2. Time and savings deposits include foreign currency deposits.
3. Figures in parentheses are a breakdown of securities, and equity shares include equity subscriptions.
4. Investment of equity shares is based on market prices and that of new shares issued in the years
up to fiscal 1990, inclusive, is based on the capital plus capital reserve and that is based on themarket prices since fiscal 1995.
Source: Compiled from the Flow of Funds Account data published on the web site of the Bank of Japan.

markets for large and small-to-medium enterprises, the prevalence of securities-based financing is expected to remain stable in the coming years.
3. The Securities Market and Public FinancePublic finance is a type of economic activity carried out by the government(national and local). More specifically, the government conducts administrative services (law enforcement and education, etc.) and public investment

6Chap. I The Securities Market and the National Economy

Chart I-2.

Changes in the Balance of Outstanding Public Securities and the Degree ofDependence on Public Securities(in trillions of yen)
1,200

(%)
70

1,000

60

800

Bond dependency ratio(the scale on the right)

Total balance ofoutstanding public
securities

50
40

600
30
400

20

200
0
End of FY1965 70

Balance of construction
bonds
75

80

85

90

95

00

05

10

15

10
0
21

Notes: 1. Figures for fiscal 2021 are estimates.
2. Based on straight government bonds.
Source: Compiled from the data issued by the Ministry of Finance.

based on the revenue largely from taxes. In practice, the government adjusts
its fiscal policies in response to economic trends. When government expenditures exceed revenues, the deficit is met mainly by issuing public bonds(government and municipal government bonds).
A survey of changes that have occurred in the balance of outstanding public bonds and the government’s dependency on debt financing shows that the
government had issued special government bonds (deficit-financing) in fiscal
1965, the first time since the end of World War II, under a supplementarybudget and also that the government has issued a series of construction bonds
on a continuing basis since fiscal 1966. However, both the bond dependency
ratio and the balance of outstanding government debt securities had remained
at a low level until the first half of the 1970s. As tax revenues had leveled off
due to an economic slowdown that began in the second half of the 1970s, thegovernment had no choice but to issue a large amount of government bonds,
and their outstanding balance had increased sharply to ¥71 trillion at the endof fiscal 1980. As a result, government bonds came to carry an increasing
weight in the securities market, and the influence of government fiscal policies on the securities market had taken on a growing importance. In order toimprove the fiscal situation, a fiscal restructuring policy was adopted from

Chap. I The Securities Market and the National Economy

Table I-3.

7

Changes in JGB and Short-Term Government Bill Ownership by InvestorType(in percentages)

Types of investors

End of
FY2009 FY2011 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 Dec.
2020

General government

1.9

1.9

2.3

2.1

0.4

0.4

0.3

0.3

0.3

0.2

Public pension funds

9.2

7.9

7.1

5.5

4.9

4.4

4.0

3.8

3.3

3.0

Fiscal loan funds

0.2

0.1

0.1

0.3

0.0

0.0

0.0

0.0

0.0

0.0

Bank of Japan

8.8

9.6

20.0

26.3

33.8

39.4

41.8

43.2

44.2

44.7

Banks

47.2

45.4

35.6

30.8

24.8

20.3

18.4

15.6

15.0

16.3

Life, nonlife, and otherinsurance companies

18.0

19.1

19.6

19.6

20.4

19.7

19.5

19.5

19.5

18.0

Pension funds

3.4

3.2

3.5

3.4

3.3

3.0

2.9

2.8

2.8

2.6

Overseas

5.6

8.3

8.2

9.4

10.2

10.7

10.9

12.7

12.9

13.3

Households

4.0

2.9

2.0

1.5

1.1

1.2

1.1

1.2

1.2

1.1

Others

1.9

1.6

1.6

1.1

1.0

0.9

0.9

0.9

0.8

0.7

Notes: 1. Figures for the end of fiscal 2020 are preliminary figures.
2.“Government bonds”includes“FILP bonds.”
3. Banks include Japan Post Bank, securities investment trusts and securities companies.
4. Life, nonlife, and other insurance companies include Japan Post Insurance.
5. Others are composed of nonfinancial corporations and private nonprofit institutions serving
households.
Source: Compiled from Saimu kanri ripoto 2021 (Debt Management Report 2021) published by the Ministry of Finance and the Flow of Funds Account data published by the Bank of Japan.

fiscal 1981. Once public bond dependency was reduced and increases in thebalance of outstanding public bonds had been curbed, economic stimulus
measures implemented in response to the prolonged recession since the1990s and the financial crisis in 2008 have led to an increase in the issuanceof public bonds. The public bond dependency ratio has been on a declining
trend since 2009, when it was 51.5%, but jumped again to 64.8% in 2020 due
to the COVID-19 pandemic. The balance of outstanding public bonds also
continues to increase and is expected to reach approximately ¥990 trillion by
the end of fiscal 2021.
Looking at the ownership structure of Japanese government bonds (JGB)
as shown in the table below right, the ownership of banks (including Japan
Post Bank) who were previously major holders, has declined up to 2019. Thishas been particularly evident after the introduction of quantitative and qualitative monetary easing by the Bank of Japan in April 2013. Meanwhile, theBank of Japan has considerably increased its percentage of ownership and as

8Chap. I The Securities Market and the National Economyof the end of 2020, its ownership ratio was a remarkable 44.7%.
Public pension funds, who used to be stable investors premising their investments on long-term ownership, have reduced their investment percentage
to 3.0% as of the end of 2020, following a review in October 2014 by theGovernment Pension Investment Fund (GPIF) of its distribution of investment assets and a reduction in its domestic bond investment ratio. On theother hand, ownership by overseas investors has increased significantly. With
the sovereign debt crisis in Europe in 2010 amongst other factors, ownershipby overseas investors has been on the rise, reaching 13.3% at the end of
2020. When considering the problem of Japan’s budget deficit, trends inoverseas investors’ownership of JGBs should be closely monitored.
4. Financial Assets Held by the Household Sector
Looking at the financial assets held by the household sector of Japan (excess
savings) in terms of the flow of funds, the ratio of household surpluses tonominal gross domestic product (GDP) peaked in the mid-1990s and thendeclined and stabilized. However, it subsequently increased sharply to approximately 7.7% in fiscal 2020 (from approximately 3.1% in fiscal 2019).
Households’financial assets had piled up to stand at approximately ¥1,946
trillion as of the end of fiscal 2020, with a higher amount held in cash anddeposits compared to the previous year. This potentially reflects households’
desire to secure liquidity in response to the COVID-19 pandemic.
A survey of changes in the management of financial assets of the household sector found the following three characteristics. First, while the component ratio of cash and demand deposits has been rising, time deposits, whichused to carry the largest weight within financial assets, has tended to decreasesince the 1980s. This tendency of the component ratio is mainly due to the
low interest rate policy and the quantitative and qualitative monetary easing
measures adopted by the Bank of Japan. Second, the ratios of insurance andannuities rose consistently through to the end of fiscal 2000 and have sinceremained stable. This trend likely reflects that Japan has already become an
aging society. Third, the weight of securities in household financial assets,
especially stocks, declined considerably due to the sluggish stock market following the collapse of the economic bubble and the sharp sell-off in stock
prices caused by the financial crisis in 2008. However, despite the turbulencein the stock market in the first half of 2020 due to the pandemic, the ratio recovered to 12.4% by end of fiscal 2020 with the market recovery trend after
the end of 2012.
A comparison of household investment in financial assets between Japanand other countries (in the case of Japan, those of nonprofit-making institu-

9Chap. I The Securities Market and the National Economy

Table I-4.

Percentage Composition of Financial Assets of Individuals(at fiscal year-end)
1980

1985

1990

1995

2000

2005

2010

2015

2020

Cash and demand deposits
Time deposits
TrustsInsurance funds
Investment trusts
Securities(equity shares)(debt securities)
Others

9.8
48.7
4.5
13.4
1.2
16.1
13.2
2.8
6.3

7.7
44.9
4.0
16.3
2.3
19.7
16.0
3.7
5.2

7.2
40.2
3.7
20.8
3.4
19.6
16.9
2.6
5.2

8.2
41.9
3.4
25.4
2.3
13.9
11.5
2.5
4.9

11.6
42.5
1.5
27.2
2.4
9.7
7.7
2.0
5.1

21.0
29.7
0.4
25.8
3.4
15.3
13.0
2.3
4.4

23.6
31.6
0.2
28.4
3.6
8.6
6.2
2.4
4.1

26.1
26.5
0.2
29.7
4.2
11.0
9.8
1.2
2.7

37.0
23.4
0.3
30.5
4.8
12.4
11.1
1.2
3.0

Total amount

372.0

626.8 1,017.5 1,256.5 1,388.8 1,516.6 1,480.6 1,754.4 1,945.8

Notes: 1. Composition in percentages and totals in trillions of yen.
2. Time and savings deposits include negotiable and foreign-currency deposits.
3. Figures in parentheses are a breakdown of securities, and equity shares include equity subscriptions.
4. Equity shares are based on market prices.
Source: Compiled from the Flow of Funds Accounts data published on the web site of the Bank of Japan.

Table I-5.

Comparison of Japanese and U.S. Household Assets
Composition (as of March 31, 2019)
Japan

United States

Euro area

Cash and demand deposits

54.3%

13.3%

34.3%

Bonds

1.4%

4.2%

1.8%

Investment Trusts

4.3%

13.2%

9.6%

Stocks, etc.

10.0%

37.8%

18.2%

Insurance and annuity

27.4%

29.0%

33.8%

Others

2.7%

2.5%

2.3%

Source: Compiled from the Bank of Japan’s“Comparison of the flow offunds between Japan, the United States and the Euro area”(August20, 2021).

tions providing services to households are not included) as of the end of
March 2021 still shows a large difference in the preference for types of assets. While Japanese households hold 54.3% of their funds in cash deposits
and 14.3% of their funds in securities (including investment trusts), their
American counterparts holds 13.3% of their funds in the former and 51.0%
in the latter. In Europe, the figures are 34.3% and 27.8%, respectively. In

10Chap. I The Securities Market and the National Economy

choosing appropriate investment assets, while it is necessary to take into aconsideration a wide range of differences, including social security systems,
among the regions, these figures suggest that Japanese households prefer assets that guarantee principal, the Americans choose those with higher performance potential and Europeans sit somewhere between the two.
In Japan, however, the direct link between households and the securities
markets is becoming stronger with the spread of defined contribution pension
plans and the Nippon Individual Saving Account (NISA), a small-amount investment tax exemption scheme, the expansion of membership in individualtype defined contribution pension plans (iDeCo), and the introduction of installment-type NISA plans. In addition to an enhancement of investment
trusts and exchange traded funds (ETFs), there is a demand for the dissemination of practical financial knowledge, as well as the provision of highquality financial services.
5. Investment Behavior of Foreigners (Inbound Securities Investment)
Over a period of years after the war, international financial and capital transactions were banned, in principle. However, since the Foreign Exchange andForeign Trade Act was amended in December 1980 (the new Foreign Exchange and Foreign Trade Act), the system of licensing international financial and capital transactions was changed from the prior permission system tothe filing system, making them free in principle. Furthermore, by virtue of anamendment to the new Foreign Exchange and Foreign Trade Act in April
1998 (one of the main reforms under what was locally called“the Japaneseversion of the Big Bang”), the filing system of currency transactions wasabolished, completely liberalizing direct financial transactions with overseas
customers.
Looking at inbound securities investment in recent years, foreign investors
were net buyers of Japanese stocks following the stock market crash in 2002,
net sellers after the financial crisis in 2008, and net buyers again during the
sharp rally in stock prices from the end of 2012. Since 2014 they have been
either modest net buyers or net sellers of Japanese stocks. However, the volume of stocks bought and sold by foreign investors has increased sharply
since 1999, and as a result the difference between the two has fluctuatedwidely. In 2020, when the market was particularly volatile due to coronavirus, the volume of stocks bought and sold was close to the record levels of
2018.
On the other hand, the sales of medium/long-term bonds by foreign investors exceeded their purchase in 1999 after the abolition of securities transaction taxes, during the depreciation of the yen in 2002 and 2003 and duringChap. I The Securities Market and the National Economy

Table I-6.

11

Inbound Securities Investment(¥100 million)

Equity and investment fund shares

Debt Securities (excluding bills)

BoughtSold

Net

Bought

Sold

Net

2000

835,593

837,932－2,339571,013470,246

100,767

2001

779,015

741,061

37,954522,905

504,878

18,02755,981

2002

644,372

657,039－12,667

582,775

618,928－36,153－48,819

Calendaryear

Net balance
98,429

2003

790,641

692,870

97,771

619,163641,269－22,106

75,666

2004

1,161,630

1,056,357

105,273

727,773

683,161

44,612

149,885

2005

1,675,176

1,548,934

126,241

873,775

811,451

62,324

188,5652006

2,671,452

2,590,472

80,981

1,035,501

970,532

64,969145,9502007

3,371,648

3,330,228

41,4191,123,120

1,023,179

99,941

141,360

2008

2,640,366

2,714,152－73,786

895,747

933,021－37,274－111,060

2009

1,453,977

1,453,694

283

504,203

574,104－69,900－69,6172010

1,736,099

1,717,710

18,389695,100

688,976

6,125

24,513

2011

1,974,084

1,971,556

2,528

884,363

838,985

45,37947,906

2012

1,867,789

1,846,517

21,272

811,683

790,007

21,67642,9482013

3,942,020

3,783,603

158,416

838,677

873,965－35,288

123,128

2014

4,115,951

4,089,468

26,483762,694

676,154

86,540113,0222015

5,231,108

5,228,502

2,606

802,426

727,168

75,25877,865

2016

4,955,097

5,011,755－56,658

965,053921,289

43,764－12,8942017

5,167,744

5,162,228

5,515

803,430

761,290

42,14047,6552018

5,817,386

5,877,281－59,896

841,269

817,331

23,938－35,958

2019

4,776,114

4,779,757－3,643

1,081,377

981,491

99,886

96,2432020

5,712,328

5,805,004－92,676

1,043,869

1,069,475－25,607－118,283

Note: Up to 2004, figures were compiled based on“Changes in In-and Out-Bound Securities Investment(on a settlement basis).”Since 2005 and thereon, figures have been compiled based on“International Transactions in Securities (based on reports from designated major investors).”
Source: Compiled from materials listed on the web site of the Ministry of Finance.

the financial turmoil in 2008 and 2009 to cover arbitrage positions, and in2013 when the Bank of Japan introduced quantitative and qualitative easing.
However, recent trends show more purchase of bonds over sales, and tradinglevels remain high. As was the case with stocks, the bond transaction levelhas stepped up since 1999, with the result that the difference between purchases and sales has fluctuated substantially. This trend may be explained by
active arbitrage trading by foreign hedge funds in addition to the expanded
market for medium-term government notes (with a maturity of two to five12

Chap. I The Securities Market and the National Economy

Table I-7.
Year-end

Balance of Inbound Securities Investment and Related Indicators
Stocks (¥b)

Bonds (¥b)

TOPIXInterest rate (%)¥/$ (¥)

2000

63,222(30.4)

32,981(15.8)

1,283.67

1.640

114.902001

49,563(24.7)

33,546(16.7)

1,032.14

1.365

131.47

2002

40,757(21.4)

27,799(14.6)

843.290.900

119.37

2003

60,085(28.2)

27,108(12.7)

1,043.69

1.360

106.97

2004

77,393(31.2)

33,846(13.6)

1,149.63

1.435

103.78

2005

132,842(40.8)

41,428(12.7)

1,649.76

1.470

117.48

2006

149,277(43.5)

49,579(14.5)

1,681.07

1.675

118.92

2007

142,031(39.4)

60,203(16.7)

1,475.68

1.500

113.12

2008

68,625(23.4)

50,650(17.3)

859.24

1.165

90.28

2009

76,372(26.6)

42,236(14.7)

907.59

1.285

92.13

2010

80,537(26.4)

42,877(14.0)

898.80

1.110

81.51

2011

65,841(20.7)

45,730(14.4)

728.61

0.980

77.57

2012

83,556(23.2)

49,504(13.8)

859.80

0.795

86.32

2013

152,323(32.3)

50,168(10.6)

1,302.29

0.740

105.37

2014

169,144(29.2)

64,434(11.1)

1,407.51

0.320

119.802015

186,919(30.7)

72,623(11.9)

1,547.30

0.265

120.42

2016

181,530(28.0)

83,001(12.8)

1,518.61

0.040

117.11

2017219,841(32.1)

95,167(13.9)

1,817.56

0.045

112.65

2018

176,300(26.1)

102,615(15.2)

1,494.09－0.005110.402019

209,923(28.6)

118,340(16.1)

1,721.36－0.025109.15

2020

219,657(27.8)

117,051(14.8)

1,804.68

0.020

103.33

Notes: 1. Bonds include only long-term debt securities.
2. Figures given in parentheses are component ratios (%) to the total debts to overseas lenders.
3. Interest rate signifies the yield on 10-year government bonds newly issued and distributed on
the secondary market.
4. ¥/$ represents the closing spot rates on the Tokyo market.
Source: Compiled based on the data released by the Ministry of Finance and the Bank of Japan.

years) and other infrastructural factors.
Looking at the trend in the balance, it turned upward again in 2003 due toa recovery in stock prices, increasing to approximately ¥149 trillion at theend of 2006, but remained stagnant from 2010 to 2012 due to the impact of
the global financial crisis. Subsequently, with the recovery of the stock market, the balance increased to approximately ¥220 trillion at the end of 2020.
The balance of domestic debt securities held by overseas investors, long- andmedium-term bonds and notes combined, also increased steadily to a total ofChap. I The Securities Market and the National Economy

Table I-8.

13

Percentages of Japanese Stocks and Bonds Held by Investors
of Different Regions(in percentages)

Year-end

United States

EuropeAsia

Cayman Islands

Others

2014

47.4

36.9

5.4

0.6

9.8

2015

49.1

36.0

5.7

0.7

8.4

2016

49.9

34.9

6.2

1.0

8.1

2017

50.2

34.0

7.3

0.9

7.5

2018

52.6

32.5

6.4

0.9

7.6

2019

54.2

30.9

6.7

0.9

7.3

2020

51.7

33.1

7.1

0.7

7.5

33.7

21.6

6.1

16.6

Equity securities

Debt securities (bonds and notes)
2014

21.9

2015

22.6

40.0

19.3

6.2

11.9

2016

20.4

40.7

22.0

5.8

11.2

2017

22.9

42.9

22.3

4.1

7.8

2018

23.1

47.9

17.8

4.3

7.0

2019

21.3

50.1

16.9

4.2

7.5

2020

23.7

54.0

12.7

3.2

6.3

Note: Stocks refer to equity and investment fund interests; bonds refer to medium- and long-term bonds.
Source: Compiled on the basis of data from the Ministry of Finance.

approximately ¥117 trillion at the end of 2020. Looking at the breakdown ofownership by region, Japanese stock ownership by European investors is ona slightly declining trend, while American ownership remains high, accounting for a share of 51.7% at the end of 2020. For debt securities on the other
hand, contrary to stocks, American investors’share was 23.7% at the end of
2020, while European investors increased their share to nearly 54%. Asianbond holdings were 22.3% in 2017, close to the share of American investors,
but gradually declined to only 12.7% at the end of 2020.
6. Development of digital financeDigital finance is a general term to describe blockchain-based financial services developed with distributed ledger technology (DLT). It can be applied
to transactions of securities and commodities as well as to payments and re-14Chap. I The Securities Market and the National Economy

Chart I-3.

[Development of framework
in 2009]• Creation of the funds transfer
business

Digitalization of Finance Industry

Crypto-assets(virtual currency)
Introduction of blockchain
technology and Bitcoin in 2008
[Development of framework
in 2016]• Introduction of registration
system for exchange operators

Certificates
Virtual currency
fundraising

Central Bank Digital Currency(CBDC)

Virtual currency outflow in 2018
Remittance(digital money)
Global stablecoin initiatives
in 2019[Stakeholder objectives]• Low-cost, rapid
remittance• Financial inclusion fordeveloping countries[Challenges]• Initiatives to countermoney laundering andterrorist financing• Stable and reliable
remittance[Development of framework in 2019]• Shift from “virtual currency” to “crypto-asset”• Offline management of user assets in principle• Securities regulations applied for fundraising
activities

Contents • Works[Stakeholder objectives]• New investment targets
replacing traditional
assets such as equities[Stakeholder objectives]• Low cost, active trading[Stakeholder objectives]• Transactions related togame content, etc.

[Challenges]• Initiatives to countermoney laundering andterrorist financing• Continued pricevolatility[Challenges]• Digitalized trading
infrastructure• Rights and obligationsin private law[Challenges]• Concerns about use formoney laundering, etc.

Source: FSA Study Group on Digital and Decentralized Finance.

Chart I-4.

Regulatory System for Security Tokens
Self-regulatoryorganization
Stocks and bonds, etc.

Article 2.1of the FIEA
Paragraph 1
Securities

Electronically Recorded Transferable Rights to
Be Indicated on Securities, etc.
(Security Tokens)
Tokenized shares, corporate bonds, etc.※
Electronically Recorded Transferable Rights※=Tokenized beneficial interests in trusts, interests
in collective investment schemes, etc.

Article 2.2of the FIEA
Paragraph 2
Securities

Japan Securities
Dealers
Association※Regulated as“paragraph 1
securities”

Japan Security Token
Offering Association※Regulated as“paragraph 1
securities”

Excluded Electronically Recorded Transferable Rights※=Electronically recorded transferable rights that fallunder exemption requirements specified by
Cabinet Office Ordinance※Regulated as

Beneficial interests in trusts interests in collective
investment schemes, etc.

Type II Financial
Instruments Firms
Association“paragraph 2
securities”

Source: Japan Security Token Offering Association, JSTOA overview and future initiatives.

Chap. I The Securities Market and the National Economy

15

mittances using crypto-assets (virtual currencies).
DLT is a system for the decentralized management of records related to thetransfer and ownership of assets and rights whereby the transaction details
are recorded by the relevant parties via a shared ledger over the internet. In
the securities market, DLT can be applied as a decentralized infrastructure invarious fields such as issuance, distribution, and settlement. Atypical example of its application is fundraising through the issuance of digital tokens. In
the United States, large amounts of funds were raised through initial coin offerings (ICOs) in 2017－18.
Regarding digital tokens with such securities characteristics, the revised
Financial Instruments and Exchange Act (FIEA), which came into effect inJapan in May 2020, defines paragraph (2) securities, whose rights can betransferred via an electronic information processing system, as“electronically recorded transferable rights.”By adding these to paragraph (1) securities,
they are subject to the same disclosure regulations as stocks and other securities. In addition, those who buy, sell, or solicit these instruments are required
to register as a Type I Financial Instruments Business Operator (see Chapter
XII). However, for liquidity considerations, securities separately specified by
the Financial Services Agency in accordance with Cabinet Office Ordinanceare treated as paragraph (2) securities.
In response to the revised FIEA, the FSA has determined that, since electronically recorded transferable rights and paragraph (1) securities where no
certificate has been issued are defined by the Cabinet Office Ordinance as“Electronically Recorded Transferable Rights to Be Indicated on Securities,
etc.,”a wider range of instruments can be treated as Security Tokens (digitaltokens for securities). The“Study Group on Digital and Decentralized Finance”set up at the FSA in July 2021 is also considering further measures.
As described above, the establishment of laws and regulations in Japan has
made it easier to issue and distribute securities utilizing DLTs within theframework of the securities market. As described in Chapter V, Daiwa Securities and Daiwa Food & Agriculture issued Japan’s first digital corporate
bonds in February 2021 through a so-called private placement, while SBI Securities issued ¥100 million in digital corporate bonds in April 2021 througha public offering. Mitsubishi UFJ Trust and Banking Corporation managed adigital securitization and sale of real estate in August 2021. This shows thatthe issuance of security tokens backed by corporate bonds and financial assets is now increasingly commonplace in Japan.

CHAPTER II
The History of the Japanese Securities Market

1. The Securities Market in the Prewar Period
If we take the point of origin of Japan’s securities market to be the first issuance of securities, it occurred in 1870 with the issue of a foreign currency denominated government bond bearing 9% interest in London, England. If weconsider the birth of a secondary market based on a legal ordinance, it happened in 1878 with the establishment of stock exchanges in Tokyo and Osaka. Whichever definition is used, Japan’s securities market has been in existence for about 140 years. The stock exchanges started off as markets for
trading in public debt, such as old and new public bonds and Chitsuroku
bonds. Although the stocks of the exchanges and of banks were later listed,
public debt accounted for most of the trading for some time. Around 1886,
there was a period of rapidly emerging mainly railway and textile companies
that ushered in more active trading in stocks.
The formation of corporations (kabushiki kaisha) in Japan was not related
to the huge capital investments that are required to develop the heavy chemical industry. Instead, the corporation was introduced to deal with the low level of capital accumulation in the economy. In conjunction with that action,
schemes were established to facilitate the paying in of capital, such as thestock installment payment system and stock collateral loans. As a result, thecorporations set up in the Meiji era were mostly small companies primarily
involved in light industry and they really could be considered corporations in
name only in terms of their generally intended function of raising capital.
The turning point for that function in Japan came with the shift in the composition of industry toward the heavy industry prompted by World War I. Only
then did the country see a sharp increase in large albeit mainly financial combine (zaibatsu)-related companies with paid-in capital exceeding ¥5 million.
There were practically no shares of major companies listed on stock exchanges in the secondary market because the zaibatsu held exclusive ownership of their group companies. And as a result of the lack of investment capital and inadequate credit provision by banks before World War II, thesecondary market developed mainly around future trading called settlement

Chap. II The History of the Japanese Securities Market

Chart II-1.

17

Changes in Stock Prices (Long-term margin transactions) (1878－1920)

(¥)
900

High
Low

600

300

0
1878

1884

1890

1896

1902

1908

1914

1920
(year)

Source: Complied from Tokyo shoken torihikisho no nijyunen shi-kisoku to tokei (A 20-year
History of the Tokyo Stock Exchange-Regulations and Statistics).

Chart II-2.

Stock Price Movement (Major Stock Price Index) (1921－1944)

(¥)
250
200
150
100
50
0
1/1921

1/1925

1/19291/1933

1/1937

1/1941

Source: Complied from Tokyo shoken torihikisho tokei nenpo (Tokyo Stock Exchange Annual
Statistics Reports) and nisho tokei geppo (Japan Securities Exchange Monthly Statistics
Reports).

dealings and forward transactions. Even the main trading issues of exchanges’stocks were subject to speculative investment. For that reason, the prewar
stock market can be characterized as being speculative. Another characteristic that can be pointed out in retrospect is the imposition of wartime regulations. Following the Showa depression, the government sought to achieve
economic recovery by devaluing the currency to promote exports and by creating inflation through expansive government spending, principally on the
military. After the outbreak of the Sino-Japanese War, the government implemented a wartime regime and imposed regulations on the securities market.
The government restricted the issuance of securities for nonessential indus-

18

Chap. II The History of the Japanese Securities Market

Table II-1.

Issues Listed on the Tokyo Stock Exchange(as of end of 1878)

Bonds: New and old public bonds, Chitsuroku public bonds, Kinroku public, bonds, Kigyo public bonds
Stocks: Tokyo Stock Exchange, Daiichi National Bank, Tokyo Kabutocho Rice Merchant Association, and Tokyo Kakigara-cho Rice Merchant Association
Source: Complied from Tokyo shoken torihikisho no gojyunen shi (A 50-year History of the Tokyo Stock
Exchange).

Table II-2.

Number of Issues Listed on the Japan Securities Exchange, by Industry(as of May 31, 1945)

Subscription certificates, 2; banks, trust companies, and insurance companies, 64; investment companies, colonization companies, and securities companies, 28; stock exchanges, 2; railroad and electric railroad companies, 62; transportation and communication companies, 28; gas and electric utilities, 43; mining companies, 86; shipbuilding
and machinery companies, 232; steel companies, metal companies, and smelting companies, 81; textile industrial companies, 58; sugar manufacturing and milling companies, 18; food processing companies and fisheries companies, 29; chemical companies,
65; ceramics companies, 25; paper and pulp, printing, and tanning companies, 26; otherindustrial companies, 31, rubber and tobacco companies, 23; land, building, and warehousing companies, 17; commercial companies, 46
Source: Japan Securities Exchange.

tries, instituted planned corporate bond issuance, put controls on stock prices,
and introduced a licensing system for securities companies. Japan’s 11 stock
exchanges, furthermore, were merged into the Japan Securities Exchange in1943.
2. The Period of Postwar Economic Rehabilitation (1945−54)
After the war, Japan was placed under the control of the general headquarters(GHQ) of the supreme commander for the Allied powers. There was immediate movement within Japan’s securities industry to reopen the market. At one
point, in fact, the Ministry of Finance decided to restart the stock exchanges
on October 1, 1945. However, the GHQ did not approve this, and the market
was not reopened. The securities industry continued to enthusiastically lobby
for a restart of market operations, but the GHQ rejected the idea as prematureChap. II The History of the Japanese Securities Market

Chart II-3.

19

Stock Price Movements (1949－1954)

(¥)
500
400
300
200
100
0
5/19495/19505/1951

5/1952

5/1953

5/1954

Source: Compiled from Nomura Securities’ Shoken tokei yoran (Manual of Securities Statistics).

Table II-3.

Number of Members and Listed Companies of Each Exchange at
Establishment
Establishment

No. of members(at the time the fundwas established)

Listings

Tokyo Stock Exchange

May 16, 1949

116 official members,
12 specialists

681

Osaka Securities Exchange

May 16, 1949

76 official members,
11 specialists

523

Nagoya Stock Exchange

May 16, 1949

50 official members,
8 specialists

268

Kyoto Stock Exchange

July 4, 1949

41 members

217

Kobe Stock Exchange

July 4, 1949

34 members

189

Hiroshima Stock Exchange

July 4, 1949

28 members

119

Fukuoka Stock Exchange

July 4, 1949

29 members

181

Niigata Stock Exchange

July 4, 1949

24 members

176

Sapporo Securities Exchange

April 1, 1950

17 members

103

Source: Complied from shoken torihiki iinkai hokokusho (a Securities and Exchange Commission Report).

and instead gave priority to economic reforms (land reform, dismantling of
the zaibatsu, and labor reform) and political and social reforms. Consequently, it took nearly four years to reopen the stock exchanges, during which time
the Japan Securities Exchange remained closed. This has been the only blankperiod in the operation of exchanges in the history of the securities market in

20

Chap. II The History of the Japanese Securities Market

Table II-4. Member Securities Companies at the Establishment of Tokyo Stock Exchange(April 1, 1949)
Nikko Securities, Tamazuka Securities, Yamaichi Securities, Yachiyo Securities, Taguchi Securities,
Maruhiro Securities, Nitto Securities, Yamazaki Securities, Kaneju Securities, Irimaru Securities,
Yamayoshi Securities, Aizawa Securities, Kokusai Heiwa Securities, Marusui Securities,
Toyama Securities, Meiwa Securities, Sekitani Securities, Daiwa Securities, Sekito Securities,
Shinko Securities, Nomura Securities, Matsuya Securities, Tokuda Securities, Sanko Securities,
Yamaka Securities, Kanaman Securities, Bokutoku Securities, Naruse Securities, Daifuku Securities,
Rokushika Securities, Daito Securities, Oda Securities, Tokyo Daiichi Securities, Ninomiya Securities,
Yamakanou Securities, Osawa Securities, Obuse Securities, Marusan Securities, Tabayashi Securities,
Kakumaru Securities, Koyanagi Securities, Tsukuba Securities, Chiyoda Securities,
Nippon Kangyo Securities, Tachibana Securities, Marusugi Securities, Mie Securities,
Haratada Securities, Maruya Securities, Fukuyama Securities, Irinaka Securities, Ikko Securities,
Rokko Securities, Nippon Sangyo Securities, Toyo Securities, Totan Securities, Toko Securities,
Tokyo Showa Securities, Tokyo Shinei Securities, Tokyo Jiyu Securities, Chugai Securities,
Marukuni Securities, Ikanagashira Securities, Kaga Securities, Kadoman Securities,
Yoshikawa Securities, Yoshimura Securities, Taihei Securities, Taiyo Securities, Tanaka Securities,
Takai Securities, Taishichi Securities, Taisei Securities, Naigai Securities, Nakahara Securities,
Nakajima Securities, Hachisu Securities, Ueno Securities, Ono Securities, Osaka Shoji, Oda Securities,
Yamani Securities, Yamawa Securities, Fukuri Securities, Yamamaru Securities, Yamafumi Securities,
Yamasachi Securities, Yamasan Securities, Marutoyo Securities, Maruwa Securities,
Marusan Securities, Maruju Securities, Matsui Securities, Fuso Securities, Koiei Securities,
Ebisu Securities, Ando Securities, Yamata Securities, Sanshin Securities, Sansei Securities,
Sakai Securities, Kyowa Securities, Kyodo Securities, Misawaya Securities, Miki Securities,
Shimizu Securities, Shinei Securities, Jujiya Securities, Juzen Securities, Joichi Securities,
Jonan Securities, Hinode Securities, Hiyama Securities, Hirahara Securities, Central Securities,
Marugo Securities
Specialists: Daiichi to Daijuni Jitsuei Securities
Source: Compiled from Tokyo shoken torihikisho no jyunen shi (A 10-year History of the Tokyo Stock
Exchange).

Japan.
Despite trading being halted on the floors of the stock exchanges and official secondary market, the demand for securities trading persisted even in the
confusion of postwar Japan. Securities trading naturally emerged at the offices of securities companies in the form of over-the-counter (OTC) trading.
When it became clear, moreover, that the stock exchanges were not going torestart anytime soon,“group transactions,”which involved institutionalized
OTC trading at fixed places and times in parallel with the OTC trading at individual securities companies, also got under way. By the end of 1945, grouptransactions, which first emerged in Tokyo and Osaka, had spread to exchanges in Nagoya, Niigata, Kyoto, Kobe, Hiroshima, and Fukuoka, among
others.
It would, of course, have been difficult to reopen the stock exchanges
merely by continuing the prewar exchange organization and securities legislation. To democratize the securities industry, the Japanese government com-

Chap. II The History of the Japanese Securities Market

21

menced the formulation of a new legal framework. In 1947, it promulgatedthe Securities and Exchange Law, which drew on the Securities and Exchange Act of the United States. Initially, only those articles of the law dealing with the Securities and Exchange Commission, which was patterned after
the U.S. Securities and Exchange Commission (SEC), were enforced. Then afull-scale revision of the law was promulgated in 1948. This amended law
formed the legal framework for the new postwar securities market, replacing
the licensing system for securities companies with a system of registration
with the regulatory authority and putting in place such regulations as the separation of banking and securities businesses.
Stock exchanges were established in Tokyo, Osaka, Nagoya, and other cities from May 1949. The GHQ, however, instructed Japan’s Securities andExchange Commission to ensure the strict observance of its Three Principlesof Market Operation: (1) recognize transactions in order of the occurrence,(2) concentrate trading on exchanges, and (3) prohibit futures trading. All exchanges pledged to strictly follow these principles, enabling the long-awaited
reopening of stock exchanges (participants in group transactions and the issues they had traded moved en masse to these stock exchanges and restarted
trading on a cash transaction basis only). Because, however, it was difficult
to match buys and sells based only on actual demand, a movement got under
way in the industry to push for the revival of prewar forward transactions forthe purpose of introducing temporary demand. Since the management of theexchanges and the GHQ were against this proposal, a margin trading systemmodeled on the U.S. margin trading system was introduced in 1951.
3. The Securities Market during the First Period of Rapid Economic
Growth (1955−64)
As made clear in the title of an economic white paper issued in 1956, The
Post-War Period Is Over, in the first half of the 1950s Japan had finished with
its postwar recovery and was heading into its first period of rapid economic
growth. Japan’s Jinmu and Iwato booms in the mid-1950s and from 1958 to
1961, respectively, were representative of the change. Against a backdrop offavorable growth in corporate performances, stock prices rose almost universally during the period from the latter half of 1955 to July 1961. An investment trust boom at the time also contributed to the rising securities market.
Japan had introduced a postwar securities investment trust system in 1951,
but the market for these investment trusts struggled until 1955. From 1956
on, however, stock prices surged, and the outstanding principal of investment
trusts expanded sharply. Investment trusts became such a force in the securities market that they were referred to as“the whale in the pond.”Another22

Chap. II The History of the Japanese Securities Market

Chart II-4. Stock Price Movements (TSE’s Modified Stock Price Average) (1955－1964)
(¥)
2,000
1,600
1,200
800
400
0
1955

56

57

58

59

60

61

62

63

64

(year)

Source: Compiled from Nomura Securities’ Shoken tokei yoran (Manual of Securities Statistics) and the
Tosho tokei nenpo (TSE Annual Report).

Table II-5.

Changes in Assets of Stock Investment Trusts and Bond Investment Trusts(Principal basis)(millions of yen)
Stock Investment Trusts

Sales
(A)

Cancella- RedempYear-end
tion
tion
Principal(B)(C)

Bond Investment Trusts
Net assetchange(D=A–(B+C))

1955

26,381

31,792

13,64059,519 －19,051

1956

51,431

27,163

16,03967,748

8,229

1957

92,544

16,178

7,199

136,915

69,166

Sales
(A)

1958

106,41225,741

7,890

209,695

72,7801959

182,480

58,8763,219

330,081

120,385

1960

362,066

87,945－604,202274,120

1961

588,205 155,751

9,810 1,026,845

422,643 244,490

1962

347,116 229,174

14,161 1,130,627

103,781Cancella- RedempYear-end
tion
tion
Principal(B)(C)

Net assetchange(D=A–(B+C))－ 156,020

156,02088,47083,819 107,160－ 132,679 －23,341

1963

331,873 274,226

17,884 1,170,388

39,761 109,857

71,021－ 171,515

38,836

1964

330,158 293,573

45,415 1,161,558－8,829 122,332

84,811－ 209,036

37,521

1965

196,829 349,502

42,556966,328 －195,229 120,665

110,132－ 219,569

10,533

Source: Compiled from Shokenshintaku sanjyugonen shi (35-year History of Securities Investment Trusts).

23

Chap. II The History of the Japanese Securities Market

Table II-6.

Categories of Investible Custody Securities and Investment Uses
(millions of yen)
Category

Total Assets
Under
Management
Sept. 1958

62,701

Investment Area

Special debt

61,984Of above,bankdebentures

Corporatebonds

Depositedcollateral

61,384568

53,812Others5,283

Sept. 1959

108,347

107,602105,381673

88,793

19,420

Sept. 1960

146,076

144,875

141,666969

116,061

30,015

Sept. 1961

139,833

138,552

134,794

1,239

116,988

22,845

Sept. 1962

154,284

152,127

143,946

2,005

129,030

25,254

Sept. 1963

209,197

205,337

196,967

3,386

156,319

52,877

Sept. 1964

249,079

244,685

235,557

3,714

195,891

53,189Source: Compiled from the Securities Bureau of the Ministry of Finance, Nenpo (Annual Report).

factor in the bull market was the system of“investable custody.”Under thatsystem, securities companies borrowed bank debentures (primarily discountbank debentures) that they had sold in the market on a commission basis
from unspecified multiple customers for a predetermined fee through a custody system. The securities companies then raised capital from small andmedium-sized financial institutions or in the call money market by using thebank debentures as collateral and invested it in stocks or bonds through theirown proprietary trading accounts. In this manner, against the backdrop of an
expanding economy and bullish securities market, OTC trading value rose
sharply, and the number of companies approved to sell their securities OTC
grew rapidly, concentrated mainly on start-up and growth companies. To deal
with the rapid expansion in the OTC market, the Tokyo, Osaka, and Nagoyastock exchanges each established Second Sections.
Japan, though, was striving to balance its current account, and when thebalance of payments fell into the red it tightened the money supply. When theinterest rate was raised in July 1961 to improve the balance of international
payments, Japanese companies began liquidating their stockholdings. In
combination with corporations’focus on increasing capital, this trend caused
a worsening in the demand-supply balance for stocks. The resultant drop in
stock prices forced an end to the investment trust boom, as the mechanismthat had been driving up stock prices reversed and caused further declines instock prices. The increase in the official discount rate also produced a rise in
the number of redemptions of bond investment trusts, especially by compa-

24Chap. II The History of the Japanese Securities Market

nies. This action placed a great financial burden on the securities companies,
which were forced to buy bonds that were being removed from the pool ofinvestment trust assets. These factors became a cause of panic in the securities market.
For that reason, the market took such steps as urging business corporations
to rearrange their financing plans (cutting back or postponing their planned
increase of capital) and persuading commercial banks to make loans secured
by bonds to four bond investment trusts. Despite these efforts, stock prices
kept declining, partially because of the market reaction to the assassination of
U.S. President Kennedy. To deal with the issues, the industry formed stock
purchasing organizations. In January 1964, banks and securities companies
contributed capital to create the Japan Joint Securities Co., Ltd., while in January 1965 a group of securities companies jointly established the Japan Securities Holding Association. Both of these organizations carried out share purchasing operations in the market and assumed ownership of shares held by
investment trusts with the aim of improving the demand and supply balancein the stock market. In the latter part of May 1965, however, the news thatYamaichi Securities Co., Ltd., was on the verge of bankruptcy hit the market,
plunging it into a state of panic.
4. The Securities Market during the Second Period of Rapid Economic
Growth (1965−74)
The curtain opened on the 10-year period from 1965 onward with a securities
panic. At the end of the first half of fiscal 1964 (September 30, 1964), the cumulative earnings of securities companies in Japan amounted to a loss of¥26.4 billion. And Yamaichi Securities’performance had deteriorated particularly badly; by March 31, 1965, the company had racked up a loss of ¥28.2
billion, compared with total capital of only ¥8 billion. On May 21, 1965, it
finally was revealed that Yamaichi Securities was on the brink of failure. To
avoid a loss of confidence in the market, a move was made to bail the company out. In the late night on May 28, the government invoked Article 25 of
the Bank of Japan Act and announced that Yamaichi Securities would receivea special loan from the Bank of Japan without any required collateral and for
an unlimited amount (in actual fact some collateral was secured). Stock prices continued to fall for some time following the announcement but staged arally when the government made clear that it intended to issue deficit-covering bonds for the first time since the war. Meanwhile, the panic in the securities market also served as the basis for a reorganization of the securities industry. The government amended the Securities and Exchange Act,
introducing a licensing system for securities companies. This forced many

25

Chap. II The History of the Japanese Securities Market

Chart II-5.

Stock Price Movement (TSE’s Modified Average, TOPIX) (1965－1974)

(¥)
6,000

600

5,000

500

4,000

400

3,000

300

2,000

200

1,000

100

0
1965

66

67

68

69

70

TSE’s Modified average (left axis)

71

72

73

74 (year)0

TOPIX (right axis)

Source: Compiled from data the Shoken tokei yoran (Manual of Securities Statistics), the Nihon
Keizai Shimbun, and the Tosho tokei nenpo (TSE Annual Report).

securities companies to combine their operations, or merge, to prepare for the
new system. In combination with the securities companies that had their registration revoked around the time of the securities panic and those that dissolved their operations, the number of securities companies at the time of theconversion to the new licensing system declined to 277 companies, comparedwith 593 companies at the end of 1963.
During the decade from 1965 to 1974, progress was made in internationalizing Japan’s securities market. In 1964, Japan became an Article 8 country
member of the International Monetary Fund (IMF), joined the Organization
for Economic Cooperation and Development (OECD), and publicly promised
to liberalize capital transactions. Consequently the government implemented
measures to liberalize the capital market in five stages beginning in July
1967. This process steadily eased the restrictions on ownership of Japanesestock by foreigners, and they were finally fully lifted with the exception ofcertain stock categories. The liberalization of capital transactions was not
limited to foreign investors; foreign issuers and intermediates were also able
to operate in Japan’s securities market. In 1970, the Asian Development Bank
started issuing yen-denominated foreign bonds in Japan. Foreign shares weremade available to buy in Japan in 1972. The Tokyo Stock Exchange established a Foreign Section in 1973. Around the same time, foreign securities
companies commenced setting up operations in Japan. Merrill Lynch opened
a Tokyo branch in 1972, becoming the first foreign securities company to receive a securities business license in Japan.
The liberalization of capital transactions also meant that it was then possible for foreign companies to acquire Japanese companies. Japanese compa-

26

Chap. II The History of the Japanese Securities Market

Table II-7.

FY1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968

Changes in Number of Securities Companies

Changes in the number of Companies atcompanies
financial
year-end
Increase
Decrease
959
11
948
292
113
1,127
18
209
936
11
109
838
71
73
836
52
52
836
11
83
764
2
66
700
7
55
652
7
77
582
7
32
557
15
26
546
36
30
552
48
10
590
23
12
601
8
16
593
0
82
511
0
86
425
2
30
397
0
113
284
0
7
277

Number ofBusiness
Offices
1,889
1,601
1,642
1,794
2,105
1,997
1,901
1,848
1,904
1,984
2,233
2,565
2,841
2,934
2,893
2,424
2,109
2,009
1,869
1,572

Total Capital(in ¥ mil.)

Per-Company
Capital(¥ mil.)

3,014
3,454
3,767
6,683
10,115
10,713
10,826
12,022
18,062
19,56929,22139,09474,991
78,114
100,573
126,118
125,599
118,632
119,955
119,904

2.7
3.7
4.5
8.0
12.1
14.0
15.5
18.4
31.0
35.1
53.5
70.8
127.1
130.0
169.6
246.8
295.5
298.8
422.4
432.9

Note: Figures for“Number of Business Offices”and“Capital”for the years preceding 1959 are as of theend of the calendar year concerned.
Source: Compiled from the Securities Bureau of the Ministry of Finance, Nenpo (Annnual Report).

Table II-8.

Changes in Stock Ownership Among Investor Categories

FY 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975
By Owner
National and local government 0.3% 0.2% 0.3% 0.3% 0.3% 0.3% 0.2% 0.2% 0.2% 0.2% 0.2%
organizations
Financial institu- 26.8% 29.8% 30.6% 32.0% 31.9% 32.3% 33.9% 35.1% 35.1% 35.5% 36.0%
tions
Securities compa- 5.4% 5.4% 4.4% 2.1% 1.4% 1.2% 1.5% 1.8% 1.5% 1.3% 1.4%
nies
Corporations
Business corpora- 21.0% 18.6% 20.5% 21.4% 22.0% 23.1% 23.6% 26.6% 27.5% 27.1% 26.3%
tion, etc.
Foreign corpora- 1.9% 1.7% 1.7% 2.1% 3.1% 3.0% 3.4% 3.4% 2.8% 2.4% 2.5%
tions
Corporate investor total
55.1% 55.5% 57.2% 57.6% 58.4% 59.6% 62.4% 66.9% 66.9% 66.3% 66.2%
Individuals and 44.4% 44.1% 42.3% 41.9% 41.1% 39.9% 37.2% 32.7% 32.7% 33.4% 33.5%
Individual others
Foreign investors 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.1% 0.1% 0.1% 0.1%
Individual investor total
44.6% 44.3% 42.5% 42.1% 41.3% 40.1% 37.4% 32.8% 32.8% 33.5% 33.6%
Note: Investment trust portion is included in financial institutions.
Source: Compiled from Kabushiki bunpu jokyo chosa (Survey of Stock Distribution Status).

Chap. II The History of the Japanese Securities Market

27

nies countered this new possibility by focusing on building stable shareholder
bases. If companies held shares with each other, this reduced the number ofshares available in the market, making it easier to defend against takeover attempts. Share crossholdings were viewed from the perspective of takeover
prevention. Later, after Japanese companies switched the form of their capitalincreases from making rights issues to existing shareholders at par value tomaking public offerings of stock at market prices, issuers pursued sharecrossholdings from the point of view of the desirability of high share prices
in case of public offering. As a result, there was a change in the shareholding
composition of the market, with the proportion of corporate shareholdings
increasing and the proportion of individual investor shareholdings declining.
5. Measures Taken to Cope with the Oil Crisis (1975−84)
At the end of the previous 10-year period, there had been a succession of major events that shook the Japanese economy, including the Nixon Shock(1971), the introduction of a floating exchange rate system (1973), and thefirst oil shock (1973.) The second oil shock occurred later, in 1979. With Japanese companies practicing energy conservation management in the face ofback-to-back oil crises, the government seemed intent on getting through thecrises using a fiscal expansion strategy. Underpinning that strategy was themassive issuance of deficit-covering Japanese government bonds (JGBs).
As previously mentioned, government bond issuance after the war got
started in fiscal 1965. The main feature of those bonds was that they were issued at low interest rates without regard to market conditions and were forcibly allocated among financial institutions belonging to the underwriting syndicate according to their capital strength. Maintaining this artificially fixed,
low interest rate market meant that financial institutions could not be permitted to sell the JGBs in the market freely. Since at the time the government
was trying to keep JGB issuance within the scope of the growth in the money
supply, the Bank of Japan purchased almost all JGBs that had been held by
the financial institutions for one year (liquidity policy). The reason, in fact,that JGB issuance after the oil shocks was said to be massive was that JGB
issuance after fiscal 1975 exceeded the growth in the money supply.
With the massive issuance of JGBs, the liquidity policy reached its limits,making it impossible to avoid issuing JGBs in the public market. Accordingly, the government approved, with some restrictions, JGB sales on the bondmarket in 1977. Following this change, the restrictions on sales were liberalized in stages, resulting in the deregulation of the JGB secondary market.
The interest rate yields for JGB subscribers, on the other hand, were the baserates given by the regulated interest rate structure in Japan. To deregulate

28

Chap. II The History of the Japanese Securities Market

Chart II-6.

Stock Price Movement (TSE’s Modified Average, Nikkei Dow Average and
TOPIX) (1975－1984)(¥)
14,0001,400

12,000

1,200

10,000

1,000

8,000

800

6,000

600

4,000

400

2,000

200

0
1975

76

77

78

79

80

81

82

TSE’s Modified average, Nikkei Dow average (left axis)

83

84 (year)0

TOPIX (right axis)

Source: Compiled from data from the Nihon Keizai Shimbun, the Tosho tokei nenpo (TSE Annual
Report), and the Shoken tokei nenpo (Annual Securities Statistics).

Chart II-7. Change in JGB Issuance and Outstanding Balance (until the end of FY2020)
100 billionof yen100 billionof yen3,000

12‚0002,500

10‚000

2,000

8‚000

1,500

6‚000

1,000

4‚000

500

2‚000

0
1965

69
73
77
81
85
Article 4 bonds (left axis)
Others (left axis)

89

0
93
97
01
05
09
13
17 (year)Special deficit-financing bonds (left axis)
Ordinary JGB balance (right axis)

Notes: 1. JGB issuance amounts are calculated on a proceeds basis.
2. Special deficit-financing bonds include temporary-bridging, tax-reduction offset, anddisaster-recovery special public bonds.
3. Others represents the total of pension plan funding special deficit-financing bonds,
reconstruction bonds, FILP bonds, and refunding bonds.
Source: Compiled from the web site of the Ministry of Finance.

Chap. II The History of the Japanese Securities Market

29

these rates would have forced the government to change its artificially regulated interest rate policy. For that reason, there was a great deal of resistanceto the deregulation of the JGB primary market within the government, andderegulation proceeded at a snail’s pace. When, however, the designated underwriting syndicate refused to underwrite the planned issuance of JGBs in
June 1981, the issuance conditions for JGBs were deregulated, setting thestage for the deregulation of the different types of long-term interest rates.
Internationalization proceeded at this time. During the period from 1975 to
1984, Japan’s trade surplus with the United States ballooned, causing tradeand economic friction between the two countries. Perceiving the reason forthe problem to be the closed nature of Japan’s financial, capital, and service
markets, the United States demanded the overall reform of Japan’s economic
structure. As part of that process, the two countries formed the Japan-U.S.
Yen/Dollar Committee. The United States argued that deregulated financial
and capital markets driven by a market mechanism would enable the optimum allocation of capital in Japan. It therefore pushed strongly for the removal of various restrictions placed on those markets by the Japanese government that it considered obstructive to open markets. In this manner, internationalization formed the basis for financial deregulation in Japan.
6. Developments before and after the Economic Bubble (1985−89)
In a Japan-U.S. Yen/Dollar Committee Report released in 1984, the UnitedStates brought pressure on Japan to liberalize its financial and capital markets
and to internationalize the yen. The Japanese government responded by liberalizing the domestic financial market through such actions as deregulatinginterest rates on bank deposits. It also moved to improve foreign financial institutions’access to the Japanese market through such measures as opening
up membership on the Tokyo Stock Exchange (TSE). As the first step toward
internationalizing the yen, the government liberalized the Euroyen market.
The TSE, meanwhile, heeded the request of the government to open its membership by revising the fixed number of membership seats in its Articles ofIncorporation in 1985 and accepting its first round of new members. A totalof three rounds were eventually conducted, resulting in seats on the TSE for
25 foreign securities companies.
The deregulation of interest rates began in 1985 with the deregulation ofinterest rates on large deposits. After that, the deregulation of interest rates on
deposits progressed rapidly. As a result, the Bank of Japan’s open interest rate
for fund raising jumped to 53% in 1989, from 7.5% at the end of 1984, greatly increasing fund procurement costs for banks. Major corporations concurrently shifted their financing from bank loans to security issuance, resulting

30

Chap. II The History of the Japanese Securities Market

Chart II-8.

Stock Price Movement (Nikkei Dow and TOPIX) (1985－1989)(¥)
40,0004,000

30,0003,000

20,0002,000

10,000

1,000

0
1985

86

87

88

Nikkei Dow average (left axis)

89(year)

0

TOPIX (right axis)

Source: Compiled from data from the Nihon Keizai Shimbun and the Shoken tokei nenpo (Annual
Securities Statistics).

Chart II-9.

Yen to US$ Exchange Rate and Japan’s Official Discount Rate

(¥)
300

Yen exchange rate
Official discount rate

250

5.00
4.50
4.00

200

3.50
3.00

150
100
1985

%
5.50

2.50
86

87

88

89

(year)

2.00

Source: Compiled from the web site of the Bank of Japan.

in a decline in the balance of loans being extended by major banks to theircore customer base (heavy industry). To cope with the loss of business, theleading Japanese banks expanded the scope of their loan operations to include real estate, construction, and other industries and launched international operations. They also began planning to enter the securities business, creating friction between the banking and securities industries.
In 1985, the Plaza Accord was signed, after which the yen appreciatedsharply against the U.S. dollar. The rate movement raised concerns about astrong yen-related economic recession in highly export-dependent Japan. The
Bank of Japan’s reaction was to implement successive reductions in the offi-

Chap. II The History of the Japanese Securities Market

Table II-9.

31

Stock Trading Composition by Investor Category(100 million shares)

Total
Brokerage
Trading
1983

1,250.7

Life and
Non-Life
Individuals Foreigners
Insurance
Companies
59.5%

15.9%

1.3%

Banks
3.5%

Investment
TrustsCorporations

4.4%

9.3%

Others6.1%

1984

1,344.5

54.6%

17.3%

1.2%

5.3%

4.4%

11.5%

5.7%

1985

1,615.6

49.5%

15.4%

1.2%

10.6%

5.0%

11.6%

6.6%

1986

2,772.0

41.7%

13.8%

1.1%

16.1%

5.4%

15.4%

6.5%

1987

3,683.4

36.8%

12.4%

1.0%

21.5%

5.6%

17.0%

5.8%

1988

3,979.2

34.8%

9.1%

1.2%

24.7%

6.8%

17.7%

5.7%

1989

3,395.1

32.3%

10.8%

1.2%

25.4%

10.0%

14.6%

5.7%

Note: Total brokerage trading equals the buying and selling of all securities companies on the first andsecond sections of the TSE, Osaka, and Nagoya exchanges.
Source: Compiled from the Tosho yoran (TSE Fact book).

cial discount rate from January 1986 onward, and the economy responded byentering a recovery phase. Amid this low interest rate climate, Black Monday
rocked the U.S. market on October 19, 1987, causing nations around theworld to initiate monetary easing to avert recessions. Japan, meanwhile, wasstill in an economic recovery phase, and its official discount rate remained ata low level. Consequently, the price of land and stocks continued to rise.
Against this backdrop of asset inflation, corporations began taking advantageof their ability to raise capital through bank loans and securities, using financial engineering, or zaitech, to boost their financial income. Financial institutions, hurt by the decline in loan balances, also aggressively invested capitalin securities. Heated investment in securities pushed the Nikkei Dow index
up from ¥12,716.52 (September 30, 1985) before the Plaza Accord to a record high of ¥38,915.87 at the end of 1989.
New trading methods were also introduced during this period, commencing with bond futures trading in 1985. Stock index futures trading was introduced in 1987, and stock index options in 1989. Japan’s securities market
thus gained a full complement of cash, future, and options trading.

32

Chap. II The History of the Japanese Securities Market

Chart II-10.

Stock Price Movement (Nikkei Dow and TOPIX) (1990－1995)(¥)
40,0004,000

30,0003,000

20,0002,000

10,000

1,000

0
1990

91

92

93

Nikkei Dow average (left axis)

94

95(year)

0

TOPIX (right axis)

Source: Compiled from data from the Nihon Keizai Shimbun and the Shoken tokei nenpo (Annual
Securities Statistics).

7. The Reform of the Financial System after the Stock Market Scandals(1990−95)
The debate on financial system reform began in Japan in the mid-1980s. It
arose in response to the global trend toward financial deregulation and to thechange in the financing methods of Japanese corporations. The Financial
System Research Council took the lead in the debate of revising in the specialized financial institution systems including the separation of long-term
interest rates from short-term interest rates, commercial banks from trustbanks, and the banking industry from the securities industry. These systems
were the pillars of the postwar financial system in Japan. The Financial System Research Council, however, was positive about banks being allowed toenter the securities business and decided that the best approach would be toallow mutual entry into the banking, trust and securities businesses based onwholly owned subsidiaries. It requested the Securities and Exchange Council
to revise the system separating the banking and securities industries. But the
Securities and Exchange Council was wary of allowing banks into the securities business, recognizing that the securities industry overall was far less enthusiastic about this idea than the banking industry. The Securities and Exchange Council nevertheless decided to approve mutual entry throughsubsidiaries on the condition that firewalls were established between subsidiaries and parent companies. And for the time being bank subsidiaries, in-Chap. II The History of the Japanese Securities Market

Table II-10.

33

Establishment of Securities Subsidiaries of Banking Institutions

Month/Year

Companies Starting New Securities BusinessJul. 1993

IBJ Securities (currently Mizuho Securities), LTCB Securities (currently UBS Securities),and Nochu Securities (currently Mizuho Securities)

Nov. 1993

Sumitomo Trust Securities (liquidated in 2000) and Mitsubishi Trust Securities (currently
Mitsubishi UFJ Morgan Stanley Securities)

Jul. 1994

Asahi Securities (dissolved in 1999)

Aug. 1994

Yasuda Trust Securities (currently Mizuho Securities)

Nov. 1994

Sakura Securities (currently Daiwa Securities), Sanwa Securities (currently Mitsubishi
UFJ Morgan Stanley Securities), Daiichi-Kangyo Securities (currently Mizuho Securities), Fuji Securities (currently Mizuho Securities), Mitsubishi Diamond Securities (currently Mitsubishi UFJ Morgan Stanley Securities), and Sumitomo Capital Securities (currently Daiwa Securities)

Mar. 1995

Tokai International Securities (currently Mitsubishi UFJ Morgan Stanley Securities)

Apr. 1995

Hokkaido Takushoku Securities (dissolved in 1998)

May 1995

Mitsui Trust Securities (terminated business in 1999)

Oct. 1995

Toyo Trust Securities (liquidated in 1999)

Nov. 1996

Shinkin Securities and Yokohama City Securities (both liquidated in 1999)

Aug. 1997

Tokyo Forex Securities (currently ICAP Totan Securities), and Nittan Brokers Securities(currently Central Totan Securities)

Nov. 1997

Ueda Tanshi Securities (dissolved in 2001)

Oct. 1998

Hitachi Credit Securities (currently DBJ Securities)

Source: Complied from data from the Nihon Keizai Shimbun, the Securities Bureau of the Ministry of
Finance, Nenpo (Annual Report).“The First Year of the Financial Supervisory Agency”, and“The First Year of the Financial Services Agency.”

cluding indirectly owned subsidiaries, were prohibited from operating in thestock brokerage market. The Institutional Reform Law was enforced in June
1992 based on those conditions, and mutual entry into these financial sectors
became a reality.
Around the time that the debate on financial system reform was dying
down, the uncovering of major financial and securities scandals shook thebanking and securities industries. For the securities industry it was unveiled
by a tax audit that during the financial bubble major securities companies had
been compensating their largest corporate clients for losses incurred (in August 1991, total compensation by the four major securities companies and 17
second-tier and medium-sized companies had reached approximately ¥172
billion). Dealings with members of known crime syndicates and market manipulation charges also surfaced, escalating the problems into a social issue.
Most of the loss compensation was done to eigyo tokkin accounts (discretion-

34

Chap. II The History of the Japanese Securities Market

ary accounts managed by the securities company). The commonly usedmethods involved arranging to have the client earn a profit on transactions
disguised as bond transactions or shifting losses between corporate clientswith differing fiscal year-ends to avoid reporting the loss by temporarilytransferring securities with losses at book value between their accounts in aprocess called tobashi.
Since under the then existing law loss compensation for trades after thefact was not illegal, the Securities and Exchange Act was immediately
amended to ban securities trading under a discretionary account and loss
compensation before or after the fact. Criticism mounted that“excessive
profits of securities companies due to the regulator’s protection, problematic
administration, and fixed rate commissions had made loss compensation possible,”and it was said that“what the solution requires is not the banning ofloss compensation or the punishment of securities companies, but the implementation of financial system reform itself.”In September 1991, the Provisional Council for the Promotion of Administrative Reform recommended
the liberalization of brokerage commissions, the promotion of new market
entries, and the separation of the market surveillance organization from the
Ministry of Finance. In July 1992, the authorities established the Securities
and Exchange Surveillance Commission. The rest of the Provisional
Council’s recommendations were included in the financial Big Bang reforms
that came later, contributing to the formation of a new framework for Japan’sfinancial and capital markets.
8. The Debate on, and Enforcement of, the Act on Revision, etc. of
Related Acts for the Financial System Reform (1996−2000)
The bursting of the economic bubble left deep scars on the economy. The
trauma from the collapse of stock prices emerged in the form of securities
scandals, while that from the collapse of land and real estate prices emerged
as the nonperforming loan problem in the financial industry. The nonperforming loan problem in particular lingered without the implementation of
any fundamental solution - the banking industry struggled for close to 10
years to get out from under its bad debt. During this long process, foreigncompanies and investors and financial transactions flowed out of the Japanese market, making the hollowing out of the financial market real. Japan’s
way of addressing the issue was the financial Big Bang initiative proposed bythen prime minister Ryutaro Hashimoto in 1996. The goals of the initiative
were to wrap up the cleanup of nonperforming loans by 2001 and rebuild theJapanese financial market into an international market comparable to the
New York and London markets based on the principles of“free, fair, andChap. II The History of the Japanese Securities Market

Chart II-11.

35

Stock Price Movement (Nikkei Dow and TOPIX) (1996－2000)(¥)
25,0002,500

20,0002,000

15,0001,500

10,000

1,000

5,000

500

0
1996

0
97

98

Nikkei Dow average (left axis)

99

2000

(year)TOPIX (right axis)

Source: Compiled from data from the Nihon Keizai Shimbun and the Shoken tokei nenpo (Annual
Securities Statistics).

global.”Discussions on financial reform took place in the Securities and Exchange
Council, the Financial System Research Council, the Insurance Council, theCouncil on Foreign Exchange and Other Transactions, and the Business Accounting Council. Those discussions resulted in recommendations to change
Japan’
s established bank intermediation-based capital allocation system (indirect financing) to a market-based capital allocation system (direct financing). Passed in October 1998, the Act on Revision, etc. of Related Acts for
the Financial System Reform, paved the way for services based on vigorous
intermediation, set up a market system with special characteristics, and established a framework for trading that users could trust. Among its many revisions, the deregulation of stock brokerage commissions and the shift to theregistration system of securities companies provided incentive for securities
companies to reform their business models. Its elimination of the obligation
to trade stocks only on exchanges, on the other hand, promoted competition
between markets.
Almost at the same time as the financial Big Bang initiative was being
proposed, major financial institutions experienced business and financial crises that led to bankruptcies. Among troubled banks were Hokkaido Takushoku Bank, Ltd., the Long-Term Credit Bank of Japan, Ltd., and the Nippon
Credit Bank, Ltd. The list of securities companies included second-tier Sanyo
Securities Co., Ltd., and one of the four major securities companies, Yamaichi Securities Co., Ltd. These companies previously would have been

36

Chap. II The History of the Japanese Securities Market

Table II-11.

Schedule for Reforming the Securities Market During the Big Bang
FY1997 FY1998 FY1999 FY2000 FY2001

I. Investment Vehicles (Attractive investment instruments)
1. Diversity of the types of bonds
2. Diversity of derivatives products
3. Developing Investment Trust Products(1) Introduction of Cash Management Account (wrap account)(2) OTC sales of investment trusts products by banks(3) Private placement of investment trusts(4) Investment company type funds
4. Review of the definition of securities
5. Enhancement of corporate vitality and efficient use of capital
II. Markets (An efficient and trust framework for transactions)
1. Improvement of transaction system on stock exchanges
2. Improvement of OTC (JASDAQ) market system
3. Deregulation of sales solicitations by securities firms for unlisted, unregistered stock
4. Improvement of share lending market
5. Improvement of clearing and settlement system
6. Strengthening inspection, surveillance and enforcement systems
7. Strengthening disclosure
III. Financial Intermediaries (Diverse investment services to meet client needs)
1. Deregulating brokerage commissions
2. Diverse activity by intermediaries
3. Use of holding company structure
4. Strengthening asset management
5. Enhancing monitoring system for soundness of securities companies
6. Entry regulations for securities companies(1) Licensing system reform(2) Enhancing mutual entry into banking, securities and trust businesses
7. Investor protection related to exits of intermediaries from the market(1) Strict separation of client assets from securities companies’own assets(2) Enhancing the securities Deposit Compensation Fund scheme
Review of the taxation related to securities
Shift to the new administrative regime

Source: Drawn from the Securities and Exchange Council’s report“Comprehensive Reform of the Securities Market—For a Rich and Diverse 21st Century”

rescued by being absorbed by or merged with other major financial institutions. But there were no financial institutions with the financial strength to doso. The myth that banks could not fail was shattered, and the convoy systemof securities companies came to an end. Forced into action by the crisis, themajor financial institutions reorganized beyond traditional corporate lines,
condensing into four major financial groups. The new groups also, furthermore, began reorganizing their affiliated securities companies from secondtier to small and medium-sized ones. Amid such major changes as the shift toa registration system and the deregulation of brokerage commissions, an information technology (IT) revolution occurred. This resulted in a rush into
the market of securities companies with online brokerage businesses and other new business models, producing a change in key market players.

Chap. II The History of the Japanese Securities Market

Chart II-12.

37

Stock Price Movement (Nikkei Dow average and TOPIX) (2001－2008)(¥)
20,0002,000

15,0001,500

10,000

1,000

5,000

500

0
2001

0
02

03

04

05

Nikkei Dow average (left axis)

06

07

08

(year)TOPIX (right axis)

Source: Compiled from data the Nihon Keizai Shimbun, the Tosho tokei geppo (TSE Monthly Report),
Shoken tokei nenpo (Annual Securities Statistics), and the web site of the Tokyo Stock Exchange.

9. Developments Since the Big Bang (2001−2008)
Entering the 2000s, the nonperforming loan problem reached a turning point.
Prime Minister Junichiro Koizumi championed structural reform and oversaw the final clearing of this bad debt from the banking sector based on a Financial Revitalization Program in October 2002 that prioritized eliminating
nonperforming loans. Because this approach threatened dangerously low levels of capital reserves at banks, a rise in bankruptcies in the corporate sector,
and an increase in unemployment, the government took steps to control its
adverse effects. It injected capital into banks to maintain the stability of thefinancial system and established restructuring mechanisms for corporations.
These mechanisms included the enactment of the Civil Rehabilitation Act
and of the function of the Resolution and Collection Corporation (RCC) andthe setting up of the Industrial Revitalization Corporation of Japan (IRCJ).
Under the slogan of“From Savings to Investment,”Japan’s government
also implemented policies and programs to shift to a market-based financial
system with a strongly rooted securities market at its core in which a diverse
range of investors would participate. The policies and programs included the
Basic Policies for Economic and Fiscal Management and Reform (June
2001), the Program for Structural Reform of Securities Markets (August2001), and the Program for Promoting Securities Markets Reform (August
2002). These policies and programs put an emphasis on the expansion andimprovement of sales channels (lifted a ban on banking and securities joint
branch offices and introduced a securities intermediary system); the diversification of financial instruments and services (lifted a ban on wrap accounts,

38

Chap. II The History of the Japanese Securities Market

Chart II-13.

Changes in the Composition of Household Assets

%
100
80
60
40
20
0

2001

2003

2005

Cash and deposits

2007
Bonds

Insurance and pension reserves

2009

2011

2013

Investment trusts

2015

2017

2019

(FY)
Stocks and equity contribution

Other

Source: Compiled from the web site of the Bank of Japan.

Chart II-14.

Trading Amounts on TSE and Brokerage Income(10 billions of yen)(100 million of yen)

90,00080,00070,00060,00050,00040,00030,00020,00010,00001974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019
Trading amounts on TSE (left axis: 10 billions of yen)

30,00025,00020,00015,00010,000
5,000
0

(FY)
Brokerage income (right axis: 100 million of yen)

Source: Produced based on data from the Tosho tokei geppo (TSE Monthly Report), the Tosho yoran(TSE Fact Book), the Shoken and the website of the Tokyo Stock Exchange.

etc.); and the fairness and transparency of the financial business (thoroughdisclosure and the greater supervisory oversight of audit corporations, etc.).
The authorities aimed at establishing a market that participants would haveconfidence in and that would attract a wide range of investors. Thanks totheir reforms, the allocation of household financial assets into risk-class assets, such as equities, bonds, investment trusts, and other securities, trended
upward until 2006. The reforms also, however, resulted in an increase in thenumber and volume of complex financial instruments and transactions thatdemanded a comprehensive set of regulations to ensure the thorough observance of investor protection rules and the coverage of an expanding and in-Chap. II The History of the Japanese Securities Market

39

creasingly diversified range of investment instruments. In response, the government revised the Securities and Exchange Act, reintroducing it as the
Financial Instruments and Exchange Act.
In the aftermath of the financial Big Bang, the retail securities business reform and the inter-market competition between exchanges got under way inearnest. In the retail securities business, ever since the liberalization of brokerage commissions, the level of commission income became sluggish.
Therefore, leading securities companies that used to focus on the brokeringbusiness shifted their direction to adopting a marketing approach of paying
greater attention to asset management in an effort to break away from being
dependent on the market condition. Meanwhile, the inter-market competition
was focused on attracting new listings and more transaction volume. The exchanges started targeting new listings around 2000, launching start-up company markets, and start-up companies and growth companies successively
listed their shares on exchanges. In the battle for greater transaction volume,
Tokyo Stock Exchange (TSE) quickly took the lead. The TSE introduced
electronic stock trading and off-floor trading, strengthening its dominant position. The concentration of stock trading on the TSE, however, produced anotable decline in support for other regional stock exchanges, leading to successive reorganizations that began around 2000.
10. Changes after the Lehman Shock (2008 onwards)
Following the Lehman Shock, the outlook for global economy became increasingly uncertain, reflecting factors such as European sovereign debt crisis triggered by problems with Greek debt, trade friction between the U.S.
and China, and the COVID-19 pandemic. In response to these crises, countries continued to implement massive fiscal injections and monetary easing.
In addition, the Bank of Japan has had a policy of drastic monetary easingin place since 2013 to combat deflation, purchasing not only government
bonds but also ETFs and REITs. In February 2016, the central bank adopted
a negative interest rate policy. Nearly 10 years have passed since the start ofmonetary easing, but consumer price changes have still to reach the year-onyear inflation target. Accordingly, the Bank of Japan’s assets have expanded
rapidly, from ¥164 trillion at the end of March 2013 to ¥717 trillion at theend of June 2021. Moreover, the assets purchased by the Bank of Japan include about ¥37 trillion in ETFs and REITs - measures still not used by central banks overseas. It has been reported that the number of companies inwhich the Bank of Japan is the de facto largest shareholder exceed 100 as ofNovember 2020. Such large purchases of JGBs and ETFs continue to increase the Bank of Japan’s presence in the market and raise concerns about a40

Chap. II The History of the Japanese Securities Market

Chart II-15.

Stock Price Movement (Nikkei Stock Average and TOPIX) (2010 onward)(¥)
35,0003,500

30,0003,000

25,0002,500

20,0002,000

15,0001,500

10,000

1,000

5,000

500

0
2009

10

11

12

13

14

15

16

17

Nikkei Dow average (left axis)

18

19

0
21 (year)

20

TOPIX (right axis)

Source: Compiled from data the Nihon Keizai Shimbun and the web site of the Tokyo Stock Exchange.

Chart II-16.

Changes in the Central Bank Assets (at the end of March)(100 billions of yen)CP, etc.

20
20
21

19

Loan

20

18

20

17

REIT

20

16

20

15

ETF

20

14

20

13

Bonds

20

12

20

11

20

10

20

09

20

08

Long-term government bonds

20

07

20

06

20

05

20

04

20

03

20

02

20

20

20

01

7,000
6,000
5,000
4,000
3,000
2,000
1,000
0

(year)
Other

Source: Compiled from the data published on the web site of the Bank of Japan.

Chart II-17.

Transactions on Proprietary Trading Systems
%
8.0

60

6.0

40

4.0

20

2.0
19
20

20

20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17

0

18

%
80

20
20

0.0
(year)

PTS transaction values for off-exchange types of transactions (left axis)
PTS transaction values for all types of transactions (right axis)
Source: Compiled from the data published on the website of the Japan Securities Dealers Association.

Chap. II The History of the Japanese Securities Market

41

deterioration in the proper functioning of the market.
Corporate governance reforms have also been implemented in order to improve corporate profitability. These reforms include the introduction of the
Corporate Governance Code, which outlines standards to be observed by listed companies, and the Japanese version of the Stewardship Code, which outlines the Principles for Responsible Institutional Investors, with the aim of
improving corporate value and returns over the medium to long term. Since
the introduction of these codes, institutional investors have publicly disclosed
the results of their exercise of voting rights and engaged in dialog with investees (source: Bank of Japan website). In addition, the number of companies appointing outside directors and dissolving cross-shareholdings is also
increasing.
Another change has been the increasing use of IT in securities trading, typified, for example, by high-frequency trading (HFT) and robo-advisors. In
2010, the Tokyo Stock Exchange upgraded its trading system, leading to theintroduction of HFT in earnest. According to the FSA, the number of orders
placed via co-location had reached 80% by March 2021. With the large-scale
entry of HFT and the start of margin trading, use of proprietary trading systems (PTS) has also begun to increase. Meanwhile, changes are also evident
in the asset management practices of individuals. Robo-advisor services,which use AI to automatically manage assets, were launched in Japan in
2016. The number of users has increased, mainly among those in their 20s
and 30s, with assets under management for specialized firms alone in excessof ¥580 billion at the end of fiscal 2020.

CHAPTER III
The Stock Primary Market

1. New Issues of Stocks in the Primary Market
For the purpose of the Companies Act, companies are classified into corporations (kabushiki kaisha); general partnerships (gomei-gaisha); limited partnerships (goshi-gaisha); and limited liability companies (godo-gaisha). Of
these, corporations have a number of advantages against the others in that (1)ownership interest in a company is divided into shares of stock; (2) investors
may recoup contributed capital simply by selling their shareholdings; and (3)investors shall be held liable only to the extent of capital contributed by them(limited liability). These advantages help a corporation to raise a large
amount of capital from various investors.
The shares issued by a corporation are capital securities, or narrowly defined securities, in that they represent certain claims and rights of their investors. Shareholders contribute capital in exchange for their shareholdings,
which give them privileges to (1) participate in the management of the corporation (by attending general shareholder meetings and exercising voting
rights that are proportionate to their shareholdings); (2) claim distribution of
profits; (3) claim residual corporate assets; and (4) file derivative suits. Issued shares, unlike bonds, are not redeemable except when shares are repurchased by the corporation or upon liquidation. Because contributed equity
may not usually be repaid by the corporation, shareholders wishing to monetize their holdings can only do so by selling them in the market. For the benefit of increased liquidity, stock is divided into a standard unit of shares andoften represented by share certificates. On the other hand, with corporate
bonds, another class of capital securities, the repayment value is backed by
the issuer.
The legal framework for stocks has undergone substantial changes by a series of amendments to the Commercial Code introduced since 2001. Pursuant
to the amendments that took effect on October 1, 2001, par value stock was
abolished and all stocks are now issued with no par value. Accordingly, thepar value-based tan’i-kabu round-lot system was replaced by the new, discretionary tangen-kabu system. Under the amendments enforced on April 1,

Chap. III The Stock Primary Market

Table III-1.

43

Principal Rights of Shareholders

Rights for personal interest(rights on benefits of owing property)

Rights for common interest(rights on participating in management)

・Right to claim dividend of surplus
・Right to subscribe for new shares
・Right to demand distribution of residual assets
・Right to request registration of name transfer
・Right to request purchase of shares

・Right to exercise votes at general shareholder
meetings
・Right to bring representative suit・Right to convoke a general shareholder meeting
・Right to demand suspension of illegal action by adirector
・Right to make a shareholder proposal
・Right to request dissolution
・Right to demand dismissal of a corporate officer
・Right to request inspection, etc.

Table III-2.

Recent Amendments to the Commercial Code Relating to Equity Financing
and Main Contents of the Companies Act

The amendments made in 2001 (enforced on October 1, 2001):
A revision of the system of acquiring and holding one’s own shares (the ban on holding treasury
shares was lifted); the abolition of the system of issuing shares with face value (under this system, allshares are issued without par value); the abolition of the requirement of net asset value (a minimum of¥50,000 or $487.8 at the rate of ¥102.50 to the dollar); the abolition of the tan’i-kabu system in favor oftangen-kabu system; and the relaxation of the legal reserve system, etc.
The amendments made in 2001 (enforced on April 1, 2002):
The institution of the equity warrant system and the abolition of regulation of the stock option system, the electronification of corporate documents, and a revision of regulation of the classified stock(the lifting on the ban of tracking stock＊), etc.
The amendments made in 2002 (enforced in April 2003):
A revision of regulation of the classified stocks, the institution of the system relating to lapses ofstock certificates, and the rationalization of the procedure for reducing capital, etc.
The amendments made in 2003 (enforced on September 25, 2003):
The acquisition of one’s own shares by a resolution of the board of directors under the provisions of
the articles of incorporation and a revision of the method of computing a limit on interim dividends, etc.
The amendments made in 2004 (enforced on October 1, 2005):
The adoption of a system of not issuing stock certificates, the introduction of a system of issuing notices by electronic means, etc.
Amendments in conjunction with the enactment of the Companies Act in 2005 (enforced on May 1,2006):A revision of regulations to make the share transfer system more flexible, the rationalization of thesystem of retiring shares, a revision of regulations relating to issuing of share certificates, and the abolition of fractional shares, etc.
The amendments made in 2014 (enforced on May 1, 2015):
Revision of new share issuance procedure involving transfer of controlling shareholders Introductionof a cash-out method that allows a special controlling shareholder to request other shareholders to sell
their shares, etc.
The amendments made in 2019 (enforced on March 11, 2021):
Founding the system of share delivery
Note: The ban on tracking stock (under this system, dividends are paid not out of the earnings of a company as a whole but out of the earnings of a specific division or a subsidiary of such company) was
lifted.

44

Chap. III The Stock Primary Market

2002, (1) new subscription rights/warrants were introduced, (2) the regulation of stock options was relaxed, and (3) the regulation regarding multiple
classified stocks was relaxed.
The Commercial Code as amended in 2004 and the Law Revising the Act
on Book Entry of Corporate Bonds and Shares etc., for Streamlining Settlement of Transactions in Stocks, etc., introduced a system allowing electronic
bookkeeping for shares. As a result of the revision of the Companies Act,
share certificates of public companies were dematerialized from January
2009. Transfer restrictions on any and/or all classes of stock and issuance ofclassified stocks subject to wholly call were put in place in May 2006, and a“cash out”system where controlling shareholders of a company may force
minority shareholders to sell their shares to them was enacted in May 2015.
The amended Companies Act of 2019 introduced a new stock delivery system as a way for companies to acquire other companies in exchange for theirown shares (enacted in March 2021).
2. Forms of Issuing New Shares
Shares are first issued when a corporation is established. Establishment of acorporation can be roughly divided into incorporators-only establishment andby-subscription establishment. When a corporation is established only withthe funds contributed to its capital stock by its promoters, this method of establishing a corporation has the advantage of its shares being fully subscribed
to, but it has a drawback in that the number of shares it can issue is limited to
the funds its promoters can raise. On the other hand, establishing a corporation with the capital raised by publicly offering its shares to an unspecified
large number of investors is called“establishment through a public offeringof shares.”While a large amount of capital can be raised through this method, one major drawback is that it takes time to successfully complete thepublic offering, and when its shares are not fully subscribed to by investors
during the public offering period, the corporation cannot be established. Under the old provisions of the Commercial Code, the par value of shares issued
by a corporation at the time it was established had to be ¥50,000 or more, but
this restriction was abolished—and the requirement of par value has been liberalized—by virtue of the 2001 amendment to the Commercial Code.
Even after a corporation is established, it is a general practice for the corporation to issue new shares after in order to raise funds, to transfer the control of its management to a third party, or to enhance the liquidity of its
shares. Usually, the method of issuing new shares is divided into paid-in capital increase and stock splits (and gratis issues).
Issuing new shares against the payment for them by shareholders is calledChap. III The Stock Primary Market

Table III-3.

45

Forms of Issuing New Shares

Payment required
Capital increase through a public offering
Capital increase through a third-party allocation of new shares
Capital increase through a rights offering
The exercise of subscription rights/warrants
Payment not required
Stock split
MergerSwap of shares
Stock transfers
Share delivery

Table III-4.

Funds Raised by Equity Financing(100 million yen)Year

Rights offering Public offering

Third party
allotment

Exercise ofPreferred stock
subscription
and others
rights/warrants

Total

No. Amount No. Amount No. Amount No. Amount No. Amount No. Amount
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020

0
0
2
3
0
2
1
2
0
1
1
0
1
0
1
1
0
1
1
2
0
0
1

0
0
82
320
0
15
27
37
0
81
1
0
7
0
4
10
0
1
2
1
0
0
4

8
28
24
18
19
35
78
74
69
60
27
52
50
45
53
114
129
131
95
116
129
93
108

2,782
3,497
4,941
12,015
1,533
5,672
7,502
6,508
14,477
4,570
3,417
49,66833,089
9,678
4,518
11,137
13,780
9,620
2,577
4,242
4,016
2,198
7,328

32
75
46
57
62
84
129
150
145
117
93
115
88
66
71
151
190
187
151
238
303
307
342

Source: Website of the Tokyo Stock Exchange.

6,880
23,473
9,228
4,772
4,844
2,232
5,726
7,781
4,165
6,621
3,958
7,146
5,356
3,952
1,593
3,719
3,928
1,636
6,230
8,816
2,146
9,104
7,226

28
62
87
85
78
121
228
336
371
347
240
169
159
171
174
350
412
437
483
526
597
572
624

864
2,529
1,056
374
2,763
366
995
1,669
1,513
1,650
209
188
246
261
218
1,904
1,087
815
901
1,926
2,277
1,431
2,203

5
25
4
5
36
74
50
45
26
12
9
28
10
7
17
3
14
6
7
7
6
10
11

4,710
73
69,894 190
1,073 163
2,161 168
9,968 195
25,322 316
13,626 486
11,678 607
5,597 611
7,955 537
5,937 370
4,740 364
736 308693 289
12,755 316
1,200 619
2,242 745
7,513 762
1,480 737
613 889595 1,035
1,508 982
1,947 1,086

15,23699,393
16,29819,322
19,10733,592
27,84927,63525,751
20,796
13,521
61,74339,427
14,58419,084
17,97021,037
19,583
11,191
15,5999,034
14,241
18,708

46

Chap. III The Stock Primary Market

paid-in capital increase, and a corporation can raise its equity capital by thismethod. Paid-in capital increase is also divided on the basis of investors towhom shares are issued into public offering, rights offering, and allotment of
new shares to a third party.
By definition, a stock split, the act of splitting one share into two or moreshares, does not by itself increase the assets or the capital of a corporation.
However, new shares issued through a stock split play an important role. The
stock split increases the number of the corporation’s shares outstanding on
the market, and the fall in the per share price caused thereby enhances the liquidity of shares, making it easier for the corporation to raise funds throughequity financing in the future. Until 2001, there was a rule banning any stock
split that reduces the value of net assets per share to less than ¥50,000, but
this rule was abolished by virtue of the 2001 amendment to the Commercial
Code. This step was taken because of widespread complaints among venturebusinesses—those that have high growth potential and whose shares are traded at high prices despite limited net assets—that on account of the restrictions against a stock split, they could not improve the liquidity of their shares.
However, it was desirable to prevent share certificates from being in short
supply during the period from the record date of stock split (day on which theshareholders to whom new shares are allocated are determined) to the effective date (day on which the right to new shares for shareholders goes into effect), which can disrupt the demand-supply balance and cause stock prices tofluctuate violently. Hence, it was decided that the effective date would fall on
the day following the record date from January 2006.
Other cases in which a corporation is authorized to issue new shares include the exercise of new share subscription rights/warrants, a new type of
warrant introduced by the April 2002 amendment to the Commercial Code;equity swaps with one’s subsidiaries under the equity swap system; allocationof shares to shareholders of one’s subsidiaries under the stock transfer systemand the newly introduced stock delivery system.
3. Procedures for Issuing New Shares
New share issuance may be done in exchange for capital paid in by investors
in the form of a public offering, third-party allotment, or rights offering.
In a rights offering, shareholders on record as of a specified record date are
given subscription rights in proportion to their stockholdings. In the case of
public companies, grant of subscription rights or allotment of new shares tonon-shareholders are only subject to board approval. On the other hand, athird-party allotment by a private company, under the Companies Act, inprinciple, requires a special resolution at the general shareholders meeting, but itChap. III The Stock Primary Market

Chart III-1.

47

Equity Financing in 1989 by TSE-Listed Companies, by Type of Financing(Total capital procured: ¥8,529.39 billion)

Corporate bonds with subscription
rights/warrants (cash paid-in)¥2,104.76 billion(25%)

Rights offerings¥689.54 billion(8%)

Third-party allotments¥89.14 billion(1%)

Public offerings¥5,645.95 billion(66%)

Source: Tokyo Stock Exchange, the Tosho tokei geppo (TSE Monthly Report)

Chart III-2.

Equity Financing in 2020 by TSE-Listed Companies, by Type of Financing(Total capital procured: ¥1,870.77 billion)
Exercise of new sharesubscription rights¥220.27 billion(11.8%)

Third-party allotments¥722.57 billion(38.6%)

Preferred stock, etc.
¥194.67 billion(10.4%)

Allotments toshareholders¥0.43 billion(0.0%)
Public offerings¥732.83 billion(39.2%)

Source: Web page of the Tokyo Stock Exchange.

48

Chap. III The Stock Primary Market

may be conducted by ordinary resolution when provided for in the Articles ofIncorporation. A rights offering to existing shareholders is a means of capitalraising that is neutral to the control of corporations, in that it does not affectproportionate ownership of the shareholders. An offering of rights at par used
to be the dominant measure of equity financing, but such offering is no longer common, partly due to the elimination of par value of stocks underamendments to the Commercial Code in 2001.
Public offerings grant subscription rights to the general public. A public
offering raises more capital for an issuer than an offering of rights at par,which was once prevalent along with par value stock, by the excess of the issue price over par. From the viewpoint of investors, however, it deprives investors of the opportunity to earn the premium, thereby losing their incentive
to subscribe. Although public offerings declined in the 1990s, they are now a
primary means of raising equity capital today.
A third-party allotment raises capital by granting subscription rights to certain third parties, including banks or business corporations with special relationships with the issuer and/or its director(s). This method is often used tobail out troubled companies, strengthen relationships with corporate partners,
and form a business and capital alliance rather than simply to raise capital.
Additionally, the method has recently been noted as a measure for fending
off hostile takeovers. Third-party allotments cause dilution of ownership ofexisting shareholders. They may be approved by board resolution except
when terms of rights harm the interests of existing shareholders because they
are unequivocally advantageous to the grantee(s) in which case a special resolution at the general shareholders meeting will be required (advantageousissuance). An issuer pursuing a capital increase by third party capital allocation has an obligation to explain the rationality and necessity of the capitalincrease in its securities registration statement.
Under the revised Companies Act of 2014 that went into effect in 2015,
when new share issuance by a public company involves any transfer of controlling shareholders (accounting for one-half or more of voting rights), thename and other information of the underwriter must be notified to existing
shareholders. Furthermore, if there is opposition by 10% or more of voting
rights, the share issuance is subject to a resolution not only by the board of
directors but also by the general shareholders meeting. Thus the involvementof shareholders in share issuance was strengthened.
4. The Current State of the New Issue Market
New shares are usually issued (1) in exchange for capital contribution (equity
financing in the forms of public offerings, third-party allotments, rights offer-

5,900,618
10,621,006
4,919,006
4,231,828
5,312,713
5,580,645
4,503,842
8,600,184
9,052,096
12,467,106
4,733,374
1,604,596
766,227
1,605,059
1,530,474
1,433,831
2,546,611
3,093,475
3,641,490
9,627,895
3,709,565
4,526,944
4,260,986
4,541,171
5,659,174
11,393,111
7,459,697
5,341,133
3,542,021
22,418,250
10,464,418
6,391,284
4,309,521
5,226,016
4,624,642
3,717,412
5,403,536
4,747,915
2,380,544
4,691,381
2,955,072

Year

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020

1,761,008
5,624,372
1,932,416
1,005,145
1,170,322
909,635
371,191
547,900
849,464
803,396758,546
420,553244,895
87,091
24,152249,876455,200
204,686
7,707－
87,140143,051－
20,352
18,19353,120－80,862
6,998－
68－
34,504
613
－
1,560
3,699
1,312
－
－
6,155

Rightsoffering

1,619,438
2,360,917
1,760,389
513,645778,686
590,696346,883
718,327
1,286,177
3,558,558
1,284,250
39,8502,180
4,150
33,36010,400200,883
93,25097,33754,59984,20049,760238,268
431,517516,166
616,574
1,638,972
409,532
687,868
12,049,714
7,548,008
2,947,644
2,371,349
1,244,084
1,422,172
679,898
140,825
320,095
251,482
110,331
338,199

Publicoffering

311,354
99,890111,822589,154319,665
118,126
78,308314,650
169,633
94,151
252,593
182,776
190,340
479,440
543,846
490,557
583,427
1,493,319
2,380,126
8,402,531
2,621,987
3,328,896
2,719,749
2,995,729
1,586,466
2,957,298
850,680
1,521,236
1,549,130
3,192,219
1,935,650
2,283,962
663,776
2,058,111
627,019
767,728
4,152,569
2,934,439
572,821
3,895,668
1,380,132

Third party
allotment

2,208,818
2,535,827
1,102,860
2,006,283
2,835,670
3,514,706
2,831,297
4,753,694
4,623,233
5,522,653
1,859,145
600,930
139,205
347,764
445,479
343,684
506,753
1,034,959
1,079,024
976,593835,744935,912546,153
679,8412,404,691
6,241,871
4,450,694
2,928,468
1,119,159
6,846,482
835,992
839,2111,024,399
1,400,302
1,933,058
1,797,390
798,326
606,853
323,032
59,353214,293－－
11,519117,601
208,370
447,179
876,161
2,265,611
2,123,587
2,488,346
578,839
360,485
189,605
686,612483,635
339,311800,348
267,261
77,295
194,170
80,492
69,324756,815
413,729
1,133,656
1,524,246
519,349
401,032
178,863
329,833
144,697
320,465
215,492
522,905
642,391
470,834
308,115885,2141,233,208
626,026
1,016,292

Preferred stock,conversion of a
Exercise of
corporate bond with
subscription rights/
subscription
warrants of therights/warrants
convertible bondtype into shares, etc.

3,270,677
3,542,488
4,265,996
4,208,030
4,033,612
4,390,653
3,939,802
3,300,518
4,004,200
5,906,047
8,283,600
3,451,047
1,584,403
901,948
2,330,679
1,015,654
847,835
551,076
168,263
742,946
1,599,465
624,199
692,917
333,448
2,975,260
3,051,215
6,713,875
11,749,106
120,552
16,193,816
877,229
1,842,238
3,759,441
27,099,251
8,841,942
7,060,155
2,232,113
4,836,899
4,567,464
6,495,653
7,360,701

Stock split

The State of Issuing New Shares by Listed Companies

Source: Tokyo Stock Exchange, Shoken tokei nenpo (Annual Securities Statistics) and Tosho tokei geppo (TSE Monthly Report).

Paid-in
capitalincrease

Table III-5.

