2016

Securities Market in Japan 2016

Securities
Marketin Japan

Securities
Marketin Japan
2016

JAPAN SECURITIES RESEARCH INSTITUTE

Securities
Marketin Japan
2016

JAPAN SECURITIES RESEARCH INSTITUTECopyright © 2016 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 InstituteTokyo Shoken Kaikan
1-5-8 Nihonbashi Kayabacho, Chuo-ku,
Tokyo 103-0025, Japan
Telephone (+81) 3-3669-0737
Facsimile (+81) 3-3662-8294

ISBN 978－4－89032－820－8

The book is a translation of“Illustrated Guide: 2014 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
We have issued a revised edition of Securities Markets in Japan every two
years since we began publishing this book in 1973. This is the English version of the 2016 edition of The Securities Markets in Japan: An Illustrated
Guide. In the 2016 edition, we enhanced the contents by adding informationthat reflects new movements seen over the past couple of years, including
matters concerning corporate governance, the JSDA’s Report/Dissemination
System for Information of Corporate Bond Transactions, equity investment
crowdfunding, shareholder community system, stewardship code, and NISA.
Having entered a period of depopulation, Japan faces a major challenge ofachieving prompt economic revitalization, which entails building an economic structure that enables our economy to demonstrate sustainable growth in
the medium-to-long term.
Looking at this issue from a financial viewpoint, there is growing anticipation for securing the function and role of the securities market to smoothly
provide good-quality risk money that would contribute to implementing
structural reforms and promoting sustainable growth of the Japanese economy.
Meanwhile, from the perspective of the Japanese public, there is an increasing need to make efforts toward asset formation in preparation for retirement amid a rapidly aging population combined with a declining birthrate
and a continuing budget deficit faced by the country. Given these factors, it
can be said that the roles and responsibilities of the securities market as a fairand effective place for asset management and of financial instruments firmsthat serve as faithful financial intermediaries, including securities companies
and asset management companies, are expanding more than ever.
Furthermore, given the economic and financial globalization plus the advancement of international financial systems reforms following the Lehman
shock, reinforcing the global competitiveness of our country’s securities market and of our securities business and financial instruments business as business industries has become imperative for achieving economic growth.
Assuming that“increasing the welfare of people through promoting sustainable growth of corporations and the economy and stable asset formation,etc.”is the direction to be pursued by Japan’s financial sector as set forth in
the Financial Administration Policy for the Administrative Year 2015 by theFinancial Services Agency, we expect there to be strong calls for establishinga securities market that is suitable for supporting this direction. It is our sincere hope also in this sense that a wide range of people interested in the reform of Japan’s financial and securities markets and in the status of the country’s securities markets today will find this book a useful reference.
Aug. 2016

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

i

CHAPTER I The Securities Market and the National Economy
1. What Is a Security? ....................................................................
2. Corporate Financing ..................................................................
3. The Securities Market and Public Finance ...............................
4. Financial Assets Held by the Household Sector .......................
5. Investment Behavior of Foreigners (Inbound Investment) .......
6. New Developments on Corporate Governance..........................

1
3
5
8
10
13

CHAPTER II The History of the Japanese Securities Market
1. The Securities Market in the Prewar Period ..............................
2. The Period of Postwar Economic Rehabilitation (1945－54) ....
3. The Securities Market during the First Period of Rapid
Economic Growth (1955－64) ....................................................
4. The Securities Market during the Second Period of Rapid
Economic Growth (1965－74) ....................................................
5. Measures Taken to Cope with the Oil Crises (1975－84)...........
6. Developments before and after the Economic Bubble(1985－89) ..................................................................................
7. The Reform of the Financial System after the Stock Market
Scandals (1990－95) ...................................................................
8. The Debate on, and Enforcement of, the Financial System
Reform Law (1996－2000) .........................................................
9. Developments Since the Big Bang (2001－2008) ......................
10. Developments after the Lehman Shock .....................................

16
18
21
24
27
29
32
34
37
39

CHAPTER III The Stock Issuing Market
1. New Issues of Stocks in the Primary Market ............................. 42
2. Forms of Issuing Shares ............................................................. 44
3. Procedures for Issuing New Shares .......................................... 46
4. The Current State of New Issue Market ................................... 48
5. New Shares Underwriting .......................................................... 51
6. Private Equity Market ................................................................ 53
CHAPTER IV The Stock Trading Market
1. The Structure of the Stock Trading Market ...............................

56

iv

Contents

2.
3.
4.
5.
6.
7.
8.
9.
10.

Volume of the Stock Trading Market .........................................
The Structure of Share Ownership .............................................
Stock Prices and Indicators for Investment (1) ..........................
Stock Prices and Indicators for Investment (2) ..........................
Stock Prices and Indicators for Investment (3) ..........................
Stock Prices and Indicators for Investment (4) ..........................
The Margin Trading System (1) .................................................
The Margin Trading System (2) .................................................
Diversification of the Securities Trading System ......................

CHAPTER V New Issues of Bonds in the Primary Market
1. Types of Bonds ..........................................................................
2. The Present State of the Bond Issuing Market...........................
3. Methods of Issuing Public Bonds ..............................................
4. Methods of Issuing Corporate Bonds ........................................
5. Credit-Rating Agencies and the Credit Rating of Bonds ...........
6. Bond Management ....................................................................
7. Corporate Bonds with Subscription Rights/Warrants andStructured Bonds........................................................................

58
60
62
64
66
68
70
73
75
78
80
82
85
88
90
92

CHAPTER VI The Secondary Markets for Bonds
1. Trading of Bonds ....................................................................... 95
2. Participants in the Secondary Bond Market............................... 96
3. OTC Bond Trading Market ........................................................ 98
4. Publication of Reference Prices for OTC Bond Trading (1)...... 100
5. Publication of Reference Prices for OTC Bond Trading (2)...... 103
6. Reporting and Announcement of Bond Transaction
Information ................................................................................ 104
7. Book-Entry Bond Transfer System ............................................ 107
8. Secondary Market Yields and Terms of Bond Issues................. 110
9. Gensaki Market for Bonds (1) ................................................... 112
10. Gensaki Market for Bonds (2) ................................................... 115
11. Bond Lending............................................................................. 117
CHAPTER VII The Derivatives Market
1. Futures Trading .......................................................................... 120
2. Bond Futures Trading ................................................................ 122
3. Stock Index Futures Trading ...................................................... 124
4. Financial Futures Trading .......................................................... 126
5. Options Trading ......................................................................... 128
6. Bond Options Trading ................................................................ 130
7. Stock Index Options Trading ..................................................... 132

Contentsv

8. Securities Options Trading......................................................... 134
9. OTC Derivatives Trading........................................................... 136
10. Credit Derivatives Trading ........................................................ 139
CHAPTER VIII The Securitized Products Market
1. Securitized Products .................................................................. 141
2. Basic Mechanism of Issuing Securitized Products ................... 143
3. Description of Major Securitized Products ............................... 144
4. The Size of the Market .............................................................. 147
5. New Issue Market for Securitized Products............................... 149
6. Secondary Market for Securitized Products .............................. 151
7. New Issue and Secondary Markets for the Beneficiary
Certificates of Real Estate Investment Trusts ............................ 153
8. Risks and Credit Enhancement of Securitized Products ............ 155
9. The Enactment of Securitization-Related Laws ........................ 158
CHAPTER IX The Financial Instruments Exchanges (1)1. The Function of the Financial Instruments Exchanges .............. 161
2. The Listing System .................................................................... 163
3. The Listing Management System ............................................. 165
4. The Stock Trading System (1) ................................................... 168
5. The Stock Trading System (2) ................................................... 170
6. The Clearance and Settlement System (1) ................................. 172
7. The Clearance and Settlement System (2) ................................ 173
8. The Book-Entry Transfer System for Stocks, Etc. .................... 176
9. System Development at Financial Instrument Exchanges (1) ... 177
10. System Development at Financial Instrument Exchanges (2) ... 180
CHAPTER X The Financial Instruments Exchanges (2)1. The Evolution of the Start-up Market ........................................ 182
2. Start-up Market Concepts .......................................................... 184
3. Start-up Market Listing Systems ............................................... 186
4. The Listing Administration System for Start-up Market ........... 188
5. An Outline of the OTC Stock Market ........................................ 190
6. OTC Securities, Etc. .................................................................. 192
7. Equity Crowdfunding (1) ........................................................... 194
8. Equity Crowdfunding (2) ........................................................... 196
9. Shareholder Community (1) ...................................................... 198
10. Shareholder Community (2) ...................................................... 200
11. The Green Sheet System (1) ...................................................... 202
12. The Green Sheet System (2) ...................................................... 204
13. The Green Sheet System (3) ...................................................... 206

vi

Contents

14. Phoenix Issue System ................................................................ 208
15. Professional Investors Markets (1) - TOKYO PRO Market ...... 210
16. Professional Investors Markets (2) - TOKYO PRO-BOND
Market ........................................................................................ 212
CHAPTER XI Financial Instruments Business (Securities Business)
1. Overview of Financial Instruments Firms(Securities Companies) (1) ........................................................ 215
2. Overview of Financial Instruments Firms(Securities Companies) (2) ........................................................ 217
3. Overview of Financial Instruments Firms(Securities Companies) (3) ........................................................ 220
4. Securities Businesses (1)—The Principal Businesses (1).......... 222
5. Securities Businesses (2)—The Principal Businesses (2).......... 225
6. Securities Businesses (3)—Incidental Business, Concurrent
Business, and Other Businesses ................................................. 227
7. Revenue and Expenditure of Financial Instruments Firms(Securities Companies) .............................................................. 229
8. Financial Condition of Financial Instruments Firms(Securities Companies) .............................................................. 232
9. Financial Instruments Firms Associations (1)............................ 235
10. Financial Instruments Firms Associations (2)............................ 238
11. Investor Protection Fund ............................................................ 241
12. The Securities Business of Banking Institutions ....................... 244
13. The Competitive Landscape of the Securities Industry ............. 247
CHAPTER XII Asset Management Service
1. Investment of Individual Financial Assets ................................. 250
2. Pension Fund Management ........................................................ 252
3. Asset Management of Trust Banks ............................................ 254
4. Asset Management of Life Insurance Companies ..................... 256
5. Asset Management of Discretionary Asset Management
Companies.................................................................................. 259
6. Asset Management of Investment Trusts ................................... 261
7. Stewardship Code ...................................................................... 263
CHAPTER XIII Investment Trusts
1. Summary .................................................................................... 265
2. History of Investment Trusts...................................................... 267
3. Forms of Investment Trusts ....................................................... 269
4. Investment Trust Products ......................................................... 271
5. Sale of Investment Trusts .......................................................... 273

Contents

6.
7.
8.
9.
10.

vii

Investment Management of Investment Trusts ......................... 275
Customer Base of Investment Trusts ........................................ 278
Disclosure of Investment Trusts................................................. 280
Services and Products Based on Investment Trusts .................. 283
Foreign Investment Trusts.......................................................... 285

CHAPTER XIV Prohibited and Regulated Acts of Securities Trading
1. Introduction ................................................................................ 289
2. Regulation of Market Manipulation........................................... 291
3. Prohibited and Regulated Acts of Corporate Insiders ................ 293
4. Prohibited and Regulated Acts for Financial Instruments Firms(Securities Companies) and Their Employees, Officers, andDirectors .................................................................................... 295
5. Other Regulated Acts ................................................................ 297
CHAPTER XV The Information Disclosure System
1. The Information Disclosure System in the Securities Market ... 300
2. The System of Disclosing Corporate Information under the
Financial Instruments and Exchange Act ................................... 302
3. Other Disclosures to Be Made under the Financial Instruments
and Exchange Act ...................................................................... 304
4. Timely Disclosure System of Financial Instruments Exchanges(The Stock Exchanges) .............................................................. 306
5. Ensuring Appropriateness of Information Disclosure................ 306
6. Recent Moves of Information Disclosure .................................. 309
CHAPTER XVI Securities Taxation
1. Transitions in Securities Taxation (1) ........................................ 312
2. Transitions in Securities Taxation (2) ........................................ 314
3. Taxation on Interest.................................................................... 316
4. Taxation of Dividends ................................................................ 318
5. Adjustment of Double Taxation Relating to Dividends ............. 321
6. Capital Gains Taxation (1) ......................................................... 323
7. Capital Gains Taxation (2) ......................................................... 324
8. NISA .......................................................................................... 327
9. Taxation of Nonresidents ........................................................... 329
10. Taxation of New Products .......................................................... 331
11. Tax Treatment of Pension-Type Products ................................. 333
CHAPTER XVII The Securities Regulatory System
1. Financial Instruments and Exchange Act ................................... 336
2. Securities Market Related Laws and Regulations ..................... 338

viii

Contents

3.
4.
5.
6.
7.

Organization of the Securities Regulatory System .................... 341
Law Enforcement by the Financial Services Agency ................ 343
Securities and Exchange Surveillance Commission .................. 345
Self-Regulatory Organizations................................................... 348
International Securities Regulations .......................................... 350

APPENDIX Chronology of Events Related to Securities .................. 353
INDEX....................................................................................................... 364

LIST OF TABLES
CHAPTER I
I- 1 The Definition of Securities under the Provisions ofParagraphs 2-1 and 2-2 of FIEA...........................................
I- 2 Percentage of Funds Raised and Invested by the Corporate
Sector ....................................................................................
I- 3 Changes in JGB and Short-Term Government Bill
Ownership by Investor Type ................................................
I- 4 Percentage Composition of Financial Assets ofIndividuals ............................................................................
I- 5 Comparison of Japanese and U.S. Household Assets
Composition (as of June 30, 2015).......................................
I- 6 Changes in In- and Out-Bound Securities Investment(on a settlement basis) ..........................................................
I- 7 Balance of Inbound Investment and Related Indicators.......
I- 8 Percentages of Japanese Stocks and Bonds Held by
Investors of Different Regions .............................................
I- 9 Corporate Governance Code Structure by Country .............
I-10 Comparison between the 2015 version G20/OECD
Principles of Corporate Governance and the TSE’s Japan’s
Corporate Governance Code ................................................
CHAPTER II
II- 1 Issues Listed on the Tokyo Stock Exchange ........................
II- 2 Number of Issues Listed on the Japan Securities Exchange,
by Industry............................................................................
II- 3 Number of Members and Listings of Each Exchange at
Establishment .......................................................................
II- 4 Member Securities Companies at the Establishment ofTokyo Stock Exchange (April 1, 1949) ................................
II- 5 Changes in Assets of Stock Investment Trusts and Bond
Investment Trusts (Principal basis) ......................................
II- 6 Categories of Investible Custody Securities andInvestment Uses ...................................................................
II- 7 Changes in Number of Securities Companies ......................
II- 8 Changes in Stock Ownership Among Investor Categories...
II- 9 Stock Trading Composition by Investor Category ...............
II-10 Establishment of Securities Subsidiaries of Banking