34,84664,632
318,347
24,857
169,830
93,169621,924510,942
96,212
44,848
1,632,879
1,581,058
414,121
1,147,000
1,190,447
359,334
1,873,163
251,712
22,696
61,952
1,158,762
3,330,016
1,412,881
5,931,549
24,497△13,967,015△1,201,938△3,504,021△542,754
238,890△860,938
625,267
576,904△8,996,091△6,101,224△12,958,857△29,020,941△71,033,038△26,497,834△5,056,466△25,389,212

Others9,206,243
14,228,128
9,503,352
8,464,718
9,516,159
10,064,468
9,065,569
12,411,644
13,152,509
18,418,003
14,649,854
6,636,703
2,764,752
3,654,008
5,051,602
2,808,819
5,267,610
3,896,265
3,832,450
10,432,793
6,467,792
8,481,160
6,366,784
10,806,168
8,658,931
477,311
12,971,634
13,586,219
3,119,819
38,850,955
10,480,708
8,858,789
8,645,867
23,329,176
7,365,361△2,181,288△21,385,291△61,448,223△19,549,824
6,130,569△15,073,438

Total(in thousands of shares)

Chap. III The Stock Primary Market

49

50

Chap. III The Stock Primary Market

ings, exercise of subscription rights, etc.); (2) in conjunction with stock splits(and gratis issues); and (3) for the purpose of corporate acquisitions. (Sharecounts are reduced when treasury stock is cancelled.) In 2020, the leading
source of new shares issued by listed companies was by stock splits and gratis issues (increase of 7.36 billion shares), followed by the onerous exerciseof new share subscription rights/warrants (1.38 billion shares) and the third
party allotment (1.02 billion shares). The amendments to the Commercial
Code in 1991 defined stock splits as a notion that encompasses stock dividends, gratis issues and reclassification of paid-in capital in excess of par into
capital stock all of which were cases that did not involve payments by investors at the time of issuance of new shares.
Today, in Japan, equity financing is the leading source of new shares. Listed companies on the Tokyo Stock Exchange (TSE) raised approximately ¥1.9
trillion in equity in 2020. By contrast, equity financing, except for initialpublic offerings, is less used in the United States and the United Kingdom
because it tends to cause earnings dilution and consequently pushes down thestock price. It should be noted, however, that over the past years, equity financing in Japan has undergone many changes. During the period of rapid
economic growth, corporations mostly used the method of rights offering at
par to raise equity capital, because investors did not have enough accumulation of financial assets, while issuing companies suffered a chronic shortageof funds. (Stock par value was abolished in 2001.) In those days, corporations mostly relied on bank borrowings for their funding requirements, andthe stock market was a marginal marketplace for raising capital. However, as
the economy slowed down after the oil shocks, the funding needs of businesses were reduced, and due in part to the necessity of securing a strong
stockholder base, public offerings at market price became the prevalentmeans of raising equity among business corp orations. Meanwhile, theweight of rights offerings also shifted from rights offering based on par value
to that based on a median of par and market values. In the second half of the
1980s, with progress in deregulation concerning debt financing, issuing of
convertible corporate bonds and corporate bonds with subscription rights/
warrants increased, and so did their conversion and exercise. Particularly, asbanks came under pressure to meet Tier 1 capital requirements imposed by
the Basel regulatory standards, they scrambled to shore up their capital base,and such issuing accounted for about half of equity financing at the time.
In the 1990s, there was a marked decline in public offerings because ofstagnant stock prices, and increasing capital through public offerings remained stagnant thereafter. However, following the global financial crisis
that kicked off in 2008, equity financing picked up as companies sought toshore up their weakened financial bases by public stock offerings which became active in 2009. Although significant volumes of shares have been is-Chap. III The Stock Primary Market

51

sued through the exercise of new share subscription rights/warrants and stock
splits in recent years, the overall number of issued shares has been declining,
due mainly to the retirement of treasury shares.
5. New Share Underwriting
The method of issuing shares may be divided into direct offering and indirect
offering, and public offering and private placement. When the issuing company itself performs the administrative procedures necessary for issuingshares and sells them to investors, this is called“direct offering (or self-offering).”Although this method helps the issuing company save the fees payable
to an intermediary, it is not an easy task to perform the technically complicated procedures and sell the securities to an unspecified large number of investors. When the issuing company commissions a specialist intermediary tohandle the public offering of its shares, this is called“indirect offering.”The
intermediary provides the issuing company with expert advice, handles the
distribution of shares and performs the necessary administrative procedures
on behalf of the issuing company, and takes over the shares remaining unsold
after the public offering period. At present, almost all shares are offeredthrough the indirect offering method. A“public offering”is the public solicitation of an unspecified large number of investors for the purchase of newshares, and“private placement”is the private solicitation of a specified small
number of investors to purchase them. In public offerings of new shares, indirect offering through underwriting securities companies is the general rule.
In the case of an indirect offering, the issuing company concludes an underwriting agreement with a securities company. Underwriting agreements
are divided into standby underwriting (the underwriting securities company
commits itself to buying up the shares remaining unsold) and firm commitment underwriting (it agrees to buy up the entire issue from the start). Today,
the latter has become the general practice.
When the total amount of shares offered is too large, a securities company
alone cannot accept the underwriting risk involved. Therefore, a number of
securities companies often get together to form an underwriting syndicate. Of
these securities companies, the firm that plays the leadership role in organizing the syndicate members and in negotiating the terms and conditions of theunderwriting agreement with the issuing company is called the“lead managing underwriter.”And the group of securities companies that assumes no underwriting risk and only sells the securities is called the“selling group.”
In a public offering or secondary distribution, it is necessary to have astrategy for balancing supply and demand. Using an over-allotment option
allows the securities firm that is the lead managing underwriter of an offering

52

Chap. III The Stock Primary Market

Table III-6.

Number of Lead Managing Underwriters in Shares of Securities Companies(IPOs)(Existing stock exchanges and start-up markets in 2020)
Securities companies

Main Markets

Mothers

JASDAQ

No. of co. % of total No. of co. % of total No. of co. % of total

Nomura

5

33.3

4

28.6

13

20.6

Mizuhoa

1

6.7

3

21.4

16

25.4

SMBC Nikko Securities

4

26.7

1

7.1

10

15.9

Daiwa

3

20.0

－

－

9

14.3

SBI

－

－

3

21.4

11

17.5

Mitsubishi UFJ Morgan Stanley

2

13.3

－

－

－

－

Ichiyoshi

－

－

2

14.3

3

4.8

Tokai Tokyo

－

－

－

－

1

1.6

H.S.

－

－

1

7.1

－

－

Total

15

100.0

14

100.0

63

100.0

Source: PRONEXSUS, Kabushiki Kokai Hakusho (White Paper on Public Listings).

Table III-7.

Flow from additional secondary distribution by over-allotment in initialpublic offering to syndicate cover transaction

Board of directors’
Determine
meeting on issuanceprovisionalof new shares andterms
secondary distribution
Set OA offering limit

BB(Reportdemand)Set open price
Set OA offering
volumeListing date
(Trading
start date)

SC transaction
or GS exercise

BB＝Book Building
OA＝Over-Allotment
SC transaction＝ Syndicate Cover (short cover) transaction
GS exercise ＝Exercise of Green Shoe option
Note: SC transactions and exercise of GS must be executed within 30 days from the day following thedate on which the period during which investors submit their applications to securities companies is completed (normally, 2 or 3 business days prior to the listing date).

Chap. III The Stock Primary Market

53

to borrow shares from existing shareholders and sell them if demand is greater than the original scheduled number of shares. In Japan, lead managing underwriters of offerings have been able to use the over-allotment option basedon the underlying underwriting agreement since January 31, 2002. This option allows the sales of additional shares up to 15% of the scheduled numberof shares in the public offering or secondary distribution. The short position
arising when the lead managing underwriter the over-allotment option iscleared differently depending on whether the price in the secondary market
has risen or fallen compared with the price after the listing. When the priceof the shares has fallen, the lead managing underwriter purchases the excess
shares in the secondary market (syndicate cover). When the price of theshares has risen, the lead managing underwriter exercises a green shoe option(right to acquire additional shares from the issuing company or from investors who have lent shares).
6. Private Equity Market
Public offerings and other equity financing that raise capital from the generalpublic are mostly conducted by public companies that have their shares traded on an exchange or other public market. However, that does not mean that
equity financing by private companies faces special legal restriction. In fact,
equity financing regulations for private companies can be said to be less strict
than those for public companies. For example, the written notice of securities
does not require information concerning the operating performance or financial conditions of the issuer because, unlike the securities registration statement, it is not intended to disclose information to investors. Under the Financial Instruments and Exchange Act and Cabinet Office Order, etc. currently
in force, furthermore, in cases where the proceeds from a proposed offeringor secondary distribution of shares (securities) are less than ¥100 million, theprivate company is exempt from filing a securities registration statement, anda written notice of securities is filed in its place, regardless of whether the solicitation is extended to 50 persons or more or not. Furthermore, if the proceeds from an offering do not exceed ¥10 million or fewer than 50 persons
are solicited, the issuer is not, in principle, required to file a written notice of
securities.
However, when viewed from the standpoint of investors, private equity investments, given the limitations on information available to them, involve
higher risks. While stock prices of public companies are properly formed
through market transactions, reasonable values of private stocks are not easy
to determine since there are various methods to estimate private stock prices,
including the net asset method of estimating based on the company’s net as-

54

Chap. III The Stock Primary Market

Table III-8. Criteria for Requirement to Submit Securities Registration Statement or
Written Notice of Securities Under the Financial Instruments and ExchangeAct, and Cabinet Office Order, etc.
No. of Investors*
Less than 50
Issue
Amount50 or more

100 million yen or more

Not necessary

Securities
Registration
Statement

10 million yen or greater but less than 100
million yen

Not necessary

WrittenNotice ofSecurities

10 million yen or less

Not necessary*Notes: 1. Under the current FIEA and Cabinet Office Order, etc. even when the number of investors solicited is less than 50, if the issuer has made an offering of the same type of security within six
months previously and the combined number of investors solicited is 50 or more, the determination of whether a securities registration statement or written notice of securities is required
must be made based on the total issuance amounts of the offerings.
2. In accordance with the revision of administrative orders effective April 1, 2003, issuance regulations have been liberalized as follows.
(1) Under specified condition of the number of Qualified Institutional Investors being 250 orless, etc., the number of professional investors (Qualified Institutional Investors) may be
deducted from the count of 50 or more of the number of investors being solicited.
(2) In determining the issuance amount for a professional investor private equity offering in asolicitation for purchase of securities where only Qualified Institutional Investors arecounterparties and there is little possibility of sales to anyone other than qualified institutional investors, equities, etc. and equity related products are to be included. In this case,regardless of the number of investors, the written notice of securities is required only for
issues of 100 million yen or more (for solicitations of investor groups of less than 50,
please see note 1 above).

sets, the income method based on cash flows, and the dividend discountmethod based on future dividend projections. Moreover, the problem withprivate equity investments is that the funds invested in them are not easily recoverable due to lack of liquidity. Thus investment in private equity was limited to a small number of investors, such as venture capital funds, which havethe economic wherewithal to tolerate the high risks and long investment periods associated with such investments.
In order to stimulate entrepreneurial activity and foster startup businesses,
streamlining the fund raising mechanism prior to going public has been discussed as a matter of priority.
The Japan Securities Dealers Association launched a public quotation system (Green Sheet system) for private equity or unlisted shares in July 1997.
Securities companies became able to solicit investment in private equities for
issues of OTC securities that met a certain standard of information disclosureChap. III The Stock Primary Market

Table III-9.

55

Examples of methods of calculating stock values of private companies

1. Net assets approach(1) Book value method
Price per share＝Book value of net assets/Total number of issued shares(2) Adjusted book value method
Price per share＝Book value of net assets reflecting unrealized gain and losses/Total number ofissued shares(3) Market value method
Price per share＝Market value of net assets/Total number of issued shares
2. Income approach(1) Income capitalization method (direct return method)
Price per share＝(Projected future net profit after tax/Capitalization ratio)/Total number of issued
shares(2) DCF method
Price per share＝Total amount of discounted present value of projected future profit/Total number of issued shares
3. Dividend discount approach(1) Dividend discount method
Price per share＝(Projected future annual dividends/Capitalization ratio)/Total number of issued
shares(2) Gordon Growth Model method
Price per share＝(Projected future annual dividends/(Capitalization ratio-Investment return ratio
×Retained ratio)

and for which the securities companies provide publicly announced buy andsell quotes. The Green Sheet system was later dissolved at the end of March
2018, and new shareholder community system was introduced in May 2015.
The Japan Securities Dealers Association introduced an equity-based crowdfunding system in May 2015 to facilitate the supply of risk finance for new
and fast-growing companies. In June 2021, in response to the government’sGrowth Strategy and other measures to facilitate and diversify the means offinancing for unlisted companies, the Japan Securities Dealers Association
made recommendations for the development of the system, including a revision of the calculation method for the total issuance amount (less than 100
million yen) under the system and the removal of the maximum investment
amount (500,000 yen) for specified investors (professional investors).

CHAPTER IV
The Stock Secondary Market

1. The Structure of the Stock Secondary Market
The stock secondary market on which shares are traded consists of a trading
market opened on a stock exchange, a proprietary trading system (the socalled PTS) operated by private companies authorized under the 1998
amendment to the Securities and Exchange Act, and the off-exchange tradingof listed stocks that was made by virtue of the same amendment, which abolished the duty to centralize securities trading on stock exchanges.
The exchange market is provided by stock exchanges, and there are four
stock exchanges in Japan: the Tokyo Stock Exchange, and the Nagoya, Sapporo and Fukuoka exchanges. Stock exchanges used to be membership organizations consisting of securities companies. However, under the 2000
amendment to the Securities and Exchange Act, they were authorized tochange their status as corporations. Today, the Japan Exchange Group, whichowns the Tokyo Stock Exchange, and the Nagoya Stock Exchange are corporations.
Shares of listed stocks (1) that meet certain listing requirements are traded(2) during fixed trading hours (3) by auction, and (4) the stock exchanges as
self-regulatory organizations manage and supervise the trading process andthe business conduct of securities companies with a view to ensuring the fairness of trading.
The Tokyo Stock Exchange introduced arrowhead, the world-class, highspeed trading platform in January 2010. Arrowhead was renewed to copewith dramatic changes in the market: increased bargains, concentration of order placement at a short time, and the new demand from investors.
The system for off-floor trading of shares listed on the Tokyo Stock Exchange (ToSTNeT) has a three-part structure to accommodate the diverse
needs of investors: ToSTNeT-1 which processes large-lot and basket tradesof listed stocks through negotiated or cross transactions; ToSTNeT-2 whichconcludes trades at specific prices such as the closing price several times aday; and ToSTNet-3 which handles purchases of treasury stocks. In addition,certain securities companies have opened a proprietary trading system (PTS)Chap. IV The Stock Secondary Market

Chart IV-1.

Inter-market Competition in Japan

Japan Exchange Group(as of August 30, 2021)

Second Section
470 companies

Mothers
380 companies

JASDAQ
Standard
656 companies
JASDAQGroth
37 companies

ToSTNeTFirst Section
2,188 companies

Fukuoka Stock Exchange(as of August 30, 2021)
92 companies
Q-Board 15 companies

N-NET<1st Sect.> 189 companies<2nd Sect.> 79 companies
Centrex
14 companies

OTC trading by
securities companies
Shareholders Community(as of September 10, 2021)
26 companies

n
io
tit g
pe in
m ad
Co or trf

Tokyo Pro Market
49 companies

Nagoya Stock Exchange(as of Septemer 22, 2021)

57

OTC trading by
securities companies
Listed issues, etc.

Privately
conducted trading by
securities companies
through electroniccommerce [PTS]

Trading in Japanesestocks on overseas
markets

Sapporo Stock Exchange(as of August 30, 2021)
48 companies
Ambitious 10 companies

on their own mainly for the purpose of matching orders received after business hours.
In addition, the Shareholder Community is a system for secondary tradingof unlisted shares. This system was developed in May 2015 as an alternative
to the Green Sheet market where shares of unlisted companies or not regis-

58

Chap. IV The Stock Secondary Market

tered with the over-the-counter (OTC) market were traded over the countersof securities companies and reported to the Japan Securities Dealers Association (JSDA). The value of total transactions amounted to about ¥500 million
in 2020.
2. Transaction Size of the Stock Secondary Market
As of the end of 2020, the number of companies listed on the national exchanges (including multiple listings) stood at 3,859, with 311 billion shares
listed. The trading volume for 2020 was 465.8 billion shares, and the trading
value totaled ¥742.4 trillion. Of these, the number of shares of the 3,753
stocks listed on the Tokyo Stock Exchange was 309.6 billion shares, with a
trading volume of 465.8 billion shares and a trading value of ¥742.2 trillion.
Thus, Japan’s exchange tradings of shares are extremely concentrated on theTokyo Stock Exchange, where most of the nation’s companies are listed andwhich accounts for the majority of transactions in volume and value.
The heavy concentration of stock trading on the TSE may be explained by
the fact that the stock markets have taken on a hierarchical structure, with theFirst Section of the TSE at the top, and many companies aim for a listing on
the First Section because of its high social status and prestige. Therefore,
blue-chip corporations have tended to converge on the First Section of theTSE. And as shares are actively traded in large volumes and on a highly liquid market, the externality of the order flow—trading flows to where sharesare actively traded—was at work accelerating the concentration of orders.
The Second Section of the TSE, which is a market for companies, withgood track-records had 476 listed stocks at the end of 2020, with a market
capitalization of ¥6.8 trillion, a trading volume of 35.7 billion shares, and a
trading value of ¥10.7 trillion. The JASDAQ, which became a regular stock
exchange in December 2004, has two markets: The Standard market is for
growing companies with a certain business scale and performance and theGrowth market is for companies with unique technologies or business models and significant future growth potential. At the end of 2020, there were
704 listed stocks in total, with a market capitalization of ¥10.4 trillion, a trading volume of 29.8 billion shares, and a trading value of ¥15.5 trillion. The
Second Section of the TSE and the JASDAQ market have long competedagainst each other in the listing of start-up companies, but the JASDAQ market has outperformed the TSE in all indicators except trading volume.
The TSE has a market for start-up companies called Mothers, with 346
listed stocks, a market capitalization of ¥9.5 trillion, a trading volume of 28.5
billion shares, and a trading value of ¥44.4 trillion at the end of 2020. Other
domestic markets for start-up companies are the Centrex market of the59

Chap. IV The Stock Secondary Market

Table IV-1.

Trading volume(in thousands of shares)year

TSE Trading Volumes by Each Market Segment

2014

2015

2016

2017

2018

2019

2020

First Section

612,851,073 620,005,885 593,610,396 490,384,220 406,069,774 331,759,774 368,980,635

Second Section

36,199,273

36,580,825

25,604,041

46,368,789

30,622,268

18,408,268

35,740,358

Mothers

23,035,432

16,053,604

16,838,945

19,187,800

14,775,667

15,957,358

28,485,961

JASDAQ Standard

34,570,141

34,391,591

26,080,691

28,428,353

26,006,913

17,359,611

29,533,254

JASDAQ Groth

2,448,911

2,686,382

3,634,413

3,359,757

4,158,478

2,598,980

3,097,174

Source: Japan Securities Dealers Association, Japan Exchange Group.

Table IV-2.

Trading amount(millions of yen)year

TSE Trading Value by Each Market Segment

2014
First Section

2015

2016

2017

2018

2019

2020

576,525,070 696,509,496 643,205,780 683,218,254 740,746,041 598,213,662 671,671,658

Second Section

7,739,865

8,266,622

6,118,938

12,744,471

11,006,506

6,188,491

10,657,529

Mothers

34,968,861

23,059,265

29,640,306

27,408,857

23,828,660

24,904,937

44,377,305

JASDAQ Standard

21,599,665

16,566,416

10,543,834

15,998,536

15,772,124

9,505,233

14,430,686

JASDAQ Groth2,272,146

1,550,819

1,591,839

1,944,079

2,468,600

1,460,462

1,108,330

Source: Japan Securities Dealers Association, Japan Exchange Group.

Table IV-3.

Trading Volume and Value by Stock Exchanges and Respective Market
Share (2020)
Trading Volume(thousands of shares)

Market Share
%

Tokyo

465,838

99.922742,247,154

99.976

Nagoya163

0.035

119,969

0.016

Fukuoka

25

0.005

26,5790.004

Sapporo

174

0.037

35,051

0.005

466,201100

742,428,755

100

Stock Exchanges

Total

Trading Value(millions of yen)

Market Share%

Source: Japan Exchange Group.

Nagoya Stock Exchange, the Ambitious market of the Sapporo Stock Exchange, and the Q-Board market of the Fukuoka Stock Exchange.
The TSE began a review of its market segments in the fall of 2018, anddecided to reorganize the five segments into three. The transition to the newmarket segments of“Prime,”“Standard,”and“Growth”will be implemented
in April 2022.

60

Chap. IV The Stock Secondary Market

3. The Structure of Share Ownership
Following the liquidation of the financial combine zaibatsu (great industrial
or financial conglomerates or holding companies) after the war, shares heldby them were released to the stock market for distribution among individual
investors. And the ratio of shares held by individual shareholders rose to69.1% in 1949. However, as obviously not many of these individual investors
could afford to hold these shares for the long haul, they liquidated their holdings soon after they had acquired them. As a result, the ratio of individual investors’shareholdings declined rapidly thereafter. Partly due to the fact thatsome investors had cornered these shares, groups of companies that had belonged to the former financial combine (zaibatsu) started cross-holding
shares of one another to strengthen their group solidarity.
In the 1960s, capital transactions were liberalized following the post-war
restoration efforts. However, in fear of a hostile takeover by foreign firms
taking advantage of liberalized capital transactions, Japanese firms sought tobuild a strong shareholder base, and the ratio of the shareholdings of businesscorporations and financial institutions increased. Subsequently, the system of
issuing shares at par value changed to one of issuing at market price, making
it necessary for business corporations to maintain their share prices at a highlevel if only to enable them to advantageously raise funds for a capital increase. Consequently, the ratio of the shareholdings of business corporations
continued to increase in the years up to 1975. Meanwhile, encouraged by thelong-lasting bull market, financial institutions also continued to build theirequity portfolios and increased the ratio of their stock holdings until the
speculative bubble in the end of the 1980s.
Such corporate domination of the shareholdings structure brought about amaterial impact on the formation of stock prices. While individuals and institutional investors bought stocks as an investment to earn yields (profit-earning securities), business corporations or financial institutions bought shareson their proprietary accounts, in many cases, for the purpose of holding
shares to strengthen corporate affiliations or business tie-ups as a means ofgaining control of the management. Therefore, these corporations were moredetermined to hold such shares for the long haul (management-stake securities) without consideration to yields on investment, and yields on such sharestended to decline. As a result, prices of such shares rose to a level that was
beyond the reach of individual investors who invested in shares on the basisof the yield they produced, and the ratio of stock holdings by individual investors dropped further. In addition, as individual investors had no choice but
to aim at making capital gains even under such circumstances, the rate ofturnover of their investments needed to be quickened. This was why individ-

Chap. IV The Stock Secondary Market

Chart IV-2.

Changes in the Ratio of Shares Held by Different Categories of Investors

%
45

%
45

Business corporations, etc.

40
35

61

Commercial and regional banks, life andnon-life insurance companies, and otherfinancial institutions

Individuals and others

40
35

30

30

25

25

20

20

15
10

15

Trust banks
Foreign investors

10

5
0
1970

5
1975

1980

1985

1990

1995

2000

2005

2010

2015

0
2020
FY

Notes: 1. Results of Trust banks are included in that of Commercial and Regional banks in and before
1985 Survey.
2. Results from FY 2004 to FY 2009 include the portion of companies listed on JASDAQ, andthose after FY 2010 include JASDAQ figures within Osaka Securities Exchange or Tokyo
Stock Exchange.
Source: 2020 Shareownership Survey.

Chart IV-3.
%

Ratios of Cross-Shareholdings
Listed banks
Listed business companies

15

Life insurance companies
Non-life insurance companies

10

5

0
FY1990

2000

10

19

Note: Research by Nomura Institute of Capital Markets Research. Breakdownof cross-holding ratios by holding entity (by market capitalization).
Source: Nihon Keizai Shimbun Electronic Edition; July 6, 2021

62

Chap. IV The Stock Secondary Market

ual investors took to highly speculative investment, bringing about a special
structure of the stock market in this country.
However, as unrealized capital gains on stock investment shrank sharply
due to falls in stock prices after the burst of the speculative bubble, holding
shares was no longer an attractive investment even for corporate investors. In
recent years, there has been an acceleration in the reduction of cross-shareholdings. Among other factors, this is advocated by the Corporate Governance Code, and it is also one of the listing criteria for the Prime market thatthe tradable share ratio should be at least 35%. In addition, companies havealso felt the need to secure their cash reserves against COVID-19.
4. Stock Prices and Indicators for Investment (1)Theoretical prices of assets such as land and stocks represent rents or dividends, as the case may be, capitalized by a certain rate of return of capital(interest rate plus risk premium). However, as only a small part of such assets
is actually bought or sold, the total asset value is calculated by multiplying
the total of such assets using the prices formed through such transactions. For
instance, the total market capitalization on the First Section of the TSE as of
September 24, 2021 was approximately ¥768 trillion, but the value of sharesactually traded on that day was about ¥3.6 trillion. This indicates that the total market capitalization of the TSE is computed on the basis of share prices
formed through the trading of approximately ¥3.6 trillion worth of shares.
(Actually, it represents a sum total of the market valuation of all listed stocks,
and the above explanation is intended to simplify the picture.)
At this stage, whether the given price of a stock is high or low is judged bycomparing its dividend yield with the market interest rate then prevailing. In
other words, an investment opportunity to generate better-than-average
earnings, working through competition among investors who seek suchinvestment opportunities, equalizes the dividend yield on a given stock to themarket rate then prevailing. However, if an oligopoly strengthens in a given
industry group and the earnings gap among companies belonging to the same
industry group widens, those with higher growth potential tend to reinvest alarger portion of their profit as retained earnings. (Typical of this tendency
are the former IBM and Microsoft, which had no dividends until the end of
2002.) Under such circumstances, dividend yields cannot be computed tostart with, and the level of stock prices becomes irrelevant as an indicator forinvestment.
As highly profitable corporations increase their capital by reinvesting theirearnings instead of issuing new shares, their per share profit increases andthe price of their stock also rises proportionately thereto. If their stock priceChap. IV The Stock Secondary Market

Table IV-4.

Stock Splits and Changes in Divisor

Before stock split

Issue

After stock split

No. of shares

Stock priceNo. of shares

Stock price

10
10
10

$20
10
6

20
10
10

$10
10
6

36

40

A
B
C
Total

30

26

Dow divisor

32.1667

Dow scaled
average

1212Source: J. H. Lorie and M. T. Hamilton, The Stock Market, 1973; Japanesetranslation Shoken kenkyu, Vol. 51, 1977, pp. 73

Chart IV-4.

Stock Price and Capital Increase of Toray Industries

(yen)
350
300

a 1:0.5
○
b 0.5
○

150
100

¥327

a 1:0.8
○
b 0.2
○

a 1:1
○

¥168

¥161

¥334

¥275

250
200

¥314

¥133

a 1:0.54○¥219
b 0.06
○
¥179
a 2:1
○

¥155

¥112

50
0

1953 ’54 ’55 ’56 ’57 ’58 ’59 ’60 ’61 ’62 ’63

a Rights offering.
Notes: ○b Free distribution of shares.
○

New divisor＝Previous day’s divisor×

Previous day’s total stock price±total ex rights portion
Previous day’s stock price total＝Previous day’s divisor×�� 1±

Total ex rights portion�Previous day’s stock price total �

63

64

Chap. IV The Stock Secondary Market

rises too high, small investors cannot buy their shares, with the result that themarketability and liquidity of their shares suffer. Therefore, such corporations
seek to recover the marketability of their shares by lowering their stock
prices by means of stock split-ups or stock dividends—forms of issuing newshares that do not require payment for the new shares.
If this kind of capital management policy is adopted, such practice isbound to affect the stock price indexes. Assuming that other conditions
remain unchanged, a two-for-one stock split would halve the price of suchshares. However, since the number of shares a shareholder of such a
corporation holds would double as a result of the two-for-one split while thestock price is halved, the total market value of the shares held by such ashareholder would not change at all. The Dow scaled average represents theaverage of original stock prices as seen from the standpoint of shareholders
prior to the stock split. The Dow Jones Industrial Average is computed bychanging the divisor each time a stock price declines due to a stock split oran issuance of new shares that does not accompany payment.
5. Stock Prices and Indicators for Investment (2)In Japan, the Nihon Keizai Shimbun (the Nikkei Daily) has devised several
Dow indexes (the Nikkei average), typical of which is the Nikkei 225. This isa price-weighted equity index, which consists of 225 leading issues listed on
the TSE representing various industry groups. Whenever a stock split or dividend is reported or whenever any of the 225 issues is replaced by another,
DOW indexes (the Nikkei average) are computed using a revised divisor. The
Nikkei 225 started with a divisor of 225. Subsequently, however, the divisor
has continued to decrease and dropped to 27.769 as of September 24, 2021
with the result that its multiple has risen to 8.1. This means that when thesimple average of the stock prices of the 225 issues rises or falls ¥20, theNikkei average will increase or decrease ¥162. Thus, the problem with the
Dow Jones indices is that they reflect the rise or fall in the simple average ofstock prices at a scale several times larger than what occurred, and can besusceptible to fluctuations in the price of scarce or highly-priced stocks because they are unweighted.
Indexes designed to remedy these shortcomings of the Dow Jones indices
are market capitalization weighted indexes such as the New York Stock Exchange Composite Index, Standard & Poor’s (S&P) 500 index, and the
TOPIX (Tokyo Stock Price Index). TOPIX measures the free-float adjusted
current market capitalization of the First Section of the TSE assuming thatthe market capitalization as of the base date (January 4, 1968) is 100. TOPIX
has the following characteristics: (1) it covers all issues listed on the First

65

Chap. IV The Stock Secondary Market

Chart IV-5.

Transitions in Stock Prices
TOPIX (right)

Nikkei average (left)
JPX Nikkei 400 (left)(Points)
30,000(Points)
3,000

25,0002,500

20,0002,000

15,0001,500

10,000

1,000

5,000

06

07

08

09

10

11

12

13

14

15

16

17

18

19

20 21
(year)

500

Note: The record date of JPX Nikkei 400 is August 30, 2013 (base value of 10,000 points).
Source data: Bloomberg.
Source: Japan Securities Dealers Association.

Chart IV-6.

Amounts of Trades on the TSE
Total trading amounts on TSE (right)
Daily average trading values on TSE (left)(trillions of yen)800

(billions of yen)
4,000
3,500

700

3,000

600

2,500

500

2,000

400

1,500

300

1,000

200

500

100

0

06

07

08

09

10

11

12

Source data: Japan Exchange Group.
Source: Japan Securities Dealers Association.

13

14

15

16

17

18

19
20
(year-end)

066

Chap. IV The Stock Secondary Market

Section of the TSE and therefore reflects changes in the country’s industrial
structures and market trend, and is not susceptible to potential discontinuity
when some issues are replaced; (2) it allows easy determination of changes inmarket size from the perspective of market capitalization; and (3) it isweighted by the number of shares of listed issues and is therefore not overly
impacted by a rise or fall in the prices of scarce stocks or highly-priced
stocks.
Although TOPIX has long played an important role as a benchmark formany institutional investors, it is not seen as a practical investment benchmark because it comprises all the issues in the First Section. The TSE is now
considering a review of TOPIX, while taking into account the need to ensure
its continuity as an index.
Apart from TOPIX, JPX and Nikkei have collaborated in the publicationof the JPX-Nikkei Index 400 since January 2014. This index was developedwith the aim of selecting issues that meet the requirements of global investment standards among listed issues, such as efficient use of capital and investor-focused management perspectives. Further more, the S&P/JPX Carbon
Efficient Index, which bases its weighting of component issues by focusing
on their environmental information disclosure and level of carbon efficiency,
JPX and S&P have been jointly publishing since September 2018.
6. Stock Prices and Indicators for Investment (3)As room for the discretionary implementation of capital management policy
grew and diversified, the weight carried by capital gains in determining an
investment policy increased and the importance of dividends or return on investment as an indicator for investment decreased. Consequently, the comprehensive yield that adds dividends to capital gains has come to be adopted
as an indicator. In addition, a growing number of investors have come to value the price earnings ratio (PER), which is the quotient of the per share stock
price divided by profit, i.e., a reciprocal of return on investment.
The reason behind the growing popularity of PER as an index for investment was that the concept of“growth stocks appeared”In other words, as
corporations with high growth potential continued to follow financial policies
that valued retained earnings and reinvestment of profit, dividend yield (atraditional index for investment) decreased, making it difficult for brokeragefirms to put out buy recommendations on such shares. A phenomenon representative of this was what was known as the yield revolution—in which dividend yield fell below bond yield—that occurred in the United States in 1958.
In Japan, also, a similar situation occurred in the 1960s.
In such a situation, there was a need to link the growth potential of a cor-

67

Chap. IV The Stock Secondary Market

Chart IV-7.

Dividend Yields of TSE First Section Companies (simple average)

(%)
3.00
2.50
2.00
1.50
1.00

2021/04

2020/102020/04

2019/10

2019/04

2018/10

2018/04

2017/102017/04

2016/10

2016/04

2015/10

2015/04

2014/10

2014/04

2013/102013/04

2012/10

2012/04

2011/04

0.00

2011/100.50

Source: Japan Exchange Group.

Chart IV-8.

Japan’s“Yield Revolution”

(%)
14
12
10
8
6
4
2
0

1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988
(year)
Stock dividend yield

Bond yield

Note: Dividend yields are for dividend-paying companies on the TSE First Section. Bond yields are forgeneral corporate bonds until 1961 and for interest-bearing NTT bonds from 1962.
Source: Tokyo Stock Exchange, statistics from Tokyo Stock Exchange Materials (1979-1988).

poration to the level of its stock price one way or another in order for brokerage firms to put out buy recommendations on such shares, and the answer
was the PER. In other words, the PER shows multiples of earnings at which
the underlying shares are bought and sold. Therefore, when the shares of acorporation have a high PER, it means that the market believes that the corporation has high growth potential. Actually, securities companies compare

68

Chap. IV The Stock Secondary Market

the PER of an issue with the industry average or with other issues in the same
industry group to measure whether the issue is overvalued or undervalued.
What is more, the PER is used not only as a stock price indicators of individual issues but also as a measure to compare the stock price level of a country
with the levels of other countries. Today, it has thus become one of the typical stock price indicators.
However, while stock yield can be compared with an objective index, suchas market interest rate, the PER has a drawback in that it can be comparedwith other indicators only relatively. For instance, as is often pointed out, thePER of the S&P 500, one of the major stock indexes of the United States, has
moved between 15 and 30 since the war, but the Nikkei 225 of Japan has risen as high as 80 or more in the past. (On September 24, 2021 unconsolidated
PER of the TSE First Section stood about 14.0.) It has been analyzed that thedifference between the levels of the PERs of the two countries was attributable to the difference in the business accounting system (notably, the methodof depreciation) and the cross-shareholding system of Japan. It is possiblethat these factors affected the PER level of Japan. More importantly, however, was the fact that there was no valid PER level to start with.
7. Stock Prices and Indicators for Investment (4)While the PER shows the relationship between per share earnings and stock
prices, earnings vary depending on the method used to calculate them. Particularly, depreciation expenses associated with capital investments are deducted from taxable income (which, therefore, cuts into earnings), but suchinvestments contribute significantly to future earnings. Therefore, a stock
price indicator based on earnings could sometimes mislead investors when
they make an investment decision.
The price cash flow ratio (PCFR) is an indicator designed to reflect thegrowth potential of a corporation based on its share price. The PCFR is computed by dividing the stock price by the sum of the after-tax income and depreciation expenses for the term, minus any dividends and executive officers’
bonuses. Since depreciation expenses are retained and reinvested at a later
date, they are an important factor to take into account when assessing the
growth potential of a corporation, as they indicate its real earnings and cashflow.
The PCFR is generally used in comparing the stock price of a corporation
with the stock prices of other corporations in the same industry group andparticularly in evaluating the stock prices of high-tech corporations whose
future competitiveness is largely determined by the scale and components of
their capital investment.

69

Chap. IV The Stock Secondary Market

Chart IV-9.

PERs of TSE First Section Companies (Simple average)(times)
30.0
25.0
20.0
15.0
10.0

2020/102021/04

2020/102021/04

2020/04

2019/10

2019/04

2018/10

2018/04

2017/102017/04

2016/10

2016/04

2015/10

2015/04

2014/10

2014/04

2013/102013/04

2012/10

2012/04

2011/04

0.0

2011/10

5.0

Source: Japan Exchange Group.

Chart IV-10.

PBRs of TSE First Section Companies (Consolidated)(times)
1.6
1.4
1.2
1.0
0.8
0.6
0.4

2020/04

2019/10

2019/04

2018/10

2018/04

2017/102017/04

2016/10

2016/04

2015/10

2015/04

2014/10

2014/04

2013/102013/04

2012/10

2012/04

2011/04

0.0

2011/100.2

Source: Japan Exchange Group.

PER＝Stock price
Per share after-tax income

PBR＝Stock price
Per share net asset value

PCFR＝Stock price
After-tax income + depreciation charges－(dividend + officers’bonus)

70

Chap. IV The Stock Secondary Market

Another frequently used indicator for investment is the price book value
ratio (PBR), which shows the relationship between the net asset value owned
by a corporation and its stock price. The PBR of a corporation is computedby dividing its stock price by the value of net assets per share. The net assets
of a corporation represent the sum of the capital and earned surplus, etc.,
which is called equity capital, and they are computed by deducting liabilities(debt, etc.) from the total assets listed on the debit side of the balance sheet.
In other words, it is the net assets that would remain after repaying all thedebts of a corporation out of the proceeds of its assets when the corporation
is dissolved at a certain point in time. Hence, the PBR is an indicator thatcompares the stock price of a corporation prevailing at a given time with its
liquidation net asset value per share. If the PBR of any corporation falls below one (or below its liquidation net asset value per share), the stock price ofsuch a corporation is often considered undervalued.
It is to be noted, however, that the use of the PBR as an indicator for investment is based on the assumption that it reflects the actual book value ofthe issue. If the actual asset value of the land and shareholdings of a corporation falls below the book value of the land and shareholdings on account ofan unrealized loss, the stock price of such issue, even when its PBR is below
one, cannot be considered undervalued. If such a situation arises, and thestock market functions efficiently to a certain degree, corporations will likely
seek actively to merge with or acquire (M&A) another corporation. In fact, astring of corporate mergers and acquisitions did take place on the U.S. stock
markets when Tobin’s q (a modified version of the PBR) fell below one. The
PBR of the First Section of the TSE stood at 1.28 on September 24, 2021.
8. The Margin Trading System (1)Shinyo torihiki (margin trading) is a system crafted on the model of the margin trading conducted in the United States and was introduced into Japan inJune 1951 with a view to stimulating speculative demand for securities trading. Margin trading is a transaction in which an investor can buy a certain
number of shares of a stock or sell shares which it does not own, with funds
or shares borrowed from a Financial Instruments Business Operator (securities company) by depositing a margin with the Financial Instruments Business Operator. On the other hand, the Financial Instruments Business Operator that receives such an order must settle the transaction on the settlementday. As there was no adequate stock lending market or securities financing
market in Japan in the early days, a securities finance company was createdto help Financial Instruments Business Operators reduce their burden of having to provide cash or stock certificates for the settlement of such margin

Chap. IV The Stock Secondary Market

Chart IV-11.

71

Outline of Margin Trading and Loans for Margin Transactions
Financial
institution,etc.

Call broker
Call money
System participant(bank, etc.)
deposit receipt

Call money procurement

Application for borrowing stock

Securities finance
Financial instruments
companybusiness operator, etc.
Stocksprocurement

Lending stock

Call money

Funds
procurement

Application forborrowing stock(Sale consignment)

Financial instruments
business operator

Margin transaction
selling customer

Lending stock

Japan Securities
Clearing Corporation

Execution of sell order

Loan

MarketExecution of buy order

Application for loan

Financial instruments
exchange

Loan

Financial instruments
business operator

Margin transaction
purchasing customer(Purchase
consignment)
Loan application

Bank ofJapan◦Standardized margin trading (between a customer and a Financial Instruments Business Operator)
Collateral: Shares bought (or the proceeds from the sale of shares sold)Margin: 30% or more of the market price of the shares bought (or sold) on margin. (When a substitutesecurity is deposited, such security will have a collateral value of up to 80% or less of its
market price.) However, the minimum amount of the margin in all cases is ¥300,000.
◦Loans for margin transactions (between a Financial Instruments Business Operator and a securities finance company)
Collateral: Shares bought (or the proceeds from the sale of shares sold)
Guarantee deposit: 30% or more of loan balance (or the lending stock balance) (When a substitutesecurity is deposited, such security will have a collateral value of up to 80% of its
market price.)◦Call money share collateral deposit receipt system (participating in the system are securities financecompanies, call money dealers, companies affiliated with the deposit receipt system, financial instruments exchanges, and the Bank of Japan).
Under this system, stock certificates pledged as collateral for a loan for margin transaction received
by a securities finance company (only such issues recognized as appropriate by the Bank of Japan) aretransferred to the account of a financial instruments exchange opened with the Japan Securities
Depository Center and the securities finance company takes in call money by pledging as collateral thedeposit receipt issued by the financial instruments exchange based on the aforesaid stock certificates.
In other words, the system enables collateral to be used to procure the funds necessary for the loantransaction, effectively using the stock as collateral. The deposit receipt also serves as collateral whenborrowing money from the Bank of Japan through a call money dealer.
Note: The margin rate and the ratio of collateral value above may change based on margin trading regulations.

72

Chap. IV The Stock Secondary Market

trading. This is called the Loans for Margin Transactions.
The loan for margin transaction is where a securities finance company
lends a Financial Instruments Business Operator, who is a participant of a financial instruments exchange, funds or stock certificates that are associatedwith margin trading issues and that are needed to settle a margin transaction,
through the settlement organization of the financial instruments exchange.
The securities finance company can save costs and expenses by internallyoffsetting applications for a loan of shares of a certain stock against those forlending shares of the same stock—more specifically, by lending the money itcollects from a margin selling investor (or stock certificates it collects as collateral from a margin buying investor). When a shortage of funds develops
after offsetting, the securities finance company meets the shortage by borrowing the amount of such shortage from a bank, the call market, or the Bankof Japan. When a shortage of stock certificates develops after offsetting, thesecurities finance company may borrow them by inviting bids from Financial
Instruments Business Operators and institutional investors (see the chart on
the next page). Issues for margin trading purposes are selected from among
listed stocks based on standards set by the financial instruments exchange.
Stocks that can be margin traded or lent for margin trading purposes can be
categorized into trading issues, which can be used for both trading and loans,and loanable issues, which are used only for loans. Loanable issues are selected from the perspective of ensuring liquidity to handle speculative demand based on the number of tradable shares or the number of shareholders.
Moreover, there are added restrictions on the amounts of stocks that can beborrowed.
The securities finance companies are special financial institutions on the
securities market established in February 1950. They began operating loantransactions in line with the introduction of the margin trading system in June
1951. Since the role of securities finance companies on the securities market
increased thereon as margin trading expanded, to strengthen their function,
the government introduced a licensing system in April 1956, requiring securities finance companies to be authorized by the Minister of Finance (currently, the Prime Minister). Since then, there has been significant consolidation among securities finance companies that had been established onregional stock exchanges. As of September 30, 2021, Japan Securities Finance (JSF) alone handles loans for margin transactions as designated byeach of the stock exchanges in Tokyo, Nagoya, Sapporo, Fukuoka and Osaka.
9. The Margin Trading System (2)Based on the amendments to the Securities and Exchange Act in 1998, theChap. IV The Stock Secondary Market

73

restrictions on Financial Instruments Business Operators borrowing stock
without going through securities finance companies and on borrowing andlending stock between themselves (the so-called stock lending market) werelifted. At the same time, the regulator approved negotiable margin trading, allowing Financial Instruments Business Operators to freely determine prices,interest rates, and contract terms between themselves and their customers. At
this juncture, those margin tradings backing loans for margin transactions forwhich the financial instruments exchanges determine prices, interest rates,
and contract terms on their markets came to be called standardized margintransactions (see Table IV-4). Negotiable margin trading became increasingly
popular after they started to be used in Internet trading in Japan in 2003, andsuch transactions have come to account for about 20% of all margin purchasebalances in recent years.
Looking at the proportion of loan balances in standardized margin stockbuying balances, the dependency of Financial Instruments Business Operators on loans for margin transactions almost uniformly declined up to 1988
because of their growing ability to finance themselves primarily out of theirinternal reserves. However, the market’s dependency on loans for margintransactions began to rise again in the 1990s, due to factors including the deterioration in the financial positions of Financial Instruments Business Operators following the burst of the economic bubble, the emergence of Internet
trading, and a recovery in stock market prices starting in 1999. In 2005, thedependency of Financial Instruments Business Operators on loans for margintransactions neared the 50% mark. Since then, the dependency on loans for
margin transactions has taken a downward path because of the greater diversification of financing sources for Financial Instruments Business Operators.
On the other hand, looking at the balance of shares used in lending transactions, the traditionally small amount of margin sales began to rise in the latter
half of the 1990s as institutionalization of stock markets became active andcases of Financial Instruments Business Operators borrowing shares from securities finance companies on their own proprietary accounts to settle buy orders increased. By 2000, the dependency of Financial Instruments Business
Operators on loans for margin transactions had risen to 70%. Since then, thisdependency has continued to fall because of the expanding number of sources of stock lending following the lifting of restrictions on the stock lending
market.
The margin trading system and margin deposit operations of securities finance companies have changed and diversified along with the developmentof the securities market in Japan. The margin trading system was revised frequently to expand the number of available issues as a measure to invigorate
the market, with the Second Section issues being added in December 1991
and the JASDAQ issuee in October 1997 and PTS in August 2019, added.

74

Chap. IV The Stock Secondary Market

Table IV-5.

Comparison of Standardized and Negotiable Margin TradingStandardized margin trading

Margin deposit

Negotiable margin trading

30% or more of trade contract value 30% or more of trade contract value

Loan rate (negative interest) Rate set xby the financial instru- Determined between the investor
ments exchange
and the Financial Instruments Business Operator
Repayment due date

Up to six months

Eligible issues

Issues selected by the financial in- In principle, all listed stocks
struments exchange

Rights processing

Method set by the financial instru- Determined between the investor
ments exchange
and the Financial Instruments Business Operator

Financing (loan transaction) Available

Determined between the investor
and the Financial Instruments Business Operator

Not available

Source: Complied using data from the website of the Japan Exchange Group, etc.

Margin deposit operations have changed as well. A financing system using
loanable issues for margin transactions for non-loanable issues was introduced in October 1995, and loans for margin transactions became available
for the JASDAQ market in April 2004 and PTS in August 2019. Furthermore,
a commercial financing system became available for Financial Instruments
Business Operators that needed cash to settle their margin buying trades innegotiable margin transactions.
In addition to their licensed-based loans for margin transactions business,securities finance companies also (1) offer collateral loans for bonds and general collateral loans to Financial Instruments Business Operators or their clients, (2) run a commercial stock lending business other than the loans for
margin transactions for financial instruments companies, and (3) act as intermediates in bond lending transactions.
10. Diversification of the Securities Trading System
The basic function of the stock market is to efficiently allocate funds by finding a price at which all demands are matched with the supply available. At astage when information technology (IT) was not fully developed, there was aneed to concentrate securities trading in one place in order to achieve that
purpose. In fact, a number of stock exchanges had been established in different regions to the extent that transactions in each region could be concentrated at the respective exchange, and listed securities were required to be tradedChap. IV The Stock Secondary Market

Chart IV-12.

75

Margin Buying Balances (standardized and negotiable trading) and Loan/
Selling Balances(trillions of yen)
(%)
100
60
90
50
80
70
40
60
30
50
40
20
30
20
10
10
0
0
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20(year)
Standardized margin
buying balance

Negotiable margin
buying balance

Stock lending loanbalance

Loan balance/selling balance(total of standardized and negotiable
system balances, units on right axis)

Note: Previous to 2012, figures included the margin balances of companies listed on the Osaka Securities
Exchange.
Source: Complied using data from the website of the Japan Exchange Group, etc.

Chart IV-13.

Margin Selling Balances (standardized and negotiable trading) and Loan/
Stock Lending Balances(trillions of yen)
16

(%)
100
90
80
70
60
50
40
30
20
10
0

14
12
10
8
6
4
2
0

72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20(year)
Standardized margin
buying balance

Negotiable margin
buying balance

Stock lending loanbalance

Stock lending balance/selling balance(total of standardized and negotiable
system balances, units on right axis)

Note: Previous to 2012, figures included the margin balances of companies listed on the Osaka Securities
Exchange.
Source: Complied using data from the website of the Japan Exchange Group, etc.

76

Chap. IV The Stock Secondary Market

Chart IV-14.

Trading Amounts of Exchange Transactions and OTC Transactions(trillions of yen)

(%)

1,000

20

800

15

600
10
400
5

200
0

2009

2010

2011

Exchange transaction

2012

2013

2014

OTC transaction

2015

2016

2017

2018

2019

0
2020
(year)

Percentage of Off-exchange transactions to totaltransactions (right axis)

Source: Japan Securities Dealers Association.

Chart IV-15.

Breakdowns of OTC transactions(trillions of yen)

(%)

140

70

120

60

100

50

80

40

60

30

40

20

20

10

0

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Amounts of trades other than PTS
Amounts of PTS trades
Percentage of PTS against Off-exchange transactions (right axis)
Source: Japan Securities Dealers Association.

0
2020(year)

Chap. IV The Stock Secondary Market

77

on these stock exchanges. In an environment where dissemination of information, communication of orders, and processing of transactions incur costs
and cannot be conducted in a timely manner, no arbitrage transaction—apractice that plays the role of eliminating a price difference—could sufficiently take place even if an opportunity arose to make a profit by taking advantage of a difference in the price of one and the same stock between stock
exchanges. Under such circumstances, it became necessary to concentrate securities trading on the stock exchange to avert the occurrence of what is
known as the“fragmentation of the market.”
However, the securities markets have shifted to computerized trading systems thanks to the development of information technology, and stock exchanges where orders are processed manually on the trading floor have become a rarity in the world. That is, elements of securities trading, i.e.
integration of trading information, transmission and execution of orders, delivery of securities, settlement, and custody, are integrated by the computer
networks and processed in real time, realizing an environment in which balanced prices can be found even through a dispersed computer network installed at markets in multiple locations. The idea of market operation basedon such an infrastructure of securities trading is called inter-market competition. Meanwhile, given the growing number of institutional investors in the
securities market, the need for a guarantee of anonymity and for a trading
system designed to minimize the market impact cost has increased, and special forms of trading, such as large-lot transactions and basket transactions,have also increased. As complex trading rules can be instituted without difficulty in a computerized trading system, a trading system capable of meetingsuch needs can be provided at a low cost.
These technological innovations make it difficult to distinguish the trading
systems provided by private companies from those provided by the traditional securities exchanges. In the United States, the Securities and Exchange
Commission (SEC) has acknowledged the similarity of functions performedby the two types of trading systems and has adopted the Alternative Trading
System (ATS) and has authorized the Electronic Communication Network(ECN), a type of ATS, as a securities exchange. Also in Japan, the regulators
have authorized negotiated trading in listed securities following the lifting of
the ban against off-exchange securities trading and have added a Proprietary
Trading System (PTS) to the types of securities business that can be handled
by securities companies.

CHAPTER V
New Issues of Bonds in the Primary Market

1. Types of Bonds
The term“bonds”generally refers to debt securities issued by governments
and other public entities as well as by private companies. The issuance ofbonds is a means of direct financing, through which the issuer raises funds,
but, unlike equity financing, the issuer has an obligation to repay the principal at maturity. Bonds are classified by type of issuer into government debt
securities, municipal debt securities, government agency bonds, bank debentures, corporate bonds (industrial bonds), and foreign bonds.
Government debt securities are those issued by the national government,
and they are classified as short-term bills (maturing in one year or less), medium-term notes (maturing in two to five years), long-term bonds (maturing
in ten years), or superlong-term bonds (maturing in ten years or more) to distinguish an issue’s term to maturity. Issuance of 10-year government bonds
for retail investors (variable rate) was introduced in fiscal 2002. In January
2003, issuance of bonds designated by the Finance Minister as STRIPS
bonds, whereby the principal and interest portions can be traded separately as
book-entry transfer JGBs, started. In addition, the government started issuing
10-year CPI (consumer price index)-linked bonds, 5-year bonds for retail investors, 40-year fixed-rate bonds, and 3-year bonds for retail investors in fiscal 2003, 2005, 2007, and 2010 respectively.
Municipal debt securities can be roughly divided by type of funds into
“public sector funds”and“private sector funds.”The former are raised
through fiscal loan funds and Japan Finance Organization for Municipalities,
while the latter are raised in the public market or underwritten by banks andother financial institutions. Among these funds, the funds raised in publicmarkets are divided into nationally placed municipal bonds, jointly offeredlocal government bonds, and municipal bonds targeting local residents (minilocal bonds). While the municipal bonds underwritten by banks and other financial institutions are called bank, etc. underwritten bonds, they come in
two types, funds borrowed on deeds from banks and other financial institutions or debt securities issued in the market. Government agency bonds areKinko bonds

Bank debentures

Yen-denominatedforeign bonds andforeign currency
denominated foreign bonds

Corporate bonds with equity warrant
Corporate bonds with equity warrantof the convertible bond type

Central Cooperative Bank for Agriculture and Forestry(Norin Chukin Bank)/ Shinkin Central BankInternational organizations and foreign governments, etc.

Business corporations at large

Nippon Telegraph and Telephone Corporation (NTT)/ Nippon Hoso
Kyokai (NHK: Japan Broadcasting Corporation)
Electric power companies, etc.
Business corporations at large

Independent Administrative Institutions (Urban Renaissance Agency,etc.), Koko (Financial Corporation for Municipal Enterprises, etc.)
Special corporations (Kansai International Airport)

Private debt securities

Note: Local government bonds represent debt issued under local government laws and fiscal policies. However, only those publicly placed or underwritten bybanks or other financial institutions based on the issue of debt securities are included in public bonds.

Bonds

Power (or utilities) bonds
General industrial bonds

OthersGovernment-guaranteed debts
Bonds issued by Treasury investment andloan agencies
Privately placed agency bonds

Local public bodies

Government

Government bonds for individual investors
Consumer price index government bonds
Variable-rate government bonds
Superlong-term government bonds
Long-term government bonds
Medium-term government securities(or notes)
Short-term government bonds

Public bonds

Corporate bonds
with equity warrant

Straight bonds

Government
agency bonds

Municipal debt
securities

Government debt
securities

Types of Bonds

Chart V-1.

Chap. V New Issues of Bonds in the Primary Market

79

80

Chap. V New Issues of Bonds in the Primary Market

debt securities issued by various government-affiliated entities, such as independent administrative agencies. Agency issues with a government guarantee
are categorized as government-guaranteed bonds. On the other hand, nonguaranteed government agency bonds can be further divided into Fiscal Investment and Loan Program (FILP) agency bonds that are publicly placedbonds and privately placed bonds issued by certain special financial institutions. The three categories of debt securities mentioned above are sometimes
collectively called“public bonds.”
Bank debentures are debt securities issued by certain banking institutions
under special laws. They are principally issued in the form and maturities of
5-year interest-bearing and 1-year discount debentures. As bank debenturesand government agency bonds fall within the category of“debentures issued
by a juridical person under a special Act”stipulated in Article 2, Paragraph 1,
Item (iii) of the FIEA, they are sometimes called“special debts (tokushusai).”Corporate bonds are those issued by private-sector companies and arealso known as industrial bonds. In addition to non-financial enterprises,banks and consumer finance companies may also issue corporate bonds. Foreign bonds are defined as debt securities issued in Japan by foreign governments and companies (non-residents).Those denominated in yen, in particular, are separately classified as yen-denominated foreign bonds.
2. Issuing Status of Bonds
With three major supplementary budgets drawn up as a response to the
COVID-19 pandemic, the total amount of bond issuance in fiscal 2020 was¥253.1 trillion, an increase of about 45% on the previous year.
If we look at the breakdown of issuance by type, total government bond issuance in fiscal 2020 was ¥221.4 trillion, accounting for about 87.5% of all
public and corporate bonds. Government bond issuance had continued to increase from fiscal 2009 to fiscal 2013, driven by the financial crisis of 2008.
However, issuance fell back from fiscal 2014 onwards, and the value of government bonds issued in fiscal 2019 was more subdued and in line with thelevel of fiscal 2001. However, in fiscal 2020, the issuance of JGBs increased
by about ¥78 trillion vs. the previous year, mainly in the form of treasury
bills, due to the pandemic. JGB issuance can be broken down into superlongterm government bonds (¥34.7 trillion), long-term government bonds (¥35.3
trillion), medium-term government bonds (¥64.4 trillion) and treasury bills(¥80.9 trillion).
Similar to government bonds, although municipal bonds were on a downward trend after peaking in fiscal 2013, issuance has turned up since 2019.
The continuing high level is basically due to the deterioration in the fiscal

Chap. V New Issues of Bonds in the Primary Market

Table V-1.

81

The Value of Bonds Issued(¥100 million)

Of which,
Of which,
Of which,
Of which,
Of which,
Of which,
10-year5-year4・2-year
Short-term
Government
Interest-bearing interest-bearing interest-bearing interest-bearing
Total of bonds Government
discount
bonds forbonds
government
government
government
government
government
individual
bonds
bond
bond
bond
bonds
investors
No. of Issue No. of Issue No. of Issue No. of Issue No. of Issue No. of Issue No. of Issue No. of Issue
FY
issues Amount issues Amount issues Amount issues Amount issues Amount issues Amount issues Amount issues Amount1998 3,531 142,467
64 95,843
3 2,398
8 16,25900
18 6,555
24 39,518001999 2,672 141,307
80 99,807
5 2,897
10 16,920
2 1,639
18 14,487
36 48,799
002000 5,386 148,356
78 105,392
10 5,894
9 18,019
9 11,755
17 20,015
24 42,841
002001 4,651 181,531
68 144,493
11 7,392
8 20,600
7 20,425
12 19,663
24 39,596002002 9,608 181,109
73 147,298
15 10,589
10 21,800
7 22,979
12 20,731
24 43,595
1
384
2003 13,827 196,008
79 157,797
17 12,986
11 23,000
10 23,189
12 22,185
24 47,998
4 2,967
2004 19,252 223,796
79 185,101
18 16,753
10 23,000
9 25,007
12 21,742
24 47,195
4 6,8212005 24,485 221,001
84 180,692
20 19,579
9 23,100
10 25,718
12 22,338
24 41,907
5 7,271
2006 19,433 204,033
79 170,432
17 19,331
8 23,959
9 26,038
12 22,789
22 36,799
8 7,1382007 12,926 173,003
63 136,504
13 17,343
5 23,533
7 25,773
12 22,041
14 22,796
8 4,662
2008 2,140 156,867
68 123,867
12 16,787
9 24,354
11 25,039
12 23,126
14 21,000
8 2,2932009 1,507 188,807
63 156,023
11 23,141
7 28,880
7 29,621
12 29,397
18 32,899
8 1,360
2010 1,601 192,981
67 160,411
12 25,926
7 30,856
7 30,288
12 33,001
12 29,999
17 1,028
2011 1,500 196,954
72 167,283
12 26,136
8 31,360
8 31,036
12 34,514
12 29,999
20 2,426
2012 1,436 204,091
73 174,957
12 28,068
7 31,872
6 32,421
12 34,008
12 29,999
24 1,875
2013 1,458 210,040
72 180,171
10 29,349
5 33,727
8 35,216
12 36,176
12 29,999
24 3,349
2014 1,397 204,622
82 176,065
9 31,776
5 33,607
6 35,158
12 33,177
12 26,700
36 2,633
2015 1,280 199,414
78 173,670
9 34,787
4 35,519
4 32,128
12 30,766
12 25,800
36 2,137
2016 1,377 197,142
78 168,001
9 33,040
4 35,172
4 30,878
12 29,654
12 25,000
36 4,556
2017 1,409 183,344
78 155,903
9 33,172
4 33,029
4 29,336
12 28,360
12 23,800
36 3,449
2018 1,478 177,678
74 148,696
7 31,686
3 33,275
3 26,115
12 27,109
12 21,600
36 4,693
2019 1,503 174,024
78 142,985
9 30,956
4 30,195
4 25,343
12 25,775
12 21,600
36 5,248
2020 1,525 253,115
90 221,416
9 34,701
4 35,347
4 30,003
12 34,442
24 80,899
36 3,029

Source: Japan Securities Dealers Association.
Corporate bonds
Yenwith equity
Bankdenominatedwarrant of thedebentures
non-resident
convertible
bonds
bond typeof Issue No. of Issue No. of Issue No. of Issue No. of Issue No. of Issue No. of Issue No. of Issue
FY No.
issues Amount issues Amount issues Amount issues Amount issues Amount issues Amount issues Amount issues Amount
1998
69 1,754
35 2,610
00 635 10,453
59
378
15
214 712 24,474
76
393
1999
72 2,061
40 3,325
00 437 7,788 126441
23
434 688 23,304
68 1,037
2000
86 2,269
67 5,1411
50 367 7,637 140342
18283 696 21,043
89 2,618
2001
90 2,225
55 4,31524
731 333 8,172 127394
17
283 755 16,867
41 1,3082002
151 2,837
55 4,446
63 2,565 312 7,318
85
517
13
205 666 12,023
30
671
2003
226 4,621
95 6,898
86 2,663 353 6,993
82200
977 667 9,271
39
943
2004
262 5,660
94 8,752 105 3,019 307 5,895
46
187
19
191 598 7,960
45 1,6772005
312 6,189
94 7,002 115 4,722 335 6,904
28
354
13
113 563 8,756
47 1,592
2006
334 5,860
77 4,301 101 4,399 335 6,830
25
143
10
495 496 6,730
25
798
2007
365 5,721
79 4,298 125 4,941 425 9,401
5153
330 407 6,505
78 2,6472008
375 6,346
69 4,752 123 4,159 313 9,605
8181
1
150 384 5,517
58 2,0822009
418 7,361
78 4,667 164 4,735 388 10,300
2100
3249 347 4,180
40 1,1922010
412 7,482
64 4,197 172 5,063 459 9,933
2120
378 352 3,777
70 1,9192011
394 6,663
61 3,331 212 5,735 394 8,277
5200
2
33 284 3,438
76 1,9942012
392 6,577
71 4,722 206 5,312 416 8,152
4200
329 220 3,000
51 1,1422013
421 7,069
69 5,060 212 4,678 462 8,142
150
10
77 121 2,618
90 2,1742014
407 6,943
68 4,220 199 3,997 439 8,715
1
60
5
37 121 2,499
75 2,0862015
406 6,772
68 3,146 212 4,489 348 6,941
1
50
4
166
91 2,365
72 1,8162016
360 6,249
79 3,107 184 4,857 546 11,413
2
100
5
55
76 1,738
47 1,6222017
362 6,101
82 3,956 210 4,814 560 10,063
2
100
1
10
76 1,330
38 1,067
2018
373 6,312
77 3,104 231 5,020 583 10,452
3
270
2
16
76 1,446
59 2,362
2019
371 6,450
49 1,803 209 4,810 704 15,759
0012
940 1,116
40 1,0922020
375 6,991
36 1,419 262 6,170 692 15,613
00
623
40 1,01624
467
Municipal debt
securities

Governmentguaranteeddebts

Bonds issued
by Treasury
investment and Straight bonds
loan agencies

Asset backed
corporatebonds

Note: From April 2019 onwards, the figures for general bonds other than JGBs are based on statistical data from the Japan Securities Depository Center (JASDEC).
Source: Japan Securities Dealers Association.

82

Chap. V New Issues of Bonds in the Primary Market

position of local governments, resulting in the introduction of publicly offered municipal bonds targeting local residents in fiscal 2001 and publicly
offered joint local government bonds in fiscal 2003.
Issuance of straight corporate bonds has moved from a declining trend up
until fiscal 2015 to an increasing trend at present, with both the number ofcorporate bond issues and the value of bonds issued remaining at high levels
in recent years. In fiscal 2020, there were 692 issues with a value of ¥15.6
trillion, an all-time record. Since the start of 2019 there have been a numberof large-scale corporate bond issues against the background of the decline inlong-term interest rates. In response to the further monetary easing of monetary conditions, especially in response to the pandemic, straight corporate
bonds of ¥2.5 trillion and ¥2.8 trillion were issued in July and December
2020, respectively, with another ¥2.2 trillion issued in June 2021.
The total amount of bank debentures issued in fiscal 2020 (all interest
bearing) stood at ¥1.0 trillion, continuing to decline from the ¥43 trillion recorded in fiscal 1995. Backdrop to the decline includes the virtual disappearance of the long-term credit banks that had acted as suppliers of long-term
capital to industry, the discontinuation of bank debenture issues by Bank ofTokyo-Mitsubishi (now the Bank of Mitsubishi-Tokyo UFJ) in March 2002,
followed by Mizuho Corporate Bank (excluding debentures for asset building purposes) in March 2007 and Aozora Bank in September 2011. Among
government agency bonds, issuance of government-guaranteed bonds in fiscal 2020 was ¥1.4 trillion and issuance of FILP agency bonds was ¥6.2 trillion. Back in fiscal 2000, the Government Housing Loan Corporation issued
its first ¥50 billion. FILP agency bond, following the reform of the fiscal investment and loan program. Since then, FILP agency bond issuance hasgrown considerably. The amount of yen-denominated foreign bonds dropped
sharply to ¥0.5 trillion yen in fiscal 2020.
3. Methods of Issuing Public Bonds
Government securities are issued in the public market or directly to individual investors or underwritten by the public sector. This section deals with theformer two methods of issuance.
When issued in the market, JGBs are primarily sold through public auctions based on competitive bidding on price (or on yield), as the method of
underwriting by syndicates was discontinued in fiscal 2006. In accordancewith the terms of offering set forth by the Ministry of Finance, auction participants submit their bid prices and amounts, and they are then aggregated todetermine the issue price and amount. Depending on the type of securities tobe auctioned, the issue price is set either in a conventional auction, whereChap. V New Issues of Bonds in the Primary Market

Table V-2.
MaturityType of issue

Categories of Government Securities

Short-term government bonds

Medium-term government Long-term government
bonds
bonds

6-month2-year, 5-year

1-year

Discount government bonds

10-yearInterest-bearing government bonds

Minimum denomi- ¥50,000
nation¥50,000

Issuance method

Public auction BOJ switch

Public auction OTC sales(based on subscriptions to offering)Auction method

Price-competitive bidding Conventional style

Price-competitive bidding Conventional style

Noncompetitive
Bidding, etc.

Non-price Competitive Auctions I

Noncompetitive Bidding
Non-price Competitive Auctions I
Non-price Competitive Auctions IITransfer restriction No

No

Issuance frequency Twice a month(FY2021 Plan)
MaturityMonthlyMonthly

Superlong-term government bonds

20-Year83

30-YearType of issue

Individual investor Inflation-indexed Floating intergovernment bonds government bonds est rate government bonds
40-Year3 - y e a r, 5 - y e a r 10-year
fixed rate; 10-year
floating rate

15-year(Note 1)

Interest-bearing government bonds

Minimum denomi- ¥50,000
nation¥10,000

Issuance method

Public auction

OTC sales (based Public auction
on subscriptions tooffering)

Auction method

Price-competitive bidding
Conventional style

Noncompetitive
Bidding, etc.

Non-price Competitive Auctions I Non-priceNon-price Competitive Auctions II Competitive
Auctions IITransfer restriction No
Issuance frequency Monthly(FY2021 Plan)

Yield-competi- －tive bidding
Dutch auction－Yes
6 times a year Monthly¥100,000－

Price-competitive －bidding
Dutch auction
Non-price
Competitive
Auctions II

－

No

No

Quarterly

Not scheduled

Note: 1. There have been no additional issues of 15-year floating rate JGBs since they were first issued in May 2008.
2. There have been no additional issues of Inflation-indexed government bonds after May 2020.
Source: Based on the Ministry of Finance, Debt Management Report 2021, p. 39.

bonds are issued to successful bidders at their respective bid prices, or in a
Dutch auction, where the issue price (yield) is set at the lowest price (highest
yield) among accepted bids. Other than competitive bidding, two-, five-, andten-year fixed rate JGBs are also offered through a noncompetitive bidding

84

Chap. V New Issues of Bonds in the Primary Market

Chart V-2. Organization of Underwriting Publicly Offered Municipal Bonds at a Glance
Public offeringagreement
TrusteeIssuerUnderwriting and distribution agreement

Municipal bond underwriting syndicate

Underwriting
fee

Underwriting
agreement

City banks
Long-term credit banks
Regional banks
Trust companies
Second-tier regional banks
Norinchukin Bank
Shinkin banks
Securities companies

Executive fee
Fees for handlingsubscriptions andstandby underwriting

Distribution handling agents
Exchange memorandum on handling distribution
Investors
Source: Japan Local Government Bond Association.

process that facilitates small- and medium-sized bidders and through Nonprice Competitive Auctions I and II reserved for special participants (20companies are designated as of September 1, 2021). Private financial institutions handle subscriptions for individuals in offering JGBs for individuals
and in offering two-, five-, and ten-year fixed rate JGBs under the new overthe-counter sales approach.
To issue municipal bonds, a local public body must prepare a budget planthat defines the use of proceeds from the proposed bond issue and obtains theapproval of the local assembly. The actual issuance is also subject to consultation with the Minister of Internal Affairs and Communications (MlC) or thegovernor of the prefecture concerned (local bond consultation system). Even
when the issuer is authorized to issue a municipal bond, the proceeds of suchbonds can be used only for authorized projects - to finance a publicly run
corporation, for equity contributions and loans, and to roll over maturing
debts, etc. As of September, 2021, 36 prefectures and 20 cities “( designatedcities”) that have been designated by an ordinance of the Ministry of Internal
Affairs and Communications have issued municipal bonds through public offerings. In most cases, the issuer negotiates the terms of issue with an underwriting syndicate that handles its public offering, under which the underwriting syndicate buys up whatever bonds remain unsold after the public

Chap. V New Issues of Bonds in the Primary Market

85

offering. Municipal bonds publicly offered on the joint primary market (municipal bonds jointly issued by 36 local public bodies) in and after fiscal 2003
are also handled by underwriting syndicates, but the municipal bonds targeted at local residents introduced in March 2002 generally commission local
financial institutions to handle the underwriting and subscription administration.
The issuance of government-guaranteed bonds is planned as part of the
Fiscal Investment and Loan Program, and annual ceilings on the issue
amount must be approved by the Diet. They are issued by way of either anunderwriting syndicate or issued by separate and individual bidding by competing underwriters. In the former method, the terms of issue are determinedbased on the results of recent JGB monthly competitive bidding. In the latter,
the terms are bid for competitively along with the lead managing underwriterfor the offering. FILP agency bonds are also issued as interest-bearing bonds,
and in issuing them, the issuing agency usually selects a lead managing underwriter which, in turn, forms an underwriting syndicate.
4. Methods of Issuing Corporate Bonds
The issuance of straight bonds had in the past been subject to strict regulations, and the corporate bond trustee system was the core of those regulations. Against the backdrop of the main bank system in Japan at the time, thebanks had an extremely strong influence on individual corporate straightbond issues under the corporate bond trustee system. Even in the overall corporate bond primary market, banks had a greater voice than securities companies. However, as the role played by the corporate bond trustee system declined in the 1980s, the Commercial Code was amended in 1993 to
drastically change the system, and regulations on the issuance of corporate
bonds have been substantially eased.
The issuing corporation appoints managing underwriters and other underwriters that together constitute an underwriting syndicate, a bond manager ora fiscal agent, and providers of other relevant services and obtains a preliminary credit rating. When preparations are completed, the underwriting syndicate, under the leadership of managing underwriter, conducts pre-marketingin order to build a book for the bonds. Along with this process, the issue
terms of the bonds are finalized and the offering begins. The book-building
method is one under which the lead managing underwriter asks syndicate
member companies to survey investors’interest in the bonds and then decides
on the issuing terms on the basis of the findings of that survey. Previously,
many issuers employed“spread pricing”, a method under which investors’
appetite in an issue is measured in terms of a spread over the yield of a JGB

86Chap. V New Issues of Bonds in the Primary Market

Table V-3.

Major Corporate Bonds issue cases

Low rating bonds

Issue AmountInterest Rate

Maturity

RatingJun. 2020 AIFUL CORPORATION

10 billion yen

1.00%

BB＋ (JCR)

Jun. 2021 AIFUL CORPORATION

20 billion yen

0.93%

1 year and6 month
1 year and6 monthBB＋ (JCR)

Perpetual subordinated bonds
Oct. 2020 DMG MORI CO.,LTD (Note 1)
33 billion yen(Note 2)
Aug. 2021 DMG MORI CO.,LTD
30 billion yen
0.9% (Note 3)
Apr. 2021 Rakuten Group, Inc. (Note 4)
1 billion euros 4.25% (Note 5)
Apr. 2021 Rakuten Group, Inc.
1.75 billion dollars(Note 6)－－－－BBB (R&I)
BBB (R&I)
BB (S&P)
BB (S&P)

1 yearA－ (JCR)

Digital corporate bond (Security Tokens)
Apr. 2021 SBI SECURITIES CO.,LTD.

100 million yen

0.35%

Note: 1. Issued in two tranches, ¥8.0 billion and ¥25.0 billion. The perpetual subordinated bonds issued
by DMG Mori Seiki in 2016 were not offered to the public.
2. The ¥8.0 billion tranche has a fixed interest rate of 1.00% until October 2023 and a floating interest rate thereafter. The ¥25.0 billion tranche has a fixed interest rate of 2.40% until October
2027 and a floating interest rate thereafter.
3. Fixed interest rate until August 2026, floating interest rate thereafter.
4. Rakuten’s foreign currency perpetual subordinated bonds are issued to overseas investors.
5. Fixed interest rate until April 2027, floating rate thereafter.
6. $750 million of the bonds have a fixed interest rate of 5.125% until April 2026 and a floating interest rate thereafter. $1.0 billion of the bonds have a fixed interest rate of 6.25% until April
2031 and a floating interest rate thereafter.
7. Prior to SBI Securities, Daiwa Securities, issued digital corporate bonds through private placement in February 2021.
Source: Japan Securities Dealers Association, The List of public and corporate bond, bonds and debentures.

or an interest rate swap with the same term, to determine the issuing rate.
However, after the introduction of negative interest rate policy by the Bankof Japan in January 2016, so-called“absolute value pricing”has become
more familiar, which provide absolute yield in projecting potential investor
demand.
In terms of issuer ratings, the majority of issuers continue to issue bonds
with high ratings; only a small proportion of bonds have low ratings, which
is a characteristic of Japan. The reason can be attributed to the fact that major
institutional investors limit their investment in corporate bonds to issues withratings of A or higher. AIFUL CORPORATION attracted attention in 2019with a BB-rated bond issue, and followed this up in June 2020 and June 2021
with ¥10 billion and ¥20 billion, respectively, of publicly offered BB+ bonds.
Mitsui O.S.K. Lines’corporate bond issued in April 2021 was rated BBB, but
this was a subordinated bond with a high interest rate of 1.60%.
Perpetual subordinated bonds are subordinated bonds that do not have aChap. V New Issues of Bonds in the Primary Market

Chart V-3.
IssuerUnderwriting

87

Mechanism of Underwriting Corporate Bonds

Agreement commissioning the management of bond/Financial agent agreement*

Bond management company/
financial agent*

Underwriting agreement (purchase agreement/underwriting and public
offering agreement)

Underwriter

Memorandum among
the underwriters

Underwriting syndicate

Underwriting agreement

Distribution
Investors
Note: *The issuer signs this agreement with a trustee company in the case of a mortgage bond.
Source: Daiwa Securities Co., Saiken no joshiki.

fixed maturity date and therefore have a capital like nature. DMG Mori Seiki
issued perpetual subordinated unsecured bonds totaling ¥33 billion yen in
October 2020 and ¥30 billion in August 2021, while Rakuten Group issued
perpetual subordinated bonds totaling ¥320 billion in April 2021, one eurodenominated and two dollar-denominated.
In addition, SBI Securities’¥100 million security token offering in April
2021 attracted attention as the first publicly offered digital corporate bond inJapan.
5. Credit-Rating Agencies and Rating of Bonds
Credit rating is a classification of credit risk, indicated by a rating symbol
based on measurement of the certainty of payment of the principal of, and interest on, a bond, and it is ordinarily given by an credit-rating agency specializing in rating credit. Originally, the system developed in the bond market of
the United States and is believed to have taken root during the Depression of
the 1930s. It was introduced to Japan in the 1980s, and today, obtaining acredit rating has become a general practice among issuers of corporate bonds.
In assigning a credit rating to a given bond issue, a credit-rating agency investigates and verifies to see if the issuer has any collateral to back up its obligation and if it has a special financial contract and, if it has preferential or
subordinated creditors, analyzes its financial position and business; determines its capacity to pay the principal of, and interest on, the proposed bond;

88

Chap. V New Issues of Bonds in the Primary Market

Table V-4.
Credit Rating
AAA

Definitions of Credit-Rating Symbols
Rating and Investment Information, Inc. (R&I)
Definition

AA
A
BBB
BB

Highest creditworthiness supported by many excellent factors.
Very high creditworthiness supported by some excellent factors.
High creditworthiness supported by a few excellent factors.
Creditworthiness is sufficient, though some factors require attention in times of major environmental changes.
Creditworthiness is sufficient for the time being, though some factors require due attention in times of environmental changes.

B
CCC
CC

Creditworthiness is questionable and some factors require constant attention.
Creditworthiness is highly questionable and a financial obligation of an issuer is likely to default.
All of the financial obligations of an issuer are likely to default.

C

R&I believes that all of the financial obligations of an issuer are in default.
Japan Credit Rating Agency, Ltd. (JCR)

Credit Rating
DefinitionAAA
The highest capacity of the obligor to honor its obligation to its financial commitment.
AA
A very high capacity to honor its obligation to its financial commitment.
A
BBB
BB
B
CCC
CC
C
D

A high capacity to honor its obligation to its financial commitment.
An adequate capacity to honor its obligation to its financial commitment. However, this capacity is more likely to diminish in
the future than in the cases of the higher rating categories.
Although the capacity to honor the financial commitment on the obligation is not considered problematic at present, this capacity may not persist in the future.
A low capacity to honor its obligation to its financial commitment, giving cause for concern.
There are factors of uncertainty that the obligation to financial commitment will be honored, and a possibility of default.
A high default risk.
A very high default risk.
In default.

Moody’s Investor Service
Credit Rating
Definition
Aaa
Obligations rated“Aaa”are judged to be of the highest quality, subject to the lowest level of credit risk.
Aa
Obligations rated“Aa”are judged to be of high quality and are subject to very low credit risk.
A
Obligations rated“A”are considered upper-medium grade and are subject to low credit risk.
Obligations rated“Baa”are subject to moderate credit risk. They are considered medium grade and as such may possess certainBaa
speculative characteristics.
Ba
Obligations rated“Ba”are judged to be speculative elements and are subject to substantial credit risk.
B
Caa

Obligations rated“B”are considered speculative and are subject to high credit risk.
Obligations rated“Caa”are judged to be speculative of poor standing and are subject to very high credit risk.

Ca

Obligations rated“Ca”are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
Obligations rated“C”are the lowest rated class and are typically in default, with little prospect for recovery of principal or interest.

C

Credit Rating
AAA
AA
A
BBB
BB
B
CCC
CC
C

D

NR

Standard & Poor’s
Definition
An obligation rated“AAA”has the highest rating assigned by Standard & Poor’s. The obligor’s capacity to meet its obligation
to its financial commitment is extremely strong.
An obligation rated“AA”differs from the highest-rated obligations only to a small degree. The obligor’s capacity to meet its
obligation to its financial commitment is very strong.
An obligation rated“A”is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its obligation to its financial commitment is still strong.
An obligation rated“BBB”exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its obligation to its financial commitment.
An obligation rated“BB”is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its obligation to its financial commitment.
An obligation rated“B”is more vulnerable to nonpayment than obligations rated“BB,”but the obligor currently has the capacity to meet its obligation to its financial commitment. Adverse business, financial, or economic conditions will likely impair the
obligor’s capacity or willingness to meet its obligation to its financial commitment.
An obligation rated“CCC”is currently vulnerable to nonpayment and is dependent upon favorable business, financial, andeconomic conditions for the obligor to meet its obligation to its financial commitment. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its obligation to its financial commitment.
An obligation rated“CC”is currently highly vulnerable to nonpayment. The“CC”rating is used when a default has not yet occurred, but Standard & Poor’s expects default to be a virtual certainty, regardless of the anticipated time to default.
An obligation rated“C”is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared to obligations that are rated higher.
An obligation rated“D”is in default or in breach of an imputed promise. For non-hybrid capital instruments, the“D”rating
category is used when payments on an obligation are not made on the date due, unless Standard & Poor’s believes that suchpayments will be made within five business days in the absence of a stated grace period or within the earlier of the state period
or 30 calendar days. The“D”rating also will be used upon the filing of a bankruptcy petition or the taking of similar action andwhere default on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligation’s rating islowered to“D”if it is subject to distressed exchange offer.
This indicates that no rating has been requested, or that there is insufficient information on which to base a rating, or the Standard & Poor’s does not rate a particular obligation as a matter or policy.

Chap. V New Issues of Bonds in the Primary Market

89

and assigns a symbol on the basis of the findings of such investigations. Normally, any debt security with an AAA rating indicates that its issuer has thehighest credit standing and is virtually free from the uncertainties of paying
the principal of and interest on the obligation. The creditworthiness of a bonddeclines as its rating goes down, in order, from AAA to AA, A, and BBB, anda bond with any of these four ratings is called an investment-grade bond.
Bonds with a credit rating of BB, B, CCC, CC, or C are called“junk bonds.”
As these bonds carry high credit risk, their issuer offers a high yield to attract
buyers. Thus, they are called“high-yield bonds,”and their primary market
has developed on a relatively large scale in the United States and Europe.
This type of junk bond primary market did not exist in Japan because of apolicy that excluded bonds that did not meet the eligibility standards from themarket. However, today no such regulations restrict the issuance of junkbonds because the eligibility standards were abolished in 1996. Nevertheless,very few BBB-rated bonds have been offered in the market despite being an
investment-grade category; with the exception of a BB-rated issue (byAIFUL) in 2019.
Designated credit-rating agencies now include both domestic players, suchas the Rating and Investment Information (R&I) and the Japan Credit Rating
Agency (JCR), and global agencies, such as Standard & Poor’s and Moody’sand Fitch. In Japan, a new registration system of the credit-rating agencies
replaced the conventional system based on the Act for Partial Amendment of
the Financial Instruments and Exchange Act enforced in April 2010. Further,in recent years, municipal bonds and FILP agency bonds have also come to
be rated.
The outbreak of the U.S. subprime loan problem raised strong doubts over
the way ratings were given. To begin with, there were criticisms pointing outthat credit-rating agencies tended to give generous ratings because theirsource of income was rating fees collected from issuers. Meanwhile, from adifferent perspective, ratings were acknowledged as nothing more than reference. Currently, however, ratings are used in various financial regulations
and policies. Credit-rating agencies today operate under a registration system
also on a global basis and are placed under administrative supervision.
6. Corporate Bond Management
A drastic reform of the conventional corporate bond trustee system was carried out by an amendment of the Commercial Code in June 1993 to clarify
the basic functions of the current corporate bond administrator system. Under
this amendment, the conventional name“bond trustee company”waschanged to“bond management company.”In addition, (1) the establishment

90

Chap. V New Issues of Bonds in the Primary Market

Table V-5. Appointment, Power, and Liability of the Bond Manager under theCompanies Act
Item

Contents

ArticleAppointment and Power
When a bond manager has A corporation issuing a corporate bond must appoint a bond manager. However, when the Article 702 of the New
to be appointed
face value of a bond certificate is in excess of ¥100 million, and in such other cases as may Companies Act
be prescribed by an ordinance of the Ministry of Justice as one which poses no threat to theprotection of bondholders, the issuer need not appoint a bond manager.
Qualifications for becom- Banks, trust companies, and equivalent financial institutions
ing a bond manager

Article 703

Matters entrusted

The bond manager will be entrusted to receive payments, to preserve rights of claim, and Article 702 of the New
to take other steps necessary for the management of bonds on behalf of bondholders.
Companies Act

Duty of the bond manager

The bond manager must perform the administration of bonds in a fair and sincere manner Article 704
on behalf of the bondholders “( duty of fairness”). The bond manager must manage thebonds with due care of a prudent manager to the bondholders “( duty of due care of a prudent manager”).

Power of the bond manager The bond manager has the authority do all judicial and non-judicial acts on behalf of bond- Paragraphs 1 and 4 ofholders that are necessary to receive payments relating to the bonds or to preserve the real- Article 705
ization of claims relating to the bonds. When the bond manager deems it necessary to takesuch steps, the bond manager may, with the permission of the court, investigate the statusof the business and assets of the bond-issuing company.
Special regulation on the When the bond manager plans to take the steps described below, it must obtain a resolution Paragraphs 1 and 2 ofArticle 706
power of the bond manager of a bondholders’meeting.
(1) With respect to all of the bonds, granting extension for the payment of those bonds, or
releasing, or settling liability arising from the failure to perform the obligations of thosebonds(2) With respect to all of the bonds, prosecuting lawsuits, or proceeding with bankruptcy Item (viii), Article 676
procedures, rehabilitation procedures, reorganization procedures or procedures regarding special liquidation “( lawsuit”includes court-mediated settlement)
Under the Act, the bond manager has the power to take these actions without a resolutionof a bondholders’meeting if the bond management agreement so prescribes.
Power of the bond manager When a bondholder wants to object to any action taken by the issuer, he/she must obtain a Paragraghs 1 and 2,
in taking steps for the pro- resolution of a bondholders’meeting, in principle, but the bond manager can express its Article 740
objection on behalf of bondholders. This, however, shall not apply in cases where there is atection of creditors
provision to the contrary in the contract entrusting bond management.
Liability
Liability (damages)

When the bond manager takes an action in violation of the Companies Act or any resolu- Paragraph 1 of Article
tion of the bondholders’meeting, it is jointly and severally liable for damages incurred by 710
bondholders.

Statutory special liability(damages)(1) When the bond manager has received from the issuer of a bond collateral for the obli- Paragraph 2 of Article
gation represented by such a bond or when the issuer has taken an action extinguishing 710
such obligation within three months prior to a default on the redemption of, or on thepayment of interest on, the bond, or the suspension of payment by its issuer(2) When the bond manager has received from the issuer collateral for the obligation or repayment with respect to the credit of the bond manager(3) When the bond manager transfers its credit to a company controlling, or controlled by,such bond manager, or to another company that has a special relationship with the bondmanager(4) When a bond manager who has a credit to the issuer of the bond concludes an agreement with the issuer authorizing it to dispose of the property of the issuer for the purpose of offsetting such credit, or when the bond manager concludes an agreement totake over any obligations of any company that owes a debt to the issuer.
(5) When a bond manager that owes a debt to the issuer offsets such debt by taking over acredit to the issuer.

Exemption of debt

The bond manager is exempt from debt when it has not been derelict in its management of Proviso to Paragraph 2
the bond, or when it is established that any loss caused to the bondholders is not blamable of Article 710
to an action taken by the bond manager.

Resignation of the bond (1) The bond manager may resign with the consent of the bond issuer and the bondholders’Article 711
manager and its liability
meeting. (However, the bond manager must appoint in advance a successor who willtake over the administration of the bonds.)(2) In case the bond manager has an unavoidable reason to resign, it may resign with permission of the competent court.
(3) The bond manager may resign based of the causes prescribed in the agreement entrusting the management of the bonds. (However, such agreement must have a provision
designating a succeeding bond manager that will take over the job.)*) A bond manager that resigns after the issuer has defaulted on the redemption of the Article 712
bond or on the payment of interest on such bond, or that has resigned for reasons prescribed in the agreement commissioning the management of the bond within threemonths prior thereto, is not exempted from liability to pay damages under Paragraph 2
of Article 710.
Source: Compiled from the data drawn from Akihiro Sato, Shinkaishaho de kawatta kaisha no shikumi (The Changed Company System under
the New Companies Act), Nihon Horei, 2005, pp. 179 and 181.

Chap. V New Issues of Bonds in the Primary Market

91

of a bond management company was made mandatory, in principle, and theeligibility for becoming one was restricted to banks, trust companies, andcompanies that have received a license under the Mortgage Bond Trust Law;
(2) services to be provided by a bond management company were restricted
to the management of outstanding bonds; and (3) the powers, duties, and liabilities of the bond management company were clarified. Put another way,
the back-office services provided by the trust company at the time a bond isoffered will not become the core services of the bond management company,
and the services to be provided by the bond management company after abond is issued are restricted to bond management.
As a result of the amendment, the possibility of a bond trustee company
being involved in the issuance of corporate bonds of individual issuers has
been legally removed, and the power of the conventional bond trustee systemregulating individual issuers has thus come to an end. The amendment has
resulted in the following changes: (1) The fee the trustee bank had been collecting was renamed“bond management fee,”and it was lowered; (2) by instituting exceptional provisions with respect to the mandatory establishmentof a bond management company (this applies when the face value of a bondcertificate is in excess of ¥100 million), issuers can appoint a fiscal agent inlieu of a bond management company, and instances of making do with a fiscal agent have since increased.
Under the New Companies Act enforced in May 2006, a bond management company is now known as a“bond manager,”and its liability and power have been expanded. More specifically, (1) under the former Commercial
Code, the term“management of corporate bond”referred only to the exercise
of power legally granted to the bond management company and did not include the exercise of power based on an agreement, etc., entrusting the management of bonds (contractual power); under the new Companies Act, however, the exercise of the contractual power is included in“the management ofbonds”and the bond manager owes the duty of fairness and the duty of due
care of a prudent manager; (2) when the agreement entrusting the management of bonds contains a provision to that effect, the bond manager may act
in relation to filing a lawsuit and taking bankruptcy or rehabilitation proceedings for all of the bonds without obtaining a resolution of the bondholders’meeting; and (3) in taking steps to protect the creditors in the case of a capital
reduction or a merger, the bond manager may, in principle, object to suchcapital reduction or merger without obtaining a resolution of the bondholders
meeting.
The revised Companies Act, which came into effect in March 2021, has
introduced an“assistant bond administrator”system, whereby assistant bondadministrators are obliged to facilitate administrative procedures related tocorporate bonds and help to protect claims. The system is applicable to bonds

92

Chap. V New Issues of Bonds in the Primary Market

for which no bond administrator is established, and like the“bondholder supporting agent”system founded by the Japan Securities Dealers Association in2016, it can be played by financial institutions as well as lawyers and legal
firms familiar with bankruptcy affairs.
7. Corporate Bonds with Subscription Rights/Warrants and Structured
Bonds
Subscription rights/warrants give their issuer an obligation to either issue
new shares or transfer shares in its treasury at a predetermined price to therights/warrants holder upon the exercise of their rights/warrants within a prescribed period.
Corporate bonds with subscription rights/warrants are divided into thosethat in effect correspond to convertible bonds and those with undetachable
warrants. Corporate bonds with subscription rights/warrants correspond to
the former and refer to bonds (1) from which the rights cannot be detached or
separately transferred, (2) whose issue value is equal to the amount of money
payable upon the exercise of the rights, and (3) for which the exercise of thesubscription rights/warrants is always based on the contribution in kind of
the corporate bonds (debt equity swap). Except in the case of a stock split,
the conversion price is fixed at the time of its issue. In certain cases, however, the conversion price of rights may be revised downward when the price of
its underlying stock falls. Among these cases, bond issued under the condition that the conversion price can be adjusted downward with a frequency of
one or more times every six months are called“corporate bonds with subscription rights/warrants with adjustable conversion price (MSCBs: moving
strike convertible bonds).”Because of market concerns about this type of“death spiral”financing, however, few of these types of bonds have been issued recently. On the other hand, as corporate bonds issued with detachable
warrants are deemed a concurrent offering of corporate bonds and equity
warrants, only those with undetachable warrants are included in the definition of“corporate bonds with subscription rights/warrants.”In such case, themoney to be paid upon the exercise of subscription rights/warrants should be
paid additionally, and the bond remains outstanding.
“Structured bond”is the name popularly given to a bond structured with
derivatives. In recent years, various types of structured bonds have been issued. The underlying assets for derivatives embedded in structured bonds include equities, interest rates, foreign exchanges and credit risks. Nikkei 225
Index-linked Bond is a form of structured bonds, which incorporates Nikkei
225 options trading, a form of derivative component exposed to equities-related risks. In general, when the Nikkei 225 index rises, the deal generates aChap. V New Issues of Bonds in the Primary Market

Table V-6.

93

Kinds of Structured Bonds[Variable Cash Flow Bonds]
Step-up Bond: A bond issued initially with a coupon rate that is lower than the going rate thenprevailing and that rises after the lapse of a certain period. By its very nature, the issuer often issues
such a bond with a call option.
Step-down Bond: A bond issued initially with a coupon rate that is higher than the going rate thenprevailing and that declines after the lapse of a certain period.
Deep-Discount Bond: This bond carries an interest rate lower than the going rate throughout its
life, but it is issued at an under-par price to help its holders make up for the lower coupon by aredemption gain.
Reverse Floater Bond: The coupon rate of this bond falls when the interest rate rises, and the
coupon rate rises when the interest rate declines. This is a kind of derivative bond using interest rate
swap.
[Index Bonds]
Stock, interest rate, or bond-index-linked bond: These are bonds whose redemption principal islinked to the Nikkei average, whose coupon rate is linked to the Nikkei average, whose coupon rate islinked to the interest swap rate, or whose redemption principal is linked to the Japanese government
bond futures price.
Exchange Rate Index Bond: Most of these dual-currency bonds are divided into those with aprincipal and coupon in yen that are redeemable in a foreign currency and into reverse dual-currency
bonds with a principal and coupon redeemable in yen that carry a coupon in a foreign currency. As theamount of principal is normally larger than the coupon, dual-currency bonds carry a larger risk of
exchange rate fluctuation.
[Bonds with Options]Exchangeable Bonds (EB): Issuers of this bond may at their discretion pay redemptions with a prefixed number of shares of another company. For the purchaser, this means the sale of a put option, andunder this arrangement, the coupon increases by as much as the option premium.
Other Bonds with Options: Included in this kind are callable bonds (the issuer can call the bond inadvance of its maturity at the discretion of the issuer); puttable bonds (its holder can demand
redemption in advance of its maturity); and knock-in, dual-currency bonds (a dual-currency bond withan exchange-rate option).
Source: Compiled on the basis of the data drawn from the website of Hephaistos Investment Research(http://hephaistos.fc2web.com/bond_guide/shikumi_sai.html) (Japanese) and the website of The
Central Council for Financial Services Information

higher return; but when it falls, the options is exercised, causing a loss, andthe bond price falls below its par value.A corporate bond with a clause toconvert it into shares of another company “( exchangeable bond”or EB) is abond that incorporates a stock option of the target company. In general, when
the stock price of such corporation rises, the deal generates a higher return
because the holder can acquire the option fee, but when the price of its stock
falls, the option is exercised, and the holder has to accept the share at a lower
price and suffers a loss. However, unlike in the case of a bond linked to the
Nikkei average, the holder can hold the share until its price recovers.

CHAPTER VI
The Secondary Markets for Bonds

1. Trading of Bonds
Bonds are circulated by two different methods: (1) trading on a market operated by a financial instruments exchange, and (2) negotiated transaction between an investor and a securities company or other market intermediary.
The former is referred to as an exchange transaction and the latter as an overthe-counter (OTC) transaction. OTC transactions account for the majority oftransactions on the bond secondary market.
The trading volume of public and corporate bonds in the secondary market(including JGB basket trades from May 2018; the same applies here in Section 1 below) was only ¥58 trillion in fiscal 1975, but continued to growthereafter, hitting the ¥10 quadrillion level in fiscal 2007. Although trading
volume decreased to ¥7.7 quadrillion in fiscal 2010 due to the impact of theLehman Shock and other factors, it has recently increased significantly due
to the shift from general collateral repos to repurchase repo transactions, andhas reached ¥30 quadrillion in fiscal 2020.
Looking at the bond trading volume by bond type, trading of JGBs accountfor over 90% of all trading. The government has continuously been issuing
massive amounts of JGBs, resulting in a large increase in those outstanding
in the market and driving the expansion of the bond secondary market.
This trend has been continuing. Between fiscal 2010 to 2020, the trading
volume of JGBs increased by ¥22,908 quadrillion, while the overall increase
for all public and corporate bonds was ¥22,857 quadrillion. As such, government securities outweigh by far other categories of bonds in overall fixed income trading volume. The dominance of government debts stems most likely
from the difference in liquidity, which in turn is mainly because government
debts are considered risk free in Japan and attract funds for various investment needs.
For the sake of development of secondary markets for bonds in Japan going forward, it is important that bonds other than JGBs are traded actively.
Recognizing the need to vitalize the corporate bond market, which plays animportant role in corporate finance, the Japan Securities Dealers Association

Chap. VI The Secondary Markets for Bonds

Chart VI-1.

Annual Amount of Purchasing and Selling of Bonds (Face Value Basis)and Share of OTC Trades(trillions of yen)
35,00028,000

Amounts of public and corporate bond trades (left)
Share of OTC trades (right)

21,00014,0007,000
0952005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

100.000%
99.999%99.998%99.997%99.996%99.995%99.994%99.993%99.992%99.991%99.990%(FY)

Notes: 1. Figures include gensaki trades and exclude corporate bonds with equity warrants.
2. The purchase price is, in principle, based on original face value, but government bondbasket transactions from May 2018 onwards are based on execution price.
Source: Compiled from statistics on the Japan Securities Dealers Association website (OTC trading
volume of public and corporate bonds; OTC trading volume by bond type) and the Japan
Exchange Group website (transaction volume and value)(JSDA) issued, in 2009, a report titled,“Toward Vitalization of the Corporate
Bond Market”that organized the issues faced by the country’s corporatebond market and also proposed specific measures to create a more efficient
corporate bond market with higher transparency and liquidity. The reportwent on to state that vitalization of the Japanese corporate bond market
would be an important factor in Japan’s new economic growth strategy andthat the public and private sectors should actively cooperate in advancing themeasures.
Some of the specific initiatives taken by the JSDA are described later inthis Chapter.
2. Participants in the Secondary Bond Market
Looking at the OTC bond market by type of investor or transaction party,
trading is dominated by bond dealers, such as securities companies. OTC
trading of public and corporate bonds requires dealers to promptly cope witha broad range of trading requirements from investors. However, the large
number of bonds and the wide variety of available transaction forms make it
difficult to quickly find a matching counterparty for certain transactions.
Therefore, in most bond transactions, securities companies or dealer banks
act as the counterparty, buying or selling as principal against clients’needs to96Chap. VI The Secondary Markets for Bonds

Chart VI-2.
(trillions of yen)
9,000

Bond Trading volume by Bond Type
Shares of JGBs trades (right)
Interest-bearing ultra-long-term
Interest-bearing medium-term

Interest-bearing long-term
Short-term, etc

100%

7,500

99%

6,000

98%

4,500

97%

3,000

96%

1,500

95%

0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 202094%

Note: Figures include gensaki trades (excluding JGB basket transactions from May 2018) andexclude corporate bonds with equity warrants.
Source: Compiled from statistics on the Japan Securities Dealers Association website(OTC trading volume of public and corporate bonds; OTC trading volume by bond type)(trillions of yen)
120
100

Financial bonds
Manicipal bonds (Including Nepotism bonds)
Government guaranteed bonds
Bonds (Including Agency bonds, etc.)

80
60
40
20
0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Note: Figures include gensaki trades and exclude corporate bonds with equity warrants.
Source: Compiled from statistics on the Japan Securities Dealers Association website (OTC
trading volume of public and corporate bonds; OTC trading volume by bond type)facilitate smooth transactions. Furthermore, securities companies, etc. trade
bonds on a proprietary basis, which adds to overall dealer trading volumes.
Following bond dealers, entities grouped as“others”account for the next
largest share of the total volume. This group includes the Bank of Japan,
which functions as the underwriting agent for JGBs and also buys and sells a
range of debt securities as part of its open market operations Buying and selling by non-residents has risen in recent years, aggressively trading short-term
government bonds such as treasury bills, as well as long-term and superlongterm bonds. Their purpose of investing in the Japanese bond market is moreas a means to make investment in the yen rather than in bonds. In addition,

Chap. VI The Secondary Markets for Bonds

Table VI-1.

97

Trends in Bond Transactions by Investor Type

(Figure on the top line is the total of buy and sell; figure on the lower line is the net of buy and sell andnegative figure denotes selling on balance)(¥10 billion)
FY2011City (commercial) banks

FY2012FY2013

FY2014FY2015FY2016FY2017FY2018FY2019FY202046,511
40,15018,59925,407(－1,997) (－2,861) (－2,837) (－2,630)

12,709(－973)

6,085(1,064)

10,231(2,209)

9,135
(352)

10,077(158)

12,401(3,259)

Regional banks

5,891(1,020)

5,765
(644)

4,140
(482)

4,550
(303)

3,480
(51)

2,525
(－80)

1,640
(－60)

1,561
(16)

1,484
(308)

1,606
(518)

Trust banks

24,789(8,252)

22,294(8,109)16,800(5,478)14,175(1,298)

10,861(561)

10,000(299)

10,074(516)

10,582(423)

12,234(882)

13,792(1,964)Agriculture-related banking
institutions

3,356(2,221)

3,099(2,126)

1,764
(779)

1,307
(486)

1,000
(232)

975
(240)

980
(325)

1,026
(230)

1,038
(286)

1,245
(408)

Other banking institutions

5,448(2,346)

4,266(2,602)3,475(2,016)

2,636
(790)

2,128
(806)

1,631
(578)

733
(155)

613
(109)

545
(140)

706
(244)

Life and property casualty
insurance companies

4,583(1,896)

4,826(1,631)

4,256(1,387)

2,704
(908)

1,956
(507)

1,555
(404)

1,507
(371)

1,701
(406)

1,880
(563)

2,256
(728)

Investment Trusts

2,885(2,100)3,108(2,309)4,318(3,165)

4,372(3,045)3,961(2,284)

2,139
(416)

2,159
(240)

2,498
(381)

2,912
(519)

3,634
(733)

Public employees mutual
aid associations

277
(166)

299
(213)

210
(151)

114
(54)

115
(15)

84
(5)

86
(7)

82
(3)

65
(5)

109
(－32)

Corporations

1,003
(922)

1,203
(1,093)

1,281(1,104)

696
(630)

320
(256)

81
(40)

98
(75)

144
(94)

180
(109)

160
(120)

36,902(14,891)

34,131(15,997)

34,799(16,300)

35,730(20,103)37,609(21,575)

36,466(21,814)34,992(21,208)

40,444(24,486)

45,376(23,929)54,653(27,909)

Entities not domiciled in
Japan
Others52,71958,93062,35560,97561,742
56,86948,84946,83744,07570,883(－31,408) (－30,369) (－26,367) (－23,756) (－24,673) (－22,866) (－24,303) (－26,216) (－26,870) (－37,612)

Bond dealers

179,035 164,805(－570) (－1,172)

162,073(－661)

187,339(－223)

142,679(－446)

116,243(－465)

117,185(28)

111,706(34)

111,933(10)

101,576(－135)

Total(including other investors)

369,000(1,253)

318,446(2,222)

344,034(1,984)

281,281(557)

236,550(1,490)230,135(881)

228,532(474)

233,583(336)

265,029(－799)

348,505(1,432)

Note: Excludes trades of corporate bonds with equity warrants, other than gensaki bonds.
Source: Compiled from statistics on the Japan Securities Dealers Association website (OTC trading volume of public and corporate bonds; OTC trading volume by bond type)with the difficult investment environment recently, city banks, in pursuit ofprofit, are vigorously engaging in proprietary bond trading and also resellingmunicipal and other bonds underwritten by themselves. It should also be noted that trust banks have traditionally allocated large shares of assets undermanagement or administration, including pension assets, to bonds.
As measured in terms of difference between selling and buying transactions, almost all business categories were net buyers of bonds in fiscal 2018

98

Chap. VI The Secondary Markets for Bonds

and 2019, except“others”. The reason why“others”is constantly and significantly oversold is that primary JGBs issued by auction are settled via the
Bank of Japan and reported as sales by the central bank. In fiscal 2020, government bond issuance increased significantly due to two supplementarybudgets in response to the pandemic. This drove a sharp rise in the net saleamount in the“others”category but also a large increase in the net value inmany categories, including city banks and non-residents. According to the
JGB issuance plan for fiscal 2021, issuance is expected to be lower than in
fiscal 2020. However, since issuance remains at historically high levels, thenet buying trend in all categories except“others”is expected to continue.
3. Over-the-counter Bond Transactions
Depending on where transactions take place, the circulation of bonds may bebroadly divided into exchange transactions and over-the-counter (OTC)transactions.
An overwhelming majority of bond transactions takes place over the counter rather than on exchanges. This is due to the following reasons: (1) there
are so many issues of bonds that it is practically impossible to list all of themon exchanges; (2) due to the wide variety of bond transaction forms and otherspecifications that different buyers and sellers require, it is difficult to instantly locate a matching counterparty for a particular transaction; (3) corporate investors, who account for the bulk of the bond trading volume, tend to
trade in large lots and often carry out complex transactions involving morethan one issue; and (4) tax on bond interest varies according to the tax profiles of bondholders. Due to these reasons, bond transactions, in general, do
not lend themselves to trading on exchanges, where the terms of transactions
need to be standardized. Bonds are more efficiently traded over the counter,
where trades are executed based on the terms individually negotiated between buyers and sellers.
Unlike exchange markets, where all orders for a particular instrument areconcentrated in a single marketplace, OTC trading, in essence, is a decentralized, free transaction process based on one-to-one negotiation between theparties that is conducted over the counter at individual securities companies,
etc. In that sense, it may be said that the counter of each securities company
is a market in itself and that there are as many OTC markets as there are securities companies.
A wide variety of transactions may be executed over the counter once aninvestor and a securities company agree on their terms. Private placement
bonds as well as publicly offered bonds may be traded, and the delivery andsettlement procedures are to be agreed upon between the buyer and the seller.

Chap. VI The Secondary Markets for Bonds

Table VI-2.

99

Bond Trading by Market(¥10 billion)
Corporate bonds with
subscription rights/
warrants

Government
securities
FY2011FY2012FY2013
FY2014FY2015FY2016FY2017FY2018FY2019FY2020

OthersStock Exchanges

0

40

0

Over the counter

829,983

46

10,773

Stock Exchanges

0

30

0

Over the counter

842,31445

9,760

Stock Exchanges

0

27

0

Over the counter

936,753

24

9,230

Stock Exchanges

0

8

0

Over the counter

1,039,157

11

11,273

Stock Exchanges

0

30

0

Over the counter

1,025,087

20

14,432

Stock Exchanges

0

18

0

Over the counter

921,027

31

7,335

Stock Exchanges

0

6

0

Over the counter

983,60913

8,717

Stock Exchanges

0

4

0

Over the counter

1,889,240

11

8,141

Stock Exchanges

0

3

0

Over the counter

2,596,532

8

7,979

Stock Exchanges

0

4

0

Over the counter

3,052,768

7

5,090

Notes: 1. The figures for exchange trading volume are double those actually reported by exchanges to account for both buy and sell sides of transactions.
2. OTC trading volume includes gensaki trades (including JGB basket transactions (execution
amount basis) from May 2018)
Source: Compiled from statistics on the Japan Securities Dealers Association website (OTC trading volume of public and corporate bonds; OTC trading volume by bond type) and the Japan ExchangeGroup website (transaction volume and value)

The transaction price can also be decided between the two parties, often inreference to the prices of other relevant financial instruments.
In OTC trading, a securities company, etc. first buys bonds that a client offers to sell and then resells them to another client afterward. When a client
wants to buy bonds, it sells them out of its own inventory or tries to get themfrom other brokers. These types of transactions, in which a securities compa-

100Chap. VI The Secondary Markets for Bonds

Table VI-3. Breakdown of Major Bond Categories, by Outstanding Balance andNumber of Issues(¥1 trillion, No. of issues)

FY2011 No. of Issues
Outstanding balance
FY2012 No. of Issues
Outstanding balance
FY2013 No. of Issues
Outstanding balance
FY2014 No. of Issues
Outstanding balance
FY2015 No. of Issues
Outstanding balance
FY2016 No. of Issues
Outstanding balance
FY2017 No. of Issues
Outstanding balance
FY2018 No. of Issues
Outstanding balance
FY2019 No. of Issues
Outstanding balance
FY2020 No. of Issues
Outstanding balance

Government Municipal
securities
bonds(public
offering)

Government- Straightguaranteedbonds
bonds; FILP
agency bonds

449

2,525

1,634

2,658

21

781

52

64

62

1

15

470

2,655

1,772

2,709

17

1,163

Corporate Bank
bonds with debenturessubscription (interestrights/bearing andwarrants
discount)
1,272

814

55

66

60

1

14

476

2,805

1,916

2,823

18

900

848

57

69

60

0

12

493

2,917

2,021

2,863

22

789

873

58

69

59

0

12

497

3,008

2,151

2,828

24

526

901

59

69

57

0

11

506

3,059

2,244

2,961

26

428

927

60

68

60

0

10

512

3,100

2,370

3,070

23

366

948

60

68

60

0

9

516

3,152

2,505

3,269

17

364

966

61

68

62

0

8

520

3,193

2,475

3,556

25

235

978

62

67

70

0

7

536

3,261

2,624

3,769

23

223

1,065

62

68

76

0

6

Note: Outstanding balance figures are in trillions of yen. The aggregation method has been partiallychanged since April 2019.
Source: Compiled from statistics on the Japan Securities Dealers Association website (issuance and redemption amount of public and corporate bonds)

ny takes part in a transaction as the client’s counterparty, are generally referred to as“principal transactions”and make up a significant proportion of
trades in the bond market.

Chap. VI The Secondary Markets for Bonds

101

4. Reference Statistical Prices (Yields) for OTC Bond Transactions (1)As OTC bond trading is a negotiated process between a securities company,
etc. and a client, it is difficult for a third party to discover the price at which atransaction is consummated. Publication of prices and other information concerning OTC bond transactions not only helps efficient and orderly trading ofbonds but is also of critical importance from the standpoint of investor protection by promoting the formation of fair prices and facilitating investors’
access to trading at the best possible price. Publication of bond prices is thus
indispensable for the development of bond markets.
With a view to providing investors, securities companies, and others withreference information, the JSDA instituted the System for Dissemination ofReference Statistical Prices (Yields) for OTC Bond Transactions, which publishes (mid price between buy and sell quotes) quotes for publicly offeredbonds that meet certain criteria. The system was originally instituted in August 1965 by the Bond Underwriters Association of Japan for publishing
OTC Quotes for Industrial Debentures and was succeeded by the Tokyo Securities Dealers Association, the predecessor of the JSDA, which began thesystem for dissemination of OTC quotations of bonds in March 1966. The
initiatives were implemented with a backdrop of social necessity to promote
the formation of fair prices and efficient and orderly trading for JGBs, issuance of which had been resumed after the war with a view to contributing to
public interest and investor protection. The system has since undergone many

Table VI-4.

The System for Dissemination of Reference Statistical Prices (Yields) for
OTC Bond Transactions

1. Outline(1) Purpose
To publish quotations reported by member companies appointed by the Japan Securities Dealers Association to be used as reference by member companies of the association and their clients in trading
bonds over the counter between them.
Note: In August 1965, the Bond Underwriters Association started publishing quotations on
OTC industrial bonds. Subsequently, the Tokyo Securities Dealers Association started
publishing OTC bond quotations in March 1966, and improvements have been made on
several occasions thereafter.
(2) Calculation of Reference Statistical Prices (Yields) for OTC Bond Transactions
The JSDA receives reports from its member companies affiliated with the system (13 securities companies as of December 31, 2021) on quotations of trades with a face value of approximately ¥500 million
as of 3:00 p.m. each trading day. The JSDA computes the reference prices (yields) of a given issue on
the basis of an arithmetic average of quotations on issues with respect to which it has received reports
from five or more member companies.

102

Chap. VI The Secondary Markets for Bonds

Table VI-5. History of System for Dissemination of Reference Statistical Prices (Yields)
for OTC Bond Transactions
Kinds of selectable issues
No. of selected issues
March 1966
Government securities, municipal bonds, govern- No. of issues announced:
Over-the-counter quotes announced
ment-guaranteed bonds, coupon bank debentures, 280･ Date of announcement (Thursday of each corporate bonds, telegraph and telephone (TT) (as of May 12, 1966)
week)
coupon bonds subscribed to by subscribers, discount TT bonds, and such other bonds as may berecognized by the Japan Securities Dealers Association (JSDA)
January 1977
(1) Benchmark quotes (for institutional investors) (1) Benchmark quotes:･ Announcement of bench-mark and standard
are selected from such bonds whose volume
Issues announced: 14
quotes (Benchmark quotes are announcedof trading correctly reflects the movement of(as of January 31, 1977)
the market.
every day except Saturday. Standard quotes(2) Standard quotes:
are announced once a week on Thursday.) (2) Standard quotes (for small-lot investors) are
Issues announced: 77
selected from one of government securities,(as of January 27, 1977)
municipal bonds, special debts, bank debentures, corporate bonds, and yen-denominatedforeign bonds, other than those listed in (1)above in terms of maturities and interest
rates.
August 1978
The same as above.
(1) Benchmark quotes:･ Announcement of bench-mark and standard
Issues announced: 19
quotes (bid and ask quotations are an(as of August 31, 1978)
nounced). (Benchmark quotes are an(2) Standard quotes:
Issues announced: 137
nounced every day except Saturday. Standard quotes are announced once a week on(as of August 31, 1978)
Thursday.)January 1992
One of the government securities, municipal Issues announced: 298･ Standard quotes on OTC bonds are an- bonds, government-guaranteed bonds, bank de- (as of January 31, 1992)
nounced daily.
bentures, corporate bonds, and yen-denominatedforeign bonds that are not listed is selected interms of kinds, maturities, and interest rates.
April 1997
Publicly offered but unlisted bonds (with a re- Issues announced: 1,746･ No. of selectable issues was sharply in- maining life of one year or longer) that maintain (as of May 1, 1997)
creased (the new system started operating.) a fixed interest rate throughout their life and redeem their principal in a lump sum were selected.
December 1998
Publicly offered bonds (with paid-in principal, Issues announced: 2,867･ The duty to concentrate its trading on the interest, and redemption money all paid in yen) (as of December 1, 1998)
exchange market was abolished.
are selected.
August 2002
The same as above.
Issued announced: 4,198･ Name of system changed to “Reference(as of August 1, 2002)
Statistical Prices (Yields) for OTC Bond
Transactions.”In addition to average values,
highs, lows and medians are announced.
December 2013
The same as above.
Issued announced: 7,931･ Decision made to revise the calculation(as of December 2, 2013)
method for corporate and other bonds andannounce quotes earlier.
November 2015
The same as above.
Issued announced: 8,257･ Start of operation of revised system(as of November 2, 2015)
May 2018
The same as above.
･ Change of last announcement date due tothe shortened settlement period (T+1) of
JGBs.
July 2020
The same as above.
･ Change of last announcement date due tothe shortened settlement period (T+2) of
non-JGB bonds.

No. of issues announced:
9,345(as of May 1, 2018)
No. of issues announced:
10,423(as of July 13, 2020)

Note: Selected issues reported on and after August 5, 2002, were transferred to the System for Dissemination of Reference Statistical Prices (Yields) for OTC Bond Transactions.

Chap. VI The Secondary Markets for Bonds

103

changes and improvements in response to the changing environment surrounding the bond market. During that period, the number of published issues has ballooned from about 300 when the system was introduced to approximately 11,100. In August 2002, the JSDA changed the name of the datafrom Standard Quotes on OTC Bonds to Reference Statistical Prices (Yields)
for OTC Bond Transactions to clearly indicate that the data is offered as areference for OTC bond transactions. At the same time, the system was enhanced by publishing high, low, and median values of quotes in addition to
the average, which had previously been the only data available.
Since the system started publishing bond quotes 50 years ago, its use has
evolved from the original purpose of providing price references for OTC
bond trading in Japan. In addition to that role, it has become widely used formark to market valuation for financial reporting and tax accounting purposes
and the valuation of collateral for different types of transactions. The expansion of usage required an even greater degree of confidence in the system. As
a result, in 2013 a review was made of the quotation system primarily withregard to publishing reference statistical prices (yields) for corporate straightbonds. The new system arising from that review began operation in November 2015.
5. Reference Statistical Prices (Yields) for OTC Bond Transactions (2)To provide reference information on bond prices, the JSDA publishes Reference Statistical Prices (Yields) for OTC Bond Transactions each business day
based on the values of quotations for trades with a face value of roughly ¥500
million reported as of 3:00 p.m. by members designated by the JSDA (hereinafter referred to as“Designated-Reporting Members”). With calls made tofurther increase the reliability and stability of this publication system, however, the JSDA made some revisions to the system, primarily to the mattersrelating to corporate bonds. The new system was implemented in November
2015.
Major enhanced elements in the new system are as follows.
(1) Stricter designation standards for Designated-Reporting Members:
Recognizing the need to appoint members with the capability to report appropriate quotations that reflect movements of the corporate bond market as
Designated-Reporting Members in order to increase reliability of Reference
Statistical Prices (Yields) for OTC Bond Transactions, stricter designation
standards, such as the member’s trading volume of corporate bonds, etc. must
be within the top 20, were added.
(2) Enhancement and reinforcement of guidance and management structure at the JSDA: To ensure that proper reporting is made by Designated-Re-

104

Chap. VI The Secondary Markets for Bonds

Chart VI-3.

Illustrated Flow of Procedure up to the Publication of Reference StatisticalPrices (Yields) for OTC Bond Transactions
Corporate bonds:
Reporting by
5:45 p.m.

DesignatedreportingmemberJapan Securities
Dealers Association

Corporate bonds:
Announcement
around 6:30 p.m.

Internet users
Securities
companies

OTC public & corporate
bonds

Calculation ofreference prices

Public bonds:
Reporting by
4:30 p.m.

Table VI-6.

Buys and sells reference
Compilation of statistics

Public bonds:
Announcement
around 5:30 p.m.

Financial
institutions
Media members,etc.

Designation of Designated-Reporting Members

The Japan Securities Dealers Association screens members intending to become Designated-Reporting
Members based on the following designation standards to specify Designated-Reporting Members.
(1) The member understands the purport of the System for Dissemination of Reference Statistical Prices(Yields) for OTC Bond Transactions and intends to become a Designated-Reporting Member.
(2) The member is well versed in the operations for OTC bond trades.
(3) The member has in place an organizational structure and staffing required for properly executing theoperation for reporting quotations.
(4) Other matters set forth by the JSDA.
*For further details on screening standards, please see the website of the JSDA.

porting Members, the JSDA performs checks to detect (i) any inappropriate
quotations for each business day and (ii) any problems with the reporting
framework of each Designated-Reporting Member.
(3) Revised calculation method for Reference Statistical Prices (Yields) for
OTC Bond Transactions: When the reported corporate bond quotations are
relatively dispersed and there is a major movement on the market, quotations
that deviate significantly from the average quote may actually be more appropriate, and because abnormal values are eliminated in the checking performed in (2), it was decided that truncating the highest and lowest values ofreported quotations, which was previously done mechanically, would no longer be performed.
(4) Pushing back the time of reporting deadline and the time of announcement: In consideration of the voices from non-reporting members raising theneed to push back the reporting deadline for bond quotations in order tomake reports, the deadline for trade reporting and that for announcement
were pushed back by 75 minutes and 60 minutes respectively.
(5) Promoting better understanding of Reference Statistical Prices (Yields)
for OTC Bond Transactions: It was decided that more easy-to-understand explanations on the characteristics of the Reference Statistical Prices (Yields)

Chap. VI The Secondary Markets for Bonds

105

Table VI-7. Revisions to Reference Statistical Prices (Yields) for OTC Bond Transactions
Revision measures(1) Stricter designation
standards for Designated-Reporting
Members

Outline

Revisions to bonds
applicable to reporting

Added the following specific standards in ac- Corporate bonds, TMK
knowledging that the member is“well versed in bonds, yen-denominatedthe operations for OTC bond trades.”foreign bonds･ A Designated-Reporting Member that reports
quotations on corporate bonds, etc. shall beranked within the top 20 in terms of the bondtrading volume.
･ However, reporting may be made for bond trades
for which the member serves as the lead managing underwriter.

(2) Enhancement and ･ Adoption of a process to check the reported quo- All debt securities
tations (including warnings issued to Designatreinforcement of
ed-Reporting Members) every business day
guidance and management structure at ･ Adoption of a process to check the reporting
the JSDA
systems of Designated-Reporting Members･ Setting self-regulatory regulation of prohibiting
information exchange, etc. relating to quotation
standards between Designated-Reporting Members(3) R e v i s i o n s t o t h e ･ Removal of the step to cut off the highest and Corporate bonds, TMK
method of calculatlowest quotations reported
bonds, yen-denominateding reference statistiforeign bonds
cal prices for OTC
bond transactions(4) Pushing back the ･ Pushed back the time of reporting deadline by 1 Corporate bonds, TMK
hour and 15 minutes to 5:45 p.m.
time of reporting
bonds, yen-denominatedd e a d l i n e a n d t h e ･ Pushed back the time of announcement by about foreign bonds
1 hour to 6:30 p.m.
time of announcement(5) Promoting better un- ･ Easier-to-understand explanations on the nature, All debt securities
derstanding of referetc. of reference statistical prices (yields) forence statistical prices
OTC bond transactions, such as the possible deviation from actual trade prices, on the JSDA
(yields) for OTC
website, etc.
bond transactions

for OTC Bond Transactions should be posted on the JSDA website, etc., suchas the fact that the Reference Statistical Prices (Yields) for OTC Bond Transactions referred to the middle rate of bid and ask, and therefore some discrepancy between data and actual transaction price could be seen.

106

Chap. VI The Secondary Markets for Bonds

6. Reporting & Announcement System of Corporate Bond Trading
Recognizing the importance of increasing transparency of information on
corporate bond prices and securing reliability through providing bond trading
data in an aim to vitalize the corporate bond market, the JSDA decided to
publicize actual trading prices of corporate bond trades on the OTC market
from November 2015.
This new initiative is composed of the JSDA’s system to receive reportingon transaction prices, etc. from member securities companies and the system
to disclose the reported transaction prices, etc.
(1) System of reporting corporate bond transactions: JSDA’s Self-Regulatory Rules set out reporting requirements on each securities company (amember of JSDA) that participate in a bond transaction on one side or theother. Reporting is required for the following bonds: (i) that were publicly offered or sold in Japan, (ii) that were in Japan, (iii) of which the principal, interest, and redeemed principal are yen-denominated (excluding short-term
corporate bonds and corporate bonds with subscription rights/warrants).
Transactions subject to reporting include the followings: (i) transactions thatare reported every business day (trades with a face value of ¥100 million or
above) and (ii) transactions that may be reported on a monthly basis if notified to the JSDA (trades with a face value of less than ¥100 million; provided, however, that transactions with a face value of less than ¥10 million may
be omitted from reporting).
(2) System of publicizing corporate bond transactions: The JSDA announces information on bond trades on its website on the business day following the day on which reports on trades are received from securities company. Items announced are: (i) contract date, (ii) issue code, (iii) name ofissue, (iv) due date, (v) coupon rate, (vi) trading value (whether the face value is ¥500 million or above, or not), and (vii) unit price (traded price per facevalue of ¥100 yen), and (viii) buy or sell (whether the counterparty of securities company is abuyer or seller). In addition to bonds with an issue rating ofAA or higher, from April 2021, bonds with an issue rating of A (excluding A
minus) and an issue amount of 50 billion yen or more (excluding subordinated bonds and bonds with a remaining maturity of 20 years or more) has been
adopted as the bonds to be announced.
When certain conditions apply, the announcement of such corporate bondtransaction is suspended.
(3) Periodical verification: The JSDA has decided to periodically verify
the impact, etc. of the implementation of the system of publicizing corporatebond transaction information on the liquidity of corporate bonds and to consider revising the system if needed.

Chap. VI The Secondary Markets for Bonds

Chart VI-4.

107

Illustrated Flow of Reporting & Announcement of Corporate Bond
Trading

JSDA members
Transaction
information (*1)

Direct or
via-JASDEC
reporting by 5:15 p.m.

Announcement at
9:00 a.m. thefollowing day

JSDAInternet users
Securities companies

JASDEC

Financial institutions

Transaction
information (*2)

Media persons, etc.

(*1) Transactions processed (or approved) by the system between 3:00 p.m. on the previous business day and3:00 p.m. on the day.
(*2) Trade reporting data transmitted to the settlement reconciliation system between 4:45 p.m. on the previous
business day and 4:45 p.m. on the day.

Chart VI-5.

Information announced○Announced on December 1, 2021
Trade contract date: November 30, 2021
Issue code Issue name

Redemption Coupon Trading Transaction Transaction Contracted [Reference]
date
rate
type
volume (face volume (face unit price Reference Statistical Prices (Yields)
value basis) value basis) (¥)
f or OTC Bondof ¥500 mil- of less thanlion or above ¥500 million
Transactions (Average Prices)

000039023 XX Industries 3 2027/09/20

1.9

Sell

000039023 XX Industries 3 2027/09/20

1.9

Buy

000039023 XX Industries 3 2027/09/20

1.9

Sell

Chart VI-6.

＊

102.△△

102.09＊102.××102.09＊102.●●

102.09

Example of suspension of announcement and removal of suspension ofannouncement
Scheduled month of resuming announcement

Oct 22

Nov 15

In accordance with thestandards for suspensionof announcement

Suspension ofannouncement

Update judgment
date

Dec 1

Removal of suspensionof announcement(resume announcement)
Extension of suspensionof announcement(no resumption ofannouncement)

Dec 15

Update judgment
date after carry-overOct 21

Jan 1

Removal of suspensionof announcement(resume announcement)

108

Chap. VI The Secondary Markets for Bonds

7. Book-Entry Transfer System for Bonds
In the past, investors held bonds in various forms—more specifically, in
physical certificates issued by the issuers; in registered form, where bondholders are registered on the registry at the registrar designated for the issue;
and as book-entry JGBs, where physical certificates are deposited with the
BOJ so that trades can be settled by book-entry transfers (within the systemestablished in 1980) among the accounts of brokers and other system participants (account management institutions).
However, with the increasing bond trading volume, it was evident that thecurrent management measures of bondholders’ownership by means of certificates, which needed to be physically delivered, or registered bonds, whosetransfer required amendment in records of bond-specific registries, would encounter a capacity bottleneck in terms of settlement procedures, and that thebook-entry transfer system for JGBs had several shortcomings. The situation
indicated that the settlement procedures for bonds were in need of review.
There was a growing perception that Japan urgently needed to renovate theexisting system to create a safer and more efficient infrastructure that would
Chart VI-7.

Structure of Book-Entry Transfer System for Bonds
Central Custody and Transfer Agent

JGBs, TBs and FB (JGS): BOJ
Master Account

Account Management Institution(Securities company/bank)Account

Master AccountParticipant(Investor)

Non-JGS bonds: JASDEC
Master Account

Account Management Institution(Securities company/bank)Account

Account Management Institution(Securities company/bank)Participant(Institutional
investor)

Account

Participant(Investor)

Participant(Investor)

Participant(Investor)

Chap. VI The Secondary Markets for Bonds

Table VI-8.

109

Bonds under Custody and Book-Entry Transfer Volume(No. of transactions, millions of yen)
Increase: Under- Decrease:
Transfer
writing new is- Redemptions andsues
retirement bypurchase

FY2011

No.
Amount

FY2012No.

FY2013

No.

AmountAmount
FY2014

No.
Amount

FY2015

No.
Amount

FY2016No.

FY2017

No.

AmountAmount
FY2018

No.
Amount

FY2019No.

FY2020No.

AmountAmountNumber ofparticipating
issues (at fiscal
year-end)
Account balance

26,66435,619439,867

60,701

32,955,046

30,589,808

156,713,049

252,439,190

27,32633,476

471,798

58,48633,558,410

33,213,581

143,537,681

252,784,020

26,726

31,642437,387

55,59534,446,614

34,030,438

135,561,923

253,200,196

25,761

32,082465,81354,29433,410,427

34,831,065

158,293,806

251,779,558

25,72230,604524,130

53,82531,146,061

32,462,918

204,529,981

250,462,702

27,401

28,040349,226

58,28841,737,175

35,052,475

131,163,539

257,147,401

28,34527,238287,072

63,08734,276,788

34,479,534

140,831,156

256,944,654

28,885

26,163

289,272

68,82636,439,329

31,520,591

145,921,506

261,863,392

26,76526,564

318,896

74,56937,743,822

31,844,372

146,798,435

267,762,842

21,821

25,775300,11377,90041,438,860

31,240,061

127,984,617

277,961,641

Note: The JGB book-entry system began on January 10, 2006.
Source: Compiled from Japan Securities Depositary Center website (Book-Entry Transfer System for
Corporate Bonds)

make the country’s securities markets globally competitive. Against thisbackground, the securities settlement system reform law was enacted in June
2002, and, pursuant to its provisions, the existing legislation for book-entry
transfer was later amended and renamed the Act on Book Entry of Corporate
Bonds and Shares with objectives including the complete dematerializationof securities, the shortening of settlement cycles, and the reduction in settlement risk. The amended law provided for the legal framework of new bookentry transfer systems for corporate and government securities. On the basis

110Chap. VI The Secondary Markets for Bonds

Table VI-9.
Month/Year

Reforms of Bond Delivery and Settlement System
Changes implemented

April 1994 Delivery versus payment (DVP) of government bonds through the Bank of Japan
network starts.
April 1977 System of T+3 government bond rolling settlement starts.
October 1999 System of T+3 general bond rolling settlement starts.
January 2000 Real-time gross settlement (RTGS) of government bonds starts.
January 2003 Act on Book Entry of Corporate Bonds and Shares (stipulating paperless trading inbonds, etc.) is enforced.
Paperless trading in government bonds starts.
May 2004 DVP trading in bonds other than government bonds starts.
May 2005 Trading in government bonds through a settlement organization starts.
January 2006 Paperless issuance of and paperless trading in bonds other than government bonds
starts.
April 2012 Shortening of settlement of JGBs starts. (T+2)
May 2018 Shortening of settlement of JGBs starts. (T+1)
July 2020 Shortening of settlement of retail JGBs and general bond transactions starts. (T+2)

of that framework, the BOJ renovated the existing JGB book-entry system inJanuary 2003, and the Japan Securities Depository Center (JASDEC) started
operating a new central custody and book-entry transfer system for securities,
including nongovernment bonds in January 2006.
The book-entry transfer systems have a multitier, tree-like structure. On
the top tier of the system are the“Transferring Institutions”– the Bank of Japan for government bonds and the JASDEC for other eligible securities. The
second tier consists of a number of“Account Management Institutions”(suchas securities companies etc. that directly hold accounts in the Transferring Institutions). Under each Account Management Institution are other securities
companies etc. and investors that hold accounts in the Institution. Bond ownership is managed through the registration or recording in the“Transfer Account Book”managed by Transferring Institutions and Account Management
Institutions. In principle, all bonds under the book-entry transfer system areincorporated into the system at the time of issuance. With the entire issue being dematerialized, none of those book-entry bonds may be withdrawn overtheir life in the form of either physical certificates or registered bonds.
The previously mentioned Securities Settlement System Reform Law also
provided measures to abolish the Corporate Bond Registration Law following the setup of the book-entry transfer systems.

Chap. VI The Secondary Markets for Bonds

111

8. Bond Yield and Terms of IssuanceThose who raise funds (fund raising party) by issuing bonds look for the lowest possible cost. On the other hand, investors who buy bonds choose issues
that offer the highest possible return within the range of tolerable risk. In theory, the issue terms of a new bond (subscriber’s yield to maturity) are determined at a certain level where opportunities for arbitraging its subscriber’syield to maturity and the secondary market yield (yield to maturity) of outstanding issues of a nature similar to that of the bond are balanced. Whensuch a point of balance is achieved, it is said that“issue terms that adequatelyreflect the secondary market conditions have been established.”Importantconditions for efficient arbitrage to occur include the following: the outstanding balance and trading volume of comparable bonds are sufficiently large,
new bonds are issued regularly, and the secondary market yields of comparable bonds are available for reference at the time of pricing new issues. It canbe said that in the Japanese bond market yields at the issue of bonds havecome into line with yields of comparable bonds as the amount of new issuesof the bonds and secondary trading volume of such bonds increased.
More specifically, while JGBs had been issued through the underwriting
syndicate program for smooth and stable financing, the proportion of bondissuance through competitive bidding that more closely reflect market conditions has steadily increased under a market-oriented national debt management policy, replacing the previous emphasis on non-competitive, syndicatedunderwriting, where issue terms were based on the official discount rate orother benchmarks. Currently, in principle, all government bonds (excluding
those for retail investors) are issued through auctions (the syndicated underwriting program for JGBs was discontinued in March 2006).
The market-oriented transition of bond issuance has also been witnessed inpricing spreads among bonds with different credit qualities. For example,
yields at the issue of government-guaranteed bonds and local bonds are determined in reference to the yield at issue of 10-year JGBs issued earlier inthe month. From time to time in the past, the spreads of issues among thethree classes of bonds deviated from market spreads. In recent years, however, as investors started to focus more on differences in credit quality, thespreads of issues among the three classes have increasingly tended to move
more in line with credit spreads prevailing in the market. Another case inpoint that demonstrates the increased market orientation in bond issuance isthat a growing portion of government-guaranteed bonds is now issued
through a competitive bidding process (as individual issues). Investors arealso showing an increasing tendency to differentiate corporate bonds basedon credit ratings by rating agencies, ESG initiatives and other factors. In re-

112

Chap. VI The Secondary Markets for Bonds

Chart VI-8.

Changes in Issue Terms (Yields) of Bonds
Long-term government bonds

(%)
0.4

Government-guaranteed bonds
Publicly offered local government bonds – jointly issued

0.3

Publicly offered local government bonds – individually issued(Tokyo municipal bonds)

0.2
0.1
0.0
－0.1

“Government guaranteed bonds”are aggregated as follows
By March 2020:“Japan Expressway Holding and Debt Repayment
Agency Bonds”10-year bonds
June, September, December 2020:“Development Bank of Japan
Corporate Bonds”10-year bonds
February 2021:“Japan Finance Corporation Bonds”10-year bonds

－0.2
－0.3
－0.4
'19/4 5

6

7

8

9

10 11 12 '20/1 2

3

4

5

6

7

8

9

10 11 12 '21/1 2

3(year/month)

Source: Compiled from statistics on the Ministry of Finance website (JGB auction results) and the Japan
Securities Dealers Association website (list of Bond Issues).

Chart VI-9.

Changes in the Difference in Issue Terms and Secondary Market
Yields between Publicly Offered, Jointly Issued Municipal Bonds andGovernment-Guaranteed Bonds

(%)
0.12
0.09

Difference in issue terms (subscriber yield)

0.06
0.03
0.00

Spread in secondary market yields－0.03'16/4 5 6 7 8 9 10 11 12'17/1 2 3 4 5 6 7 8 9 10 11 12'18/1 2 3 4 5 6 7 8 9 10 11 12'19/1 2 3 4 5 6 7 8 9 10 11 12'20/1 2 3(month & year of issuance)

Notes: 1. Spread in secondary market yields is the difference in reference prices of OTC traded public andcorporate bonds (average value: simple interest) on the day prior to the term determination date ofjointly issued local government bonds and of government guaranteed bonds (10-year long-term).
2. Difference in issue terms (subscriber yield) is jointly issued local government bonds minus
government guaranteed bonds (each 10-year bonds).
Source: Compiled from statistics on the Japan Securities Dealers Association website (Issuing, Redemption
and Outstanding Amounts of Bond, Reference Statistical Prices (Yields) for OTC Bond Transactions)Chap. VI The Secondary Markets for Bonds

113

sponse to this, many issuers go through a premarketing process to identify
and estimate investors’demand and determine the terms of issue accordingly.
9. Gensaki Market for Bonds (1)A repurchase agreement (gensaki transaction) (a conditional purchase or sale)is a form of trading between a seller and a buyer of bonds whereby the seller(or the buyer) agrees to repurchase (or resell) the securities at an agreed-uponprice at a stated time. When the holder of bonds sells them to a buyer underan agreement to buy them back (a gensaki sell transaction), the holder canraise funds temporarily. When the counterparty buys bonds from a seller under a repurchase agreement to sell them back to the seller (a gensaki buy
transaction), the buyer can earn a certain amount of interest by investing
funds for a short period. When a securities company, etc. acts as an intermediary and arranges a repurchase agreement (gensaki transaction) by introducing a buyer which wants to invest idle cash in bonds to a seller which wants
to raise funds by selling bond holdings, such a deal is called a brokered repurchase agreement. When a securities company, etc. that is in need of shortterm cash sells bonds out of its inventory to an investor under a repurchaseagreement, it is called a proprietary repurchase agreement. As the repurchase(or resale) price includes an amount equivalent to a return on investment or
financing charge based on an agreement by the buyer and seller, the pricedoes not usually tally with the market price of the bond prevailing at the timeof its repurchase (or resale).
Despite some annual fluctuation, gensaki transactions have maintained asignificant level of trading volume because they conveniently meet the shortterm funding and cash management needs. The outstanding balance of gensaki transactions reached almost ¥50 trillion at the end of fiscal 2007, compared with ¥7 trillion in the latter 1980s. Although there have been some dipsin the balance since then due primarily to the effects of the global financial
crisis, the balance has turned upward since 2010. After the settlement period
for government bond transactions was compressed (to T+1) in May 2018,
trading volume and outstanding balance of gensaki transactions have increased sharply in line with the shift from general collateral repos to repurchase repo transactions. The trading volume in fiscal 2020 and the outstanding balance as of the end of fiscal 2020 exceeded ¥28 quadrillion and ¥140
trillion, respectively.
Previously, the overwhelming majority of gensaki transactions were forshort-term government securities (Treasury Bills (TBs) and Financing Bills(FBs)), supported by the increasing trading activity of TBs and FBs, whichhave maturities and credit quality more suitable for gensaki transactions

114

Chap. VI The Secondary Markets for Bonds

Chart VI-10.

Working Mechanism of Bond Lending (secured with cash deposit)[Proprietary repurchase agreement]

Securities
company

Debt securities→ Purchase
After the lapse of a certain period
Repurchase of← Debt securities
debt securities

Investor[Brokered repurchase agreement]

Selling
investor

Table VI-10.

Sale of debt →securities
After the lapse ofa certain period
Repurchase of ←debt securities

Securities
company

Purchase of →debt securities
After the lapse ofa certain period← Resale of debt
securities

Buyinginvestor

Turnover and Balance of Bond Repurchase Agreements (Gensaki)(¥10 billion, %)FYTurnover ofbonds (A)

Turnover of repurchase agreements
(B)

2011

840,802471,756

56.1

2,538

2012

852,118

503,564

59.1

2,354

2013

946,008

627,538

66.3

2,641

2014

1,050,441

706,429

67.3

3,079

2015

1,039,539

758,277

72.9

3,053

2016

928,393

691,841

74.5

3,344

2017

992,339762,223

76.8

4,024

2018

1,897,392

1,668,849

88.0

11,6422019

2,604,519

2,370,929

91.0

15,6352020

3,057,865

2,792,828

91.3

14,841

B/A

Balance ofrepurchaseagreements

Notes: 1. Figures include government bond basket transaction from May 2018.
2. Fiscal year-end balance (March 31st)
Source: Compiled from statistics on the Japan Securities Dealers Association website (OTC trading volume of public and corporate bonds; OTC trading volume by bond type; monthly outstanding
amounts of conditional sale and purchase of bonds (gensaki transactions) by investor type)

115

Chap. VI The Secondary Markets for Bonds

Table VI-11.

Balance of Bond Repurchase Agreements, by Major Investor Group(¥10 billion)

FY2011FY2012FY2013

FY2014FY2015FY2016FY2017FY2018FY2019FY2020

Selling Buying Selling Buying Selling Buying Selling Buying Selling Buying Selling Buying Selling Buying Selling Buying Selling Buying Selling Buying
balance balance balance balance balance balance balance balance balance balance balance balance balance balance balance balance balance balance balance balance

Trust banks

0

97

0

13

0

0

0

2

0

0

0

0

0

0 1,715 1,396 1,895 1,537 1,638 1,386

Other banking
institutions

0 111

0

86

0

56

3

4

0

0

5

0

0

0 1,843776 2,179 1,136 2,423 1,035

Investment Trusts

0 143

0 206

0

84

0

33

0

0

0

0

0

0

0

27

0

14

0

26

Corporations

0

0

0

31

0

25

0

4

0

3

0

3

0

2

0

2

0

1

Entities not
domiciled in Japan616 1,200 511 1,293 588 1,759 865 1,951 754 2,228 572 2,373 882 2,988 1,175 2,995 1,818 4,254 1,329 3,888

82

50

Others

121 288

Bond dealers

1,800 618 1,772 511 1,998 588 2,111 876 2,233 774 2,383 914 2,991 913 6,088 5,054 8,012 6,846 7,719 6,250

70 19655 12299 18866

46 38455 151 119

820 1,392 1,731 1,844 1,731 2,256

Total

2,538 2,538 2,354 2,354 2,641 2,641 3,079 3,079 3,053 3,053 3,344 3,344 4,024 4,024 11,642 11,642 15,635 15,635 14,841 14,841

Source: Compiled from statistics on the Japan Securities Dealers Association website (OTC trading
volume by bond type; monthly outstanding amounts of conditional sale and purchase of bonds(gensaki transactions) by investor type)compared to other instruments in the secondary market. More specifically,
these short-term government securities dominated the market because in1986, (1) the government introduced public auction for TBs on the basis of
the principle that the government securities must be absorbed by private-sector market participants, and (2) the BOJ stopped reselling FBs that it had underwritten in the secondary market, shifting this operation back to the gensaki market, and in 1999 (3) the government introduced public auction for FBs
on the basis of aforementioned principle. Subsequently, the issuance of both
TBs and FBs has been regular and of large volume.
Although the gensaki market developed primarily against the backdrop of
this expansion of the short-term government securities market, interest-bearing JGBs have taken center stage in recent years, partially because of themassive overall issuance of government bonds.
10. Gensaki Market for Bonds (2)In an effort to modernize and strengthen the international competitiveness ofJapan’s money market, the gensaki market underwent a reform to improve its
functions as a repo market that facilitates the need for both short-term financing and bond borrowing, and thus what came to be called new gensaki transactions started in April 2001. Up to that point, gensaki transactions were116

Chap. VI The Secondary Markets for Bonds

Working Mechanism of the New Gensaki Transaction System

Chart VI-11.
1. Start of transaction

Bonds

The buyer of bonds(the provider of funds)

Fund

The seller of bonds(the receiver of funds)- Purchase money for bonds
The market price of the bonds prevailing at the time a deal is struck÷(1 + haircut rate)×numberof bonds traded
2. Control of credit risk during the life of the agreement①The amount of money
corresponding to theinterest accrued on the
repurchase agreement
during the period

Haircut rate

②Collateral deficiency
developed by a fallin bond priceDuring the lifeof the agreement

Purchase money

The transaction starts

Interest on the
repurchaseagreement

Haircut rate
The market priceof the bond thenprevailing

Purchase money

Market price ofthe bond

The market
price of thebond falls

The transaction ends

- Credit given to the seller of the bonds by the buyer of the bonds (the provider of funds) = ① + ②- In the case referred to above, the buyer of the bonds can demand collateral (cash and/or bonds) of
the seller, the value of which is equal to the credit given him (margin call).
3. End of transaction

The buyer of bonds(the provider of funds)

Funds(repurchase)
Bonds

The seller of bonds(the receiver of funds)- Money to repurchase the bonds is necessary for the seller at the time the transaction isconsummated.
- The money of the buyer is needed to purchase the bonds at the time the transaction started +interest accrued on the repurchase agreement.

bought and sold much like the transactions commonly known as repo tradesin the U.S. and Europe but had various shortcomings that cried out for reform. In particular, the gensaki market did not have functional risk management facilities or standard rules for dealing with counterparty default. Therefore, measures were taken to establish new gensaki transactions, on the basis

Chap. VI The Secondary Markets for Bonds

117

of conventional ones, in accordance with global standards through the development and expansion of various mechanisms including risk management.
The newly introduced provisions for risk management and other purposes(clauses in the repurchase agreement) may be summed up as follows:(1) Risk control clause:
The amount of collateral (bonds) shall be adjusted flexibly so as not tocause a shortage of collateral on account of a fall in the price of bonds
submitted as collateral.
(i) Application of the ratio for computing the purchase/sale value ofbonds (the haircut clause): mechanism is established to ensure thatthe unit price used in the repurchase agreement is lower by certain
rate than the market price of the bonds at the time of execution, sothat there is no shortfall in collateral even if the market value of thebonds experiences some decline during the trading period.
(ii) Application of a margin call clause (collateral management, etc.): A
mechanism is established to ensure that the amount of credit extended is maintained by adjusting collateral so that the market valueof the bonds is consistent with the amount of collateral (i.e.; thebuyer has the right to require the seller to put up collateral if themarket value of the bonds declines.)(iii) Application of repricing: In a case in which the market price of theunderlying bonds falls sharply from that which prevailed at thetime of the repurchase agreement, the parties to the agreementagree to cancel the agreement and renegotiate a new agreement on
the basis of the price then prevailing, on terms and conditions identical to those of the agreement thus canceled.
(2) Substitution of underlying bonds:
Under this clause, the seller of bonds can replace the underlying bonds
with other bonds with the consent of the buyer, allowing the seller to
use the underlying bonds if necessary.
(3) Institution of a netting-out system:
If the other party goes into default for any reason, such as bankruptcy,
the value of all transactions covered by the agreement will be reassessed based on market prices, and the difference between claims andobligations will be settled.
11. Bond Lending
When investors have shorted bonds (or sold bonds that they do not own) andfailed to buy them back before the settlement date, they turn to bond lending
services to borrow bonds to deliver. When the collateral is cash, bond lending

118

Chap. VI The Secondary Markets for Bonds

Chart VI-12.

Trading Mechanism of Repurchase Agreements[Proprietary repurchase agreement]
Bonds
Selling investor

Buying investor
Cash[Brokered repurchase agreement]
Bonds
Bond lending rates
Selling investor

Buying investor
CashInterest accrued fromthe cash deposit

Table VI-12.

The Balance of Bond Lending Transactions, by Type of Collateral (on thebasis of delivery and face values)(¥10 billion)
Bonds lent

End ofBonds borrowed

SecuredSecured by Unsecuredtransactions cash deposit transactions

Total

SecuredSecured by Unsecuredtransactions cash deposit transactions

Total

2011

8,296

8,286

207

8,503

8,296

8,286

207

8,503

2012

8,239

8,200

227

8,467

8,239

8,200

227

8,467

2013

10,085

9,984

267

10,352

10,085

9,984

267

10,352

2014

10,483

10,310322

10,805

10,483

10,310322

10,805

2015

9,680

9,454

450

10,130

9,680

9,454

450

10,1302016

12,316

12,178428

12,744

12,316

12,178428

12,7442017

13,093

12,903806

13,89913,093

12,903806

13,899

2018

5,536

5,370

846

6,382

5,536

5,370

846

6,382

2019

5,589

5,419

1,160

6,749

5,589

5,419

1,160

6,749

2020

5,232

5,041

1,040

6,273

5,232

5,041

1,040

6,273

Note: Breakdowns of bond lending transactions have been published since January 1997. A partial revision was made to the calculation method in January 2009.
Source: Compiled from statistics on the Japan Securities Dealers Association website (bond borrowing
and lending transactions - list)

Chap. VI The Secondary Markets for Bonds

119

is also used to procure or invest money on a short-term basis similar to gensaki transactions. Bond lending services enable investors to execute sell position even if they do not own bonds (short sell), which could lead to improvement of bond market liquidity.
Bond lending was instituted by the lifting of the practical ban on bondshort selling in 1989. Traditionally, market participants had refrained fromshortselling bonds because of concerns over potential repercussions on brokers’and financial dealers’financial soundness and the potential impact onbond pricing. This ban, however, was lifted to help encourage active market
making in cash bonds, and arbitrage between cash bonds and futures. Bondlending was introduced as a means to locate bonds for delivery. Initially, cash
collateral bond borrowing and lending was restricted in light of potential
conflicts with the gensaki market and other considerations, and, subsequently, most transactions were uncollateralized. However, with credit fears rising,
the bond lending market remained stagnant and cash collateral bond borrowing and lending transactions were effectively deregulated in 1996 in order toinvigorate the market.
When viewed from a legal standpoint, a bond lending transaction isdeemed to be a contract for a loan for consumption. A borrower borrows
bonds for the purpose of consumption and, when due, the borrower has only
to return bonds identical in kind and quantity with those originally borrowed.
Bond lending transactions may be broadly classified into“secured transactions”and“unsecured transactions”depending on whether they are collateralized or not. Secured bond lending transactions may be further divided into
“cash-collateralized transactions”and“securities-collateralized transactions”
by the type of collateral being pledged. Cash-collateralized transactions used
to borrow specific bond issues are called SC torihiki (specified collateral
trades), while those without such specifications that mainly aim for financing
and cash management are termed GC torihiki (general collateral trades). The
size of the bond lending market (in terms of the balance of outstanding loans)has generally been on the rise since cash-collateralized transactions were deregulated in 1996. The market has grown from approximately ¥34 trillion at
the end of fiscal 1996 (including approximately ¥17 trillion in cash-collateralized transactions) to ¥139 trillion at the end of fiscal 2017 (including approximately ¥129 trillion in cash-collateralized transactions). At the end of
fiscal 2020, the market had fallen to around ¥63 trillion (including approximately ¥50 trillion in cash-collateralized transactions), reflecting the recent
trend toward increased usage of gensaki transactions.

CHAPTER VII
Investment Trusts

1. Overview
An investment trust is a financial instrument that raises money from plural
number of investors in order to establish a large fund that it invests in regarding a variety of assets, such as stocks and bonds, under the management of aninvestment specialist, and the profits earned through that investment are thendistributed among the investors in proportion to their contributions.
An investment trust allows investors to indirectly enter various asset markets even with a small amount of money as well as to enjoy the benefits ofscale economies and efficient diversified investment that are generated
through a joint investment with other investors, also allowing them to takeadvantage of information analysis and investment sophistication gained byhaving the investment managed by specialists. The repayment of the principal of an investment trust is not guaranteed, because its earnings depend
upon its performance. There are a variety of investment trusts depending on
investment instruments and methods, including one that is similar to deposit
and savings accounts and another that is like derivatives trading in that it
aims at achieving higher earnings by assuming higher risks.
The overall structure of the Japanese investment trust system is stipulated
in the Act on Investment Trusts and Investment Corporations. Regulations
concerning the actions of investment trust management companies, the key
players in the management of investment trusts, are defined in the Financial
Instruments and Exchange Act. Investor protection is also provided by selfregulatory rules established by The Investment Trusts Association, Japan(JITA), an approved self-regulatory organization under the Financial Instruments and Exchange Act.
Investment trusts play a major role in making investments for the generalpublic and have the economic benefit of helping companies to raise moneyby bringing the funds of the general public to the securities market. They also
perform the function of contributing to the reasonable determination of prices
in the securities markets as an institutional investor.
Chart VII-2 shows the growth of the total net assets of publicly offered in-

121Chap. VII Investment Trusts

Chart VII-1.
Investors

Investment Trust Concept
Varied investment

Investment targets selectedby specialists

Start from a small sum

Collation offunds

Mutual funddomestic
Diversified
investment(Fund)

Asset management specialists

overseas

StocksBonds
CD • CP
Derivatives, etc.

(Investment trust management company)

Source: The Investment Trusts Association, Japan.

Chart VII-2. Trend of Total Net Assets of Publicly Offered Investment Trusts and Their
Positions(trillions of yen)

160
140

Balance of net assets of investment trusts (left scale)
Ratio of investment trusts in individual financial assets (right scale)

(%)
16
14

120

12

100

10

80

8

60

6

40

4

20

2

0

2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 210Note: Figures for 2021 are as of the end of June (percentages in individual financial assets are as ofthe end of May).
Source: Balance of net assets of investment trusts: the Investment Trusts Association, Japan; ratio ofinvestment trusts in individual financial assets: Bank of Japan“Flow of Funds Accounts”.

122

Chap. VII Investment Trusts

vestment trusts over the past 20 years in Japan. The outstanding balance declined after the burst of the bubble economy but rebounded temporarily
around 2005 along with the recovery of the stock market encouraged by aheightening of investment awareness among the people of the country in an
ultralow-interest-rate environment. The outstanding balance fell again, a dropof 35% year on year, following the global financial crisis in 2008. Nevertheless, it hit the bottom in January 2009 and topped the ¥100 trillion level forthe first time in May 2015. The COVID-19 pandemic hit in March 2020, but
had generally little impact on the balance throughout the course of the year.
As of the end of 2020, Japan accounted for only 2.4% of the net assets totalof the world’s publicly offered open-ended investment trust of more than
$57.4 trillion (¥5,920 trillion), a small share compared with Japan’s approximately 5.9% share of the world gross domestic product (GDP). This suggeststhat there is high growth potential for investment trusts in Japan, so it is expected that investment trusts will grow as a core product to accelerate theshift from“saving”to“asset-building”in the future.
2. History of Investment Trusts
A product of the investment trust, a collective investment scheme, has proved
popular in various forms around the world since its inception in the U.K. in
the late nineteenth century.
In Japan, investment trusts existed before World War 2; however, the current system started with the implementation of the Securities Investment
Trust Act in June 1951, taking the form of unit-type stock investment trust(contractual type). It was not naturally generated from demands from investors as in the U.S. and Europe but was politically introduced for a supplyand-demand adjustment of stocks substantially released as a result of the
break-up of the zaibatsu financial combines (democratization of securities)
and in order to raise money for revivifying industries during the postwar period, when there was a severe lack of funds.
The Securities Investment Trust Act was partially amended in 1967 after
the securities crisis, to establish the code of conduct for investment trust
management companies; to clarify the fiduciary duty of investment trust
management companies to beneficiaries (persons who process operations forothers in trust are required to act only for the benefit of the others); and to
adopt and strengthen provisions on prohibited activities. In 1995, a major reform was conducted, mainly for the purpose of advancing deregulation andgreater disclosure.
The drastic amendments to the law made in 1998 were associated with implementation of the Act on Revision, etc. of Related Acts for the Financial

Chap. VII Investment Trusts

Table VII-1.

123

History of the Investment Trust in Japan (Post-war)

SystemProducts
MarketingManagement
The Securities Investment Trust I n v e s t m e n t t r u s t s w e r e Investment trusts became Assets were invested mainly
Act was implemented (1951)
launched in the form of unit- available at securities compa- in domestic stocks
type investment trusts (1951) nies
Open-type investment trust
was launched (1952)
Investment trust management Bond investment trusts werebusiness was separated from established (1961)
securities companies (beginning operations in 1960)
The Securities Investment
Trust Act was amended to add
provisions for the duty of loyalty of investment trust management companies to beneficiaries and the duty of
disclosure, etc. (1967)

The medium-term governInvestment trust management ment bond investment trusts
companies entered the invest- were established (1980)
ment advisory business (1984)

The weight of domestic bonds
substantially increased (1961)

Foreign securities began to be
The marketing of foreign in- included in assets of investvestment trusts in Japan was ment trusts (1970)
liberalized (1972)

Foreign companies entered
Japanese investment trust
management business (1990)

MMFs were establishedBank affiliates entered invest- (1992)
Investment trust managementcompanies started to sell inment trust management business (1993)
vestment trusts directly (1993)
Investment trust reform wasdetermined (1994)
Reform was implemented in Nikkei 300 Exchange Trad1995
ed Fund was established(1995)Act on Revision, etc. of Related
Banks and insurance compaActs for the Financial Systemnies started to sell investment
Reform was implemented
trusts (1998)(1998)
Private placement investment trusts were launched(1999)The Act on Investment Trusts Corporation type investment
and Investment Corporations t r u s t s w e r e e s t a b l i s h e d(2000)
was implemented (2000)

Investment restrictions were
deregulated, including utilization of derivatives for purposes other than hedging (1995)

Target of investment trusts expanded to a variety of fields,
including real estate (2000)

Portfolio valuation method ofbond investment trusts shiftedto market value accounting(2001)
Defined contribution pension
plaus started (2001)

Real estate investment trusts The Act on Sales, etc. of Fi- Some MMFs’net asset value
were established (2001)
nancial Instruments was im- fell below their principle
amount (2001)
plemented (2001)

Launch of NISA (2014)

Monthly distribution investment trusts are popular

In-kind contribution ETFs
were listed (2001)
Sales of investment trusts
started at post offices (2005) Target of investment trusts
The Financial Instruments andwas expanded to commodities
Exchange Act was implement(2008)ed (2007)
ETF purchases by BOJ began(2010)
Implementation of credit risk
regulations (2014)
FSA promotes customer-first MMF balances go to zero on
negative interest rates (2017)business practices (2017)
ESG investment trusts are Introduction of Critical Inforpopularmation Sheet (2021)

Source: Materials prepared by Mr. Koji Sugita (modified by the author)

124

Chap. VII Investment Trusts

System Reform. As a result of the amendments, the corporation type investment trust, the mainstream in the U.S. and Europe, was introduced in Japan,
where only the contractual type had existed, deregulating the establishmentof new funds by changing from an approval system to a filing system, and allowing investment trust management companies to outsource the management of the fund to outside companies. Distribution channels were also expanded to financial institutions, and banks became able to distributeinvestment trusts. Disclosure was enhanced by obligating investment trusts
to meet disclosure requirements under the Securities and Exchange Act.
In 2000, investment objects were expanded to those other than securities.
This allowed investment trust management companies to establish the“realestate investment trust.”The law was renamed“the Act on Investment Trusts
and Investment Corporations,”deleting the word“Securities.”Amendments
were made to include additionally the duty of due care of a prudent management (investment fund management companies are required to give instructions on asset management of investment trusts as good managers) in therules of conduct for investment trust management companies.
In 2006, in relation to the enactment of the Financial Instruments and Exchange Act (implemented at the end of September 2007), the Act on Investment Trusts and Investment Corporations was amended to relegate provisions
on the rules of conduct for investment trust management companies. Further,in 2014, risk regulations on managed assets were also introduced.
In recent years, NISA (Nippon Individual Savings Account, a smallamount investment tax exemption scheme) and defined contribution pensions
systems, such as iDeCo, as well as wrap accounts haven been developed. The
investment trust industry, being well aware of the expectations that its
products and services will be utilized and developed in a healthy manner,requests the distributers to be fully compliant with customer-first businesspractices.
3. Forms of Investment Trusts
Investment trusts are broadly classified into the contractual type and the corporation type.
Contractual Type (Investment Trust)Contractual type investment trusts take such legal form as a trust or a common fund; in Japan the contractual type investment trust takes the legal formof a trust and is subclassified into investment trusts with investment instructions from trustors and those without investment instructions from trustors.
An investment trust with investment instructions from trustors involves

Chap. VII Investment Trusts

The Operating Structure of Investment Trusts with Instructions fromTrustors
Distributing
companies

TrustorTrustee

Instructions on
management,
etc.

Safekeeping,etc.

Purchase/holding

Handling ofsubscription

Sales/

Securities

Sales/

Distribution
Registered agreement

Investors

Investors

Investors

Redemption companies

financial

Redemption institutions
Sales/

DirectRedemption marketing

Main
investment
objectives

Investment

Trust
agreement

Trust banks, etc.

Beneficiaries

Investment trust
management companies

Chart VII-3.

125

Investment

Investment

Securities

Real estate

Others

Source: Partially adjusted flowchart from the Investment Trusts Association, Japan’s report on“Investment Trusts in Japan 2014.”

Chart VII-4.

Operating Structure of Corporation Type (Investment Corporation)
Investment Trusts
Investment corporation

Auditor(Certified public accountant,accounting firm)

Administration
service providers

Appointment
Auditing
Entrustmentof generalbusiness
administrations

General meetingof investors

Board of directors
Executive directors andsupervisory directors

Entrustment ofmanagement

Investment adviser(Financial instruments
business operators)

Entrustment ofsafekeeping Asset custody company(trust bank, securities
firm, etc.)

Entrustment of subscription
Distributing company(securities firms andregistered financial
institutions)

Investor

Source: The Investment Trusts Association, Japan,“Investment Trusts in Japan 2014.”

126

Chap. VII Investment Trusts

three players: the trustor, the trustee, and the beneficiary. The trustor is an asset management company (investment trust management company) registered with the Financial Services Agency. It carries out product development,
prepares a trust deed and files it with the authorities, and provides investment
instructions to a trustee (it has the authority to outsource the investment instructions to outside companies). The trustee is a trust company or a bankconcurrently engaging in the trust business of holding and administrating assets under investment trusts according to a trust agreement. Investors obtain
the position of beneficiary by accepting a beneficiary certificate and receive
the profits arising from investment management as dividends or by redeeming the certificate. This structure is illustrated in the figure on the right.
In the case of an investment trust without investment instructions fromtrustors, the trustee enters into a trust agreement with two or more investors
and combines their funds into a trust asset, which is then invested mainly in
specified assets excluding securities and held and administrated by the trustee
without instructions from the trustors.
Corporation Type (Investment Corporation)
The corporation type is operated in a legal form that is similar to a corporation. In Japan, an investment corporation with a corporate veil is establishedand operated by officers who are appointed by an investors meeting, but it
must entrust its business, such as asset management, custody of the fund’s assets, general business administration, and the handling of subscriptions, tooutside companies. Investors obtain the position of shareholder by accepting
share certificates (investment certificates) issued by the investment corporation and receive the profits arising from the investment management as dividends. Chart VII-4 illustrates such a structure.
Both the contractual type and the corporation type of investment trusts inthe world include the open-end type and the closed-end type. Which typethey are grouped into depends on the claims of investors to redeem issued
certificates. The open-end type accepts the beneficiary’s request and redeems
the certificates at market price by selling trust assets, while the closed-end
type does not accept the beneficiary’s request to redeem the beneficiary’s certificates. The latter ensures liquidity by listing its issued certificates. In Japan,
contractual type investment trusts are principally of the open-end type, while
corporation type investment trusts, in particular, real estate investment trusts,
are of the closed-end type.
4. Investment Trust Products
The total net assets of broadly defined investment trust products amounted to127

Chap. VII Investment Trusts

Chart VII-5.

Overview of Investment Trusts (total net assets, number of funds)
As of June 30, 2021
Figures refer to total net asset value (billions of yen)
Figures in parenthesis indicate the number of funds
Shaded area represents securities investment trusts
Contractual-type
investment trusts
156,685,820(5,891)

Securities investment
trusts156,685,820(5,891)

Unit-type investment trusts

Stock investment
trusts142,220,577(5,793)597,610(115)

Open-type investment trusts 141,622,947(5,678)ETFs

61,181,428(207)
Others 80,441,519(5,471)

Public offering
investment
trusts167,754,984(5,959)Bond investment
trusts
14,465,263(98)

Investment trusts other than 0
securities investment trusts (0)Total investment
trusts279,151,211(13,891)

Privateplacement
investment trusts
111,396,227(7,932)

Investmentcompanies
11,069,164(68)

Securities investment companies

Contractual-type
investment trusts
108,877,856(7,890)

Securities investment trusts
108,876,717(7,889)Unit-type investment trusts

2,491
(11)

Open-type investment trusts 14,462,772
(87)
MRFs
13,884,759
(12)
MMFs

0
(0)

Others578,013(75)

Money trust benefit funds0(0)Investment trusts managed by trustee 0
(0)

0
(0)
Real estate investment companies (Note) 10,933,103(61)
Infrastructure investment companies (Note) 136,061(7)
Stock investment trusts 103,858,534(6,470)Bond investment trusts 5,018,183(1,419)Investment trusts other than securities investment trusts 1,139(1)Investmentcompanies
2,518,371(42)

Securities investment companies

0(0)Real estate investment companies (Note) 2,518,371(42)

Note: Figures on real estate investment companies and infrastructure investment companies are from the previous month.
Source: The Investment Trusts Association, Japan.

¥279 trillion in Japan as of the end of June 2021. They are classified by a variety of methods.
Public Offering of Investment Trusts and Private Placements of Investment Trusts
A public offering of investment trusts is offered to 50 or more unspecified investors, while a private placement is sold to Qualified Institutional Investors
or specified investors stipulated in the Financial Instruments and Exchange

128

Chap. VII Investment Trusts

Act or to fewer than 50 investors. Establishment of a private placement wasmade possible by the 1998 amendment to the Investment Trust Act. It has themargin to freely design products only with the approval of the investors, because a private placement is subject to less-rigid investment restrictions thana public offering. Therefore, privately placed funds attract the attention oflarge investors, in particular institutional investors, and rapidly increase involume as funds invested in by variable annuities, etc.
Stock and Bond Investment Trusts
The Japanese tax laws define stock investment trusts as funds that hold evena small number of stocks, and bond investment trusts are funds that invest
not in stocks but only in bonds. Bond investment trusts include funds that invest mainly in long-term bonds and Money Reserve Funds (MRF) that invest
in short-term money market vehicles.
Unit-Type and Open-Type Investment Trusts
Unit-type investment trusts are funds that do not allow additional subscriptions after having accepted funds in principal value only during their initialsubscription period, while open-end investment trusts are funds that do accept additional subscriptions at market value after their establishment. In Japan, investment trusts were launched in the form of the unit type, which was
similar to savings instruments, in 1951; however, open-end investment trusts
have currently become a mainstream, just as in overseas markets.
Classification by Investment Object
The Investment Trusts Association, Japan, offers a product classification according to the object of investment of the funds, so that investors can selectfunds easily. The prospectus of each funds must clearly describe into whichclassification the fund fall.
Exchange Traded Funds (ETF)
Among open-type funds, funds whose net asset value fluctuates closely withvarious indexes, including the stock indexes, and whose units are listed on
exchanges and traded like stocks are called ETF. (In the U.S., actively managed ETFs also exist.) They are formed by the in-kind contribution of stocks
by designated participants and others, and the units/shares of many ETFs canbe exchanged for the component stocks held in a timely manner. This createsarbitrage opportunities with the component stocks, a mechanism that keeps
the gap between the traded prices of the fund on the exchange and the indexes targeted by the fund within a small range.

Chap. VII Investment Trusts

129

5. Sale of Investment Trusts
The subscription and sale of investment trusts had been practiced only by securities companies in Japan since the establishment of investment trusts in
1951. (Some investment trust management companies started direct marketing in the 1990s.) The entries of financial institutions, including banks, in1998 and some post offices in October 2005 expanded the distribution network rapidly. The share of publicly offered investment trusts sold through financial institutions was once over 40%, but as of June 2021, this has declined
to 21%. On the other hand, the share of privately placed investment trusts
was almost 50% from the beginning, and has been as high as 80% in recent
years. In contrast, investment trust management companies saw weak growthin direct marketing, partially due to the exit of large companies related to securities companies (as such companies absorbed the sales).
Investment trusts were generally sold on an over the counter basis from
distributing companies and through sales agents. Recently, the number of online transactions has also grown. According to a JSDA survey in 2021, 20.6%
via securities company, and 9.9% via financial institution, of respondents
said that they used internet to place orders to buy or sell investment trusts.
Distributing companies are subject to the Financial Instruments and Exchange Act, Act on Sales, etc. of Financial Instruments and the regulations of
the Japan Securities Dealers Association, and they are obliged to comply
with the rules on sales of the Investment Trusts Association, Japan. For example, they must comply with the suitability rule, which requires distributing
companies not to engage in inappropriate solicitation activities in light ofcustomers’knowledge, experience, investment purpose, and assets and to assume“accountability”for risk factors, including market and credit risk, andfor important portions in the structure of transactions and to maintain the“duty of sincerity to customers”not to conduct“prohibited activities”at thetime of sale, such as providing conclusive evaluations. Depository institutions, such as banks, shall be required to take measures to prevent customers
from mistaking investment trusts for deposits at the sale of investment trusts,
including explaining that they are not covered by the deposit insurance system. As a part of the enhancement of accountability at the implementation of
the Financial Instruments and Exchange Act in 2007, the“duty to deliver
documents prior to the conclusion of a contract”was introduced. For investment trusts, the requirement is satisfied by delivering the eligible prospectus.
Furthermore,“Critical Information Sheets”to help customers compare products with investment risk for the advancement of“customer-first businesspractices”were introduced from 2021.
The sales commission for investment trusts, which had been determined

130

Chap. VII Investment Trusts

Chart VII-6.

Breakdown of Total Net Assets of Publicly Offered Stock Investment
Trusts by Distribution Channel (As of June 30, 2021)

Total public offering investment trusts

Public offering stock investment trusts

Direct marketing 0.7%

Direct marketing 0.8%

Banks,
etc
20.9%

Chart VII-7.

Banks,
etc
22.9% Securities
firms
76.3%

Securities
firms
78.4%

Changes in Composition of Total Net Assets of Publicly Offered Investment Trusts by Distribution Channel
Banks, etc

Securities companies

Direct marketing
3.1%

2000

85.9%

11.0%

05

61.8%

37.6%

10

59.4%

40.0%

0.6%
0.7%

15

68.5%

30.8%
0.7%

21/6

78.4%

Chart VII-8.

20.9%

Changes in Breakdown of Total Net Assets of Overall Private Placement
Trusts by Distribution Channel
Securities companies

2000

Banks, etc

37.8%

05
10

0.6%

47.7%

32.4%
21.1%

Direct marketing

61.5%
71.4%

14.5%
6.1%
7.5%

15

16.4%

76.6%

6.9%

21/6

14.6%

80.1%

5.4%

Source: All the above are based on statistics of the Investment Trusts Association, Japan.

Chap. VII Investment Trusts

131

by the fund, was liberalized in Japan as a result of amendments to the business rules of the Investment Trusts Association, Japan, in 1998. At present,different companies can charge different commissions even for the same
fund. There have also been reductions in commissions and a diversificationof commission systems.
6. Investment Management of Investment Trusts
Investment trusts invest mainly in“specified assets”defined by the Order for
Enforcement of the Act on Investment Trusts and Investment Corporations.
(As of September 2019, the specified assets consist of 12 types of assets, including securities, real estate, and rights associated with derivatives trading.)
Funds investing mainly in securities are called securities investment trusts.
Chart VII-9 shows the distribution of assets under the management of publicly offered securities investment trusts as of June 2021. Reflecting an improvement in stock market conditions, the ratio of stocks is high while the ratio of bonds is declining due to low interest rates. Moreover, blue-chip stocks
are being given preference in the selection of the domestic stocks included in
the funds, such as electric, information and communications stocks.
In operating business activities, investment trust management companies,
which invest their assets according to the investment policies described in theprospectus of funds, are subject to the Special Provisions Concerning the Investment Management Business of the Financial Instruments and ExchangeAct. They assume the duty of sincerity to customers and the duty of loyalty
and the duty of due care of a prudent management to the beneficiaries; theyalso are prohibited from undertaking following activities: (1) transactions between the investment trust management company and its directors/executive
officers; (2) transactions among funds under management (excluding certain
portions); (3) transactions for the purpose of its own benefit or the benefit ofa third party by taking advantage of the changes in price of specific financial
instruments resulting from such transactions; (4) transactions whose terms
are different from those of ordinary transactions and that affect adversely thebenefits of beneficiaries; (5) transactions of securities and other transactions
for its own account by using the information for investment management;and (6) cases in which an investment trust management company or somethird party provides beneficiaries or a third party with compensation to offset
a loss or increase profit. As firewalls it is prohibited to execute unnecessarytransactions in light of the investment management policy to promote profits
of other businesses or of the parent company, subsidiaries, etc.. Additionally,
the Investment Trust Act imposes a restriction on investment trust management companies prohibiting them from giving instructions to acquire stocks

132

Chap. VII Investment Trusts

Chart VII-9.

Distribution of Assets of Investment Trusts in Japan (as of June 30, 2021,
total publicly offered securities investment trusts)
Others12.0%

Investment trust
beneficiary securities &investment securities
21.4%

Stocks 57.4%

Bonds 9.2%

Chart VII-10.

Breakdown by Industry Group of Domestic Stocks Held by Investment
Trusts (publicly offered stock investment trusts as of the end of June
2021)

Precision equipment 3.1%

Others 18.0% Electrical equipment 19.7%

Grocery 3.3%
Banking 3.4%
Wholesale 3.9%
Machinery 5.4%
Service
Pharmaceuticals 6.2%
5.9%

Information andCommunications
10.1%
Chemical 7.5%
Retail 6.9%
Transportation-related
equipment
6.6%

Source: All of the charts on this page are based on data from the Investment Trust Association, Japan.

of the same issuing company when the number of stocks held by all investment trusts managed by the given investment trusts management company
exceeds 50% of the total number of outstanding stocks of that same issuing
company. The Investment Trusts Association, Japan, has self-regulatory rules
concerning investment instruments and investment methods in addition to
those concerning credit risk regulations.
The Investment Trust Act stipulates that an investment trust managementcompany exercises the rights of shareholders, including voting rights, on
portfolio stocks. Investment trust management companies disclose their basic
policies and the results of the exercise of voting rights on their websites. Additionally, in accordance with Japan’s Stewardship Code formulated in 2014,activities to promote engagement by listed companies are also under way.

Chap. VII Investment Trusts

Table VII-2.

133

Exercise of Voting Rights for Domestic Stocks at General Shareholders
Meetings by Investment Trust Management Companies (One year until
June 2020)— Voting on Items Proposed by Companies, Total for 71 Companies that
Invest in Domestic Stocks —Name of proposal

For
(A)

Total
Total
Percentage
Blank Against and number of of votes
Against Abstain
mandate Abstain
proposals
against,
(B)
(C)
(D)
(E)
(E)
etc.
(B)+(C) (A)+(E)+(D) (E)/(F) %Proposal about Election and Dismissal 343,917 40,733
Establishment of Directors (*1)
of Organs
Election and Dismissal 50,937 8,658
of Company auditors
(*1)

659

0

41,392

385,309

11%

18

0

8,676

59,613

15%

Election and Dismissalof Accounting Auditors

1,203

14

2

0

16

1,219

1%

Proposal about Remuneration for Offi- 16,364
Remuneration cers (*2)
for Officers
Payment of Retirement 1,210
benefits for Retired Officer

1,520

16

0

1,536

17,900

9%

1,658

2

0

1,660

2,870

58%

Proposal about Disposal of surplus
32,302
Capital policy
Reorganization related
690(except for Pro(*3)
posal about Ar167
ticles of Associ- Introduction/update/abolition of takeover
ation)
defense measures

945

55

0

1,000

33,302

3%

24

0

0

24

714

3%

1,661

1

0

1,662

1,829

91%

1,091

73

0

0

73

1,164

6%

10,256

368

3

0

371

10,627

3%

205

60

0

0

60

265

23%

458,342 55,714

756

0

56,470514,812

11%

Other capital policy
proposal (*4)
Proposal about Articles of Association
Total of Other proposals
Total*1 Revision of executive compensation, issuance of stock options, introduction/revision of performancebased compensation system, officer bonus, etc.
*2 Merger, business transfer/acquisition, share exchange, share transfer, company split.
*3 Purchase of treasury shares, decrease in statutory reserve, capital increase by third-party allotment,
capital decrease, share consolidation, issuance of class shares, etc.
Source: Compiled by the author from data of the Investment Trusts Association, Japan.

134

Chap. VII Investment Trusts

7. Customer Base of Investment Trusts
The chart on the right shows the breakdown of investment trust beneficiaries(in terms of value) in Japan. Over 30% of investment trust assets are held byhouseholds, and nearly 40% by financial institutions, followed by insurancecompanies and pension funds. Compared to the U.S., households and insurance companies and pension funds account for less proportion. Purchasefrom private pensions remains low profile, while financial institutions are active buyers of private placement investment trusts. Meanwhile, the holding
ratio of the BOJ has increased as the central bank expanded its ETF purchase.
The penetration of investment trusts into household financial assets is low.
A 2021 survey that was conducted by the Japan Securities Dealers
Association indicates that only 10.1% of the adult population holds
investment trusts. That ratio is extremely down from the level of more than
16% in 1988 during the bubble economy. The penetration shows a sign ofrecovery after reaching the bottom of 6.1% in 2003. By age group, theholding rate of investment trusts is almost 15% for people aged 55 or more,while it is only 0 to 10% for people in their 20s. It is noticeable that theholding rate is extremely low in young people. Although not shown in thechart, the average penetration of investment trusts among households in the
U.S. is 46%, with 54% within Generation X (40-55 years), 44% within Baby
Boomers (56-74 years), and as high as 47% within the younger generation ofMillennials (under 39 years). (as of 2020) It is desired also in Japan thatenhancing the individual-type defined-contribution pension plan, including
NISA, Junior NISA, Dollar-Cost Averaging NISA and iDeCo, will drive an
increase in the holding of investment trusts among the younger age groups.
According to a 2020 Investment Trust Association survey, the average total
amount of investment trust purchases was ¥3.62 million. In terms of thenumber of subscribers, 38.5% of subscribers spent less than ¥1 million,
20.1% spent between ¥1 million to ¥3 million, while 10.2% spent more than
¥10 million (non-applicable responses were 10.2%).
Many investors had previously answered that there was no specific investment purpose for their purchase investment trusts “( saving up in case of illness or disaster”is a typical and somewhat vague response). Recently, however, more and more people are giving“post-retirement living expenses”astheir reason for buying investment trusts.
In the U.S., the majority of individuals buy investment trusts for their retirement. In many cases, Americans continuously purchase the trusts via accounts for defined contribution pension plans, including the 401k. (This results in a higher holding rate among the young and middle-aged groups.) In
contrast, many buyers do not have any specific purpose in Japan. In many

135

Chap. VII Investment Trusts

Chart VII-11.

Breakdown of Holders of Investment Trusts (as of the end of 2020)
Japan(Reference) U.S.
Business
corporations

Central banks Others
Business
corporations

18.0%

2.0%

Households

30.0%

0.8%

Financial
institutions

Financialcorporations

12.6%

Others5.9%

Households

2.4%

Insurance companies
and pension funds

36.6%

4.4%

57.8%

Insurance companies
and pension funds

29.5%

Source: Bank of Japan,“Flow of Funds Accounts”. Source: FRB, Flow of Funds Accounts.

Table VII-3.

Profiles of Individual Investors Holding Investment Trusts (2021)

Investment trust holding ratio by age
Male
Aged 20 to 24
Aged 25 to 29
Aged 30 to 34
Aged 35 to 39
Aged 40 to 44
Aged 45 to 49
Aged 50 to 54
Aged 55 to 59
Aged 60 to 64
Aged 65 to 69
Aged 70 to 74
Aged 75 to 79
Aged 80 to 84
Aged 85 to 89
Aged 90 or above

2.9%
7.3%
10.6%
12.8%
12.1%
11.5%
6.9%
18.6%
15.1%
17.0%
14.3%
15.2%
15.2%
3.2%
0.0%

Female
2.3%
4.7%
7.5%
7.2%
10.4%
8.3%
6.0%
12.0%
11.0%
10.2%
11.4%
7.8%
5.6%
5.3%
3.3%

Investment trust holding ratio by annual income
Less than ¥1 million¥1 million or above, less than ¥2 million¥2 million or above, less than ¥3 million¥3 million or above, less than ¥4 million¥4 million or above, less than ¥5 million¥5 million or above, less than ¥7 million¥7 million or above, less than ¥10 million¥10 million or above

5.7%
8.5%
9.4%
11.7%
13.1%
16.8%
20.4%
32.7%

Overall average: 10.1%
Note: 7,000 respondents overall.
Source: JSDA“Nationwide Survey (on individuals) concerning Securities Investment Trusts)”FY2021
issue

cases, they do not make monthly payments into investment trusts; rather,
they invest a good sum of money at one time, and this is estimated to belargely dependent on the movement of the securities markets.

136

Chap. VII Investment Trusts

Table VII-4.

Purpose of Purchasing Financial Instruments by Individual Investors
Japan

Living expenses after retirement
Saving in case of possible illness or accident
Education funds for children
No particular purpose, but having financial assets
makes me feel more secureFunds for purchasing durable consumer goods
Funds for travel and leisureFunds for acquiring a house or extending it(including land)
Funds for children’s marriage(Reference) U.S.A.
70.0%
60.9%
30.4%
18.6%

Funds after retirement
To prepare for emergencies
Supplementary to current revenue
Education funds

75%
6%
5%
5%

18.4% Funds to purchase house or other large item
14.3% Reduction of taxable income
12.0% Others

4%
3%
2%

4.1%

Source: Japan: Central Council for Financial Services“Survey of household finances; Household surveyof 2 or more people 2020”Multiple answers allowed up to 3
U.S.A.: ICI“Profile of Mutual Fund Shareholders”2020 Single answer responses to survey on“Primary Purpose of Owning Mutual Funds”

8. Disclosure of Investment Trusts
Until 1997, disclosure of investment trusts was covered not by the Securities
and Exchange Act but by the framework defined in the Securities Investment
Trust Act (now the Act on Investment Trusts and Investment Corporations).
Following the deregulation of the establishment of funds, in which the filingsystem replaced the approval system, as a result of the enforcement of the
Act on Revision, etc. of Related Acts for the Financial System Reform in
1998, the Securities and Exchange Act (now the Financial Instruments andExchange Act) was applied to investment trusts the same as to stocks, etc.
Therefore, publicly offered investment trusts are now subject to both the Investment Trust Act and the Financial Instruments and Exchange Act in termsof disclosure. Details of disclosure are summarized as follows.
Issuance Disclosure
The Financial Instruments and Exchange Act requires investment trust management companies to make a disclosure at the time of offering by filing the“securities registration statement”with the competent authority (for public
inspection) and by delivering the“prospectus”to individual investors at thetime of subscription. Given the unique characteristics of the way in which investment trusts are sold (while offering for subscription of stocks is madeonly at initial public offering and capital increases, and at other times, investors purchase issued stocks on the secondary market, investment trusts arecontinuously offered after establishment of funds by initial subscription), theChap. VII Investment Trusts

Table VII-5.

Publicly Offered Securities Investment Trusts Disclosure System of Japan
Voluntary
disclosure

Statutory disclosure
Disclosure for supervisory
authorities and for public
inspection
FIEA
Issuance
Disclosure(Disclosure atoffering)

137

Securities
Registration
Statement
Amendment ofSecurities
Registration
Statement

Act on Investment Trusts andInvestment
Corporations

Individual disclosure forinvestors

FIEA

Registration on Prospectus
the contents of (Summary
the agreement prospectus)(Detailedprospectus)

AnnualFinancial report
Periodic
Securities Report (investment
Disclosure
report)(disclosure while Semi-annual
under manage- Securities
ment)
ReportExtraordinary
ReportPublic disclosurefor investors

Act on Invest- The Investment
ment Trusts andTrustsInvestment
Association,
Corporations Japan Rules, etc.
Document
Define thesummarizing the Guidelines oncontents of the
Preparation ofagreement
Prospectus(may be indicatedin the prospectus)
Financial report Monthly(investment
disclosure ofreport) (Summary MMF, MRF andfinancial report) timely disclosure(full-version
on the website offinancial report) each investment
managementcompany

Source: Created by Mr. Koji Sugita

prospectuses were split into two volumes to“provide investors with information in an easy-to-understand manner”in 2004. That is, the two volumes consist of a“summary prospectus,”which distributing companies are required todeliver in advance to all investors entering into contracts, and a“detailed
prospectus,”which distributing companies deliver to investors when requested.
As issuance disclosure, the Investment Trust Act requires investment trust
management companies to“notify the details of the basic terms and conditions”to the competent authority and to“deliver documents describing thedetails of the basic terms and conditions”to the investors. Descriptions in theprospectus are substituted for the latter.
Periodic Disclosure
In terms of disclosure after the establishment of investment trust funds, pursuant to the Financial Instruments and Exchange Act investment trust management companies are required to file their“securities report”to the compe-

138

Chap. VII Investment Trusts

Table VII-6.

Major Items in Summary Prospectus (Explanatory Document) of Publicly
Offered Investment Trust

Items recorded

Contents recorded(Items recorded on the front page, etc.)(1) Name of fund and product category Name of the fund indicated on the securities registration statement and product category in the Guidelines Concerning Product Categories set forth by the Investment Trusts Association,
Japan.
(2) Information on investment trust Name of investment trust management company, date of establishment, paid-in capital, total net asset value of investment
management company, etc.
trusts managed, website address, telephone number, name oftrustee, etc.
(Items recorded in the main text)(1) Fund objective and characteristics

Fund characteristics and investment focus based on the basic
investment policy, investment attitude, etc. provided in theagreement; Matters reflecting the fund characteristics, e.g.,fund structure, investment method, investment process, investment restrictions, and distribution policy; If investment management is outsourced, the name of the investment manager
and the content of outsourcing(2) Investment risks

Factors underlying fluctuations in standard price, risk management system, comparison with other assets(3) Investment performance( i ) Transition of standard prices and net assets in the last decade—standard prices illustrated using a line graph; net assets illustrated using a bar or area graph( ii ) Transition of distributions in the last decade(iii) Status of core assets—top 10 portfolio issues, ratio by industry, ratio by asset type, etc.
(iv) Transition of annual earnings ratio in the last decade—illustrated using a bar graph. For funds with benchmarks,
also indicate the percentage changes of benchmarks(4) Procedure, commission, etc.

( i ) Subscription memo (purchase price, application procedure,
trust period, taxes, etc.)(ii) Fund costs (commission at purchase, partial redemption
charge, investment management cost (trust fees) and allocation thereof, other expenses, taxes(5) Additional information

If there is a need to provide explanations on fund characteristics and risks in a greater detail (e.g., for fund of funds, use ofstructured bonds and derivatives), the details

Source: Cabinet Office Order on Disclosure of Information on Regulated Securities and the JITA Rules
on Preparation of Summary Prospectus.

tent authority after the end of each accounting period (for public inspection).
(Semi-annual securities reports are also filed when funds settle accounts oncea year.)Chap. VII Investment Trusts

139

As for periodic disclosure, pursuant to the Investment Trust Act investment
trust management companies are required to deliver their“financial report”
to individual investors. In 2014, it was decided that the financial report would
be made available in two phases based on an approach similar to having twovolumes of prospectuses as described above: a summary financial report issued to all beneficiaries and a financial report (full version) publicized on thewebsite of the management company and issued to beneficiaries upon request.
In addition, the Investment Trusts Association, prescribes in its self-regulatory rules a requirement for each investment trust management company, tomake a timely disclosure on its website, to post and this disclosure is performed at least monthly for each fund.
9. Services and Products Based on Investment Trusts
Cash Management AccountThis is a combination of the securities trading accounts of securities companies and money reserve funds (MRFs), open-end bond investment trusts forthe account, via auto transfer. Recently, the MRFs can be replaced with bankaccounts in some cases. The account invests its remaining idle monies, including the interest on bonds, dividends on stocks, and proceeds from thesale of securities in MRFs and also offers such services as payment on theacquisition of securities, cash advance on ATMs, and securities-backed loans.
The account was established in October 1997 on the model of the CMA(Cash Management Account) funds developed in 1977 by Merrill Lynch in
the U.S. The Investment Trusts Association, Japan, imposes rules on MRFs
on investment management, including one stipulating that investments
should be made to financial instruments with high credibility and with a shortterm up to maturity in light of liquidity and security.
Wrap AccountA wrap account is a product that securities companies, etc. bundle and forwhich they offer a set of asset management services, including the determination and rebalancing of asset allocation and the selection of individual issues and management reports, only in exchange for annual fees to customers’balance of assets (no commission resulting from trading). Wrap accounts,
which invest their assets in investment trusts only, were commercialized following liberalization of sales commissions for investment trusts in 1998 andafter obtaining permission to engage in the discretionary investment management business by securities companies. Wrap accounts are also commercialized to offer asset management services with individual issues, such as

140

Chap. VII Investment Trusts

Chart VII-12.

Outline of a Securities General Account
MRF

Customersayingaccount, etc.

- Unit of subscription: ¥1 or
more- No fee is charged onsubscription and cashing- Purchase or cancellation on
the same day (until a certain
time, such as noon)- Maximum amount ofcashing: ¥5 million

Deposit andwithdrawal

Investment instocks, bonds, andAutomatic transfer investment trustsof purchase moneyor the proceeds ofsale

Source: Author of chapter.

Chart VII-13.

Flow of Wrap Account Service (example)
Asset management
consultation

Review of investment
policyRecommended asset
management styles

Regular management
reports

Discretionary
contract

Asset management
based on a discretionary
contract

Investment trust groups specified foreach asset class
Source: Information compiled by reference to Daiwa Securities website etc.

stocks, as a result of the complete liberalization of brokerage commissions in
October 1999.
Defined Contribution Pension Plans (e.g., Japanese 401k, iDeCo)
Partially backed by the increasing mobility of the employed and a deterioration in the financial positions of DB (defined benefit) corporate pensions, DC(defined contribution) pension plans offering high portability began to be offered in 2001. The participants in corporate DC plans invest their company
contributions (contributions to the reserves by employees have been permit-Chap. VII Investment Trusts

141

ted since 2012), and participants in individual-type DC plans (referred to as) invest their own distributions in investment instruments, including“iDeCo”
investment trusts, deposits and savings, and insurance, at their own responsibility. Their performances are reflected in future receivable pensions. Many
investment trust companies offer low-cost funds exclusively for individualtype defined-contribution pension funds.
Variable Annuities
Variable annuities, which were launched in full scale in 1999, are products
offered by insurance companies. Just as with the defined contribution pension plans, variable annuities also invest premiums from policyholders in investment trusts, and receivable pension amounts are determined by their performance. In addition to securities companies, banks have also begun sellingthese products.
10. Foreign Investment Trusts
The sale of foreign investment trusts created under foreign laws in foreigncountries was liberalized in 1972. Initially, foreign investment trusts were
subject to regulations that they should be invested mainly in foreign-currency-denominated assets and that a weighting of yen-denominated assets waslimited to below 50% of the total assets, in consideration of the effect on domestic investment trusts. However, foreign private placement investment
trusts were introduced into Japan, as foreign investment trusts were not subject to the Securities Investment Trust Act. At that time, private-placement
investment trusts had yet to be recognized in Japan.
As a result of amendments to the Investment Trust Act in 1998, foreign investment trusts became subject to the same regulations as Japanese investment trusts was under the revised act. Namely, the amendments required foreign investment trust management companies to file the same notification as
Japanese investment trusts did at the sale of foreign investment trusts in Japan and allowed Japanese courts to issue an order to prohibit or stop the saleof foreign investment trusts if inappropriate investment management of foreign investment trusts impairs the profits of domestic investors and if there isan urgent necessity to prevent further losses to investors. It was also permitted to introduce yen-denominated funds into Japan, and currently the sametax system as Japanese investment trusts is applied to foreign investment
trusts. The disclosure system is also in line with Japanese and foreign investment trusts, including preparation and delivery of a prospectus and financial
reports. The Japan Securities Dealers Association has“selection criteria offoreign investment trust beneficiary certificates”in the“rules concerning for-

142

Chap. VII Investment Trusts

Table VII-7.