2
5
7
9
9
11
12
12
14
14
18
18
19
20
22
23
26
26
31

x

List of Tables

Institutions ............................................................................ 33
II-11 Schedule for Reforming the Securities Market During the
Big Bang ............................................................................... 36
CHAPTER III
III- 1 Principal Rights of Shareholders ..........................................
III- 2 Recent Amendments to the Commercial Code Relating toEquity Financing ..................................................................
III- 3 Forms of Issuing New Shares...............................................
III- 4 Funds Raised by Equity Financing.......................................
III- 5 The State of Issuing New Shares by Listed Companies.......
III- 6 Number of Lead Managers in Underwriting Shares of
Securities Companies (IPOs) ...............................................
III- 7 Flow from additional secondary offering by over-allotment
in initial public offering to syndicate cover transaction .......
III- 8 Criteria for Requirement to Submit Securities Registrationor Notification Statements Under the Financial Instruments
and Exchange Act and Cabinet Office Ordinance ................
III- 9 Green Sheet Issue Designations ...........................................
CHAPTER IV
IV- 1 Trading Volumes of Major Stock Exchanges and the OTC
Market ..................................................................................
IV- 2 Trading Volume by Stock Exchanges and Percentage
Composition (2014)..............................................................
IV- 3 Stock Split-ups and Changes in Divisor ...............................
IV- 4 Comparison of Standardized and Negotiable Margin
Transactions..........................................................................
CHAPTER V
V- 1 The Value of Bonds Issued ...................................................
V- 2 Categories of Government Securities (Notes 1 to 4)............
V- 3 Corporate Bonds Offering Amounts by Ratings ..................
V- 4 Definitions of Credit-Rating Symbols..................................
V- 5 Appointment, Power, and Liability of the Bond Manager
under the Companies Act .....................................................
V- 6 Kinds of Structured Bonds ...................................................

43
43
45
45
49
52
52
54
55

59
59
63
72
81
83
86
89
91
93

CHAPTER VI
VI- 1 Trends in Bond Transactions, by Type of Transaction
Parties ................................................................................... 97
VI- 2 Bond Trading by Market ...................................................... 99

List of Tables

VI- 3
VI- 4
VI- 5
VI- 6
VI- 7
VI- 8
VI- 9
VI-10
VI-11
VI-12

xi

Breakdown of Major Bond Categories, by Outstanding
Balance and Number of Issues ............................................. 100
The System of Reference (Yields) Table for OTC Bond
Quotations ............................................................................ 101
History of the Program for Publishing Reference Prices(Yields) for OTC Bond Transactions ................................... 102
Designation of Designated-Reporting Members .................. 104
Revisions to Reference Prices for OTC Bond Trading ........ 105
Bonds under Custody and Book-Entry Transfer Volume ..... 109
Reforms of Bond Delivery and Settlement System.............. 110
Turnover and Balance of Repurchase Agreements .............. 113
Balance of Repurchase Agreements, by Major Investor
Groups .................................................................................. 114
The Balance of Bond Lending Transactions, by Types ofCollateral (on the basis of delivery and face values)............ 118

CHAPTER VII
VII- 1 Years in Which Major Financial Futures of the World
Were Listed........................................................................... 121
VII- 2 The Trading Mechanism of Bond Futures............................ 123
VII- 3 The Trading Mechanism of Bond Futures............................ 123
VII- 4 The Trading Mechanism of Stock Index Futures ................. 125
VII- 5 The State of Trading in Stock Index Futures........................ 125
VII- 6 The Trading Mechanism of Financial Futures ..................... 127
VII- 7 Financial Futures Trading..................................................... 128
VII- 8 Years in Which Major Financial Options of the World
Were Listed........................................................................... 129
VII- 9 The Trading Mechanism of Bond Options ........................... 131
VII-10 Trading in Bond Options ...................................................... 132
VII-11 The Trading Mechanism of Stock Index Options ................ 133
VII-12 The State of Trading in Stock Index Options ....................... 134
VII-13 The Trading Mechanism of Securities Options .................... 135
VII-14 Trading in Securities Options ............................................... 135
VII-15 OTC Trading in Securities Derivatives ................................ 137
VII-16 Credit Derivatives Trading in Japan ..................................... 140
CHAPTER VIII
VIII- 1 Classification of SPVs .......................................................... 145
VIII- 2 Features of Major Securitized (or Similar) Products............ 146
VIII- 3 Changes in Composition of Collateralized Assets, etc. ....... 148
VIII- 4 The Listing Requirements of the Tokyo Stock Exchange..... 154
VIII- 5 Statistics Relating to REITs Listed on the Tokyo Stockxii

List of Tables

Exchange .............................................................................. 154
VIII- 6 Main Credit Enhancing Measures ........................................ 156
VIII- 7 Typical Risks of ABS ........................................................... 157
VIII- 8 Chronology Relating to the Securitization of Assets............ 159
CHAPTER IX
IX- 1 The Listing Requirements of the Second Section of theTokyo Stock .......................................................................... 164
IX- 2 Outline of Tokyo Stock Exchange’s Code of Corporate
Conduct ................................................................................ 166
IX- 3 Criteria for Delisting Stocks (the Tokyo Stock Exchange) .. 167
IX- 4 Methods of Concluding Transactions ................................... 169
CHAPTER X
X- 1 History of the JASDAQ Market ........................................... 183
X- 2 History of the Mothers Market ............................................. 183
X- 3 Listing Criteria for the Mothers and JASDAQ Markets ...... 187
X- 4 Criteria for Delisting Stocks (Tokyo Stock Exchange) ........ 189
X- 5 A Brief History of the OTC Market ..................................... 191
X- 6 JSDA’s Self-Regulatory Regulations ................................... 197
X- 7 Major Components of the JSDA’s Self-Regulatory Rules
regarding the Shareholder Community System.................... 199
X- 8 Number of Green Sheet Issues and Its Breakdown andNumber of Phoenix Issues.................................................... 203
X- 9 Comparison of the Total Market Capitalization ................... 203
X-10 Recent Business Results and Dividends of Emerging andOrdinary Issues ..................................................................... 205
X-11 Comparison of the Green Sheet Issue and Phoenix Issue
Systems................................................................................. 209
X-12 Overview of TOKYO PRO Market Listing System............. 211
X-13 Comparison of Disclosure Systems for TOKYO PRO-BOND
Market and Other Japanese Bond Markets........................... 213
CHAPTER XI
XI- 1 The Scope of Business of Securities Companies (Type I
Financial Instruments Business), and Requirements............ 216
XI- 2 The Number of Securities Companies and Their Capitaland Employees ..................................................................... 220
XI- 3 JSDA Member Categories .................................................... 221
XI- 4 Breakdown of 145 Japanese Brokers (securities-related)by Controlling Shareholder, Size, Region and BusinessCharacteristics ...................................................................... 221

List of Tables

XI- 5
XI- 6
XI- 7
XI- 8
XI- 9
XI-10
XI-11
XI-12
XI-13
XI-14
XI-15
XI-16

XI-17
XI-18
XI-19
XI-20
XI-21
XI-22
XI-23

xiii

Business Volume Handled by TSE and OSE Member
Companies .............................................................................223
PTS Transactions .................................................................. 224
OTC CDF Transactions on Securities .................................. 226
Number of Wrap Accounts and Assets Under
Management ......................................................................... 228
General Trading Participants of TSE
Non-Participants of TSE ...................................................... 230
Profitability Comparison by Member, Domestic or Foreign
and Business Characteristics (Term ended March 2015) ..... 231
Major Accounts of Securities Companies in Japan(252 firms) as of March 31, 2015 ......................................... 233
Capital-to-Risk Ratio of General Trading Participant
Members of the TSE (97 companies) as of June 30, 2015 ... 234
An Outline of the Risk-to-Capital Ratio Requirements forType I Financial Instruments Firms (Securities companies).............................................................................................. 234
Orders Issued on the Basis of the Primary Capital Ratio toTake an Early Remedial Measure ......................................... 235
Principal Functions of the Japan Securities Dealers
Association ........................................................................... 236
Permissible Forms of Business by Registered
Representatives (JSDA Rules: Article 2, Regulations
Concerning Qualification and Registration, etc., of Sales
Representatives of Association Members) ........................... 237
Numbers of Registered Financial Instruments Firms andRelated Financial Instruments Firms Associations .............. 239
Investors Eligible for Compensation, Compensation
Procedures, and Sources of Funds of the Investor
Protection Fund .................................................................... 242
Comparison Between New and Former System................... 243
An Outline of the Investor Protection Fund ......................... 243
Balance of Investment Trusts, by Seller(as of August 31, 2015) ........................................................ 245
Banking and Securities Joint Branch Offices and Financial
Instrument Intermediary Business of the Three Largest
Financial Groups .................................................................. 245
Major Regional Bank-Affiliated Securities Companies ....... 246

CHAPTER XII
XII- 1 Points of Focus When Selecting Financial Products ............ 251
XII- 2 Asset Composition ............................................................... 257

xiv

List of Tables

XII- 3 Composition of Securities under Management .................... 257
XII- 4 Scheme comparison.............................................................. 260
XII- 5 Trends in the Liberalization of Investment Trust Regulationsin Japan ................................................................................. 262
XII- 6 The Principles of the Stewardship Code .............................. 264
CHAPTER XIII
XIII- 1 History of the Investment Trust in Japan ............................. 268
XIII- 2 Exercise of Voting Rights for Domestic Stocks at General
Shareholder Meetings by Investment Trust Management
Companies (2015)— Voting on Items Proposed by Companies, Total for 87
Companies that Manage Securities Investment Trusts —.............................................................................................. 277
XIII- 3 Profiles of Individual Investors Holding Investment
Trusts .................................................................................... 279
XIII- 4 Purpose of Purchasing Investment Trusts by Individual
Investors ............................................................................... 280
XIII- 5 Publicly Offered Securities Investment Trusts Disclosure
System of Japan .................................................................... 281
XIII- 6 Major Items in Summary Prospectus (Explanatory
Document) of Publicly Offered Investment Trust ................ 282
XIII- 7 Total Net Assets of Foreign Investment Trusts in Japan(¥100 million) and Their Ratio to Total (public offering)
Investment Trusts ................................................................. 286
CHAPTER XIV
XIV- 1 Main Provisions Relating to the Ban on Unfair Trading ...... 290
XIV- 2 Provisions of the Financial Instruments and Exchange Act
Relating to Market Manipulation ......................................... 292
XIV- 3 An Outline of the Targets of Regulations, Materials Facts,
Methods of Announcement Relating to the Regulation of
Insider Trading ..................................................................... 294
XIV- 4 Flow of Tender Offer ............................................................ 298
XIV- 5 Flow on Disclosure of Possession of Large Volume of
Shares ................................................................................... 298
CHAPTER XV
XV- 1 Disclosure Systems under the Commercial Code and under
the Financial Instruments and Exchange Act ....................... 301
XV- 2 Statutory Disclosure Documents Required to be Filed ........ 303
XV- 3 Transitions in Tender Offer Bid (TOB) System ................... 305

List of Tables

XV- 4
XV- 5

xv

Main Points of Corporate Information Required by Timely
Disclosure (in the case of the Tokyo Stock Exchange) ........ 307
Overview of the Corporate Governance Code ..................... 310

CHAPTER XVI
XVI- 1 Securities Taxation Evolution Timeline (1949－2002) ......... 313
XVI- 2 Securities Taxation Evolution Timeline (Since 2003) .......... 314
XVI- 3 Interest Taxation System (2015)........................................... 317
XVI- 4 The Status of Taxation on Interest Income, Etc. (2013) ....... 318
XVI- 5 An Outline of Dividend Income Taxation (2015) ................ 319
XVI- 6 Taxation of Dividend Income (withheld at source) (2013) .. 320
XVI- 7 Adjustment of Double Taxation in Major Countries ............ 322
XVI- 8 Outline of the Capital Gains Taxation System for Stocks,
Etc. (2015) ............................................................................ 324
XVI- 9 Outline of Nippon Individual Savings Account (NISA) ...... 328
XVI-10 Outline of Junior NISA ........................................................ 328
XVI-11 Outline of Matters Related to Taxation of Nonresidents,
Etc. (2015) ............................................................................ 330
XVI-12 Outline of New Taxation Framework for Investment
Trusts (2015) ........................................................................ 332
XVI-13 Taxation on Stock Options ................................................... 332
XVI-14 Tax Treatment of Defined Contribution Pension Plans ........ 335
CHAPTER XVIIXVII- 1 Banking Act, Insurance Business Act, and Trust BusinessAct ........................................................................................ 339
XVII- 2 Major Legal Basis of Inspection and Supervision by the
FSA....................................................................................... 345
XVII- 3 SESC Recommendations by Business Year(as of July 31, 2015) ............................................................. 346
XVII- 4 List of Self-Regulatory Organizations Governed by FIEA
(September 2015) ................................................................. 349
XVII- 5 Principal Regulations of the Japan Securities Dealers
Association (as of September 2015)..................................... 349
XVII- 6 Major IOSCO Committees ................................................... 351

LIST OF CHARTSCHAPTER I
I- 1 Corporate Financing .............................................................
I- 2 Changes in the Balance of Outstanding Public Securities
and the Degree of Dependence on Public Securities............
CHAPTER II
II- 1 Changes in Stock Prices (Long-term margin transactions)(1878－1920).........................................................................
II- 2 Stock Price Movement (Major Stock Price Index)(1921－1944).........................................................................
II- 3 Stock Price Movements ........................................................
II- 4 Stock Price Movements (TSE’s Modified Stock Price
Average) (1955－1964) .........................................................
II- 5 Stock Price Movement (TSE’s Modified Average, Nikkei
Dow, TOPIX) (1965－1974) .................................................
II- 6 Stock Price Movement (Nikkei Dow and TOPIX)(1975－1984).........................................................................
II- 7 Change in JGB Issuance and Outstanding Balance..............
II- 8 Stock Price Movement (Nikkei Dow and TOPIX)(1985－1989).........................................................................
II- 9 Yen to US$ Exchange Rate and Japan’s Official DiscountRate.......................................................................................
II-10 Stock Price Movement (Nikkei Dow and TOPIX)(1990－1995).........................................................................
II-11 Stock Price Movement (Nikkei Dow and TOPIX)(1996－2000).........................................................................
II-12 Stock Price Movement (Nikkei Dow and TOPIX)(2001－2008).........................................................................
II-13 Changes in the Composition of Household Assets...............
II-14 Stock Price Movement (Nikkei Dow and TOPIX)(2010 onward) ......................................................................
II-15 Transactions on Proprietary Trading Systems ......................
II-16 Trading Amounts on TSE and Brokerage Income................
CHAPTER III
III- 1 Equity Financing in 1989 by TSE-Listed Companies,
by Type of Financing (Total capital procured : ¥8,529.39