Year-end
2000
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
20
21/6

Total Net Assets of Foreign Investment Trusts in Japan (¥100 million) and
Their Ratio to Total (Public Offering) Investment Trusts
Total net assets offoreign investment
trusts (A)Total net assets ofdomestic investment
trusts (B)36,084
41,42647,14754,42762,411
79,67087,10482,42751,47359,30658,80052,35857,83961,29062,89354,24853,54060,91354,14362,09465,73568,183493,992
452,807360,160
374,356
409,967
553,476
689,276
797,606
521,465
614,551
637,201
573,274
640,600
815,200
935,045977,562
966,415
1,111,920
1,051,592
1,231,723
1,394,311
1,566,858

Total (C)
530,076494,233
407,307428,783
472,378
633,146776,380880,033
572,938
673,857
696,001
625,632
698,439
876,490997,938
1,031,810
1,019,955
1,172,832
1,105,735
1,293,817
1,460,046
1,635,041(A)/(C)
6.8%
8.4%
11.6%
12.7%
13.2%
12.6%
11.2%
9.4%
9.0%
8.8%
8.4%
8.4%
8.3%
7.0%
6.3%
5.3%
5.2%
5.2%
4.9%
4.8%
4.5%
4.2%

Note: The total net assets of domestic investment trusts are the total net assets of publicly offered investment trusts in Japan.
Source: Total net assets of foreign investment trusts and domestic investment trusts were taken from theJapan Securities Dealers Association and the Investment Trusts Association, Japan, respectively.

eign securities transactions”to set the requirements for foreign funds to beavailable in Japan.
Table VII-7 shows the trend of total net assets of foreign investment trusts
sold in Japan for the recent 20 years. The total net assets had been dependent
on the effects of exchange rates, etc. Sales of foreign investment trusts surgedin Japan after 1997, reflecting a higher demand for high-yield foreign bonds
and a tendency toward a weaker yen during the continued ultralow interest
rate. The ratio of foreign investment trust assets to total investment trust assets, including domestic investment trusts, was above 13% in 2004. After
that, the growth in sales of overseas registered investment trusts came to ahalt due to the recovered popularity of domestic stock funds and an increaseChap. VII Investment Trusts

Chart VII-14.
(%)
100
90
80
70
60
50
40
30
20
10
0

143

Breakdown of Total Net Assets of Foreign Investment Trusts in Japan by
Product Category

Other
MMF
Bond-type(excluding MMF)
Equity-type2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21/6

19/9

Source: Compiled by the author based on materials disclosed by the Japan Securities Dealers Association.

Chart VII-15.
(%)
100
90
80
70
60
50
40
30
20
10
0

Breakdown of Total Net Assets of Foreign Investment Trusts in Japan byPresentation Currency

Other
Euro
Yen
US dollar

2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21/6

Source: Compiled by the author based on materials disclosed by the Japan Securities Dealers Association.

in monthly dividend paying type funds registered in Japan. Recently, total net
assets have fallen below ¥7 trillion yen, and the pace of expansion has beenslower than that of domestic investment trusts. By product, as shown in the
figure on the right, stock investment trusts increased for a time after 2004
when stock prices recovered globally, and real estate and alternative funds
classified in the“others”category also increased. However, broadly-definedbond funds, including MMFs, have continued to be mainstream. Looking at
foreign investment trusts by country of establishment, Luxembourg investment trusts enjoyed an overwhelming share of the market in the past, but
Cayman investment trusts have increased their share since around 2005. At
the end of March 2021, Cayman, Luxembourg, and other investment trusts
accounted for 54.5%, 33.8%, and 11.7% in terms of total net assets, respectively.

CHAPTER VIIIThe Derivatives Market

1. Futures Trading“Futures trading”refers to an agreement to buy or sell a specific amount of acommodity or financial instrument at a particular price on a stipulated futuredate. The history of futures trading is said to be as old as that of commodities
trading. However, it is generally believed that the precursor of today’s fullydeveloped futures market emerged in Japan as the account-balancing tradingin rice (the rice market) conducted in Osaka in the Edo period (1603–1868).
This was a method that made it possible for parties to consummate a transaction by organizing one-on-one negotiated transactions in such a way as to enable them to settle the difference without delivery of the underlying commodity or financial instrument and is considered the beginning of Japan’sfutures trading. By inheriting this tradition, stock futures were traded by settling the difference in the form of forward transactions on the stock exchange
in Japan in prewar years. After the war, forward transactions were prohibitedby the General Headquarters (GHQ) of the Supreme Commander for the Allied Powers (SCAP) in Japan in order to curb speculative transactions, butsome claim that it was partly revived in the form of margin trading with individual investors on the stock market.
In 1972, the Chicago Mercantile Exchange started trading in currency futures. The Chicago Board of Trade started trading in futures on fictitious
bonds called benchmark issues in 1974, and the Kansas City Board of Tradestarted trading in stock index futures in 1982. And these types of futures trading spread to other countries around the world, including the introduction of
trading in securities futures in Japan. Long-term government bond futures
trading that started on the TSE in 1985 was the first financial futures trading
conducted in Japan. More products emerged in quick succession: the OSE’ss Nikkei 225 futures“Osaka Stock Futures 50 (OSF50)”in 1987; the OSE’contracts trading and the TSE’s TOPIX futures trading in 1988; and the Tokyo Financial Exchange Inc. (TFX)’
s Japanese yen short-term interest rate
futures, U.S. dollar short-term interest rate futures, and yen-dollar currency
futures in 1989.

Chap. VIII The Derivatives Market

Table VIII-1.
Year
1972
1976
1977
1981
1982
1984
1985
1986
1987
1988
1989
1990
1991
1992
1996
1997
1998
1999
2000
2001
2004
2005
2006
2008
2010
2019

145

Years in Which Major Financial Futures of the World Were Listed

Other countries
Currency futures (mark-dollar and yen-dollar) (CME)
TB futures (CME)
Treasury bond futures (CBOT)
Eurodollar interest rate futures (CME)
S&P 500 futures (CME); T-note futures(CBOT); U.K. government bond futures andpound interest rate futures (LIFFE)FTSE 100 futures (LIFFE)Japan

Long-term government bond futures (TSE)
French government bond futures (MATIF),
Nikkei average futures (SIMEX)Japanese government bond futures (LIFFE)
CAC40 futures; PIBOR (Paris interbank of- Nikkei 225 futures (OSE); TOPIX futures
fered rate) futures (MATIF); BUND futures (TSE)(LIFFE)
Euroyen interest rate futures (SIMEX)
Euroyen short-term interest rate futures(TIFFE)
Euromark interest rate futures (LIFFE); Nikkei average futures (CME); DAX futures and
BUND futures (DTB)
Interbank interest rate futures (BM&F)
USD/RUB currency futures (MICEX)Euroyen interest rate futures (LIFFE); NASDAQ 100 futures (CME); KOSPI 200 futures(KSE)
E-mini S&P 500 futures (CME)EURIBOR futures (LIFFE), Euro STOXX
50 futures (EUREX)
E-mini NASDAQ 100 futures (CME)
CNX Nifty Index futures (NSE)Single stock futures (LIFFE), FTSE China
A50 (SGX)
VIX index futures (CFE)RTS stock price index futures (RTS)
Exchange FOREX margin contracts (TFX)
Russell 2000 futures (ICE)
Nikkei 225 mini futures (OSE)
CSI 300 futures (CFFEX)
Micro E-mini S&P 500 futures (CME), Micro E-mini Nasdaq 100 futures (CME)

Note: BM&F: Brazilian Mercantile and Futures Exchange (presently BM&F BOVESPA), CBOT: Chicago Board of Trade, CFE: CBOE Futures Exchange, CFFEX: China Financial Futures Exchange,
CME: Chicago Mercantile Exchange, DTB: Deutsche Terminbörse (presently Eurex), ICE: ICE
Futures U.S., KSE: Korea Stock Exchange (presently KRX), LIFFE: London International Futures
and Options Exchange (presently ICE Futures Europe), MATIF: Marché à Terme International deFrance (presently Euronext Paris), MICEX: Moscow Interbank Currency Exchange (presently
Moscow Exchange), NSE: National Stock Exchange of India, RTS: Russian Trading System (presently Moscow Exchange), SIMEX: Singapore International Monetary Exchange (presently SGX),
TSE: Tokyo Stock Exchange; OSE: Osaka Securities Exchange (presently Osaka Exchange), TFX:Tokyo Financial Futures Exchange (presently Tokyo Financial Exchange).

146

Chap. VIII The Derivatives Market

In English,“futures contracts”are transactions that are traded on theexchange, however while a futures contract can be transferred to a third
party, a margin has to be deposited to provide against non-performance of thecontract. Whereas a“forward contract”is a transaction between parties thatcannot be transferred to a third party, and does not require a deposit of amargin. Transactions in currency or short-term interest-rate futures are forward contracts often negotiated between a bank and its client, and they arecalled forward-exchange agreements (FXA) or forward-rate agreements(FRA). Along with swap trading, these two types of transactions played aleading role in boosting the derivatives markets around the world in the
1990s.
2. Bond Futures Trading
Trading in securities futures (Government National Mortgage Association[GNMA] certificates) started in 1974 in the United States. Trading in 10-year
government bond futures started on the Tokyo Stock Exchange in 1985 withthe backup that they were issued in massive amounts. This was the first financial futures trading in Japan. In 1988, superlong-term (20-year) government bond futures (discontinued in 2002, but resumed in 2014) were listedon the Tokyo Stock Exchange, and trading in U.S. Treasury bond futures,
which had the largest trading volume in the world, started on the Tokyo Stock
Exchange in 1989. With the trading in medium-term (5-year) government
note futures that started on the Tokyo Stock Exchange in 1996, Japan had finally developed a product mix comparable to that of other countries.
Bond futures are generally traded on the basis of a fictitious issue called abenchmark issue whose price is assumed to indicate the level of yield curvethen prevailing. Therefore, the price of bond futures is formed in the belief
that the prices of individual bonds are above the yield curve of the benchmark issue or above a yield curve that runs parallel to it. Because a seller canchoose an issue just as in a regular settlement, the seller chooses the most
reasonably priced issue at that point in time, but the price of the issue to bedelivered is computed by multiplying the price of the benchmark issue by aconversion factor prescribed by the exchange.
One of the characteristics of the bond futures trading conducted in Japan isthat issues are traded in units with a total par value of ¥100 million, about 10
times as large as that of other countries. (This compares with $100,000 in thecase of treasury bond futures traded on the Chicago Board of Trade, or
100,000 Eurodollars in the case of BUND futures traded on the EUREX.)
This is due to the fact that in cash bond transactions, bonds whose value falls
short of ¥100 million are treated as a fraction of a trading unit. As bond fu-

147

Chap. VIII The Derivatives Market

Table VIII-2.

Trading Mechanism of Bond Futures

Medium-term JGB futures

Long-term JGB futures

Superlong-term JGB futures

Trading object

Medium-term JGB Stan- Long-term JGB Standard- Superlong-term JGB Standardized 3%, 5-year resid- ized 6%, 10-year residual dardized 3%, 20-year reualsidualDelivery object

Interest-bearing 5-yr. govt. Interest-bearing 10-yr. Interest-bearing 20-yr.
notes with a remaining life govt. notes with a remain- govt. bonds with a remaining life of 19 yrs. and 3of 4 yrs. to 5 yrs. and 3 ing life of 7 to 11 yrs.
mos. to 20 yrs.
mos.

Contract month

3 contract months from 3 contract months from 3 contract months fromMarch, June, September, March, June, September, March, June, September,
December
December
December

Delivery date

20th of March, June, Sep- 20th of March, June, Sep- 20th of March, June, September, December
tember, December
tember, December

Final trading day

5 business days prior to 5 business days prior to 5 business days prior to
the delivery datethe delivery datethe delivery dateTrading hours

8:45-11:02, 12:30-15:02, 8:45-11:02, 12:30-15:02, 8:45-11:02, 12:30-15:02,
15:30–5:30 the following 15:30–5:30 the following 15:30–5:30 the following
day
day
day

Trading unit

¥100 million in par value¥100 million in par value¥100 million in par value

Price asked¥0.01 per par value of¥100¥0.01 per par value of¥100¥0.01 per par value of¥100

Daily price limit

Standard: Base price±¥2.00Maximum: Base price±¥3.00Standard: Base price±¥2.00Maximum: Base price±¥3.00Standard: Base price±¥4.00Maximum: Base price±¥6.00Circuit breakermechanism

In a futures trading, if following a buy (sell) order for the central contract monthplaced (or contracted) at the upper (lower) price limit, there is no trade execution ata price outside the price range from the upper (lower price) limit to the immediately
executable price range (for medium-term and long-term JGB futures, last tradedprice plus or minus 0.1 yen, for superlong-term JGB futures, last traded price plus
or minus 0.3 yen) for one (1) minute, trading is suspended for 10 minutes.

Table VIII-3.

Transition in Bond Futures Trading

Medium-term JGB futures

2017
2018
2019
2020
2021

No. ofdeals

No. ofcontracts

0
0
0
0
0

0
0
0
0
0

Long-term JGB futures

Superlong-term JGB futures

No. ofdeals

No. ofcontracts

No. ofdeals

No. ofcontracts

8,190,265
10,304,257
9,611,513
7,148,071
8,187,093

96,251
110,589
78,887
68,770105,539

1,602
3,434
1,957
1,648
1,055

62
162
312
28
46

Source: Website of the Japan Exchange Group (JPX).

148

Chap. VIII The Derivatives Market

tures trading is usually compared with that of other countries in terms of thenumber of contracts, futures traded in Japan tend to be underestimated.
It is said that another characteristic of the bond futures market of Japan isthat it is concentrated in trading in long-term government bond futures. Thisis likely to be related to the fact that the maturities of government bonds,
though to a lesser extent than before, tend to be primarily in 10-year issues.
Yet this stands in contrast with the U.S. and Germany where medium-termbond futures trading maintains liquidity.
Since the mid-1990s, however, the concentration of cash government bondtrading on the benchmark issue, which was a phenomenon peculiar to Japan,
has eased. Since the end of March 1999, the practice of designating a government bond as a benchmark issue has been discontinued, with 10-year government bond futures assuming the role played by benchmark issues. Among
new products, contract for difference (CFD) futures on mini-long-term government bonds, which are one-tenth the amount of normal bonds, were listedon the Tokyo Stock Exchange from the end of March 2009, but trading accounts for less than 1% of long-term government bond futures.
3. Stock Index Futures Trading
The first stock index futures contract was listed in the United States in 1982.
In Japan, the Osaka Securities Exchange started trading Osaka Stock Futures
50, a futures contract for a basket of 50 stocks, in 1987. That product was
followed in 1988 by the listing of Nikkei 225 futures on the Osaka Securities
Exchange and TOPIX futures on the Tokyo Stock Exchange. Nikkei 300 futures were listed on the Osaka Securities Exchange in 1994. In 1998, HighTech 40, Financial 25, and Consumer 40 stock index futures started to be
traded on the Osaka Securities Exchange and sector index futures contracts
for three industries, electric appliances, transportation equipment, and banks,
were listed on the Tokyo Stock Exchange. The Tokyo Stock Exchange
launched S&P/TOPIX 150 stock index futures in 2001, while three futurescontracts based, respectively, on the MSCI Japan, the FTSE Japan, and the
Dow-Jones Industrial Average indices were listed on the Osaka Securities
Exchange (OSE) in 2002. RN (Russell Nomura) Prime Index futures commenced trading on the OSE in 2005, followed by Nikkei 225 mini-futures on
the OSE in 2006, and the TOPIX mini, TOPIX Core30, and TSE REIT index
futures on the TSE in 2008. In 2010, the OSE introduced the Nikkei Stock
Average Dividend Point Index and the TSE introduced TOPIX and TOPIX
Core30 dividend indexes, while the Tokyo Financial Exchange launched Nikkei 225 equity margin contracts. In 2012, the OSE began trading Nikkei
Stock Average Volatility Index futures and NY Dow Jones Industrial AverageChap. VIII The Derivatives Market

Table VIII-4.

149

Trading Mechanism of Stock Index Futures

Nikkei 225 mini futures

Nikkei 225 futures
Nikkei stock average

TOPIX futures

Trading object

Nikkei stock averageContract month

Jun & Dec:
Jun & Dec:
5 months in the Mar, Jun,
Nearest 10 contract months Nearest 10 contract months Sept & Dec quarterly cycle
Mar & Sept:
Mar & Sept:
Nearest 3 contract months Nearest 3 contract months
Other months:
Nearest 3 contract months

Trading unit

Nikkei stock average×100 Nikkei stock average×1,000 TOPIX×¥10,000

Price asked

Units of ¥5 in Nikkei stock Units of ¥10 in Nikkei stock Units of 0.5 points inaverageaverage
TOPIX

MaturityOn the 2nd Friday ofMar, Jun, Sept, or Dec

On the 2nd Friday ofMar, Jun, Sept, or Dec

TOPIX

On the 2nd Friday ofMar, Jun, Sept, or Dec

Final trading day One business day prior to One business day prior to One business day prior to
the delivery datethe delivery datethe delivery dateTrading hours

8:45–15:15, 16:30–5:30 the 8:45–15:15, 16:30–5:30 the 8:45–15:15, 16:30–5:30 thefollowing day
following day
following day

Daily price limit Standard: Base price±8%
2nd Expansion: Base price±12%
Maximum: Base price±16%
Circuit breakermechanism

Standard: Base price±8%
2nd Expansion: Base price±12%
Maximum: Base price±16%

If, following a contract or buy (sell) order for the central contract month for a futures
trading placed at the upper (lower) price limit, there is no trade execution for one (1)minute because of a fall (rise) of over 10% of the price limit range from the upper(lower) price limit, trading is suspended for 10 minutes.

Table VIII-5.

2017
2018
2019
2020
2021

Standard: Base price±8%
2nd Expansion: Base price±12%
Maximum: Base price±16%

Transition in Stock Index Futures Trading

Nikkei 225 mini futures

Nikkei 225 futures

No. ofdeals

No. ofcontracts

No. ofdeals

683,633
1,279,710
500,550
365,751
245,947

23,054,495
26,193,823
22,527,189
27,171,013
18,073,552

219,518,050
273,327,463
237,577,721
321,718,519
224,009,276

Source: Website of the Japan Exchange Group (JPX).

No. ofcontracts
413,373426,448
335,127
304,922319,752

TOPIX futures
No. ofdeals
24,392,610
26,224,277
26,345,546
27,702,276
23,309,732

No. ofcontracts
665,711534,861
561,087
514,650
421,213

150

Chap. VIII The Derivatives Market

futures. In 2014, CNX Nifty futures and JPX Nikkei Index 400 futures, andin 2016, TSE Mothers and Taiwan Capitalization Weighted Stock Index futures were listed on the Osaka Exchange, followed by FTSE China A50 Index futures in 2017. Prior to all these domestic listings for Nikkei 225 futures, the Singapore International Monetary Exchange (SIMEX, now SGXDT) started trading SIMEX Nikkei 225 futures in 1986, followed in 1992 bydollar- and yen-denominated Nikkei 225 futures on the Chicago Mercantile
Exchange (CME).
Out of many futures contracts based on a variety of Japanese stock indexes
or listed on different exchanges, the OSE Nikkei 225 futures are the most actively traded, while the TOPIX futures, Nikkei 225 mini-futures, and SGX
Nikkei 225 futures contracts, are quite liquid, creating a rather unique situation in which there is more than one contract having good liquidity among
the stock index futures.
Since June 1989, the last trading day falls, as is the case with the UnitedStates, one business day prior to maturity, and the final settlement price is decided on the basis of a special quotation (SQ) that is computed on the basisof the opening prices of component issues on the date of maturity. In addition
to a three-stage daily price limit, the stock exchanges in Japan have instituteda system temporarily suspending trading called the circuit breaker system inorder to control price fluctuations for domestic stock index futures trading.
This does not exist in the cash market and is different to restrictions onchanges in stock prices.
4. Financial Futures Trading
Currency futures trading started in the United States in 1972, and Eurodollar
short-term interest rate contracts were the first interbank futures listed on a
U.S. exchange, in 1982. In Japan, Euroyen futures, Eurodollar short-term interest rate futures (trading was suspended in 1998), and Japanese yen-U.S.
dollar currency futures (contracts were delisted in 1992) were simultaneously
listed on the Tokyo International Financial Futures Exchange in 1989. These
contracts were followed by the TIFFE/TFX listings of dollar-yen futures in
1991; 1-year Euroyen futures in 1992 (trading was suspended in 1998); Euroyen LIBOR futures in 1999; 5-year and 10-year yen swap futures in 2003
(trading was suspended in 2007); and Exchange FOREX margin contracts(Click 365) on U.S. dollars, Euros, UK pounds, and Australian dollars in
2005. In 2009, the TFX listed overnight (O/N) uncollateralized call rate andgeneral collateral (GC) spot-next (S/N) repo rate interest futures, and added
margin contracts for Nikkei stock average, FTSE 100, and DAX indexes(Click 365) on the TIFFE (TIFFE was renamed the Tokyo Financial Ex-

Chap. VIII The Derivatives Market

Table VIII-6.

Trading unit

151

Trading Mechanism of Financial Futures

3-month Euroyeninterest rate futures

USD-JPY exchange
FOREX margin contracts

Nikkei 225 margin
contracts

Principal ¥100 million

US$10,000

Nikkei stock average×100

Indicating method 100 minus rate of interest Yen equivalent per U.S. Yen equivalent per stock(%, Act/360 day basis)
dollarprice index
Price asked

0.005 (¥1,250)

0.01 (¥100)

Contract monthMar, Jun, Sep, Dec, cycle No(20 contract months traded at any one time)No

Final trading day

Two business days prior No
to the third Wednesday ofthe contract monthNo

Final settlement
day

Business day following No
the final trading day

No

Settlement
methodSettlement of differences Making up differences(the final settlement priceis equal to ¥100 less TIBOR rounded off at the
fourth decimal places)

Making up differences

Daily price limit

No

Trading hours

8:45–11:30, 12:30–15:30, Monday 7:10 a.m. to 6:55
15:30–20:00
a.m. the following day
Tuesday to Thursday 7:55
a.m. to 6:55 a.m. the following day (1 hour eachduring U.S. Daylight Savings Time)No

Table VIII-7.

2017
2018
2019
2020
2021

1,545,861
1,423,666
855,250
263,657
74,206

No
Friday 7:55 a.m. to 6:00
a.m. the following day
8:30 a.m.–6:00 a.m. thefollowing day(5:00 a.m. during U.S.
Daylight Savings Time)

Transition in Financial Futures Trading

3-month Euroyeninterest rate futures
No. ofdeals¥1 (¥100)

No. ofcontracts
134,560
102,874
58,55015,656
6,080

USD-JPY exchange FOREX Nikkei 225 margin contracts
margin contracts
No. ofdeals
10,478,227
8,363,218
5,352,811
7,181,607
6,326,876

Source: Website of the Tokyo Financial Exchange.

No. ofcontracts
537,737
534,564
523,692
398,555
373,916

No. ofdeals
5,722,311
4,266,773
5,254,459
10,701,148
9,730,043

No. ofcontracts
237,114
218,858
200,762
167,049
45,919

152

Chap. VIII The Derivatives Market

change (TFX) in 2007) in 2010.
Financial futures trading in the United States began with futures and futures options on commodity exchanges while European countries introduced
financial futures exchanges for these products. In Japan, futures and options
on bonds and stocks are traded on the stock exchanges, while interbank interest rate and currency futures and options are traded on the TFX, a separate
market established by some banks and securities companies.
On the TFX, trading has been concentrated from the start in yen short-term
rate futures, with little trading in other futures. To increase the liquidity of
those financial futures, the market-making system was introduced for dollar
short-term rate futures and yen-dollar currency futures in 1990, dollar-yen
currency futures in 1991, and options on yen short-term rate futures in 1992.
However, their liquidity did not improve much.
Meanwhile, in 1996 TIFFE introduced a TIFFE-SPAN (Standard Portfolio
Analysis of Risk) system on the basis of which the amount of margin commensurate with the risks involved is computed. Moreover, in an effort tostimulate financial futures trading, it linked the prices of its products to thoseof the London International Financial Futures and Options Exchange (LIFFE)
and extended its trading hours in the same year. It made efforts to stimulate
trading by introducing the night-trading system for dollar-yen currency futures in 1997. Since 1995, however, TIFFE/TFX’s business, which had
grown during the first half of the 1990s, has been decreasing on account of
the extremely low interest rate climate. Meanwhile, trading of Click 365,
which was listed with an eye to the expansion of foreign exchange margintransactions, and trading of Click Stock 365, which is linked with Nikkei average stock prices, have established a presence.
5. Options Trading
Options trading refers to an agreement to trade the right to buy or sell a specific amount of a commodity or a financial instrument at a fixed price (theexercise price) within a specified period in the future. The right to become
the buyer is called a call option, and the right to become the seller is called aput option.
The history of options trading goes back to antiquity. According to Aristotle, the first known option trading was written by Thales (ca. 620–ca. 555
BC), a Greek philosopher, on the sale of an olive press. The Chicago Board
Options Exchange (CBOE) established in 1973 is the first fully developed
options trading market. This provided a method that made it possible for parties to consummate a transaction by organizing one-on-one negotiated transactions in such a way as to enable them to settle the difference without deliv-

Chap. VIII The Derivatives Market

Table VIII-8.

Years in Which Major Financial Options of the World Were Listed

Year

Other countries

1973
1974
1978
1982

U.S. options on individual stocks (CBOE)
U.S. options on individual stocks (AMEX, PHLX, PCX)
U.K. options on individual stocks (LTOM)
Currency options (PHLX), T-bond futures options(CBOT)
S&P 100 options; S&P 500 options (CBOE); S&P 500 futures options (CME)
Currency futures options (CME), FTSE 100 options(LIFFE)
Pound interest rate futures options (LIFFE), options on
French individual stocks (MONEP)
French government bond futures options (MATIF);
CAC40 options (MONEP); BUND futures options(LIFFE)

1983
1984
1987
1988
1989
1990

1991
1992
1994
1997
1998
2000
2001
2006
2013

153

Japan

Bond OTC options (OTC); Nikkei
225 options (OSE); Nikkei 225 options (OSE); TOPIX options (TSE)
Options on individual German stocks (DTB); Euroyen in- Long-term government bond futures
terest rate futures options (SIMEX); Euromark interest options (TSE)rate futures options (LIFFE); DAX options and BUND
futures options (DTB)
Euroyen short-term rate futures options (TFX)
Nikkei average futures options (SIMEX)JGB futures options (SIMEX)KOSPI 200 options (KSE)
Options on individual stocks (TSE,OSE)
EURIBOR futures options (LIFFE), Euro STOXX 50 options (EUREX), TAIEX options (TAIFEX)
U.S. options on individual stocks (ISE)
Nifty options (NSE), SENSEX options (BSE)
VIX index options (CBOE)
Nifty Bank option (NSE)

Note: AMEX: American Stock Exchange (presently NYSE MKT), BSE: Bombay Stock Exchange,
CBOE: Chicago Board Options Exchange, CBOT: Chicago Board of Trade, CME: Chicago Mercantile Exchange, DTB: Deutsche Terminbörse (presently EUREX), ISE: International Securities
Exchange, KSE: Korea Stock Exchange (presently KRX), LIFFE: London International Futures
and Options Exchange (presently ICE Futures Europe), LTOM: London Traded Options Market(presently ICE Futures Europe), MATIF: Marché à Terme International de France (presently Euronext Paris), MONEP: Marché des Options Négociable de Paris (presently Euronext Paris), NSE:
National Stock Exchange of India, PHLX: Philadelphia Stock Exchange (presently Nasdaq OMX
PHLX), PCX: Pacific Exchange (presently NYSE Arca), SIMEX: Singapore International Monetary Exchange (presently SGX), TAIFEX: Taiwan Futures Exchange,TSE: Tokyo Stock Exchange,
OSE: Osaka Securities Exchange (presently Osaka Exchange), TFX: Tokyo International Financial
Futures Exchange (presently Tokyo Financial Exchange).

154

Chap. VIII The Derivatives Market

ery of the underlying commodity or financial instrument, similar to a futures
trading, and is considered to have been the groundbreaking event in the history of options trading.
The options trading started by the CBOE in 1973 spread to other financial
instruments, such as currency options trading, bond options trading, and bondfutures options trading, in 1982; stock index options trading, and stock index
futures options trading in 1983; and to currency futures options trading in
1984. And it has since spread to major financial markets worldwide. In Japan, OTC bond options trading (trading in bonds with options) was introduced in April 1989. The Osaka Securities Exchange introduced Nikkei 225
options in June, the Tokyo Stock Exchange introduced TOPIX options in October, and the Nagoya Stock Exchange introduced Options 25 in October
1989 (discontinued in 1998). The Tokyo Stock Exchange introduced longterm government bond futures options in 1990, and the Tokyo International
Financial Futures Exchange (TIFFE) introduced yen short-term rate futures
options in 1991. In addition, the Osaka Securities Exchange introduced Nikkei 300 options in 1994, and both the Tokyo Stock Exchange and the Osaka
Securities Exchange introduced options on individual stocks in 1997. In
1998, the Osaka Securities Exchange introduced three industry-specific stockindex options (High-Tech 40, Financial 25, and Consumer 40). In 2015 it introduced Nikkei 225 Weekly options.
Listed options are traded on exchanges. While they can be transferred to athird party, the seller is required to deposit a margin with the exchange toprovide against defaults on the contract. OTC options trading is a one-on-one
transaction, and it cannot be transferred to a third party, but the seller is not
required to deposit a margin. Unlike stock options and stock index options,many of the currency or interest rate options are traded with banks or securities companies on the OTC market.
6. Bond Options Trading
Treasury bond (T-bond) options trading (on the Chicago Board Options Exchange) and T-note options trading (on the American Stock Exchange) started
simultaneously in 1982 constituted the first trading in listed bond options.
And T-bond futures options were traded on the Chicago Board of Trade forthe first time in 1982. In Japan, the first bond options trading was started on
the OTC market in the name of“trading in bonds with options”in April
1989. Trading in long-term government bond futures options started in 1990,
and trading in medium-term government note futures options (discontinued
in 2002) started in 2000, both on the TSE.
Unlike bond futures trading, which is conducted on the basis of a bench-Chap. VIII The Derivatives Market

Table VIII-9.

155

Trading Mechanism of Bond Options Trading

OTC bond options

Long-term government
bond futures options

Medium-term government
bond futures options

Trading
objectAll debt securities other Call options or put options on Call options or put options onthan convertible bonds long-term government bond medium-sterm government
and warrant bonds
futuresbond futures

ContractmonthsFree

March, June, September, December cycle (nearest twocontract months traded at any
one time), other months (up tonearest two contract months)

Finaltradingday―

The last trading day of the The last trading day of themonth immediately preceding month immediately preceding
Mar, Jun, Sep, and Dec.
Mar, Jun, Sep, and Dec.

DeliverydateWithin one year and 3 Business day following the Business day following themonths from the date of trading day
trading day
contract

Trading
unit¥100 million in par value One contract on long-term One contract on medium-term
JGB futures
JGB futures

March, June, September, December cycle (nearest twocontract months traded at any
one time), other months (up tonearest two contract months)

Price asked ―¥0.01 per par value of ¥100

¥0.01 per par value of ¥100

Optionexercise
price±10 prices at ¥0.5 intervals,
additional prices set according
to price movement in underlying futures±10 prices at ¥0.5 intervals,
additional prices set according
to price movement in underlying futures

Daily price ―limitStandard: Base price ±¥2.10
Maximum: Base price±¥3.00Standard: Base price ±¥2.10
Maximum: Base price±¥3.00Circuit―breakermechanism

When circuit breaker mecha- When circuit breaker mechanisms are in place for the un- nisms are in place for the underlying futures contracts
derlying futures contracts

Method ofexercising
the right

American option

Free

Free

American option

mark issue, OTC bond options are traded on the basis of individual issues,
such as government bonds, corporate bonds, or foreign bonds. Because they
are traded on the OTC market, bond options agreements cannot be transferred to a third party (most of the transactions are for government bonds).
As with government bond futures trading, bond options are traded in units of¥100 million in par value. Because their life (from the date of contract to thedate of delivery) is restricted to a maximum period of one year and threemonths, and as they cannot be resold to a third party, contracts usually run a
relatively long period—six months or one year.
By contrast, long-term government bond futures options are available in

156

Chap. VIII The Derivatives Market

Table VIII-10.

Transition in Bond Options Trading

OTC bond options
Trading
value
2017
2018
2019
2020
2021

1,644,695
2,145,579
2,188,984
1,805,445
1,447,264

Outstanding
price
12,22629,494
17,99023,852
20,158Long-term government
bond futures options
No. ofdeals
861,714783,545
631,807323,210
193,708

No. ofcontracts
20,995
7,720
4,411
3,710
4,994

Medium-term government
note futures options
No. ofdeals

No. ofcontracts
－
－
－
－
－

－
－
－
－
－

Source: The websites of the Japan Exchange Group (JPX) and the Japan Securities Dealers Association(JSDA).

the form of listed American options (the option can be exercised any day during its life), and their trading mechanism is similar to that of long-term government bond futures. Whereas long-term government bond futures have
only three contract months with a maximum period of nine months, longterm government bond futures options offer up to four contract months witha maximum period of six months. In addition, compared with OTC bond options, transactions in long-term government bond futures and long-term government bond futures options are concentrated in those with a short remaining life.
In Western countries where options trading has long been conducted, investors are quite familiar with the system. However, in Japan, where there isno custom of options trading, investors utilize options trading less often thanfutures trading. Particularly, the amount of long-term government bond futures options trading is far smaller than that of long-term government futures
trading. This is because investors’interest is concentrated in outright transactions that deal only in options, and covered transactions are not made in conjunction with underlying assets (namely, long-term government bond futures). On the other hand, in conducting OTC bond options trading, investors
follow the strategy of combining underlying assets with covered call or target
buying.
7. Stock Index Options Trading
Trading in listed options on individual stocks started in 1973 on the Chicago
Board Options Exchange (CBOE). In 1983, the CBOE introduced S&P 100
options (the first stock index options). The Chicago Mercantile Exchange(CME) listed S&P 500 futures options (the first stock index futures options

Chap. VIII The Derivatives Market

Table VIII-11.

157

Trading Mechanism of Stock Index Options

Nikkei 225 options (Weekly)

TOPIX options

Trading object

Call options or put options on Nikkei Call options or put options on TOPIX
stock averageContract months

Jun and Dec contracts are nearest 16
months, Mar and Sept contracts arenearest 3 months, other contract
months are 6 months (Weekly Options
are nearest 4 weekly contracts)

June and Dec contracts are nearest 10
months, Mar and Sep contacts arenearest 3 months, other contracts
months are nearest 6 months

Trading unit

Nikkei stock average×1,000

TOPIX×¥10,000

Price asked¥50 or less: ¥1; over ¥50 up to ¥1,000: 0.1 points for prices up to 20 points,¥5; over ¥1,000: ¥10
0.5 points for prices over 20 points

MaturityOn the 2nd Friday of the delivery On the 2nd Friday of the delivery
month
month

Final trading day

One business day prior to the delivery One business day prior to the delivery
date
date

Trading hours

9:00–15:15, 16:30–5:30 the following 9:00–15:15, 16:30–5:30 the following
day
day

Option exercise price Initially, ±8 strike prices at ¥250 intervals; ±8 strike prices at ¥125 intervals for closest 3 contract months
when less than 3 months remaining

Over-4 month contracts: ±6 prices at
50-point intervals (if 4 months, sameas 4 months or less), contracts of 4months or less: ±9 prices at 25-pointintervals

Method of exercising European option
the right

European option

Daily price limit

Normal: 4, 6, 8 or 11% according to
the base price
1st Expansion: Base price ＋3%
2nd Expansion: 1st Expansion ＋3%

Normal: 4, 6, 8 or 11% according to
the base price
1st Expansion: Base price ＋3%
2nd Expansion: 1st Expansion ＋3%

Circuit breakermechanism

Possible interruption in connection
with the actuation of the circuit breaker mechanism for Nikkei 225 futures
trading

Possible interruption in connection
with the actuation of the circuit breaker mechanism for TOPIX futures tradingever) and the New York Stock Exchange (NYSE) listed the New York Stock
Exchange Composite Stock Index futures options in 1983. In Japan, a seriesof stock index options have been listed—the Nikkei 225 stock index options
on the Osaka Securities Exchange in June 1989, Options 25 on the Nagoya
Stock Exchange in September of the same year (discontinued in 1998), andthe TOPIX options on the Tokyo Stock Exchange in 1989. In 1994, the Nikkei 300 stock index options were introduced on the Osaka Securities Exchange (discontinued in 2010). Three industry-specific stock index options(High-Tech 40, Financial 25, and Consumer 40, discontinued in 2002) werealso introduced on the Osaka Securities Exchange in 1998, and S&P/TOPIX

158

Chap. VIII The Derivatives Market

Table VIII-12.

Transition in Stock Index Options Trading

Nikkei 225 options

2017
2018
2019
2020
2021

Nikkei 225 Weekly options

No. ofdeals

No. ofcontracts

No. ofdeals

32,594,768
35,502,311
29,763,572
28,666,550
24,187,070

2,083,846
1,909,369
1,546,360
1,253,114
1,102,485

493,801
601,555
697,579
634,770
735,201

No. ofcontracts
2,229
1,605
628
1,088
9,413

TOPIX options
No. ofdeals
259,384
179,262
238,319
306,978
431,916

No. ofcontracts
76,958
69,11399,87678,58982,066

Source: Website of the Japan Exchange Group (JPX).

150 options (discontinued in 2002) were listed on the Tokyo Stock Exchange
in 2001. In 2015, the Osaka Exchange introduced weekly options for the
Nikkei 225 options. Meanwhile, trading in the Nikkei average futures options
started in 1992 on the Singapore International Monetary Exchange (SIMEX,
or the present SGX-DT).
In Japan, listed stock index options (the Nikkei 225 options) are most actively traded on the Osaka Securities Exchange. Unlike stock index futures,
other stock index options are scarcely traded in Japan.
A comparison of the trading mechanisms of the Nikkei 225 options, theTOPIX options, and the SGX’s Nikkei average futures options shows thatwhile domestically traded stock index options are based on cash stock options, the Nikkei average futures options traded on the SGX are based on futures options. Another difference in the trading mechanisms is that the Nikkei
225 options and SGX’s Nikkei average futures options offer long-term options. Meanwhile, in computing the amount of margins, all exchanges haveadopted the method of netting margins in accordance with risks called Standard Portfolio Analysis of Risk (SPAN) developed by the Chicago Mercantile
Exchange, and there is no significant difference among them. In addition,
when the circuit breaker mechanism is tripped in stock index futures trading,
options trading is also halted.
8. Securities Options Trading
Options on individual stocks were first listed on the Chicago Board Options
Exchange in 1973, with call options. In 1977, put options were also listed on
the same exchange. While the options on individual stocks were first listed
and then stock index options were listed in other countries, in Japan stock index options were introduced in 1989 first and equity options on 20 individual
stocks were listed afterward on the Tokyo Stock Exchange and the Osaka Se-

Chap. VIII The Derivatives Market

Table VIII-13.

159

Trading Mechanism of Securities Options
Marketable securities options (OSE)

Trading object

Call options or put options on domestically listed marketable securities

Contract month

Nearest two contract months + nearest two months from March, June, September and December

Delivery date

5th day from the exercise of the right

MaturityOn the 2nd Friday of the delivery month

Final trading day

One business day prior to the delivery dateTrading unit

The trading unit of the underlying stock

Price asked

16 stages from ¥0.1 to ¥5,000 depending on the price of the underlying security

Option exercise price ±2 prices at 16 stages from ¥25 to ¥5 million depending on the price of the underlying stock, with additional prices available afterwards based on market
Daily price limit

The value derived by taking the base price of the security for the option trade on
the designated market as of the trade date and multiplying it by 25%

Position limit

Set for each eligible security

Trading hours

9:00–11:35, 12:30–15:15

Method of exercising European option
the right

Table VIII-14.

Transition in Securities Options Trading
OSE Securities Options
No. of deals

2017
2018
2019
2020
2021

915,787
869,163
1,226,146
1,347,612
2,032,945

No. of contracts
78,082
24,71329,12944,22328,011

Source: Website of the Japan Exchange Group (JPX).

curities Exchange in 1997 (seven of them were listed on both exchanges).
Since then, option trading has been extended to all listed securities alongwith a name change to“securities options.”On March 24, 2014, the derivatives market on the Tokyo Stock Exchange was merged with the derivatives
market on the Osaka Exchange, and individual securities options trading on
the Osaka Exchange was integrated with the marketable securities options
trading on the Tokyo Stock Exchange as of that date.

160

Chap. VIII The Derivatives Market

Soon after the Chicago Board Options Exchange was established, the advisability of introducing securities options to Japan was considered. However, it is said that their introduction was postponed for more than 20 years forfear that they might compete with margin trading, a major source of income
for small- to medium-sized securities companies.
The mechanism of trading in marketable securities options is basically
identical to that of stock index options but differs from that of stock index
options trading in that the securities certificate underlying an option must be
delivered to the buyer and that the final settlement price is decided on the basis of the closing price of the underlying securities.
Although it was thought that securities options might compete with margin
trading, they were not as actively traded. This is because there is no traditionof trading in options in Japan, investors are not familiar with options trading,and, unlike their Western counterparts, few individual investors are interested
in options trading. Options are traded in combination with their underlying
assets. In Japan, capital gains earned from trading underlying equities andfrom securities options are subject to separate taxation. However, investors
are not allowed to offset gains and losses between these two categories. Thisis believed to have discouraged individual investors from participating in securities options trading. In other countries, brokers and dealers are granted
preferential treatment for their market-making in relatively illiquid securities
options. In a similar move, the Osaka Securities Exchange and Tokyo Stock
Exchange introduced the Securities Options Market-Maker Program and TSE
Securities Option Supporter system, respectively. These actions, however,
have not resulted in any significant increase in the trading of these options inJapan.
9. OTC Derivatives Trading
The market on which derivatives trading achieved remarkable growth aroundthe world in the 1990s was not the exchanges but the OTC market. Particularly, spurred by the financial liberalization, the interest rate swap trading thatstarted in 1982 has spread not only to banking institutions, but also to business corporations and has come to play the leading role on the derivatives
market. As statistics on derivatives trading conducted on the exchanges havebeen well kept, it was easy to follow changes occurring in their trading, but
because there was no organization that kept track of the derivatives trading
conducted on the OTC market, it was extremely difficult to find out how it
was doing. To remedy the situation, the Bank for International Settlements(BIS) decided to investigate, beginning in 1995, the derivatives markets
along with—and on the occasion of—the triennial investigation of the for-

Chap. VIII The Derivatives Market

Table VIII-15.

161

OTC Trading in Securities Derivatives

Trading status (notional principal, ¥100 million)
Number oftransactions

Total

Forwardtrading

FY2016FY2017FY2018FY2019FY20205,165,442 －12.5%
5,590,496
8.2%
15,800,873 182.6%
26,977,566
70.7%
35,593,111
31.9%

1,874
1,182
2,375
3,870
7,310

Trading
value

Total

Forwardtrading

FY2016FY2017FY2018FY2019FY20202,122,106 －11.4%
2,645,609
24.7%
3,967,378
50.0%
3,870,469 －2.4%
3,596,332 －7.1%

Term-endbalance

Total

Forwardtrading

FY2016FY2017FY2018FY2019FY2020550,87429.9%
486,476 －11.7%
523,7597.7%
435,003 －16.9%
545,29625.4%

13,17821,387
15,922
22,947
13,17885,36891,602
195,294
201,334
231,454

Forward tradingin OTC index, etc.
0% 3,899,9780% 3,369,999
0% 10,105,159
0% 19,456,439
0% 30,931,296

76% 237,830
60% 244,985
64% 360,779
72% 2,628,363
87% 3,454,510

Forward tradingin OTC index, etc.
4%
3%
5%
5%
6%

161,615
171,760
319,906
356,499563,143

8%
6%
8%
9%
16%

Forward tradingin OTC index, etc.
2%
4%
3%
5%
2%

10,0538,454
7,142
10,484
10,053OTC options
trading

2%
2%
1%
2%
2%

5%
4%
2%
10%
10%

OTC options
trading
1,525,389
1,901,057
2,086,395
1,879,968
1,347,410

OTC index
swaps trading
1,025,760
1,974,330
5,332,560
4,888,894
1,199,995

20%
35%
34%
18%
3%

OTC index
swaps trading

72% 349,733
72% 481,190
53% 1,365,783
49% 1,432,668
37% 1,454,324

16%
18%
34%
37%
40%

OTC options
trading

OTC index
swaps trading

297,890242,686
281,099
196,774
297,890229,753
213,949
219,596
204,798
224,175

54%
50%
54%
45%
55%

42%
44%
42%
47%
41%

Brokering status (notional principal, ¥100 million)
Number oftransactions

Total

Forwardtrading

FY2016FY2017FY2018FY2019FY20201,478,041
97.6%
3,093,610 109.3%
28,605 －99.1%
27,169 －5.0%
26,546 －2.3%

1,081
1,034
1,545
1,435
1,352

Trading
value

Total

Forwardtrading

FY2016FY2017FY2018FY2019FY2020652,753 －14.8%
894,61537.1%
701,479 －21.6%
662,435 －5.6%
661,200 －0.2%

73,469117,021
186,539
194,539
212,315

0%
0%
5%
5%
5%

Forward tradingin OTC index, etc.

OTC options
trading

1,700
2,223
1,625
1,502
1,877

18,78925,273
17,55815,442
14,256

0%
0%
6%
6%
7%

Forward tradingin OTC index, etc.
11%
13%
27%
29%
32%

120,653
185,121
131,695
126,692
194,683

18%
21%
19%
19%
29%

OTC index
swaps trading

1% 1,466,471
1% 3,065,080
61%
7,877
57%
8,790
54%
9,061

99%
99%
28%
32%
34%

OTC options
trading

OTC index
swaps trading

205,505
193,597
145,707138,033
137,872

253,125
398,876
237,534
203,169
116,328

31%
22%
21%
21%
21%

39%
45%
34%
31%
18%

Note: Figures next to annual total amounts represent percentage changes from the previous fiscal year.
Percentages in parentheses elsewhere represent the ratio to the total for the year under the respective transaction types.
Source: Compiled based on the data available on the JSDA website.

162

Chap. VIII The Derivatives Market

eign exchange markets from 1986 to grasp the state of trading in derivatives
on the OTC market worldwide.
According to a survey of the Japanese OTC derivatives market conductedin April 2019, the daily average notional value of OTC interest rate derivatives traded in Japan (excluding FS swaps) was $135.2 billion, representing
an increase of 142% from the previous survey in April 2016 (the results compare against a daily global total of $6.501 trillion and an increase of 143%).
By contract type, interest rate swaps were $129.9 billion (up 174%) (overnight index swaps: $11.4 billion, others: $118.5 billion), interest rate options
were $4.6 billion (down 40%) and FRAs were $800 million (down 8%). The
total notional value of the outstanding OTC derivatives contracts of financial
institutions in Japan as of the end of June 2019 stood at $55.1 trillion, up 8%
from June 2016, relative to a total of $524 trillion and a 4% decrease worldwide. Looking at the breakdown of the total by contract type, interest rate
swaps increased by 4% to account for 78.0% (compared with 81.6% in the2016 survey), interest rate options increased by 61% to account for 11.2%(compared with 7.6% in 2016), and FRAs increased by 8% to account for
10.7% (compared with 10.8% in 2016).
At the G20 Pittsburg Summit in 2009, it was agreed that all OTC derivatives contracts standardized by the end of 2012 should be settled throughcentral clearing organizations. In Japan, Japan Securities Clearing Corporation (JSCC), which belongs to the Japan Exchange Group (JPX), began
clearing and settlement of CDS in July 2011, followed by clearing of interest
rate swaps starting in October 2012. JSCC settles ¥70 trillion to ¥100 trillion
worth of yen-denominated interest rate swaps, which account for 90% of allinterest rate swaps, on a monthly basis.
10. Credit Derivatives Trading“Credit derivatives trading”refers to trading in credit risks involved in loans
and corporate bonds in the form of swaps and options. While conventional
derivatives trading bought or sold market risks, credit derivatives trading
deals in credit risks. Credit risks trading may be characterized as trading inguarantees in that it not only deals in guarantees against default but also provides a variety of products that cover the risk of declining creditworthinesscaused by a deterioration of business performance.
Credit derivatives are traded largely in three typical types: credit default
swaps (CDS), total return swaps (TRS), and credit-linked notes (CLN). A
CDS is a type of options trading that guarantees the credit risks involved in aloan, and when the borrower defaults on a loan underlying the CDS the damage caused by such default is guaranteed. CDS derives its name from theNote: Figures for“credit-linked notes”and“other products”that had been included in credit derivatives were excluded from the scope of the survey from 2016
onwards. Data shown is for reference purposes only.
Source: Compiled based on the data on chronological coefficients in Bank of Japan,“A Survey of Regular Market Reports Concerning Derivatives Trading.”(http://www.boj.or.jp/en/statistics/bis/yoshi/index.htm/)

June 2011
Dec. 2011
June 2012
Dec. 2012
June 2013
Dec. 2013
June 2014
Dec. 2014
June 2015
Dec. 2015
June 2016
Dec. 2016
June 2017
Dec. 2017
June 2018
Dec. 2018
June 2019
Dec. 2019
June 2020
Dec. 2020
June 2021(Outstanding balance of notional principal; US $ million)

Credit Derivatives Trading in JapanOTC trading
Credit default swap
Total return swap
Credit spread productCredit-linked notes
Other products
Sell
Buy
Total
Total
Sell
Buy
Total
Sell
Buy
Total
Sell
Buy
Total
Issue Purchase Total
1,157,661 1,151,538 579,602 571,934
278
266
12
0
0
0 5,642 4,915
727
204
136
620
1,116,847 1,111,618 553,655 557,963
195
182
13
0
0
0 4,649 4,068
581
386
199
575
1,105,389 1,098,891 547,638 551,253
209
196
13
0
0
0 6,038 3,933 2,105
252
107
418
1,047,913 1,040,915 529,454 511,462
473
374
99
0
0
0 6,302 3,510 2,792
226
93
282
1,061,005 1,055,262 536,826 518,436
542
143
399
130
65
65 4,868 1,838 3,030
203
86
68
853,899 848,494 427,571 420,923
455
119
336
0
0
0 4,815 1,815 3,000
132
75
187
785,138 778,255 389,898 388,358
367
123
244
0
0
0 5,999 2,316 3,683
514
455
145
710,060 703,689 356,398 347,292
261
104
157
0
0
0 5,664 2,471 3,193
444
394
133
563,687 552,855 280,527 272,330 4,415 2,260 2,155
00
0 6,144 2,864 3,280
270
221
117
518,641 507,140 261,156 245,986 4,313 2,101 2,212
00
0 6,967 3,591 3,376
223
173
57
510,693 505,278 255,136 250,141 5,414 2,054 3,360
000 (9,209) (4,784) (4,425) (384) (384)(59)
441,444 437,525 219,801 217,721 3,918 1,522 2,396
000 (9,071) (5,340) (3,731) (353) (353)(50)
411,471 406,931 203,595 203,335 4,537 1,804 2,733
000 (8,862) (6,291) (2,571) (138) (138)(49)
381,682 375,022 187,255 187,769 6,656 2,802 3,854
000 (9,410) (6,548) (2,862) (159) (159)(50)
382,030 377,141 189,032 188,108 4,812 2,091 2,72182
82
0 (10,438) (7,465) (2,973) (262) (262)(0)
384,498 380,788 189,823 190,965 3,707 1,647 2,060000 (10,156) (7,265) (2,891) (342) (342)(0)
391,418 387,741 194,000 193,741 3,683 2,174 1,509
000 (10,133) (7,098) (3,035) (445) (445)(0)
416,496
411,549 207,163 204,390 4,947 2,390 2,557
000 (9,785) (6,691) (3,094) (562) (562)(0)
481,306 473,848 241,711 232,137 7,459 2,547 4,912
000 (9,062) (5,986) (3,076) (620) (620)(0)
510,502506,011 259,276 246,734 4,495 1,950 2,545
000 (8,469) (5,134) (3,335) (925) (797)(0)
534,398 525,860 270,351 255,509 8,546 4,627 3,919
000 (7,824) (4,710) (3,114) (645) (645)(0)

Table VIII-16.

Chap. VIII The Derivatives Market

163

164

Chap. VIII The Derivatives Market

form in which the payment of a premium is swapped. Next, a TRS is a deal
that swaps the total profit or loss (coupon and evaluated profit or loss) withthe market rate, and it is used when the holder of a credit cannot sell it. And a
CLN is a deal that links credit risks to a bond issued by the issuer of the underlying notes. Therefore, it may be said that a CLN is a CDS based on abond instead of a guarantee. A CLN is redeemed in full on maturity unlessthe company designated in the contract defaults on its obligations, but when
the company defaults the CLN is redeemed at a reduced value prior to maturity. While a CDS is concluded under the assumption that the guaranteeing
company has an adequate capacity to guarantee, a CLN is guaranteed by thepurchase of a bond. Therefore, a CLN has the advantage in that it can be concluded regardless of the credit standing of the investor.
According to the data published by the Bank of Japan, the total notional
value of outstanding credit derivatives in Japan was accelerating in growthfrom 2003 on, increasing by a factor of 83 from the end of December 2002 to
the end of June 2011. However, the value declined almost constantly and was
down to half or less of its peak by the end of June 2015. The notional valueof outstanding credit derivatives has also been on a decrease in the U.S. after
hitting a peak in 2008, but the degree of decline has not been as significant asthat of Japan. During the period from 2008 when the nominal value of outstanding credit derivatives recorded its peak in the U.S., the outstanding balance of credit derivatives in Japan doubled over a period of three years fromthen. However, the outstanding balance halved from the end of June 2011 to
the end of June 2015, reflecting erratic movements on the market. Aftertouching bottom in December 2017, the balance has continued to increase
thereafter.

CHAPTER IXThe Securitized Products Market

1. What Is a Securitized Product?
A company pool the income-generating assets separately from its balance
sheet into a special-purpose vehicle (SPV), and the SPV issues a security
backed by the cash flow to be generated by such assets and sells the security
to investors. This method is called“securitization.”The security issued
through such a process is generally called a“securitized product.”Businessenterprises use their assets—such as auto loans, mortgage loans, leases receivable, business loans and such claims as loans to corporations, and commercial real estate—as collateral to back up their securitized products. As defined by the Act on Securitization of Assets, intellectual property (such as
copyrights and patents) also can be securitized.
When viewed from the standpoint of asset holders, securitization of assets
has the advantage of enabling them to use the proceeds of the assignment orsale of such assets that they obtain at the time of issue in exchange for cash
flows that may be generated by the assets over a future period of years. In
other words, asset holders can monetize uncertain future cash flows into current income. In addition, in case any holder of a piece of less-liquid commercial real estate wants to issue a security by putting up such real estate as collateral, such asset holder may easily sell the security by issuing it in small
denominations to attract a larger number of small investors, thereby increasing liquidity.
When viewed from the standpoint of investors, securitized products givethem an additional choice of investments that have a new character. Morespecifically, a security backed by a piece of real estate gives them an opportunity to invest in real estate that otherwise they cannot afford to buy outrightwith a small sum of money. Second, as asset holders can issue different
classes, or tranches, of securities “( the senior/subordinated structure”) at oneand the same time with varying levels of credit risks, they offer investors theopportunity to purchase a security that meets their needs. The issuers of asset-backed securities—Security 1 to Security N in Chart IX-1—simply tailor
their terms of issue to best suit the needs of Investor 1 to Investor N, instead

166

Chap. IX The Securitized Products Market

Chart IX-1.

Conceptual Chart of Securitized Products

At the time a securitized product is issued

Money for thepurchase of the
security

Proceeds of theassignment/saleof the asset

Acquisitionof the asset
Asset 1

Security 1・・・

Assignment/saleof the asset

Asset N

Special-purpose vehicle (SPV)

Asset 2The holder of the asset

Cash flow

Investor 1
Sale of the
security

Security 2

Investor 2

・
・
・

・
・
・

Security N

Investor N

Principal, interest,and dividends
Security 1

Investor 1

Security 2

Investor 2

After the securitized product has been issued

Asset 2・・・Special-purpose vehicle (SPV)

Asset 1

Cash flow

・・・

Security N Investor N

Asset N

Assets pooled by the special-purpose vehicle

Chap. IX The Securitized Products Market

167

of making them uniform. For instance, by issuing securities with different
characters—differentiation of the order of priority for the payment of interest
and redemption of principal or granting credit-enhancing conditions (credit
enhancement)—the scope of choice for investors can be enlarged. By adding
such new wrinkles, investors can restructure their portfolios into more efficient ones.
2. Basic Mechanism of Issuing Securitized Products
Generally, many of the securitized products are issued through the mechanism described below. First, the holder “( originator”) of assets such as mortgage loans and accounts receivable that are to be securitized assigns them toa SPV. By doing so, such assets are separated from the balance sheet of theoriginator and become assets of the SPV, which becomes the holder of the assets. An SPV may take the form of a partnership, a trust, or a special-purpose
company (SPC). An SPC established under the Act on Securitization of Assets is called tokutei mokuteki kaisha (TMK, or a specific-purpose company).
To ensure bankruptcy remoteness (no impact even if the company, etc., heldby the SPC goes bankrupt), an overseas SPC is generally set up as a subsidiary through what are called charitable trusts under U.S. and U.K. laws using
what is termed a“declaration of trust,”and the domestic SPC established asa subsidiary of the overseas SPC. In terms of originators, the entity responsible for the debt is called the original obligor.
The next step is to formulate the terms of issue of the securitized productto be issued by the SPV. If the originator opts for the trust method, it issues
beneficiary certificates like those of a trust company. If it chooses the SPC
method, it issues the kinds of securities decided upon by the SPC to provide
securitized products to investors, but it does not have to issue them on one
and the same terms of issue. In short, it can design each type (tranche) of security with a different character by differentiating the order of priority withrespect to the payment of interest and redemption of principal, by varying
maturities, or by offering the guarantee of a property and casualty insurancecompany. By adding such variation, the originator can issue securities thatmeet the diverse needs of investors. In the order of priority for payment, suchsecurities are called“senior securities,”“mezzanine securities,”or“subordinated securities.”
When the originator plans to sell its securitized products to an unspecified
large number of investors, it should make them readily acceptable to investors by offering them objective and simple indicators (credit ratings) for independently measuring the risks involved. In addition, there are other players
involved in different processes of securitized products, such as servicers, who

168

Chap. IX The Securitized Products Market

Chart IX-2.

Example of General Working Mechanism for Issuing Securitized Products
Equitycontribution

Charitable trust

Overseas SPC

Equitycontribution

Original obligor

Proceeds of assignment
Originator

Loan
agreement

Assignment of loans
receivable
Agreement commissioning
Back-office operation

Domestic SPC

Servicer

Payment ofprincipal andinterest

Payment of principal
and interest
Payment ofprincipal andinterest

Issuance of securitized products
Credit-rating
agencyCredit rating

Proceeds of the sale ofsecuritized products
Guarantee

Underwriting
company
Sale of securitized products

Credit-complementing
organization

Bond managementcompany

Payment of the proceedsof the sale of securitized
products

Payment of principal and interest

Investors

manage assets that have been assigned to an SPV and securitized and also recover funds under commission from the SPV, and bond management companies, which administer the securitized products (corporate bonds) purchasedby investors. Firms that propose such a mechanism for securitizing assets andthat coordinate the issuing and the sale of such products are called“arrangers,”and securities companies and banks often act as arrangers.
3. Description of Major Securitized Products
Securitized products are divided into several groups according to the types ofassets offered as collateral and the characters of the securities issued. Thosebelonging to the group of products that are backed by real estate and theChap. IX The Securitized Products Market

Table IX-1.
Types

169

Classification of SPVs

SPVs established under basic laws

Corporation type Special-purpose company (SPC)
Domestic:－Corporation (Companies Act)
Overseas:－SPC (foreign governing law)

SPVs established under special laws
Specific-purpose company–TMK (Acton Securitization of Assets)
Investment corporation (Act on Investment Trusts and Investment Corporations)

Trust type

General trust (Trust Act and Trust Busi- Specific-purpose trust (SPT) (Act on Seness Act)
curitization of Assets)
Investment trust (Act on Investment
Trusts and Investment Corporations)

Partnership type

Silent partnership (Commercial Code), Silent partnership, general partnershipgeneral partnership (Civil Code)(Act on Specified Joint Real Estate Ventures)

Source: Prepared by the author from various materials.

claims collateralized by it are residential mortgage-backed securities(RMBS), commercial mortgage-backed securities (CMBS), and real estate
investment trusts (REIT). RMBSs are issued in retail denominations against
a portfolio that pools home mortgage loans. The first securitized productbased on residential mortgage loans was the residential mortgage loan trust
launched in 1973. However, this product failed to attract the attention of bothissuers and investors because of too much limitation. Nevertheless, as thescheme based on SPC became available thereafter, thanks to the enforcementof the SPC Law, the volume of this type of issue has increased since 1999.
Although bonds backed by housing loans that have been issued by the Japan
Housing Finance Agency since 2001 were not issued through an SPC, they
may be included among the RMBSs. CMBSs are backed by loans given
against the collateral of commercial real estate (office buildings, etc.). The
mechanism of issuing them is almost the same as that for RMBSs. The REIT
that became available by virtue of enforcement of the Act on Investment
Trust and Investment Corporation in May 2000 is an investment trust in thatit can only invest in assets backed by real estate.
Another group consists of asset-backed securities (ABS, narrowly defined), such as accounts receivable, leases receivable, credits, auto loans, andconsumer loans, etc. Sales of these products began to increase in the latter
half of 1990s following the enforcement of the Specified Claims Law in June
1993. As these collateralized assets are a collection of relatively small assets
and can be dispersed, they are highly suitable for securitization. What ismore, as the laws governing the products have since been developed, they are
securitized more extensively than the real-estate-backed group.

Table IX-2. Description of Major Securitized Products

Securities issued
Originator
Governing laws
Basic scheme
Residential mortgage- Banks
Act on Securitization of Assets, Trust A banking institution that holds mortgage credits assigns
backed securities
Other banking institu- Act, Trust Business Act, Financial In- them to an SPC; the SPC, in turn, issues a bond backed bytions
struments and Exchange Act
such credits or entrusts them to a trust bank, which, in turn,issues beneficiary certificates backed by them.
Housing loans receivable Japan Housing Finance J a p a n H o u s i n g F i - Act on the Japan Housing Finance Housing loans receivable held by the Japan Housing FiAgency, Independent Administrative nance Agency are given in trust to a trust bank, and a speciAgency bonds backed nance Agency
Agencyby housing loans refied corporate bond backed by the beneficiary certificates
Financial Instruments and Exchange of a trust is issued at that time through an SPC.
ceivable (RMBS)
Act
mortgage- Business corporations, Act on Securitization of Assets, Trust The originator assigns the commercial mortgage credits andCommercial mortgage Commercial
backed securities
Banks
Act, Trust Business Act, Financial In- rental revenues, etc., to an SPC, the SPC, in turn, issues acredits and rental
bond backed by such credits or entrusts them to a trust bank,(CMBS)
Other banking institu- struments and Exchange Act
revenues
which, in turn, issues beneficiary certificates backed by them.
tions
Real estate-specific Authorized or regis- Act on Specified Joint Real Estate An equity contribution is invited from a large number of rejoint venture products tered firms
Venturestail investors, and the funds thus pooled are jointly invested
in real estate by taking advantage of the scheme of a voluntary association, an anonymous association, or a real estate
investment trust.
Real estate
Real estate investment Owners of property Act on Investment Trusts and Invest- An investment corporation issues units of investment andtrusts (REIT)
purchased by an in- ment Corporations
purchases a piece of real estate and real estate loan claims
vestment trust
Financial Instruments and Exchange with the proceeds of such units in accordance with instrucActtions given by a management company.
Mortgage loans receivable Mortgage securities
Mortgage securities Mortgage Securities Act
Mortgage securities are issued by registering mortgage loancreated on land, buildings,
companies
Financial Instruments and Exchange receivables of the mortgage securities company, and jointly
and superficies
Act
held equity in mortgage securities is sold to investors.
Fiscal Loan Fund loan- Government
Act on Securitization of Assets,
The government entrusts the loan receivables from its FisFiscal Loan Fund loan backed securities
Financial Instruments and Exchange cal Loan Fund to a trust company. Beneficiary certificatesreceivables
Act
issued on the loans are then sold to an SPC, which issues
securities with the loans as the underlying assets.
Leases receivable, credit Asset-backed securities Business corporations Act on Securitization of Assets, Trust A business corporation that holds lease credits assigns themcard receivables, and(ABS, ABCP)
Act, Trust Business Act, Financial In- to an SPC; the SPC, in turn, issues a bond backed by such
installment credit
struments and Exchange Act
credits or entrusts them to a trust bank, which, in turn, isaccounts and notes
sues beneficiary certificates backed by them.
receivable
Collateralized loan ob- Banks
Act on Securitization of Assets, Trust A banking institution that holds general loans assigns them
ligations (CLO)
Act, Trust Business Act, Financial In- to an SPC; the SPC, in turn, issues a bond backed by such
General loans
struments and Exchange Act
loans or entrusts them to a trust bank, which, in turn, issues
beneficiary certificates backed by them.
Collateralized bond ob- Banks and other bond- Act on Securitization of Assets, Trust The banks and other bondholders that hold a number ofligations (CBO)
holders
Act, Trust Business Act, Financial In- bonds assign them to an SPC; the SPC, in turn, issues a bond
Bonds
struments and Exchange Act
backed by such credits or entrusts them to a trust bank,which, in turn, issues beneficiary certificates backed by them.

Underlying claims

170
Chap. IX The Securitized Products Market

Chap. IX The Securitized Products Market

171

Other securitized products are called collateralized debt obligations(CDO), which are securities issued against the collateral of general loans,
corporate bonds, and credit risks of loans that are held by banking institutions. For instance, loans to small and medium-sized business enterprises thatare securitized may be considered CDOs. And CDOs are subdivided into collateralized loan obligations (CLO) and collateralized bond obligations(CBO). Moreover, since the eligibility requirements for issuing commercial
paper (CP) were abolished in 1996, an increasing number of business corporations have come to use asset-backed commercial paper (ABCP) as a formof securitized product.
4. The Size of the Market
In 2011, the Bank of Japan started to publish the outstanding balance of securitized products, tracing back to data as of the end of fiscal 2007. Until then,a part of the outstanding balance of securitized products had been disclosed
as“credit liquidation-related products.”According to these statistics, the balance of securitized products outstanding as of the end of fiscal 2020, stoodclose to ¥41 trillion. When compared with that of stocks and beneficiary certificates of investment trusts (¥1,568 trillion), loans by private financial institutions to corporations and government entities (¥957 trillion), industrial
bonds (¥94 trillion) and bank debentures (¥ 6 trillion), their share of privatesector financing as a whole is still not very large. In contrast, a similar balance (of ABS and mortgage-related combined) in the United States, which isconsidered the most advanced nation in securitizing claims, stood at about¥1,400 trillion at the end of fiscal 2021. The total issuance amount came to¥440 trillion, reflecting the extraordinary size of the market compared to theJapanese one.
The scale of the securitized products market that stood at a mere ¥400 billion at the end of fiscal 1989 increased sharply thanks to the enforcement of
the Specified Claims Law in 1993 (repealed in 2004), the Special Purpose
Companies Law in 1998 and the Act on Securitization of Assets, which is arevised version of the Special Purpose Companies Law, in 2000. This alsosuggests that assets that can be used as collateral have diversified and that asset securitization has found a growing number of applications. Looking back,the issuance of securities backed by installment credits, which was made possible by the enactment of the Specified Claims Law, was the engine of
growth of the market. As these assets have short maturities and can be readilypooled for diversification, they carry relatively low risks and can be easily
securitized, and such attributes have been a factor in expanding the scale ofthe market for them. Since 2000, the securitization of mortgage loans, as well

172

Chap. IX The Securitized Products Market

Chart IX-3.

The Balance of Securitized and Claims Liquidation-Related Products(trillions of yen)
50
45
Claims liquidation-related
40
products
35
Securitization products
30
25
20
15
10
5
0
91 93 95 97 99 01 03 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20(fiscal year-end)
FY

91

92

93

94

95

96

Asset-liquidation products 6.9

5.9

5.3

5

4.5

5.3 12.3 14.2 13.6 14.8 18.3 24.2 27.4 30.1 35.5

Securitized Products

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

FY

06

07

08

09

10

11

12

13

14

15

16

17

18

19

20

31 27.4 25.1 24.6 22 20.5 20

19

18 18.6 20.2 22.4 23.7

Asset-liquidation products 38.6 34
Securitized Products

97

98

99

00

01

02

03

04

05

－ 45.6 43 39.8 37.5 37.6 34.8 33.1 32.8 32.5 32 33.4 35.9 39.2 41.4

Source: Complied on the basis of the data drawn from Nichigin shikin junkan-tokei (Flow-of-Funds
Statement of the Bank of Japan).

Table IX-3.

Changes in Composition of Collateralized Assets, etc.
(trillions of yen)2008 2010 2012 2014 2016 2018 2020

Ratio to net
operating income

Asset backed bonds (ABB)
13.8 13.9 14.1 14.1 14.9 16.5 18.8
MBS issued by JHFA
7.6
9 10.611 12.1 13.6 15.1
ABB backed by real estate properties 4.4 3.4 2.2 1.7 1.8 2.2 2.5
Other ABB
1.8 1.4 1.3 1.3
1 0.8 1.2

45.4
36.5
6.0
2.9

ABCP

3.9

1.8

4.3

Trust beneficiary rights
Of which backed by housing loans
Of which backed by loans tocompanies and governments
Of which backed by accounts
receivable
Of which backed by lease andconsumer credits

25.4 21.2 18.4 16.9 15.4 17.9 20.8
9.7 8.6 7.7 7.7 7.6 9.5 11.3

50.2
27.3

3.7

2.7

1.9

1.7

1.7

1.5

2.2

5.3

5.2

5.4

5.1

3.6

1.7

1.2

0.7

1.7

5.6

3.8

2.8

2.9

3.6

4.5

5.1

12.3

32 35.9 41.4

100.0

Total

2.4

2.3

1.8

43 37.5 34.8 32.8

1.7

1.5

Source: Complied based on the data from Nichigin shikin junkan-tokei (Flow-of-Funds Statement of the
Bank of Japan).

Chap. IX The Securitized Products Market

173

as of loans to business corporations and the government, has expanded dramatically. This may be explained by the fact that, pressed by the need to raise
the capital adequacy ratio in compliance with the Basel Accords, banks havesought to unload loan assets from their balance sheets. After reaching a peakin fiscal 2006, the volume of securitized products fell back as the economy
weakened in the wake of the subprime loan crisis. It has, however, started torecover again since.
“Securitized products”are defined as the total of asset-backed securities,
asset-backed commercial paper (ABCP) and trust beneficiary interests. Residential mortgage-backed securities (RMBS) issued by the Japan Housing Finance Agency (JHF; formerly, Housing Loan Corporation) account for 80%
of asset-backed securities. Looking at the underlying assets of trust beneficiary interests that account for nearly half of the total outstanding balance,nearly 50% are mortgage loans while almost 25% are leases & credit receivables.
5. Primary Market for Securitized Products
As the bulk of securitized products are issued in private placement transactions between the parties concerned, it is difficult to accurately grasp the sizeof the primary market of securitized products. However, the Japan Securities
Dealers Association (JSDA) currently compiles and publishes the“Securitization Market Trends Survey”conducted jointly with the Japanese Bankers
Association based on information on issuance trends of securitized products
received voluntarily from arrangers of securitized products and others. According to the Securitization Market Trends Survey, securitized products issued in Japan in fiscal 2020 reached just over ¥5 trillion. Although securitized product issuance reached a peak of ¥9.8 trillion in fiscal 2006, it went
through a period of decline under the impact of the weakening economy
kicked off by the subprime loan crisis. However, it has been on a recovery
trend over the last few years.
Looking at the trend by the type of asset pledged as collateral, while
residential mortgage loans and shopping credits have exhibited a recovery
trend, other assets have declined—a result that reflects the differences in thetypes of underlying assets. Residential mortgage loans account for an
increasing percentage of the underlying assets used as collateral, a trend thathas not changed over the past few years. This trend reflects that lendingbanks are actively securitizing mortgage loans of their own origination andthat the issuance of RMBS by the Japan Housing Finance Agency hasremained at a high level. Shopping credit saw a steep rise between fiscal
2012 to 2020 to jump almost fivefold, now accounting for 30% of the174

Chap. IX The Securitized Products Market

Chart IX-4.

Securitized Products Issuance(trillions of yen)
10
9

Accounts receivable,commercial bills
Lease receivables

87Credit card receivables

6

Consumer loans

5

Residential loans

43Real estate related

2

CDOs

1

Others0

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20(FY)

Source: Compiled from “Securitization Market Trends Survey Report” by the Japan Securities Dealers
Association.

Chart IX-5.

Breakdown of Collateralized Assets

(FY)
20
18
16
14
12
10
08
06
04
0

10

20

Others
CDOs
Credit card receivables

30

40

50

Real estate related
Lease receivables

60

70

80

90

100
(%)
Consumer loans
Residential loans
Accounts receivable, commercial bills

Source: Compiled from “Securitization Market Trends Survey Report” by the Japan Securities Dealers
Association.

Chap. IX The Securitized Products Market

175

underlying assets used as collateral.
According to the data on issuance compiled by the JSDA, the total valueof publicly offered asset-backed corporate bonds had steadily increased since1997, the year in which the association started tracking the data. After hitting
a peak of ¥0.52 trillion in fiscal 2002, however, the total declined, falling to¥50 billion in fiscal 2019, with no bonds issued at all in 2020. The popularity
of privately placed asset-backed corporate bonds is thought to be the result ofconsiderations with regard to investor protection framework, taxes, anddisclosure cost.
Now turning to other characteristics of securitized products issued, passthrough repayments accounted for 8% or more of the overall repayment
methods, followed by installment and lump-sum repayments.
In terms of ratings, 80% or more is rated AAA. The remaining portion
consists of long- or short-term AA-, A-, and a few BBB-rated instruments.
No issuance below BB can be seen since 2017.
6. Secondary Market for Securitized Products
With the exception of beneficiary certificates of real estate investment trusts(REITs) and infrastructure funds to be discussed later, trading in securitized
products is not concentrated in stock exchanges. As is the case with the secondary market for bonds, securitized products and their transactions are toocomplex and varied to lend themselves to exchange trading. Hence this has
led to the dependence on an over-the-counter interdealer market as the secondary market for their trading. In this section, we will overview the present
state of the interdealer market of securitized products by using primarily thedata on“TMK bonds”(which are publicly offered corporate bonds issued bya corporation established based on the Act on Securitization of Assets. And
asset-backed bonds, which is an item for statistics for the primary market, includes the portion of the issuer established for funds raising purposes basedon the Companies Act.) published by the JSDA, which is in a position to obtain data on interdealer transactions.
Data on the trading amounts of TMK bonds compiled by the JSDA on thebasis of reports from member securities companies for the years prior to 1998
are not available. According to these reports, the trading amount of TMK
bonds peaked in 2014, but is on an overall declining trend albeit withfrequent fluctuations. A comparison of TMK trading amounts with those ofother bonds in 2020 shows that TMK bond trading amounted to nearly ¥50
billion, and those of corporate straight bonds and utility bonds stood at ¥10.8
trillion and ¥2.4 trillion, respectively. Although these issues constitute only apart of the whole universe of securitized products, it is evident that the176

Chap. IX The Securitized Products Market

Chart IX-6.

The Amount of TMK Bonds Traded(¥100 million)
18,00016,00014,00012,00010,000
8,000
6,000
4,000
2,000
0
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20(year)
Source: Compiled from “Trading Volume of Over-the-Counter (OTC) Bonds” by the Japan Securities
Dealers Association.

Chart IX-7.

Changes in launch spread (Average) of Japan Housing Finance Agency
MBS (Monthly Bonds)

(%)
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

04

05

06

07

08

09

10

11

12

13

14

15

16

17

18

19

20

(FY)

Source: Compiled by the author from data of the JSDA Securitization Market Trends Survey Report.

trading amounts remain quite limited. The number of securities companies
that offer them is quite limited, and their liquidity is considerably low. On theother hand, a large number of securities companies make a market in RMBS
issued by the Japan Housing Finance Agency, the bonds are classified as
FILP agency bonds for statistical purposes, and their market seems to have acertain degree of liquidity.
As their trading market is yet to attain maturity, it is difficult to precisely

Chap. IX The Securitized Products Market

Chart IX-8.

177

Claims Liquidation-Related Product Holding Ratio

2020
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998

0

10

20

30

Financial institution

40

50

60

Non-financial corporation

70

80

Household

90

100
(%)

Overseas

Source: Complied on the basis of the data drawn from Nichigin shikin junkan-tokei (Flow-of-Funds
Statement of the Bank of Japan).

measure their secondary market yields, and they have to be substituted withyields at issue. Measured in terms of yields at issue, the most highly liquid
JHF bonds are traded at a higher yield than government-guaranteed bonds.
Reinvestment risk occasioned by early mortgage loan repayment in addition
to the expected redemption period and the availability of a government
guarantee may be a factor behind this. While the spread of these two bonds
can slightly widen at times, it is generally stable at no more than 0.4% inrecent years.
According to the balance of financial assets and liabilities of the Flow-ofFunds Accounts of the Bank of Japan, the current holders of credit
liquidation-related products (securitized products) are almost entirely madeup of non-financial corporations (less than 40%) and financial institutions(60%). In 1990, households were the primary holders. Since then, however,holdings by households have declined consistently, and currently stand atzero. During this time, financial institutions increased their holdings of
securitization-related products and have become the primary holders.
7. Primary and Secondary Markets for the Beneficiary Certificates ofReal Estate Investment Trusts
On September 10, 2001, the Japan Building Fund Investment Corporationand the Japan Real Estate Investment Corporation listed their certificates on
the Tokyo Stock Exchange and became the first public real estate investment

178

Chap. IX The Securitized Products Market

Table IX-4.
Item

The Listing Requirements of the Tokyo Stock Exchange
Listing requirements

Eligibility for becoming an The investment trust management company, the trust company for an inasset management company vestment trust without instruction by trustor, or an entity that otherwise
manages assets of a REIT applying for listing must be a member of theInvestment Trusts Association, Japan.
Ratio of real estate to the to- The ratio of real estate is expected to be 70% or higher.
tal value of assets managed
Ratio of real estate and relat- The ratio of real estate is expected to be 95% or higher.
ed assets and liquid assets tothe total assets under management
Total net asset value

Expected to increase to ¥1 billion or more by the time of listing.

Total asset value

Expected to increase to ¥5 billion or more by the time of listing.

Auditor’s opinion(a) The securities report for the two immediately preceding terms are fair
and accurate and contain no false statements.
(b) The audit reports for the two immediately preceding terms containthe remarks“unqualified opinion”or“qualified opinion with an exception.”

No. of units listed

Expected to increase to 4,000 or more by the time it is listed.

Major beneficiaries or inves- The total number of units owned by major beneficiaries or investors is
tors
expected to be 75% or less of the total units listed.
No. of beneficiaries or inves- Their number (except major beneficiaries or investors) is expected to intors
crease to 1,000 or more at the time of listing.
Source: Compiled on the basis of the data drawn from the website of the Tokyo Stock Exchange.

Table IX-5.
Calendar year

Statistics Relating to REITs Listed on the Tokyo Stock Exchange

No. of issues Capital contribution Total net Assets Total liabilities
listed(¥100 million)(¥100 million) (¥100 million)

Total assets(¥100 million)

2009

42

39,62440,20240,94781,5142010

35

36,23939,09041,36080,842
85,6362011

34

37,92541,09744,321

2012

37

42,44445,78947,654

93,6792013

43

53,762

57,38757,595

115,252

2014

49

61,521

65,40764,601

130,3282015

52

66,28773,48370,504

144,336

2016

57

72,797

82,955

77,972

161,4312017

59

78,19988,49882,772

171,8892018

61

83,92895,837

89,193

185,5442019

64

90,001102,099

94,788

197,499

2020

62

95,595

108,121

101,194

209,891

Source: Compiled from“Real Estate Investment Trusts” by Investment Trusts Association, Japan.

Chap. IX The Securitized Products Market

179

trusts (REITs) in Japan. These real estate investment trusts owe their creation
to the amendment of the Securities Investment Trust Act enforced in November 2000, which made it possible to form trust funds through a real estate investment trust scheme. In addition, the Tokyo Stock Exchange instituted arule granting a special exception to the securities listing regulations in favorof real estate investment trust certificates and enforced it on March 1, 2001.
By March 31, 2020, the number of listed issues had increased to 62.
The basic mechanism of REITs is this: investment corporations or investment managers called investment trust management companies pool funds ofinvestors, invest such funds primarily in real estate, and distribute the investment income (including rent income) to investors. The three types of securities defined in the Act on Investment Trusts and Investment Corporations—beneficiary certificates of investment trusts with instruction by trustor,
beneficiary certificates of investment trusts without instruction by trustor,and investment securities of investment corporations—may also be issued byreal estate investment trusts. The first type of trust is managed by a trust
company that holds the assets in custody in accordance with instructions given by the management company. The second type is managed by a trust bankin accordance with its own judgment. And the third is commissioned to a
management company by the investment corporation that holds the assets.
All of the certificates of the REITs listed on the Tokyo Stock Exchange areinvestment securities issued by investment corporations.
One of the advantages investors can derive from REITs is that they areable to invest in real estate with a small amount of money, and they can enjoyliquidity in freely trading their investments in the market. Another is that REITs offer diversification to their investment portfolio. REIT dividends may be
expensed provided that a REIT meets certain requirements, including distributing more than 90% of its income to its certificate holders.
One problem that the managers of REITs have to address is the possibilityof a conflict of interests between investors and the manager of a REIT withrespect to any investment of its assets commissioned to a third party. In otherwords, it is feared that the management company may force the REIT to buy
a piece of real estate held by its stockholders at a high price. To avoid the occurrence of such a situation, it is desirable to require the REIT to fully disclose information concerning its investments. And investors should consider
getting involved in the management of investment corporations through ageneral meeting of investors.

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Chap. IX The Securitized Products Market

8. Listed Infrastructure Funds
In April 2015, the Tokyo Stock Exchange (TSE) established an infrastructure
fund market for listing funds that invest in infrastructure properties. The infrastructure funds handled on this market hold infrastructure properties andattain a cash flow that arises when lending the assets to operators. It is on theinfrastructure fund market that the securities issued as underlying instrumentsof the cash flow are traded.
The structure of infrastructure funds is basically similar to that of REIT.
While the listing rules for the infrastructure fund market are generally basedon the framework for the REIT market, there is a key difference in that thepolicy for selecting operators who borrow and operate the infrastructure
properties is included in the rules.
There have been listed only six issues on the infrastructure fund market by
March 31, 2019. In addition, all listed issues hold solar power generation
facilities as underlying assets and have issued securities. This is likely due tothe projection that a solar power plant would be a highly stable source ofprofits given that power companies buy power at fixed prices following theenforcement of the Act on Special Measures Concerning Procurement ofElectricity from Renewable Energy Sources by Electricity Utilities “( Feed-in
Tariffs (FIT) Act”
) in 2011.
Properties that support the livelihoods of people, including electricity andgas facilities, water supply facilities, railroads and roads, can be the underlying assets of infrastructure funds. One of the reasons why infrastructure funds
have been drawing attention is because earnings generated by such infrastructure properties are considered to be relatively less vulnerable to economic changes. This makes it possible for infrastructure funds to also maintain stable profits. While currently in Japan all funds pertain to solar power
plants, it is anticipated that infrastructure funds that invest in other types ofproperties will emerge going forward.
The total number of shares issued for the seven issues combined amounted
to approximately 630,000 shares, with a market capitalization of
approximately ¥160 billion as of December 2019. Daily trading volume
stood at nearly 4,000 shares from March to August 2021 for the seven issues
listed at the time. The trading volume is also on the rise, drawing attention
for further developments in the future.
In infrastructure investment, the terms greenfield and brownfield are used.
The former signifies a field that has not been touched by human hands, reflecting a type of investment made where nothing exists. Meanwhile, the latter refers to a state in which human intervention has already been made, reflecting an investment in an existing infrastructure facility.

Chap. IX The Securitized Products Market

Chart IX-9.

Structure of Infrastructure Funds
Asset Management
Company

Supply Infrastructure
Asset

Instructions on Investment

InvestOrdinary Company

Infrastructure

AcquireInfrastructure
Company

Management ofInfrastructure(Operator)

Establish
Infrastructure Fund
Infrastructure
Company

Public Orgnization
Sell

181

InvestInfrastructure
Fund(Investment
Corporation)

Ordinary Company

Investor
Retail Investor

Lease Infrastructure

InvestInfrastructure
Company

Institutional Investor
Corporate Investor

Source: Website of the Japan Exchange Group, Inc.

Target infrastructure(Includes concessions targetting the assets)
Energy related
Renewable power
generation facilities
Electric Facilities(Power plants)

Transportation
related

Other

Airports

Water and sewage

Roads

Telecommunicationequipment

Railways

Gas Facilities

Harbor Facilities

Oil and Gas pipelines

Energy ships

Wireless equipment* Right to operate public facilities (concession) refers to the right to operate the public facility, whichcollects charges for usage that can be outsourced to a private business operator while the ownershipof the facility remains with the public entity.
Source: “Infrastructure Funds” Section on the website of the Japan Exchange Group, Inc.

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Chap. IX The Securitized Products Market

9. Risks and Credit Enhancement of Securitized Products
As the structure of securitized products is complex, credit rating is widelyused as a criterion for making an investment decision. And in order to package assets into a securitized product that merits a high credit rating, a device
for controlling various risks has to be built into the product. The substance ofrisks varies depending on the kind of underlying assets and the participantsin the scheme, but one thing in common among them is the default risk, or
the probability that the issuer may fail to pay its interest or principal promptly when due. The default risk of a securitized product is largely divided into
two kinds: the risk of changes occurring in the cash flow generated by theunderlying assets (bad debt or arrears) and the risk of bankruptcy of parties
involved in the securitization of assets (the debtor, the SPC, or the originator).
The risk involved in the cash flow may be reduced by taking various credit-enhancing measures. Unlike general corporate bonds, whose credit rating
is determined by the credit risk of their issuers, the credit rating of a securitized product must be based on the results of examinations of assets underlying each product. The arranger who underwrites and markets the securitized
product and the originator negotiate with a credit-rating agency to obtain ahigh rating. There are various credit-enhancing measures to choose from fordifferent schemes employed for issuing a securitized product, but they may
be largely divided into two: an external credit-enhancing measure that utilizes external credit (such as banking institutions) and an internal credit-enhancing measure that gives the structure of the security the function of enhancing
its credit. There are two methods of external credit enhancement: indirect anddirect. The former complements cash flows from underlying loan assets, andthe latter complements that of a securitized product. The indirect method has
a drawback in that it cannot eliminate risks associated with a servicer or any
other party involved in securitization. As a means of enhancing internal credit, a senior subordinated structure is commonly used. In Japan, however, thesubordinated securities are often held by the originator because, among otherreasons, there are few investors who are willing to purchase them.
A large part of the risk of changes in cash flows from underlying assets
can be covered by credit enhancing measures. However, the risk of bankruptcy of the parties involved in securitization is a serious problem. As assigned
claims and receivables of a bankrupt originator are typically subject to bankruptcy proceedings, investors carry the risk of nonpayment of their principal
and interest. Therefore, it is important to check whether there is any risk inthe business of any party concerned or whether the party is shielded from therisk of other parties concerned. Risks are complexly intertwined, and they aresummed up in Table IX-7.

Chap. IX The Securitized Products Market

Table IX-6.

Creditenhancement(external)

183

Main Credit Enhancing Measures

The originator owes recourse to a certain part of the assets
Recourse of the origi- sold to the SPC. Off-balance sheet accounting may not be aunator
thorized depending on the extent to which the originator owes
such recourse.
Credit default swaps

The purchaser of a swap pays a certain amount of money inpremium in exchange for a guarantee of credit risk of a specified claim.

Guarantee, insurance A property and casualty insurance company provides insurby financial institu- ance covering the entire default risk is issued securities.
tions

Creditenhancement(internal)

Spread account

The balance of funds remaining after deducting the amounts
paid to the investors and fees from the cash flow of the underlying assets is deposited in a spread account to be used ascompensation money in case of default.

Over collateral

The credit standing of securities is enhanced by selling suchpart of the underlying assets whose value is in excess of theamount of the securities issued to the special purpose vehicle(SPV).

Senior/subordinated By designating part of the securities issued as subordinatedstructuredebt, the credit standing of the rest of the issue is enhanced.

10. The Enactment of Securitization-Related Laws
The existing legal system of Japan is built around business-specific laws, andthe regulatory system of financial instruments is vertically divided along thelines of business-specific laws. As these laws contain many provisions regulating or banning business activities outright, it was pointed out that to spurthe development of new business, such as the securitization of assets, the existing laws had to be amended, and new laws must be enacted.
As regards the securitization of assets, pioneered by the Mortgage Securities Act introduced in 1931, the Specified Claims Law was enacted as an independent law in 1993. Since the enforcement of this law, the legal infrastructure has been developed steadily. Under and thanks to the Specified
Claims Law, the liquidation and securitization of assets classified as specified
claims, such as leases receivable and credit card receivables, started. Thereafter, various laws were enacted to help the banking institutions meet thecapital adequacy standards imposed by the Basel Committee on Banking Supervision and to encourage the securitization of their assets to deal with thebad loan problem that had become serious since the turn of the decade of the
1990s.
Under the Special-Purpose Company (SPC) Law and the Act on Securiti-

184

Chap. IX The Securitized Products Market

Table IX-7.
Overall risksof ABS

Typical Risks of ABS

OutlineMeasures necessary to avoid risks

Credit risk

There is a risk of a failure to generate A review of credit-enhancing measures is
an expected cash flow due to a default needed. In the case of an underlying asset thatof the originator.
consists of many credits, steps must be taken
to diversify such underlying assets.

Prepaymentrisk

If the issuer redeems the security ahead It is necessary to develop techniques such as aof its maturity, the investors will be ex- collateralized mortgage obligation (CMO) andposed to prepayment risks.
a security with a period of deferment that adjusts the relationship between the underlying
assets and the cash flow generated by the security issued thereby.

Liquidity
risk

When the funds flow out rapidly fromthe market, the holder cannot sell the
security in a timely manner because theliquidity of the securitized product is
not adequate, and the holder is thus exposed to a liquidity crunch.

The development of a secondary market fortrading ABSs is a must.
Also, the subordinated security shoud be tradedwidely among the investors.

Risks of theparties
concerned

OutlineMeasures necessary to avoid risks

Once the claims of the originator soldto the SPC are recognized as part of thebankruptcy estate, the investors have
Originator’s
the risk of forfeiting their right to rerisk
ceive the payment of the principal andinterest of the security.

It is necessary to ensure that the transfer of theclaims is not for securing a loan but is theirtrue sale.
The assets must be separated from the balance
sheet.
Transaction must have the conditions necessary for counteracting against a third party.

The commingling risk: A servicer ofreceivables that went bankrupt may
mingle the funds it had received before
Servicer risk it went bankrupt with its own funds
without remitting them to the SPV.

The designation of a backup servicer capableof putting up excess collateral is needed.
Payment of remittances received from debtors
must be made directly into the account of the
SPV.
Management of a lock-box account must be
conducted.

Bankruptcy remoteness must be established so that the SPC of an asset securitization scheme itself will not gobankrupt or will not be affected by thebankruptcy of other companies.

The substance of business must be clearly defined, and an SPC in which the originator has
no equity interest must be founded by establishing a charitable trust.
The commencement of bankruptcy proceedings must be averted by making the charitable
trust its beneficial shareholder.

SPC risk

Chap. IX The Securitized Products Market

Table IX-8.

185

Chronology Relating to the Securitization of Assets

Month &
Changes implemented
Year
Aug. 1931 The Mortgage Securities Act is enacted.
June 1973 Housing loan companies raise funds by offering beneficiary certificates of housing loan
claim trusts.
Sept. 1974 Housing loan companies raise funds by offering mortgage-backed securities.
Jan. 1988 The Law Concerning the Regulation of Mortgage-Backed Securities Business is enforced.
Apr. 1992 The Law Concerning the Regulation of Business Relating to Commodity Investment (theCommodity Fund Law) is enforced.
Apr. 1993 The Securities and Exchange Act designates beneficiary certificates of housing loan claim
trusts as securities.
June 1993 The Law Concerning the Regulation of Business Relating to Specified Claims, etc. (theSpecified Claims Law) is enforced.
July 1993 The ban on the issuance of CPs by nonbanks is lifted.
Apr. 1995 The Act on Specified Joint Real Estate Ventures is enforced.
Apr. 1996 As a method of liquidizing assets under the Securities and Exchange Act, the issuance ofasset-backed securities (ABS and ABCP) is authorized, making it possible to issue themother than under the Securities and Exchange Act.
June 1997 Beneficiary certificates of general loan claim trusts (including loans secured by real estate)
are designated as securities under the Securities and Exchange Act.
Feb. 1998 The Securities Investment Trust Act is amended (and the ban on corporation type investment trusts and privately placed investment trusts is lifted).
Apr. 1998 A total plan for the liquidation of land and claims is announced.
Sept. 1998 The Act on Securitization of Specified Assets by Specified Purpose Companies (the SPC
Law) is enforced.
Oct. 1998 The Law Concerning Exceptions to Requirements under the Civil Code for the Perfectionof Assignment of Receivables and Other Properties (the Perfection Law) is enforced.
Jan. 1999 A statement of opinion on establishing accounting standards for financial instruments ispublished. (The financial component approach to conditional transfer of financial assets is
adopted.)Feb. 1999 The Act on Special Measures Concerning Claim Management and Collection Business (theServicer Law) is enforced.
May 1999 Act on Issuance, etc. of Bonds for Financial Corporations’Loan Business (the so-called
Nonbank Bond Law) is enforced.
May. 2000 The SPC Law is amended to the Act on Securitization of Assets (Revised SPC Law), theassets subject to liquidation is expanded.
Nov. 2000 The Act on Investment Trusts and Investment Corporations (the revised Securities Investment Trust Act) is enforced, expanding the assets that can be securitized to real estate, etc.
Sept. 2001 The revised Act on Special Measures Concerning Claim Management and Collection Business is enforced.
Dec. 2004 The Trust Business Act is amended, and the system requiring trust companies of the management type to register is launched.
Dec. 2004 The Specified Claims Law is repealed.
Oct. 2005 The Special Provisions of Assignment of Obligations was amended to the Act on Special
Provisions, etc. of the Civil Code Concerning the Perfection Requirements for the Assignment of Movables and Claims.
May 2006 The Companies Act is enforced.
Dec. 2006 The Trust Act is amended and provided for business, personal, and purpose trusts.
Oct. 2007 The Financial Instruments and Exchange Act is enforced.
Nov. 2011 Revised Act on Securitization of Assets is enforced.
Apr. 2018 Revised Financial Instruments and Exchange Law is enforced.
June 2023 Revised Company Law is scheduled to be enforced.