4
6

17
17
19
22
25
28
28
30
30
32
35
37
38
40
40
40

List of Charts

III- 2

xvii

billion) .................................................................................. 47
Equity Financing in 2014 by TSE-Listed Companies,
by Type of Financing (Total capital procured: ¥2,103.70
billion) .................................................................................. 47

CHAPTER IV
IV- 1 Inter-market Competition in Japan .......................................
IV- 2 Changes in the Ratio of Shares Held by Different
Categories of Investors .........................................................
IV- 3 Ratios of Cross-Shareholdings .............................................
IV- 4 Stock Price and Capital Increase of Toray Industries...........
IV- 5 Transitions in Stock Prices ...................................................
IV- 6 Amounts of Trades on the TSE ............................................
IV- 7 Nikkei Average 1-Year Return on Investment(Year-on-Year Comparison) .................................................
IV- 8 Transitions in PER................................................................
IV- 9 Dividend Yields of TSE First Section Companies andLong-Term Interest Rates .....................................................
IV-10 TOPIX and PBR Ratios of TSE First Section Companies ...
IV-11 Outline of Margin Trading and Stock Lending
Transactions..........................................................................
IV-12 Proportion of Margin Loan Trading in Overall Trading
Value .....................................................................................
IV-13 Margin Transactions and Stock Lending Balances ..............
IV-14 Trading Amounts of Exchange Transactions and OTC
Transactions..........................................................................
IV-15 Breakdowns of OTC Transactions .......................................

57
61
61
63
65
65
67
67
69
69
71
74
74
76
76

CHAPTER V
V- 1 Types of Bonds ..................................................................... 79
V- 2 Organization of Underwriting Publicly Offered
Municipal Bonds at a Glance ............................................... 84
V- 3 Mechanism of Underwriting Corporate Bonds .................... 87
CHAPTER VI
VI- 1 Annual Amount of Purchasing and Selling of Public andCorporate Bonds (Face Value Basis) and Share of OTC
Trades ................................................................................... 96
VI- 2 Illustrated Flow of Procedure Up To the Publication ofReference Prices for OTC Bond Trading ............................. 104
VI- 3 Illustrated Flow of Reporting & Announcement of Bond
Trading Information ............................................................. 106

xviii

List of Charts

VI- 4
VI- 5
VI- 6
VI- 7
VI- 8
VI- 9
VI-10
VI-11

Information announced......................................................... 106
Example of suspension of announcement and removal ofsuspension of announcement ................................................ 106
Structure of Book-Entry Transfer System ............................ 108
Changes in Issue Terms of Public and Corporate Bonds(yields) .................................................................................. 111
Changes in the Difference in Issue Terms and SecondaryMarket Yields between Publicly Offered, Jointly Issued
Municipal Bonds and Government-Guaranteed Bonds........ 111
Trading Mechanism of Repurchase Agreements.................. 113
Working Mechanism of the New Gensaki Transaction
System .................................................................................. 116
Working Mechanism of Bond Lending(secured with cash deposit) .................................................. 118

CHAPTER VIII
VIII- 1 Conceptual Chart of Securitized Products............................ 142
VIII- 2 Example of General Working Mechanism for Issuing
Securitized Products ............................................................. 144
VIII- 3 The Balance of Claims Liquidization-Related Products ...... 148
VIII- 4 Securitized Products Issuance .............................................. 150
VIII- 5 Component Ratios of Collateral Assets ................................ 150
VIII- 6 The Amount of Specified Corporate Bonds Traded ............. 152
VIII- 7 Yield to Subscribers of the Housing Loan Corporation
Bonds .................................................................................... 152
VIII- 8 Breakdown of Buyers ........................................................... 152
CHAPTER IX
IX- 1 Organization Chart (as of September 1, 2015) ..................... 162
IX- 2 A Comparison of the Trading Value of Floor Trading and
Off-Floor Trading of the Tokyo Stock Exchange ................. 171
IX- 3 Delivery and Settlement Using JSCC
(Exchange Transactions) ...................................................... 173
IX- 4 Delivery and Settlement Using JSCC
(OTC Derivatives Transactions)........................................... 174
IX- 5 DVP Settlement Timetable ................................................... 175
IX- 6 The DVP Scheme ................................................................. 175
IX- 7 Relationships Among Participants, JASDEC and Issuersin the Book-Entry Transfer System for Stocks, etc. ............ 177
IX- 8 Major Changes in the System Before & After
Implementation of Electronic Share Certificate System ...... 178
IX- 9 System Integration Schedule of Japan Exchange Group,List of Charts

IX-10

xix

Inc. ........................................................................................ 179
Image Diagram of Japan Exchange Group’s System ........... 181

CHAPTER X
X- 1 Positioning of Mothers and JASDAQ Markets within
Tokyo Stock Exchange ......................................................... 185
X- 2 Relationships Between OTC Securities and Listed/
Registered Issues .................................................................. 193
X- 3 Crowdfunding Patterns ......................................................... 195
X- 4 Concept Diagram of Equity Crowdfunding ......................... 195
X- 5 Provision of Information to Investors and Receipt/
Delivery of Documents in Equity Crowdfunding ................ 197
X- 6 Basic Mechanism of Shareholder Community..................... 199
X- 7 Provision of information regarding shareholder
community issues ................................................................. 201
X- 8 Receipt/delivery of documents regarding shareholder
community issues ................................................................. 201
X- 9 Changes in the Green Sheet Market ..................................... 203
X-10 Amounts of Capital Raised at the Time the Issue was
Categorized as Emerging and Ordinary Issues..................... 205
X-11 The Flow of Solicitation for Investment in Green Sheet
Issues .................................................................................... 207
X-12 An Outline of Trading in Green Sheet Issues andConfirmation Note................................................................ 207
X-13 Role of J-Adviser ................................................................. 211
X-14 Benefits of Using the TOKYO PRO-BOND Market ........... 212
CHAPTER XI
XI- 1 An Outline of Securities Agents ........................................... 218
XI- 2 OTC FOREX Margin Transactions ...................................... 225
XI- 3 Changes in the Number of M&As Involving JapaneseCompanies ........................................................................... 228
XI- 4 Mega-Bank Securities Subsidiaries and Independent
Securities Companies ........................................................... 248
CHAPTER XII
XII- 1 Composition of Household Assets (at March 31, 2015) ...... 251
XII- 2 Structure of Pension System ................................................ 253
XII- 3 GPIF’s Investment Assets and Portfolio Allocation(total reserve funds) (as of June 30, 2015) ........................... 253
XII- 4 Trust Scheme ........................................................................ 255
XII- 5 Fund-Type Company Pension Plan Trust Scheme ............... 255

xx

List of Charts

XII- 6
XII- 7

Investment of Pension Assets by Investment Advisory
Service Companies ............................................................... 260
The Structure of Investment Trusts with Instructions fromTrustors ................................................................................. 262