186

Chap. IX The Securitized Products Market

zation of Assets enacted as the revised SPC Law, structures incorporating
SPVs, including specific-purpose companies (TMK) and specific-purpose
trusts (SPT), may be used for securitizing specified assets designated in theprovisions of the said laws (real estate, designated money claims, and beneficiary certificates issued against such assets in trust) in the form of assetbacked securities (such as senior subscription certificates, specified corporate
bonds, and specified promissory notes, etc.). Under the SPC Law, the systemof disclosing an asset liquidation plan and individual liquidation projects wasintroduced, in addition to the disclosure requirements on the disclosure of information on securities under the Securities and Exchange Act (currently the
Financial Instruments and Exchange Act).
In 1998 the Act on Special Provisions, etc. of the Civil Code Concerning
the Perfection Requirements for the Assignment of Movables and Claims
was enacted as a law prescribing exceptions to requirements under the Civil
Code for the perfection of the assignment of receivables and other properties,
and it was amended in 2005. The Civil Code provides the legal requirements
for the assertion of the assignment of nominative claims (claims with named
creditors) against obligors or third parties. Designated claims were transferable, but the provisions of the Civil Code had been a major hurdle standing
in the way of securitizing them. And the Perfection Law set forth simple procedures for the perfection of such interests.
The Act on Special Measures Concerning Claim Management and Collection Business, enacted to account for exceptions to the provisions of the Attorney Law, allows accredited corporations to provide the services of administering and collecting debts. Under the Act on Special Measures Concerning
Claim Management and Collection Business, a debt collection company may
be established to provide a bad debt collection service without conflicts with
the Attorney Law. The Act on Issuance, etc. of Bonds for Financial Corporations’Loan Business conditionally lifted the ban imposed on nonbanks on theissuance of corporate bonds and CPs for the purpose of raising capital for
lending operations and on ABSs.
As a result of the revision of the Securities and Exchange Act based on the
Act on Revision, etc. of Related Acts for the Financial System Reform andthe enforcement of the Financial Instruments and Exchange Act, beneficiary
certificates of and trust beneficiary interests in assets that are deemed eligible
for securitization by the provisions of the Act on Securitization of Assets andmortgage certificates under the Mortgage Securities Act are now legally considered securities. Furthermore, pursuant to the enactment of the Act on Investment Trusts and Investment Corporations as revised, real estate was included in eligible assets, which paved the way for the issuance of REIT
securities. Since then, the scope of eligible assets has been expanded, and theinfrastructure funds emerged.

CHAPTER X
Financial Instruments Exchange, etc. (1)1. The Function of the Financial Instruments Exchanges
The basic function of a financial instruments exchange is to establish a market and concentrate supply and demand of marketable securities in a single
market to enhance the liquidity of securities, to help form fair prices that reflect supply and demand, and to promptly publish the prices thus formed.
The purpose of a financial instruments exchange is to establish a market fortrading securities and executing exchange derivatives trading and to run themarket in such a way as to facilitate fair and efficient trading in the public interest and for the protection of investors. The basic mission of the financial
instruments exchange is to provide a fair and transparent market. The market
established by a financial instruments exchange has the function of providing
a marketplace that enhances the liquidity of financial instruments and helps
form fair prices so as to provide investors with an environment in which investors can conduct investment activities free from anxiety, raise funds
smoothly by issuing securities, and hedge risks by executing exchange derivatives trading among other activities. Furthermore, prices formed on an exchange can serve as a base for assessing the asset value of securities among
others and price indexes serve as an important indicator of economic andbusiness trends. Because financial instruments markets operated by exchanges perform an important role in supporting the economy of the nation, a license must be obtained from the prime minister to open an exchange, and theoperation of that exchange is placed under supervision according to the Financial Instruments and Exchange Act.
Stock exchanges were conventionally required to be membership organizations under the Securities and Exchange Act. An amendment of that law
that went into effect in 2000, however, allowed stock exchanges to change
their legal status to that of a corporation. Starting with Osaka in 2001, the Tokyo, Nagoya, and JASDAQ exchanges became corporations. The enforcement of the Financial Instruments and Exchange Act in 2007 provided for theestablishment of an exchange holding company, self-regulatory organization,etc. Given this law, in the same year, the Tokyo Stock Exchange Group, Inc.

188

Chap. X Financial Instruments Exchange, etc. (1)Chart X-1.

The Function of the JPX-operated Financial Instruments Exchanges
Price information (Internet · Newspapers, etc.)

Information
vendors

Cash market
Derivatives market

Commodity
Futures
Trading Law

Financial Instruments and Exchange Law

Chart X-2.

Clearing andsettlement

Investors

Execution of
buying and selling

Buy and sellorders

Delivery ofshare certificates,
price, etc.

Overview of Comprehensive Exchange

Exchange

Clearing House

Osaka Exchange, Inc.

Japan Securities
Clearing Corporation

Trading Participants

Stock Price Indices(Nikkei 225 futures, TOPIX futures, etc.)
Individual stocks(securities options)

Securities company(Financial Instruments
Dealers)

Bonds (long-term JGB futures, ultra-long-term
JGB futures, etc.)
Precious metals (Gold, platinum, silver, palladium)
Rubber (RSS3, TSR20)

Securities company(Financial Instruments
Dealers)(Commodity futures firm)

Agricultural Products (Corn, soybeans, azuki beans)

Tokyo Commodity
Exchange, Inc.
Energy (Dubai crude oil, gasoline, electricity, etc.)

Commodity futurescompany

Investors and market users

Listed companies

Buy and sellordersBenefits of listing●Funding●Improving
reputation and
trust

Price
information

Securities companies

Price
information

Information distribution●Stock price information●Index information, etc.

(Financial Instruments
Dealers)(Commodity futures firm)

As of August 31, 2021

Chap. X Financial Instruments Exchange, etc. (1)189

was established as a holding company of the Tokyo Stock Exchange and aself-regulatory organization. The establishment of a holding company wasprompted by potential conflicts of interest between the public role of an exchange as an operator of self-regulating operations and the for-profit orientation of an exchange as a corporation, where exchanges sought to reinforce
the independence of their highly public function to ensure self-regulation of
the market. Furthermore, against the backdrop of intensifying competition
among markets across borders resulting from the advancement of financialtransaction systems, in 2013, the Tokyo Stock Exchange Group and the Osaka Securities Exchange combined their operations to increase the appeal andconvenience of their markets and to enhance their global competitiveness,forming the Japan Exchange Group (JPX).
In 2019, JPX acquired Tokyo Commodity Exchange (TOCOM), and in2020 it transferred trading in precious metal futures and other commodities
from TOCOM to Osaka Exchange (OSE), which specializes in derivatives,and integrated clearing organizations under its umbrella to create acomprehensive exchange for trading a wide range of products from financial
instruments to commodities.
2. Footsteps of Markets
When the stock exchange resumed trading after WW2, the exchange market
was a single market. With the Japanese economy entering a period of highgrowth and the demand for capital from small and medium-sized enterprises
increasing, the OTC transactions executed outside the stock exchange rapidly
evolved into a marketplace for so-called“collective transactions”. It became
necessary to institutionalize the marketplace to encourage the developmentof the SMEs and to protect investors. In 1961, the Tokyo, Osaka and Nagoya
Stock Exchanges set up Second Sections that have with more relaxed listing
standards than the conventional market, thereby absorbing many of theshares which had previously been traded OTC. This is the origin of the First
Section and the Second Section of the TSE. Previously, new listing companies were due to be designated on the Second Section. However, with the initial listing of Nippon Telegraph and Telephone Corporation (NTT) in 1986,
part of designation standards was revised, enabling certain companies with alarge number of listing shares and likelihood for exceptionally favorable
shareholder base to be designated on the First Section. In 1996, with the objective of clarification, the standards for listing directly on the First Section
were formalized, which required a certain number of listing shares and theshareholder base conformable to the First Section designation standards.
Amid Japan’s high economic growth, the Japan Securities Dealers Associ-190

Chap. X Financial Instruments Exchange, etc. (1)Table X-1.

History of the TSE’s First and Second Sections

Apr. 1949 Stock Exchange reopened
Oct. 1961 The Second Section of the market opened in Tokyo, Osaka and Nagoya
Establishment of listing criteria for shares designated to be listed on the First Section andthose re-designated to be listed on the Second Section
Nov. 1986 Revision of regulations concerning the listing of NTT shares• Certain companies with a large number of listing shares and the likelihood for exceptionally favorable shareholder base could be directly designated as First Section stocks.
Nov. 1996 Standards for listing directly on the First Section formalized for clarification purposes• Number of listing shares, shareholder base (conformable to the First Section designation
standards), etc.

Table X-2.

History of the JASDAQ

Nov. 1983 New over-the-counter (OTC) market launched.
Dec. 1998 The JASDAQ market defined as an OTC securities market (in parallel with other exchange
markets).
Dec. 2004 Stock exchange license acquired by JASDAQ and by the Securities and Exchange Act its
name changed to the JASDAQ Securities Exchange.
Aug. 2007 The NEO market established.
Oct. 2007 JASDAQ, NEO, and Hercules markets merged, forming the new JASDAQ market.
July 2013 The businesses of TSE and OSE combined, with the TSE continuing to operate JASDAQ.

Table X-3.

History of the Mothers

Nov. 1999 Mothers launched.
May 2002 Listing criteria reviewed:• Newly establish delisting criteria regarding sales.
• Newly establish listing screening standards and delisting criteria regarding market capitalization, etc.
Dec. 2006 The first phase of a comprehensive listing system improvement program undertaken.
• Require new applicants to obtain a letter of recommendation from the managing underwriter.
Nov. 2007 The second phase of a comprehensive listing system improvement program undertaken.
• Abolish provisions for moving from main exchange to Mothers market (clarify Mothers’
position as a start-up market), etc.
Nov. 2009 Steps taken to improve confidence in market taken.
• Newly establish“appropriateness of business plan”as a listing criteria.
• Newly establish stock price related delisting criteria, etc.
Mar. 2011 Further steps to improve confidence in and stimulate market taken.
• Require listed companies to be audited by an audit firm registered with exchange.
• Newly establish requirement to choose whether to stay on Mothers after 10 years.
• Introduce listing screening policy in line with market concept (confirm appropriatenessof business plan).

Chap. X Financial Instruments Exchange, etc. (1)191

ation (JSDA) introduced the OTC Registration System in 1963 to provide amarketplace to secure funding for those companies that lack listing opportunities on the exchange markets. The OTC Registration System was reorganized into the new OTC Stock Market in 1983 and served to complement theconventional stock exchanges as a capital market for growth and start-up
companies. After the revision of the Securities and Exchange Act in 1998, theOTC Stock Market was redefined that exists in parallel with other exchange
markets in its own right. In 2004, it became the JASDAQ Securities Exchange, which was subsequently merged with the OSE-operated Hercules in2010. Following the management integration of the TSE and the OSE, theexchange has been operated as the TSE JASDAQ market since July 2013.
In 1999, the TSE established a market of start-ups called Mothers to provide listing opportunities for emerging companies in their start-up growthphase. This new market offered improved protection for investors throughenhanced disclosure requirements, while allowing companies with highgrowth prospects to get listed even if they had negative net worth or sufferedpretax losses. Subsequently, after a set of scandals among some of the listedcompanies, the screening criteria for listing were tightened to improve investor protection. Consequently, in 2011, the TSE undertook a review of theMothers’listing system and implemented measures to increase confidence
and stimulate activity in the market. Among those measures, the exchange
added the requirement for listed companies to be audited by an audit firm
registered in JICPA’s Company Audit Firm Resister. The TSE also changed
its listing screening policy to one of evaluating whether the business plans ofcompanies seeking to list were achievable in the long term.
3. Review of TSE market segment
As of September 2021, TSE operates four markets for general investors: theFirst Section, the Second Section, Mothers and JASDAQ (Standard and
Growth). This market structure reflects the fact that when TSE and OSE
merged in 2013, they maintained their respective structures so as to minimize
the impact on listed companies and investors. In recent years, however, it has
become evident that there is room for improvement in certain areas. Accordingly, in 2018, TSE canvassed opinion on various issues related to market
structure and the future direction of the market. Specifically, market participants raised the following points: (1) many investors find the concept of eachmarket segment unclear and confusing; (2) the market is not fully fulfillingits expected role in terms of incentivizing listed companies to sustainably increase their corporate value, and (3) there is no index that functions properly
as a benchmark investable index.

192

Chap. X Financial Instruments Exchange, etc. (1)Chart X-3.

Major Issues regarding TSE Cash Equity Market Structure

1. Ambiguous market concept impairing convenience of investors & losing attractiveness Concerns that market concept of the 2nd Section, Mothers, and JASDAQ overlap and confusing
Concerns that market concept of the 1st Section is unclear, and the growth of TOPIX-linked passive
investment is affecting price formation of issues with relatively low liquidity
2. Insufficient incentives for listed companies to sustainably grow and increase corporate value
 Concerns that listing criteria for“step-up”to the 1st Section is not functioning sufficiently to incentivize growth Concerns of insufficiency of market participation by institutional investors Mothers and JASDAQ
and of the disclosed information of start-up companies
3. There is no index available that is not only good for investment but also well representing the wholemarket TOPIX, widely used by investors as a benchmark is comprised of all stocks listed on the 1st Section
 Few investors use JPX Nikkei 400 nor TOPIX 500 as a benchmark stocks
For the Japanese economy to continue growing, it is imperative and urgent that listed companies
increase their corporate value over the medium-to-long term and many start-up companies growChart X-4.

Restructuring the Market Segments with a clear market concept

Current

First Section

For Companies with high liquidity

Mothers

For startups

For various companies(including those with a track record and startups)

Second Section

For companies with a track record

Standard
GrowthNew

For companies with large market
cap. (liquidity) ivestable to many
institutional investors, a highquality of corporate governance,and commitment to sustainablegrowth through constructive
dialogue with investors

For companies with a base-line,
standard level of market cap(liquidity) appropriate as a publiccompany, basic corporate
governance standards as a listedcompany, and commitment tosustainable growth

For companies having reasonablebusiness plan to realize their highgrowth potential, conducting
appropriate and timely disclosure,and having a certain level ofmarket value, but bearing a
relatively higher risk from thebusiness performance viewpoint

Chap. X Financial Instruments Exchange, etc. (1)193

Based on these issues, TSE has been reviewing the segments of the market. On April 4, 2022, the market is scheduled tobe reorganized into three
new segments: Prime, Standard, and Growth, in order to provide a market
that incentivizes sustainable growth and mid-to long-term corporate value
creation of listed companies and attracts various types of investors, both domestic and foreign.
Listing requirements for each new market segment set quantitative andqualitative criteria for liquidity, corporate governance and others in accordance with each market concept. In principle, the same criteria shall apply toboth initial listing and listing maintenance for each segment, and therefore
listed companies will be required to comply with the standards of the initiallisting criteria on a continuous basis after listing. Each market segment is independent, and thus are no special lowered requirements for transfer between
segments, as is the case so far. Therefore, when a listed company changes its
market segment, it is required to undergo a new examination based on thesame criteria as the initial listing criteria of the market segment to which it ischanging, and to comply with those criteria.
In addition to the abovementioned review of market segments, TOPIX,
currently comprised of all companies listed on the First Section, will also be
reviewed with the aim of further improving not only how well it represents
the market but also its functionality as an investable index.
4. Initial Listing System
The TSE imposes initial listing requirements on each market segment fromthe viewpoint of investor protection and examines listing applications to see
whether they satisfy the listing requirements. TSE’s initial listing criteria foreach market segment comprise quantitative (formal) and qualitative (eligibility) requirements and the TSE examines applications from companies wishing to be listed based on consultation and their submitted documents.
Prime Market: In terms of the formal requirements,“tradable share market capitalization of at least ¥10 billion”which ensures the basis for ample liquidity so that a variety of institutional investors can invest in a company
with confidence;“tradable share ratio of at least 35%”which is the basis for
ensuring an effective foundation for constructive dialogue with institutional
investors; either ¥2.5 billion profit (total of previous two years) or sales of atleast ¥10 billion and notional market capitalization of at least ¥100 billion
which are the basis for a stable and excellent revenue/financial base. In termsof the qualitative requirements, criteria are set from the viewpoint of corporate continuity, profitability, corporate governance, and effectiveness of internal control systems.

194

Chap. X Financial Instruments Exchange, etc. (1)Table X-4.
Items
Liquidity

Number of
Shareholders

Initial Listing Criteria (Quantitative Requirements)
Prime Market

Growth Market

400 or more

150 or more

Tradable Shares 20,000 units or more

2,000 units or more

1,000 units or more

MarketJPY 10 billion or more
capitalization of
the tradable share

JPY 1 billion or more JPY 0.5 billion or mor

MarketCapitalization

800 or moreStandard Market

JPY 25 billion or more——

Governance The number of
tradable shares

35% or higher of the listed 25% or higher of the 25% or higher of thestockslisted stocks
listed stocks

Operatingresults

The applicant company Total profits over thesatisfies either of the fol- last year are JPY 0.1
lowing a. or b.:Aggregated billion or more
profits over the last two
years are JPY 2.5 billion ormore
Net sales over the last year
are JPY 10 billion or more
and market capitalization
is estimated to be JPY 100
billion or more at time oflisting—

The amount of consolidat- The amount of coned net assets is JPY 5 bil- solidated net assets islion or more and amount a positive figureof unconsolidated net assets is a positive figure—

Revenue baseFinancial conditions

Public Offering
Others——

500 trading units or
moreYears of Business Operation, False Statements or Adverse Opinions, etc.,
Audit by a Listed Company Audit Firm, Establishment of a Shareholder
Services Agent, Share Unit, Classes of Stock, Restriction on Transfer of
Shares, Handling by the Designated Book-Entry Transfer Institution, etc.

Notes: 1. No. of shareholders means the number of shareholders who own one or more units of shares.
2. The number of“tradable shares”is the number of shares after deducting from the number oflisted shares the shares owned by shareholders, directors, etc., who own 10% or more of thelisted shares, treasury (if they own their own shares), domestic common banks, insurance companies, and business corporations, and other shares deemed fixed by the Exchange.
3. The amount of profits is the amount derived by adding or subtracting net income attributable tominority interests in subsidiaries to/from the amount of current profit (loss).
4. An audit firm that is registered in the registry of listed company audit firms based on the Registration System for Listed Company Audit Firms of the Japanese Institute of Certified Public Accountants (including audit firm which is subject to quality control reviews by the Japanese Institute of Certified Public Accountants).

Chap. X Financial Instruments Exchange, etc. (1)Table X-5.
Prime Market

195

Initial Listing Criteria (Qualitative Requirements)
Standard Market

Growth Market【Corporate Continuity and Profit-【Corporate Continuity and Profit-【Appropriateness of Disclosure ofability】
ability】
Corporate Information, Risk InThe applicant company is operat- The applicant company is operat- formation, etc.】
ed continuously and has a stable ed continuously and has a stable The applicant company is in a position to appropriately disclose its
and excellent revenue base.
revenue base.
business details and risk information, etc.
【Soundness of Corporate Man-【Soundness of Corporate Man-【Soundness of Corporate Management】
agement】
agement】
The applicant company carries The applicant company carries The applicant company carries
out its business fairly and faith- out its business fairly and faith- out its business fairly and faithfully.
fully.
fully.
【Effectiveness of Corporate Gov-【Effectiveness of Corporate Gov-【Effectiveness of Corporate Governance and Internal Management ernance and Internal Management ernance and Internal Management
System】
System】
System】
Corporate governance and inter- Corporate governance and inter- Corporate governance and internal management systems are ap- nal management systems are ap- nal management systems that arepropriately established and func- propriately established and func- commensurate with the size andtioning.
tioning.
maturity of the company are appropriately established and functioning.
【Appropriateness of Disclosure of【Appropriateness of Disclosure of【Reasonableness of the businessCorporate Information, etc.】
Corporate Information, etc.】plan】
The applicant company is in a po- The applicant company is in a po- The applicant company has estabsition where it is able to disclose sition where it is able to disclose lished a rational business plan andits corporate information appro- its corporate information appro- built a business foundation necespriately.
priately.
sary to execute the business planor has a rational plan to do so.
Other matters deemed necessary by the Exchange from the viewpoint of public interest or investor protection

Standard Market: The formal requirements include a“tradable sharemarket capitalization of at least ¥1 billion”as the basis for appropriate liquidity for smooth trading by general investors;“a tradable share ratio of at least
25%”to ensure minimum publicness as a listed company; and“profit at least¥0.1 bn. in the most recent year”as the criterion for a stable revenue base. In
terms of the qualitative requirements, similar to the Prime Market, there is
the perspective of corporate continuity and profitability. However, while thePrime Market requires a stable and excellent revenue base, the Standard Market only requires a stable revenue base.
Growth market: In terms of formal requirements, the minimum liquidity
requirement for a company to be investable for general investors is a“tradable shares market capitalization of at least ¥500 million;”“a tradable shareratio of 25% or more”for ensuring a minimum publicness as a listed compa-

196

Chap. X Financial Instruments Exchange, etc. (1)ny and“public offering of at least 500 units at initial listing”as a necessary
fund raising to achieve growth.
To widely accept start-up companies to the capital market, there are no criteria related to pase business performance or financial position (profit and net
assets). In terms of qualitative requirements, companies are required to demonstrate reasonable business plan to realize high growth and to have ability to
conduct appropriate disclosure.
5. Listing Administration Systems
With a view to carrying out the proper administration of listed securities andto protecting investors, stock exchanges have instituted various rules relating
to the administration of listings and have sought to ensure the effectivenessof these rules by requiring issuers to commit to observe these in the listing
agreement they sign at the time of listing. TSE’s listing requirements include
rules for timely disclosure of important corporate information, a code of corporate conduct requiring companies to adhere to appropriate behavior, andthe delisting of securities.
Rules Requiring Timely Disclosure of Corporate Information: To ensure the formation of fair market prices and to foster the sound developmentof a financial instruments market, it is extremely important for listed companies to make proper disclosure in a timely manner of information concerning
important corporate matters that may influence the investment decision-making of investors, the very basis on which stock prices are formed.
TSE requires listed companies to disclose important corporate information,such as corporate decisions, events, and financial results, in a timely manner.
The timely disclosure requirements are fundamentally the same through all
the market segments, but the only Growth Market requires companies to disclose“business plans and matters relating to growth potential”on a continuous basis.
Code of Corporate Conduct: The Tokyo Stock Exchange has introduced
a code of corporate conduct. The multifold purposes of requiring proper conduct by listed companies are to raise awareness of their role as members of
the financial instruments market, to ensure greater transparency by enhancing
the disclosure of corporate information, and to achieve the proper operationof investor protection measures and market functions.
Continued listing criteria; delisting criteria: Under the new market segments each market has its own continued listing criteria based on the respective concept and listed companies are required to comply with these criteria
on a continuous basis. If a company is in breach of the criteria and fails to
remedy this within the required period, the company will be delisted. In addi-

Chap. X Financial Instruments Exchange, etc. (1)Table X-6.

197

Outline of Code of Corporate Conduct of the Tokyo Stock Exchange

Matters to be observed (if a listed company violates a Matters desired to be observed (listed compaprovision regarding these matters, it may be subject to nies are expected to make efforts to observethem)measures enforced by the TSE)
• Matters to be observed regarding third-party allotment • Efforts toward the shift to and maintenance of• Prohibition of stock split, etc., that could cause turmoil the desired investment unit levelin the secondary market• Efforts toward unification of trading unit
• Matters to be observed pertaining to issuance of • Respect for the principles of the Corporate
MSCB, etc.
Governance Code• Duty to exercise of voting rights in writing, etc.
• Securing management structure that includes• Duty to carry out framework improvement to facilitate independent directors
exercise of voting rights for listed foreign companies • Framework improvement to enable proper• Duty to secure an independent director/auditor
functioning of independent directors/auditors• Duty to explain the reasons for implementing or not • Provide information on independent directors/
implementing the Corporate Governance Codeauditors, etc.
• Duty to appoint a board of directors, an audit board or • Framework improvement to facilitate exercise
committee, and an accounting auditorof voting rights• Duty to select a certified public accountant or public • Delivery of documents to shareholders ownaudit firm to provide the audit certificate of the ac- ing stock without voting rights
counting auditor• System improvement for prevention of occur• Duty to carry out necessary structural development of rence of insider tradinga system for ensuring the appropriateness of business • Development of system, etc. for excluding• Matters to be observed pertaining to introduction of anti-social forces• Development of systems and structures totakeover defense measures• Matters to be observed pertaining to disclosure of properly respond to changes in accounting
standards, etc.
MBOs, etc.
• Matters to be observed pertaining to significant trans- • Fair provision of supplementary explanatory
actions, etc., with controlling shareholders
materials on details of account settlement• Audit by an audit firm placed on the TSE’s ListedCompany Audit Firm Register• Prohibition of insider trading• Exclusion of anti-social forces• Prohibition of behavior destructive to the functioningof the secondary market or the rights of shareholders

tion to these criteria, there are other criteria common to all the markets.
To the existing listed companies the continued listing criteria shall not apply strictly but do in a relaxed manner for the timebeing as the transitional
treatment. Howeber, to receive this treatment, companies must disclose aplan and the progres for meeting the full requirements.
When any stock is in danger of falling within the purview of the delisting
criteria the stock shall be put on the watch list to notify general investors.
When any stock actually falls within the purview of the delisting criteria, thestock shall be put on the liquidation list to publicize the information and allow the trading of such stock to continue for a specified period (ordinarily
one month). After this period, the stock shall be delisted.

198

Chap. X Financial Instruments Exchange, etc. (1)Table X-7.
Item
Liquidity

Continued Listing Criteria

Prime Market

Standard Market

Growth Market

Number of
Shareholders

800 or more

400 or more

150 or more

Number of
tradable shares

20,000 units or more

2,000 units or more

1,000 units or more

MarketJPY 10 billion or more JPY 1 billion or more JPY 0.5 billion or more
capitalization of
the tradable share
Trading Value

Daily average trading Monthly average trad- Monthly average tradvalue: JPY 20 million ing volume: 10 units ing volume: 10 units oror moreor moremore

GovernanceTradable shareratio

35% or higher

Financialconditions

Amount of Net
Assets

The amount of net as- The amount of net as- The amount of net assets is a positive fig- sets is a positive fig- sets is a positive figure.
ure.
ure.

25% or higher—

MarketCapitalization—

25% or higher

JPY 4 billion or more
(applicable after 10
years from initial listing)Note: Improvement period is generally one year. (Standard Market and Growth Market trading criteria is
6 months.)

Table X-8.

Delisting Criteria
Item

Failure to Meet Continued Listing Criterialack of entrustment to a shareholder services agent

Suspension of bank transactions

restrictions on transfer of sharesbankruptcy/rehabilitation/reorganization proceed- conversion to a wholly-owned subsidiaryings
suspension of business activities

ceasing to be subject to the book-entry transfer operation of a designated book-entry transfer institution

inappropriate merger, etc.

inappropriate restrictions on shareholders’rights

impairment of sound transactions with a controlling acquisition of all sharesshareholder
Delay in Submission of Securities Report or Quar- acquisition by request for sale of shares, etc.
terly Securities Report
False Statement or Adverse Opinion, etc.

share consolidation

Securities on Alert, etc.

involvement of anti-social forces

Violation of Listing Agreement, etc.

others (cases where delisting is deemed appropriate
for public benefits or investor protection)

Chap. X Financial Instruments Exchange, etc. (1)199

6. The Corporate Governance CodeOutline of the Corporate Governance Code: The TSE formulated the Corporate Governance Code“(the Code”), a set of key principles that contributeto the realization of effective corporate governance of listed companies,
which has been applied to the listed companies since June 2015.
The Code consists of a three-layered structure of general principles, principles, and supplementary principles, and adopts the“comply-or-explain”approach. Implementation of each principle is not uniformly required. However, if there is a principle that is not implemented due to the individual
circumstances of the company, the company is required to provide an appropriate explanation of the reasons for this and the status of implementation ofalternative measures. The Code has been formulated on a principles-based
approach. Although there are no clear definitions of terms, it is expected thatthose involved will interpret the Code and respond to it appropriately in accordance with the intention and spirit of the Code. All listed companies arerequested to document their status of adoption of the Code in a Corporate
Governance Report. The reports are to be made available for public inspection on the websites of the relevant stock exchanges, etc.
Apart from the Corporate Governance Code, which is a code of conduct
for listed companies, the Stewardship Code has been formulated for institutional investors, and it is expected that the two will work together to promote
the sustainable growth of listed companies based on constructive dialogue
with institutional investors. In addition, in 2018, as an annex to both codes,
the“Guidelines for Dialogue between Investors and Companies”was formulated, which summarizes matters that are expected to be discussed intensively
Chart X-5.
Corporate Governance Code(established June 2015, revised
June 2018, revised June 2021)

Two codes and dialogue guidelines
Investor-Company
Dialogue Guidelines(established June 2018,
revised June 2021)

Stewardship Code(established February 2014,
revised May 2017, revised
March 2020)

Best practices that provide a practicalframework to support precise decisionmaking by listed companies aiming toachieve sustainable growth and enhance
corporate value over the medium to longterm.

Matters to encourage
constructive dialogue between
listed companies and investors
to achieve more effective
corporate governancePrinciples considered useful for
institutional investors in fulfilling theirstewardship responsibilities (i.e.,
encouraging medium- and long-term
improvements in corporate value andincreasing investment returns throughconstructive dialogue with companies)

Listed Companies

Constructive dialogue from a
medium- to long-term perspective

Institutional Investors

200

Chap. X Financial Instruments Exchange, etc. (1)Chart X-6.

Overview of the Corporate Governance Code

【1. Securing the Rights and Equal Treatment of Shareholders】
Companies should take measures to fully secure rights and equal treatment of shareholders.

Securing the substantial Rights and Equal Treatment of Shareholders⇒Measures for giving shareholders sufficient time to consider the agenda of general shareholder meetings (early delivery of convening notices, electronic exercise of voting rights, english translation ofnotice of convocation, etc.)Description of capital policies⇒Basic policy, takeover defense measures and changes in controlling rights, necessity and rationale
for large-scale dilution, and cross-shareholdings* etc.
*Cross-shareholdings: disclosure of policy for reducing cross- shareholdings, explanation of the objective and rationale for shareholding based on an examination of economic rationale, establishment and disclosure of standards for the exercise of voting rights【2. Appropriate Collaboration with Stakeholders Other Than Shareholders】
Companies should recognize that their sustainable growth is brought about as a result of contributions made by a variety of stakeholders, including employees, customers, business partners, and local
communities, and should endeavor to appropriately cooperate with these stakeholders.

Appropriate response to issues surrounding sustainability, including social and environmental problems
Ensure diversity in the company’s core human resources (women, foreigners, mid-career hires)【3. Ensure Appropriate Information Disclosure and Transparency】
Listed companies are required to appropriately disclose financial and non-financial information incompliance with the relevant laws and regulations, and should also proactively engage in providing
other information, thereby providing information that is easy for users to understand and highly useful.
Enhancement of Information Disclosure⇒Business strategies, Plan, basic principle on corporate governance, policy and procedure of nomination and remuneration of directors, English disclosure, and activities for sustainability【4. Responsibilities of the Board】
In order to promote sustainable corporate growth and enhance earnings power and capital efficiency,
the board should appropriately fulfill the following roles and responsibilities:(1) Setting the broad direction of corporate strategy;(2) Establishing an environment where appropriate risk-taking by the senior management is supported;and(3) Carrying out effective oversight from an independent and objective standpointUse of independent/external directors⇒At least one-third of the directors (prime Market listed companies) or two of the directors (othermarket isted companies) to be those who are qualitied to contribute to sustainable growth, exclusive
meetings for independent directors, lead independent directors, proper involvement in nominationand compensation, etc.
Ensuring the effectiveness of the board of directors and the audit & supervisory board⇒Evaluation of effectiveness of the board of directors, management of directors’meetings (distributionof materials, matters to be discussed, etc.), access to information (streamlining of the company’ssupport system, provision of opportunities for training, etc.)【5. Dialogue with Shareholders】
In order to contribute to sustainable growth, companies should engage in constructive dialogue withshareholders.
Source: Materials released by the Financial Services Agency.

Chap. X Financial Instruments Exchange, etc. (1)201

in the dialogue between companies and investors.
Revision of Corporate Governance Code: The Corporate Governance
Code was revised in 2018, and again in June 2021. The three main points ofthe 2021 revision are the enhancement of the function of the board of directors, ensuring diversity in the core human resources of the company, and addressing issues related to sustainability. In the new market segmentation, allof the revised general principles, principles, and supplementary principles
apply to companies listed on the Prime Market and Standard Market, andonly the general principles apply to companies listed on the Growth Market.
However, considering that the Prime Market is a segment focused on constructive dialogue with global investors, the revised principles and supplementary principles also include a requirement for a higher level of governance for companies listed thereon.
7. The Stock Trading System (1)Most of the transactions on the stock exchanges are effected during the trading sessions. In the case of the Tokyo Stock Exchange, the trading hours are
divided into two sessions: the morning session, from 9:00 a.m. to 11:30 a.m.,and the afternoon session, from 12:30 p.m. to 3:00 p.m.
There are mainly two types of orders: a limit order, by which a customer
limits the acceptable price, and a market order, which is executed immediately at the price available in the market without restrictions or limits. Limit orders can be made in such increments as ¥1 or ¥10, with the allowable priceincrements being determined according to the price range of the stock. Particularly for some highly liquid issues, more minute units of pricing are set
for the purpose of improving contract prices and easing the wait until contract, and currently orders can be made even in increments of ¥0.1 (when theprice is ¥1,000 or below). The allowable price for a limit order is restricted toa fixed price range based on the closing price of the previous trading day,which also controls any sharp movement in stock prices.
Trading of shares on the exchange floor is conducted in accordance withthe price-priority rule (under which a buy/sell order with the highest/lowest
bid/offer price takes precedence over the others) and the time-priority rule
(when there is more than one order offering or bidding at the same price, theorder placed the earliest takes precedence over others) and by either the Itayose method (single-price auction using an order book) or the Zaraba method(continuous auction).
Itayose method: The Itayose method is a system that is used to determine
the opening or first price when trading commences or resumes on the floor.
All buy and sell orders for a given issue are matched according to the price-202

Chap. X Financial Instruments Exchange, etc. (1)Table X-9.

Methods of Concluding Transactions

Itayose method
Zaraba method
A memo (on a board) about an order received at the time
A memo (on a board) about a Zaraba order for aan opening price is decided
given issue received(Asked price)(Price)(Bid price)(Asked price)(Price)(Bid price)
H(2) I (4)MarketK(1) M(3)MarketQuotation
Quotation
◯◯◯
¥503
◯◯◯
¥503
◯◯◯
¥502
T(1)
◯◯◯
¥502
◯◯
¥501
P(5) N(2)◯D(2) C(4)¥501
G(1) F(1) E(1)¥500
A(4) B(3) C(2) D(1)B(3) A(3)
¥500
S(2)
¥499
◯◯◯
¥499
F(3) G(2)◯
R(4)
¥498
◯◯◯
¥498
◯◯◯
¥497
¥497
◯◯◯
Notes: 1. Alphabetical letters represent securities companies.
2. Figures given in parentheses represent the number of trading units, each consisting of 100 shares.
3. ◯◯◯ are blanks to be filled with securities companies bidding or asking prices and the number of trading units.
4. In the case of the Itayose method, all bid and asked prices are considered to have been proposed simultaneously (simultaneous outcry).

The Itayose Method

a. First, a sell order for 600 shares at a market-asked price without limit (200 shares by securities company H and400 shares by securities company I) is matched against buy orders for 400 shares at a market-bid price without
limit (100 shares by securities company K and 300 shares by securities company M). At this point, 200 shares ata market-asked price without limit are left unmatched.
b. Then, assuming that the opening price will be ¥500, the remaining unfilled sell orders for 200 shares at a marketasked price without limit and those for 600 shares at an asked price of ¥499 or less (200 shares by securities company S and 400 shares by securities company R) are matched against buy orders for 800 shares at a bid price of¥501 or more (500 shares by securities company P and 200 shares by securities company N and 100 shares by securities company T). As a result, sell orders for 1,200 shares at an asked price and buy orders for 1,200 shares atthe bid price are matched.
c. Lastly, a sell order for 300 shares at an asked price of ¥500 (100 shares by securities company E, 100 shares by
securities company F, and 100 shares by securities company G) are matched against buy orders for 1,000 sharesat a bid price of ¥500 (400 shares by securities company A, 300 shares by securities company B, 200 shares by
securities company C, and 100 shares by securities company D). However, there are only 300 shares offered forsale at an asked price of ¥500, while there are buy orders for 1,000 shares at a bid price of ¥500. In such cases, all
the sell orders for 300 shares at an asked price of ¥500 are matched against the buy orders for 100 shares eachfrom securities company A, B, and C (for a total of 300 shares) at an asked price of ¥500. As a result, the opening
price is decided at ¥500, and orders for a total of 1,500 shares are consummated at such price.

The Zaraba Method

a. When the contents of an Ita (board) are as shown in the chart, a buy order of securities company M for 200
shares at a bid price of ¥500 can be consummated by matching the sell order of securities company A for 200
shares out of its original sell order for 300 shares.
b. When securities company N places a buy order for 1,000 shares at a bid price without limit, it can be consummated by matching it against the remaining 100 shares offered for sale by securities company A at an asked price of¥500 and a sell order of securities company B for 300 shares at an asked price of ¥500 and then a sell order of securities company C for 400 shares at an asked price of ¥501 and a sell order of securities company D for 200
shares at an asked price of ¥501.
c. If securities company K places a sell order for 500 shares at an asked price of ¥499, a contract can be concluded
by matching it against a buy order of securities company F for 300 shares at a bid price of ¥499 and a buy orderof securities company G for 200 shares at a bid price of ¥499.
d. As a result, the following trading agreements can be concluded
Selling securities company
Buying securities company
Contracted priceNo. of shares
Securities company A
Securities company M¥500
200 shares
Securities company A
Securities company N
¥500
100 〃
Securities company B
Securities company N
¥500
300 〃
Securities company C
Securities company N
¥501
400 〃
Securities company D
Securities company N
¥501
200 〃
Securities company K
Securities company F
¥499
300 〃
Securities company K
Securities company G
¥499
200 〃
e. In such a manner, asked and bid prices are offered without interruption during the session hours, and when buy
orders (sell orders) are matched against sell orders (buy orders), trading agreements are concluded.

Chap. X Financial Instruments Exchange, etc. (1)203

priority rule to find a single price that clears all market orders and meets certain other conditions.
Zaraba method: The Zaraba method is a system by which, following theestablishment of the opening price by the Itayose method, trades are executedin a continuous auction, in principle, through the end of a session. Throughthis method, a newly placed buy/sell order is matched against the existingsell/buy order that has the highest precedence based on price priority andthen on time priority in order to determine the execution price.
8. The Stock Trading System (2)While most of the transactions are effected during the trading sessions, stock
exchanges introduced complementary off-auction trading systems in the second half of the 1990s to accommodate need of executing block trades or basket trades.
During the initial period that followed the introduction of these systems,
the systems were used solely for executing cross transactions (buy and sellorders by the same trading participant) due in part to the restriction that required orders to be placed via fax. However, the Tokyo Stock Exchange automated its off-auction trading system to improve efficiency and convenience
with the introduction of ToSTNeT in June 1998 and expanded its trading system by adding new classes of transactions.
After that, in January 2008, further classes of transactions were added andtrading hours were extended, making the market independent from trading
sessions. Regarding single stock trading and basket trading, in August 2020
and May 2021, various measures were put in place to improve the system inline with the diversification of the transaction needs of investors, for instancethrough the expansion of the range of settlement dates that can be specified.
ToSTNeT, the off-auction trading system of the Tokyo Stock Exchange,
accommodates the following four types of transactions: single-stock trading,basket trading, closing-price trading, and off-floor corporate share repurchases.
Single-Stock Trading: Under the single-stock trading system, investors
can effect transactions in an individual stock issue at a price within plus-minus 7% (¥5 when 7% of the price is less than ¥5) of the last price of the issue
on the floor or some other reference price as specified.
Basket Trading: The basket-trading system enables investors to trade baskets of a minimum of 15 stocks worth at least ¥100 million in aggregate value within plus-minus 5% of the value of the basket based on the last prices of
the component issues on the floor or some other reference prices as specified.
Closing-Price Trading: Under the closing-price trading system, off-auc-

Ratio of off-floor/floor trading volumes

Off-floor trading

Floor trading

2

01 04 07 10 01 04 07 10 01 04 07 10 01 04 07 10 01 04 07 10 01 04 07 10 01 04 07 10 01 04 07 10 01 04 07 10 01 04 07
2. 2. 2. 2. 3. 3. 3. 3. 4. 4. 4. 4. 5. 5. 5. 5. 6. 6. 6. 6. 7. 7. 7. 7. 8. 8. 8. 8. 9. 9. 9. 9. 0. 0. 0. 1. 0. 1. 1.
01 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2

0

5,000

10,00015,00020,00025,00030,00035,00040,00045,000(billion yen)
50,000Chart X-7. A Comparison of the Trading Value of Floor Trading and Off-Floor Trading of the Tokyo Stock Exchange

0.0

5.0

10.0

15.0

20.0

(%)
25.0

204
Chap. X Financial Instruments Exchange, etc. (1)Chap. X Financial Instruments Exchange, etc. (1)205tion orders of investors are matched, in principle, based on time priority before the morning and afternoon sessions and after the afternoon sessions at
the closing prices of the preceding session (i.e., the closing prices of the previous day, those of the morning session, or those of the afternoon session) or
some other reference prices as specified.
Off-Auction Corporate Share Repurchases: Orders for share buyback
are executed before the morning session at the previous day’s closing prices
or some other reference price as specified. Buyers eligible for the facility are
limited to listed companies that intend to repurchase their own shares.
9. The Clearing and Settlement System (1)Securities trading executed on the exchanges is cleared and settled throughthe Japan Securities Clearing Corporation (JSCC). Since January 2003, when
JSCC was established all the clearing and settlement for securities trading
carried out at each exchange have been unified under the JSCC.
The main functions performed by the JSCC are (1) to assume obligations,(2) to net shares and funds to transfer, (3) to instruct book-entry transfer, and(4) guarantee settlement.
(1) Assuming obligations: Upon the execution of a transaction on a stock
exchange, the JSCC assumes the obligations of both the buyer and the seller
against the other party (for the seller to deliver the securities sold and for thebuyer to make payment for them) and, at the same time, acquires claims corresponding to both obligations. Thus, the JSCC takes up the role as the counterparty for claims and obligations. It helps enhance the efficiency of settlement operations on the part of clearing participants (those who are qualified
for handling clearing and settling securities transactions through the JSCC)
because the JSCC is the single settlement counterparty.
(2) Netting: The JSCC mutually offsets (nets) volumes bought and sold,and proceeds and payments, and settles the net balance. This streamlines
fund payments and securities transfers required in the settlement procedures.
(3) Book-entry transfer instructions: The JSCC, after determining thesettlement amount through netting, instructs the Japan Securities Depository
Center, the settlement organization, to make transfers of securities, and the
Bank of Japan or the fund settlement bank designated by JSCC to make thetransfer of funds.
(4) Making settlement guarantees: Even in the case of a clearing participant failing to settle a trade, the JSCC performs and guarantees the settlement
as the settlement counterparty against any other clearing participant. Thanks
to this settlement guarantee, parties can trade securities without being concerned about the settlement default risk on the part of the original trade coun-

206

Chap. X Financial Instruments Exchange, etc. (1)Chart X-8.

Delivery and Settlement Using JSCC (Exchange Transactions)Tokyo Stock
Exchange

Nagoya Stock
Exchange

Fukuoka Stock
Exchange

Sapporo Stock
Exchange

PTS

Trade
contract

Tradecontract

Tradecontract

Tradecontract

TradecontractTradeverificationTradeverificationTradeverificationTradeverificationTradeverification

JSCC
Acceptance of obligation
Centralcounterpartyfunctions
Guarantee
payment

Clearing participant
Netting
Instruction to transfer

Clearing participant

Designation

Clearing participantMarket participants
other than clearing
participant (nonclearing participant)Book-entry transfer instructions

Fund transfer instructions
DVP settlement(delivery of securities and payment of proceeds are linked)

Central Depository

Account ofclearing
participants

Account ofclearing
agencies

Settlement Bank

Account ofclearing
participants

Account ofclearing
participants

Account ofclearing
agencies

Account ofparticipants* The Clearing Agency is referred to as the Central Counter Party (CCP). It stands between the buyer andseller and acts as the settlement counterparty for both parties.
* Transactions by non-clearing participants (market participants other than clearing participants) are settled
by clearing participants designated in advance by the non-clearing participants.

terparties.
Since its inception, the JSCC has expanded the scope of its clearing andsettlement services, adding on offering services for securities traded on proprietary trading systems (PTSs) in 2010. After the global financial crisis,
moreover, the regulatory reform of OTC derivatives trading has advanced
around the world, with each country obliged to clear and settle standardized
OTC derivatives trading through a central clearing house (central counterparty clearing).
The JSCC commenced clearing and settlement services for credit default
swaps (CDS) transactions in July 2011 and for interest rate swaps in October
2012. In October 2013, the JSCC merged with the Japan Government Bond
Clearing Corporation and thereby added OTC JGB transaction clearing andsettlement services. Then, alongside the transformation of Japan ExchangeGroup into a comprehensive exchange, the merger of JSCC and the Japan
Commodity Clearing House in July 2020 enabled the start of clearing services for commodity derivatives transactions, including precious metals.

Chap. X Financial Instruments Exchange, etc. (1)Chart X-9.
Clearing
participants

207

Delivery and Settlement Using JSCC (OTC Derivatives Transactions)
OTC market(CDS and interest rate swaps)

Contract
concluded

Verification platform

Verification andassumption of
obligation

Clearing
participants/
Non-clearing
participants*1

Contract
concluded

Verification andassumption of
obligation

Post-verificationtransaction data

JSCC
Notification of
obligation
assumption
status anddeposit amount,etc.
Deposit andreturn, etc.,
of collateral

Obligation assumption(implemented after verification of
appropriateness, etc., of transaction)

Settlement
guarantee• Position management• Calculation of initial
margin, variation
margin, clearing fund,etc.
• Collateral management

Notification of
obligation
assumption
status anddeposit amount,etc.
Deposit andreturn, etc.,
of collateral

Settlement instructions
Bank of Japan

Account ofclearing
participants

Account ofBank of Japan

Account ofclearing
participants*1 Non-clearing participants commission
clearing participants to clear theirtransactions, carrying out requests forobligation assumption, receiving information
on margins, and applying for deposit andreturn of collateral through their designatedclearing participant.
*2 Interest rate swap transactions denominatedin foreign currencies are settled by funds atcommercial banks.

10. The Clearing and Settlement System (2)With a view to eliminating the risk involved in the settlement of transactionsin shares (and other securities handled by the Japan Securities Depository
Center), in general, and the risk of a default in the payment of the principal,
in particular, after the delivery of underlying securities, the JSCC has introduced a delivery-versus-payment system (DVP settlement system).
DVP settlement links the exchange of securities and funds, whereby securities are delivered on the condition that payment is made and vice versa.
This ensures that the transaction does not fail even if payment default occurs.
DVP settlement by JSCC takes place on the third business day counting
from the trade date (T+2) for transactions of shares and convertible bonds
with new share reservation rights (CB) issues handled by the Japan Securities
Depository Center on exchanges and PTS where obligation is assumed.
Under the DVP settlement system, a buyer basically cannot take deliveryof shares until such time as payment from them (via fund transfer) has beenverified. This, however, could undermine the overall efficiency of settlement,
including payment and delivery between clearing participants and customers.

208

Chap. X Financial Instruments Exchange, etc. (1)Chart X-10.

DVP Settlement Timetable

DVP Settlement
9:00
13:00
Securities settlement＊Seller’s clearing participant ⇒ JSCC (securities delivery)(Night batch
transfer)

14:15 14:45

Securities delivered to JSCC as soon as balance
appears in seller’s clearing participant’s accountSecurities settlement deadline (delivery) ▲＜Fail Determined＞＊Buyer’s clearing participant ⇒ JSCC (securities receiving)(Night batch Transfer is effected by JSCC, which holds the deposit for facilitation of DVP
settlement and delivers the securities, based on the status of the exchange,transfer)
deposit of provisional net purchase amount, and additional payment.
Cash settlement provisional net purchase amount (cash collateral) deposit cut off≧△ Additional payment cut off≧▲ ▲≦cash received
Note: The receiving of securities by the buyer’s clearing participant is carried out in a way that eliminates
the risk of principal default versus the cash payer JSCC through nonperformance of obligations orof delivery of collateral.

Chart X-11.

The DVP Scheme (normal setllement)

Japan Securities Clearing Corporation

Securities company X–13:00 hours (a)B shares (¥1.2m) (v)after delivery of A sharesand transfer of an estimatedpurchase money

Cash (estimated purchasemoney) ¥300,000 (iv)
–13:00 hours (a)AB¥

A shares (¥900,000) (iii)
after delivery of B shares
B shares (¥1.2m) (ii)
–13:00 hours (a)Funds (purchase money)¥300,000 (vii)
14:45 hours (c)Timetoestablish the amount(vi)
of purchase money

Securities company Y

A shares (¥900,000) (i)Collateral

Deadline for settlement:
a. Deadline for the delivery of securities and the deposit of the estimated purchase money(cash collateral): 13:00
b. Deadline for the payment of purchase money: 14:15
c. Time for the receipt of purchase money: 14:45(i) Securities company X delivers A shares while (ii) securities company Y delivers B shares to
JSCC by 13:00.
(iii) Securities company Y can receive A shares after delivering B shares to JSCC.
(iv) Securities company X deposits the estimated purchase money to JSCC by 13:00.
(v) Securities company X can receive B shares after (i) and (iv) have been executed.
(vi) JSCC appropriates the estimated purchase money for the payment relating to funds settlement
at the time the amount of the purchase money is finalized.
(vii) Securities company Y receives the funds (purchase money) at 14:45.

Chap. X Financial Instruments Exchange, etc. (1)209Therefore, JSCC has established a mechanism for early receipt of securities. It allows the buy-side clearing participant to receive securities prior tothe completion of funds settlement on deposit of cash or securities equivalent
to the value of the securities to be received as collateral.
Also, in the event that a sell-side clearing participant should fail to delivera security by the settlement deadline on the settlement date (known as a), the JSCC will carry over the delivery of and payment for the securi“fail”
ties to the following day, with delivery and payment settlement netted off
against delivery and payment of securities scheduled for that day.
However, since settlement is in principle due on the settlement date, there
are mechanisms in place to prevent repeated fails, such as late payment penalties against clearing participants if a fail occurs or a buy-in (right of a participant who has suffered a fail to request compulsory purchase and deliveryof the securities concerned).
11. The Book-Entry Transfer System for Stocks, Etc.
Administration of shareholder ownership rights, etc. of listed companies isperformed by the book entry transfer system of the Japan Securities Depository Center, Inc. (JASDEC), the central depository for shareholder ownershiprights, and transfer accounts set up by securities firms, etc. which are accountadministrators. Previously, administration was carried out on the premise of
the existence of share certificates, etc.; now this is done electronically sinceshare certificates were dematerialized in January 2009 through the digitization of the share certificates.
Securities eligible for the book-entry transfer system for stocks, etc., include stocks listed on domestic public exchanges; convertible-type corporate
bonds (CB); investment units, such as real estate investment trusts (REIT);
and preferred shares of cooperative financial institutions, subscription rights/
warrants, beneficiary certificates of exchange-traded funds (ETFs), Japanesedepositary receipts (JDR), and others.
The features and functions of the book-entry transfer system for stocks,
etc., are as follows.
(1) Shareholders’ownership rights are administrated based on the recordsof the transfer account book, with transfers of shares being processed throughthe transfer account. (2) Account administrators inform JASDEC of the identification of beneficiary shareholders, including their names and addresses
along with their share ownership data. JASDEC then compiles the information to periodically report to respective issuers (general shareholder notification). (3) Issuing companies produce their records of voting rights for general
meetings of shareholders and retained earnings distributions based on a reg-210

Chap. X Financial Instruments Exchange, etc. (1)Chart X-12.

Relationships Among Participants, JASDEC and Issuers in the Book-Entry
Transfer System for Stocks, etc.

Issuing company
Transferring institution (JASDEC) (4) Notice on shareholder(Book-entry Accountand number of shares (Shareholder Register Controller)(5) Creation of Shareholder Register
Register)(2) Recording ofshares in theaccount(3) Notice on shareholder
and number of shares

Account administrator(securities company, bank, etc.)(Book-entry Account Register)(1) Recording of sharesin the account

Subscriber(Shareholder)(6) Voting rights exercise(6) Various notices concerning the general
meeting of shareholders, etc.
(6) Dividend payment

ister of beneficiary shareholders drawn up from the general shareholder notification. (4) Minority shareholders, etc., can exercise their rights by applying
to JASDEC to have a notification sent to the issuer verifying their shareholdings, duration of ownership, and other particulars (individual shareholder notification). They can then exercise their rights for a limited period of time
following receipt of the notification.
The main benefits that are expected from transition to the electronic bookentry transfer system include:(1) shareholders can eliminate the risks of loss, theft, or forgery of certificates that are held at their own risk, and they also do not need to submit certificates to the issuer for replacement in the event of a corporate name changeor change in the share trading unit; (2) issuers can save costs associated withissuance, such as printing costs and stamp duties, as well as those associatedwith corporate reorganization (such events as corporate mergers, exchangesof shares, and stock transfers) for collecting old certificates and distributing
new ones; and (3) securities companies can reduce the risks and costs associated with the storage and transport of certificates.

Chap. X Financial Instruments Exchange, etc. (1)Table X-10.

211

Major Changes in the System Before & After Implementation of Electronic
Share Certificate System
Central Depository and Book-Entry Trans- Book-Entry Transfer System (current)
fer System (before dematerialized)

Sharecertificates• Share certificates• No share certificates• Share certificates deposited with JASDEC
are centrally stored at JASDEC and issued upon request• Share certificates outside the Book-Entry
System are kept individually by owners

Attributionof rights• Presumption of rights on stock by owner- • Presumption of rights regarding stocks
ship of share certificates (outside the recorded in the book-entry account register
Book-Entry System)• Party recorded in the account register isregarded as the owner of share certificates

Form of• Managed by shareholder register (outside • Uniformly managed by shareholder registershareholder
the Book-Entry System)
management • Managed by substantial shareholder reg- • JASDEC performs name-based aggregaister (within the Book-Entry System)tion and notifies the shareholder register• Name-based aggregation of shareholders controller
is performed by the shareholder register
controller
Transfer ofstocks• Issuance of share certificates (outside the • Account transfer
Book-Entry System)• Account transfer (within the Book-Entry
System)12. Computerized Trading and Clearing Systems of the Financial
Instruments Exchange (Stock Exchange) (1)The following is a summary of the electronic stock trading system and thesettlement and clearing system that maintain the stock market.
In the cash market of the Tokyo Stock Exchange (TSE), the stock trading
system processes stocks, corporate bonds with subscription rights/warrants,
etc. (convertible bonds), and other transactions during the trading sessions
and the off-auction ToSTNeT market. Orders from a trading participant are
mainly entered through the trading participant’s in-house system or through a
direct connection to the TSE’s trading system.
The computerization of securities trading at the TSE started with CORES(Computer assisted Order Routing and Execution System) (the old stock
trading system) that was introduced to the Second Section in January 1982.
The current stock trading platform consists of arrowhead, renewed in November 2019 for enhanced functionality and improved performance, and theTrading Systems

OTC Clearing
SystemJGB Clearing
SystemDerivatives
Clearing System

Cash Equities
Clearing System

ISC(Index & Statistics
Calculation)

ToSTNeT(Off-Auction)

J-GATE(Futures/Options)arrowhead(Cash Equities)

UpgradeFeb. 2018

Shorten settlement cycle

May 2018
New Function

LaunchFeb. 2018

PartialReplacement

Feb. 2018

UpgradeSep. 2015

UpgradeMar. 2017

UpgradeJul. 2016

UpgradeSep. 2015

FY2018FY20202Q FY2022

Work for new
secondary center(Including work for new
secondary center)
3Q-4Q FY2022

Replacement

Work for new
secondary center

3Q-4Q FY2022

Upgrade/Shorten
settlement cycle

3Q-4Q FY2022

2Q FY2022

Work for new
secondary centerWork for new
secondary centerWork for new
secondary center

4Q FY2021

2Q FY2022

FY2022～Work for new
secondary center(Including work for new
secondary center)

Replacement

Sep. 2021

FY2021

Replacement

Jul. 2019

Replacement

Nov. 2019

Replace hardware

Replacement

Nov. 2019

Expand risk management function/
Improve trading rules, etc.

Replacement

Nov. 2019

FY2019Chart X-13. System Integration Schedule of Japan Exchange Group, Inc.

Source: IT Master Plan, Japan Exchange Group, April 2021

Clearing Systems

212
Chap. X Financial Instruments Exchange, etc. (1)Chap. X Financial Instruments Exchange, etc. (1)213

ToSTNeT system.
With the basic policy of enhancing three features—reliability, convenienceand processing capacity—arrowhead was renewed in order to accommodate
the further development of electronic trading, a continuing increase in thenumber of orders, and other changes in the market environment as well as torespond better to risks that the development of electronic trading can createon the market. The ToSTNeT system was also renewed with the basic policyof expanding the processing capacity and increasing convenience.
The market information system, which had been serving the role of disclosing marketing information, was integrated into arrowhead when arrowhead was renewed in 2015.
The Japan Exchange Group, Inc. (JPX) commenced operations in January
2013. In July 2013, it amalgamated the cash equity markets of the TSE andOSE while also integrating the stock and CB trading system of the OSE into
the TSE’s arrowhead and ToSTNeT systems.
The settlement and clearing system for stocks and CBs is designed to support delivery and other operations for the settlement and clearing of transactions executed on the TSE and other markets. Since January 2003, the JSCC
has acted as the cross-market clearing organization for all domestic exchanges. Also in terms of the settlement and clearing system, the OSE’s system
was integrated into the TSE’s platform in November 2014. The system was
upgraded in July 2019 in line with the shortening of the settlement period forstocks and other securities.
The data for this process from trading participants, etc., is passed throughthe TSE’s dedicated network arrownet.
13. Computerized Trading and Clearing Systems of the Financial
Instruments Exchange (Stock Exchange) (2)The following is a summary of the trading system and the settlement andclearing system that support the derivatives market.
The derivatives trading system is a system for entering and matching orders, preparing transaction reports, and inquiring into the state of the order
book, etc., of the derivatives market of the OSE. The system processes futures, options, and other transactions during the trading sessions and the offauction market. Orders from a trading participant are mainly entered throughthe trading partner’s in-house system or through a direct connection to theTSE’s trading system.
The OSE’s trading system for derivatives, J-GATE, has the same functions
and transaction formats as the systems used by major overseas markets. In
introducing the system which began operation in February 2011, the OSE re-Source: IT Master Plan, Japan Exchange Group, April 2021

Other Systems

3

AP

Trading Systems

Secondary Center

Back-up
OfficeOptical Ring Network

arrownet

Other Systems

Clearing Systems

Trading Systems

Clearing Systems

2

AP

1

AP

Primary CenterTokyo Stock
Exchange(Kabuto-cho)

Osaka
Securities
Exchange(Kitahama)

Securities Cos.
and Other Users

Chart X-14. Image Diagram of Japan Exchange Group’s System (as of April 2021)

214
Chap. X Financial Instruments Exchange, etc. (1)Chap. X Financial Instruments Exchange, etc. (1)215

viewed the complex transaction system peculiar to Japan to address the shift
among investors to algorithmic and other advanced and diversified trading
methods.
Following the launch of JPX in January 2013, the derivatives markets of
the TSE and the OSE were amalgamated on the OSE market in March 2014,
with the trading systems integrated into J-GATE. The J-GATE network wasalso consolidated into arrownet in September 2014.
In July 2016, the system was updated with NASDAQ’s Genium INET
Trading as the base with a view to further increasing stability and reliability
as well as promoting liquidity. In September 2021, the system was updated toenable the addition of flexible products and functions, and to further improvesystem reliability and convenience.
Although the OSE had been using the OSE clearing system while the TSE
used the JSCC clearing system, the clearing organizations were integrated
into the JSCC in July 2013 and all margin operations relating to derivatestrading have since been processed on the JSCC clearing system. Subsequently, in November 2014, clearing and settlement operations were also integrated into the JSCC clearing system. In February 2018, partial replacements
were made for the settlement and clearance function for futures options transactions.
In July 2020, following the merger of the Tokyo Commodity Exchange(TOCOM) and its clearing organization, the Japan Commodity Clearing
House (JCCH), clearing and settlement operations for commodity derivatives
were integrated into the JSCC clearing system.

CHAPTER XI
Financial Instruments Exchange, etc. (2)1. An Outline of the OTC Stock Market(1) What is OTC trading?
In addition to shares traded on stock exchanges, shares are also traded overthe counter. As only those listed issues that meet certain listing standards may
be traded on exchanges, shares that are not eligible for exchange trading need
to be traded elsewhere, outside exchanges. Such shares are traded between
securities companies serving as brokers/dealers or between customers andbrokers/dealers over the counter in negotiated transactions known as“overthe-counter (OTC) transactions.”While trading and other activities of listed
shares are regulated by the relevant stock exchanges, OTC stock trading executed through securities companies is regulated by the“Rules Concerning
Over-the-Counter Securities”of the Japan Securities Dealers Association(JSDA) and by other rules.
OTC transactions include transactions in unlisted shares (including unlisted shares issued by listed companies); transactions effected in the OTC securities market; and off-exchange transactions in exchange-listed shares.
(2) An Outline of the OTC Stock Market
As OTC trading becomes active, information about quotes and prices is exchanged among securities companies and distributed to investors, and themarket becomes more organized. After the war, OTC trading remained active
even after the reopening of stock exchanges. In 1961, actively traded OTC
issues were moved to the Second Section of the stock exchanges, but stocks
continued to be actively traded over the counter to such an extent, in fact,that an OTC stock market, an organized market where OTC securities thatmeet the registration requirements of the JSDA are traded, was launched in
February 1963.
As solicitation for investments was restricted in the early years, the OTC
stock market was generally characterized as a market for the liquidation ofstock holdings. To remedy the situation, the legal framework was enhancedby the 1971 amendment to the Securities and Exchange Act, and, in 1983, theChap. XI Financial Instruments Exchange, etc. (2)Table XI-1.

217

A Brief History of the OTC Market

1945 Group trading in shares emerges spontaneously after the war.
1949 A system of trading in OTC-authorized issues is launched in June under the rules of the JSDA.
1961 The stock exchanges create the Second Section, into which OTC-authorized issues are absorbed, and the OTC authorizing system is terminated.
1963 The OTC registration system is launched in February.
1976 The OTC market broker, Japan OTC Securities, Inc., is established.
1983 A new OTC Stock Market (the JASDAQ market) is launched in November.
1991 The JASDAQ system comes into operation.
1992 The Prohibited Acts Rule is applied to the JASDAQ market.
1997 The green sheet system is launched.
1998 The JASDAQ market becomes the OTC securities market for the purpose of the Securities andExchange Act (currently, the Financial Instruments and Exchange Act).
2001 Japan OTC Securities changes its name to JASDAQ, Inc., and takes charge of the market.
2004 The JASDAQ market becomes a securities exchange in December and the OTC securities market is closed.
2005 Green sheet issues become“to-be-handled securities”for the purpose of the Securities and Exchange Act in April, and the regulations of insider trading are applied to green sheet issues.
2008 The Phoenix issue system is spun off from the green sheet system into an independent system.
2015 Equity Crowdfunding Scheme and Shareholders Community System are established in May.
2018 The Green Sheet system is abolished in March.

OTC stock market was defined as a market that complements exchange markets and was reorganized drastically into the JASDAQ market for trading
shares of mid-tier small-to-medium sized enterprises with reasonable trackrecords. The JASDAQ market has since grown larger as a market for emerging companies, and it was redefined as an“OTC securities market”under the
Securities and Exchange Act in 1998. But the designation of“OTC securities
market”exists only in law following the upgrading of the JASDAQ market
into the JASDAQ Securities Exchange in December 2004.
Because a need arose for trading unregistered or unlisted stocks also
outside the JASDAQ market, the JSDA established the green sheet system inJuly 1997, Following the abolishment of the green sheet at the end of March
2018, JSDA created the crowd funding system for equities along with theshareholders community system in May, 2015.

218

Chap. XI Financial Instruments Exchange, etc. (2)2. OTC Securities, Etc.
(1) Unlisted/Unregistered Issues
Issuers of unlisted or unregistered stocks are not required by law to disclose
their corporate information, and, in principle, JSDA rules prohibit securities
companies from soliciting investment in such issues. This is because soliciting the investing public, including individual investors, for an order to buy orsell a security on which no pertinent corporate information is available would
subject the public to significant risks and cause various problems from thestandpoint of the protection of investors, and such self-regulatory rules havebeen in place for a long time.
However, brokers/dealers may accept unsolicited orders for such issues
and trade them with customers as OTC securities in negotiated transactions.
The rules pertaining to such transactions (including those prohibiting themfrom accepting market orders or affecting when-issued or margin trading) arecontained in the Rules Concerning Over-the-Counter Securities of the JSDA.
The April 2004 amendment to the Securities and Exchange Act authorized
a company to issue an equity product in private placements limited to qualified institutional investors. Under this amendment, securities companies areallowed to solicit only Qualified Institutional Investors for the purchase ofsuch shares on the condition that they do not resell their holdings to anyone
other than Qualified Institutional Investors.
(2) OTC-handled Securities
Securities whose issuers regularly disclose specified corporate information in
the form of an Explanatory Note on Business Conditions are considered tocarry less risk than other unregistered issues. And the rules of the JSDA define them as“over-the-counter-handled securities,”regarded as candidate securities to be eligible for solicitation.
An Explanatory Note on Business Conditions is a type of disclosure material required by the JSDA and prepared in accordance with the format for the“corporate information”section of a securities report pursuant to the Financial Instruments and Exchange Act. It shall be accompanied by annual financial statements with an audit report that includes the opinion of certified public accountants or persons with equivalent designation that the company’sfinancial statements are unqualified or qualified in light of the provisions of
the Financial Instruments and Exchange Act or in conformity with those of
the Companies Act. Such explanatory note shall also contain forward-looking
statements as to the outline of the company’s business plan, its feasibility,
and other aspects. In the case of a company in compliance with periodic disclosure requirements, a securities report or a securities registration statement

Chap. XI Financial Instruments Exchange, etc. (2)Chart XI-1.

219

Relationships Between OTC Securities and Listed/Registered Issues
Financial Instruments Exchange Markets: Listed issues(Tokyo, Nagoya, Sapporo, and Fukuoka)

OTC securities market: Registered issues(At present, the market is not open)

OTC securities
OTC-handled securities

Equity CrowdFunding

Shareholders Community

Shares and other securities
issued by companies incompliance with periodic
disclosure requirements or
those disclosing specified
corporate information in an
Explanatory Note on business Conditions

A scheme in which solicitation for investment is performed only via the Internet
website and email

A scheme in which the securities companies designated by the JSDA may solicit investment only fromparticipants of the shareholders community

Phoenix issues(At present, there is no issue)

Restrictions apply in termsof the amount of funds
raised per issuer and theamount of investment perinvestor

Tradable securities under
the Financial Instruments
and Exchange Act
Issues for which securities companies that havebeen designated by the
JSDA present quotations
and solicit investmentswith an unqualified or qualified opinion of the auditor can be substituted for
the Explanatory Note on Business Conditions.
At present, the ban on solicitation for the purchase of OTC-handled securities is partially lifted for primary or secondary offerings of securities on thecondition that the transfer of such shares is restricted for two years based on
an agreement among the issuer, securities companies, and investors and thatthe issuer publishes an Explanatory Note on Business Conditions. The ban isfully lifted for unlisted securities of listed companies based on the condition

220

Chap. XI Financial Instruments Exchange, etc. (2)that the issuer publishes an Explanatory Document on Securities Information,etc.
3. OTC securities transactions for the purpose of transferring management control, etc.
(1) Transactions in OTC securities for the purpose of transferring management control, etc.
As described previously, securities companies are prohibited in principle
from soliciting investment for OTC securities under JSDA rules. On the other
hand, business succession has recently become a social challenge for nonlisted companies. Based on these circumstances, the ban on solicitation of investment for trading OTC securities for the purpose of transferring management control, etc., including business succession, was lifted in August 2019.
Transactions of OTC securities for the purpose of transferring management rights, etc. refer to a series of transactions in OTC securities, or an intermediary service thereto, aimed at both acquiring a majority of the voting
rights of all shareholders of the issuing company and enabling the purchaser
or a person designated by the purchaser to take office as the representative of
the issuing company.
The principal requirements for such transactions are that securities companies must obtain consent from the issuing company concerning the attributesof prospective buyers and shall tell prospective buyers that they have theright to carry out a pre-trade inspection of the issuer.
(2) Solicitation for investment in OTC securities for professional investors who can assess corporate value
The ban on solicitation of investment in OTC securities was lifted in November 2020 to professional investors who can assess corporate value, etc. in order to facilitate the supply of risk funding to new growing companies.
“Solicitation for investment in OTC securities for professional investors
who can assess corporate value”refers to allowing securities companies handling private placements (small private placements) and soliciting investment
from large-scale investors (corporate venture capital, overseas funds, etc.)
who are capable of assessing corporate value on their own under certain conditions.
The main requirements for such solicitation of investment are that securities companies obtain written representations and affirmations from theircustomers that they are solely responsible for their own assessment of corporate value and that securities companies provide the customers with information about the issuers.

Chap. XI Financial Instruments Exchange, etc. (2)221

Table XI-2.

Article 3-2 of the Rules Concerning Over-the-Counter Securities of theJSDA’s Self-Regulatory Rules
Main contents of the investment solicitation for transaction of Over-the-Counter
Securities for the purpose of transferring management control, etc.

1 . Can investment solicitation for transaction of Over-the-Counter Securities for the purpose of transferring management control, etc.
2 . To obtains the consent for the attributes, etc. of the customer who is subject to investment solicitation related to purchase from the issuer
3 . Due diligence• The issuer cooperates with the Due diligence• To explains for the candidate for purchase that Due diligence is possible• To provides a summary of the Due diligence results to the another customer who is subject toinvestment solicitation through the securities companies, etc. when the candidate for purchaseinvestigates
4 . Confirmation before transaction/Prior explanation• To confirms before transaction that there is the prospect that the purpose of transferring
management control, etc. set forth, etc. before transaction• To explain in advance that transaction is not executed when there is no prospect that the purposeof transferring management control, etc. set forth, etc.
5 . Reports to the JSDA before and after

Table XI-3.

Article 4-2 of the Rules Concerning Over-the-Counter Securities of theJSDA’s Self-Regulatory Rules
Main contents of the investment solicitation for Acquisition of Over-the-Counter
Securities which is made to professional investors who can evaluate the corporate value

Association members
1 . Can conduct investment solicitation for Over-the-Counter securities to professional investors who
are able to evaluate the corporate value on their own responsibility
2 . Must obtain written representations and warranties from customers that they will evaluate the corporate value of the issuing company on their own responsibility and will make an investment basedon such evaluation.
3 . Must provide following information of the company• The company profile• Business description• Financial information• In the case of private placemnts, future perspective
4 . Reports to the JSDA before and after

4. Equity Crowdfunding (1)(1) What is Equity Crowdfunding?
The term“crowdfunding”is a coined word composed of“crowd”and raisingfunds or“funding.”It refers to the practice of funding start-ups and growthcompanies by asking a large number of people to each contribute a small

222

Chap. XI Financial Instruments Exchange, etc. (2)Chart XI-2.

Concept Diagram of Equity Crowdfunding
Small-amount requirement (the total
amount of funds raised annually is
no more than ¥100 million)

Crowdfunding
providerExamination

Issuers

Payment of subscriptions

Entrustment of solicitation

Subscription, payment

Small-amount requirement (the total
amount of funds invested in the same
issuer is no less than ¥500,000)

Information provision

Investors

Table XI-4. JSDA’s Self-Regulatory Rules
Key components of the Rules Concerning Equity Crowdfunding Operations
1 . Solicitation for investments conducted by members of the JSDA (securities companies and Type I
Small Amount Electronic Subscription Handling Agents) under the equity crowdfunding scheme ispermitted as an exception to the prohibition of investment solicitation relating to unlisted stocks.
2 . Examination of issuers and measures to eliminate antisocial forces
3 . Indication of equity crowdfunding deals on the website
4 . Issuance of document prior to conclusion of contract
5 . Request for letter of intent from investors purchasing unlisted stocks for the first time under the equity crowdfunding scheme
6 . Small-amount requirements (total amount of funds raised per issuer: less than ¥100 million a year;
investment per investor for one issuer: no more than ¥500,000 a year)
7 . Prohibition of simultaneous use of solicitation method other than the Internet (e.g., telephone andface-to-face contact)
8 . Conclusion of an agreement to the effect that the issuer provides proper information on a periodicalbasis to investors after the completion of handling of investment under the equity crowdfunding,and confirmation of information provision
9 . Establishment of an operation management system
10. Reporting and publication of monthly results

Chap. XI Financial Instruments Exchange, etc. (2)223amount of money, often performed via Internet-mediated registries.
With the use of the Internet, crowdfunding makes it possible to raise funds,
even on a small scale, at low cost and over a wide range by collecting a small
amount of money from a large number of contributors. Thus crowdfunding,primarily the purchase-type and lending-type, has rapidly become a popular
option for raising funds in the last few years. Given the circumstances, an equity crowdfunding system was introduced in May 2015 with a view to promoting provision of risk money to start-ups and growth companies and enabling such companies to raise capital by issuing OTC securities.
The equity crowdfunding scheme may be used only by securities companies and intermediaries specializing in small-amount equity crowdfunding(Type I Small-Amount Electronic Public Offering Service Operators) that areregistered as Type I Financial Instruments Business Operators.
(2) Small Amount Requirements and Prohibition of Concurrent Use ofUnspecified Solicitation Methods
In light of the nature of the equity crowdfunding scheme of raising a small
amount of funds from each of a large number of investors, certain restrictions
apply in the equity crowdfunding system. The amount of funds raised per issuer must be less than ¥100 million per year and the amount of funds contributed per investor to an issuer must not exceed ¥500,000 per year. In addition,
considering that investment frauds involving unlisted stocks and corporate
bonds continue to take place, the method of solicitation for investment is limited to using (i) the website and (ii) email assuming the use of the aforesaid
website, and solicitation by telephone and visits by securities companies, etc.
are prohibited.
(3) Examination of Issues and Issuers
In handling OTC securities using the equity crowdfunding scheme, securities
companies, etc. may handle such issues as deemed proper after careful examinations of issuers, the nature of their business, financial standing, appropriateness of business plan, intended use of funds, etc. in accordance with theirinternal rules. Securities companies, etc. also enter into a contract with eachissuer to the effect that the issuer is not an antisocial force, and must not use
an equity crowdfunding scheme if it is recognized that an issuer corresponds
to an antisocial force.

224

Chap. XI Financial Instruments Exchange, etc. (2)5. Equity Crowdfunding (2)(4) Provision of Information via Website and Receipt/Delivery of Documents
While using the equity crowdfunding system, securities companies, etc. must
provide information on issuers and fund raising as well as on risks, etc. specific to the acquisition of OTC securities issued by the issuers (such as no
obligation to provide disclosure comparable to that prescribed by the Financial Instruments and Exchange Act or to the timely disclosure required bystock exchanges) via the website for perusal by investors.
Furthermore, in order to receive confirmation from investors purchasing
OTC securities for the first time under the equity crowdfunding scheme of
their understanding of risks, commission, etc. involved and of making the investment based on their judgment and responsibility, securities companies,
etc. must provide advance explanations of these matters, request a letter ofintent from each investor, and deliver the document prior to conclusion ofcontract containing at minimum the matters to be informed via the website
concerning individual issues for every investment handled.
(5) Periodical Subsequent Information Offering by Issuer
Securities companies, etc. must have an agreement with each respective issuer that it shall regularly provide appropriate information on its business after
the completion of equity crowdfunding.
(6) Reporting and Announcement of Investment Status
Securities companies, etc. must report the status of investments made underthe equity crowdfunding scheme on a monthly basis to the JSDA, and the
JSDA publishes the information reported.
(7) Business Control Measures by Securities Companies
Securities companies, etc. must formulate internal rules and put in place anbusiness control measures necessary for properly carrying out equity crowdfunding in conformity with laws and regulations and their self-regulatory
rules. In addition, securities companies, etc. are required to prepare an outlineof their equity crowdfunding procedure and publish it on the company’s website to enable investors to view the information.
When a securities company etc. violates laws and self-regulatory rules andis ordered to improve its business control measures, the securities company
can not be engaged in equity crowdfunding until the ordered improvements,
etc. are completed.

Chap. XI Financial Instruments Exchange, etc. (2)Chart XI-3.

225

Provision of information/receipt of written document on equity-based
crowdfunding (conduct by offer handling agent)
1 . To investors: Obligation to disclose information on website
1) Information on issues and issuers2) Information on financing
3) Risk information
4) Other

Table XI-5.

After the offer period
is closed

3 . To investors who become shareholders: Obligation to provide information- The issuer regularly provides appropriate information on the businessto investors who have become shareholders- The handing agent signs an information provision contract with the issuer in advance to confirm that the information is actually being provided.

Offer period

2-1. To subscribing investors: Obligation to issue document prior to conclusion of a contract
1) Information on issues and issuers2) Information on financing
3) Risk information
4) Other
2-2. To investors subscribing for the first time: Obligation to receive a confirmation note
- a document containing the contents of pre-contract document must be
delivered to the investors, and a confirmation note must be secured
stating that investors understand the risks and details of the transaction
and that they carry out the transaction at their own discretion and responsibility.

Handling of Equity Crowdfunding
As of December 31, 2021

Number of registered firms(companies)

Number of deals handled(deals)Amount of financing(¥1,000)

2016

—

—

—

2017

3

18

514,740

2018

3

59

1,470,395

2019

3

54

951,590

2020

6

100

2,179,624

2021

5

159

3,736,570

226

Chap. XI Financial Instruments Exchange, etc. (2)6. Shareholders Community (1)(1) What Shareholders Community is
The JSDA established the Shareholders Community System in May 2015 asa system for unlisted stock trading and fund-raising in place of the Green
Sheet system that was abolished at the end of March 2018.
Shareholders Community was established as a mechanism in which a securities company creates a shareholders community by OTC issue and accepts investments only from investors that proactively declare and participate
in the community. Since the scope of solicitation and trading is limited toparticipants of the Shareholders Community, and thus the distribution is limited the System is not subject to the application of insider trading regulations.
(2) Designation and Cancellation of Designation of Operating Members
In order for a securities company to create and operate a shareholders community, it must register with the JSDA and receive designation as an operating member. The JSDA may decide not to grant designation if the securities
company is found to be in violation of law or self-regulatory rules.
Cancellation of designation as an operating member is normally based ona notification submitted by the operating member. It may cancel the designation altogether or suspend the designation for a certain period of time even
without the aforesaid notification if, however, the JSDA finds that an operating member is in violation of law or self-regulatory rules, etc.
(3) Development of business management system
Operating members and securities companies intending to become operating
members must formulate internal regulations and put in place an business
management system necessary for properly operating shareholders communities. In addition, operating members are required to prepare an outline of
their shareholders community operating method, etc. and publish this outline.
(4) Prohibition of Solicitation for Participation in a Shareholders Community and of Solicitation for Investment
Operating members may not solicit investors who are not shareholders community participants to participate in a shareholders community or to make investments in principle. However, if an investor falls under any of the following categories: (1) shareholder of the issuer (2) officer or employee of theissuer (3) former shareholder or former officer or employee (4) relative of an
officer or employee, or (5) officer or employee of a group company of the issuer, the operating members can conduct solicitation regarding participationin the shareholders community.

Chap. XI Financial Instruments Exchange, etc. (2)Chart XI-4.

Basic Mechanism of Shareholders Community
Operating members(Securities companies)

Investment
solicitation

Investment
solicitation

Investment
solicitation

Internet

Telephone

Face-to-face

No solicitation for investment to investors
who are not participants

Table XI-6.

227

Shareholders
community

Investment
solicitation

Investment
solicitation

Investment
solicitation
Solicitation for investment to participantsin the shareholders community is OK

Major Components of the JSDA’s Self-Regulatory Rules regarding
Shareholders Community

1 . Securities companies construct a shareholders community for an unlisted stock. Investors intending
to invest in the unlisted stock participate in the shareholders com-munity.
• Assumed principal participants include officers and employees and their families of the issuer;shareholders and business partners of the issuer; and users and customers of the issuer’s business.
2 . Securities companies structuring and operating a shareholders community receive designation by
the JSDA as operating members.
3 . Solicitation for investment is allowed only toward investors who participate in a shareholders community.
• Solicitation for participation in a shareholders community is allowed only toward the executives
and employees of the issuer and the issuer’s shareholders and other company-related persons.
• Only limited information is available to investors who are not participants in the shareholders
community.
4 . Examination of issuers and measures to eliminate antisocial forces
5 . Investors participating in a shareholders community are provided with financial statements, business reports and other information based on the Companies Act in regard to the issuer.
6 . Issuance of document prior to conclusion of contract
7 . Investors who participate in a shareholders community for the first time are requested to submit aletter of intent.
8 . Establishment of an operation management system
9 . Weekly reporting and public disclosure of trades

228

Chap. XI Financial Instruments Exchange, etc. (2)7. Shareholders Community (2)(5) Examination of Issues and Issuers
In handling OTC securities for which a shareholders community is to be created, operating members may strictly examine each issuer and verify the nature of their business, etc. in accordance with their internal rules and handle
only such issuers as they find proper. Operating members shall enter into acontract with each issuer to the effect that the issuer is not an antisocial force.
(6) Provision of Information Regarding Shareholders Community Issues
and Receipt/Delivery of Documents
Operating members are to provide investors with the necessary information
on shareholders community issues in accordance with their level of involvement in the shareholders community (participation/declaration of participation in the shareholders community or otherwise; request for information orotherwise).
Furthermore, in order to receive confirmation from investors executing
OTC transactions of shareholders community issues for the first time on theirunderstanding of risks, commission, etc. involved and of making the investment based on their judgment and responsibility, operating members must
provide advance explanations of these matters, request a letter of intent fromeach investor, and deliver the document prior to conclusion of contract containing at minimum the risks specific to such OTC transactions and othermatters (e.g., no disclosure obligation comparable to the disclosure prescribed in the Financial Instruments and Exchange Act or to the timely disclosure required by stock exchanges is imposed) concerning individual issues, and explain the contents thereof.
(7) Handling of private placements, etc. of shareholders community issues
Operating members may not solicit investors who are not shareholders community participants to make investments in issues of a shareholder community in principle. However, small private placements may be made to investors
who are not participants in a shareholders community on condition that they
participate in the shareholders community and acquire the shareholders community issue. In this case, even if they have not yet joined the shareholders
community, they shall be deemed to be participants, and the provisions of (6)Provision of Information Regarding Shareholders Community Issues shallapply.
(8) Withdrawal from and Dissolution of Shareholders Community
Operating members shall perform the withdrawal procedure when notified byChap. XI Financial Instruments Exchange, etc. (2)Chart XI-5.

229

Provision of information and delivery/receipt of documents related toshareholders community issues (by operating members)
1 . For all investors: Disclosure obligation/provision of information
1) Name of issue
2) URL of issuer’s website (or telephone number, if the issuer does not have aparticular website)3) Benefits for shareholders (shareholder incentives)
4) If handling an offering, private placement or secondary distribution, the fact
thereof and the application period5) Type of business of the issuer
6) Location of the issuer’s head office7) Outline of the issuer’s business
8) Whether or not the issuer is obliged to submit a securities report
2 . For investors who request information: Provision of information
1) Public information on the issuer
2) Unpublished information on the issuer where the issuer has consented toprovide3) Information on previous contracts
3-1. For investors who have applied to participate in a shareholders community:
Obligation to provide information
1) Basic information on the issuer (business year, timing of annual general
meeting of shareholders, and record date of voting rights of annual general
meeting of shareholders)
2) Method of receiving information on issuers or inspecting such information
3-2. For investors participating in a shareholders community for the first time: Obligation to secure a confirmation note
- a document containing the contents of pre-contract document must be delivered and explained to the investors, and a confirmation note must be secured
stating that investors understand the risks and details of the transaction andthat they carry out the transaction at their own discretion and responsibility.
4 . For investors who execute transaction in shareholders community issues: Obligation to issue pre-contract documents
1) Issue pre-contract documents
2) Convey to participants that they may request explanations on the contents ofthe specified documents and materials (see 5)
5 . For investors participating in a shareholders community: Obligation to provide
information and make it readily accessible
1) Securities Registration Statement, Annual Securities Report, Quarterly Securities Report, Amendment Report
2) Without the above, Financial statements and business report* provided foe
in the Companies Act Information conforming to“Business risks, etc.”and“Overview of stock administration of the submitting company”of the Annual Securities Report and (if handling an offering, etc.) information conforming to“Securities information”of the Securities Registration Statement
3) Other information recognized as necessary by the operating member*Non-public companies are requested to comply with the requirements thatpublic companies are obligated under the Companies Act in preparing these
documents

230

Chap. XI Financial Instruments Exchange, etc. (2)Table XI-7.

Handling of Shareholders Community
As of December 31, 2021

Number of operating members(companies)

Number of portfolio issues(issues)

Trading amount(¥1,000)

2015

2

11

71,149

2016

3

13

441,599

2017

3

16

551,013

2018

5

20

499,065

2019

6

19

500,798

2020

6

21

2,497,624

2021

7

29

1,182,991

a participant of the shareholders community of the participant’s intent towithdraw or when there are other reasons as prescribed in the handling guide.
If an operating member’s designation is cancelled by the JSDA, the operating member must immediately dissolve all shareholders communities it operates.
(9) Special provisions related to intermediary services for delisted issues
With respect to issues that become shareholders community issues after delisting from a stock exchange, securities companies other than the operating
member of the shareholders community may solicit sales to customers on thecondition that they act as intermediaries, etc., for the operating member.
8. TOKYO PRO Market
The TOKYO PRO Market is a market for professional investors now operated by the Tokyo Stock Exchange (TSE). Its origin is the TOKYO AIM,
which was founded jointly by the TSE and the London Stock Exchange(LSE) in June 2009. TOKYO AIM, Inc., was originally operated as a partnership (ownership: TSE 51%; LSE, 49%). In March 2012, however, the TSE
acquired LSE’s stake and merged Tokyo AIM with the TSE in July 2012.
TOKYO AIM is operated under the professional investor market system provided for by the enactment of the December 2008 revision of the Financial
Instruments and Exchange Act (FIEA).
Placing orders on traditional exchanges is not limited to any special category of investor. The professional investor market system, conversely, restricts trading to specified investors and nonresidents. Where fund procurement is limited to professional investors, securities registration statements areChap. XI Financial Instruments Exchange, etc. (2)Table XI-8.

231

Overview of TOKYO PRO Market Listing System

Disclosure language• Japanese or English

Listing criteria• No quantitative criteria

Subject of evalua- • J-Adviser (Conducts review and check on listing eligibility on behalf of thetionexchange)
Period from listing • As a general rule, ten (10) business days
application to listing • (provided, however, that there is a check procedure by the exchange to J-Adviser 30 business days prior to application)
approval
Audit certification

Latest one (1) year

Internal control reOptional
port
Quarterly disclosure Optional• Professional investors (Note) and non-residents
Note: Professional investor refers to:Specified investors Qualified Institutional Investors (e.g., financial institutions); National government; Bank of Japan(Tokutei Toushika)
Specified investors(Tokutei Toushika)
Listed companies and corporations with paid-in-capi(may shift to general tal of no less than ¥500 million
investors)

Investors

Corporations other than specified investors
Individuals who meet specified requirements (total net“Deemed”specified worth/total financial assets expected no less than ¥300
investors
million and with experience of one year or more in
trading financial assets)

Chart XI-6.

Role of J-Adviser

Tokyo Stock Exchange
Certification of J-Adviser Qualification
Entrustment of listing screening andmanagement services

J－Adviser
Investigates and confirms listing eligibility on behalf of the TSE
Business due diligence

Legal due diligence

Conclude a “J-Adviser agreement”(cost and cancellation matters, etc.)

Financial due diligence

Judgment of listing eligibility;
Support after listing

Listing applicant company/Listed company

J-Adviser System Roles• The J-Adviser investigates and confirms listingeligibility for new listings (so-called listingexamination)• Provides continuous give advice and guidance toensure that listing eligibility can be maintainedeven after listing• Listing companies are obligated to maintain one(1) responsible J-Adviser at all times
 Requirements• The applicant company must have experience incorporate finance advisory operations (IPOs/
M&A) and stock offering support services, etc.,
have human resources well-versed in such areas ofbusiness and must be authorized by the exchange.
List of approved J-Advisers today(13 companies; in alphabetical order)• AIZAWA SECURITIES Co., Ltd.
• Daiwa Securities Co., Ltd.
• GCA FAS Co., Ltd.
• H.S. Securities Co., Ltd.
• IR Japan, Inc.
• Japan Investment Adviser Co., Ltd.
• Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
• Mizuho Securities Co., Ltd.
• Nihon M&A Center Inc.
• Nomura Securities Co., Ltd.
• Phillip Securities Japan, Ltd.
• SMBC Nikko Securities Inc.
• TAKARA PRINTING Co., Ltd.
*As of End of December 2021

232

Chap. XI Financial Instruments Exchange, etc. (2)not required, and issuers need only make public financial information, etc.
(called specified securities information), using the format and method stipulated by the TSE. Companies already listed on the exchange, moreover, neednot submit annual securities reports and need only make public financial information, etc. (issuer information), using the TSE-stipulated format andmethod. The submission of internal control system reports and quarterly disclosure is voluntary. By premising requirements on the fact that only professional investors—those capable of analysis and making investment decisions—will invest in the market, the cost burden of issuing has been reducedin comparison with traditional stock exchanges.
The statutory penalties for falsifying financial information, etc., and for insider trading apply as much to the professional investor market system on thereport of possession of large volume and tender offer systems. The page on
the right shows details of how the TOKYO PRO Market aims to provide a
flexible but disciplined market system for issuers and investors through the JAdviser system (approved adviser system) within the previously mentioned
legal framework. This operational method, which has the J-Adviser system at
its core, has been drawn substantially from the Nomad (Nominated Adviser)system of the LSE’s Alternative Investment Market (AIM). Under the system, specialists in corporate finance, etc., who have been approved as J-Advisers are required to guide a company through the admission process and tofulfill a duty to provide advice and instruction on timely disclosure and otherregulatory matters following listing.
As of December 31, 2021, the TOKYO PRO Market had 13 J-Advisersand 47 listed companies.
9. Market Making Scheme in the ETF Market
The TSE introduced a market-making scheme (hereinafter referred to as the“scheme”) in the ETF (Exchange Traded Funds) market on July 2, 2018 toimprove the liquidity of ETFs. Under the scheme, market makers who aredesignated by the exchange place constant orders on the basis of continuous
quote obligation as prescribed, thereby enabling investors to trade on a timely
basis at appropriate prices. The scheme covers all ETFs except leveraged/inverse ETFs. Market makers select at least five stocks and display quotes forthese.
Continuous quote obligation and incentives
Market makers can earn incentives in exchange for placing constant orders
on the basis of continuous quote obligations as prescribed. There are three
types of quote obligations: 1) the number of issues for continuous quoting, 2)

Chap. XI Financial Instruments Exchange, etc. (2)Table XI-9.

233

Overview of ETF Market Making Incentive Scheme

Category

Item

Description

TargetETFs
excluding Leveraged/Inverse ETFs

• ETNs and Leveraged/Inverse ETFs are notincluded in this scheme.

• Prop Deskof TSE Member Firm (Type 1 Financial Instruments/Foreign Securities Broker)
Prop Desk of TSE Trading Participant • Agency (Registered as Low Latency Trader)
Either can sign up as an ETF Market Maker.
Qualifications Or
The firm must apply through a TSE trading
Registered Low Latency Trader
participant to sign up as an agency market
maker.
• Dedicated Virtual Server is needed.
Obligation(Continuous
Quote
Obligation)

Incentives(1) Number of ETFs for Continuous • Must show quotes for at least the number of
Quoting
ETFs designated• At least 80% of the time during continuous
auction. Exempt from obligation during trading halts or Special Quote periods.

(2) QuotingTime(3) Spread & Minimum Quantity• Depends on type of ETF

1. Proportional to TradingValue• Price rate differs by liquidity (Average Trading Value).

2. Waiver of Access Fee• Access fee is partially waived for eligible issues.

3. Waiver of Virtual Server Fee• Server fee is partially waived when continuously quoting at least the number of ETFs
designated.

Source: Tokyo Stock Exchange, Inc.

Table XI-10.

Continuos Quoting Obligation and Delivers a of number of Incentives
As of October 1, 2021

Type

Issue

Maximum Bid-Ask Spread(whichever is larger)

A

ETFs tracking Nikkei 225, TOPIX,
or JPX Nikkei 400

20 bps OR 2 ticks

JPY 30 mil.

B

ETFs tracking domestic stocks
or REITs

50 bps OR 3 ticks

JPY 10 mil.

C

Foreign index ETFs

50 bps OR 3 ticks

JPY 5 mil.

D

Selected foreign index ETFs

80 bps OR 4 ticks

JPY 5 mil.

Source: Tokyo Stock Exchange, Inc.

Minimum Quantity(one leg)

234

Chap. XI Financial Instruments Exchange, etc. (2)Chart XI-7.

Quote Display Sample

Offer Volume (Value)

Offer price- With a quote of JPY 30 mil,as more offer quotes pile up,
JPY104 (the price to fulfil
the obligation) becomes theOffer price.
- Market Makers can use
multiple order/price levels
within the spread to fulfill theobligation.

Price

Bid Volume (Value)105

200,000 (20.8 mil.)

104

100,000 (10.3 mil.)

103
102
101

350,000 (35.7 mil)Bid price

Spread is 2 ticks/194bps**Spread=(Offer price–Bid price) /Mid (Offer and Bid)

Source: Tokyo Stock Exchange, Inc.

quoting time period, and 3) spread and minimum quantity. By fulfilling all, amarket maker can obtain incentives proportional to trading value and partial
exemptions on transaction costs. While incentives proportional to trading
value are set higher for less liquid/newly listed ETFs, none will be payablefor issues with a daily trading volume in excess of ¥5 billion. This is to encourage more participants in the market making of less liquid issues.
The constant orders placed by the market makers on the basis of continuous quote obligations lead to a narrowing of spreads and an increase in volumes for a number of issues on an ongoing basis in the auction market,
thereby providing an environment that is conducive to trading for investors.
Sponsored ETF Market Making Scheme
While the TSE scheme offers one-size-fits-all obligations and incentives
across the board to ensure equal treatment of each ETF in the same category,a sponsored ETF market making scheme is also being implemented whichenables asset managers to set their own additional quote obligations and incentives for market makers. It is expected to encourage more market makers
to sign up for issues that are harder to trade in and bringing in higher level ofquote obligations, leading to more liquidity in such ETFs.

CHAPTER XII
Financial Instruments Business (Securities Business)

1. Overview of Financial Instruments Business Operators (Securities
Companies) (1)The Financial Instruments and Exchange Act (FIEA), a comprehensive overhaul of the former Securities and Exchange Act, was fully enforced in September 2007. The FIEA defines the four financial instruments businesses: theType I Financial Instruments Business, Type II Financial Instruments Businesses, the Investment Advisory and Agency Business, and the Investment
Management Business. Securities companies are required to be registered as
Type I Financial Instruments Business Operators (Article 29 of the FIEA).
What has traditionally been known as the securities business corresponds toSecurities Services (Article 28, Paragraph 8) within Type I Financial Instruments. Other Type I Financial Instruments Business include OTC financial
futures business (mainly OTC foreign exchange margin business).
The securities business registration system that had been in place since1948, when the Securities and Exchange Act was first enacted, was replaced
by a licensing system in April 1968. The licensing system was designed tohelp stabilize the management of securities companies by curbing excessivecompetition and obligating them to specialize (ban, in principle, on concurrently operating non-securities business), thus strengthening the investor protection. As a result, the regulatory regime increasingly took on a defensive
bias, and virtually no companies entered the securities business anew.
However, as the securities market developed, the types of financial products handled by securities companies became increasingly diverse. Furthermore, as the years rolled on into the 1990s, customer needs for securities services started to change and vary, from private equity and asset securitization
to M&A advisory, asset management, and online brokerage, against the background of the nation’s shifting industrial structure, aging population, dying
traditional long-term employment practices, and ongoing information technology revolution (such as the proliferation of the Internet).
The licensing system did play a role in stabilizing the management of securities companies. On the other hand, there turned out to be a number of236

Chap. XII Financial Instruments Business (Securities Business)

Table XII-1.

The Scope of Business of Securities Companies (Type I Financial Instruments Businesses), and Requirements

1. Type I Financial Instruments Businesses (Article 28 Paragraph 1, Items Securities-related business (FIEA Article 28, Paragraph 8)(i)–(v) of the Financial Instruments and Exchange Act (FIEA))(1) Proprietary securities trading, intermediary, brokerage, or agency service Of the Type I Financial Instruments Businesses listed, the business related to seof securities, market transactions of derivatives or foreign market deriva- curities (in principle, the scope of business which financial institutions are prohibtives transactions; intermediary, brokerage, or agency service for the en- ited from conducting).
trustment of the transactions listed above; brokerage for the clearing of
securities, etc.; secondary distribution of securities; or the handling of Refusal of Registration (i.e., registration requirements) (Article 29-4, Paragraph 1
public, primary offering or secondary distribution of securities or the of the FIEA, Article 15 of the FIEA Enforcement Order)
handling of the private placement of securities(1) An applicant who had his/her registration rescinded and for whom five years(2) Intermediary, brokerage, or agency service of commodity-related market
have not passed since the rescission; an applicant who has been punished by aderivatives trading; intermediary, brokerage, or agency service for thefine for violating the provision of any applicable law or regulation and for
entrustment of the transactions listed above; or brokerage for clearing
whom five years have not passed since the imposition of the fine(3) Intermediary, brokerage, or agency service of OTC derivatives trading (2) An applicant with an officer, etc., who is bankrupt or has received certain
and brokerage for clearing of such transactions
criminal punishment and for whom five years have not passed since the com(4)“Underwriting”of securities
pletion of the sentence(5) Sale or purchase of securities or intermediary, brokerage, or agency ser- (3) An applicant without appropriate personnel resources to properly conduct thevice therefor, which is conducted through an electronic data processing
financial instruments businesssystem and in which a large number of persons participate simultane- (4) An applicant with stated capital or net worth of less than ¥50 million
ously as a party or parties of the transaction (business of operating a pro- (5) An applicant that is not a corporation
prietary trading system (PTS business)(6) An applicant whose additional business other than incidental or registered/ap(6) Acceptance of deposit of securities, etc., in relation to the transactions,proved concurrent business is found to be against the public interest or to poseetc., listed above or book-entry transfer of stocks or corporate bonds (sedifficulty in risk management
curities management business)(7) An applicant whose major shareholder (with 20% or more of voting rights) is
disqualified for registration
Note: (5) requires approval (Article 30, Paragraph 1). PTS stands for Propri- (8) An applicant with a capital-to-risk ratio less than 120%
etary Trading System.
(9) An applicant with a trade name that is the same as or similar to that of an already existing Financial Instruments Business Operator
Minimum Capital Requirement (Article 15, Paragraphs 7 and 11 of the FIEA Enforcement Order)(1) When conducting wholesale underwriting as a lead managing underwriter: ¥3billion(2) All other underwriting: ¥500 million or more
(3) Business of operating PTS: ¥300 million(4) All other Type I Financial Instruments Businesses: ¥50 million
2. Incidental businesses (Article 35, Paragraph 1, Items (i)–(xv)(1) Lending or borrowing of securities, or intermediary or agency service (The following items are newly included as incidental businesses under the
FIEA.)
thereof(10) Custody of assets of a registered investment corporation(2) Making a loan of money incidental to a margin trading(3) Making a loan of money secured by securities held in safekeeping for (11) Provision of consultation to any other business with regard to assignment ofa business, merger, spin-off, share exchange or share transfer or intermediacustomers
tion thereof(4) Agency service for customers concerning securities(5) Agency service of the business pertaining to the payment of profit distri- (12) Provision of management consultation to any other businessbution or proceeds from redemption at maturity or at the request of an (13) Sale or purchase of currencies and other assets related to derivatives trading
investment trust
or intermediary, brokerage, or agency service thereof(6) Agency service of the business pertaining to the payment of dividends or (14) Sale or purchase of negotiable deposits or other monetary claims or intermerefunds or distribution of residual assets with regard to investment cerdiary, brokerage, or agency service thereoftificates of an investment corporation (corporate type investment trust) (15) Management of assets under its management as investment in specified as(7) Conclusion of a cumulative investment contract
sets defined in the Investment Trust Act(8) Provision of information or advice in relation to securities(9) Agency service of the business of any other Financial Instruments Business Operator, etc.
3. Other businesses requiring notification (Article 35, Paragraph 2 of the FIEA; Article 68 of the Cabinet Office Order on Financial Instruments Business, etc.)(6) business pertaining to lease of real properties owned by a FinancialInstru(1) Conducting a transaction on a commodity exchangements Business Operator itself; (7) goods leasing business; (8) business per(2) Conducting a transaction in a derivative contract on a commodity pricetaining to creation and sale of computer programs for the business of any otheror other benchmark
business operator, and a business to accept the entrustment of computing ser(3) Money-lending business or intermediary service for lending and borrowing of money
vice; (9) business of management of the defined contribution pension; (10)(4) Business pertaining to building lots and buildings transaction business
Trust Agreement Agency Business; (11) intermediary service for forming aand lease of building lots or buildings
trust by will or concluding a contract for the disposition of an estate of a deceased party; (12) Financial Institution Agency Service; (13) real property(5) Real estate specified joint enterprisemanagement business; (14) advisory business related to real property invest(6) Commodity investment management business(7) Business of investing property entrusted under an investment management; (15) business of trading emission rights and emission derivatives or actment contract in assets other than securities or rights pertaining to deriving as an intermediary, broker or agent therefor; (16) business of undertaking
atives trading
administrative operation entrusted by an investment corporation or a specialAmong the businesses designated by a Cabinet Office Order, the main
purpose company; (17) business of investing money or other properties forbusinesses include:
other person, as an investment in assets other than securities or rights pertaining to a derivative transaction ; (18) business of concluding a contract for a(1) business pertaining to purchase and sale of gold bullion, or an intermediary, brokerage or agency service therefor; (2) business pertaining toguarantee or assumption of an obligation, or an intermediary, brokerage orconclusion of a Partnership Contract; (3) business pertaining to concluagency service therefor; (19) business of making an arrangement with or introsion of a Silent Partnership Contract; (4) business pertaining to concluducing another business operator, to customers of its business; (20) business ofsion of a Loan Participation Contract or an intermediary, brokerage orcreating any advertisement or promotion in regard to the business of any otheragency service therefor; (5) business pertaining to insurance solicitation;business operator; and (21) funds transfer business.

Notes: 1. A Financial Instruments Business Operator may, in addition to the above, engage in a businessfor which approval has been obtained from the prime minister (approved business, Article 35,
Paragraph 4 of the FIEA).
2. A discretionary investment contract is now included as“investment management business”,
which is one of the independent investment management businesses that can be conducted without special approval from the prime minister.

Chap. XII Financial Instruments Business (Securities Business)

237

drawbacks, including a detriment to creativity in business approaches, suchas branch network management and the development of new products andservices and a lower sense of self-reliance on the side of securities companies. Increasingly concerned about such negative fallout, the government
amended the Securities and Exchange Act as part of the Act on Revision, etc.
of Related Acts for the Financial System Reform, and a new registration system replaced the licensing system for the securities business in December
1998.
With the objective of providing an equal and uniform investor safeguard
across various financial products and services with considerable risk, the
FIEA was subsequently enacted to cover a wider range of objects, includingcollective investment schemes and derivatives trading. The FIEA is comprehensive legislation that combines the Securities and Exchange Act, the Mortgage Securities Business Regulation Law, the Financial Futures Trading Act,and the Investment Advisory Services Act, and aims at achieving effective
regulation of a unified financial instruments business across a securities-related industry once vertically segmented into the securities business, financial futures trading business, and investment advisory business. Also as a result of amendments to the Financial Instruments and Exchange Act in 2012,
commodity derivatives trading was added to the Type I Financial Instruments
Business.
2. Overview of Financial Instruments Business Operators (Securities
Companies) (2)The former securities intermediary service is redefined as“Financial Instruments Intermediary Service”under the FIEA. The term“Financial Instruments Intermediary Service”means services comprising the following acts
conducted under entrustment from a Type I Financial Instruments Businesses, an investment management business, or a registered financial institution(see section 12): (1) intermediation for the sale or purchase of securities (excluding PTS transactions); (2) intermediation for the sale or purchase of securities conducted in an exchange market or market transactions of derivatives; (3) handling of a public, primary offering or secondary distribution of
securities or handling of a private placement of securities; and (4) intermediary service for the conclusion of an investment advisory contract or a discretionary investment contract (Article 2, Paragraph 11 of the FIEA). As is common with the items listed above, the provider of the service does not havecustomer accounts but solicits customers and redirects their orders for transactions to brokers/dealers, etc., from which it receives a commission.
Compared with the former definition for securities intermediary service,

238

Chap. XII Financial Instruments Business (Securities Business)

Chart XII-1.

An Outline of Financial Instruments Intermediary Service Providers

Affiliated financial
instruments firm
supervised by Finance
BureauTo cause securities agentsto submit—and examine—a report on the state of observance of the laws andregulations and to takedisciplinary action againstthem or make a recommendation for rectification
to themAffiliated financial
instruments firm
supervised by FSA

Liability for damages(burden sharing
agreement)

Financial Bureau(with jurisdiction
over the area inwhich C is located)
Agreement commissioning
an order, remuneration forcommissioned service (Ato C), and responsibility
for supervision (A to C)

Agreement commissioning
an order, remuneration forcommissioned service (Bto C), and responsibility
for supervision (B to C)

Registration of Financial
Instruments Agency Business
Notification of concurrent
Inspection Bureau of
operation
Supervision and inspection the Financial Services
Agency, Securities andExchange SurveillanceCommission
Financial Instruments Agent, an
Inspection
individual or a corporation (excluding banking institutions)

Financial
Instruments Firms
Association

Registration of registered representatives
and supervision

Securities agent,registered representative E
Securities agent,registered representative D

Securities agent,registered representative F

Duty to preserve recordsof transactions

Opening an account, safekeeping,
and trading (conveyed by C); issuance of a transaction report;
and liability of A for damages

Opening an account, safekeeping,
and trading (conveyed by C); issuance of a transaction report;
and liability of B for damages

Securities businesses and conclusion of aninvestment advisory or discretionary investment contract (agency or intermediaryservice only)
Identification of the affiliated financial instruments firms to which transaction orders are forwarded (acceptance of deposits
of customer assets is prohibited)

Customers

Note: More than one agreement commissioning an order is allowed.
Source: Compiled on the basis of the data drawn from materials published by the Financial Services
Agency.

Chap. XII Financial Instruments Business (Securities Business)

Table XII-2.

239

Financial Services Intermediary Business

Financial Services Provider Act

Remarks

Definition: To engage in deposit, etc. inter- With one registration, multiple mediation
mediary business, insurance intermediary (agency) operations can be performed (oneArticle 11. business, securities intermediary business, or stop service)
money lending intermediary business in thecourse of business.
Article 18. Exemption from registration as an agent for On condition that an appropriate and reliable
electronic settlement, etc.
execution system and financial foundation
are realized in the firm.
Article 22. Obligation of depositing security deposit (to Unlike the financial instruments intermediary
secure indemnity resources)business, it does not adopt an affiliation system, so it bears its own liability for compensation.
Notes: 1. Items that require highly specialized explanations (structured deposits, unlisted stocks, derivatives, etc.) are excluded.
2. The minimum deposit is 10 million yen and 5% of the previous year’s compensation (Article 26of the Enforcement Order of the Financial Services Provision Law).

an intermediary service for derivatives trading and intermediary service forthe conclusion of an investment advisory contract or a discretionary investment contract are newly included in the new financial instruments intermediary service. In spite of the expanded coverage, however, the underlying regulatory principles remain intact. The provisions of the FIEA are designed toensure the protection of investors by instituting a number of preventive measures. More specifically, they require all financial instruments intermediaryservice agents to be registered and prevent any disqualified person from becoming an agent. The FIEA makes all agents subject to the same set of prohibited and regulated acts that are applicable to Financial Instruments Business Operators (the prohibition of loss compensation, the duty to observe thesuitability rule, etc.); explicitly defines agents under the control and authority
of securities companies employing them; and holds these securities companies legally responsible for supervision and damage compensation. The FIEA
also gives the regulatory authority power to inspect and supervise financial
instruments agents.
Registration requirements for financial instruments agents under the FIEA
are essentially identical to those for the securities intermediary service under
the former law. The requirements are less stringent than those for Type I Financial Instruments Business Operators to facilitate their market entry. Morespecifically, (1) either an individual or a legal entity can register as an agent
and a legal entity does not need to be a corporation and (2) there are no minimum requirements for capital, net worth, or capital-to-risk ratio. However,240

Chap. XII Financial Instruments Business (Securities Business)they can only solicit investors for orders and redirect such orders to their broker/dealer. They are not allowed to take a deposit of cash or securities fromtheir customers. (For this reason, they are exempt from joining an investor
protection fund.) As is the case with registered representatives of Financial
Instruments Business Operators, salespersons of financial instruments agentsshall be qualified as registered representatives and register with the Japan Securities Dealers Association (JSDA) (as an Authorized Financial Instruments
Firms Association).
Financial instruments agents may be affiliated with one or more securities
companies. As of the end of May 2021, for example, there were 874 actual
financial instruments agents (626 companies and 248 individuals), according
to the Financial Services Agency’s“List of Financial Instruments
Intermediary Service Providers. Many of these are mid-tier securities firms
and online securities firms that are looking to expand their sales network as
intermediaries.
In June 2020, a Financial Services Intermediary Business system wasestablished (the Financial Instruments Sales Act was changed to the Financial
Services Provision Act and came into effect in November 2021). This system
has enabled one-stop intermediary businesses that provide all banking,securities, and insurance services (registration required), with several
important differences compared to the past financial instruments intermediarybusinesses (see table on the right).
3. Overview of Financial Instruments Business Operators (Securities
Companies) (3)For quite some time after the war, securities companies in Japan had one
characteristic in common: heavy reliance on the stock brokerage businessboth in terms of revenues and business volume. In the process, (1) there developed a bipolarization of securities companies—integrated securities companies that hired a large number of employees and ran multifaceted securities
business on a large scale, on the one hand, and small and midsized securities
companies that relied on the brokerage business generated by commissionregistered representatives, on the other—and (2) the large integrated securities companies—Nomura, Daiwa, Nikko, and Yamaichi, collectively referred
to as the“Big Four”—captured a large share of the market in all segments ofthe securities business. And they had gained an oligopolistic control of themarket as a group by creating a network of affiliated small securities companies. This was a major characteristic of the postwar securities market of Japan, unknown before the war or in other countries. And this structure wasmaintained until the latter half of the 1990s with only minor changes.

Chap. XII Financial Instruments Business (Securities Business)

Chart XII-2.

Net Assets and Number of Firms

9,000

340

8,000
7,000
6,000

241

313 316283

272

288 305

285 286
283

5,000

276

265

320
301

300
288

278

268
253

4,000

251 252 251 256 260 261 261

265

260
240
220

19

98
19 .3
99
20 .3
00
20 .3
01
20 .3
02
20 .3
03
20 .3
04
20 .3
05
20 .3
06
20 .3
07
20 .3
08
20 .3
09
20 .3
10
20 .3
11
20 .3
12
20 .3
13
20 .3
14
20 .3
15
20 .3
16
20 .3
17
20 .3
18
20 .3
19
20 .3
20
20 .3
21
.3

3,000

280

Net assets (billions of yen, left axis)

Number of JSDA members (right axis)

Note: Excluding firms inactive in business. As of March 31 of each year.
Source: Compiled from“Number of Members and Capitalization”, Japan Securities Dealers Association.

Table XII-3.

JSDA Member Categories(July 31, 2021)

Securities
business
operator

Non-securities
Investment
business
Management
operator
Business

Breakdown
FX (FOREX
MarginTransactions)

Domestic brokers: 190 firms

149

41

20

16

Foreign brokers:

46

29

26

3

75 firms

Others5Note: Non-securities business operator refers to a business operator whose primary business is not the securities business.“Asset Management Service”refers to investment management and sale of structured funds and securitized products. Foreign brokers are foreign-owned firms whose controllingshareholder (author’s estimate).

However, in the 1990s, after the speculative bubble finally burst, the securities slump worsened and Yamaichi Securities and a number of smaller securities companies went bankrupt in the process in 1997 and afterward. In addition, large securities companies abandoned the strategy of forming a networkof affiliated small and midsize securities companies, making the managementof securities companies increasingly fluid. Around the same time, largebanks, etc. acquired the right to manage securities companies while a numberof firms that were armed with a unique business style and focused on selected segments of the securities business have entered the market.
In addition, a number of foreign securities companies have opened branches in Japan. Since 1990, some have increased their shares in the equity andderivatives trading markets in their existing securities business, largely

242

Chap. XII Financial Instruments Business (Securities Business)

Table XII-4.

Breakdown of 150 Japanese Brokers (securities-related) by Controlling
Shareholder, Size, Region and Business Characteristics

Independent major
securities companies(2 Nomura-affiliated,
Daiwa): 3

Megabank-affiliated:

3

Regional bank-affiliated: 27
Other bank-affiliated:

3

Breakdown

14

Bank-affiliated
33 companies

Breakdown

Listed securities
companies:

Second-tier small &midsize (face-to-face)
73 companies
Tokyo:

22

Osaka:

7

Regional:

44

Online brokers(including securities
which used
smartphone)
15 companies
PTS specialists
5 companies
Others
5 companies

Notes: 1. Independent major securities companies include Nomura Financial Products & Services, Inc.
2.“Listed securities companies”are securities companies whose shares are listed. If a holding
company is listed, its controlling subsidiary is included in“listed securities companies”. However, independent major securities companies and online brokers are excluded. Second-tiersmall & midsize securities do not include“listed securities”.
3. Online brokers include seven“smartphone securities”companies.

thanks to increases in orders received from their overseas customers. They
are playing a major role in new types of business, such as the securitizationof assets, packaging structured bonds, and M&A.
Following the introduction of new registration system and the abolition of
single-business scheme (in 1998) and the relaxation of the member eligibility
requirements of the JSDA (in 2007; see Section 9), entities that do not engage in the securities-related business as their primary business have started
to register under the Type I Financial Instruments Business, becoming members of the JSDA. Over the twelve years between April 2007 and March
2021, 161 companies left (as a result of mergers, business transfers, voluntary business closures or deregistration), while 120 companies entered thebusiness (including newly registered companies), reflecting the fluidity of theindustry. While there are 10 foreign securities companies with operating sites
in Japan (as of July 31, 2021), many more foreign entities are actually in operation through the establishment of a local subsidiary, conversion to a Japanese corporation, or acquisition of a domestic securities company (see Table
XII-3).
As such, the Japanese securities industry, where the“Big Four”(Nomura,
Daiwa, Nikko, and Yamaichi Securities) used to have an oligopolistic controlof the market and where brokering was the core and standard operation,changed drastically, resulting in having diverse players, such as foreign entities and banks, hold stakes in securities businesses. And as the securities
business itself became increasingly diverse to cover operations other thanChap. XII Financial Instruments Business (Securities Business)243

brokerage, a growing number of firms whose primary business is not a securities-related business have entered the market.
4. Securities Businesses (1)̶The Principal Businesses (1)“Securities Companies”has come to be redefined as“Financial Instruments
Business Operators”under the FIFA, and the scope of the businesses are expanded. Securities business are largely divided into those related to stocks,
bonds, investment trusts, and derivatives. By type of services, they are largely divided into those relating to (1) dealing—proprietary trading, (2) brokerage—agency trading, (3) investment banking—underwriting, and (4) public
offering and private placement—distribution of securities.
The bulk of the securities-related business of brokers/dealers in the secondary market is the brokerage business of executing customer orders on
stock exchanges, and the rest is the proprietary trading conducted for theirown account. As not many customer orders for bonds—except for convertible bonds, whose prices are linked to underlying stock prices—are executedon stock exchanges, most bond orders are executed by matching them against
the positions of securities companies’proprietary accounts (bond dealing).
Along with stock exchanges, securities companies play an important role informing fair prices and maintaining the liquidity of securities through theirbroker/dealer functions.
In addition to underwriting publicly offered new issues of public bonds(government securities, etc.), nonconvertible bonds of private business corporations, and equity securities (stocks and bonds with subscription rights/
warrants) of public companies, securities companies also underwrite theshares of companies to be listed on exchanges, etc., in the process of initialpublic offerings. The term“underwriting”means an act of acquiring a security by a securities company with the aim of ensuring successful issuance of a
new security or secondary distribution of shares by reselling them to others
and, if so agreed, purchasing the unsold portion of the security, if any. Morespecifically, the act of acquiring new security from the issuer is called“wholesale underwriting”(and the securities company that negotiates awholesale underwriting agreement with the issuer is called“the managing
underwriter”), and acquiring the security from a wholesale underwriter iscalled“sub-underwriting.”Beneficiary certificates of investment trusts arealso sold in public offerings, in addition to the new-issue securities mentioned above. Secondary distribution means the placing of already issued securities and includes block sales of major shareholders, etc.
In 1998, over-the-counter derivative trading and PTS services were newly
authorized. The former refers to an act of effecting or entrusting to effect244

Chap. XII Financial Instruments Business (Securities Business)

Table XII-5.

Business Volume Handled by TSE and OSE Member Companies
Cash Stock Transaction Value(Trillions of yen)

Proprietary

AgencyListed Derivatives Trading(Trillions of yen)

Traded on margin (%) Notional principal (stocks, bonds, etc.)

2017/3

280

1,212

14

2,223

2018/3

336

1,429

14

2,870

2019/3

317

1,349

13

3,140

2020/3

288

1,218

13

3,212

2021/3

280

1,514

16

2,769

Notes: 1. The accounting year runs from April 1 to March 31 of the following year.
2. Figures are double the actual volume because both sales and purchases are included.
3. Cash stock transaction volumes are those handled by 88 general members (including foreign securities companies, as of March 31, 2021).
4. Of these members, 75 members also participate in derivatives trading on the OSE.
5. In addition, 21 financial institutions participate in JGB futures trading on the OSE.
6. Derivatives trading include commodity-related (Howerer, thansactions on the Tokyo Commodity Exchange are not included.)
Source: Compiled from statistical data issued by Japan Exchange Group

Table XII-6.

PTS Transactions(Billions of yen)

Trading on
Exchange(A)

Trading off
Exchange(B)

Total(A)+(B)

Proportion of
PTS
Proportion of
PTS Trading totransactions PTS Trading off
Total
(C)
Exchange (C/B)(C/(A+B))

2017/3

671,447

83,932755,379

30,967

36.9%

4.1%

2018/3

787,401

121,446

908,846

35,235

29.0%

3.9%

2019/3745,182

114,155

859,336

37,339

32.7%

4.3%

2020/3671,051

88,315595,011

44,140

50.0%

7.4%

2021/3766,839

106,954749,490

70,276

65.7%

9.4%

Notes: 1. The accounting year runs from April 1 to March 31 of the following year.
2. Figures are actual volume because only one side of the transaction is included.
3. Major PTSs include SBI Japannext and Chi-X.
4. ToSNeT (off-auction trading) enters into Trading on Exchange.
Source: Compiled based on statistical data from the PTS Information Network.

Chap. XII Financial Instruments Business (Securities Business)

Table XII-7.

245

Electronic record transfer rights and handling services (Securities Token
Offering，STO)

What is STO (according to the Japan STO Association website)
STO is a system using technology to provide a service for the needs of new financing methods to replace
traditional equity and debtfinancing and of new financial instruments to replace stocks and bonds incompliance with laws and regulations is a mechanism called STO. This is called“electronic record
transfer right”in Japan.
Financial Instruments and Exchange Law (amended in 2019, effective May 2020)
Electronic record transfer rights “Deemed securities”as defined in Article 2, Paragraph 2, refers torights that can be transferred using an electronic data processing system, and is positioned as“securities”as defined in Article 2, Paragraph
1. (Article 2, Paragraph 3, etc.).
Electronic record transfer rights Since the electronic record transfer right falls under Article 2(1), itspurchase and sale, brokerage, handling of offering and sale, and deposit, etc., require“registration of change”when a Type 1 firm handles
such business (Article 31(4)).
Note: Electronically recorded rights that are not tradable are considered“deemed securities”under Article 2, Paragraph 2, and the business of handling them is positioned as Type 2 Business.

with a customer a forward or options trading of a stock or a stock index or aswap contract involving, for example, a stock index and an interest rate off
the exchange. The PTS service matches orders from investors by utilizing anelectronic information processing system. It is a licensed system since it requires specialized technical expertise and advanced risk management skills(see Section 1). As information technology has developed, fund-raising via
the internet “( crowdfunding,”see Chapter 11, Sections 4 and 5) as well astransactions of digital securities “( electronically recorded transferable
rights”), have become more commonplace (see diagram in lower right).
5. Securities Businesses (2)̶The Principal Businesses (2)Because the Financial Instruments and Exchange Act (FIEA) combined the
Securities and Exchange Act and the Financial Futures Trading Act, the Type1 Financial Instruments Businesses includes financial futures, etc., as well as
securities derivative trading. Moreover, the OTC derivatives business no longer requires authorization from the authorities (for an overview of the OTC
derivatives business, see section 9 of Chapter 8).
The underlying assets of derivatives can comprise financial instruments,
such as (1) securities, deposits, and currencies (Article 2, Paragraph 24 of the
FIEA) and (2) financial indexes, such as price and interest rate of a financial

246

Chap. XII Financial Instruments Business (Securities Business)

Chart XII-3.

OTC FOREX Margin Transactions(trillions of yen)
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0

20

2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
05 006 006 007 007 008 008 009 009 010 010 011 011 012 012 013 013 014 014 015 015 016 016 017 017 018 018 019 019 020 020 021
3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q

Notes: 1. Figures compiled based on reports from association members and special members.
2. Trading volume includes both buy and sell sides, including agency transactions.
3. Foreign currency amounts have been converted into Japanese yen using the spot rate at the endof each period.
Source: The Financial Futures Association of Japan.

instrument, and weather indexes (Article 2, Paragraph 25). In 2012 the definition of financial instrument was expanded to include commodities (excluding rice), and in 2019, crypto-assets were added, making them subject to the
Financial Instruments and Exchange Act. The main customers for derivatives
are financial institutions or institutional investors. In addition to acting as
swap arrangers, securities companies typically use OTC stock options assweeteners for structured bond issues or conclude interest rate or currency
swap agreements with companies issuing foreign currency denominatedbonds when underwriting the issue.
Nikkei 225 mini-futures (Osaka Exchange), and foreign exchange (FX)transactions are among the products that individual investors use relatively
often. Investors use OTC FX transactions to purchase or sell currencies bydepositing a margin with the broker and settle the transaction usually on a net
basis. These OTC transactions got their start in Japan when some commodity
traders became the first to use them following the deregulation of foreign exchange transactions through the 1998 amendment of the Foreign Currency
and Exchange Law (currently Foreign Exchange and Foreign Trade Act.)
These FX transactions enable high leverage factors of 20 times on average
and up to 100 times on small margins.
Without any laws or regulations initially, problems did occur in the FX
market, resulting in the 2005 revision of the Financial Futures Trading Act,

Chap. XII Financial Instruments Business (Securities Business)

Table XII-8.

Number of Accounts

247

OTC CFD Transactions on Securities

March-end
2013

March-end
2015

March-end
2017

March-end
2019

March-end
2021

101,196

105,790

148,692

248,497409,729

63

107

161

309

678

Bond
relatedOther
securities
relatedMargin Deposit Balance(100 million yen)
(Transactions)Individual Stock index
stock related
related

Total

From April 2019 to March 2020
Transaction amount (100 million yen)
Number of transactions
Open interest (100 million yen, end of
March 2018)

290,652

1,850

340,010 16,837,419

1,526

14,826

18

440

7

3,193

297,2212,249,015 19,441,270
30

495

1,559

494,037

From April 2020 to March 2021
Transaction amount (100 million yen)
Number of transactions
Open interest (100 million yen, end of
March 2019)484,990

1,477

1,042,447 27,873,722

6,011

14,783

140

805

26

1,982,107 30,913,05928

999

Note: Transaction amounts and open interest are on a notional principal basis. Open interest is as of theend of the fiscal year. Figures represent the sum of transaction value, etc. of JSDA regular and special members.
Source: Compiled from materials issued by the Japan Securities Dealers Association.

currently included in the Financial Instruments and Exchange Act. The revised law introduced a registration system for the FX business, which eliminated many of the bad operators. As a result, there was a sharp expansion in
the use of FX transactions, as can be seen in Chart XII-2. Moreover, in a bid
to make FX transactions more transparent, the Tokyo International Financial
Futures Exchange (TIFFE, now TFX) listed an FX product in 2005 called
Click 365. The ceiling on leverage in FX transactions was lowered to 50
times in August 2010 and again to 25 times in August 2011.
Today, FX transactions, have been shifted from face-to-face transactions
with brokers to online. Internet trading specialist FX firms, such as Gaitame.
com and Gaitame Online, are, together with internet securities companies,
aggressively developing the market. This type of OTC trading, where investors can place orders with low margins and settle the contracts on a net basis,
is called contract for difference (CFD transaction) and is available not only
for FX but also for securities, indexes, interest rates, and commodities.

248

Chap. XII Financial Instruments Business (Securities Business)

6. Securities Businesses (3)̶Incidental Business, Concurrent Business,
and Other Businesses
In addition to the principal businesses outlined in the foregoing, securities
companies may conduct businesses incidental to their principal businesses
and other businesses that require notification to the authorities. Managementof assets of investment trusts, those entrusted under discretionary investment
contracts, or properties pertaining to collective investment schemes used torequire notification only, but, under the FIEA, securities companies are required to make registration in order to conduct this type of“investment management business”(Article 28, Paragraph 4). Income from non-principal
businesses tends to be recorded as“other fees”(see table on the right and following section).
The volume of margin trading, or transactions in securities that are lent on
margin to customers or financed by margin loans extended to them, began toincrease around 1999, and it has been accounting for approximately 14 to
20% of agency transactions in the 2000s (see table in Section 4). The term
“securities lending and borrowing”refers to the lending and borrowing ofstock or bond certificates and is also known as stock lending or bond repurchase agreements (repo). As a lending broker demands a borrowing investor
to pledge cash as collateral, these transactions may also be considered as ameans of financing secured by stock or bond certificates, and therefore abond repo transaction is equivalent to a bond gensaki transaction economically. This practice makes it easier for securities companies to finance stocks,
bonds, and cash and hence to accept large orders or basket orders from customers. For this reason, it contributes to the formation of fair prices of securities and improves the liquidity of the market. By“consultation with any otherbusiness operator with regard to a business assignment, merger, company
split, share exchange or share transfer, or intermediation for these matters”ismeant the M&A consulting service that an investment bank provides to its
clients with respect to the spinning off of a business division, the computation of an IPO price, or an acquisition offer, etc.
Major securities companies of the top- and second-tier brokers, also
registered themselves under the investment management service and havestarted to market a“wrap account”discretionary investment service and tolaunch and manage collective investment schemes to invest in nonpubliccompanies, real estate, and others. As of the end of March 2021, according toa survey by the Japan Investment Advisers Association, there were a total of
1,178,396 wrap accounts in the industry, holding approximately ¥11,208.5
billion, reflecting a stable increase. Major brokers, foreign affiliates, andsecurities subsidiaries of mega-banks focus on M&A; structuring of private

Chap. XII Financial Instruments Business (Securities Business)

Table XII-9.

249

Composition and Share of“Other Fees”by Type (FY 2019)

Other Fees

11,323billion yen
Total

Number ofComposition
companies261(35.3%)

Share
100.0%

Major General and Wholesale

47

37.4%

76.9%

Independent
Megabank Affiliates
Other bank affiliates
Foreign-affiliated

2
4
3
38

31.2%
25.1%
34.2%
72.7%

21.8%
18.1%
0.5%
36.5%

Mainly Retail

131

11.8%

6.3%

Listed securities
Regional bank affiliated
Small and medium-sized securities
Online securities (including foreign-affiliated)

14
27
73
17

15.2%
11.1%
9.2%
10.1%

2.8%
0.7%
0.7%
2.1%

New business entities

83

66.3%

16.7%

Investment management, fund sales, etc. (Japanese-affiliated)
Investment management, fund sales, etc. (foreign-affiliated)
FX (including foreign-affiliated)
PTS (including foreign-affiliated companies)
Others

21
24
19
8
11

83.7%
95.1%
5.4%
29.5%
11.9%

1.7%
12.7%
0.3%
0.3%
1.7%

Notes: 1. Classification criteria are based on“shareholder composition”(independent and listed securities, bank-affiliated, foreign-affiliated, etc.) and“business characteristics”. Listed securities areincluded if its holding company is listed and it is a controlling subsidiary. Foreign-affiliated securities firms by shareholder composition are 71 (FY2019).
2.“Online securities”includes foreign-affiliated and smartphone securities.
3.“Others”includes OTC derivatives, private equity, etc.
4.“Composition”is the ratio of“other commissions”to net operating revenues.
Source: Prepared based on figures published by each company.

equity funds; and securitization (defined as business to trade monetary claims
and requires notification), collectively known as investment banking services,along with securities underwriting, which is often conducted in association
with these services.
In addition, following the full deregulation of brokerage commissions (inOctober 1999), low-commission online stock brokers offering service overthe Internet have emerged, and their share of the market has been increasing
rapidly. The number of online brokers stood at 89, with the number ofaccounts rising to 33.47 million at the end of March 2021. The value of cash
stock and margin transactions of these online brokers during the period
between October 2020 and March 2021 amounted to ¥218,826.7 billion,
accounting for 24.6% of the total value of agency transactions, and the online
brokers sold ¥1,990.7 billion worth of investment trust units according to the250

Chap. XII Financial Instruments Business (Securities Business)

Table XII-10.

Number of Wrap Accounts and Assets Under Management(¥100 million)

Discretionary investment
No.

AmountInvestment advisory
No.

Grand Total

AmountNo.

AmountMarch-end 2013

51,758

7,689

0

0

51,758

7,689

March-end 2014

105,706

13,7600

0105,706

13,760March-end 2015

307,346

38,97300307,346

38,973

March-end 2016

482,21757,7764

0482,22157,776

March-end 2017564,620

65,70000564,62265,702

March-end 2018716,612

79,8414

10716,618

79,853

March-end 2019

868,091

88,2715

15868,097

88,287

March-end 2020

1,027,344

87,7733

7

1,027,347

87,780March-end 2021

1,178,394

112,0792

6

1,178,396

112,085

Note: A wrap account is an account that is managed for a flat fee covering fees for investment advisory,
trading commission expenses, account management fees, etc. in proportion to the balance of managed assets.
Source: Compiled from statistics produced by the Japan Investment Advisers Association.

JSDA Monthly Report for June 2021. Growth in the business of Internet
brokers was particularly notable.
7. Income and Expenditure of Financial Instruments Business Operators(Securities Companies)
Sources of revenue for securities companies include (1) brokerage commission; (2) management and underwriting fees; (3) selling concessions frompublic offerings and secondary distributions; (4) trading income (net of trading losses); (5) financial income in the form of interest on loans made in conjunction with margin trading and lending fees on shares lent to customers,
lending fees on shares and bonds lent in conjunction with transactions otherthan margin trading (such as repos), collateral for shares or bonds borrowed,
interest, and dividends and other distributions on securities held in inventory;and (6) other fees and commissions, including those received in connection
with incidental or concurrent businesses, chiefly among them agency fees received from investment trust management companies for handling the payment of dividends and other distributions and fees from investment banking
customers for the provision of information and advice, etc., on best capital
policies and M&A opportunities.

Chap. XII Financial Instruments Business (Securities Business)

Table XII-11.

251

Financial Overview of Regular Member Firms, JSDA

(Millions of yen)
No. of menbers
Operating income

Fiscal year ending March 1991

FY2020260

Percentage of net
operating income

262

Percentage of net
operating income

4,428,700

100.0%

4,114,801

100.0%(Commissions received)

2,877,500

65.0%

2,319,328

56.4%(Brokerage commissions)

2,023,000

45.7%

661,064

16.1%(Underwriting fees)

172,100

3.9%

165,318

4.0%(Selling concession)

314,300

7.1%

269,919

6.6%(Other fees and commissions)

368,100

8.3%

1,222,843

29.7%

Trading profit/loss

217,400

4.9%

1,071,523

26.0%

Financial income

1,333,800

30.1%

692,376

16.8%(Profit from margin trading)

784,300

17.7%

94,3092.3%
9.4%

Financial expenses

677,800

15.3%

387,159(Margin trading expenses)

184,400

4.2%

16,1920.4%(Interest expense)

467,000

10.5%

50,6391.2%

Net operating income

3,750,900

84.7%

3,727,561

90.6%

Selling, general andadministrative expenses

3,036,100

2,961,825(Transaction-related expenses)

562,700

809,188(Personnel expenses)

1,264,300

1,077,571

Operating profit/loss

714,800

765,681

On the other hand, expenditures of securities companies consist of (1) selling, general and administrative expenses (personnel expenses, rent and otherreal estate expenses, administrative costs, trade-related expenses, etc., and (2)financial expenses (interest and fees on brokers’loan and stock certificatesborrowed from securities finance companies, etc. in connection with margin
trading, interest and fees on brokers’loans and bonds borrowed in connection
with repos, interest on bank loans and outstanding bonds, etc.). Revenues
generated from the securities business are called“operating income.”Deducting financial expenses from that amount yields“net operating income,”
and net operating income less selling, general and administrative expenses iscalled“operating profit.”Nonoperating profit or loss is added to operating
profit to reach“current profit.”Profit or loss, if any, from the sale of investment securities or real estate holdings and losses due to capital contribution
to affiliates, subsidiaries, etc. (such as nonbank lenders) are further added or
deducted as extraordinary profit.

252

Chap. XII Financial Instruments Business (Securities Business)

Table XII-12.

Breakdown of other fees received (FY2020)(Breakdown)

Ratio (%)

Equities

106,362

2.6%

Bonds

143,668

3.5%

Beneficiary securities

239,995

5.8%

Others732,655

17.8%

Profit distribution to Japanese corporations, etc. related to internationaltransactions, etc.

291,587

7.1%

M&A related income

92,666

2.3%

Mutual fund trustee fees

81,0832.0%

Wrap-related revenues

80,7492.0%

Discretionary investment management fees

46,134

1.1%

Advisory/Consulting Fees

29,1700.7%

Administration fees

20,6040.5%

Insurance-related revenues

15,741

0.4%

Fees for system use/development, etc.

14,533

0.4%

Notes: 1. JSDA members are no longer required to close their books in March after April 2014; FY2020
corresponds to the fiscal year ending March 31, 2021 under the previous notation.
2. Composition ratio is the percentage of operating revenue.
Note:“Other fees”that cannot be classified by product are further subdivided into“Other.”
Source: Compiled from Financial Overview of Regular Member Firms, JSDA

Commission income has been on a declining trend over the past thirty
years, both in absolute terms and as a proportion of net operating income,while“other fees”have increased. Underwriting fees account for around 7%of net operating income, a large proportion of which is due to investment
trust sales.“Other fees”now form the largest revenue stream, including 1)
allocation of income from parent companies of foreign securities companies,
etc., 2) advisory fees for M&A, 3) agency commission for investment trusts,
4) management fees for investment trusts, discretionary investment advisoryfees.
In recent years, the securities business has become increasingly globalized
and cooperation with overseas affiliate companies has risen. Investment inforeign bonds by domestic investors has increased, with these transactions
typically executed through overseas affiliate-company intermediaries. The
increase in M&A involving Japanese companies and the large-scale entry ofinvestment management businesses and fund distributors, both domestic andforeign (Section 13), with most of their income recorded as“other fees”
reflects this trend.

Chap. XII Financial Instruments Business (Securities Business)

253

8. Financial Condition of Financial Instruments Business Operators(Securities Companies)
Reflecting—and because of—the uniqueness of their business, the balance
sheets of securities companies appear to be larger than they actually are. The
biggest items on their balance sheets are“loans against the collateral of securities”and“borrowings against the collateral of securities.”These are deposits made in connection with the lending and borrowing of securities (see section 6). Funds received from the borrower of a bond or other security tosecure them are treated as borrowings, while funds deposited with the lenderof a bond or other security to secure them are treated as loans. The trading
instrument is one that arises from the dealing of securities, and a net long position in cash securities (securities held for trading purposes) is entered on
the debit side, and a net short position is entered on the credit side of the balance sheet. Derivatives (futures, options, and swaps) are marked to market,
and unrealized gains are entered under the item of derivatives transactions on
the debit side and under unrealized losses on the credit side. In case a transaction was not settled after execution, an amount equivalent to the value of
securities sold is entered under the item of collateral account on the debit
side, and an amount equivalent to the value of securities purchased is enteredon the credit side. Securities companies hold both long and short positions ina security for the purpose of speedy execution of customer orders involving
cash security, derivatives, or bond repos, as well as the pursuit of arbitrage
gains, and, instead of netting them out, they are required to adhere to thetrade-date accounting process with stringent risk management on a contract
basis.
Incidentally, a loan to facilitate margin trading is made in an amountequivalent to the amount required to make the margin purchase of a security
by a customer, and cash collateral is deposited with a securities finance company as a borrowed securities deposit. On the other hand, the cash for conducting margin trading is borrowed from a securities finance company, and it
is equivalent to the amount that needs to be paid to a customer for the securities sold on margin.
Securities companies are required to keep customer assets segregated fromtheir own assets and to hold them in an outside trust (see section 11); thissystem is called“segregated customer asset trust.”
Ceilings on the ratio of individual products to the total net worth were used
to control risks. However, as new products have since increased and the lesson was learned from Black Monday of 1987 (the market crash on WallStreet), the industry and the authorities became painfully aware of the needto control risk on a total basis. At the same time, the International Organiza-

254

Chap. XII Financial Instruments Business (Securities Business)

Table XII-13.

Major Accounts of Securities Companies in Japan (265 firms) as ofMarch 31, 2021
AssetsCash and deposits
Deposit(Segregated customer asset trust)
Trading products(Trading securities, etc.)(Derivatives trading)Collateral-for-contract account
Assets for margin tradingIn ¥ millions

Liabilities and capital

10,427,012
9,960,574
8,823,080
48,538,363
34,363,797
14,174,553
942,649

Trading products(Trading securities, etc.)(Derivatives trading)Collateral-for-contract accountDebt on margin trading(Debt for margin trading)(Money received for securities
lent for margin trading)
3,849,523 Borrowings against the collateral of securities
3,275,358 Deposit received
574,109 Guarantee money received

In ¥ millions
32,681,698
19,851,035
12,830,646
1,153,032
1,519,740
397,750
1,121,927
89,103,702(Money lent for margin trading)(Cash collateral deposited to secure thesecurities lent for margin trading)
Loans against the collateral of securities

89,729,520 Short-term debt

19,300,044

Short-term guarantee money submitted

6,451,620 Total of current liabilities

160,625,976

Short-term loans

1,575,085 Long-term liabilities

Total of current assets
Tangible fixed assets
Intangible fixed assets
Investment, etc.
(Investment securities)
Total of fixed assets
Total of assets

172,801,237 Total liabilities
235,842 Total Capital
397,312 Capital surplus
1,337,884 Retained earnings
946,493
1,971,240 Total capital
174,772,884 Total of liabilities and capital

7,567,248
6,436,122

6,040,657
166,828,232
1,815,739
3,124,453
2,843,385
7,944,515
174,772,884

Source: Compiled from materials prepared by the Japan Securities Dealers Association. These figures exclude those of companies that have suspended their operations. Totals may not match sums.

tion of Securities Commissions (IOSCO) called for the international harmonization of securities regulations. Against this backdrop, securities companies
have been subjected to requirements for their capital-to-risk ratio. (The requirements were put into effect in 1990, and a law institutionalizing themwas enacted in 1992.)
As securities companies handle products whose prices fluctuate in themarket, their revenues are vulnerable to sudden changes in market prices.
Therefore, a framework of capital-to-risk ratio regulations was put into placeso that they can maintain their solvency and protect the interests of their customers even when the prices of their assets fall by providing for a sufficientamount of liquid assets against various risk contingencies.

Chap. XII Financial Instruments Business (Securities Business)

Table XII-14.

255

Capital-to-Risk Ratio of General Trading Participant Members of theTSE (86 companies) as of March 31, 2021
The minimum ratio
The maximum ratio
The median ratio
The average ratio

215.1%
1835.0%422.7%
484.2%

Distribution
Those in the range of
100% to 199%

0 company

200% to 299%

20 companies

300% to 399%

19 companies

400% to 499%

17 companies

500% to 599%

8 companies

600% to 699%

12 companies

700% to 799%

2 companies

800% or higher

8 companies

Source: Compiled from materials produced by the Tokyo Stock
Exchange.

Table XII-15.

An Outline of the Capital-to-risk Ratio Requirements for Type I Financial Instruments Business Operators (Securities companies)(Article 46-6, Paragraph 1 of the FIEA and Article 178 of the Cabinet Office Order on Financial Instruments Business, etc.)
Capital-to-risk ratio＝(non-fixed primary capital÷the equivalents of various risks)×100%
Non-fixed primary capital＝Tier I item (equity cap- Equivalents of various risks＝market risk + cusital) + complementary item (subordinated debt, al- tomer risk + fundamental risks
lowance)－deducted assets (fixed assets, etc.)
Market risk＝risk of loss that may arise from a fall in the prices of securities held by securities companies
Customer risk＝risk of a loss arising from the default by the other party to a transaction effected by securities companies
Fundamental risks＝risks that may arise in the ordinary course of business by mistakes made by members of the administrative department of securities companies
Note: Large companies having assets totaling more than ¥1 trillion are designated as“Special Financial
Instruments Business Operators”and are subject to primary capital regulations on a consolidated
basis (Article 57-2, Paragraph 1 of the FIEA; as of June 30, 2020, 21 companies) Among suchcompanies, since the shareholding companies of two groups—Nomura and Daiwa—correspond to
the Designated Parent Companies prescribed in Article 57-12, Paragraph 1 of the FIEA (capital ratio against the entire group including the parent company and fellow subsidiaries), they are eligible
for selecting the consolidated capital-to-risk ratio under the Basel III Accord.

256

Chap. XII Financial Instruments Business (Securities Business)

Table XII-16. Orders Issued on the Basis of the Capital-to-Risk Ratio to Take a Prompt
Corrective Action
Capital-to-Risk Ratio
140% or lessRequired to notify the regulatory Art. 179 of the Cabinet Office Orderagencyon Financial Instruments Business,
etc.

120% or more

Obligated to maintain ratio at such a Art. 46-6, Para. 2 of the FIEA
level

Less than 120%

- Denial to accept a registration ap- Art. 29-4, Para. 1, Item (vi) of theplication
FIEA- Orders to change the method of Art. 53, Para. 1 of the FIEA
business and deposit its property

Less than 100%

Orders to suspend business for a pe- Art. 53, Para. 2 of the FIEA
riod of three months or lessLess than 100% and has Cancellation of registrationno prospects for recovery

Art. 53, Para. 3 of the FIEA

9. Financial Instruments Firms Associations (1)The former Japan Securities Dealers Association is now regarded as the Authorized Financial Instruments Firms Association under the Financial Instruments and Exchange Act (FIEA). Under the FIEA, the association shall becomposed of Type I Financial Instruments Business Operators (excluding
OTC financial futures business operators) and must be authorized by theprime minister (Article 67-2, Paragraph 2 of the FIEA). The association aims
to ensure the fair and smooth sale and purchase of securities, etc., and to contribute to the protection of investors and is enabled to establish a market
where over-the-counter securities are traded (Article 67, Paragraph 1 and 2).
The principal functions of the association are (1) self-regulatory operations,(2) businesses that contribute to the development of the financial instruments
business and the financial instruments market, and (3) international businesses and promotion international exchange (see Table XII-15). At present, theJapan Securities Dealers Association (JSDA) is the country’s only organization established as the Authorized Financial Instruments Firms Association
under the FIEA.
In 1940, the government ordered securities companies to form one securities dealers association in every prefecture for the purpose of facilitating thewartime control of the securities market. After the war, the Japan Securities
Dealers Joint Association was established in 1949 as a national federation. In
1968, 33 associations were consolidated into 10, and a single national body,Chap. XII Financial Instruments Business (Securities Business)

Table XII-17.

Principal Functions of the Japan Securities Dealers Association (JSDA)(1) Drawing up and enforcing
self-regulatory rules

1. Self-Regulatory Operations

257

With a view to facilitating the efficient operation of the financial instruments market, theJSDA establishes various forms of self-regulatory rules applicable to Financial Instruments Business Operators, etc. and endeavors to ensure the fairness and efficiency of
trading of financial instruments. The principal rules regulate: OTC trading in stocks andbonds, underwriting of securities, off-exchange trading in listed stocks, safe custody of
securities, code of conduct of directors and officers, internal control system of member
companies, qualifications and registration of registered representatives, advertising ofmember companies, solicitation and management of customers of member companies,
financial instruments intermediary service, segregation and management of customers’
assets, settlement of disputes with customers, and standardized accounting methods of
securities-related businesses.

(2) Auditing, monitoring, and self- The JSDA audits member companies to see whether they comply with the laws and regulations,
regulating
the rules of self-regulation in carrying out business activities and other relevant rules and whether
they have an adequate internal control system; monitors the operation of member companies andchecks to see whether they segregate customers’assets; and takes actions to discipline member
companies and their directors and employees who have violated the laws and the rules of self-regulation.
(3) Qualification tests, qualifica- The JSDA conducts qualification tests on registered representatives and on the personnel in charge
tion renewal training and registra- of management and control, and carries out training for the renewal of qualifications. (The admintion of registered representative
istrative work relating to the registration of registered representatives is commissioned by theprime minister.)(4) General improvement of the
securities market and performing
the market administration
functions.

(i) The JSDA establishes and reviews the rules concerning transactions and practices in the overthe-counter market of bonds. JSDA publishes Reference Statistical Prices (Yields) for OTC Bond
Transactions. JSDA collects materials and compiles statistics concerning the bond market.
(ii) The JSDA implements upgrades and expansion of securitization-related products andDerivatives market.
(iii) The JSDA takes steps to ensure the fairness and efficiency of off-exchange tradingin listed stocks and the protection of investors. JSDA collects and publishes data on thevolume of listed stocks traded off exchange and publicly announces in real time pricequotations, contract, and other information on listed shares traded on PTSs (Proprietary
Trading Systems).
(iv) The JSDA establishes system regarding unlisted stocks (Equity Crowdfunding
Scheme, Shareholders Community System, etc.).

(5) Settlement of securities-related
disputes through the mediation of
the JSDA and the handling oftrade-related complaints of investors

Consultation regarding complaints concerning the business carried out by a member firm or by Financial Instruments Intermediary Service Providers; and mediation of a dispute between a member
firm and a customer pertaining to securities transactions (complaint handling and dispute mediation have been commissioned to the Financial Instruments Mediation Assistance Center (FINMAC), a non-profit organization).

(6) Services provided by the au- The organization provides services for the proper handling of personal information of members ofthorized personal information pro- the JSDA as an authorized personal information protection organization under the Act on the Protection organization
tection of Personal Information.
2. Services to promote the sound devel- (i) The JSDA investigates and studies the financial instruments market and considers institutional
opment of financial instruments busi- problems and tax issues and then publishes opinions.
ness and financial instruments market(ii) The JSDA makes public statistical material, etc., on the stock and bond markets.
(iii) The JSDA disseminates knowledge about financial instruments, indexes, and markets and educates investors.
(iv) The JSDA communicates and exchanges views with market-related organizations.
(v) The JSDA supports actions to eliminate antisocial forces.
(vi) The JSDA supports regarding as business continuity of the entire financial instruments market.
3. International business and interna- Participates in international conferences, such as those of the International Council of Securities
tional exchange
Association (ICSA), Asia Securities Forum (ASF), and International Organization of Securities
Commissions (IOSCO), exchanges information with securities-related organizations of foreigncountries, and promotes international exchange.
4. Promotion of public awarenesson finance and securities Dissemination and knowledge and learning
about financial products

The JSDA facilitates activities to promote public awareness on finance and securities forschools as well as for adults from a fair neutral standpoint so that people would be able
to correctly understand knowledge and information about financial products and makeproactive judgments on their own.

Note: The Self-Regulatory Organization is responsible for self-regulatory operations and market administration while the Securities Strategy Board is responsible for operations that promote the sound development of the securities market and the securities business.

258

Chap. XII Financial Instruments Business (Securities Business)

Table XII-18.

Permissible Forms of Business by Registered Representatives (JSDA
Rules: Article 2, Regulations Concerning Qualification and Registration,
Etc., of Sales Representatives of Association Members)

Class 1 Sales Representa- Sales representative who is authorized to engage in all acts of a sales repretive
sentative with the exception of designated over-the-counter transactions ofderivatives
Class 2 Sales Representa- Sales representative who is authorized to engage in all Acts of a Sales Reptive
resentative related to any securities with the exception of stock subscription
rights/warrants or covered warrants (excluding Acts of a Sales Representative related to securities derivative transactions or transactions in bonds
with options, and limited to the cases prescribed by the detailed rules regarding margin transactions)
Special Member Class 1
Sales Representative

Sales representative who is authorized to engage in all Acts of a Sales Representative related to the business of a registered financial institution (withthe exception of designated over-the-counter transactions of derivatives, financial instruments intermediary service of registered financial institution,or brokerage with written orders)Special Member Class 2
Sales Representative

Sales representative who is authorized to engage in all Acts of a Sales Representative related to transactions of public and corporate bonds, commercial papers, investment trust certificates, etc. (excluding Acts of a Sales
Representative related to securities derivatives trading or transactions inbonds with options)

Special Member Class 4
Sales Representative

Sales representative who is authorized to engage in all Acts of a Sales Representative related to“Specified Financial Instruments Business”(marketingof investment trusts and other specified acts of an insurance company orother financial institution)

Margin Trading Sales
Representative

Sales representative who is authorized to engage in all Acts of a Sales Representative by a Class 2 Sales Representative and acts of a sales representative relating to margin trading (including“when-issued”trading)Note: Qualification tests for Special Member Class IV Sales Representative and Margin Trading Sales
Representative are not performed (as of July 2021).

the JSDA, with the 10 associations as regional units, was formed. At present,
there are 9 regional associations: Hokkaido, Tohoku, Tokyo, Nagoya,
Hokuriku, Osaka, Chugoku, Shikoku, and Kyushu. (The regional associations of Kyushu and South Kyushu were consolidated into one in 1995.)
Since securities company scandals came to light, pressure to strengthen the
self-regulatory function of the JSDA has mounted, and the status of the JSDA
was changed from a public-service corporation under the Civil Code to a legal entity under the Securities and Exchange Act in 1992, and the Ministry of
Finance (currently, the prime minister) commissioned the JSDA to handle theregistration of registered representatives. This helped define the status of the
JSDA as a self-regulatory organization of the securities industry. In July
1998, the Bond Underwriters Association of Japan was consolidated into theChap. XII Financial Instruments Business (Securities Business)

259

JSDA, and in July 2004 the JSDA was reorganized into a structure consistingof the Self-Regulation Division, the Securities Strategy Division, and theGeneral and Administration Division. As the JASDAQ Securities Exchange
was established (see Chapter 10) in December 2004, the OTC securities market was closed, and the JSDA consolidated the Securities Information Center
under its wing in April 2005.
In September 2007, the JSDA became the association authorized under the
FIEA, and the scope of membership eligibility was expanded from securities
companies to Type I Financial Instruments Business Operators. The
association established the Code of Conduct Committee in July 2011 todeliberate the code of conduct of member firms and make proposals.
Handling of consultation matters and complaints from users of securities
transactions and mediation of disputes between users and members havebeen commissioned to the Financial Instruments Mediation Assistance Center(FINMAC), a non-profit organization, since February 2010.
Registered financial institutions under the provision of Article 2, Paragraph
11 of the FIEA (see section 12) joined the JSDA as special members in 1994.
As of June 2021, the JSDA had 270 regular members, 16 specified businessmembers, and 199 special members (including 118 banks, 13 foreign banks,
38 shinkin banks (credit unions), 9 life insurance companies, 4 property andcasualty insurance companies, and 17 others).
10. Financial Instruments Firms Associations (2)Unlike the Securities and Exchange Act, the Financial Instruments and Exchange Act (FIEA) provides for the comprehensive regulation of a diverse
range of collective investment schemes (funds) and investment trust beneficiary certificate sales businesses. Self-offerings by funds, investment trust
beneficiary certificates sales businesses, and some other businesses are defined under the FIEA as Type II Financial Instruments Businesses “( Type II
Businesses”). Because financial instruments, such as funds, etc., are nothighly circulated, the registration requirements for Type II Businesses are lenient, such that even individuals may register as businesses. The underlying
assets of funds, investment trust beneficiary certificates, and similar products
cover a wide range of real estate, specified instruments, and other assets.
Registered Type II Businesses, therefore, are not solely securities companies;
many real estate companies also have entered the market.
As a result, the number of registered Type II Businesses had risen to 1,167
as of the end of September 2017, exceeding by roughly four times the number of Type I Financial Instruments Businesses (securities business, financial
futures trading business, etc., hereinafter referred to as“Type I Businesses”
).

260

Chap. XII Financial Instruments Business (Securities Business)

Table XII-19.
Business
Category

Numbers of Registered Financial Instruments Business Operators andRelated Financial Instruments Firms Associations

Number of
Related Financial Instruments Firms Associations
Registered Firms(as of May 31, 2021)
Type I
308 (Authorized) Japan Securities 270 Regular members
Dealers Association(as of June 2021)(Certified) Financial Futures 141 Regular members
Association of Japan(as of June 30, 2021)(Certified) Japan Security 13 Reqular members
Token Offering Association(as of July 31, 2021)
Type II
1,209 (Certified) Type II Financial 532 Regular members
Instruments Firms Association (as of August 2019)
974 (Certified) Japan Investment 480 Investment advisory andInvestment advisory and agency
Advisers Association
agency members
business(March 2019)
401
297 Investment management
Investment management busimembers (March 2019)
ness(Certified) The Investment 104 Investment trust members (August 2019)
Trusts Association, Japan
78 REIT members(August 2019)
6 Infrastructure fund members (August 2019)
Total
2,875 (total numberof registrants)
1,947 (actual numberof firms)
Notes: 1. Of the 308 Type I businesses, 38 (FX specialists) are not members of JSDA, but have joined the
Financial Futures Association of Japan. Because some firms are registered under multiple business categories and with multiple associations, the totals do not match the sum of the individual
numbers.
2. In addition to regular members, Japan Securities Dealers Association has“Specified Business
Member”. These are Type 1 firms that are engaged only in specific businesses. As of July 2021,
there are 15 members in total, including those engaged in the specified OTC derivatives business, the Class 1 Small Amount Electronic Offering Business, and the commodity-related
market derivatives brokerage business.
Source: Produced using the Financial Services Agency’s“List of Certified Financial Instruments Firms
Associations”and“List of Registered Financial Instruments Business Operators”and data fromassociations’websites.
• In addition to the above, there are firms deemed to be Business Operators Engaging in Specially Permitted Business for Qualified Institutional Investors, etc. (the so-called firms handling funds for professional investors) that are not required to register, most of which are not members of any of the above Financial Instruments Firms Associations. (See the Financial Services Agency’s“List of Qualified
Institutional Investors and other Registered Special Business Operators.”
When one or more investor is a Qualified Institutional Investor and other investors (general investors)
number 49 or less among investors in a collective investment scheme (fund), under the Special Provisions Concerning Specially Permitted Businesses for Qualified Institutional Investors, the financial instruments firm is exempt from registration and may conduct management and self-offering of the fundby submitting notification of such to authorities. (Art. 63, Para. 1 and 2)
Reference: Essentially, firms or individuals with special investment skills have been allowed to participate in the market without registering and only a duty to submit notification of their businesses in orderto enable them to offer their superlative investment instruments to professional investors at low cost. Of
course, there are firms or individuals within this group that achieve excellent results and become members of one of the above associations, thereby being covered by self-regulatory rules. However, there arealso firms or individuals that clearly have gathered together one (1) Qualified Institutional Investor and
49 individual investors with the intention of using the provisions as a legal loophole to avoid registrationof a Type II business or investment management business. Hence the amendments to the FIEA for limiting subscriptions to affluent groups that satisfy certain conditions were promulgated in May 2015 andthen enforced in March 2016.

Chap. XII Financial Instruments Business (Securities Business)

261

The lax registration requirements, however, have resulted in lawsuits regarding the solicitation for self-offerings, etc., of funds and other incidents requiring administrative discipline because of legal violations.
To address such issues, the Type II Financial Instruments Firms Association was established in November 2010 and designated as a Certified Financial Instruments Firms Association (FIEA, Article 78, Paragraph 1). The association aims to contribute to the fair and smooth operation of Type II
Businesses as well as to their sound development and to investor protection.
It was set up taking into account the self-regulatory systems of the self-regulatory organizations (SROs) already in place for Type II Businesses, investment management business, investment advisory and agency business, etc.
Establishing an“authorized”association in Japan requires the authorization of the prime minister of Japan. But“certified”associations are granted
certification by the prime minister following their establishment. The Japan
Securities Dealers Association is the only“authorized”association in Japan’ssecurities market. The country’s“certified”associations, however, include
the Financial Futures Association of Japan; the Japan Investment Advisers
Association; The Investment Trusts Association, Japan; and, of course, theType II Financial Instruments Firms Association. The major difference between the two types of associations is that“authorized”associations are able
to establish and operate OTC securities markets (refer to section 9).
Other than that single difference,“authorized”and“certified”associations
carry out the same self-regulatory operations. The associations are responsible for (1) forming rules and regulations, (2) inspecting members to determine their state of compliance with laws and ordinances and self-regulation
rules, (3) disciplining members that have violated laws and ordinances andself-regulation rules, (4) resolving complaints and disputes involving members’businesses, (5) mediating conflicts about members’businesses, and (6)carrying out sales representative registration operations when so commissioned by the government authorities.
There are 1,947 firms registered under financial instruments businesses inJapan, with some firms being registered under multiple business categories
and some being members of multiple SROs. In addition, there are 2,850 organizations classified as Business Operators Engaging in Specially Permitted
Business for Qualified Institutional Investors, etc. that are not registered despite carrying out self-offerings of funds just like Type II Businesses (as ofend of April 2021). Since almost all of these Business Operators Engaging inSpecially Permitted Business for Qualified Institutional Investors, etc. were
not covered by self-regulatory rules, causing troubles to arise, rules were
strengthened under the amendment to the FIEA in 2015.

262

Chap. XII Financial Instruments Business (Securities Business)

11. Investor Protection FundThe purpose of an investor protection fund is to protect the credit of generalcustomers from insolvency of the securities companies. As we saw in section
1, the 1998 amendment to the Securities and Exchange Act changed the licensing system of securities companies to a less-demanding registration system for securities business, encouraging non-securities companies to enter
the securities market, and relaxed restrictions against conducting side business, liberalizing the lines of business that securities companies can undertake. And this created the need to take measures to protect investors from any
unforeseen loss that they may suffer from insolvency of the securities companies they deal with. The government instituted provisions in the 1998
amendment to the Securities and Exchange Act (the present FIEA) with aview (1) to preventing bankruptcy of securities companies, empowering the
Financial Services Agency to take a prompt corrective action on the basis of
the capital-to-risk ratio (Article 53 of the FIEA) (see section 8) and as aframework to protect investors in case the securities companies they deal
with went bankrupt; (2) to requiring securities companies to segregate thecustomer assets from their own assetts (Articles 43-2 and 3); and (3) to establishing an investor protection fund (Articles 79-20 through 80). In line with
this, the law concerning the bankruptcy proceedings of financial institutions(Act on Special Measures for the Reorganization Proceedings of Financial
Institutions) was amended, and this amended law has become applicable tosecurities companies.
The system of the segregated custody of securities is designed to recover
the assets of customers in preference to other creditors of a security company
if it goes bankrupt by holding the cash and securities of its customers separately from its proper assets. It is done in two ways: (1) securities of its customers are managed separately and (2), with respect to a customer’s cash andsubstitute securities deposited with the securities company as collateral for
margin trading, etc., that are impossible to physically identify when they arerehypothecated, the securities company trusts in an outside account anamount equal to its customers’claim, net of their liability, to the securities
company (this is called the“customer segregated fund”). If this system of
separate management were strictly enforced, customers would not suffer any
unforeseen loss even if their securities company went bankrupt. However, therub is that the customer segregated fund is computed only once a week, andthe possibility of misappropriation of its customers’fund by a securities company cannot be ruled out.
Therefore, with a view to strengthening the protection of investors, investor protection funds were established as legal entities under the Securities andChap. XII Financial Instruments Business (Securities Business)

Source of funds

Compensation proceduresThose eligible for compensation

Table XII-20.

263

Investors Eligible for Compensation, Compensation Procedures, andSources of Funds of the Investor Protection Fund

(1) Eligible
persons(Art. 79-20,
Para. 1 of the
FIEA)“General Customer”who conducts a Subject Securities-related Transaction or a
Subject Commodity-related Derivatives Trading with a Financial Instruments
Business Operator that conducts the securities-related business or commodity-related exchange derivatives trading agency service, etc. (excluding a Qualified Institutional Investor, central or local government, or any other person specified bya Cabinet Order)(2) Scope ofcustomer assets
eligible forcompensation(Art. 79-20,
Para. 3)(i) Money or securities deposited as a margin for exchange transactions of derivatives, etc., or money or securities deposited as guarantee money for margin trading, etc.; (ii) money belonging to the account of or deposited by a customer withregard to a transaction pertaining to the Financial Instruments Business (such asadvance payment for purchase, proceeds from a sale that have not been withdrawn, etc.); (iii) securities (securities deposited for sale or held in safekeeping);and (iv) other customer assets specified by a Cabinet Order

Notice andrecognition(Art. 79-53 and79-54)

When the Fund receives a notice from a Financial Instruments Business Operator
or the Prime Minister, it shall recognize whether or not there is any difficulty forthe firm to perform the obligation to return or refund customer assets pertaining
to such notice.

Public notice of When a Fund has granted recognition to the effect that it is difficult for a notifying Financial Instruments Business Operator to perform the obligation to returnrecognition
or refund customer assets (such a Financial Instruments Business Operator re(Art. 79-55)
ferred to as the“Recognized Financial Instruments Business Operator”), it shallgive a public notice that prompts the relevant customers to file a claim for the return or refund of their assets.
Payment ofclaims eligible
for compensation(Art. 79-57,
Para. 4)

A Fund shall, when having made a payment to General Customers, acquire
claims eligible for such compensation of the amount commensurate with its payment. The Fund shall collect the claims from the bankrupt Financial Instruments
Business Operator through bankruptcy proceedings.

Loans to a
“Notifying
Financial
Instruments
Business
Operator”(Art. 79-59)

When the financial position of a“Notifying Financial Instruments Business Operator”has deteriorated to such a point that, while it does not yet face difficulties
in returning and refunding customer assets, loans from the Fund could facilitate
expedited return or refund, the Fund may make loans to such“Notifying Financial Instruments Business Operator.”

Investor
Burden charges collected from member Financial Instruments Business OperaProtection Fund tors shall be the source of funds.
(Art. 79-64 and
79-65)
Borrowing(Art. 79-72)

Borrowings from financial institutions may be made with the approval of thePrime Minister of Japan and the Minister of Finance.

264

Chap. XII Financial Instruments Business (Securities Business)

Table XII-21.

Comparison Between New and Former Systems
Former System

New System

Name, Year of Estab- Entrusted Securities Indemnity Japan Investor Protection Fund (December
lishment
Fund (August 1969)
1998)
Underlying Entity

Incorporate foundation with Corporation defined under the Securities andno legal basis
Exchange Act (current Financial Instruments
and Exchange Act) (must be approved by thePrime Minister and the Minister of Finance)

Membership obliga- Voluntarily by each securities Compulsory membershiption
company
Contribution

Donation (subject to taxation)

Burden charges (tax deductible as expenses)

Limit of the amount ¥2 billion per bankrupt securi- ¥10 million per customer
as indemnity (Note) ties company
7 cases in and after May 1997 ・Minami Securities (went bankrupt in March(succeeded by the new fund in2000); indemnity amount of approximately
December 1998)¥5.9 billion (including ¥2.4 billion returned
from bankruptcy trustee)・Marudai Securities (went bankrupt in March2012); indemnity amount of approximately¥170 million

Past records

Note: Up till March 2001, however, a special provision on full indemnity was available (Article 4 of Revision Provisions of the Securities and Exchange Act).

Table XII-22.

An Outline of the Investor Protection FundJapan Investor Protection Fund

Securities Investors Protection Fund

No. of members (at 235 companies (224 domestic and 11 46 companies (1 domestic and 45 foreignthe time the fundforeign-affiliated companies)
affiliated companies)
was established)
Scale of the fund¥30 billion at the time of establish- ¥10 billion at the time of establishment (¥3ment; ¥50 billion at the end of March billion in cash and ¥7 billion guaranteed)
2001
and ¥5 billion in cash and ¥5 billion guaranteed after April 2001

Burden charge on
members

A fixed amount and a fixed rate ofburden charge (computed on the basisof the operating income and the number of registered representatives). The
total of annual burden charge is ¥4billion.

Remarks

The fund has taken over the compen- Members are required to have their books
sation service provided by the En- audited by outside auditors.
trusted Securities Indemnity Fund andits entire assets and liabilities.

1% of the customer assets, and a bankguarantee of an amount equivalent to 50%
of margin trading requirement. When thefund falls ¥1 billion or more short of ¥10billion, members are asked to contributean additional burden charge.

The two organizations were consolidated in July 2002 into the Japan Investor Protection Fund. As ofJune 30, 2021, there were 267 member firms and the size of the fund was approximately ¥58.4 billion(end of March 2021).

Chap. XII Financial Instruments Business (Securities Business)

265

Exchange Act (currently under the FIEA). To accomplish the above purpose,the investor protection fund (hereinafter referred to as the“fund”) will (1)pay a specified amount of money (up to ¥10 million per customer to insure
the repayment of his/her assets in the case of bankruptcy of a securities company and (2) make loans to securities companies to facilitate the prompt return of customer assets.
To enable the fund to provide such services, it is empowered by law to (1)perform any and all acts that are necessary to preserve customer assets heldby securities companies, (2) become a trust manager of securities companies,and (3) create an“Investor Protection Fund”to secure the necessary funds
and collect burden charges from its member companies. Members of the fundmust be Financial Instruments Business Operators. More than one investor
protection fund may be created, and securities companies must participate in
one of them.
12. Securities Operations of Financial Institutions
In 1948, banking institutions were prohibited, in principle, from conducting
the securities business under Article 65, Paragraph 1 of the Securities andExchange Act. As the Banking Act did not explicitly authorize banking institutions to conduct certain business related to public bonds or brokerage withwritten orders, which were provided for as exceptions to the above prohibition (Article 65, Paragraph 2 of the Securities and Exchange Act), banking
institutions (except for trust banks, which could pass their customer orders on
to a securities company) did not conduct the securities business. Following
the issuance of massive amounts of JGBs since 1975, the government enacted a new Banking Act in 1981, explicitly authorizing banking institutions to
trade in public bonds, and it also correspondingly amended the Securities andExchange Act. Accordingly, banking institutions started selling public bonds
over the counter in 1983 and dealing in public bonds in 1984.
Subsequently, the following services have been added to types of securities
businesses that banking institutions are allowed to provide: (1) brokerage fortransactions in bond futures trading (1988); (2) trading, etc., and involvementin private placement of commercial papers (CPs), foreign certificates of deposit (CDs), beneficiary certificates of mortgage bond trusts, etc. (1992); (3)handling of OTC derivatives of securities and public offerings of beneficiary
certificates of investment trusts (1998); and (4) securities agent business(2004; currently the financial instruments intermediary service). The registration system of securities companies and the system of authorizing certain securities businesses instituted in 1998 are also applied to banking institutions.
And banking institutions that have registered under this system are called266

Chap. XII Financial Instruments Business (Securities Business)

Table XII-23.

Balance of Investment Trusts, by Seller (as of September 30, 2021)(¥100 million)
Direct sales (investment
trust managementcompanies)

Securities companies

Banks (registeredfinancial institutions)

Stock investment trusts

1,116,589

76.6%

330,72922.7%

11,2430.9%

1,458,561

Bond investment trusts

144,498

99.3%

1,028

0.7%

3

0.0%

145,529

1,261,087

78.6%

331,759

20.7%

11,2460.7%

1,604,090

Total

Total

Note: These figures are only for publicly offered investment trusts. Given the introduction of a negativeinterest policy by the Bank of Japan, early repayment of MMFs continued, and the balance has
been zero since May 2017.
Source: Compiled from the statistics produced by The Investment Trusts Association, Japan.

Table XII-24.

Intermediary service’s effect on retail sales performance of Mitsubishi
UFJMS Securities (Fiscal year ending March 2021)

Balance of(¥100 million) assets undercustodyAmount via
intermediary% of total

Number of
Individual
New accounts Sale of stock
Sale of retailoutstanding
investor
openedinvestment
foreignaccounts
government(in thousands)
trustsbonds(in thousands)
bonds

24,803

278

4

965

188

3,686

25,674

299

7

492

151

4,091

6.6%

22.9%

5.3%

8.5%

66.2%

27.1%

8.9%

24.0%

17.1%

5.5%

68.0%

39.5%

Note: Balance of assets under custody and number of outstanding accounts figures are as of the end of
March 2021. Percentages are of total amounts. Assets under custody pertain to domestic sales divisions (including financial institutions). Figures below are for the fiscal term ended March 2020.
Source: Compiled from the Databook provided for the FY2020 investor information meeting of the Mitsubishi UFJ Financial Group.

“registered financial institutions.”The revised FIEA of 2007 redefined thescope of the securities business prohibited in principle as securities-related
businesses (section 1), no material changes to the provisions of law weremade (with the only change being the number of the article: Article 65, Paragraph 1 and 2 became Article 33, Paragraph 1 and 2 of the FIEA).
On the other hand, the 1992 Institutional Reform Law authorized banks,
securities companies, and trust banks to enter markets of one another throughsubsidiaries. Securities subsidiaries of banks were defined as“Specialized
Securities Companies”(Article 16-2, Article 52-23 of the Banking Act) andChap. XII Financial Instruments Business (Securities Business)

Table XII-25.

267

Major Regional Bank-Affiliated Securities Companies

Name of company

Parent bank(investment ratio)

Year established(or the year of
making it asubsidiary)

Name of company

Parent bank(investment ratio)

Year established(or the year of
making it asubsidiary)

Shizugin TM
Securities Co., Ltd.

The Shizuoka Bank
Group (100%)

Dec. 2000

Toho Securities
Co., Ltd.

The Toho Bank, Ltd.
(100%)

January 2016

Daishi Securities
Co., Ltd. (former
Niigata Securities
Co., Ltd.)The Daishi Bank,
Ltd. (100%)

March 2006

Gungin Securities
Co., Ltd.

The Gunma Bank,
Ltd. (100%)

July 2016

Hachijuni Securities The Hachijuni Bank,
Co., Ltd.
Ltd. (100%)

April 2006

Hokuhoku Tokai
Tokyo Securities
Co., Ltd.

Hokuhoku Financial
Group, Inc.
(60%)

October 2016

YM Securities
Co., Ltd.

Yamaguchi Financial
Group, Inc. (60%)

July 2007

77 Securities
Co., Ltd.

The 77 Bank, Ltd.
(100%)

January 2017

Mebuki Securities
Co., Ltd. (former
The Joyo Securities
Co., Ltd.)

Mebuki Financial
Group, Inc.
(100%)

November 2007

Kyogin Securities
Co., Ltd.

Bank of Kyoto, Ltd.
(100%)March 2017

Hamagin Tokai
Tokyo Securities
Co., Ltd.

The Bank of
Yokohama, Ltd.
(60%)

July 2008

Okigin Securities
LimitedThe Bank of
Okinawa, Ltd.
(100%)March 2017

Chugin Securities
Co., Ltd.

The Chugoku Bank,
Ltd. (100%)

June 2009

Tochigin Tokai
Tokyo Securities
Co., Ltd. (former
Utsunomiya
Securities Co., Ltd.)The Tochigi Bank,
LTD. (60%)

April 2017

Hyakugo Securities The Hyakugo Bank,
Co., Ltd.
Ltd. (100%)

August 2009

Hirogin Securities
Co., Ltd. (former
Hirogin Utsumiya
Securities Co., Ltd.)The Hiroshima
Bank, Ltd.
(100%)

June 2017

Nishi-Nippon City
Tokai Tokyo
Securities Co., Ltd.

Nishi-Nippon
Financial Holdings,
Inc. (60%)

May 2010

Kyushu FG
Securities, Inc.

Kyushu Financial
Group, Inc.

December 2017

Chibagin Securities
Co., Ltd.

The Chiba Bank,
Ltd. (100%)January 2011

Juroku Tokai Tokyo
Securities Co., Ltd.

The Juroku Bank,
Ltd. (60%)

April 2018

Shikoku Alliance
Securities Co., Ltd. The Iyo Bank, Ltd.
(former Iyogin(100%)
Securities Co., Ltd.)

February 2012

North Pacific SecuriNorth Pacific Bank,
ties Co., Ltd. (former
Ltd.
Joko Securities Co.,
(100%)
Ltd.)

October 2018

The Nanto Bank,
Ltd.
(100%)

October 2018

FFG Securities
Co., Ltd. (former
Fukuoka Securities
Co., Ltd.)The Bank ofFukuoka(100%)

April 2012

Nanto Mahoroba
Securities Co., Ltd.
(former Nara
Securities Co., Ltd.)Senshu Ikeda Tokai
Tokyo Securities
Co., Ltd.

The Senshu Ikeda
Bank, Ltd.
(60%)

January 2013

OKB Securities
Co., Ltd.

The Ogaki Kyoritsu
Bank, Ltd.
(100%)March 2019

Gogin Securities Co., The San-In Godo
Ltd.
Bank, Ltd. (100%)

August 2015
(Closed October
2020)

Kiraboshi Life
Design Securities
Co., Ltd.

Tokyo Kiraboshi
Financial Group,
Lnc.

December 2019

Source: Compiled based on websites of corporations and newspaper coverage.

268

Chap. XII Financial Instruments Business (Securities Business)the scope of their businesses was provided to include the“Securities-Related
Business”(Article 28, Paragraph 8 of the FIEA), incidental businesses (items(i) through (viii) in Article 35, Paragraph 1 of the FIEA) and businesses required to be notified to the prime Minister (Article 35, Paragraph 2). At first,
with a view to preventing potential adverse effects, the regulatory agency (1)restricted the scope of business that the securities subsidiaries of banks may
conduct (i.e., the prohibition of stock brokerage, etc.) and (2) required the installation of a firewall between securities subsidiaries and their parents.
The restrictions on the scope of business were lifted in October 1999. Restrictions of the firewall were also eased in phases. In September 2002, theban on opening banking and securities joint branch offices was lifted. And in
March 2005, banks were allowed to introduce customers to securities companies as initial public offering (IPO) candidates (business-led service). In June
2009, the joint position regulations prohibiting officers and employees of securities companies and banks from working on both sides of the firewall
were lifted, and the sharing of confidential information relating to corporate
customers was permitted. Simplification of procedures for non-public information sharing is being discussed in 2021. Recently, not only megabankgroups but also regional banks have been entering into financial instrumentsintermediary service agreements with securities companies in developing
joint banking and securities businesses through introducing customers, opening accounts and handling orders.
13. Competition Structure of the Securities Industry
The competitive structure of the Japanese securities industry had been called
the“Big Four oligopoly”with four major securities companies commanding
the largest share of the market and controlling affiliate networks that consisted of a number of small and medium-sized securities companies. However,the Big Four oligopoly broke down in the 1990s as (1) Yamaichi Securities
went bankrupt in 1997; (2) Daiwa and Nikko split up their companies into
two divisions in 1998—the wholesale division (providing underwriting,
M&A advisory, proprietary trading and other services to corporate customers) and the retail division (providing individual investors with a brokerage
service and offering the sale of investment trusts) (Daiwa later reintegrated
the divisions); and (3) Nomura, Nikko (later changed name to Nikko Cordial), and Daiwa liquidated their holdings of shares in their affiliates. Following an accounting scandal, Nikko Cordial was acquired by Citigroup in 2007
and then was acquired by Sumitomo Mitsui Banking Corporation in October
2009 and became SMBC Nikko Securities.
The conventional business strategy of the former Big Four was to increase269

Chap. XII Financial Instruments Business (Securities Business)

Table XII-26.

Changes in the share of net operating income profits by business type
Term ending March
1991

Term ending March
1997

37,50924,317

Net operating income (¥100 million)

No ofShare of
No of
Share ofcompanies
total
companies
total
210
92.4%
225
85.3%

Domestic securities companies

The“Big Four”
Integrated securities companies
Small and Medium Securities companies

4
42
83

44.6%
37.2%
8.5%

4
44
81

47.6%
28.4%
5.7%

Exchange Small and Medium Securities companies
Non-members
Bank-offiliated securities subsidiary

81

2.1%

77
19

1.4%
2.2%

(Exchang
Members)

Foreign securities companies
Members
Non-Members

50

7.6%

56

14.7%

25
25

6.3%
1.3%

21
35

12.4%
2.3%

Source: Compiled from the Securities Bureau of the Ministry of Finance, Nenpo (Annual Report) (Vol.4
Financial Statements) and the JSDA’s Financial Overview of Regular Member Firms, Shoken
gyoho (Securities Industry Report))

Net operating income (¥100 million)

Term ending March2008

FY201937,03832,047

No ofShare of
No of
Share ofcompanies total companies total
54 78.7%
47 68.4%

Major General and Wholesale
Independent
Megabank Affiliates
Other bank affiliatedForeign-affiliatedRetail Main
Listed securities
Regional bank affiliated
Small and medium-sized securities
Online securities (including foreign-affiliated)

4
7
3
40

31.4%
14.1%
0.2%
33.0%

2
4
3
38

24.7%
25.5%
0.5%
17.7%

173

17.5%

131

18.8%

16
6
137
14

7.3%
0.4%
4.9%
4.9%

14
27
73
17

6.4%
2.2%
2.7%
7.5%

New business entities

81

3.8%

83

13.0%

Investment management, fund sales, etc. (Japanese-affiliated)
Investment management, fund sales, etc. (foreign-affiliated)
FX (including foreign-affiliated)
PTS (including foreign-affiliated companies)
Others

17
22
19
8
15

0.3%
1.5%
0.7%
0.3%
1.0%

21
24
19
8
11

0.7%
4.7%
2.2%
0.4%
5.0%

Notes: 1. Classification criteria are based on“shareholder composition”(independent and listed securities, bank-affiliated, foreign-affiliated, etc.) and“business characteristics”. Listed securities areincluded if they are listed by a holding company and it is a controlling subsidiary. Foreign-affiliated securities firms by shareholder composition are 71 (FY2019).
2.“Online securities”includes foreign-affiliated and smartphone securities.
3.“Others”includes OTC derivatives, private equity, etc.
Source:“Time-Series Analysis of Securities Companies’Management”(commissioned by JSDA, 2018)
written and partly revised by myself. 2019 data calculated from disclosure magazines.

270

Chap. XII Financial Instruments Business (Securities Business)

their shares in the brokerage market and win the mandate as the lead manager
of equity financing by taking advantage of their share in brokerage. To
achieve such goals, they sought to build a nationwide network of branches,hire a large number of employees loyal to their company, and lure manymember companies of the stock exchanges under their umbrella. However, as
such strategy entailed huge costs and risks, only a small number of securities
companies could afford to pursue the strategy by providing full-line services(and by diversifying the sources of income thereby). In consequence, there
came into existence only a few big and integrated securities companies that
adopted the Japanese-style employment system with many affiliated brokers.
The business strategies and management systems proved effective during
the period of high growth as a mechanism to supply large amounts of capital
into the industry in a timely manner. However, excess capital tends to lead toover-financing, which became evident during the bubble period in the late1980s. In the 1990s, after the burst of the bubble economy, the fundamentalsof the Japanese economy changed (excess capital) and the traditional management strategies and systems had to be reformed. After the collapse of Yamaichi, major securities companies abandoned the strategy of maintaining
affiliate networks of small and medium-sized securities companies. The largebanks, which had been keen to enter the securities industry, brought thesmall-, medium-, and second-tier securities companies that had been the Big
Four affiliates under their umbrella.
The stock market experienced dissolution of cross-shareholdings and decline of share prices throughout the 1990s. The financial behavior of corporate managers gradually shifted to focus more on“cost of capital,”leading to
the reduction of overabundant capital (purchase of treasury stock) and the reallocation of existing capital (disposals of business divisions and M&A). In
addition, the overabundant capital, released from companies and absorbed as
idle money by the institutional investors, boosted their assets, flowing into
foreign bonds and structured bonds which offered higher returns. Foreign securities companies entered the market to provide M&A advisory services orto trade overseas securities.“Trading volume”became less important as acompetitive yardstick. The table on the right shows the competitive structureof the industry through changes in the share of net operating income.

CHAPTER XIII
Asset Management Service

1. Management of Individual Financial Assets
According to a survey by the Bank of Japan,“Comparison of the Flow ofFunds between Japan, the United States, and Europe,”at the end of March
2021 individuals in Japan had ¥1,946 trillion worth of financial assets. Of
this amount, 54.3% was invested in cash and deposits and 15.2% in securities(debt securities, investment trusts, stocks, etc.) investments. Compared with
the United States and Europe, Japanese individuals’financial assets are heavily skewed toward cash and deposits more so than not only the U.S. but also
the Euro area, and thinly invested in securities. In the 2020 survey by The
Central Council for Financial Services Information, 37.2% of respondents
said that they focused on“safety”as their reason for selecting financial instruments, while 24.5% said“liquidity.”Only 22.0% of respondents said thatthey focused on“profitability. (Nonetheless the percentage of respondents
highlighting profitability has increased over the years.)”Individuals’financial assets in Japan thus are mainly invested in low-risk bank deposits, withlittle preference for more profitable securities. Certainly during the era of deflation, the heavy investment in bank deposits probably turned out to havebeen the right call. However, it is possible that the focus on safety carries
with it the risk that the real value of cash will erode during of inflation.
Under these circumstances, the government introduced a preferential tax
treatment investment system (NISA Nippon Individual Saving Account, asmall-amount investment tax exemption scheme) (General NISA) in 2014 topromote the“Shift from Savings to Investment.”Additionally in 2018, theinstallment-type (tsumitate) NISA was launched. In 2024, the General NISA
is scheduled to be replaced by a new two-tiered system (New NISA) which
consists of a general portion and an installment portion. In 2022, the age forparticipation in iDeCo (individual-type defined contribution pension plan) is
due to be raised from under 60 to under 65.
Asset management companies include trust banks, life insurance companies, and discretionary asset management companies that manage the pension
and insurance reserves of individuals, i.e. people’s security for the future. In-

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Chap. XIII Asset Management Service

Chart XIII-1.

Composition of Household Assets (at March 31, 2021)
Insurance, pension
Investment
and fixed
Bonds trusts Stocks, etc. warranty Others total

Cash and deposits(54.3%)

Japan(2.7%)(1.4%) (4.3%) (10.0%)(13.3%)

U.S.A(13.2%)(37.8%)(2.5%)(18.2%)(34.3%)

0

10

20($109.6 trillion)(29.0%)(4.2%)
EuroArea(¥1,946 trillion)(27.4%)(1.8%) (9.6%)
30
40
50

(33.8%)

60

70

80

( 27.6 trillion)(2.3%)
90
100

Percentages of the total financial assets

Note: Others total is the remains after deducting“Cash and deposits”,“Bonds”,“Investment trusts”,“Stocks, etc.”, and“Insurance, pension and fixed warranty”from total financial assets.
Source: Bank of Japan.

Table XIII-1.

Points of Focus When Selecting Financial Products<Households Holding Financial Assets>(%)
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Profitability

18.7

16.9

14.7

16.7

17.6

17.5

18.7

17.6

19.0

22.0

High return

13.8

12.1

9.8

11.7

11.9

12.1

12.9

11.3

11.5

12.4

Anticipated price increase in the
future

4.9

4.9

4.9

4.9

5.6

5.4

5.9

6.2

7.5

9.5

Safety

48.0

46.7

47.0

45.7

46.1

45.7

46.6

41.8

41.9

37.2

Principal is guaranteed

30.3

28.7

29.6

29.5

29.3

29.9

30.1

27.8

28.2

26.5

Financial institution handling the
product is reliable and secure

17.6

18.0

17.4

16.3

16.8

15.8

16.5

14.0

13.6

10.6

Liquidity

23.7

24.7

25.0

25.0

23.1

24.7

21.0

25.8

22.9

24.5

Easy to convert to cash

4.6

5.3

5.9

6.0

6.0

6.7

5.5

5.7

6.1

7.3

Free to deposit/withdraw even insmall amounts

19.0

19.4

19.1

19.1

17.2

18.0

15.5

20.1

16.8

17.2

Product content is easy to understand

2.2

2.5

2.5

3.1

3.2

2.4

3.2

2.2

2.6

4.1

Others

5.4

6.7

8.5

7.9

8.4

7.9

9.1

9.9

10.8

9.6

No response

2.0

2.4

2.2

1.5

1.7

1.9

1.5

2.7

2.8

2.7

Source: The Central Council for Financial Services Information.

Chap. XIII Asset Management Service

273

vestment trust management companies are also asset management companies, handling investment trusts for individual financial assets. Either indirectly or directly, asset management companies play an important role infinancial asset formation by individuals in a society with low birth and mortality rates. These asset management companies also contribute to growth incorporate performances and to the sound development of the economy—and
therefore society—through the following two functions. To begin with, they
fulfill a role in achieving the efficient allocation of capital by supplying
growth companies with capital through the market. Furthermore, they engage
in stewardship activities to increase investment returns for customers andbeneficiaries on a medium- to long-term basis, thereby contributing to enhancing corporate value and promoting sustainable growth of investee companies.
2. Pension Fund Management
Japan’
s pension plan system is a three-tier system consisting of (1) a foundational national pension (basic pension benefits) common to all citizens supplemented by (2) employee pension plans for employees of private companies and government employees, and (3) Private pensions (corporate pension
plans and private pension plans) for civil servants and private-sector salaried
employees. Of these plans, the national pension and employee pension plans
utilize a modified pay-as-you-go system which provides support shared
among generations in the form of public pensions, while private pension
plans use a funding system.
Private pensions can be broadly divided into (1) defined benefit and (2)defined contribution types. For (1) defined benefit pensions, the benefits are
determined based on the duration of membership of the scheme or the contributions made. For (2) defined contribution pensions, the contributed premium of each individual is clearly segregated, with pension benefits being determined based on the total of premiums and investment income. (1) Defined
benefit pensions include defined benefit corporate pensions (scheme- or
fund-type), the national pension fund and the employee fund. (2) Defined
contribution types include corporate defined contribution pensions and individual-type defined contribution pensions (iDeCo).
The management of pension plans must be safe and efficient from the perspective of protecting entitlement to pension benefits. With the exception,
therefore, of a few large-scale pension funds that manage investments inhouse, asset management of the pension fund is commissioned to outside investment companies. According to the Corporate Pensions Survey (fiscal
year 2017) by the Pension Fund Association, the allocation of corporate pen-274

Chap. XIII Asset Management Service

Chart XIII-2.