CHAPTER XIII
XIII- 1 Investment Trust Concept..................................................... 266
XIII- 2 Trend of Total Net Assets of Publicly Offered Investment
Trusts and Their Positions .................................................... 266
XIII- 3 The Structure of Investment Trusts with Instructions fromTrustors ................................................................................. 270
XIII- 4 The Structure of Corporate-Type (investment corporation)
Investment Trusts ................................................................. 271
XIII- 5 Overview of Investment Trusts (as of the end of
September 2015) .................................................................. 272
XIII- 6 Breakdown of Total Net Assets of Public Offering
Investment Trusts by Distribution Channel(as of the end of September 2015)........................................ 274
XIII- 7 Trend in Breakdown of Total Net Assets of Public Offering
Stock Investment Trusts by Distribution Channel................ 274
XIII- 8 Trend in Breakdown of Total Net Assets of Total Private
Placement Investment Trusts by Distribution Channel ........ 274
XIII- 9 Distribution of Assets of Investment Trusts in Japan(as of the end of September 2015, total publicly offeredsecurities investment trusts) ................................................. 276
XIII-10 Breakdown of Industry Groups among Domestic Stock
Held by Investment Trusts (publicly offered stock
investment trusts as of the end of September 2015)............. 276
XIII-11 Breakdown of Holders of Investment Trusts(as of the end of 2014).......................................................... 279
XIII-12 Outline of a Securities General Account .............................. 284
XIII-13 Flow of Investment Trust Wrap Accounts (example)........... 284
XIII-14 Breakdown of Total Net Assets of Foreign Investment
Trusts in Japan by Product Category .................................... 287
XIII-15 Breakdown of Total Net Assets of Foreign Investment
Trusts in Japan by Presentation Currency ............................ 287
CHAPTER XIV
XIV- 1 Major Prohibited and Regulated Acts of Securities
Companies (Duties and Prohibited Acts) ............................. 296

List of Charts

xxi

CHAPTER XV
XV- 1 The Scheme of the Disclosure System on the Securities
Market .................................................................................. 301
XV- 2 Flow from Designation as Securities Under Supervision/
Alert to Removal of Designation.......................................... 308
XV- 3 Number of Companies Adopting IFRS in Japan and Their
Market Capitalization ........................................................... 311
CHAPTER XVI
XVI- 1 An Outline of Taxation on Listed Stocks, etc.
(from 2016) .......................................................................... 315
XVI- 2 Withholding Taxes on Capital Gains on the Sale of Listed
Stock, Etc., Managed in Special Brokerage Accounts ......... 325
XVI- 3 An Outline of the Angels Taxation System .......................... 326
XVI- 4 Expansion of NISA under the Fiscal 2015 Tax Reform ....... 329
XVI- 5 Beneficiaries of Defined Contribution Pension, Ceiling onContributions, and the Existing Pension System ................. 334
CHAPTER XVIIXVII- 1 Transition from Securities and Exchange Law to Financial
Instruments and Exchange Act ............................................. 337
XVII- 2 Enhancement of Civil Liability for Sales of Financial
Products ................................................................................ 340
XVII- 3 Shift from Securities and Exchange Law to Financial
Instruments and Exchange Act ............................................. 342
XVII- 4 Process Leading to Issue of Administrative Monetary
Penalty Payment Order......................................................... 344
XVII- 5 Activities of the SESC.......................................................... 347
XVII- 6 IOSCO Organization Chart (as of June 2015)...................... 351

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, which is
divided into an issue market (where securities are issued and distributed) anda trading 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, they are issued in various forms, such as
stocks and bonds issued by business corporations; notes, checks, and bills of
lading; government securities issued by national governments; and municipal
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, of that law.
Paragraph 1 defines securities whose interests are represented by securities orcertificates that are physically issued as listed in the table on the following
page. In addition to those formerly provided for in the Securities and Exchange Law, new types of securities, such as mortgage securities and securities representing financial options contracts, have been included in the new
definition. Item 21 of the paragraph provides that securities and certificates
so designated by government ordinance, including bonds issued by educational institutions, shall be deemed to be securities under the law.

2

Chap. 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

Paragraph 2 of Article 2 sets forth the definition of deemed securities.
First, interests represented by securities that are listed in the preceding paragraph are deemed to be securities by themselves in cases where no physicalcertificates are issued. For example, interests represented by bonds or stocks
held under a book-entry transfer system are deemed equivalent of those securities listed in Paragraph 1. The latter part of the paragraph then goes on todefine deemed securities as interests other than those represented by securities or certificates. The scope of the definition has been substantially widened
compared with that of the former law, and, specifically, there are comprehensive provisions in Item 5 of the paragraph for FIEA to be applicable to various types of collective investment vehicles, or funds. In Item 7, interests designated by government ordinance, including claims on loans to educational
institutions, are provided for as deemed securities. In addition to securities,
FIEA applies to derivative transactions in domestic financial instrument andover-the-counter markets and foreign markets.
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 inventories) to carry out production and marketing activities on a continuing basis.
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. As the company is not required to repay the principal of, or pay interest or dividends on, such funds,
they are considered the most stable means of corporate financing. In actuality, however, business corporations cannot meet their funding requirementswith internal funds alone, and many of them have to rely on external funds.
External funds are divided into the proceeds resulting from loans and the issuance of equity and debt securities, according to the method employed toraise them. Loans are obtained primarily from banking institutions. Thismethod of raising funds with debt securities is termed“indirect financing.”
In addition to those issued at the time of their incorporation, business corporations issue additional equity shares (an increase of capital) to finance theexpansion of their production capacity or for other 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4

Chap. I The Securities Market and the National Economy

Chart I-1.
Internal funds

Corporate Financing

Internal reserves
Depreciation
Borrowing
StocksExternal 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.

stable form of funds among external funds. As is the case with equity shares,
corporate debt securities are also an instrument for raising funds from thecapital markets, and issuers have to redeem them on or by a predetermined
date of redemption and pay a definite rate of interest on them. Corporate debt
securities are largely divided into straight bonds (SB), bonds with subscription rights, and structured bonds (see Chapter V). As the securities underlying equity shares or corporate debts are held directly by the providers offunds, this method of raising funds is called“direct financing.”
A survey of changes that have occurred in the amount of funds raised fromexternal sources as a percentage of the outstanding balance of financial debts
shows that bank borrowings have tended to decrease since the 1980s. In the
2000s, funds raised through the issue of securities have outpaced those obtained through bank borrowings, suggesting that the weight of corporate financing structure has shifted from indirect to direct financing. This tendency
to raise funds from external sources is due to the fact that following the liberalization and internationalization of the financial markets since the 1980s,
businesses have actively sought to raise funds by selling new shares andbonds on the market. Although at one point the proportion of loan financing
rose after the financial crisis of 2008 curtailed the functioning of the capital
market, funds raised through the issue of securities have considerably outpaced those obtained through borrowings after the hike in stock prices at theend of 2012. With the growth of emerging markets and the liberalization andabolition of regulations on the issue of debt securities, not only large corporations but also small-to-medium-sized companies have come to obtain financ-5Chap. I The Securities Market and the National Economy

Table I-2.