Structure of Pension System
iDeCO
Defined Defined
Employee
Retirement
contribution benefit
pension pension benefits
pension corporate
funds(corporate type) pension

National Pension
Funds

iDeCO

(Substitutepart)(Private sector salaried workers)(CivilServant, etc.)

Employees’ Pension insurance

National Pension (basic pension)

Self-employedpersons, etc.

Dependent spouses
Civil
of category-2
Servant, etc. insured
persons

Office workers

Category-1
insured persons

Category-2
insured persons, etc.

Category-3
insured persons

Source: Ministry of Health, Labor and Welfare.

Chart XIII-3.

GPIF’s asset/composition ratio (total pension fund)
Inner: Base portfolio (Deviation tolerance in brackets)
Outer: End of March 2021

Foreign stocks
24.89%
47,818.0 billion yen

Domestic stocks
24.58%
47,227.3 billion yen

25%

25%

(± 7 %)(± 7 %)

50%

50%(±11%)(±11%)

25%

25%(± 8 %)(± 6 %)

Domestic bonds
25.92%
49,807.8 billion yen

Foreign bonds
24.61%
47,294.3 billion yen

Source: The Government Pension Investment Fund (GPIF).

Chap. XIII Asset Management Service

275

sion funds (employees’pension funds and defined-benefit corporate pension
plans) to asset managers was trust banks, 45.6%; discretionary asset management companies, 27.2%; and life insurance companies, 27.3%. By composition of fund assets, domestic bonds accounted for 22.5%, domestic stocks for
9.1%, foreign bonds for 17.1%, foreign stocks for 12.1%, the general accountof life insurance companies for 18.7%, hedge funds for 4.7%, short-term assets for 6.0% and others for 9.7%.
The cumulative reserves of the national pension and employee pension
plans, which are public pensions, are administered and managed by the Government Pension Investment Fund (GPIF). By composition of fund assets of
GPIF (as of the end of March 2021), domestic bonds accounted for 25.30%,
foreign bonds for 24.61%, domestic stocks for 24.58%, foreign stocks for
24.89%. Previously, pension funds invested primarily in domestic bonds.
However, the allocation is now more diversified with investments in stocks
and foreign currency-denominated assets, (1) because domestic bond yields
are negative or very low with little prospect of income gain and (2) in orderto hedge against capital losses on bonds in case interest rates surge (and bondprices plummet) once the Japanese economy overcomes deflation. In addition, compared to the corporate pension, which uses a funding system, thepublic pension system, which utilizes a modified pay-as-you-go system, hasa higher risk tolerance in respect of stocks and foreign currency-denominatedassets and can be actively managed.
3. Asset Management of Trust Banks
Entrustment occurs when (1) an entity (trustor) transfers its rights to property
to an entity that can be depended on (trustee) based on a trust or some otherlegal agreement and when (2) the trustee is enabled to legally manage anddispose of the entrusted property on behalf of the trustor or a third party(beneficiary). In the case of the entrustment of a fund-based company pension plan trust, for example, the company’s pension fund is the trustor andbeneficiary, while the trust bank is the trustee. Because the system is premised on the dependability of the trustee, trust banks have a duty of due careof a prudent manager, duty of loyalty, and duty of segregated asset management.
Trust banks can service pension funds in three different ways. They canmanage the funds at their own discretion (designated asset management-type
trust) or not become involved in management without administering the assets (specified asset management-type trust), or be an intermediary trustee(general manager) representing the trustees. Moreover, when a pension fundcommissions asset management to multiple investment institutions, trust

276

Chap. XIII Asset Management Service

Chart XIII-4.

Trust Scheme

Trust Assets
SettlorBeneficiary
Administration
and Disposition
Setting the purposeof trust, Transfer
of Assets

Fiduciary Duties
and Segregationof Assets, etc.

Trust Income

Trust Contract orWill

Monitoring andSupervision

Trustee

Source: Trust Companies Association of Japan.

banks act as the general manager overseeing multiple investment institutions.
One of the characteristics of trust bank operations is their higher proportionof passive investment in comparison with discretionary asset managementcompanies.
Passive management is an investment method that aims to achieve a returnin line with movement in a specified benchmark (index). In comparison withactive management, where a manager makes trading decisions based on theinvestment value of individual securities with the aim of outperforming abenchmark, passive management has the advantage of keeping trading turnover costs low as well as curtailing management fees because detailed research and analysis is not required for individual securities. Unlike generalcommercial banks, trust banks also engage in trust business and brokeragebusiness, in addition to their regular banking business. In terms of businesswith companies, trust banks can arrange corporate loans as part of banking
business, manage an entrusted corporate pension as part of trust business, or
administer shareholders’register, etc. as part of securities transfer business.
This suggests there are business synergies to be leveraged in terms of trustbank transactions with companies. However, acting simultaneously as a lender, a shareholder and a securities agent for a company can give rise to numer-Chap. XIII Asset Management Service277

ous conflicts of interest. In addition, business overlaps in areas such as corporate lending and pension management with commercial banking and asset
management operations in the same financial group can lead to inefficiencies(or diseconomies) such as intra-group competition. To this end, Mitsubishi
UFJ Trust and Banking Corporation consolidated corporate loans with
MUGF Bank, Ltd. and Mizuho Trust & Banking Co., Ltd., Sumitomo Mitsui
Trust Bank, Limited, and Resona Bank, Ltd. integrated and consolidated theirasset management functions with the asset management companies in theirrespective groups.
4. Asset Management of Life Insurance Companies
Life insurance policyholders pay a premium based on the likelihood of theirliving or dying. There are generally two types of life insurance: mortality insurance that insures a policyholder against death and annuities that provide
for their livelihood in old age. Life insurance companies (insurers) accumulate the insurance premiums received from policyholders into a liability reserve to provide for future claim distributions and invest them. There are two
types of accounts used to manage the investment of insurance premiums; (1)the general account in which individual insurance and corporate pension assets, etc. are jointly managed and operated under one account, and the principal and a specified interest rate are guaranteed (guaranteed rate), with the life
insurance company bearing the operational risk, and (2) the special accountthat is separate from the general account, with the customer bearing the operational risk and benefits varying according to asset management performance.
Under a general account life insurance policy, the insurer promises to pay
a certain amount of benefits, and the policyholder agrees to pay a premiumthat is commensurate with the promised benefit. The premium is computedon the premise of an assumed basic rate comprising such factors as assumed
mortality rate, assumed ratio of expenses, and assumed rate of return. Since
the assumed basic rate is set conservatively, a positive difference can occur
between the assumed and actual rate. When this happens, a portion of the
profit is returned to policyholders as a dividend.
According to the 2020 issue of Trends in the Life Insurance Business, published by the Life Insurance Association of Japan, of the total assets undermanagement by life insurance companies at the end of fiscal 2019, securities
accounted for 81.9% Looking at the breakdown of securities, Japanese government bonds made up the greatest portion (47.0%), followed by foreign securities (30.5%, of which bonds accounted for 29.3% and equities 1.2%);
Japanese corporate bonds (8.8%); Japanese equities (5.8%); and Japanese278

Chap. XIII Asset Management Service

Table XIII-2.

Asset Composition(%)

Cash andCall loans
depositsMoneytrustsSecurities

Loans

Tangible
fixed
assetsOthersTotal
assets

FY2015

2.0

0.3

1.0

81.8

9.5

1.7

3.5

100.0

2016

2.0

0.3

1.2

82.5

9.1

1.6

3.3

100.0

2017

2.1

0.4

1.5

82.3

8.6

1.6

3.5

100.0

2018

2.3

0.4

1.6

82.6

8.2

1.6

3.3

100.0

2019

2.7

0.5

1.8

81.9

7.7

1.6

3.8

100.0

Source: The Life Insurance Association of Japan.

Table XIII-3.

Composition of Securities under Management(100 millions of yen, %)Government
securities
AmountMunicipal
bonds

Corporate
bonds

Other
securities

Total% Amount % Amount % Amount % Amount % Amount %AmountStocksForeignsecurities

FY2015 1,485,684 49.4 135,178 4.5 253,634 8.4 198,130 6.6 786,531 26.2 146,074 4.9 3,005,235
2016

1,485,538 48.0 129,821 4.2 258,242 8.3 215,146 6.9 851,974 27.5 156,421 5.1 3,097,144

2017

1,473,650 47.0 120,817 3.9 261,876 8.3 231,820 7.4 889,987 28.4 159,314 5.1 3,137,466

2018

1,482,230 46.3 109,400 3.4 271,082 8.5 217,827 6.8 965,262 30.1 157,290 4.9 3,203,095

2019

1,512,024 47.0 101,342 3.1 283,830 8.8 187,661 5.8 981,283 30.5 152,239 4.7 3,218,383

Source: The Life Insurance Association of Japan.

municipal bonds (3.1%).
Investment in foreign securities has consistently increased as domestic
long- and short-term interest rates have remained low against the backdrop ofa negative interest rate policy. Among foreign securities, investment in publicand corporate bonds has increased in particular, and credit assets such as unhedged open foreign bonds and high yield bonds with higher credit risks,
have seen an increase in popularity.
Targeting group pension plans, special account insurance offers several options. In a policy with a Class 1 rider, the assets of multiple customers aremanaged as a pool based on the investment policies of the life insurancecompany. In a Class 2 rider policy, the assets of each customer in the groupare managed separately using investment policies that reflect the wishes of
the individual customer. Within a Class 1 rider policy, there also are bal-Chap. XIII Asset Management Service279

anced-type consolidated accounts for which the life insurer determines the
allocation among asset classes and separate designed investment accounts
that reflect individual customer preferences in asset allocation.
5. Asset Management of Discretionary Asset Management Companies
Discretionary asset management companies manage the assets of customers
based on a discretionary investment contract that gives those companies thenecessary authority to make investment decisions and investments on behalfof their customers. Among the major customers of these companies are institutional investors (asset owners), such as pensions. Discretionary asset management is one of the most liberalized and internationalized businesses in thefinancial services industry, with low barriers to entry for non-financial businesses and foreign companies. As a category for investment specialists, theasset management company category includes investment trust managementcompanies and fund managers that sell units in group investment schemes,such as venture capital funds, as well as discretionary management companies.
The Japan Investment Advisers Association is a self-regulatory body forthe discretionary asset management industry. It is designed to protect investors by ensuring the fair and smooth operation of members’investment management business. It also contributes to the sound development of the investment management business and related matters. The investment management
industry’s business and other activities contribute significantly to the capital
market. In consideration of this important role, the association also works to
improve corporate governance by collecting and announcing information
about initiatives taken by members of the association in adopting the Stewardship Code, by forming study groups on the Stewardship Code, and by carrying out discussions and research.
A special feature of discretionary asset management companies in comparison with trust banks is the high proportion of active investment and customized asset management services that closely reflect the wishes of customers.
When commissioned to handle the management of assets, they leave the administration side of the business to trust banks and other financial institutions. Reacting to the pension plan fraud scandal in 2012 and other incidents,
trust banks are expanding and reinforcing their monitoring systems bystrengthening their independent party checking function and other measures.
Allocation of the assets of customers is done based on investment guidelines and other agreements determined through discussions with pension
funds and additional customers. Trends in recent years show that along withthe diversification of the investment needs of customers, these funds are not280

Chap. XIII Asset Management Service

Chart XIII-5.

Investment of Pension Assets by Discretionary Asset Management
Company

Pension fund,etc. customer

Discretionary
investment contract

Discretionary AssetManagement Company(asset management)

Tripartite agreement

Tokkin specified money trust

Trust bank(custody and management of assets)

Purchase/saleand delivery of
securities

Investment instructions
Placing orders

Table XIII-4.
Traditional discretionary
investment contract

Securities companies,
etc.

Scheme comparison
Real estate private
placement fundWrap AccountCustomer

Institutional investors

Fund

Individual investors

Investment
targetTraditional securities

Real estate trust benefi- Traditional securities
ciary rights

Managing
entitySpecialized managementcompany

Specialized managementcompany

Company concurrently
engaged in securities
businesslimited to such traditional investment instruments as stocks and bonds but
also involve investments in the stocks and bonds of high-growth emerging
countries and alternative investments that target absolute rather than relative
returns, such as real-estate-related securities and hedge funds.
In addition to the aforesaid traditional discretionary investment services
for institutional investors as customers, schemes for real estate private placement funds as customers as well as the wrap accounts provided by securities
companies and trust banks for individual investors have also been attracting
attention in the last few years.

Chap. XIII Asset Management Service281

6. Asset Management of Investment Trusts
Investment trusts are a type of collective investment scheme based on pooling small investments from many investors and have three significant features. First, they enable the diversification of small investments. Using investment trusts allows individual investors to lower their risk throughdiversification just the same as institutional investors even with small investments. For example, investment in an investment trust fund that has diversified its investments into no less than one thousand stocks and in 40 or morecountries starts from about ¥100. The second feature is that investment trusts
are managed by professionals. Building the optimum investment portfolio
based on macroeconomic analysis as well as financial trends and stock priceanalysis requires advanced knowledge, analytic capabilities, and investment
technology. Through investment trusts, even individual investors can benefit
from the skills of professional fund managers. The third feature of investment
trusts is transparency. The mark-to-market net asset value of these investment
trust funds is published on a daily basis, and Japanese laws have beefed up
disclosure requirements.
An investment trust with instructions from trustors is the representative
scheme adopted in Japan. Assets collected from investors (beneficiaries)
through subscriptions by distributing companies, such as securities companies and registered financial institutions, are managed by a trustor (investment trust management companies) and held in safekeeping and administeredby a trustee (trust banks).
When the investment trust system was first set up, government regulators
only approved investments in Japanese stocks. However, the investment regulations have gradually been liberalized, and today it is possible to create atruly wide range of investment instruments based on the products available.
For example, by including short-term financial instruments, they can structure investment trusts, such as money reserve funds (MRFs), that mimic bankdeposits. Furthermore, since the approval of investment in real estate andcommodities, individual investors can take a stake in office buildings, gold,oil, and other investments such as infrastructure or solar power generation facilities through investment trusts. In addition, there are also investment trusts
utilizing AI (artificial intelligence).
Entry into the investment trust market has also been liberalized from alimitation to only approved companies associated with major securities companies to a registration system that requires only that companies meet certain
conditions. As a result, the industry has grown from only about 10 companies
at one time to over 100 investment trust management companies. Moreover,with the lifting of the bans on outsourcing asset management and on invest-

Chap. XIII Asset Management Service

Table XIII-5.

1998

1999
2001
2007
2008
2016

Securities companies begin investment trust management business
Investment trust management companies made independent of securities companies
Ban on inclusion of public bonds lifted (Bond investment trusts established)
Ban on inclusion of foreign securities lifted
Ban on use of forward exchange contracts lifted
Ban on inclusion of OTC-registered stocks lifted
Ban on use of derivatives for hedging purposes lifted
Foreign-affiliated investment management companies enter market
Bank-affiliated investment management companies enter market
Ban on use of derivatives for other than hedging purposes lifted (Bull/Bear funds established)
Exchange traded funds (ETFs) introduced
Ban on conducting both discretionary asset management and commissioned investment trust
management businesses lifted
Financial System Reform Law passed (Japanese Big Bank)
Deregulation converts investment trust management companies from licensing to approvalsystemBan on outsourcing asset management lifted
Ban on investment trusts being sold through banks on an agency basis lifted
Ban on fund of funds (FoFs) lifted
Real estate investment trusts (REITs) introduced
Further deregulation converts investment trust management companies from approval system
to registration system
Ban on inclusion of commodities lifted
Infrastructure Fund introduced

Chart XIII-6.
Beneficiaries

Purchase/holding
Investors

The Structure of Investment Trusts with Instructions from Trustors
Distributing
companies
Handling ofsubscription

Sales/
Securities
firms
Redemption

TrustorTrustee

Instructions on
management,
etc.

Safekeeping,etc.

Distribution
Registered agreement

Investors

Sales/
financial
Redemption institutions

Investors

Sales/
DirectRedemption marketing

Source: The Investment Trusts Association, Japan.

Investment

Trust
agreement

Trust banks, etc.

1951
1959
1961
1970
1978
1986
1987
1990
1993
1995

Trends in the Liberalization of Investment Trust Regulations in Japan

Investment trust
management companies

282

Investment

Investment

Main
investment
objectives
Securities

Real estate

OthersChap. XIII Asset Management Service283

ing in a fund of funds, investment trusts can also indirectly offer their customers access to the investment services of foreign asset management companies.
7. Stewardship Code (1)The UK Stewardship Code, on which the Japanese version of the Stewardship Code is based, was established in 2010 to monitor and curb excessiverisk-taking by corporate management as the responsibility of shareholders. It
was established in response to criticism that shareholders, who have limited
liability, were protected even though public funds were used to bail out financial institutions during the crisis that precipitated the Lehman Shock. Given
the Cabinet’s approval of the Japan Revitalization Strategy in June 2013, thePrinciples for Responsible Institutional Investors (Japan’s Stewardship Code)formulated by the Council of Experts Concerning the Japanese Version of the
Stewardship Code (established within the Financial Services Agency (FSA))
were formulated and published in February 2014 as part of a growth strategy,
and a revised version was released in May 2017, and then again in March
2020.
The Stewardship Code defines the principles deemed to be helpful for institutional investors in fulfilling their stewardship responsibilities of enhancing the medium-term to long-term investment return for their clients andbeneficiaries by increasing the investee companies’corporate value and sustainable growth through conducting“constructive dialog”based on in-depth
knowledge of the companies and their business environment, alongside consideration of sustainability issues in accordance with their investment strategies.
The Stewardship Code and the Corporate Governance Code serve as twowheels of a cart so-to-speak, and in expectation that broad penetration andimplementation of these two Codes will contribute to realizing effective corporate governance in Japan, over 300 institutional investors have also adopted the Stewardship Code. The Stewardship Code is not a law or a legallybinding regulation. Rather than being a set of laws or regulations, it adopts a
principles-based approach instead of a rule-based approach. The Code adopts
a“comply or explain”approach, according to which an institutional investor
either implements the principles or, if not, explains their reasons for noncompliance. In addition, the Guidelines for Dialogue between Investors andCompanies, which provide an overview of agenda items on which institutional investors and companies are expected to focus for sustainable growthand medium- to long-term enhancement of corporate value, as required by
the Stewardship Code (code of conduct for institutional investors) and the284

Chap. XIII Asset Management Service

Table XIII-6.

The Principles of the Stewardship Code

So as to promote sustainable growth of the investee company and enhance the medium- and long-term
investment return of clients and beneficiaries,
1. Institutional investors should have a clear policy on how they fulfill their stewardship responsibilities, and publicly disclose it.
2. Institutional investors should have a clear policy on how they manage conflicts of interest in fulfilling their stewardship responsibilities and publicly disclose it.
3. Institutional investors should monitor investee companies so that they can appropriately fulfill theirstewardship responsibilities with an orientation towards the sustainable growth of the companies.
4. Institutional investors should seek to arrive at an understanding in common with investee companies
and work to solve problems through constructive engagement with investee companies.
5. Institutional investors should have a clear policy on voting rights and disclosure of voting activity.
The policy on voting rights should not be comprised only of a mechanical checklist; it should be designed to contribute to the sustainable growth of investee companies.
6. Institutional investors in principle should report periodically on how they fulfill their stewardship responsibilities, including their voting responsibilities, to their clients and beneficiaries.
7. To contribute positively to the sustainable growth of investee companies, institutional investors
should develop skills and resources needed to appropriately engage with the companies and to makeproper judgments in fulfilling their stewardship activities based on in-depth knowledge of the investee companies and their business environment and consideration of sustainability consistent with theirinvestment management strategies.
8. Service providers for institutional investors should endeavor to contribute to the enhancement of thefunctions of the entire investment chain by appropriately providing services for institutional investors
to fulfill their stewardship responsibilities.
Source: Financial Services Agency.

Corporate Governance Code (code of conduct for companies), were formulated and published in June 2018, as a supplemental document to both codes.
The revised version was published in June 2021.
8. Stewardship Code (2)The Stewardship Code calls for the following three key actions to be taken
by institutional investors toward investee companies: (1) monitoring (Principle 3); (2) engagement (Principle 4); and (3) exercise of voting rights (Principle 5).
First, according to the Code, (1) institutional investors should monitor investee companies so that institutional investors can fulfill their stewardshipReturns

Source: Financial Services Agency.

Returns

Medium- to long-term
increase in corporate value

Listed companies

Corporate Governance Code(Principles for Corporate Behavior)

Realization of a virtuous cycle for the Japanese economy as a whole

Constructive dialogue from a mediumto long-term perspective

Investment

Institutional investors(shareholders)Medium- to Long-term
Return Improvement

Ultimate beneficiary

Investment

Dialogue Guidelines
Various stakeholders(employees, customers,
suppliers, local communities)

Stewardship Code(Principles for Institutional Investors)

Chart XIII-7. Relationship between the two codes and dialogue guidelines

Chap. XIII Asset Management Service

285

286

Chap. XIII Asset Management Service

responsibilities with an orientation towards the sustainable growth of thecompanies. Monitoring should be performed continuously and effectively.
This includes non-financial matters such as information regarding ESG(environmental, social and corporate governance). Next, (2) engagement refers to having“purposeful dialog”with investee companies in order to arriveat an understanding in common with investee companies and work to solve
problems. Institutional investors are expected to have a clear policy in advance on how they design dialog with investee companies. Further, (3) institutional investors should exercise voting rights on all shares held. In exercising their voting rights, they are expected to decide on the vote in light of
results of the monitoring of investee companies and the contents of dialog
with them. In addition, the Code calls for the formulation and publication ofa clear policy on the exercise of voting rights, the publication of the results ofthe exercise of voting rights for individual proposals, and clear public disclosure of the reasons for approval or non-approval.
Principle 1 requires asset owners such as pension funds to encourage asset
managers to engage in effective stewardship activities, and Principle 8 defines the roles of service providers for institutional investors such as proxyadvisors and pension management consultants.
Historically, there was a time when the Wall Street Rule was the mainstream approach, whereby institutional investors would sell their holdings in
a company if they were dissatisfied with the management of the investee
company. However, for passive managers and large public pension funds(universal owners) with widely diversified investments, selling shares is often difficult in practice, and the concept of holding shares and exercising voting rights as a part of fiduciary responsibility has become increasingly widespread. Furthermore, the Stewardship Code now requires engagement frominstitutional investors with the management of investee companies rather
than just the exercise of voting rights. Similarly, with ESG investment, rather
than divesting holdings where there is a disagreement on policy, institutional
investors are now more open to the notion of holding shares and setting out
their opinions to companies through their exercise of voting rights and engagement with management.

CHAPTER XIV
Securities Taxation

1. Transitions in Securities Taxation (1)Basically, the income tax system of Japan is based on comprehensive taxation (taxation on the total income). It traces its origin to a recommendation
made soon after the war by the Shoup Recommendation on Japanese Taxation. Under the Shoup taxation system enforced in 1950, capital gains fromsales of securities, as well as interest and dividends, were subject to comprehensive taxation in full (capital losses were fully deductible). After the end of
the Allied military occupation, however, the Japanese government authorized
separate taxation on interest and exempted from tax, in principle, capitalgains from the sale of securities primarily from a policy standpoint to encourage accumulation of capital—with the result that the ideal of comprehensive
taxation on income has disintegrated rapidly. And it was a sweeping reformof the taxation system carried out in 1987–1989 that helped the basic framework of the present income tax system take shape. At that time, the structureof income taxation was changed from one consisting of 15 brackets (10.5%–70%) to a flat one consisting of five brackets (10%–50%), and the financial
income taxation system was overhauled thoroughly, including the uniform
separate withholding taxation on interest income; the abolition of the tax-exempt savings system, in principle; and separate taxation, in principle, on capital gains from the sale of securities. The structure of income tax rates wasamended to 4 brackets (10%–37%) in the fiscal 1999 tax reform and to 6
brackets (5%–40%) in the fiscal 2006 tax reform. In the fiscal 2013 tax reform, from the perspective of correcting income disparity and reviving theincome redistribution function, starting with income tax for 2015, the rate fortaxable income in excess of ¥40 million was set at 45%. Based on the fiscal
2016 tax reform, the basic corporate income tax rate was reduced to 23.4%
from 23.9% in FY2016, and was further reduced to 23.2% in FY2018. As aresult, the tax rate for national and local combined (the effective corporate
tax rate) became 29.74% in FY2018.
Looking at major trends in Japan’s securities taxation system during thelate 1990s and early 2000s, the government built taxation systems for stock288

Chap. XIV Securities Taxation

Table XIV-1.
Year

Securities Taxation Evolution Timeline (1949－2002)
Major amendments

1949 Shoup recommendation1950 A comprehensive taxation of interest, dividends, and capital gains from the sale ofsecurities is enforced.
1951 The optional separate withholding tax (50%) on interest is revived.
1952 The withholding tax on dividends (20%) is revived.
1953 Securities capital gains are exempted from income tax, in principle.
The securities transaction tax is instituted (0.15% of the value of stock transaction).
A uniform separate withholding tax on interest (10%) is instituted.
1954 The withholding tax on dividends is reduced (from 20% to 15%).
1955 Interest is exempted from income tax.
The withholding tax on dividends is lowered (from 15% to 10%).
1957 The separate withholding tax only on interest on short-term savings is revived (10%).
1959 The separate withholding tax on interest on long-term savings is revived (10%).
1961 Securities capital gains tax is levied on certain large-lot transactions.
1962
1963 The withholding tax rate on interest and dividends is lowered (from 10% to 5%).
1965 The withholding tax rate on interest and dividends is raised (from 5% to 10%).
The system of not requiring declaration and the optional separate withholding tax on
dividends (15%) are introduced.
1967 The withholding tax on interest and dividends is raised (from 10% to 15%).
The optional withholding tax on dividends is raised (from 15% to 20%).
1969
1970
1971 The optional separate withholding tax on interest (20%) is revived.
1973 The optional withholding tax on interest and dividends is raised (from 20% to 25%).
The securities transaction tax is raised (from 0.15% to 0.3%).
1976 The optional withholding tax on interest and dividends is raised (from 25% to 30%).
1978 The withholding tax rate on interest and dividends is raised (from 15% to 20%).
The optional withholding tax rate on interest and dividends is raised (from 30% to
35%).
The securities transaction tax is raised (from 0.3% to 0.45% for stocks, etc.).
1981 The securities transaction tax is raised (from 0.45% to 0.55%).
1984
1987 A sweeping tax reform
1988 - The maruyu system is abolished, in principle.
1989 - Uniform separate withholding tax on interest (20%) (products similar to financial
instruments are also subject to the uniform separate withholding tax).
- Securities capital gains are taxed, in principle (introduction of a separate withholding tax of 1% of the stock transaction value).
- The securities transaction tax is lowered (from 0.55% to 0.3%).
1995

Income tax brackets
8 brackets (20%－55%)

11 brackets (15%－65%)

13 brackets (10%－70%)
15 brackets (8%－75%)

16 brackets (10%－75%)
19 brackets (10%－75%)(The taxable income applicableto tax rate brackets is raised in1971 and again in 1974.)

15 brackets (10.5%－70%)
12 brackets (10.5%－60%)
5 brackets (10%－50%)(In 1995, the taxable income
applicable to tax rate brackets is
raised.)1996 Securities capital gains tax is normalized (from 5% of deemed capital gains to
5.25%).
The securities transaction tax is lowered (from 0.3% to 0.12%).
1998 The securities transaction tax is lowered (from 0.12% to 0.06%).
1999 The securities transaction tax is abolished.
4 brackets (10%－37%)
2001 A tax exemption system is launched for small-amount capital gains from the sale ofstocks held long term (abolished after the 2003 tax system reform).
An emergency investment tax break is established.
2002 The special account system is established (implemented January 2003).

Chap. XIV Securities Taxation289

options, specific-purpose companies, and corporation type investment trusts
in 1998. Effective April 1999, it abolished the securities transaction tax andthe exchange tax (imposed on futures and options trading), which had long
been issues of concern. Further measures followed with the enhancement of
the Angels Taxation System in 2000 and the introduction of the tax-exemption system for profits on small sales amounts of stocks being held for thelong term (a ¥1 million special tax exemption on stocks, etc., held for morethan one year) and an emergency investment tax break (a tax exemption on
up to ¥10 million of principal) in 2001. The establishment of the special account system was included in the tax revisions for fiscal 2002 and launched
on January 1, 2003. During the same period, the government reorganized its
small-amount tax-exemption system for small-sum savings of the elderly, etc.
(Maruyu savings system for the elderly, etc.), converting it into a smallamount, tax-exemption system for persons with disabilities, etc.
2. Transitions in Securities Taxation (2)Since 2003, the reforms in the securities taxation system have focused mainly
on revisions in the preferential tax system for dividends and capital gains onlisted stocks, etc., expanding the scope of offsetting losses against gains, andrevisions concerning the systems of non-taxables.
Table XIV-2.
Year

Securities Taxation Evolution Timeline (Since 2003)
Major amendments

2003 Non-declaration system is introduced for dividends and capital gains of listed
stocks, etc.
The tax exemption system for small-amount capital gains from the sale of stocks
held long term is abolished2004 Preferential tax rate on dividends and capital gains from publicly offered stock investment trusts is introduced
Tax rate on capital gains is reduced from the sale of unlisted stock (from 26% to20%).
2007 The expiration date of application for a preferential tax rate is extended for a year
for dividends and capital gains of listed stocks, etc.
2009 Mechanism is introduced enabling netting of dividends and capital gains and losses
from listed stocks, etc.
Preferential tax rate on dividends and capital gains of listed stocks, etc. is extended
for three more years
2011 Preferential tax rate on dividends and capital gains of listed stocks, etc. is extended
for two more years
2014 Nippon Individual Savings Account (NISA) is introduced
2015
2016 Tax system for bonds, etc. is changed and scope of profit and loss netting expanded
Junior NISA is introduced
2018 Introduction of installment-type NISA
2020 Measures to adjust double taxation on investment trusts (foreign tax amount reduction) introduced.

Income tax brackets

6 brackets (5%－40%)

7 brackets (5%－45%)

290

Chap. XIV Securities Taxation

Chart XIV-1. Review and extension of NISA system (draft)
Current

Stable asset formation

Stable asset formation
Tax exemption period
5 years(¥1 millions)OR
General NISA
(Until 2023)

one tier

two tier

5 years(¥6 millions)

Expanding supply of
growth funds
Long-term shareholder
Stable asset formation
development
Tax exemption period Tax exemption period
5 years
20 years(¥5.1 millions)

one tier

Expanding supply of
growth funds
Long-term shareholder Stable asset formation
Tax exemption period
development
20 yearsTax exemption period

Draft revisions (from 2024)

OR
Dollar-Cost
Averaging NISA
(Until 2027)

New NISA(Temporary)(5 year measuresfrom 2024)

Dollar-Cost
Averaging NISA
(5 years extension
until 2042)※Secure 20 years of savings
until 2023

Source: Compiled from the Ministry of Finance pamphlet“Tax Reform for FY 2020”.

In terms of the revisions relating to the preferential tax rate, in the fiscal
2003 tax reform, the government introduced a non-declaration requirement
system that imposed only a fixed withholding tax of 20% (15% in income tax
and 5% in local inhabitant tax) on dividends and capital gains from listed
stocks, etc., and distributions of gains from publicly offered stock investment
trusts. At the same time, the government introduced a preferential tax rate of
10% on a limited-time basis. In the fiscal 2004 tax reform, the government
extended this preferential tax rate to cover taxable gains from publicly offered stock investment trusts. Then in the fiscal 2007 tax reform, the government carried over the preferential tax treatment for dividends and capitalgains from listed stocks etc., for another year. In addition, the fiscal 2009 tax
reform extended the preferential tax rate for three years, and the 2011 tax reform extended it for two more years, so that the preferential tax rate was ineffect until the end of 2013. To help fund the restoration of the areas strickenby the Great East Japan Earthquake, a special income tax for reconstruction
is being levied from 2013 to 2037.
Looking at the trend in the scope of allowing netting of losses against
gains, the fiscal 2003 tax reform made it possible for investors to offset losses on redemptions (termination of agreement) of publicly offered stock investment trusts on equities, etc., for the year. The fiscal 2004 tax reform added a tax deduction carryforward system (three years) for capital losses on
publicly offered stock investment trusts. To reduce the risk of investing inChap. XIV Securities Taxation

291

equities for individual investors, the fiscal 2008 tax reform also added amechanism allowing investors to offset capital losses on listed stocks, etc.,
against dividends beginning in 2009. Although the application of this mechanism was limited to investors who chose to separately declare their dividend
income from listed stocks, etc. in 2009, it became possible to also do so using an income tax withholding account from 2010. Furthermore, the fiscal
2013 tax reform enforced changes to the taxation method for bonds, etc.,
making it possible to offset income against losses for interest and capitalgains on specified bonds, etc., and income from listed stocks starting in 2016.
With regard to the tax exemption system, NISA was introduced in 2014,
followed by Junior NISA in 2016 and Installment-type NISA in 2018. In thefiscal 2020 amendment to the taxation system, the review and extension of
NISA and the extension of Installment-type NISA are scheduled (Junior
NISA will not be extended and will no longer be available after 2023).
In addition, various special tax measures have been implemented in response to the COVID-19 pandemic, including an extension of the allowable
period for filing income tax returns.
3. Taxation of Interest
Under the fiscal 2013 tax reform, changes were made to the taxation system
regarding interest income to go into effect in 2016. The outline of the current
system is as follows. The method of separate taxation on the basis of self-assessment or non-declaration is applied for interest on specified bonds andprofits distributed by publicly offered bond investment trusts and investment
trusts managing publicly offered bonds, etc. after paying a 20% withholdingtax (20.315% including the special income tax for reconstruction). Specified
bonds are certain bonds, such as government bonds, local government bonds,
foreign government bonds, publicly offered bonds, and listed bonds. Interest
on deposits and savings, and bonds other than specified bonds and profits
distributed by jointly invested trust accounts and privately placed bond investment trusts are treated, in principle, as interest income, and is subject to awithholding tax at a rate of 20% (20.315% including the special income tax
for reconstruction) separately from other income. Interest on deposits for tax
payment savings associations, tax reserve deposits and so-called children’sbank savings is tax exempt.
Income from similar financial products (including benefits from fixedterm deposits, benefits based on agreements covered by Article 2, Paragraph
4 of the Banking Act, interest on mortgage securities paid under specific contracts, profit on gold investment accounts, foreign exchange gains on foreign
currency investment accounts, gains on policies such as single premium en-292

Chap. XIV Securities Taxation

Table XIV-3.
Classification

Interest Taxation System
Outline・Interest on specified bonds
・Profits distributed by publicly offered Separate taxation on the basis of self-assessment or no decbond investment trusts and investment laration necessary
trusts managing publicly offered bonds, (20% withholding tax including 5% inhabitant tax)
etc.
・Interest on deposits and savings
・Interest on bonds other than specified
bonds (Note 1)
Separate withholding tax
・Profits distributed by jointly managed (20% including 5% inhabitant tax)
investment trusts and privately placedbond investment trusts

Tax-exempt savings system

・Tax-exempt interest income earned from a small-amountdeposit by persons with disabilities, etc. (on principal of
up to ¥3.5 million)
・Tax-exempt interest income earned from a small-amountinvestment in public bonds by persons with disabilities,
etc. (on principal of up to ¥3.5 million)
・Tax-exempt system for the workers’property accumulation savings for house construction plan and the workers’property accumulation savings plan (on principal of
up to ¥5.5 million)

Notes: 1. Excluding interest on corporate bonds issued by a family company the payment of which is received by a corporate executive, etc. of the family company either directly or through a relatedcompany.
2. Special income tax for reconstruction is levied from 2013 to 2037.
Source: Compiled from materials made by National Tax Administration Agency.

dowment or non-life insurance accounts that meet certain requirements) is
uniformly subject to withholding tax at a rate of 20% (20.315% including thespecial income tax for reconstruction).
Tax-exempt systems of interest income include the tax-exempt smallamount savings system for persons with disabilities, etc. and the tax-exempt
system of interest income for workers’property accumulation savings plan(tax-exempt system for property accumulation).
The tax-exempt small-amount savings system for persons with disabilities
includes a tax-exempt system for interest income on small-sum savings for
persons with disabilities (commonly known as Maruyu savings for persons
with disabilities, etc.) and one for interest income on small-amount publicbonds for persons with disabilities (commonly known as special Maruyu forpersons with disabilities, etc.). Both of these systems have an upper limit of¥3.5 million for tax-exempt principal, making earnings on a total of up to ¥7
million in principal tax free when both types of systems are used. The gov-

Chap. XIV Securities Taxation

Table XIV-4.

293

The Status of Taxation on Interest Income, Etc. (2020)(millions of yen)Classification

Amount paid

Taxable amount

Withholding tax
amountPublic bonds

3,130,335

37,5555,936

Corporate bonds

1,339,015

233,345

33,618Deposits (Banks)553,220477,995

72,832

Deposits (Others)

386,013220,665

33,460

Jointly invested trusts

15,080

9,249

1,402

Bond investment trusts

58,70653,9066,467Interest on specified bonds, etc.
(Withholding income tax special amount)

535,012

132,644

20,377

Redemption gains from discount bonds

1,552

1,552

276

Others

767,323

641,691

122,980

Total

6,786,256

1,808,602

297,348

Notes: 1. Taxable amount includes not only that paid to individuals but also that to corporations.
2. Interest on specified bonds, etc. (Withholding income tax special amount) applies to special
cases whereby the payment processor pays the special amount of withholding income tax to thegovernment on behalf of the income payer.
3. The“amount paid”and“amount of withholding tax”for“gain on redemption of discountbonds”include receipts by individuals as well as corporations.
4. As fractions were rounded to the nearest whole number, the figures may not add up to the actual
total amounts.
Source: Compiled based on the data available on the website of the National Tax Agency of Japan.

ernment abolished the previously available tax-exempt system for interest income on postal savings for persons with disabilities, etc., after theprivatization of postal services. Qualified persons with disabilities include
persons with a physical disability certificate, persons who receive a disability
pension, wives who receive survivors’basic pension benefits or a widow’spension.
The tax-system for property accumulation includes the workers’property
accumulation savings for house construction plan and the workers’property
accumulation savings plan. These savings are designed to encourage workers
below 55 years of age to buy houses and stabilize their retirement lives, andthe interest on combined principals of ¥5,500,000 or less would be nontaxable. However, the workers’property accumulation savings plan investing inlife insurance and property insurance, etc., have a nontaxable upper limit of¥3,850,000.

294

Chap. XIV Securities Taxation

4. Taxation of Dividends
In principle, not taking into consideration the special income tax for reconstruction, the balance of dividends, distributions of gains from publicly offered stock investment trusts, and other applicable income earned by stockholders or investors after the payment of a 20% withholding tax is subject tocomprehensive taxation. When comprehensive taxation is levied on dividend
income, the Income Tax Act allows the deduction of a certain percentage ofdividend income (tax credits for dividends) to avoid double taxation.
For distributions, etc., of gains on publicly offered stock investment trusts
and for dividends paid on listed stocks other than those paid on large shareholdings (those paid to a shareholder who holds 3% or more of the outstanding shares of a corporation), the payee of dividends has the option of adopting comprehensive taxation, separate taxation on the basis of self-assessment,
or non-declaration of dividend income (withholding tax only on their dividend income). For a limited period, stockholders and investors enjoyed apreferential tax rate of 10% (10.147% in 2013) on this income. However,from 2014 to 2037, the rate is 20.315%, after which a tax rate of 20% will be
Table XIV-5.
Classification

An Outline of Dividend Income Taxation
OutlineDistributions from publicly offered stock invest- ・Comprehensive taxation
ment trusts, etc.
Dividend on listed stocks, etc. (5% to 45% income
tax; 10% inhabitant tax)
Dividend on listed stocks,(Dividend deduction applicable)
etc. (excluding large
・Select either separate taxation on the basis of selfshareholdings) (Note 1)
assessment
Dividend on listed stocks, etc. (15% income tax;
5% inhabitant tax)
Dividend of sur(non-declaration is also possible)
plus, dividend of
profits, distribu- Other than above
Comprehensive taxation (tax credits for dividends)
tion of surplus,(5% to 45% income tax, 10% inhabitant tax)
Dividend
paid
at
one
time
etc.
(20% withholding)is no more than:(20% income tax)
¥100,000×
Dividend computational period
No declaration necessary(20% withholding)
12(20% income tax)
Items below
Notes: 1.“Dividends on listed stocks, etc. (other than those paid to large shareholders)”means those paid
to shareholders holding less than 3% of the outstanding shares of the listed company.
2. In addition, from January 2013 to December 2037, a 2.1% special income tax for reconstructionis levied against the amount of income tax as a time-limited measure.
Source: Based on the web site of the Ministry of Finance.

Chap. XIV Securities Taxation

Table XIV-6.

295

Taxation of Dividend Income (withheld at source) (2020)(millions of yen)Amount paid

Classification

TaxableamountTax-exempt
amountWithholding
tax amount

Dividends on profit or interest income, distribution of retained earnings, dividends,
etc., / on interest on fund corporations, andDividends, etc. of specified investment corporation investments

33,908,059

22,776,436

11,131,622

4,255,978

Distributions of profits of investment trusts
and investment trusts with specific investment purposes

2,281,427

1,577,793

703,634

310,611

Remittance to optional withholding tax account1,555,142

1,555,142－

234,126

Total

37,744,627

25,909,371

11,835,256

4,800,715

Notes: 1. Bond investment trusts and investment trusts managing publicly offered bonds, etc., are not included in“investment trusts.”
2.“Taxable amount”includes not only that paid to individuals but also that to corporations.
3. As fractions were rounded to the nearest whole number, the figures may not add up to the actual
total amounts.
Source: Compiled based on the data available on the website of the National Tax Agency of Japan.

applied. For a limited period, stockholders and investors have enjoyed a preferential tax rate of 10% (10.147% in 2013) even for separate taxation on thebasis of self-assessment. However, from 2014 to 2037, the rate will be
20.315%, after which a tax rate of 20% will be applied. It was from 2009 thatchoosing the separate taxation on the basis of self-assessment became an option. Moreover, from 2010, investors have been able to combine dividends,
etc., from listed stock, etc., in their withholding tax accounts. The term“listed stock, etc.,”refers to shares that are listed on domestic and foreign stock
exchanges and includes ETFs (exchange traded funds).
Meanwhile, dividends on stocks other than listed stocks (unlisted stocks)
and those received by large individual shareholders are subject to comprehensive taxation after paying a 20% withholding tax (20.42% from 2013 to2037). In this case, shareholders have the right to select the non-declarationof dividends paid at one time of no more than the amount derived by proportionally dividing ¥100,000 over the dividend-computation period. However,
local inhabitant tax is subject to comprehensive taxation.
Distributions of profit from publicly offered stock investment trusts aretreated as dividend income when investors opt for the comprehensive taxation method, entitling the investors to tax credits. However, the rate of deduc-296

Chap. XIV Securities Taxation

tion varies depending on the ratio of foreign currency denominated assets andnon-stock assets of the stock investment trust concerned. If the percentage ofeither foreign currency denominated assets or non-stock assets is over 75%,
the deduction of dividends is not allowed. For profits distributed by privately
placed stock investment trusts of the contractual type (see section 10 below),such dividends less withholding tax are subject to comprehensive taxation(dividends are deductible).
For the purpose of computing the amount of dividend income, interest paid
on a debt incurred to acquire stocks, etc., may be deducted from the taxable
income. However, this is allowed only when the investor files a tax return.
5. Adjustment of Double Taxation Relating to Dividends
Profits generated by a business corporation through its business activities
should, basically, be returned to the owners of that corporation. However,corporate income is usually taxed twice: corporate income tax and individual
income tax (dividend tax and capital gains tax). Considering that, ultimately,
it is the individuals who have the duty of paying taxes, some adjustments
have to be made to avoid double taxation. This is the question of consolidating corporate tax and an individual’s income tax. Ideally, all forms of double
taxation of corporate income—be it retained earnings or dividends—should
be rectified. However, adjustments are chiefly made to the dividend portion.
In Japan, in the case of individual shareholders, a dividend tax credit
system is applied that makes 10% of their dividend income from sources
such as distribution from surplus “( dividend income”) (and 2.8% forinhabitant tax) deductible from their tax liability. In the case of individual
shareholders, a dividend tax credit system is applied that makes 10% of theirdividend income (and 2.8% for inhabitant tax) deductible from their tax liability. However, in the case of those whose taxable income exceeds ¥10 million, 5% of such part of their dividend income that pushes their taxable income over and above ¥10 million (and 1.4% for inhabitant tax) is deductible.
For instance, when individual shareholders have a total taxable income of¥13 million (¥9 million in general income and ¥4 million in dividend income), they are entitled to a tax deduction of 5% of such part of their dividend income that pushes their taxable income over and above ¥10 million,
which is ¥3 million (=¥13 million－¥10 million), and 10% of other part oftheir income, which is ¥1 million. Therefore, they are entitled to a tax deduction of ¥250,000 (¥150,000 (=(¥13 million－¥10 million)×0.05)＋(¥100,000 (=(¥10 million－¥9 million)×0.1). In the US and Germany, no
adjustment measures are used. In the UK and France, the partial dividend income deduction method is used.

Dividend Taxation and Double Taxation Adjustments in Major Countries(As of January 2021)

Notes: 1. This is for dividends from listed shares, etc. (other than those paid to large shareholders).
2. This is for qualified dividends (dividends received from a domestic corporation or qualified foreign corporation with respect to shares held for morethan 60 days during a total of 121 days before and after the ex-dividend date).
3. Income is accumulated in the order of employment income, dividend income, and long-term capital gains, and a tax rate of 0% is applied to the portionof dividend income and long-term capital gains corresponding to the bracket of $40,400 or less, 15% to the portion corresponding to the bracket of over
$40,400, and 20% to the portion corresponding to the bracket of over $445,850. The corresponding portion is subject to a tax rate of 20% (for single
taxpayers). The tax rates for state and local government taxes vary from state to state.
4. 7.5% for the portion of dividend income corresponding to the bracket of 37,500 pounds or less, 32.5% for the portion corresponding to the bracket of
150,000 pounds or less, and 38.1% for the portion corresponding to the bracket of over 150,000 pounds, by accumulating income in the following order: employment income, interest income, and dividend income.
5. If the tax rate applicable when capital income is combined with other income is 25% or less, comprehensive taxation can be applied by filing a tax return. However, if the taxpayer is disadvantaged by the choice of comprehensive taxation after filing a tax return, the tax authorities will treat the capitalincome as if it were not declared and only withholding tax at the rate of 26.375% will be imposed.
6. In principle, interest and dividends are subject to withholding at source, but those whose reference taxable income (taxable income plus certain income
deductions (e.g., deductions from dividend income) added back) for the previous year is below a certain level may elect to be taxed separately on a tax
return without being subject to withholding.
Source: Compiled from the Ministry of Finance website.

Japan (Note 1)
United States (Note 2)
U.K.
Germany
Francetaxation
Choice between Separate Declara- Tiered taxation (separate taxation) Tiered taxation (separate taxation) No need to file a tax return (Sepa- Choice between separate taxation
tion and Comprehensive Taxation (Federal tax)
rate taxation)systemand comprehensive taxation※Comprehensive taxation is also (Note 6)(Separate declaration) 20%
possible (Note 5)
3 levels 0, 15% and 20%. (Note 3) 3 levels 7.5%, 32.5% and 38.1%.
(income tax: 15%(Separate taxation) 30%+(Note 4)⎧income tax: 12.8%⎫+ individual inhabitant tax: 5%)
26.375%Comprehensive taxation (state⎜+⎜orand local government tax)⎜⎧⎫
income tax: 25%(comprehensive taxation) 10% totaxes related to social security:⎜
⎜
⎜
⎜
⎜
+
55%.
In New York City
17.2%⎭
⎜Additional tax: 5.5% of the⎜ ⎩state tax: 4.00～8.82%⎜⎜
Note: It is also possible to choose
tax amountorcity tax: 2.7～3.4%⎩⎭ (comprehensive taxation) 17.2%
not to have to file a tax re+turn with only withholding 14% additional tax on the tax
to 62.2%⎧income tax: 0 to 45%⎫
tax (20% (15% income tax + amount⎜⎜
5% individual inhabitant⎜+⎜tax)).
taxes
relatedtosocialsecurity:⎜⎜⎩17.2%⎭
Reconciliation Dividend income tax credit method No preparation measures
A control and removal method
No preparation measures
A control and removal methodwith income(In the case of electing compre(Deduct £2,000 of dividend in(60% of dividends received arehensive taxation)
come)
taxes
included in the shareholder’s taxable income)(In the case of electing comprehensive taxation)

Table XIV-7.

Chap. XIV Securities Taxation

297

298

Chap. XIV Securities Taxation

In foreign countries, the imputation method was broadly adopted as amethod to adjust for double taxation. In this method, dividends including
corporate income tax are included in taxable income for the purposes of calculating income tax, and then the amount equivalent to corporate income tax
is deducted from the calculated tax amount. The dividend tax credit (dividend-received deduction) employed in Japan and the partial imputation
method employed in the UK are both types of imputation methods. Other
methods used to adjust for double taxation include the dividend paid deduction method (which authorizes deduction of dividends paid on the corporate
level from corporate taxable income) and the comprehensive business income tax method (CBIT). Interest and dividends are not deductible from taxable income on the corporate level, and such interest and dividends received
by individuals are not subject to income tax.
6. Capital Gains Taxation
In 2003, the system of opting for a separate withholding tax or for separate
taxation on the basis of self-assessment for gains on the sale of listed stocks,
etc., was abolished, and these taxes were unified into the latter system of separately filing an income tax return. In other words, not taking into accountthe special income tax for reconstruction, a 20% tax rate (a 15% income tax
and a 5% inhabitant tax) is applied to an amount of income arrived at by deducting the cost of acquiring or selling the security and interest paid on thefund used for the purchase of such security from the proceeds of such security. The capital gains from the sale of listed stocks, etc. may be treated so as todeal with issues related to taxable income based on withholding tax only using a specified account which will be discussed later. Previous to 2003, capital losses from the sale of stocks, etc., were deductible only from capitalgains from the sale of other stocks, etc., if any, made during the same year,
and it was not permissible to carry forward any unused losses. However,since 2003, investors have been able to carry forward capital losses from thesales of listed stocks, etc., for three years starting with the year following
their occurrence. Also, since 2009, investors have been able to deduct capital
losses on listed stocks, etc., from dividends, etc., received from listed stocks,
etc. Furthermore, starting in 2016, based on the change in the taxation method for bonds, etc., it became possible to offset income against losses for interest and capital gains from specified bonds, etc., and income from listed
stocks, etc. Separate self-assessment taxation shall apply to general sharesand similar.
Along with the abolition of the separate withholding tax system, the authorities sought to lessen the reporting burden on investors by establishing aChap. XIV Securities Taxation

Table XIV-8.

299

Outline of the Capital Gains Taxation System for Stocks, Etc.
OutlineSeparate taxation on the basis of self-assessment
Capital gains on listed stocks, etc. ×20%
(15% income tax: 5% inhabitant tax)
*Special exception on no declaration necessary for withholding tax
account

Listed stocks, etc.
・Listed stocks
・ETF
・Publicly offered investment trusts
・Specified bonds, etc.

General stocks, etc.
(Stocks, etc. other thanlisted stocks)

For income maintained in a withholding account (specified account selected for tax withholding purpose) from the sale of listed stocks, etc.
taxable-income-related issues may be completed based on withholding
tax only.
*Gain/loss offset and carrying-forward of unused deductible losses
relating to listed stocks, etc.
Losses from the sale of listed stocks, etc. may be deducted from theamount of dividend income, etc. on listed stocks, etc. for the sameyear.
For unused deductible losses relating to unlisted stocks, etc., the investor may carry it forward for a three-year period starting from the following year as deduction from the amount of capital gains from listed
stocks, etc. (Note 3) and the amount of dividend income, etc. from listed stocks, etc.
Separate taxation on the basis of self-assessment
Capital gains on general stocks×20% (15% income tax, 5% inhabitanttax)

Notes: From January 2013 to December 2037, a 2.1% special income tax for reconstruction is separately
levied against the amount of base income tax as a time-limited measure.
Source: Compiled based on information available on the website of the Ministry of Finance.

special account system. Under this type of account, a securities company
computes capital gains or losses, as the case may be, for its customer fromthe sale of shares of a listed stock, etc., made through a special brokerage account. The account is divided into two categories: the income tax withholding account and the simplified income tax return account (no tax is withheld).
When an investor sells his shareholdings through the income tax withholding
account, his securities company withholds the income tax, obviating the needfor the investor to file an income tax return. Furthermore, from 2010, it became possible for the securities company to deposit dividends from listed
stocks, etc. of customers that are subject to withholding tax in the income tax
withholding account set up for the customers. However, if an investor using
such an account also files a final return, the investor is also allowed to include capital gains or to offset capital losses from the sale of such sharesthrough another account. Further, in conjunction with the change in the taxa-

300

Chap. XIV Securities Taxation

Chart XIV-2.

Withholding Taxes on Capital Gains on the Sale of Listed Stock, Etc.,
Managed in Special Brokerage Accounts(millions of yen)

577,913600,000

557,872

516,579

500,000

511,351

433,386
373,698

400,000

300,870

300,000

233,936

200,000
100,000
0

38,895 43,371
2011

2012

2013

2014

2015

2016

2017

2018

2019

2020
(year)

Source: Based on the website of the National Tax Agency of Japan.

tion method for bonds, etc. effective 2016, the scope of application of thespecial account has also been widened. When an investor opts for the income
tax withholding account and does not file a final return, the spousal deduction is not affected. By contrast, if an investor opts for the simplified income
tax return account, such an investor may file a simplified version of the income tax return by attaching to it an annual statement of stock trading madeunder a special brokerage account received from his securities company (Notrequired after April 1, 2019). Currently, securities companies must send anannual statement of stock trading to the customer and the tax office no matter
what type of special brokerage account is selected by the customer.
7. The Angel Taxation System
The Angel Taxation System is a special taxation measure designed to encourage individual investors (angels) to invest in venture-stage firms (specified
small-to-midsize companies and specified new small-to-midsize companies)that meet certain requirements. Specified small-to-midsize companies arejoint stock companies as defined in Article 37 of the Act on Special Measures
Concerning Taxation, which fall under the category of specified new smallto-midsize companies as defined in Article 6 of the Small and Medium-sizedChap. XIV Securities Taxation

301

Table XIV-9. Specified small and medium-sized companies and specified new small
and medium-sized companies
Specified small and medium-sized companies

Specified new small and medium-sized companies

・Joint stock companies that fall under the ・Joint stock companies that fall under the categocategory of specified new small and mediumry of specified new small and medium-sized
sized business operators as stipulated in Article
business operators as stipulated in Article 6 of
6 of the Small and Medium-sized Enterprises
the Small and Medium-sized Enterprises Business Enhancement Act. (limited to the compaBusiness Enhancement Act.
nies incorporated within one year and satisfying
・A domestic corporation of which 10 years havecertain other requirements).
not passed since its incorporation (limited to a
corporation that falls under the category of ・A domestic joint stock company that was incorported within five years (limited to a corporasmall and medium-sized business operator listedtion that falls under the category of small andin each item of Article 2, paragraph 1 of themedium-sized business operator listed in each
Small and Medium-sized Enterprise Act anditem of Article 2, paragraph 1 of the Small andmeets other certain requirements).
Medium-sized Enterprise Act and meets other・Domestic corporations designated under Article
certain requirements).
57-2, Paragraph 1 of the Okinawa Promotion
S p e c i a l M e a s u r e s L a w t h a t h a v e b e e n ・Domestic corporations designated under Article
57-2, Paragraph 1 of the Okinawa Promotion
designated under the same provisions during theSpecial Measures Law during the period fromperiod from April 1, 2014 to March 31, 2022.
April 1, 2014 to March 31, 2022.
・Joint stock companies stipulated in Article 27-5of the National Strategic Special Zone Act.
・Domestic joint stock companies stipulated in
Article 16 of the Regional Revitalization Act
that conduct business stipulated in the same Article.
Source: Compiled from the IRS website.

Enterprises Business Enhancement Act. Etc., and domestic corporations
which were established less than 10 years ago (limited to those that meet prescribed requirements). On the other hand, specified new small-to-midsize
companies are joint stock companies as defined in Article 41 of the Act on
Special Measures Concerning Taxation, which fall under the category of
specified new small-to-midsize companies as defined in Article 6 of the
Small and Medium-sized Enterprises Business Enhancement Act. etc., (limited to those that meet prescribed requirements) and domestic corporations
which were established within five years (limited to those that meet the prescribed requirements). This system was established by the amendment to thetaxation system in 1997, and has been amended several times since then. The
2005 tax reform extended for another two years the special tax treatment reducing the rate on capital gains for shares of specified small-to-midsize companies (specified shares) to 50%.
The fiscal 2007 tax reform added another two years and liberalized the eli-

302

Chap. XIV Securities Taxation

Table XIV-10. Structure of the Angel Taxation System(for investments made on or after April 1, 2020)
The preferential tax treatment available for the year of investment in a venture company(either (1) or (2) below can be selected).
(1) Deduction of (the amount invested in the target company －¥2,000) from gross income for the year.
※For companies established less than 5 years before.
※The maximum amount of investment eligible for the deduction is the lower of gross income×40%
or ¥10 million (¥8 million after January 1, 2021).
(2) The entire amount invested in the target company is deducted from the gain on transfer of shares forthe year.
※For companies established less than 10 years before.
※No cap on deductible investment.
Preferential treatment available in the year in which unlisted venture company shares are sold(in the event of a loss on sale).
(3) Not only can losses incurred from the sale of unlisted venture company shares be aggregated (offset)with other gains from the transfer of shares in the same year, but any losses not aggregated (offset)
in a given year can be aggregated (offset) with gains from the transfer of shares successively overthe following three years.
※Similarly, losses can be carried forward over the following three years if the venture company loses
value due to bankruptcy, dissolution, etc., without being listed.
※If the investor received preferential treatment (1) or (2) in the year of investment in the venturecompany, the loss on sale is calculated by deducting the amount eligible for the deduction from theacquisition price.
Source: Compiled from the website of the Small and Medium Enterprise Agency.

gibility requirements for the special tax treatment and rationalized the approval process. This special tax treatment was abolished under the fiscal
2008 tax reform. However, at the same time, the government set up a contributions tax deduction system for investors that invest in specified start-up
small-to-midsize firms. Furthermore, under the fiscal 2020 amendment to thetaxation system, the scope of start-up companies eligible is expanded and theprocedures are streamlined to encourage a wider range of investors to use theAngels Taxation System.
The outline of the Angels Taxation System as of 2021 is as follows. Investors that have acquired shares issued by a specified new small-to-midsize
company (specified new shares) by direct investment may apply the donation
deduction for up to ¥8 million of the amount invested in the said company(¥10 million prior to 2020) (investors may choose to apply either (1) or (2))(2) investors that have acquired shares issued by a specified small and medium-sized company (specified shares) by direct investment may deduct theacquisition costs of shares of the specified small-to-midsize company fromtheir capital gains in the same year; and (3) when investors suffer losses from

Chap. XIV Securities Taxation303

the sale of the specified stocks up to a day before the listing date, or when
they suffer losses from the dissolution and liquidation of issuers, these losses
are deductible from gains on the sale of stocks in the same year. Unused deductible losses may be carried forward for three years starting with the following year. The special exception of (3) applies to specified shares acquired
through direct investment on or after June 5, 1997.
8. NISA
Based on the fiscal 2013 tax reform, NISA was introduced in Japan in 2014.
NISA is another word for a small amount investment tax-exemption scheme,
the tax exemption measure on dividends and capital gains on small investments in listed stocks, etc., in tax-free accounts. NISA is modeled on the Individual Savings Account (ISA)—a preferential tax system for investments
and savings introduced in the U.K. in 1999—and it was initially referred toTable XIV-11. Comparison of General NISA and Dollar-Cost Averaging NISA (as of 2021)
General NISA

Dollar-Cost Averaging NISA

Persons eligible to apply

Persons aged 20 or above

Account opening

One account per person; select either General NISA or Dollar-Cost Averaging
NISA

Tax benefits

Investment profit is tax-freeTax-exempt period

Up to 5 years from the initial year of Up to 20 years from the initial year of ininvestment
vestment

Limit of usage(Tax-exempt line)

Up to ¥1.2 million a year

Tax-exempt products

Investment trusts with a certain level of
Listed stocks, stock investment trusts,
marketability suitable for long-term inetc.
stallment and diversified investment

Investment period

Until December 31, 2023

Netting of profit and loss

No netting of profit and loss with a specified account and general accountWithdrawal restrictions

None

Up to ¥0.4 million a year

Until December 31, 2037

Change of financial institution Possible to change by year
OthersMust provide My Number at the time of account opening－

Method of purchase is limited to periodical purchase (e.g. once a month) of a certain amount (installment investment)

Source: Compiled based on the data available on the website of the Japan Securities Dealers Association(JSDA).

304

Chap. XIV Securities Taxation

Table XIV-12.
Tax-Exempt

Outline of Junior NISA (as of 2021)

Small amounts of dividends and capital gains on listed stocks in tax-free Junior NISA accountEligible account openers Residents under the age of 20 on January 1 of the year of account opening(investors)
or born in the year
Maximum annual invest¥800,000
ment
Tax-exempt investment
Maximum of ¥4 million
amounts
Account opening period

8 years from 2016 to 2023

Tax-exempt period

Maximum of 5 years

Investment management

Investments are made by agency or upon concurrence of a person with parental authority and, in principle, no withdrawal can be made until the account holder reaches the age of 18.

Source: Compiled based on various data issued by the National Tax Agency and the Ministry of Financeas the Japanese-version ISA. The“N”in NISA stands for NIPPON (Japan).
This system may also be referred to as the General NISA.
An outline of NISA as of 2019 is provided below. Dividends, coupons, andcapital gains from listed stocks, etc. in the NISA account are tax-exempt. A
NISA account may be opened by residents of Japan aged 20 years or older on
January 1 of the year of the account opening. The amount of annual investment was initially set at a maximum of ¥1 million making the total tax-exemption investment amount ¥5 million (¥1 million×5 years). However,starting in 2016, the annual investment amount was increased to a maximumof ¥1.2 million with the total tax-exemption investment amount coming in at¥6 million. The NISA account may be maintained for 10 years from 2014 to2023, with a maximum tax-exempt period of five years. Stocks, etc. may befreely sold during the period but the tax-exempt coverage of the sold portion
cannot be reused. Although effective January 1, 2015, the rule was changed
to allow switching of the financial institution on a yearly basis.
Furthermore, based on the fiscal 2015 tax reform, Junior NISA (a small
amount investment tax-exemption scheme on dividends and capital gains on
small investments in listed stocks, etc., in tax-free accounts of underaged persons) was introduced from 2016. Under the Junior NISA scheme as of 2019,
the tax exemption treatment applies on dividends and capital gains on small
investments in listed stocks, etc., in tax-free accounts opened by persons under the age of 20. The maximum annual investment amount is ¥800,000,
making the maximum tax-exempt investment amount ¥4 million (¥800,000

Chap. XIV Securities Taxation

305

×5 years). The account may be opened for eight years from 2016 to 2023
and the maximum tax-exempt period is set at five years. In principle, no
withdrawal can be made until the account holder reaches the age of 18.
Furthermore, based on the fiscal 2017 tax reform, the Dollar-Cost Averaging NISA was launched in 2018. The primary characteristics of the productare: (1) investors can start by making contributions in small amounts to taxexempt investment trusts; (2) investors can contribute up to ¥400,000 a year,with capital gains tax exempt for up to 20 years; (3) investors hold only one
NISA account, either the general NISA or the Dollar-Cost Averaging NISA;
and (4) the applicable investment trusts are expected to be appropriate forlong-term installment and diversified investment aimed at stable asset formation as provided for under relevant laws and regulations.
The NISA system was revised and extended as part of the tax reforms in
2020, and a new system is due to start in 2024 (see Section 2).
9. Taxation of Nonresidents
The Income Tax Act of Japan divides individuals into residents and nonresidents. Residents are individuals who have a domicile in Japan or a temporary
residence at which they have been living for one year or more. All individuals other than residents are deemed nonresidents. Of the residents, individuals who do not have Japanese citizenship and who have or have had a domicile in Japan or a temporary residence at which they lived for a total of no
more than five years in the past 10 years are referred to as non-permanent
residents. The entire income (worldwide income) of residents other than nonpermanent residents is subject to income tax. For non-permanent residents,
income other than foreign source income and foreign source income (limited
to income earned in Japan or income remitted to Japan) is taxable. And for
nonresidents, tax is imposed on their domestic source income only. The
method of imposition of income tax for nonresidents, i.e. whether the comprehensive taxation applies or the separate withholding tax applies, varies
depending on the type of domestic source income, whether the nonresident
has a permanent establishment (PE) in Japan or not, and whether the domestic source income is traced to the PE. A permanent establishment (PE) refersto: (1) a branch PE (a place in Japan where a non-resident, etc. manages abusiness, a branch, office, factory, workshop, or other fixed location for business); (2) a construction PE (a long-term construction site, etc. in Japan for
non-residents, etc.); (3) an agent PE (agents, etc. based in Japan on behalf of
non-residents, etc. who meet certain requirements).
For example, looking at the taxation system for interest and dividends, ofthe domestic source income of a nonresident, etc., income attributable to a

306

Chap. XIV Securities Taxation

Table XIV-13.

Outline of Matters Related to Taxation of Nonresidents, Etc.

Nonresident category Nonresidents with a permanent establishment
in JapanNonresidents without aWithholding
permanent establishIncome attributable totax
Other income sourced ment in Japan
permanent establishin Japan
ment
Type of income(Business income)(1) Income arising from investment/holding of assets＊
Excluding those corresponding to(7) through (15) below[Tax-Exempt Income][Comprehensive
taxation]

None
None

[Comprehensive taxation (partial)](2) Income arising from transfer ofassetsNone(3) Distribution of business profitof partnership[Tax-Exempt Income](4) Proceeds from sales of land, etc.

20.42%
10.21%(5) Compensation for personal services[Separate withholding tax followed bycomprehensive taxation](6) Rental income, etc., from realestate20.42%
20.42%(7) Interest, etc.

15.315%(8) Dividends, etc.

20.42%(9) Loan interest

20.42%(10) Usage fees, etc.

20.42%[Separate withholding
tax followed bycomprehensive(11) Salary or other remuneration
taxation]for personal services, public
pension income, severance
pay, etc.
(12) Prize money from business advertising and promotion

20.42%[Separate withholding tax]
20.42%(13) Annuity income, etc., from life
insurance contract

20.42%(14) Interest payment from investment savings plan

15.315%(15) Distribution of profit fromanonymous partnership, etc.

20.42%(16) Other income sourced in Japan[Comprehensive
taxation][Comprehensive taxation]

None

Notes: 1. Income attributable to permanent establishment may overlap with income sourced in Japan provided in (1) through (16) above.
2. Regarding income generated from by the transfer of assets in Table 2 above, apart from income
corresponding to permanent facility-related income, only income listed under Article 281 Paragraph 1, Items 1 to 8 of the Enforcement Ordinance of the Income Tax Act is subject to tax.
3. Based on the provisions of the Act on Special Measures Concerning Taxation, certain income
included in the income subject to comprehensive taxation in the above table may be applicablefor separate taxation on the basis of self-assessment or separate withholding tax.
4. Based on the provisions of the Act on Special Measures Concerning Taxation, withholding tax
rates relating to certain income among the withholding tax rates in the above table may be reduced or exempted in some cases.
Source: Complied from“Withholding Tax Basics,”FY2021 edition, National Tax Agency of Japan.

Chap. XIV Securities Taxation307

permanent establishment of the nonresident, etc. (income attributable to PE)
is subject to comprehensive taxation after withholding at the source, while
income other than that corresponding to income attributable to PE is subject
to a separate withholding tax. The withholding tax rate is 15.315% and20.42%, respectively. The withholding tax rates applied to nonresidents andforeign corporations are finally determined in accordance with the tax treaties Japan has signed with the countries where nonresidents, etc. receiving
the payments reside.
Japanese government bonds owned by nonresidents are tax exempt. In
other words, interest on government bonds held by a nonresident without apermanent establishment in Japan in an account with a specified central custody and transfer agent or a qualified foreign intermediary is exempt from income tax if it meets certain conditions. In addition, while interest on bookentry government bonds may not be tax-exempt, the withholding tax rates
applied to nonresidents and foreign corporations are relaxed in accordancewith the tax treaties Japan has signed with the countries where nonresidents,
etc. reside.
10. Tax Treatment of New Products(1) New types of investment trusts
Profits received from a privately placed stock investment trust of the contractual type are, in principle, subject to a withholding tax and then are taxed
comprehensively together with other incomes of the recipients of such profits. The tax credit for dividends is also applied, and when the recipient meets
certain requirements, he is exempted from the requirement of filing an income tax return. Capital gains from selling beneficiary certificates of suchinvestment trusts are subject to separate taxation on the basis of self-assessment. Profits received from an investment trust managing privately placedbonds are subject to a separate withholding tax, and capital gains, are currently subject to separate taxation on the basis of self-assessment. Tax rates
related to open-ended investment trusts and closed-end (listed) investment
trusts are the same as those applied to listed stocks. In other words, on dividends received from open-end investment trusts, a withholding tax of
20.315% is imposed before comprehensive taxation, separate taxation on thebasis of self-assessment, or non-declaration. A credit for dividends is not applied when the comprehensive taxation is selected on dividends. Capitalgains associated with open-ended corporation type investment trusts are subject to the separate taxation on the basis of self-assessment. On the other
hand, dividends received from closed-end (unlisted) or privately placed investment trusts are subject to a withholding tax of 20.42% and then to com-

308

Chap. XIV Securities Taxation

Table XIV-14.

Outline of Taxation Framework for New Investment Trusts
Cancellation (redemption) gains
Profitdistribution, Dividend (interest) Deemed capitalgains/losses
etc.
Income portion
portionCorporation type

Contractual typeClassification

Capital gains

Privately placed stock investment Comprehensive taxation (divi- Separate taxation on the basis of selftrusts
dend income for general stocks, assessment (capital gains on generalstocks, etc., 20.315%)
etc.)1
Investment trusts managing pri- Separate withholding tax
vately placed asset-management (20.315%)
trust bonds, etc.
Publicly Open-end typeofferedClosed-end (Listed)
type

Separate taxation on the basis of selfassessment (capital gains on generalstocks, etc., 20.315%)

Comprehensive taxation ･ Sepa- Separate taxation on the basis of selfrate taxation on the basis of self ･ assessment (capital gains on general
assessment (dividend income for stocks, etc., 20.315%)
general stocks, etc.)2(Unlisted) Comprehensive taxation (divi- Separate taxation on the basis of selfdend income for general stocks, assessment (capital gains on generaletc.)1stocks, etc., 20.315%)
Privately placed

Notes: 1. Withholding tax at 20.42% at time of receipt. Final income tax return is required except forsmall dividends.
2. Withholding tax at 20.315% at time of receipt. Taxpayer may choose not to take any further action; neither comprehensive taxation, separate taxation on the basis of self-assessment nor final
income tax return.
Source: Compiled based on the information available in“FY2019 Zeikin no Chishiki (knowledge on taxes)”by SMBC Nikko Securities Solution Planning Division; CHUOKEIZAI-SHA, INC.; pp125
and 132.

Table XIV-15.

Taxation on Stock Options

At grant ofstock options

At exercise of stock options

At the sale of stocks

Qualified stock
options－－

Separate taxation on the basis of selfassessment on (selling price - exercise price) (Note)

Non-qualified
stock options－

Comprehensive taxation on Separate taxation on the basis of self(market value of stocks at assessment on (selling price - market
exercise-exercise price)
value of stocks at exercise) (Note)

Note: Taxed as income on the sale of stocks.

Chap. XIV Securities Taxation309

prehensive taxation. A taxation system is selected that does not require thedeclaration of such income when certain requirements are satisfied. A credit
for dividends is not applied when the comprehensive taxation is selected on
dividends. Capital gains associated with open-ended corporation type investment trusts are subject to the separate taxation on the basis of self-assessment. For REITs (real estate investment trusts), if listed would be closed-end,
but dividends and capital gains from the sale of listed REITs are subject tothe similar taxation as listed stocks. However, a credit for dividends is notapplied when comprehensive taxation is selected on dividends.
(2) Stock options
The stock option system is a system under which a company grants its officers and employees the right to purchase its stocks at a certain price (exercise
price) for a certain period (exercise period). The company then pays its officers and employees remunerations linked to any increase in its stock price.
Stock option is classified into a qualified stock option and a non-qualified
stock option, depending on whether it satisfies the requirements stipulated in
the Act on Special Measures Concerning Taxation or not. The former is tax
deductible on economic benefits gained from its exercise (the difference between the market price and the exercise price). When selling stocks acquired
through rights exercise, separate taxation on the basis of self-assessment isapplied on the difference between the selling price and the exercise price. For
the latter non-qualified stock option, comprehensive taxation is imposed on
economic benefits gained from its exercise. Separate taxation on the basis ofself-assessment is imposed on the selling price of stocks issued on the exercise, deducting the market price of the stocks at the time of exercise, when
the stocks are sold.
11. Tax Treatment of Pension-Type Products
A defined contribution pension plan (the Japanese version of the 401(k) plan)
was introduced in October 2001. The defined contribution pension plan is a
private pension plan whereby an employee participating in the plan gives instructions about investing his or her contributions, with the understandingthat pension benefits may vary depending on the results of such investment.
It is divided into the individual type (iDeCo), in which the individual himself
makes contributions, and the corporate type, in which the company in principle makes contributions on behalf of its employees. In order to encourage thespread of pension products based on such a system and to enhance the efficiency of the management of such plans, it is essential to give a fixed tax incentive. And in devising such a taxation system, due care must be exercised

310

Chap. XIV Securities Taxation

Chart XIV-3.

Defined contribution plan eligibility and contribution limits (throughSeptember 2022)(1) Member of corporate DC
plan only(2) Member of corporate DC
plan and another plan, suchas DB(3) Member of another (4) Not a member ofplan such as DB
either corporate
only (including
DC plan or anothercivil servants)
plan, such as DB

Company-type DC rules permitting iDeCo enrollment and a reductionin the maximum employer contribution (from 55,000 yen to 35,000 yen;from 275,000 yen to 155,000 yen if combined with DB) are required.

iDeCo

iDeCo

68,000 yen
per month※Combined
limit with
National
PensionCorporatetype DC
55,000 yen
per month

National
Pension

20,000 yen
per month

Corporatetype DC
35,000 yen
per month

CorporateiDeCo
iDeCo
type DC 12,000 yen per month 12,000 yen per month
27,500 yen
per month

Corporate-type DC
15,500 yen per monthiDeCo

23,000 yen
per monthiDeCo

23,000 yen
per monthDB

No contribution limit for DB; for calculation of
DC contribution limits, the total DB is valued at¥2.75 million/month.

Employees welfare pension insurance
National Pension (Basic pension)

National Pension(No. 1 insured persons)

※1

※2

※3

National Pension(No. 2 insured persons)National Pension(No. 3 insured persons)

If the corporate DC plan does not allow for matching contributions, the employee can make iDeCo contributions up to a monthly amount of ¥20,000 (¥12,000 in combination with DB), provided that the plan rules (1) allow employees to join iDeCo and (2) set a maximum monthly employer contribution to the corporate DC of ¥35,000 (¥15,500 in combination with DB).
Matching contributions are permitted for participants in a corporate DC plan if the plan allows
for this, provided that the total amount of matching contributions does not exceed the employer
contribution to the corporate DC plan and is within the contribution limit (¥55,000 yen per month(¥27,500 yen in the case of a combined DB and DC)).
DB includes the Welfare Pension Fund; the Promotion and Mutual Aid Corporation for Private
Schools of Japan System; and the Coal Miner Pension Fund.

Source: Ministry of Health, Labor and Welfare website.

in striking a suitable balance between the taxation system for such pension
plans and that for other pension plans as well as in the transferability of pension assets when changing jobs. On May 29, 2020, a revised Defined Contribution Pension Plan Law will be enacted, relaxing the requirements for iDeCo membership for participants in company pension plans.
Tax measures for defined contribution plans are as follows.
(1) The employer’s contribution is treated as an expense for the company.
On the other hand, the employee’s contribution is eligible for income deduction (small enterprise mutual relief deduction). In January 2012, so-called“matching contributions”, allowing employees to make additional contributions in corporate pension plans, was introduced. In addition, the“iDeCoplus”payment system was introduced in May 2018 for iDeCo scheme mem-Chap. XIV Securities Taxation

Table XIV-16.

Tax Treatment of Defined Contribution Pension Plans

DivisionContribution stage:

311

OutlineCounted as a loss of the employer

Portion borne by theemployer
Premiums paid by em- Premiums to small-scale company mutual aid association are deducted as aployeeloss (Note)
Management stage:

Special corporate income tax is applied (frozen until the end of Fiscal 2016)

Benefits payment stage:
Old-agebenefits

PensionMiscellaneous income (deduction for public pensions is applied)

Lump sum Retirement income (deduction for retirement income is applied)

Disability Pension
Income and inhabitants’taxes are deductible
benefits
Lump sum
Lump-sum payment at Taxed as an inheritance income
the time of deathLump-sum payment at Occasional income
the time of withdrawal

bers who work for small and medium-sized businesses.
(2) At the management stage: The balance of reserves for a pension plan of
the individual type and that of the corporate type are subject to a special corporate tax of 1.173% (1% in national tax and 0.173% in local tax). However,this provision has been frozen until March 31, 2020.
(3) At the stage of benefit payment: (i) Old-age pension benefits: The beneficiary can receive pension benefits from the reserve in five or more annual
installments or in a lump sum. When the beneficiary opts for benefits in installments, such benefits are deductible from taxable income. It has been noted that income deductibility for benefits such as public pensions is overly
generous for high-income pensioners. The system came under review in thefiscal 2018 amendment to the taxation system. (ii) Benefits for persons withdisabilities: When a beneficiary has disabilities of a certain level, the beneficiary can receive the payment of benefits from the month in which he or she
is disabled, and the benefits are exempted from income tax and inhabitanttax. (iii) Death benefits: Death benefits paid in a lump sum to the survivors
when the subscriber died are deemed as inherited property, and up to ¥5 million for each legal heir is exempted from inheritance tax. (iv) Withdrawal
benefits: Benefits can be paid in a lump sum upon withdrawal from a pension
plan if certain criteria are fulfilled and they are subject to income tax and inhabitant tax.

CHAPTER XV
Prohibited and Regulated Acts of Securities Trading

1. Outline
With a view to establishing a fair securities market and enhancing the market’s credibility, the Financial Instruments and Exchange Act (FIEA) provides for various prohibited and regulated acts with respect to securities trading. In addition to prohibiting market manipulation (see Section 2) andregulating insider trading by persons associated with the companies concerned (see Section 3), it also imposes obligations on financial instruments
business operators (securities companies) to maintain a trading surveillancesystem and a corporate information management system to prevent such unfair trading (see Section 4). In addition, the Financial Instruments and Exchange Act requires trade participants to disclose certain transaction-related
information, such as the submission of reports of possession of large volume,
to ensure the fairness of securities transactions (see section 5).
However, it is practically impossible to list in the Financial Instruments
and Exchange Act all unfair trading in connection with securities transactions. In addition, as those securities transactions are complex and their structure changes rapidly, new methods that were unforeseeable at the time of legislation could emerge later. Faced with such issues, Article 157 of the
Financial Instruments and Exchange Act bans unfair transactions in broad
terms. More specifically, it prohibits the use of wrongful means, schemes, or
techniques with regard to the sale, purchase, or other transaction of securities, etc. (Item (i) of the article); the acquisition of money or other property
using a document or other indication which contains false indication on important matters or lacks indication about important matters necessary foravoiding misunderstanding with regard to the sale, purchase, or other transaction of securities, etc. (Item (ii)); and the use of false quotations in order toinduce the sale, purchase, or other transaction of securities, etc. (Item (iii))
This article is considered to be a general provision that comprehensively prohibits wrongful acts, including new types of unfair trading yet to emerge.
In addition to the above, Article 158 of the FIEA prohibits the spreading ofrumor, use of fraudulent means, assault, or intimidation for the purpose ofChap. XV Prohibited and Regulated Acts of Securities Trading

Table XV-1.

Main Provisions Relating to the Ban on Unfair Trading
Contents

Generalprovisions

313

・Prohibition of wrongful acts

Article of the Financial Instruments
and Exchange Act (FIEA)
Art. 157

・Prohibition of fake transactions or prear- Art. 159, Para. 1
ranged transactions
・Prohibition of transactions aimed at manipu- Art. 159, Para. 2, Item (i)lating securities prices
・Prohibition of making an indication with the Art. 159, Para. 2, Items (ii) and (iii)
aim of manipulating securities prices
・Prohibition, in principle, of stabilization Art. 159, Para. 3, and Arts. 20-26 of thetransactions
Order for Enforcement of the Act
・Prohibition of purchase for own account dur- Art. 117, Para. 1, Item (xxii) of theMarket
ing the stabilization period
Cabinet Office Order on Financial Inmanipulation
struments Business, etc.
・Prohibition of spreading of rumors or use of Art. 158
fraudulent means, assault, or intimidation
・Prohibition of securities companies from get- Art. 117, Para. 1, Item (xx) of the Cabiting involved in an artificial formation of net Office Order on Financial Instruments Business, etc.
stock prices
・Prevention of use of corporate share repur- Art. 162, Para. 2
chase for manipulating stock prices
・Prohibition of insider trading
Arts. 166 and 167
・Duty of officers to report securities transac- Arts. 163 and 164
tions and the duty to restitute profits made inshort-term trading
・Prohibition of short selling by officers
Art. 165
Insider trading
・Prohibition of disclosure of information and Art. 167-2
inducement of insider trading
・Prohibition of accepting orders that are sus- Art. 117, Para. 1, Item (xiii) of the Cabpected to be in violation of insider trading inet Office Order on Financial Instruments Business, etc.
regulations
・Prohibition of public notice, etc., of false Art. 168
quotations
・Restriction on the expression of opinion in Art. 169
newspapers, etc., for consideration
False
・Prohibition of indication of advantageous Art. 170
indication
purchase, etc.
・Prohibition of indication of a fixed amount of Art. 171
dividends, etc.
・Regulations on tender offersArt. 27-2 through 27-22-4
Tender offers
・Filing of Report of Possession of Large Volume Art. 27-23 through 27-30
・Prohibition of compensation of loss
Art. 39
・Restriction on Transactions conducted for Art. 161
their own account and excessive transactions
・Regulations on short sellingArt. 162
・Prohibition of massive promotional campaign Art. 117, Para. 1, Item (xvii) of theof particular securities
Cabinet Office Order on Financial Instruments Business, etc.
Others・Restriction on front-running
Art. 117, Para. 1, Item (x) of the Cabinet Office Order on Financial Instruments Business, etc.
・Ban on deliberate market manipulation by Art. 117, Para. 1, Item (xix) of the Cabimeans of trading securities for own account net Office Order on Financial Instruments Business, etc.

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Chap. XV Prohibited and Regulated Acts of Securities Trading

carrying out the sale, purchase, or other transaction of securities, etc., or
causing a fluctuation of quotations on securities, etc. Article 168 prohibits the
publishing of false quotations on market prices of securities, etc. Restrictions
on expression of opinions in newspapers, etc., in exchange for consideration
are stipulated in Article 169, while Articles 170 and 171 prohibit indicationof advantageous purchase, etc., and that of a fixed amount of dividends, etc.,
respectively.
2. Regulation of Market Manipulation
Market manipulation is an act of artificially influencing securities prices thatwould otherwise be determined by the securities market through natural supply and demand. With a view, therefore, to ensuring fair price formation insecurities markets and protection of investors, the Financial Instruments andExchange Act prohibits market manipulation and imposes heavy penalties forthe violation thereof.
Acts of market manipulation are largely divided into the following five
types: (1) fake transactions, (2) prearranged transactions, (3) price manipulation, (4) indication made for the purpose of market manipulation, and (5) stabilization transactions (Article 159).
A fake transaction is a securities transaction in which the same person
places purchase and sale orders during the same time frame with no actualchange in ownership occurring. With prearranged trades, similar transactions
are carried out in collusion with different persons. In both cases, the intention
is to mislead other investors into thinking trading in the security is very active; the requisite for being deemed a wash transaction is the existence ofsomeone whose purpose is to mislead other investors regarding trading status. Price manipulation refers to an act of engaging in transactions that could
possibly cause a fluctuation in securities prices for the purpose of misleading(inducing) other persons into believing that, despite intentional price manipulation, the prices are determined by natural supply and demand, and thus inducing them to purchase or sell the securities. (Supreme Court ruling on the
Kyodo Shiryo case, July 20, 1994)
Stabilization transactions are transactions done for the purpose of pegging,
fixing, or stabilizing the prices of specific securities. However, when primaryofferings and secondary distributions are made, there is a concern that flooding the market with the securities could result in a large decline in the security price, making it difficult to float the issue. For that reason, stabilizationtransactions are only permitted with a primary offering or secondary distribution of securities pursuant to the provisions of a cabinet order.
The offense of market manipulation carries a punishment of imprisonmentChap. XV Prohibited and Regulated Acts of Securities Trading

315

Table XV-2. Provisions of the Financial Instruments and Exchange Act Relating toMarket Manipulation

Fake transactions

No person shall, for the purpose of misleading other persons about the stateof securities transactions, conduct fake sale and purchase of securities without the purpose of transferring a right (Art. 159, Para. 1, Items (i) through(iii)).

Prearranged transactions

No person shall, for the purpose of misleading other persons about the stateof securities transactions, conduct sale and purchase of securities at the sametime and price, etc., based on collusion with another party (Art. 159, Para. 1,
Items (iv) through (viii)).

Price manipulation

No person shall, for the purpose of inducing the sale and purchase of securities in securities markets, conduct sales and purchases of securities thatwould cause fluctuations in the prices of the securities (Art. 159, Para. 2, latter part of Item (i)).

No person shall, for the purpose of inducing the sale and purchase of securities in securities markets(1) spread a rumor to the effect that the prices of the securities would fluctuate by his/her own or other party’s market manipulation (Art. 159, Para.
Market manipulation by
2, Item (ii)) orindication(2) intentionally make a false indication or an indication that would misleadother parties with regard to important matters when making a sale andpurchase of securities (Art. 159, Para. 2, Item (iii)).
No person shall conduct sales and purchases of securities in violation of a
Stabilization transactions cabinet order for the purpose of pegging, fixing, or stabilizing the prices ofthe securities (Art. 159, Para. 3).

with work for not more than 10 years or a fine of not more than ¥10 million.
In some cases, both penalties can be inflicted and the property gained throughmarket manipulation confiscated and, if it cannot be confiscated, the value
thereof shall be collected from the offender. If market manipulation is conducted by trading securities for the purpose of gaining property benefits (indirect financial benefits), the offense is subject to a punishment of imprisonment with work for not more than 10 years or a fine of not more than ¥30
million. The offense is also subject to an Administrative Surcharge Payment
Order. Moreover, there are provisions on liability for compensation for damages claims for investors in violation of market manipulation regulations(Article 160 of the FIEA).
In the Cabinet Office Order on Financial Instruments Business, etc., securities companies are prohibited from accepting the entrustment of orders
from customers with the knowledge or expectation that acceptance of the entrustment may lead to artificial market manipulation and are required to havein place trading surveillance systems for the prevention of such violations.

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Chap. XV Prohibited and Regulated Acts of Securities Trading

3. Prohibited and Regulated Acts of Corporate Insiders
Regulations concerning the acts of corporate insiders are largely classified
into two categories: those prohibiting insider trading per se and those designed for its prevention.
Prohibition of Insider Trading“Insider trading”refers to acts of effecting the sale, purchase, or other type oftransaction of securities pertaining to any unpublished corporate informationthat may significantly influence the decision-making of investors by an insider of a listed company who has come to know the information through theperformance of his/her duties or due to his/her position before such information is publicized (Article 166). If such transactions were to take place, theinvesting public would be put at a significant disadvantage and the credibilityof the securities markets would be seriously undermined.
Japan’
s insider trading regulations were introduced with the amendment of
the law in April 1989 in line with the modernization of the securities market.
The framework has since been revised, with legislative changes put in place.
In 2013, further amendments (1) expanded the scope of criminal charges andAdministrative Surcharge Payment Orders to include disclosure of information and inducement of insider trading by a corporate insider and (2) expanded the scope of regulation to include REIT transactions.
On the other hand, in 2016, the Cabinet Office Ordinance on Restrictions
on Securities Transactions, etc. was amended to expand the scope of
exemptions from insider trading regulations pertaining to so-called priorknowledge contracts and plans.
Insider trading is punishable by imprisonment with work for not more than
five years or a fine of not more than ¥5 million. In some cases, both penalties
can be inflicted. For the case of a legal entity, the fine shall be not more than¥500 million. Any property gained through insider trading shall be
confiscated and any deficient amount collected from the offender. In addition,
when receiving an Administrative Surcharge Payment Order, the offendermust pay an amount equivalent to the profit made (half the profit in the caseof disclosure of information and inducement of insider trading by a corporate
insider) to the government treasury.
Preventing Insider Trading
Along with the prohibition of insider trading, the officers and principal shareholders of listed companies, etc., are required to officially report any transactions in the shares of the company concerned. They are required to return tothe company any short-term trading profit they have made in the shares ofChap. XV Prohibited and Regulated Acts of Securities Trading

317

Table XV-3. An Outline of the Targetted People of Regulations, Material Facts,
Methods of Announcement Relating to the Regulation of Insider Trading
Item
Outline1. Targetted People of (i) Directors of the listed company (directors, officers, agents, key employees)
regulation→ information not announced to the public that came to their knowledge(1) Persons associated (ii) Persons who have the right to inspect the books and accounting records of the comwith the company
pany (for example, those who hold 3% or more of the outstanding shares of the company)→ Information not announced to the public that came to their knowledge in thecourse of the exercise of the right to inspect the books and accounting records ofsuch company(iii) Persons who have the power vested in them by laws and regulations to inspect thebooks and accounting records of listed companies (for example, officials of the regulatory agencies)→ Information not announced to the public that came to their knowledge in thecourse of the exercise of such power(iv) Persons who have concluded a contract with the listed company (for example, banks,
securities companies, certified public accountants, lawyers, etc.)→ Information not announced to the public that came to their knowledge in thecourse of negotiating, signing, and performing a contract.
(v) In case any person referred to in (ii) or (iv) above is a corporation or director, etc., ofsuch corporation→ Information not announced to the public that came to such person’s knowledge inthe course of performing his/her official duty(2) Recipients of(i) Persons who have received information concerning a material fact from persons asinformationsociated with the company(ii) Directors of a corporation to which the person who has received information concerning a material fact from a person associated with the company belongs and who
have learned of information not announced to the public in the course of the performance of their duty
2. Material facts(1) Matters decided
A decision made by a decision-making body of the listed company to carry out or not tocarry out the matters set forth below:
The issuance of new shares, a decrease in capital, the acquisition or disposal of its own
shares, a stock split, a change in the amount of dividend, a merger with another company, transfer of business, dissolution of the company, commercial production of a
newly developed product or commercial application of a new technology, an assignment or acquisition of fixed assets, etc.
(2) New facts
When any of the facts set forth below has occurred to the listed company:
A loss caused by a disaster; a change in major shareholders; a development that could
cause a delisting of its shares; lawsuits relating to a claim against the property right ofthe company; an administrative disciplinary action ordering the suspension of business, etc.; a change in the parent company; a petition for bankruptcy of the company; afailure by the company to honor its notes or bills falling due; suspension of businesswith its bank; or the discovery of natural resources, etc.
(3) Information on
When newly announced results, projected or actual, are significantly at variance withsettlement of
those announced earlier:accounts
Sales (10% or more up or down); current profit (30% or more up or down, and its ratio
to the total net assets is 5% or more up or down); net profit (30% or more up or down,
and its ratio to the total net assets is 2.5% or more up or down)(4) Others
Material facts, other than those listed in (1)－(3) above, relating to the management,
business, or property of a listed company that have a profound influence on the investment decisions the investors make(5) Material facts(1) to (4) above apply
related tosubsidiaries
3. Methods ofWhen a company notifies the stock exchange on which its stock is listed of material facts
announcing
and the material facts are placed on the website of the stock exchange that received theinformation
information for public inspection.
When twelve hours must elapse after the company that has issued the stock in question
has disclosed its material facts to two or more news media.
When a company has notified the stock exchange on which its stock is listed, and thestock exchange has placed the securities report, etc. containing the information notified
on its web site for public inspection.

Note: Any person who had been associated with any listed company and had learned of a material fact ofsuch company as set forth above and who is no longer associated with such listed company is subject to these regulations for one year after that person dissolves association with the company.

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Chap. XV Prohibited and Regulated Acts of Securities Trading

the company held for a period of six months or less, and they are prohibitedfrom selling the securities, etc., of the company in excess of the share certificates, etc., of the company that they hold.
Checks by securities companies on orders they receive and internal frameworks of listed companies (to manage and control corporate information andregulate employee trading of company shares) and posting information on JIRISS play a critical role in preventing insider trading. J-IRSS stands for Japan-Insider Registration & Identification Support System, a searchable database where securities companies regularly register information on theircustomers and listed companies post information on their directors.
4. Regulations on the Conduct of Financial Instruments Business
Operators (Securities Companies)
There are various regulations in place for securities companies (see figure on
the right). This section focuses on regulations for ensuring the fairness oftransactions.
Trading surveillance system
Securities companies are prohibited from accepting orders if they know there
is a risk that such orders could cause a false market formation that will notreflect the actual market conditions or could be an insider trading. Securities
companies are required to appropriately check transactions to prevent this.
Specifically, they are required monitor all transactions including customers’
and proprietary in a timely and accurate manner to identify any possible unfair transactions and examine those. In the event that any unfair transactions
are found, securities companies must take appropriate measures (inquiries,
alerts, suspension of transactions, etc.) regarding such transaction.
Corporate information management system
Through their underwriting and M&A-related advisory and other businesses,
securities companies have access to undisclosed information that could influence the stock price, etc. of issuers (sensitive corporate information). To prevent unfair trading based on such information, securities companies are required to establish appropriate systems. Specifically, securities companies
can set up an information barrier between the investment banking and similar
divisions and the rest of their operating divisions. In addition, personnel are
forbidden to use sensitive corporate information to solicit customers or to engage in trading.