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

1985

1990

1995

2000

2005

2010

2014

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

Total

312.4

483.5

835.7

783.2

738.9

950.3

792.6 1,110.9

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

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

Total

477.4

760.6 1,358.7 1,351.7 1,198.0 1,421.8 1,056.7 1,521.3

22.7
58.1
52.9
3.8
1.0
0.4
11.1
8.1

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.

ing through the capital market. Consequently, financing through the issue of
securities is also expected to retain its predominance going forward.
3. The Securities Market and Public FinancePublic finance is a type of economic activity carried out by the government(national and local). More specifically, it is a government activity undertaken
to finance administrative services (law enforcement and education, etc.) and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)
900

(%)
60

800
700
600

50

Bond dependency ratio(the scale on the right)

Total balance ofoutstanding public
securities

500

40
30

400

20

300
200

Balance of construction
bonds

100
0
End of FY1965 70

75

80

85

90

95

00

05

10

10
0
15

Notes: 1. Figures prior to fiscal 2013 are actual results. Figures for fiscal 2014 are based on revised budget
and those for fiscal 2015 are estimates.
2. Based on straight government bonds.
Source: Compiled from the data issued by the Ministry of Finance.

public investment with taxes and other revenues. 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
debt securities (government and municipal debt securities).
A survey of changes that have occurred in the balance of outstanding public securities and the government’s dependency on debt financing shows thatthe government had issued special government bonds (deficit-financing) in
fiscal 1965, the first time since the end of World War II, under a supplementary budget 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 halfof the 1970s, the government had no choice but to issue a large amount ofgovernment bonds, and their outstanding balance had increased sharply to¥71 trillion at the end of fiscal 1980. As a result, government debt securities
had come 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. With a view to improving the market’s financial condition, the government has adopted a fiscal restructuring policy since fiscal
1981. Helped by economic recovery, the government had succeeded in low-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

FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014

General government

3.5

4.0

3.4

2.1

1.6

2.9

1.6

1.6

2.0

1.9

Public pension funds

8.1

8.8

9.8

10.1

9.2

8.3

7.5

7.1

6.7

5.4

Fiscal loan funds

8.0

4.5

2.5

1.1

0.2

0.1

0.1

0.5

0.1

0.3

Bank of Japan

12.2

9.9

8.5

8.2

8.9

9.0

9.7

13.2

20.2

26.5

Banks

40.8

41.8

43.0

44.9

47.4

46.2

45.8

42.4

36.4

31.4

Postal savings funds/
Japan Post Bank

17.2

18.9

19.5

19.5

18.8

16.7

15.8

14.3

12.7

10.3

Life, nonlife, and otherinsurance companies

15.6

16.5

16.6

17.9

18.5

18.4

19.2

19.9

19.5

19.2

Postal insurance/
Japan Post Insurance

7.9

8.4

8.6

8.8

8.1

7.3

6.5

5.8

5.3

4.6

Pension funds

3.1

3.4

3.4

3.2

3.4

3.2

3.2

3.4

3.5

3.3

Overseas

4.4

5.9

7.4

7.0

5.6

7.1

8.3

8.5

8.2

9.4

Households

3.7

4.3

4.5

4.5

4.1

3.6

3.0

2.5

2.1

1.6

Others

0.8

0.9

0.8

1.0

1.2

1.4

1.6

1.1

1.4

1.0

Notes: 1. Figures for the end of fiscal 2014 are preliminary figures.
2. Banks include securities investment trusts and securities companies.
3. Others are composed of nonfinancial corporations and private nonprofit institutions serving
households.
4. Previous to fiscal 2007, figures included short-term discount bills (TB) and financing bills (FB),
while treasury bills (T-Bill) have been included since fiscal 2008. As of February 2009, TB and
FB were integrated into T-Bills.
5. Figures are based on a retroactive revision made on June 29, 2015.
Source: Compiled from Saimu kanri ripoto 2015 (Debt Management Report 2015) published by the Ministry of Finance and the Flow of Funds Account data published on the web site of the Bank of Japan.

ering the dependency on deficit financing and in curbing increases in the balance of outstanding public securities in the second half of the 1980s. Since
the 1990s, however, the bond dependency ratio has risen sharply due to acontraction of tax revenues caused by a prolonged recession and the implementation of a series of fiscal stimulus packages. As a result, the balance ofoutstanding government debt securities is expected to reach about ¥807 trillion at the end of fiscal 2014 (ended March 2015).
Looking at the ownership structure of Japanese government bonds (JGB)
as shown in the table on the next page, the ownership of private financial institutions, including postal savings (Japan Post Bank) and postal insurance(Japan Post Insurance) has been declining since fiscal 2012. This change is8Chap. I The Securities Market and the National Economy

primarily due to the bold quantitative and qualitative monetary easing measures introduced by the Bank of Japan in April 2013. Meanwhile, the Bank ofJapan considerably increased its percentage of ownership, which exceeded
25% at the end of fiscal 2014, and has become the next-highest investor after
the banks. Public pension funds that used to be stable investors premising
their investments on long-term ownership are lowering their percentage ofinvestment in domestic bonds given that the Government Pension Investment
Fund (GPIF) made a major change to its distribution of investment assets in
October 2014. As a result, the percentage held by public pension funds
dropped as low as 5.4% at the end of fiscal 2014. The upward trend in percentage ownership of Japanese households that existed since the introductionof JGBs (10-year, variable rate) for individuals in 2002 turned downward after fiscal 2008 due to lower interest rates and other factors. On the contrary,overseas investors continue to maintain a relatively high percentage even today after a period of growth in demand for JGBs as safe assets in the light ofthe sovereign debt crisis in Europe occurred in 2010.
4. Financial Assets Held by the Household Sector
The household sector of Japan has consistently run a surplus (over saving).
Although the ratio of nominal household surpluses to the nominal gross domestic product (GDP) has sharply dropped since the mid-1990s to about 5%
in fiscal 2014, it had remained stable at about 8% prior to that time. Prolonged over-saving has brought about a huge accumulation of households’financial assets standing at close to ¥1,700 trillion.
A survey of changes that have occurred in the management of financial assets of the household sector found the following three characteristics. First,
while time deposits continuously carried the largest weight within financial
assets, their weight has tended to decrease since the 1980s. Meanwhile, thecomponent ratio of cash and demand deposits has risen since the 1990s. The
rise is probably the result of a preference for liquidity by depositors in theface of a series of bank failures starting in the mid-1990s and the continued
super-low-interest-rate climate. Second, the ratios of insurance and annuities
rose almost consistently through to the end of FY2000 and have since stayed
high. This trend likely reflects that Japan has already become an aging society. Third, the weight of securities in household financial assets, particularly
for stocks, has been declining considerably due to the low level of the stock
market since the bursting of the Japanese economic bubble in the 1990s andthe Lehman Shock in 2008. However, stock prices continued to surge after
the sharp jump in November 2012 and the Nikkei Stock average recoveredthe ¥20,000 level at one time in 2015. Consequently, the weight of securities

Chap. I The Securities Market and the National Economy

Table I-4.