Chap. XV Prohibited and Regulated Acts of Securities Trading

319

Chart XV-1. Major Prohibited and Regulated Acts of Securities Companies (Duties andProhibited Acts)
Investors (customers)• Duty to act in good faith• Duty to provide appropriate informationand to explain important matters regarding
investment trusts• Prohibited: Use of false notifications anddisclosure, offering conclusive judgments,
fraudulent plans, violence or threats or
unfair methods to gain access to customer
assets, excessive solicitation, solicitation
at improper hours, uninvited solicitation(limited to specific transactions)• Prohibited: Loss compensation, providing
extraordinary profits, illegal discretionary
account transactions, large-scale
promotional sales campaigns• Duty to apply suitability principle• Prohibited: Accepting
orders when aware they
involve insider tradingor market manipulation• Prohibited: Entrustmentof transactions involving
high-speed trading bypersons other than highspeed traders(non-registered)• Prohibited: Solicitationby providing informationon corporations

Securities Companies• Prohibited: Trading on own
account before executing a
trade commissioned, etc.
from customer for the
purpose of executing thesame transaction(front running)

Proprietary Trading Division(responsible for proprietaryaccount trading)• Prohibited:
Trades utilizing
sensitive orporate
information

Management of sensitive
corporate information:
Chinese wall (information
barrier)• Duty to screen issues for wholesale
underwriting• Duty to underwrite issues based on
appropriate share volume, price,and other terms

Investment Banking
Division(responsible forunderwriting,
M&A and otheradvisory businesses)
Securities Analysis (Analysts)
Division
Others• Duty to manage electronic information
processing system (computer)• Duty to prevent legal violations of financial
instrument intermediaries, etc.

－－－－－Management to prevent erroneous orders－－－－－

Markets (stock exchanges, etc.)

Issuers (Listed companies, etc.)

Sales Division(Responsible mainly for brokerage and offering business operations)

320

Chap. XV Prohibited and Regulated Acts of Securities Trading

Management system to prevent erroneous orders
Securities companies are required to establish appropriate order management
systems to prevent erroneous orders (name of issue, number of shares, shareprices, etc.).
Management system for high frequency trading
In April 2018, the Financial Instruments and Exchange Act was amended to
introduce a registration system for those who engage in high frequency trading of stocks, etc. Securities companies are prohibited from accepting orders
for transactions related to high frequency trading from those who are not registered with the Prime Minister. In addition, as well as securities companies,
all those who engage in high frequency trading activities are subject to regulations requrding proper management of computer systems.
Besides the previously mentioned areas, Article 117, Paragraph 1 and Article 123, Paragraph 1 of the Cabinet Office Order on Financial Instruments
Business, etc. and the self-regulation rules of the Japan Securities Dealers
Association and each Financial Instruments Exchange, etc., set out various
strongly advised or required management systems for securities companies.
5. Other Regulated Acts̶Information Disclosure to Ensure Fairness ofTransactions
A tender offer or takeover bid (TOB) is a type of corporate action in which
an acquiring company publicly announces its offer to buy a certain numberof share certificates, etc. of a target company at a certain price in a certain
period of time in an aim primarily to gain control of the target company.
Since such an offer involves purchasing share certificates, etc. from an unspecified number of investors off the exchange, the bidder is expected to disclose information by which investors can judge whether or not to sell the respective shares and deal with shareholders in a fair and rightful manner.
Additionally, as it is likely that control over the target company may be transferred as a result of the takeover bid, disclosure of information on the buyer
is also required. Given such factors, takeover bidders are required to: (1)publish the purpose of TOB, purchase price, number of shares to be purchased, purchase period, etc.; (2) submit the Tender Offer Notification; (3)issue the Tender Offer Statement, a document explaining the TOB, to applying shareholders; and (4) report the results of the TOB after the completionof the purchase period. In order to prevent the use of TOB for market manipulation or abuse, cancellation of TOB is prohibited as a general rule, and certain restrictions apply for making changes to the terms of purchase. Meanwhile, information on the views of the target company regarding the TOB isChap. XV Prohibited and Regulated Acts of Securities Trading

Table XV-4.

321

Flow of Tender Offer(1) Begin offer
・Publicly announce the start of tender offer (TOB) (publish the purpose of TOB, purchase price,
number of shares to be purchased, purchase period, etc. in a daily newspaper).
・On the date of the public notification, file the Tender Offer Notification addressed to the Prime
Minister and send copies thereof to the target company of TOB, stock exchanges, and parties thathave submitted the Tender Offer Notification regarding the company.
(2) Purchase period (as a general rule, a period of 20 days or more and up to 60 days)・Issue the Tender Offer Statement to parties intending to sell or offer stock certificates, etc.
・Terms of TOB purchase price are consistent; decrease of purchase price and reduction of purchaseperiod are not allowed as a general rule.
・Withdrawal of application for purchase and cancellation of contract are not allowed as a general
rule. Obligation to purchase all shares if the allotment ratio of stock certificates, etc. after the TOB
exceeds two-thirds
・The party intending to sell or offer may cancel the contract at any time・The target company submits its Position Statement addressed to the Prime Minister and sends copies thereof to the takeover bidder and the stock exchange.
・The party intending to execute a TOB is prohibited, as a general rule, from purchasing the respective shares, etc. through a method other than TOB(3) Completion of purchase・Issue a public notice or disclosure regarding the number of stock certificates, etc. associated with
the TOB and submit the Tender Offer Report to the Prime Minister.
・Send the notice containing the number of stock certificates, etc. for TOB to applying shareholders.
・Settle purchases without delay.

Table XV-5.

Flow of Disclosure of Possession of Large Volume of Shares(1) Obligation to submit the Report of Possession of Large Volume arises
・A shareholder or joint shareholder submits, if its holding ratio of share certificates, etc. exceeds 5%of the total number of issued shares, the Report of Possession of Large Volume (containing shareholder or joint shareholder’s name and address, business description, matters concerning the holding ratio of share certificates, purpose of holding, matters concerning purchase funds, etc.) to thePrime Minister within five business days from the occurrence of the obligation, and sends copies of
the Report to the stock exchange and the issuing company.
・In the case of an institutional investor, etc., if its holding ratio of share certificates does not exceed
10% of the total number of issued shares, the Report of Possession of Large Volume may be submitted within five business days from the record date on which the obligation arises (twice or morea month) (Special Reporting System).
(2) Subsequent reporting obligation
・After a Large Volume Holder submits the Report of Possession of Large Volume, if its holding ratioof share certificates, etc. increases or decreases by 1% or more, it submits the Change Report addressed to the Prime Minister within five days, as a general rule, from the date of the aforesaid increase or decrease, and sends copies of the Change Report to the stock exchange and the issuing
company.
・The party that has submitted the Report of Possession of Large Volume or the Change Report ofPossession of Large Volume submits the Correction Report to the Prime Minister if any deficiency
was found with the content of the report initially submitted.
(3) Public inspection of reports
・The Prime Minister and stock exchanges disclose the reports for public inspection for a period offive years.
Note: Effective from April 2007, the reports are required to be submitted via EDINET.

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Chap. XV Prohibited and Regulated Acts of Securities Trading

extremely important for shareholders in judging whether or not to accept thetender offer. For this reason, the target company of a TOB must immediately
submit its Position Statement addressed to the Prime Minister.
While the act of purchasing a large amount of share certificates, etc. in itself does not immediately cause a problem, it can, in many cases, cause fluctuations in stock prices or influence the controlling interests of the company
concerned and may lead to inflicting damage on general investors. In consideration of such possibilities, any person or entity, if it becomes a holder ofmore than 5% of the shares or other equity securities of a listed company,
etc., is required to file a Report of Possession of Large Volume to the Prime
Minister. In addition, such a person or entity, after having become a Substantial Shareholder, is required to file a Change Report Pertaining to Report ofPossession of Large Volume addressed to the Prime Minister if its shareholding ratio in the entity covered by the aforesaid Report increases or decreases
by 1% or more or there is a material change to any other entry in the Report.
The Reports of Possession of Large Volume and Change Reports are publicly
disclosed. This system was put in place with the aim of further protecting investors by encouraging timely and accurate disclosure of information onlarge-scale purchases and on holding and secondary offering of shares, etc. toinvestors and promoting high fairness and transparency in the securities market.

CHAPTER XVIThe Information Disclosure System andInvestor Protection

1. The Information Disclosure System in the Securities Market
When a company lists its security on the financial instrument market opened
on a stock exchange, the issuer of such security is required by the Financial
Instruments and Exchange Act and by the rules of the stock exchanges to disclose information concerning certain matters of its business. Such rules arecalled disclosure requirements, and they consist of statutory disclosure rules
under the Financial Instruments and Exchange Act and the timely disclosure
required by the securities exchanges.
There are four types of statutory disclosures that the issuers of securities
are required to make: (1) issuance disclosure, which requires companies todisclose information concerning certain matters when they publicly offer securities on the primary market; (2) periodic disclosure, which requires companies whose securities are listed and traded on the securities market to disclose information concerning certain matters on a continuing and regularbasis; (3) tender offer disclosure; and (4) large volume holding disclosure(shareholdings of 5% or more). Timely disclosure, which is required by thestock exchanges, obliges companies to continuously disclose their information after listing their securities on the exchanges, and the type of information
required is classified by the target of disclosure into (1) information on listedcompanies; (2) information on subsidiaries, etc.; and (3) other information,such as supplemental information on majority shareholders, etc. Information
is categorized by the nature as (1) facts decided, (2) facts occurred, and (3)information on financial results. At present, both statutory and timely disclosures are made via an electronic disclosure system using the Internet. Statutory disclosure is made via the EDINET (Electronic Disclosure of Investors’
NETwork) while timely disclosure is made using the TDnet (Timely Disclosure network).
Companies that are required to make issuance disclosure and periodic disclosure are also required by the Companies Act to disclose certain information. The disclosure of accounting documents required to be made by the324

Chap. XVI The Information Disclosure System and Investor Protection

Chart XVI-1.
Statutory disclosure

The Scheme of the Disclosure System on the Securities Market
Disclosure of corporate
affairs

Disclosure for the new-issues market- Securities Registration Statement- Shelf Registration Statement- Shelf Registration Supplements(- Written Notice of Securities)
Continuous disclosure on the trading market- Annual Securities Report- Quaterly Securities Report- Ammendment Report- Report on the status of acquisition ofTreasury Shares(
Disclosure of information
concerning a tender offer)

A tender offer for a security conducted bypersons other than its issuer- Tender Offer Notitication- Position Statement- Tender Offer Report
A tender offer for a security conducted by
its issuer- Tender Offer Notitication- Tender Offer Report

Disclosure of the status of large shareholdings- Report on the status of large
shareholdings- Report on changes in the status oflarge shareholdings
Timely disclosure

Table XVI-1. Disclosure Systems under the Companies Act and under the Financial
Instruments and Exchange Act
Disclosure System under the Financial Instruments and Exchange Act

Disclosure System under the Companies
Act

Furnishing information necessary Purpose of disclosure Report on profits available for dividends
for investors to make an investment
and the company’s capacity for offering
judgment
security for loans (solvency)
Investors (including those who are Targets for which the Shareholders and creditors
not shareholders of the company at disclosure is intended
a given time)
Providing disclosure through EDI- Method of disclosure making of financial documents, keeping
NET and stock exchanges, replyingof such documents at the head office, andto investor requests for disclosure
publication of a summary of annual settlement of accounts

Chap. XVI The Information Disclosure System and Investor Protection

325

Companies Act is aimed at protecting the interest of creditors and at regulating the amount that can be paid in dividends. In contrast, the disclosure required to be made under the Financial Instruments and Exchange Act and under exchanges’regulations is designed to disclose information concerning thestate of business of listed companies to help the investors to make informed
and reasonable investment decisions.
2. Disclosure of Corporate Affairs under the Financial Instruments andExchange Act
Issuance Disclosure
When a company publicly offers, or makes a secondary distribution of, securities whose aggregate value is ¥100 million or more, the issuer of such securities must, in principle, file a securities registration statement with the Prime
Minister. Information at issuance is disclosed through the securities registration statement. This shall describe (1) matters pertaining to said offering or
secondary distribution, and (2) information relating to the issuing company(equivalent information as described in the Securities Report below). In addition, when a securities company solicits investors for the purchase of newly
issued securities, it is required to provide investors with a prospectus that furnishes them with information concerning the issue that is deemed necessary
for them to assess its value and to make an informed investment decision.
Periodic Disclosure
Issuers of securities listed on stock exchanges must file with the Prime Minister an annual securities report for each business year within three months
after the expiration of such business year. The annual securities report constitutes the main document of statutory disclosure for the secondary market.
More specifically, it must provide (1) key information on the issuer (such as
trends in key management indicators and history), (2) situation of issuer’sbusiness (including management policy, business environment, issues to beaddressed, business risks, etc., (3) information on the operational status of
the issuer (details of shares issued, corporate governance, etc.), and (4) the financial position of the issuer. In addition, companies that are subject to continuous disclosure requirements must file quarterly reports within 45 days ofthe end of each quarter, and, if necessary, extraordinary reports and reportson their share repurchases.
Issuers in the financial instruments market are expected to make full disclosure of all information necessary for investment decisions to ensure thatfair prices are formed for their securities. If they do not disclose informationthat is to their disadvantage, the prices of their securities will be formed on

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Chap. XVI The Information Disclosure System and Investor Protection

Table XVI-2.

Periodic disclosure

Disclosure of corporate affairs, etc.

Issuance Disclosure

Classification

Statutory Disclosure Documents Required to be Filed

Documents filed

Cases requiring the filing of documents (a summary)

If a company issuing new shares or making a secondary distributionof shares through an offering whose total issuing or secondary distribution price is ¥100 million or more plans to solicit 50 or more investors for the purchase of its new shares or plans to sell to or solicit
50 or more investors for the secondary distribution on uniform terms
and conditions, it must file a registration statement.
* Small amount offering: In the case of a company issuing newshares or making secondary distribution of shares through an offering whose total issuing or secondary distribution price is less than¥500 million the contents of the securities registration statement required to be filed by such company are simplified.
Securities Registration * Incorporating system: A company that has been filing Annual SeStatement
curities Reports continuously for one year may substitute the information therein and in the quarterly securities reports other than matters relating to the offering or secondary distribution of securities forsecurities registration statement securities report and quarterly securities reports filed in its place.
* Reference system: When transactions of issued securities fulfill
certain requirements of the securities market with which the issuer
has been filing Annual Securities Reports for a year and the issuer’scorporate information has broadly been disclosed, the descriptionthat one should refer to the last Annual Securities Reports, etc., may
be substituted for a securities registration statement concerning matters other than the offering or secondary distribution of securities.
Shelf Registration
Statement

When any issuer who is authorized to file a securities registration
statement under the reference system plans to issue new shares ormake a secondary distribution of shares through an offering whose
total issuing or secondary distribution prices are ¥100 million or
more, such issuer may in advance file a shelf-registration statementof its shares.

Shelf Registration
Supplement

When a shelf-registration statement of a security is in effect, andwhen the issuer of such security plans to issue new shares or make asecondary distribution of shares whose total issuing or secondary
distribution prices are ¥100 million or more, such issuer is required
to file supplementary documents relating thereto.

Annual Securities
ReportAny of (1) the issuer of securities listed on a stock exchange; (2) theissuer of securities stipulated by cabinet order as that similar to distribution conditions in (1); (3) the issuer of securities who is required
to file a securities registration statement when it issues new shares ormakes a secondary distribution of shares through an offering; or (4)the issuer of securities the number of whose owners was 1,000 or
more at the end of any of the latest five years (excluding certain cases), is required to file a securities report.

Quarterly Securities
ReportOf the companies required to submit Annual Securities Reports, theissuers of securities listed on stock exchanges or stipulated by cabinet order as being similar in terms of distribution conditions mustfile quarterly securities reports.

Extraordinary Report

If any material fact has occurred in a company submitting Annual
Securities Reports.

Any issuer of a security listed on a stock exchange or stipulated bycabinet order as being similar in terms of distribution conditions andShare Buyback Report that has passed a resolution at a general meeting of its shareholders
or at a board of directors’meeting to acquire its own shares must file
this report.

Chap. XVI The Information Disclosure System and Investor Protection

327

the basis of an erroneous assessment of their value that does not reflect suchwithheld information. This is why the law requires the issuers of securities toperiodically disclose all pertinent information, good or bad, in their annual
securities reports, and why it contains penal provisions to discipline issuers
who file an annual securities report containing false statements.
3. Other Disclosures to Be Made under the Financial Instruments andExchange Act
Disclosure Relating to a Tender Offer
The act of soliciting an unspecified large number of persons through a public
notice for an offer to purchase or to sell shares and of purchasing such shares
off the exchange is called a“tender offer.”If any person other than the issuer
who is required to file an annual securities report proposes the purchase ofsuch shares outside the market of a stock exchange, and in cases that fallwithin the purview of certain requirements, such as the purchase will resultin the ownership of more than 5% of the securities, etc., the person must purchase such shares through a tender offer. The tender offeror is obligated toserve a public notice of (1) the purpose of the tender offer; (2) the purchaseprices, etc.; (3) the number of shares to be purchased; (4) the period during
which shares will be purchased; and (5) other items stipulated in other cabinet ordinances “( public notice for commencing tender offer”) and must also
file the tender offer notification with the Prime Minister. In addition, the tender offeror must, on the day immediately following the day on which the tender offer period has expired, serve a public notice or make an announcement
indicating the number of shares offered to sell, the number of shares it has
actually purchased, and the method of settlement and file with the Prime
Minister a tender offer report furnishing information about such matters.
The regulation on tender offers is designed to disclose information for investors in advance and give shareholders equal opportunities to sell theirstocks from the standpoint of ensuring the transparency and fairness of offexchange trading when the transactions would have effects on the control of
the target corporation.
Disclosure of Status of Large Volume Holding of Share Certificates, etc.
When the number of shares of a listed company held by a person exceeds 5%of its outstanding shares (large-volume holders), such person is required tofile a Report of Possession of Large Volume with the Prime Minister within
five days (excluding Sundays and other holidays as may be stipulated in cabinet orders) from the date when such person’s holding rate is above 5%(called the“5% rule”). The Report of Possession of Large Volume must fur-

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Chap. XVI The Information Disclosure System and Investor Protection

Table XVI-3.

Transitions in Tender Offer Bid (TOB) System
Major Developments

1971• Public tender offer system introduced

1990• Principles set down for forcing tender offers• Percentage share offer that triggers obligation to make tender offer decreased (from 10% to
5%)• Prior notification system abolished• Duration of offer extended• Shareholders’withdrawal rights expanded

2001• Along with the deregulation, in principle, of purchasing treasury shares, system for making
tender offers for a company’s own shares introduced

2003• Scope of acquisitions exempt from the TOB system enlarged

2004• TOBs restricted to companies with equity securities• Electronic notification system introduced

2005• ToSTNeT transactions made independent of market transactions

2006• Disclosure for TOBs upgraded (purpose of acquisition, basis of price calculation, disclosurefor MBOs)• Regulations implemented concerning the combined acquisition of shares on and offmarket• Obligating a third party posessing a large stake in a company to make a TOB, if the party
increases its posession during the TOB period• Acceptance for lowering TOB price when share split occurs• Reasons for withdrawing TOB expanded• Obligating targeted company to submit a Position Statement• Obligating the offeror to answer targeted company’s questions (reply to submitted questions) for the purpose of submitting a Position Statement• Calculation of duration of TOB set using business days
• Targeted company allowed to demand extension of TOB period• Obligating the offeror to acquire all tendered shares

2008• Specified listed securities added to securities eligible for TOBs
• Monetary surcharge system introduced regarding TOB rules

nish information concerning (1) matters relating to the ratio of shares held bysuch person, (2) matters relating to the funds acquired by such person for the
purpose of purchasing such shares; and (3) the purpose for which such person has acquired such shares. And when the percentage of shareholdings ofsuch person who must submit the report increases or decreases by 1% or
more, such person must file a Change Report indicating the change that occurred in the percentage of such person’s holdings of such shares. This disclosure is required because the actions of a single person holding a large volume of shares can have large effects on the formation of stock prices at themarket.

Chap. XVI The Information Disclosure System and Investor Protection329

4. Timely Disclosure System of Financial Instruments Exchanges (Stock
Exchanges)
As described at the start of this chapter, stock exchanges require listed companies to disclose corporate information by their rules. For example, the Tokyo Stock Exchange stipulates in its Listing Rules that listed companies
shall, in a timely manner, disclose information having effects on investors’decisions and defines concrete matters to be disclosed and procedures fordisclosing such matters (see Table XVI-4). Listed companies need to disclose
both the resolutions and decisions adopted by their executive body promptly
after such resolutions or decisions were adopted and any incidents caused byexternal factors at the time the companies had learned of such incidents.
Promptness is a feature of timely disclosure. For example, stock exchanges
require listed companies to disclose their financial results immediately after
their determination. In response, the listed companies disclose earnings reports (kessan tanshin) according to the given format. The earnings report carries more importance in terms of helping investors to learn about financial
results because it is released earlier than the annual securities report.
In addition, listed companies are obliged to provide stock exchanges withconcise information on inquiries from the stock exchanges immediately if required and to disclose the details of information immediately when the stock
exchanges deem it necessary and proper. For example, in the case where
there is a broadcast or rumor regarding corporate information but the accuracy of such information is unconfirmed, the stock exchange concerned may
make a query to the company about the accuracy of information and require
the company to disclose the response to such query.
The Tokyo Stock Exchange has put in place a system for issuing alerts
where if the TSE identifies any unclear piece of information among the information about a listed company that can have a material impact on investment
decisions of investors and the listed company requires time before offering
proper information disclosure regarding the aforesaid unclear piece of information or can disclose only certain information immediately, the TSE issues
an alert to investors.
5. Ensuring the Appropriateness of Information Disclosure
In order to ensure the effectiveness of the Listing Rules, including the ruleson timely disclosure, stock exchanges may implement prescribed measuresagainst violations found, such as when the disclosed information contains
false statements or when there is a violation of matters to be observed under

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Chap. XVI The Information Disclosure System and Investor Protection

Table XVI-4. Main Points of Corporate Information Required by Timely Disclosure (inthe case of the Tokyo Stock Exchange)
1. D e c i s i o n s b y
Listed Companies

2. Facts which Occurred for a Listed Company

3. Listed Company
Earnings Information

1. Offering of new shares to be issued, treasury shares to be disposed of, issued subscription Rights/
warrants, or offering to entities who will subscribe to treasury subscription rights/warrants to be disposed of, or a secondary distribution of shares or subscription rights/warrants
2. Shelf-registration and the commencement of a demand survey
3. Decrease in amount of capital
4. Decrease in amount of capital reserve or profit reserve
5. Acquisition of one’s own stock
6. Gratis allotment of shares or gratis allotment of subscription warrants
7. Shelf-registration concerning gratis allotment of subscription rights/warrants or commencement of ademand survey or a survey on intention to exercise the warrants
8. Share split or reverse share split
9. Dividend from surplus
10. Organizational restructuring such as mergers, etc.
11. Takeover bid or take over bid for own shares
12. Announcement of opinions about a takeover bid, etc.
13. Transfer or acquisition of all or part of a business
14. Dissolution (excluding dissolution by means of merger)
15. Commercialization of a new product or new technology
16. Business alliance or dissolution of business alliance
17. Transfer or acquisition of shares or equity interest accompanied by a change in a subsidiary or othermatters accompanied by a change in a subsidiary
18. Transfer or acquisition of fixed assets, lease of fixed assets
19. Suspension or abolishment of all or part of a business
20. Application for delisting
21. Petition for commencement of bankruptcy, commencement of rehabilitation proceedings, or commencement of reorganization proceedings
22. Commencement of a new business
23. Change in representative directors or representative executive officers
24. Rationalization such as personnel reduction
25. Change in a trade name or a corporate name
26. Change in the number of shares for a share unit of a stock, or abolition/introduction of provisions forthe number of shares for a share unit
27. Change in accounting period (change in the end date of the business year)
28. Petition to the Prime Minister stating an excess of liabilities or possibility of the halt of repayment ofdeposit, etc. (petition under the provisions of Article 74, Paragraph 5 of the Deposit Insurance Act)
29. Petition for mediation in accordance with specified mediation procedures pursuant to the Act on
Specified Mediation for Promoting Adjustment of Specified Liabilities, etc.
30. Early redemption of listed bonds, etc., the convocation of bondholders’meetings, or other importantmatters relating to rights relating to listed bonds, etc.
31. Change in certified public accountants, etc.
32. Putting notes on matters related to the going concern assumption
33. Submission of application for approval of deadline extension for submission of annual securities report or quarterly securities report
34. Cancellation of entrustment of shareholding services to a shareholding service proxy institution
35. Submission of internal control reports containing content to the effect that there is a material deficiency or that the evaluation result cannot be stated
36. Amendment to the articles of incorporation
37. Acquisition of all classified stocks subject to whole acquisition clause
38. Approval or rejection of a special controlling shareholder’s request for sale of shares, etc.
39. Other important matters related to listed company operations, business, assets, or listed company
stock certificates, etc.
1. Damage arising from a disaster or in the performance of its operations
2. Change in major shareholders or the largest shareholder
3. Fact which causes delisting
4. Filing of a lawsuit or a court decision
5. Petition for a provisional disposition or decision on such petition, etc.
6. Cancellation of a license, suspension of a business or any other disciplinary action corresponding tothese on the basis of laws and regulations by an administrative agency or accusation of violation oflaws and regulations by an administrative agency
7. Change in a parent company, change in controlling shareholders (excluding a parent company) orchange in other related company
8. Petition or notification for commencement of bankruptcy proceedings, commencement of rehabilitation proceedings, commencement of reorganization proceedings, or execution of enterprise mortgage
9. Dishonor of a bill or check or suspension of trading by a clearing house
10. Petition for commencement of bankruptcy proceedings, commencement of rehabilitation proceedings, commencement of reorganization proceedings, or execution of enterprise mortgage pertaining
to a parent company, etc.
11. Default on obligations or delay in collection
12. Suspension of trade with a business partner
13. Financial support, such as exemption of obligations
14. Discovery of natural resources
15. Special controlling shareholder’s request for sale of shares, etc.
16. Claim for suspension of issue of stock or subscription rights/warrants
17. Demand for convocation of a general shareholders meeting
18. Unrealized loss of securities held
19. Acceleration of obligations pertaining to a corporate bond
20. Convocation of a bondholders’meeting for a listed bond, etc. and other important facts pertaining torights of a listed bond, etc.
21. Change in certified public accountants, etc.
22. Delay in submission of annual securities report or the quarterly securities report
23. Approval, etc. of deadline extension for submission of the annual securities report or quarterly securities report
24. The fact that an audit report attached to financial statements, etc. contains an“adverse opinion”,, or a“qualified opinion”with making issues concerning a going con“opinions are not expressed”
cern assumption as exceptions
25. An internal control audit report contains an“adverse opinion”or the fact that“opinions are not expressed”
26. Receipt, etc. of a notice of canceling a shareholder services agent agreement
27. Other important matters related to operation, business or assets of such listed company or related toa listed stock certificates, etc.
1. Earnings reports (kessan tanshin), quarterly earnings reports (shihanki kessan tanshin)
2. Amendments to performance estimates, differences in estimates and earnings values
3. Amendments to dividend estimates, etc.

Note: In addition to the above, listed companies are required to disclose important decisions and new developments
related to subsidiaries and other matters relating to controlling shareholders, etc.
Source: Tokyo Stock Exchange, Securities Listing Requirements, Guidebook for the Timely Disclosure of Corporate
Information.

Chap. XVI The Information Disclosure System and Investor Protection

Table XVI-5.

Measures to ensure effectiveness○Penalty measures• Public Announcement Measure• Penalty on breach of the listing agreement

Chart XVI-2.

331○Improvement measures• Improvement Report, Improvement Status Report• Designation as Security on Alert

Flow from Designation as Security on Alert to Removal of Designation

No improvement
can be expected

Fallen under the conditions to be designatedas a security on alert
Improvement can be expected
Designation as a security on alert

Designation

Improvement period

1 year from designation

Examination for removal

Delisting

No improvement
Continuation ofdesignationNo
improvement

Examination forremovalImprovement
RemovalImprovement period after
continuation of designation
1 year and 6 months
from designation

Improvement
RemovalNote: If it is found during the period of designation that no improvement can be expected, the security
shall be delisted.

the Code of Corporate Conduct. These measures to ensure the effectivenessare classified into two categories: improvement measures and penalties. The
former requires the listed company concerned to make improvements while
the latter imposes a penalty on the listed company.
Improvement measures are categorized into the designation as a security
on alert and the submission of Improvement Report/Improvement Status Report. For example, if a listed company has made a false statement in its secu-

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Chap. XVI The Information Disclosure System and Investor Protection

rities report, etc. and a stock exchange recognizes that there is a strong needfor the listed company to make improvements to the company’s internal management system, etc., the listed company is designated as a“security on
alert.”The designation as a security on alert is removed if the listed company
makes improvements to its internal management system, etc. within the prescribed period for improvement. If, however, no improvement is made within
the prescribed period or there is no likelihood of improvement, the company
will be delisted. The securities on alert system is a mechanism for having thelisted companies concerned make proper improvements while removing thepossibility of delisting in the future, and has been introduced as a measureequivalent to delisting. If it is found that there is difficulty in maintaining order on the market unless a stock is immediately delisted, such stock is delisted without receiving the designation as a security on alert.
Meanwhile, if a stock exchange finds that there is a strong need for a listedcompany to make improvements even when the status of the listed company
does not correspond to giving designation as a security on alert, which is ameasure leading to possible delisting, the stock exchange may require thelisted company to submit an Improvement Report containing the circumstances behind the misconduct and improvement measures. The listed company that has submitted the Improvement Report must submit an Improvement Status Report containing the status of implementation and operation of
improvement measures in a timely way after six months have passed since
the submission of the initial Improvement Report. The Improvement Report
and the Improvement Status Report submitted by the listed company concerned are made available for public inspection on the website of the stock
exchange.
Meanwhile, penalties are categorized into a penalty (a fine) against a
breach of listing contract and a disclosure measure. Depending on the degreeof damage given to the trust that shareholders and investors place in the market, a judgment will be made on whether to apply the penalty (a fine) against
a breach of contract, which is the more serious treatment.
6. Recent Moves of Information Disclosure
Movement toward Introduction of International Financial ReportingStandards (IFRS)International Financial Reporting Standards (IFRS) are accounting standards
developed by the International Accounting Standards Board (IASB). In recent years, the adoption of IFRS has been on the increase around the world.
In Japan, listing companies have been allowed to voluntarily adopt IFRS
since 2010. In addition, given the recommendations proposed by the govern-Chap. XVI The Information Disclosure System and Investor Protection

Chart XVI-3.

Number of Companies Adopting IFRS on the TSE
Rasio among the total market capitalizationof TSE listed companies: 44%

240
220
200
180
160
140
120
100
80
60
40
20
0

IFRS Adopted
Decided to adopt IFRS
planning to adopt IFRS

204

(＋33)

141

108

26

20

30

(＋66)

11

171

(＋33)

(＋30)

234

243

(＋9)

225

(＋9)

11

10
11

10

213

226

(＋21)
16

7

32

19
27

198
161

27

125

42
15

333

85

61

27
June. 30, 2014 June. 30, 2015 June. 30, 2016 June. 30, 2017 June. 30, 2018 June. 30, 2019 June. 30, 2020 June. 30, 2021

Source: Tokyo Stock Exchange, Analysis of Disclosure of Basic Approach to Adoption of AccountingStandards (September 2021).

Table XVI-5. English disclosure implementation status by market (by number of companies)

Marketsegment
First Section

Marketcapitalization(trillion
yen)

Numberofcompanies

Timely Disclosure Materials
Financial
Statements

Other

Notice ofAnnualConvocation IR PresenCG
tationSecuritiesof General
Reports
ReportMeeting of Materials
Shareholders

666.7

2,186

28.0%

55.5%

29.1%

50.3%

46.0%

16.7%

8.6%

SecondSection

6.8

475

1.3%

7.2%

1.5%

4.4%

2.9%

0.8%

0.6%

Mothers

9.5

346

7.2%

16.8%

8.1%

6.4%

16.5%

2.9%

1.4%

JASDAQ
Standard

10.1

667

1.6%

8.5%

1.6%

1.3%

4.0%

0.1%

0.1%

JASDAQ
Growth

0.3

37

8.1%

16.2%

8.1%

2.7%

5.4%

0.0%

2.7%

All Markets

693.5

3,711

17.7%

36.9%

18.5%

31.1%

29.8%

10.2%

5.3%

Source: Tokyo Stock Exchange, Summary Report of the English Disclosure Implementation Status Survey (December 31, 2020).

334

Chap. XVI The Information Disclosure System and Investor Protection

Chart XVI-4.

Questionnaire Survey on English Disclosure to Foreign Investors(1) Assessment of English disclosureof listed companies(2) Investment materials
Financial Statements

Dissatisfied
22%

Somewhatdissatisfied
35%

Satisfied11%
Somewhatsatisfied
28%

Neither
4%

50%

30%

17% 4%IR Presentation Materials
Timely disclosure materials(excluding financial statements)

41%

33%

26%

35%

37%

26%

2%

Securities Reports

37%

33%

28%

2%

Annual Reports

35%

33%

30%

Corporate Governance Reports
30%
Notice of Convocation of General Meeting of Shareholders
15%(Business Report, Financial Statements)

31%
46%

2%

33%

6%

35%

4%

ESG reports 26%
33%
33%
7%
Notice of Convocation of General Meeting of Shareholders
20%
35%
39%
6%
(Notice of Convocation, Reference Documents)
0 % 20% 40% 60% 80% 100%
Required

Necessary

UsefulDon’t

Source: Tokyo Stock Exchange, Report of the Survey to Overseas Investors on English Disclosure by
Japanese Companies (August 2021).

ment in its growth strategy, initiatives were taken toward expanding thescope of application, including the release of a report by the FSA in 2014 thatsummarized the objectives of companies pursuing voluntary adoption of the
IFRS at the time of shifting to the IFRS and the advantages of adopting the
IFRS. Currently, there are 243 companies (44% of the overall market interms of market capitalization.) listed on the TSE that have either already adopted the IFRS or are scheduled to adopt the standards.
Movement toward enhanced disclosure of descriptive information
In order to promote a constructive dialogue between investors and companies
and to boost corporate value over the medium to long term, it is considered
important to enhance descriptive disclosure of financial information and ESG
information (environment, society, governance).
The report by the Working Group on Corporate Disclosure of the Financial
System Council released in June 2018 stated that measures must be implemented to streamline the disclosure system, such as“enhancing financial anddescriptive information”,“providing governance information to facilitate aconstructive dialogue with investors”. Thereafter, efforts have been made toenhance disclosure of descriptive information in the Annual Securities Report, such as the revision in January 2019 of the Cabinet Office Ordinance on
Disclosure of Corporate Information etc., and the publication of“Principles
Regarding the Disclosure of Descriptive Information”and“Case Studies ofDisclosure of Descriptive Information”by the Financial Services Agency inChap. XVI The Information Disclosure System and Investor Protection

335

March 2019. In addition, the revised Corporate Governance Code publishedin June 2021 states that companies should provide appropriate disclosure of
their approach to sustainability, including ESG factors, on a medium- tolong-term view.
Moreover, as the percentage of shares traded and held by overseas investors increases, companies are more and more expected to improve their English-language disclosure. According to a questionnaire survey conducted by
the TSE as of the end of December 2020, the percentage of companies listedon the First Section that indicated that they publish timely disclosure materials in English was 28.0% (increase of 5.3% over the previous year in thenumber of companies.), showing a good progress in this area. However, institutional investors are still requesting further improvement.

CHAPTER XVIIThe Securities Regulatory System

1. Financial Instruments and Exchange Act
In 2006, the Securities and Exchange Act underwent major revisions and was
renamed the Financial Instruments and Exchange Act (FIEA). These revisions were enforced for the purpose of introducing cross-sectional regulations and flexibility into the financial system. Introduction of cross-sectional
regulations meant reviewing vertical regulations and applying the same typesof rules to financial instruments with similar economic functions and risks.
This was achieved by expanding the FIEA’s scope of application and by revising various related laws and regulations. More specifically, the scope of
application was extended to include not only general investment trust beneficiary rights and mortgage securities, etc. but also collective investment
schemes, making it possible to implement regulations comprehensively. In
addition, various related laws were revised to establish a regulatory framework where financial instruments not covered by the FIEA but sharing manyof the same aspects were subject to similar rules. Another move to cross-sectional application was the standardization of the registration of sales and solicitation, investment advisory, asset management, and asset administration,etc., businesses under the umbrella of Financial Instruments Business Operators with the aim of applying as common a code of conduct as possible.
The authorities introduced flexibility into the law through (1) disclosure
regulations, (2) industry regulations, and (3) separating rules for dealing withdifferent classes of investors. More specifically, (1) they placed strict disclosure obligations on highly liquid securities, strengthening the disclosure system by requiring listed companies. In contrast, illiquid securities, in principle,
are exempt from these disclosure regulations. (2) While all Financial Instruments Business Operators are required to register under the comprehensive
industry regulations, businesses are classified into the three categories ofType I and Type II Financial Instruments Businesses, Investment Advisory
and Agency Business, and Asset Management Business, with separate rules
applying for each category. In addition, (3) customers are classified into professional investors and general investors, with various exceptions to the gen-

Equivalent regulations for all financial products andservices with strong investment characteristics.

Securities and Exchange Law

Strengthening the SRO functions (listing screening, trading
investigations, etc.) of exchanges (making the SRO an
independent organization).

Exchange System

Differentiating by so-called professional and generalinvestors (level of knowledge and experience) regulations
that vary according to the type of product, etc., being sold.

Source: Materials produced by the FSA.

●

Quarterly reporting required by law
Strengthening of internal control
for financial reporting

Disclosure System

Note: Shortened deadlines on special
large shareholding reports
Within 15 days of end of eachquarter→ Within 5 business days
every two weeks●

Revision of tender offer (TOB)
system● Revision of large shareholding
reporting system

Note: Confirmation by managementof appropriateness of disclosure,
etc.

●

●

In principle, the same type of investor
protection regulations apply as in the FIEA.

Note: Terms such as “securities firm” and “stock exchange” were not changed.

So-called Investment Services Act
Financial Instruments and Exchange Act

Banking Act, Long-Term Credit Bank Law, Shinkin Bank Act, Smalland Medium Sized Cooperative Savings Insurance Corporation Law● Insurance Business Law● Securities Exchange Law● Act Concerning Designated Real Estate Joint Enterprises

Revision

Punitive Measures and Monetary Penalties● Increasing criminal penalties (maximum prison term of
five years→ten years)● Raising monetary and criminal penalties for Misogyoku(dummy-order market manipulation)●●

Flexible (converting from uniform to variable regulations)

Comprehensive coverage of collective investment schemes (funds)●

from a vertical to a horizontal
Cross-sectional (converting
legal framework)

So-called Investment Services Act regulations●

FIEA
Expanded, obligation to explain
products to customers, etc.
→ estimated amount of civil liability(lost amount of principal), etc.

2. Amendments of Regulations of Related
Laws● Laws related to commodity investment
business (so-called Commodity Fund
Law)

1. The following laws were abolished.
● Financial Futures Trading Law● Law Concerning the Regulation of
Investment Advisory Services Relating
to Securities● Law Concerning Foreign Securities
Firms● Law Concerning the Regulation of
Mortgage BusinessBill Concerning Amendments ofRelated Legislation Concerning
the Partial Revision of the Securities
and Exchange Law, etc.

Transition from Securities and Exchange Act to Financial Instruments and Exchange Act

Bill to partially revise the Securities and Exchange Law, etc.
(Establishing cross-sectional legislative framework to protect investors)

Chart XVII-1.

Chap. XVII The Securities Regulatory System

337

338

Chap. XVII The Securities Regulatory Systemeral industry code of conduct applying to dealing with professional investors.
Major revisions to the FIEA included those relating to firewall regulations
between securities companies, banks and insurance companies enforced in
2008, the introduction of public regulations on credit-rating agencies, establishment of the Alternative Dispute Resolution (ADR) System in the financial sector, establishment of a framework for alliances among financial instruments exchanges and commodity exchanges that went into effect basedon the revisions in 2009, and the introduction of a disclosure system relating
to rights offering that was made based on the revisions enforced in 2011.
Subsequently, in the 2015 revision, regulations on funds for professionals(specially permitted businesses for Qualified Institutional Investor, etc.) wereamended. And the 2017 amendments included the introduction of rules onhigh-speed trading (HST) where a registration system for high-speed traders
was adopted and the introduction of the Fair Disclosure Rules. The 2019
amendment (1) established regulations on derivative transactions involving
crypto-assets and (2) established electronically recorded transferable rights as“paragraph 1 securities”, bringing the trading thereof under the regulations
pertaining to Type-I Financial Instruments Business Operators. The 2021
amendment established a notification system for the investment managementbusiness for overseas investors.
2. Other Laws and Regulations Related to the Securities Market
While the Financial Instruments and Exchange Act (FIEA) serves as the mostfundamental law concerning securities, securities business operators, andtransactions on the securities markets, there are, in fact, many other related
laws and regulations.
As previously stated, in addition to the enforcement of the FIEA, from thepoint of view of investor protection, other laws were revised so that theyshared, to the extent possible, common regulations with the FIEA for financial instruments not covered by the FIEA but having the same economic
function. For example, such related laws as the Banking Act (Art. 13-4), Insurance Business Act (Art. 300-2) and the Trust Business Act (Art. 24-2) implemented provisions equivalent to the FIEA’s code of conduct. Specifically,
these laws have regulation of advertising, etc.; obligation to clarify conditions of transactions in advance; delivery of document prior to conclusion ofcontract; behavior prohibitions; prohibition of compensations of loss, etc.;
and best execution policy.
The Act on Sales, etc. of Financial Instruments (renamed to Act on theProvision of Financial Services (Financial Services Provision Act) in the2020 amendment) was formulated to provide cross-sectional regulations re-Chap. XVII The Securities Regulatory System

Table XVII-1.

339

Banking Act, Insurance Business Act, and Trust Business Act

1. Acts that have sales and solicitation rules equivalent to those of the FIEA for deposits,
insurance policies, and investment trusts with strong investment characteristics(Points of view on which regulations have been implemented for each act)
Banking Act (specified depos- Insurance Business Act (speci- Trust Business Act (specified
its, etc.)
fied insurance policies, etc.)
trust agreements)
Advertising,regulations, etc.

• In the case of derivative deposits, if the bank has theright to extend the term of thedeposit, it must indicate to thecustomer the risk that the interest rate could fall below
the market rate to the disadvantage of the customer.

Obligation todeliver written
documents• Exceptions to the obligation • The document prior to con- • Exceptions to the obligato deliver written documents
clusion of contract must con- tion to deliver the docu- When a document on for- tain notes on material items ment prior to conclusion ofeign currency deposit, etc. in accordance with provisions contract
was delivered within the in supervisory guidelines re- (Documents regarding apast year
garding the contract outline similar contract has pre- When a similar document and cautionary information
viously been delivered,
was delivered within the Eg.: The contract outline is and the customer has
past year
dictated on the statutory level, made it clear that issuNote: Establish transitional while cautionary information ance of documents is notmeasures at the time is dictated on the cabinet of- necessary, etc.)
of enforcement (can fice order level.
be issued prior to en- • Items covered in the docuforcement; can be is- ment delivered upon conclus u e d w i t h i n t h r e e sion of contract can be admonths of enforce- justed in line with the items
ment)
included in the insurance pol• In the case of derivative de- icy, etc.
posits, the document prior to Eg.: Items regarding the typeconclusion of contract must and content of the contractcontain the same contents as can be omitted from the docuthe items shown in the adver- ment delivered upon conclutisement, etc.
sion of contract if they arecontained in the insurance
policy, etc.

Prohibited acts

• Generally prohibited acts in • Generally prohibited acts for • Generally prohibited acts inthe banking businessconcluding or soliciting pur- underwriting trusts• Concluding a contract with- chase of insurance policy• Concluding a contract
out adequate explanation nec- • Concluding a contract with- without adequate explanaessary for understanding the out adequate explanation nec- tion necessary for underdocument prior to conclusion essary for understanding the standing the document priorof contract or the document document prior to conclusion to conclusion of contract
on foreign currency deposits, of contract
etc.

Professional
investors(Tokutei Toushika)(Type of contract)• One type (contract for speci- • One type (contract for speci- • One type (contract for
fied deposits, etc.)
fied insurance policies, etc.)
specified trusts)

2. Business scope of banks and insurance companies(Auxilliary businesses)

3. Business scope of banking and insurance company
subsidiaries• Expanded to include agency or intermediary businessfor concluding investment advisory and discretionary
investment contracts (banks only).
• Expanded to include emission rights derivatives trading. (intermediary and consulting services for emission rights trading also permitted as incidental businesses).

• Business scope of securities subsidiaries expanded(full coverage of Financial Instruments Businesses).
• Scope of financial-related businesses expanded (private placements, investment advisory and agency
business, self-management, emission rights trading,emission rights derivatives trading, etc.).

Source: The FSA.

340

Chap. XVII The Securities Regulatory System

Chart XVII-2.

Enhancement of the Act on Sales, etc. of Financial Instruments

Principles on actions for damages undercivil act (section 709 of the Civil Law)

Financial Products Sales Act

Customers (sufferers) shall prove all therequirements fromto ① to ④ to win actions fordamages against financial firms.

The act prescribes special treatment on actions fordamages regarding a wide range of financial products.
including deposits, insurance, securities, etc.
Duty to explain・possibility of loss
to principals
・risk② intention or negligence④ damages① malfeasance

Violation of
duty toexplain

Proof of ①

No fault liability offinancial firms
Presumption of loss asloss to principals
No need for customers
to prove requirementsfrom ② to ④

③ causation
Strengthening Financial Products Sales Act
Enlarging the scope of duty to explain
・Adding a possibility of losses beyond original principals
and important part of schemes of financial instruments inthe scope of duty to explain● Introducing prohibition of provision of conclusive judgment
・no-fault liability and presumption of loss in case of theviolation●

Source: The FSA.

garding the sale and solicitation of sales for deposits, investment trusts, insurance, securities, and other financial instruments. The law was revised in2006 at the same time the FIEA came into force to make it easier for customers to press civil liability suits. For example, the law expanded the scope ofobligation to explain products to customers (Article 3, Paragraph 1, Items(ii), (iv) and (vi)) and added a suitability rule (Article 3, Paragraph 2). These
revisions defined the responsibility, in the case of a violation of the suitability
rule, to compensate the customer for damages, which are presumed to be any
loss of principal (Article 6). The Commodity Exchange Act (currently the
Commodity Derivatives Transaction Act) was also reformed to include similar regulations for its financial instruments. The revisions implemented advertising regulations and inserted an obligation to explain financial products
in a manner appropriate to the customer. Furthermore, loss compensation wasprohibited and made punishable by penalties. The 2020 amendment created a
new category of financial services intermediary business (Article 11(1)) (seeChapter 12).
While most of the business and code of conduct regulations regarding theinvestment trust intermediary business and asset management business of investment corporations have been included in the FIEA, the Act on Investment Trusts and Investment Corporations (Investment Trust Act) was left toChap. XVII The Securities Regulatory System341

focus solely on investment trust regulations and to serve as one of the pillars
of investment trust regulations along with the FIEA.
There are several laws pertaining to issuance of securities. Issuing of public bonds is approved based on the provisions of the Public Finance Act andthe Local Government Finance Act while deficit-covering bonds are governed by the special law of each fiscal year (The Special Deficit-Financing
Bond Law of 2021 set the issuance period for special bonds up to 2025,
maintaining the multi-year framework adopted from 2012). There are also
laws concerning issuing administration for government bonds. For private
securities, the Companies Act provides for the issuance of stocks and corporate bonds by corporations. As for corporate bonds and other bonds, the Secured Bond Trust Act and the Enterprise Mortgage Act are separately enforced in regard to collateral. In addition, the Act on the Securitization ofAssets is in place regarding the issuance of asset-backed securities.
3. Organization of the Securities Regulatory System
After the war, the Securities and Exchange Act was in place and the Securities and Exchange Commission was modeled after the U.S. Securities andExchange Commission (SEC) was established as an external bureau of the
Ministry of Finance to oversee the securities regulatory system. However, after the end of the U.S. occupation in 1952, the securities regulatory system
was once again placed under the control of the Securities Business Divisionin the Finance Bureau of the Ministry of Finance. Then in 1964, the Securities Bureau was created within the Ministry of Finance. The Securities Bureau regulated the securities business as a core authority for overseeing thelicense system of securities business operators over a period of about 30
years under the revised Securities and Exchange Act of 1965. During Japan’sbubble economy years, the country’s securities market demonstrated significant growth to become one of the major markets on a global level. On theother hand, the market came under severe criticism for lacking openness andbeing scandal-ridden. This, in particular the major financial and securities
scandals in 1991, prompted efforts to strongly promote reforms of the securities regulatory system along with market reforms.
In 1992, the Ministry of Finance bolstered its market surveillance by establishing the Securities and Exchange Surveillance Commission (SESC) andtransferring surveillance to this body. Further change came in June 1998
when the government set up the Financial Supervisory Agency as an externalbureau (Article 3,“Committees”of the National Government OrganizationAct) of the Prime Minister’s Office, to which the Ministry of Finance transferred the SESC. Subsequently, with the enforcement of the Act on Revision,

342

Chap. XVII The Securities Regulatory System

Chart XVII-3.

Securities Administration and the Monitoring System for Securities
Transactions, etc.
Prime Minister
Appointment(subject to Diet approval)

FSA

Administrative
Actions or Orders
to PayAdministrative
Monetary Penalty

Recommendations or
Proposals

Publicprosecutors

Monitoring
Financial Instruments
Business
Operators, etc.
(Violations of laws)

FilingCriminal
Charges

SESC
Chairman
2 Commissioners

Inspection
Listed Companies, etc.
(Violations of
disclosure
requirements)

Investigation
MarketMisconduct(Insider trading/Market manipulation)

Source: Materials available on the website of the Securities and Exchange SurveillanceCommission.

etc. of Related Acts for the Financial System Reform in December 1998, theFinancial Supervisory Agency took over the role of overseeing the securities
regulatory system. Concurrently, the Financial Reconstruction Commission,
which was established around the same time, was given the highest responsibility over the financial and securities regulatory system.
Then in 2000, the Financial Supervisory Agency was reorganized as the
Financial Services Agency (FSA) to which the Ministry of Finance transferred the financial system planning and law drafting functions in 2001, thesame year as the Financial Reconstruction Commission was transferred to the
FSA and the SESC also became part of the FSA. Through this process, themajor portion of securities regulation in Japan was consolidated into a systemadministered by the FSA and the SESC. And the policy on securities regulation shifted from preventative administration to regulatory violation surveillance. Behind this shift was the clarification of the objective of the administration to increase the welfare of people in Japan primarily through promoting
sustainable growth of corporations and the economy and stable asset formation, following the winding-down of a bad debt issue among others after thecollapse of the bubble economy.

Chap. XVII The Securities Regulatory System

Chart XVII-4.

343

Securities Administration Organization Chart
Minister of State
for Financial Services

State Minister
ParliamentaryVice-Minister
Financial Services
AgencySecurities and Exchange
Surveillance Commission

Commissioner

Certified Public Accountants andAuditing Oversight Board

Vice Minister
for International Affairs

Monitoring and Inspection OfficeDisclosure Inspection Division

Executive
BureauCriminal Investigation DivisionMarket Surveillance Division

Planning and Management Division

Insurance Business Division

Securities Business Division

Banking Business Division I

Banking Business Division II

Planning and Management DivisionCorporate Accounting andDisclosure Division

Financial Markets Division

Planning and Management Division

Director for Risk Analysis Division

Risk Analysis Division

Strategy Development Division

Resources Management Division

Planning and Management Division

Director for Securities Business
Monitoring Division

Executive
BureauPlanning, Management andCPA Examination Office

Administrative
Law Judges

Market Misconduct Investigation
Division

Supervision
BureauSecurities Business Monitoring
Division

Policy andMarkets Bureau

General Counselor (1)Deputy Director (6)Policy-making Counselor (1)Counselor (11)Strategy Development andManagement Bureau

Source: FSA materials.

The FSA was reorganized in July 2018 into three bureaus-Strategy Development and Management Bureau; Policy and Markets Bureau and Supervision Bureau-with an eye toward enhancing strategy planning function andexpertise of the FSA as an administrative body, and strengthening its ability
to deal with the advancement of Fintech, etc. Under this system, the following measures are being implemented: (1) promotion of digital innovation; (2)development of an international financial center; (3) promotion of sustainablefinance; (4) revitalization of capital markets and smooth supply of growth
capital; (5) spread of user-oriented financial services, and preparation for344

Chap. XVII The Securities Regulatory Systemdealing with various risks, including money laundering measures (as of August 2021).
4. Law Enforcement by the Financial Services Agency
The executive authority for the Financial Instruments and Exchange Act lies
with the prime minister of Japan, the top cabinet minister, who in turn oversees the Financial Services Agency (FSA). In actual practice, the prime minister delegates this authority (with some exceptions such as the authority on
approval and other treatment) to the commissioner of the FSA as stipulated
in Article 194-7“Delegation of Authority to the Commissioner of the FSA.”
Major types of authority delegated to the commissioner include the authority
to issue a Business Improvement Order to Financial Instrument Business Operators and Registered Financial Institutions (Article 51, Article 51-2) or an
order to suspend operations or rescind their registration or approval (Article
52, Article 52-2). The FSA commissioner is also required to issue an Administrative Surcharge Payment Order if certain conditions are met. Primary examples subject to the issuance of the Administrative Surcharge Payment Order include non-submission of securities registration statements, etc. andfalse statement (Articles 172, 172-2, 172-3, and 172-4) and non-submission,
misrepresentation and false statement of the public announcement of the startof an offering or the Tender Offer Notification (Articles 172-5 and 172-6).
When any case of unfair trading practice is noted based on facts of spreading
rumors, use of fraudulent means, market manipulation, or insider trading(Articles 173, 174, 174-2, 174-3, and 175), an Administrative Surcharge Payment Order is normally decided through a trial procedure and based on a
draft produced by examiners (Articles 178, 185-6, and 185-7).
In addition, the following inspection authority for issuing disciplinary action by order or measures by the FSA is delegated by the commissioner to the
SESC. Certain other matters and some of the matters delegated to the commission may be delegated to the Director-General of the Finance Bureau orto the Director-General of the local finance bureau. The Director-General of
the Finance Bureau collaborates with the Director of Securities and Exchange
Surveillance Department of each location.
(1) The authority to require Financial Instruments Business Operators andparties executing transactions with Financial Instruments Business Operators
to produce or submit for inspection reports related to the business and assetsof such operators(2) Similar authority over Authorized On-Exchange Transaction Service
Operators (Foreign Securities Companies), etc.
(3) Similar authority over licensing and accrediting associations or thoseChap. XVII The Securities Regulatory System

Chart XVII-5.

345

Flow Leading to the Payment of Administrative Surcharge

Commissioner(4) Selection of examiners(6) Draft order
Tribunal formed by 3 examiners
Financial Markets DivisionCorporate Accounting andDisclosure Division(4) Selection of assigned
staff
Office of Trial Procedures(2)
Recommendation
Executive Bureau
Civil Penalties Investigation andDisclosure Document Inspection
Division(3) Decision to start trial process(7) Monetary Penalty Payment Order(Written ruling sent)(5) Trial Procedures
Trial date
(Preparatory
proceedings date)(1) Investigations

Respondent(Council)

Securities and Exchange Surveillance Commission

Note: Designated staff members are selected among the employees by the FSA Commissioner to assert
and verify the violations, etc., in the trial proceedings. They submit preparatory documents andgive evidence, etc.
Source: Materials available on the website of the Securities and Exchange Surveillance Commission.

Table XVII-2.

Major Legal Basis of Inspection and Supervision by the FSA

Financial Instruments and Exchange Act
Article 56-2
Financial Instruments Business Operators, Etc.
Article 60-11
Authorized On-Exchange Transaction Service Operators, Etc.
Article 63-6
Specially Permitted Business Notifying Persons, Etc.
Article 66-22
Financial Instruments Intermediary Service Providers, Etc.
Article 75
Authorized Financial Instruments Firms Association, Etc.
Article 79-77
Investor Protection Fund, Etc.
Article 106-6,
Major Shareholders, Etc. of Financial Instruments Exchanges and Their
Article 106-20
Holding Companies
Article 151
Financial Instruments Exchange, Etc.
Article 153-4
Self-Regulatory Organizations
Article 155-9
Foreign Financial Instruments Exchange, Etc.
Article 156-5-8
Major Shareholders, Etc. of Clearing Organization
Act on Investment Trusts and Investment Corporations
Article 22
Investment Trust Management Companies and Trustee Companies, Etc.
Article 213
Investment Corporations, Etc.

346

Chap. XVII The Securities Regulatory System

entrusted by such associations(4) Similar authority over issuers of OTC or tradable securities(5) The authority to require financial instruments exchanges and their subsidiaries, issuers of securities listed on respective exchanges and foreign financial instruments exchanges to produce and submit reports and be inspected(6) The authority to require related parties of incidents subject to administrative surcharge to produce and submit reports and be inspected
The commission carry out their investigations within the permissible scope
and when considered necessary, the commission may recommend the prime
minister or the FSA commissioner to take an administrative disciplinary action (Act for Establishment of the Financial Services Agency, Article 20) andother measures.
5. The Securities and Exchange Surveillance Commission
The Securities and Exchange Surveillance Commission (SESC) comprises achairman and two members appointed by the prime minister with the approval of the house of representatives and the house of councilors (Act for Establishment of the Financial Services Agency, Arts. 10 to 12). As described in
the preceding section, the commission has the authority delegated by the FSA
commissioner to require a wide range of people related to Financial Instruments Business Operators and registered financial institutions to produce or
submit for inspection reports and materials (FIEA Art. 56-2, Art. 60-11, Art.
63, Art. 66-22, Art. 75, Art. 79-4, Art. 79-77, Art. 151, Art. 156-15, Art. 15634, etc.). The commission also has the authority to demand the production or
Table XVII-3. Number of criminal accusations by Business Year (as of March 31, 2021)
Business Year

92－15

2016

2017

2018

2019

2020

Fake statement ofDisclosure documents

41

0

0

3

1

0

Disseminating
Unfounder Rumors・
Fraudulent Means

26

2

0

0

0

0

Market manipulation

26

3

2

0

0

1

Insider trading

77

2

2

5

1

1

Others

11

0

0

0

1

0

Total

181

7

4

8

3

2

Source: The website of the Securities and Exchange Surveillance Commission’s Initiatives (August2021).

Chap. XVII The Securities Regulatory System

New coverage of inspection (trade repositories)
New coverage of inspection (group companies, etc. following the
introduction of consolidated regulation)
New coverage of inspection (credit rating agencies, etc.)
New coverage of inspection (funds, etc.)(Investment advisory companies, etc.)
Inspection of Inspection for financial soundness
securities
companies Inspection for maintaining market fairness
Widening the scope of violations subject to administrative monetary penalties[tipping, trading recommendations and other acts related to insider trading]Widening the scope of violations subject to administrative monetary penalties[unfair trading, etc. committed on the account of others by persons other thanfinancial instruments business operators]
Expanded scope of investigation and administrative monetary penalties[Included in market manipulation: fictitious buying and selling of stocks, exchangeof stocks based on collusive arrangements and illegal stabilization operation trade]
Expanded scope of investigation and administrative monetary penalties[“Misegyoku” sham order transactions]
Insider trading, market manipulation with actual trading, disseminating unfounderrumors regarding stock markets, and fraudulent means
Widening the scope of violations subject to administrative monetary penalties(involvement in the submission of documents containing false disclosure statements)
Expanded scope of investigation and administrative monetary penalties

Recommendations & proposals

Investigation of market
misconduct
Inspection of
disclosurestatements

Activities of the SESC

Expanded scope of investigation and administrative monetary penalties[Quarterly securities reports*, internal control reports, etc.]
Securities registration statements*, Annual securities reports*,
Semi-annual securities reports*, Extraordinary reports*, etc.

Investigation of
infringements*Signifies the disclosure documents subject to administrative monetary penalties

Investigationand petitioningof injunction

Collection, analysis and examination of information

Inspection of securities
companies

Chart XVII-6.

347

Investigation of infringement cases
Insider trading (including tipping, trading recommendations and other acts),
market manipulation, disseminating unfounder rumors, fraudulent means,submission of false securities reports, compensation for loss, etc.

Investigation for seeking petitions for court injunctions

Filingcriminal
charges
Seeking
petitionsfor court
injunctions

Source: Data disclosed by Securities and Exchange Surveillance Commission.

submission for inspection of reports and materials from the submitters of securities registration statements or Statements of Large Volume Holders andtender offers (FIEA Art. 26, Art. 27-22, Art. 27-30, etc.).
Based on this process, the commission mainly carries out the following
tasks: (1) market analysis screening (daily market surveillance) involving areview of the securities trading activity of Financial Instruments Business
Operators; (2) securities inspections involving wide-ranging and detailed
branch inspections of Financial Instruments Business Operators and regis-

348

Chap. XVII The Securities Regulatory System

tered financial institutions; (3) disclosure inspections to ensure the appropriateness of disclosure by submitters of securities registration statements andannual securities reports; and (4) administrative surcharge investigations undertaken to determine whether certain behavior requiring an Administrative
Surcharge Payment Order, such as unfair trading practices or disclosure violations, has occurred. Furthermore, in the case of a criminal investigation,such as the misrepresentation of material facts in a securities registration
statement or annual securities report submitted or market manipulation, officials of the commission are authorized to arbitrarily investigate by questioning, examination, retention, etc. and keeping documents in custody (FIEA
Article 210). In such criminal investigations, the officials also have inspection, search, and seizure authority within the scope of the warrant issued by ajudge (FIEA Article 211, etc.).
As described in the preceding section, after the commission has made its
recommendations based on its securities investigations, the FSA commissioner issues orders to improve business operations, rescinds registration, or
suspends operations. When the commission recommends action as a result of
its administrative surcharge investigations, the commissioner issues an Administrative Surcharge Payment Order when he/she is convinced that regulations have been violated. Furthermore, when the commission is convincedthat irregularities have been committed following the investigation in a criminal case, it must report the case to the Public Prosecutors Office pursuant to
the provision of Article 226, Paragraph 1 of the FIEA.
In the 2008 revision of the FIEA, the authority to petition for Prohibition
and Stay Orders (Article 192, Paragraph 1) was delegated from the court to
the Securities and Exchange Surveillance Commission. It first used this power to crack down on a business operator not registered as a Financial Instruments Business Operator in 2010. More recently, petitions for the issuance ofProhibition and Stay Orders were submitted to the court for misconducts by
D.U. corporation and IFP Tokyo in 2019, and SKY PREMIUM INTERNATIONAL PTE.LTD. in 2021.
6. Self-Regulatory Organizations
A self-regulatory organization is an organization established voluntarily byintermediaries, etc. under the respective legal framework with the purpose of
ensuring fair and smooth trading of securities and other transactions and ofcontributing to the protection of investors. It takes on the role of securing the
public nature of the securities market through formulating its own rules andensuring adherence to those rules along with the laws, regulations and otherrules set out by the government.

Chap. XVII The Securities Regulatory System

Table XVII-4.

349

List of Self-Regulatory Organizations Governed by the FIEA (September
2021)
Rules, etc.

Organization

Financial Instruments
Exchange

LicensedSame as above
Same as above
Same as above

Japan Exchange Regulation (see main text)
Nagoya Stock Exchange
Fukuoka Stock Exchange
Sapporo Securities Exchange

Financial Instruments
Firms Associations

Authorized
CertifiedSame as above
Same as above
Same as above
Same as above
Same as above

JSDA
The Investment Trusts Association, Japan
Japan Investment Advisers Association
Financial Futures Association of Japan
Type II Financial Instruments Firms Association
Japan Virtual and Crypto assets Exchange Association
Japan Security Token Offering Association

Investor Protection
Organization

CertifiedFinancial Instruments
Mediation Assistance Center(FINMAC)

Source: Compiled based on data available on the website of the FSA, etc.

Table XVII-5.

Principal Rules of the Japan Securities Dealers Association (as of September 2021)

Self-Regulatory Rules
Rules Concerning Solicitation for Investments and Management of Customers, Etc. by Association
Members
Rules Concerning Establishment of Confidential Corporate Information Management System by
Association Members
Rules Concerning Establishment of Order Management System by Association Members
Rules Concerning Application for Confirmation, Examination, Confirmation, Etc. of Incidents
Rules Concerning Financial Instruments Intermediary Services Providers
Rules Concerning Elimination of Relationships with Antisocial Forces
Rules Concerning Qualification and Registration, Etc., of Sales Representatives of Association
Members
Guideline for Protection of Personal Information
Rules Concerning Maintenance of and Compliance With Ethical Code by Association Members
Uniform Practice Rules
Rules Concerning Handling of OTC Incident-Related Securities
Rules Concerning Processing of Rights in Case of Forgetting Entry of a Name Change on Stocks
Rules Concerning Exchanges of Bonds Drawn for Redemption by Lottery in OTC Trading
Rules Concerning Elimination of Fails in Bonds, Etc.
Dispute Handling Rules
Rules Concerning Outsourcing, etc. for Resolution of Disputes, Etc. Between Customers and Association Members
Rules Concerning Mediation of Disputes Between Association Members

350

Chap. XVII The Securities Regulatory System

The Financial Services Agency (FSA) acknowledges the money lending
associations, certified payment service associations and designated dispute
resolution organizations as self-regulatory organizations in addition to the Financial Instruments Firms Associations. Financial Instruments Firms Associations are categorized into authorized financial instruments firms associations
approved by the prime minister under the FIEA (Article 67-2) and certified
financial instruments firms associations designated by the prime minister under the FIEA (Article 78). The JSDA is currently the only Authorized Financial Instruments Firms Association and its members comprise Financial Instruments Business Operators and registered financial institutions. The JSDA
has in place Articles of Association; fair, conventional regulations; board resolutions; and dispute handling rules; and its members are required to carryout securities transactions in compliance with these regulations and rules.
The JSDA is also empowered to take disciplinary action when its members
violate these association rules. The scope of its disciplinary action may include reprimand, imposition of monetary penalties, suspension or limitationof membership or expulsion, or the issuing of a formal warning (JSDA Articles of Association, Article 28, Article 29).
Certified Financial Instruments Firms Associations include The Investment
Trusts Association, Japan that has investment trust management companies,
trust companies, etc. that serve as trustees in investment trusts without instruction by trustor, and securities companies and registered financial institutions that purchase and sell beneficiary certificates of investment trusts asmembers, and The Japan Investment Advisers Association having investment
advisory companies as members.
The Financial Instruments and Exchange Act (FIEA) distinguishes between a“stock company that operates financial instruments exchange markets”and a“self-regulatory organization”and recognizes a“financial instruments exchange”or“its self-regulatory organization”as a self-regulatoryorganization relating to the exchange market. With the authorization of theprime minister, the self-regulation-related service of Japan Exchange has
been commissioned to Japan Exchange Regulation pursuant to Article 85 of
the FIEA. Those services include the listing and delisting of financial instruments, inspections of compliance of members with laws and regulations, etc.,
and other measures specified by cabinet office order for the purpose of ensuring fair trading practices (Article 84, Paragraph 2). Japan Exchange Regulation’s organizational structure contains a listing examination department thatscreens listing applicants for suitability; a listing compliance department thatmaintains and improves the quality of the financial instruments listed on theexchange; a market surveillance and compliance department that investigatesand seeks to prevent unfair trading practices; and a participant examinationand inspection department that monitors compliance and implements disci-

Chap. XVII The Securities Regulatory System

351

plinary action. Under rule 34 of the Trading Participant Rules, violations oflaws or rules and regulations by participants are punishable by revocation of
trading qualifications, suspension or restriction of trading, and monetary penalties or official warnings, etc.
7. International Organization for Securities Regulation
The International Organization of Securities Commissions (IOSCO) is an international organ that sets forth global standards for the securities sector invarious countries. It takes on the role of promoting, in particular, the development and implementation of, and compliance with, internationally recognized securities regulations. In the process of implementing reforms to theinternational rules after the financial crisis, IOSCO worked in cooperation
with the G20 and the Financial Stability Board (FSB) below. The IOSCO
framework was established in 1974 as the Inter-American Association of Securities Commissions. In 1983, the code of the organ was revised to expand
membership beyond the Americas, and the organization was renamed as
IOSCO at the Paris Annual Conference in 1986. As of September 2021, there
were a total of 230 member organizations, representing the regulators of over
95% of the world’s securities markets. The Securities Bureau of Japan’s Ministry of Finance became an ordinary member in 1988. The FSA has succeeded the position and is an ordinary member at present. Besides the FSA, theSecurities and Exchange Surveillance Commission is an associate member,
along with the Ministry of Economy, Trade and Industry and the Ministry ofAgriculture, Forestry and Fisheries, both of which oversee commodity futures. Meanwhile, Japan Exchange Group, Inc. and the JSDA are affiliate
members. IOSCO has published a wide range of principles, policies, standards, guidance, codes, recommendations, and practices regarding securities
trading that have been implemented in many countries. IOSCO’s documents
are important also for Japan’s securities regulators, which have taken steps to
implement policies through defining laws and self-regulatory systems. The
Financial Services Agency closely follows IOSCO trends and publishes themon its website.
The Financial Services Board (FSB) was established as an international
body in April 2009, as the successor to the Financial Stability Forum (FSF)
founded in 1999, with a broadened mandate to promote financial stability, thefunction of the FSF. Members of the FSB include financial supervising organs and central banks of 25 major countries and regions, including Japan. In
addition, international organizations such as IOSCO, IMF, the World Bank,
the Bank for International Settlements (BIS), and the Basel Committee on
Banking Supervision are also members of the FSB. From Japan, the Bank of352

Chap. XVII The Securities Regulatory System

Chart XVII-7.
Presidents
Committee

IOSCO Organization Chart

GeneralSecretariat

Financial Stability
Engagement GroupIOSCO Board

Asia-Pacific Regional
Committee
Committee 1【Issuer Accounting,
Audit and Disclosure】

Growth and Emerging
Markets Committee

Multilateral Memorandumof Understanding
Monitoring Group

European Regional
Committee

Committee 2【Regulation ofSecondary Markets】

Affiliate Members
Consultative Committee

Administrative
Arrangement
Assessment GroupInter-American Regional
Committee

Committee 3【Regulation of Market
Intermediaries】

Finance andAudit Committee

WG on Margin
Requirements

Africa/Middle-East
Regional Committee【Enforcement and Exchange of Informationand the Multilateral Memorandom ofUnderstanding Screening Group】

Committee 4

Capacity Building
Resource Committee

TF on Market Conduct

Policy Standing Group

Committee 5【Investment
Management】

Committee on
Emerging Risks

TF on Financial
Benchmarks

Implementation
Monitoring SG

Committee 6【Credit Rating Agencies】

Assessment
Committee

Follow-Up Group to
the 2015 Task Force on
Cross-Border Regulation

WG on Cyber-resilience

Committee 7【Derivatives】

CPMI-IOSCO
Steering Group

Sustainable Finance TF

WG on Digital
Innovations

Retail Market
Conduct TF

Committee 8【Retail Investors】

Table XVII-6.

Major IOSCO Committees

Presidents Committee

The Presidents Committee is composed of all the Presidents (Chairs) of ordinary and associate members and meets once a year during the Annual Conference. It has the right to make decisions on all matters necessary for the IOSCO to achieve its objectives.

The IOSCO Board

The IOSCO Board is comprised of securities regulators of 34 countries, including the FSA. It is the governing and international standard-setting bodyfor the securities industry. Under the Board are (1) policy committees that
discuss policy issues and conduct policy work; among other committees is (2)the Growth and Emerging Markets Committee, comprised of regulators of
emerging markets and countries, which seeks to promote the development
and greater efficiency of emerging markets by establishing principles andstandards and providing training, etc.

Regional Committees

There are four regional committees—Asia-Pacific Regional Committee, Inter-American Regional Committee, European Regional Committee, and African/Middle-East Regional Committee—and they discuss specific issues pertinent to their own regions.
Japan belongs to the Asia-Pacific Regional Committee.

Source: Websites of IOSCO and the FSA.

Chap. XVII The Securities Regulatory System

353

Japan, the FSA and the Ministry of Finance are participating members. According to the FSB Charter, the organization is responsible for the monitoring
and assessment of vulnerabilities affecting the global financial system andfor identifying and reviewing regulations, supervisory and related actions
needed to address these vulnerabilities and their outcomes. Particularly important tasks of the FSB include the authorization of global systemically important financial institutions (G-SIFI) crucial for systems that are in placeacross borders and the formulation of guidelines for establishing the supervisory college. The organization also examines international standards andprinciples relating to the shadow banking system and other activities thathave not been subject to regulations thus far, and serves as an intermediaryfunction to coordinate matters among related entities. The outcomes of activities of the FSB are reported and addressed as recommendations when appropriate at the G20 summit.

APPENDIX
Chronology of Events Related to Securities(1870−2021)

Year

Date

Changes implemented

Apr. 23, 1870 The Japanese government publicly offers 9% coupon bondson the London market (the first public bond ever to be sooffered).
Oct. 13, 1874 The stock trading ordinance is enacted (the nation’s first securities law), but it is not enforced.
May 4, 1878

The stock exchange ordinance is promulgated.

May 15, 1878 The Tokyo Stock Exchange is established.
June 17, 1878 The Osaka Securities Exchange is established.
Mar. 4, 1893

The Securities Exchange Law is promulgated.

Aug. 1, 1894

The Sino-Japanese War breaks out.

Mar. 9, 1899

The Commercial Code is promulgated (the basic law of today’s Companies Act).

Feb.10, 1904

The Russo-Japanese War breaks out.

Mar. 13, 1905 The Secured Bonds Trust Act is promulgated.
Feb. 1910

Securities brokers engage in sub-underwriting in the issuance of the No. 1 issue of public bond with 4-percent interest.

July 28. 1914 World War I breaks out.
Apr. 1, 1918

The Securities Installment Sales Act is promulgated.

Mar. 15, 1920 Stock prices crash, touching off a reactionary depression.
Apr. 20, 1922 The Securities Exchange Law is amended: development ofmembership-based exchange, two transaction categories spot transactions and net-balance settlement transactions
Sept. 1, 1922

Osaka Securities Exchange starts short-term futures transactions (time bargains).

APPENDIX Chronology of Events Related to Securities

355

Sept. 1, 1923

Great Kanto Earthquake, September 7 Moratorium.

June 2, 1924

The Tokyo Stock Exchange starts short-term futures transactions (time bargains).

Mar. 15, 1927 Financial crisis occurs.
Mar. 30, 1927 The Banking Act is promulgated.
Apr. 22, 1927 Financial crisis continues, 3-week moratorium is implemented.
1928

The Tokyo Stock Exchange and the Osaka Securities Exchange mark their 50th anniversaries. The Tokyo Stock Exchange computes a stock price index for the first time
(Fisher’s ideal index, monthly average) and starts publishing it.

Oct. 24, 1929 The New York Stock Exchange crashes (Black Thursday),setting off a world-wide depression.
Jan. 11, 1930

Gold embargo is lifted, causing an outflow of massive
amount of specie and an outbreak of industrial depression(Showa Depression).

Sept. 18, 1931 The Manchurian Incident breaks out.
Sept. 21, 1931 U.K. decides to terminate the gold standard, setting off aworldwide financial crisis.
Dec. 13, 1931 Reimposition of gold embargo is executed.
May 15, 1932 The Bank of Japan begins underwriting issuance of deficitcovering government bonds.
May 5, 1933 Banks and trust banks as trustees of corporate bonds initiate
a clean-up movement of corporate bonds, disallowing issuance of unsecured corporate bonds.
May 27, 1933 The U.S. enacts the Securities Law.
June 6, 1934

The U.S. enacts the Securities and Exchange Law.

July 7, 1937 Marco Polo Bridge Incident occurs, setting off the Second
あSino-Japanese War.
July 17, 1937 Fujimoto Bill Broker Securities forms a securities investment partnership–the first investment trust.
Mar. 29, 1938 The Securities Business Control Act is promulgated.
Mar. 31, 1938 The Securities Underwriting Business Act is promulgated.

356

APPENDIX Chronology of Events Related to Securities

Sept. 3, 1939

World War II breaks out.

Aug. 30, 1941 The Stock Price Control Ordinance is promulgated.
Dec. 8, 1941

The Pacific War breaks out.

Feb. 18, 1942 The Act for Registration of Corporate Bonds, etc. is promulgated.
Mar. 11, 1943 The Japan Securities and Exchange Act is promulgated. On
June 30, the Japan Securities Exchange is established, andthe 11 stock exchanges (as corporations) are abolished to
become branch exchanges of the Japan Securities Exchange.
Oct. 19, 1943 Exchange Member Administration Guidelines are issued;
Securities Business Administration Guidelines are issued(December 17)
Mar. 10, 1945 After the Great Tokyo Air Raid, the Wartime Finance Bank
decides to provide unlimited support by buying at the
March 9 price.
Aug. 10, 1945 Japanese stock exchanges nationwide temporarily suspend
operations.
Aug. 15, 1945 Japan loses the war.
Sept. 26, 1945 The GHQ releases a memorandum (dated Sept. 25) banning
the resumption of business by the securities exchange.
Dec. 1945

Investors start group trading in stocks in Tokyo and Osaka.

Apr. 17, 1946 Shinnihon-Kogyo Corporation’s stock is publicly offered as
the first public stock offering after the war.
Aug. 8, 1946

The Holding Company Liquidation Commission is established and begins designation of holding companies.

Jan. 18, 1947

The Act Concerning Adjustment, etc. of Disposal of Securities is promulgated.

Mar. 28, 1947 The Act Concerning Dissolution of Japan Securities Exchange is promulgated, and the securities exchange is dissolved on April 16.
Mar. 28, 1947 The Securities and Exchange Law (of 1947) is promulgated.
Apr. 14, 1947 The Antimonopoly Act is promulgated.
July 23, 1947 The Securities and Exchange Commission is established.

APPENDIX Chronology of Events Related to Securities

357

Apr. 13, 1948 The revised Securities and Exchange Act (of 1948) is promulgated, and it makes securities companies subject to registration.
Nov. 7, 1948

Article 65 of the Securities and Exchange Act is enforced.

Jan. 31, 1949

The GHQ announces a policy authorizing the resumption of
securities trading.

Feb. 12, 1949 Securities companies hold inauguration meetings of stock
exchanges in Tokyo (Feb. 12), Osaka (Feb. 15), and Nagoya(Mar. 7).
Apr. 20, 1949 Adams GHQ Officer in charge of securities instructs thethree principles of securities exchange.
May 9, 1949

The Japan Securities Dealers Association is founded (as afederation of securities dealers associations).

May 16, 1949 The stock exchanges of Tokyo, Osaka, and Nagoya start
floor trading.
July 4, 1949

Stock exchanges in Fukuoka, Hiroshima, Kobe, Kyoto, andNiigata start floor trading.

Apr. 1, 1950

The Sapporo Stock Exchange starts floor trading.

June 25, 1950 Disturbance outbreaks in Korea.
June 1, 1951

Margin trading is started.

June 1, 1951

The Securities Investment Trust Act is promulgated and enforced, and stock investment trusts start operating on June
15.

Jan. 4, 1952

Based on the Dow Jones stock pricing method, averagestock prices (TSE average stock price) are adopted on exchanges and announced.

Apr. 28, 1952 Treaty of Peace with Japan and the U.S.-Japan Security
Treaty come into effect.
Aug. 1, 1952

The Securities and Exchange Commission is abolished, andits function is transferred to the Securities Section of the Finance Bureau of the Ministry of Finance.

Sept. 10, 1952 The Securities and Exchange Council is created.
Mar. 5, 1953

Nationwide stock markets crash at the news of Russian
leader Stalin is in a critical condition.

358

APPENDIX Chronology of Events Related to Securities

Oct. 26, 1954 The Tokyo Stock Exchange’s labor union goes on strike,demanding improvements in labor conditions.
June 1955

Movements to revive term (time bargain) transactions reacha peak.

Apr. 2, 1956

The stock exchanges in Tokyo and Osaka open a bond trading market.

Oct. 7, 1958

Trading on the Tokyo Stock Exchange tops 100 million
stocks for the first time.

Feb. 18, 1959 Foreign currency-denominated bonds (USD public bonds)
are issued for the first time after the war.
Jan. 11, 1961

Bond investment trusts are launched.

July 18, 1961 The Dow Jones average stock price hits the peak at
1,829.74.
Oct. 2, 1961

The stock exchanges of Tokyo, Osaka, and Nagoya open
Second Sections.

July 18, 1963 President Kennedy of the United States proposes the creation of an interest equalization tax, and stock prices on theTokyo Stock Exchange crash on July 19.
Jan. 20, 1964

Japan Joint Securities is founded and continues to buy
stocks from the fall season to the end of the year.

Sept. 25, 1964 Capitalization Coordinating Committee agrees to restrain
capital increases after February 1965.
Jan.12, 1965

Japan Securities Holding Association is founded, takes on
stock holdings of investment trusts.

May 21, 1965 Talks about the rehabilitation of the near-bankrupt Yamaichi
Securities are reported, plunging the market into a semicrash.
May 28, 1965 The Bank of Japan decides to provide special loans to 19
management companies including Yamaichi Securities.
July 27, 1965 Economic reconstruction measures, including the policy for
issuing deficit-covering government bonds, are decided.
Oct. 1, 1965

The amended Securities and Exchange Act is enforced;
among other things, it requires securities companies to obtain a license from the government.

July 1, 1967

Liberalization of capital transactions (first round) is implemented.

APPENDIX Chronology of Events Related to Securities

359

Apr. 1, 1968

Securities companies are fully transfered to a license system.

June 4, 1968

The Tokyo Stock Exchange’s market capitalization on its
1st section reaches ¥10 trillion.

Jan. 31, 1969

Nihon Gakki pursues capital increase by issuing shares onmarket with preferential terms for shareholders. Issuing ofshares on market becomes active.

July 1, 1969

TOPIX is introduced.

Mar. 3, 1971

The Law Concerning Foreign Securities Firms is promulgated.

Jan. 24, 1973

The Dow Jones average stock price hits a peak of 5,359.74.

Feb. 13, 1973 The government shifts the exchange rate system to a floating exchange rate system.
June 2, 1973

Agreement reached with OPEC on major oil companies andraising of oil prices; the first oil crisis begins.

1975

The Ministry of Finance starts issuing a massive amount ofgovernment bonds, and the turnover of bonds on the OTC
market increases sharply.

May 15, 1978 The Tokyo Stock Exchange celebrates its 100 year anniversary and enters its second century.
Mar. 30, 1979 Unsecured corporate bonds (Sears, Roebuck and Company)
are issued for the first time since the end of the war.
Dec. 1, 1980

A new Foreign Exchange and Foreign Trade Act is enforced, and in- and out-bound securities investments areliberalized, in principle.

Oct. 1, 1982

Revised Commercial Code is enforced, unit share system is
introduced, and the face value of newly founded company’sstock is set at ¥50,000.

Apr. 9, 1983

City banks and other financial institutions start OTC sale ofgovernment bonds.

Apr. 20, 1984 The Law Concerning the Custody and Transfer of Stock
Certificates is promulgated.
Oct.19, 1985

The Tokyo Stock Exchange starts bond futures trading, thefirst securities futures trading since the end of the war.

Dec. 24, 1985 Merrill Lynch and five other foreign securities firms are admitted to the Tokyo Stock Exchange for the first time.

360

APPENDIX Chronology of Events Related to Securities

Oct.11, 1986

NTT begins offering its shares to the general public.

Nov. 25, 1986 The Law Concerning the Regulation of Investment Advisers Relating to Securities is enforced.
June 9, 1987

The Osaka Securities Exchange starts Futures 50 trading as
the first stock futures trading market.

Oct. 20, 1987 The Tokyo Stock Exchange records the largest fall (14.9%)
following the crash of the New York market, Black Monday; stock price crash ripples throughout the world.
Dec. 15, 1987 The Law Concerning the Regulation of Mortgage-Backed
Securities Business is enforced.
Sep. 3, 1988

The Tokyo Stock Exchange (TOPIX) and the Osaka Securities Exchange (the Nikkei 225) start stock index futures
trading on full scale.

June 12, 1989 The stock exchanges in Osaka (Nikkei 225); Nagoya (Option 25, on Oct. 17); and Tokyo (TOPIX) start trading stockindex options.
Dec. 29, 1989 The Dow Jones average (the Nikkei average) shoots up to
an all-time high of 38,915.87.
Mar. 20, 1990 With the rapid plunge in stock prices, public offering ofstocks on the market has come to a halt.
Oct. 1, 1990

Given the plunge in stock prices, the Finance Minister
quickly announces measures to bolster stock prices.

June 24, 1991 Following the involvement of the big four securities companies in the loss compensation issue with corporate clientsand in transactions with antisocial forces, the President of
Nomura Securities and the President of Nikko Securities
take responsibility and resign, which leads unfolding securities scandals over the subsequent several months.
Oct. 3, 1991

The revised Securities and Exchange Act is approved. Revisions include the prohibition of discretionary account transactions and prohibition of loss compensation dealings.

June 26, 1992 The Law Concerning Realignment of Related Laws for a
Reform of the Financial System and the Securities Trading
System is promulgated, and the Securities and Exchange
Surveillance Commission is launched on July 20.

APPENDIX Chronology of Events Related to Securities

361

Aug. 18, 1992 The Nikkei stock average plunge to 14,309.41 and emergency measures are quickly announced. Comprehensive
economic measures, including the injection of public funds,
are revealed (August 28).
July 2, 1993

Kogin Securities and other securities companies affiliatedwith financial institutions were established for the first time.

Apr. 1, 1994

Brokerage commissions securities companies charge on
block trading are liberalized.

Oct. 1, 1994

Amendment to the Commercial Code for deregulating treasury stock purchases is enforced.

Feb. 26, 1995 Barings Securities of U.K. goes bankrupt.
Aug. 30, 1995 Hyogo Bank goes bankrupt under the Banking Act for the
first time after the war and the BOJ provides a special loan.
Sept. 8, 1995

The Bank of Japan cuts the discount rate to an all-time lowof 0.5%.

Jan. 1, 1996

The regulation of the issuance of corporate bonds is abolished.

June 21, 1996 Six laws relating to housing-loan and financial matters arepromulgated.
Nov. 11, 1996 Prime Minister Ryutaro Hashimoto instructs his cabinet tocome up with ideas for a sweeping financial system reform
to revive the Tokyo market in preparation for the 21st century (a Japanese version of the“financial Big Bang”).
Apr. 25, 1997 Nissan Life Insurance becomes the first bankrupt life insurer after the war.
June 13, 1997 The Securities and Exchange Council, the Financial System
Research Committee, and the Insurance Council submit reports on measures to be taken to achieve the goals of theJapanese Big Bang.
June 20, 1997 The Act for Establishing Financial Supervisory Agency is
promulgated.
Nov. 3, 1997

San’
yo Securities, Hokkaido Takushoku Bank (Nov. 17),and Yamaichi Securities (Nov. 22) go virtually bankrupt.

Apr. 1, 1998

The government starts carrying out Big Bang reforms, theamended Foreign Exchange and Foreign Trade Act is enforced, and the brokerage commission on trades worth ¥50
million or more and less than ¥1 billion are liberalized.

362

APPENDIX Chronology of Events Related to Securities

June 22, 1998 The Financial Supervisory Agency is launched.
Sept. 1, 1998

The SPC Act is enforced.

Oct. 16, 1998 Eight laws related to financial reconstruction are promulgated.
Oct. 23, 1998 The Long-Term Credit Bank of Japan and Nippon Credit
Bank, Ltd. (December 13) are placed under temporary government control.
Dec. 1, 1998

The Act on Revision, etc. of Related Acts for the Financial
System Reform is enforced.

Dec. 15, 1998 The Financial Reconstruction Commission is launched.
Apr. 1, 1999

Securities companies start managing their customers’assets
separately from their own.

Oct. 1, 1999

Brokerage commissions on stock transactions are liberalized.

Nov. 11, 1999 The Tokyo Stock Exchange launches Mothers market, amarket for high-growth and start-up stocks.
Mar. 1, 2000

The Niigata Stock Exchange and the Hiroshima Stock Exchange are consolidated into the Tokyo Stock Exchange.

Mar. 17, 2000 The regulatory agency cancels the securities registration of
Minami Securities, the first such cancellation ever in Japan.
May 8, 2000

The Osaka Securities Exchange opens the NASDAQ Japan
market, later converted to the Hercules market for start-up
companies on Dec. 16, 2002.

May 31, 2000 The Securities and Exchange Act as amended in 2000 is
promulgated, and the portion of the Securities and Exchange Act that provides for reorganizing stock exchanges
into corporations is enforced on Dec. 1.
May 31, 2000 The Act on Sales, etc. of Financial Instruments is promulgated.
July 1, 2000

The Financial Services Agency goes into operation.

Mar. 1, 2001

The Kyoto Stock Exchange is consolidated into the Osaka
Securities Exchange.

Apr. 1, 2001

The special measure for the protection of the entire depositof investors at the time of bankruptcy of a securities company is abolished.

APPENDIX Chronology of Events Related to Securities

363

Apr. 1, 2001

The Osaka Securities Exchange reorganizes itself into a
coorporation.

June 1, 2001

The system of electronically disclosing the contents of securities reports, etc. (Electronic Disclosure for Investors’
NETwork“EDINET”) goes into operation.

Oct. 1, 2001

The amended Commercial Code—lifting the ban on treasury stocks and instituting the system of trading units ofshares—is enforced.

Nov. 30, 2001 The amended securities taxation system (which reduces thetax rate applicable to capital gains made by individuals
from the sale of shares) is enforced.
Dec. 17, 2001 Nomura Holdings is listed on the NYSE.
Jan. 30, 2002
Apr. 1, 2002
June 5, 2002

Banks’Shareholdings Purchase Corporation is established.
The special measure for the protection of the entire depositof investors expires, and the blanket government guaranteeof deposits is partially lifted.
The Act on Securities Settlement System Reform Law isenacted.

Nov. 29, 2002 The Bank of Japan starts buying up cross-held shares released by banks.
Apr. 28, 2003 The Nikkei average drops to a 21-year low of ¥7,607.88.
Dec. 1, 2004

The ban on banking institutions against engaging in the securities intermediary service business is lifted.

Dec. 13, 2004 The JASDAQ Stock Exchange opens for business.
Apr. 1, 2005

The blanket government deposit guarantee is scrapped (excluding deposits used for settlement purposes).

Jan. 16, 2006

The Livedoor scandal occurs, leading to the Murakami fundproblem in June.

June 14, 2006 The Financial Instruments and Exchange Act is publishedand goes into effect Sept. 30, 2007.
Sept. 15, 2008 Lehman Brothers Holdings Inc. files for protection under
Chapter 11 of the U.S. Bankruptcy Code, creating theLehman Shock that spins the world into financial crisis.
Jan. 5, 2009

Japan implements a fully dematerialized registration system
for stocks.

364

APPENDIX Chronology of Events Related to Securities

Jan. 19, 2010

Japan Airlines Co., Ltd., files with the Tokyo District Court
for protection under the Corporate Reorganization Law becoming the largest business failure in Japan’s post-war history.

Feb. 4, 2010

European markets plunge due to the sovereign debt crisis in
Greece.

Sept. 10, 2010 The Incubator Bank of Japan, Limited declares its bankruptcy to the FSA, which announces the first ever triggeringof the government’s deposit insurance cap system.
Mar. 11, 2011 Great East Japan Earthquake occurs, followed by a hydrogen explosion at Tokyo Electric Power Company’s Fukushima nuclear power facility on March 13.
Aug. 5, 2011

S&P lowers the long-term credit rating for U.S. government
bonds from AAA to AA+.

Jan. 1, 2013

The Tokyo Stock Exchange Group, Inc. and Osaka Securities Exchange Co., Ltd., merged their operations, giving
birth to the Japan Exchange Group, Inc. (JPX)

April 4, 2013

The Bank of Japan introduced a quantitative and qualitative
monetary easing program aimed at achieving 2% inflationin the Japanese economy within two years.

Jan. 1, 2014

NISA, a tax saving scheme for small-amount investments,
is launched.

Mar. 5, 2015

FSA and TSE decide on the Corporate Governance Code.

Nov. 27, 2015 MOF records negative yield for the first time in the 2-year
JGB auction.
Jan. 29, 2016

BOJ decides on additional monetary easing policy of applying negative interest rates in part on excess reserves at its
Monetary Policy Meeting.

Aug. 31, 2016 Nomura Asset Management ends the management of
MMFs.
May. 29, 2017 FSA recommends individual disclosure of the results of voting rights exercise for institutional investors.
Apr. 1, 2018

GPIF allowed to invest in domestic high yield bonds.

Apr. 1, 2018

FSA opens registration system for High Frequency Trading(HFT) operators.

Jun. 12, 2018

US-North Korea summit held in Singapore.

APPENDIX Chronology of Events Related to Securities

365

Nov. 15, 2018 London Stock Exchange Group ETF is listed on TSE.
Jun. 25, 2019

Cross-listing of ETFs on JPX and Shanghai Stock Exchange
initiated.

Jul. 30, 2019

JPX announces a definitive agreement to acquire Tokyo
Commodity Exchange to create a single consolidated exchange.

Oct. 1, 2019Charles Schwab cuts trading fees for stocks, ETFs and options to zero.

Oct. 25, 2019 Toyota Finance Corporation issues 0% yïeld bond.
Feb. 25, 2020 Nomura Securities announces investment trust with 0%
trust fee.
Mar. 30, 2020 Nomura Securities and Nomura Research Institute issue
bonds using blockchain technology.
Dec. 25, 2020 The Tokyo Stock Exchange announces the abolition of thefour existing markets and reorganization into three markets:
Prime, Standard, and Growth from April 2022.
Mar. 24, 2021 CBOE Global Markets announces the acquisition of Chi-X
Japan.
Apr. 20, 2021 SBI Securities issues corporate bond-type digital securities,
the first security token offering for general investors in Japan.
The“Chronology of Events Related to Securities”that covers more details of
events from 1945 is available on the Japanese-language website of the Japan
Securities Research Institute (JSRI) (https://www.jsri.or.jp/). Events may besearched by name.
The“Chronology of Events Related to Securities”is also contained in thefollowing publication issued by the JSRI:“Chronology of Events Related to Securities (Meiji, Taisho, Showa)”(1595 to January 7, 1989)
Published September 1989; B5 size; 1,026 pages; ¥11,650
From 1989 up to 2011, the“Chronology of Events Related to Securities”
in“Shoken Shiryo”is published each year for the events of the previous year.

2022

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