9Percentage Composition of Financial Assets of Individuals(at fiscal year-end)
1980

1985

1990

1995

2000

2005

2010

2014

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

24.1
27.7
0.2
26.0
5.6
12.2
10.8
1.4
4.2

Total amount

372.0

626.8 1,017.5 1,256.5 1,388.8 1,516.6 1,480.6 1,707.5

Notes: 1. In percentages and 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 Account 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 June 30, 2015)
Japan

United States

Cash and demand deposits

52.0%

Bonds

1.5%

13.2%
4.4%

Investment Trusts

5.7%

13.2%

Securities and equity
subscriptions

10.6%

34.3%

Insurance funds

25.8%

32.1%

Others4.3%

2.8%

Notes: U.S. household assets include non-profit making institutions
providing services to households.
Source: Compiled from the Bank of Japan’s“Comparison of theflow of funds between Japan and the United States”(September 30, 2015).

rose to 12.2% at the end of fiscal 2014.
A comparison of household investment in financial assets between Japanand the United States (including, in the case of the latter, those of nonprofitmaking institutions providing services to households) as of the end of June2015 still shows a large difference in the preference of investors for types of

10

Chap. I The Securities Market and the National Economy

assets. While Japanese households invest 77.8% of their funds in cash deposits, insurance funds, and pension funds and 17.8% of their funds in securities(including investment trusts), their American counterparts invest 45.3% of
their funds in the former and 51.9% in the latter. While it is necessary to takethe social security systems, retail loan services, and other differences between the two countries into account, these figures suggest that while Japanese households prefer assets that guarantee principal, their American counterparts choose investment performance.
However, a stronger direct link has been forged between households andthe securities market with the introduction of such systems as the defined
contribution pension plan in 2001 and the Nippon Individual Saving Account(NISA), a small amount investment tax exemption scheme, in January 2014.
In addition, a broader range of investment trusts and exchange-traded funds(ETF) among other factors are widening options for household investment infinancial assets. Going forward, this sector will call for an improvement in
the quality of retail sales operations and the greater dissemination and understanding of financial knowledge among Japanese households.
5. Investment Behavior of Foreigners (Inbound 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 Control Law was amended in December 1980 (the new Foreign Exchange Control Law), the system of licensing international financial
and capital transactions was changed to a prior reporting system, making
them free in principle. Furthermore, by virtue of an amendment to the new
Foreign Exchange Control Law in April 1998 (one the main reforms underwhat was locally called“the Japanese version of the Big Bang”), the prior reporting system of currency transactions was abolished, completely liberalizing direct financial transactions with overseas customers.
A survey of inbound investment made by foreign investors in recent years
shows that they have consistently net bought Japanese stocks except for selloffs in the markets that occurred in 2000 and 2002 after the bursting of the IT(information technology) bubble. However, foreign investors reversed direction in 2008 after the Lehman Shock, becoming net sellers. Furthermore, thevolumes of stocks bought and sold by foreign investors have increased sharply since 1999—with the result that the difference between the two has fluctuated widely. Particularly since 2012, the trading of Japanese stocks by foreign investors has become increasingly active against the backdrop of surging
prices on the stock market. It is apparent that foreign investors also have consistently net bought Japanese debt securities (both bonds and notes). ThereChap. I The Securities Market and the National Economy

Table I-6.

11

Changes in In- and Out-Bound Securities Investment (on a settlement basis)(¥100 million)

Fiscal year

Equity securities

Debt securities (excluding bills)

Net balance

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

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

86,540113,022

Note: Up to 2004, figures were compiled as“Changes in In- and Out-Bound Securities Investment (on asettlement basis).”Since 2005, figures have been compiled as“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.

has been net selling of debt securities by foreign investors in some years, butthese temporary reversals involved selling to cover arbitrage positions. Thissituation happened in 1999 after the abolition of securities transaction taxes,
during the depreciation of the yen in 2002 and 2003 and during the financial
turmoil in 2008 and 2009. Net selling was also evident in 2013 due to thequantitative and qualitative monetary easing measures introduced by the
Bank of Japan among other factors, but the level of trading was high. As was
the case with stocks, the bond transaction level has stepped up since 1999,
with the result that the difference between purchases and sales has fluctuatedsubstantially. 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 years) and other infrastructural
factors.
Looking at the trend in stocks (debt), although the balance turned upwardagain in 2003 due to a recovery in stock prices, increasing to ¥149 trillion at

12

Chap. I The Securities Market and the National Economy

Table I-7.
Year-end
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

Balance of Inbound Investment and Related Indicators

Stocks (¥b)
63,222(30.4)
49,563(24.7)
40,757(21.4)
60,085(28.2)
77,393(31.2)
132,842(40.8)
149,277(43.5)
142,031(39.4)
68,625(23.4)
76,372(26.6)
80,537(26.4)
65,841(20.7)
83,556(23.2)
152,323(32.3)
169,144(29.2)

Bonds (¥b)
32,981(15.8)
33,546(16.7)
27,799(14.6)
27,108(12.7)
33,846(13.6)
41,428(12.7)
49,579(14.5)
60,203(16.7)
50,650(17.3)
42,236(14.7)
42,877(14.0)
45,730(14.4)
49,504(13.8)
50,168(10.6)
64,592(11.2)TOPIX Interest rate (%)
1,283.67
1.640
1,032.14
1.365
843.290.900
1,043.69
1.360
1,149.63
1.435
1,649.76
1.470
1,681.07
1.675
1,475.68
1.500
859.24
1.165
907.591.285
898.801.110
728.610.980
859.800.795
1,302.29
0.740
0.320
1,407.51¥/$ (¥)
114.90131.47119.37106.97103.78117.48118.92113.12
90.28
92.13
81.51
77.57
86.32
105.37
119.8

Notes: 1. Debt securities covers only bonds and notes.
2. Figures given in parentheses are component ratios (%) to the total debts to overseas lenders.
3. Interest rate means secondary market yield of newly issued 10-year government bonds.
4. ¥/$ represents the closing spot rates on the Tokyo market.
Source: Compiled on the basis of data from the Bank of Japan.

Table I-8.

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

Year-end
United States
Equity securities
2006
41.5
2007
44.2
2008
49.8
2009
53.9
2010
46.6
2011
46.0
2012
44.3
2013
45.7
Debt securities (bonds and notes)
2006
12.7
2007
12.5
2008
13.2
2009
16.4
2010
14.9
2011
14.2
2012
14.6
2013
18.0

EuropeAsia

Others

50.3
45.1
37.6
36.5
36.0
35.5
37.2
37.9

2.0
3.1
3.6
1.7
7.7
8.9
8.4
5.8

6.2
7.6
9.0
7.9
9.7
9.6
10.1
10.6

59.7
60.7
53.0
47.5
43.1
42.0
39.8
40.0

14.2
13.9
15.4
19.4
21.8
24.1
25.0
20.4

13.4
12.9
18.4
16.7
20.2
19.7
20.6
21.6

Note: The figures for Europe include Eastern European nations and Russia.
Source: Compiled on the basis of data from the Bank of Japan.

Chap. I The Securities Market and the National Economy

13

the end of 2006, by 2010 it had dropped to ¥81 trillion because of the Lehman Shock. Subsequently, with the recovery of the stock market from November 2012, the balance increased to ¥169 trillion at the end of 2014. Next,
in terms of regional breakdown, the share of American investors has remained at a high level while the downward trend in the share of European investors has come to a halt. The total amount of domestic debt securities heldby overseas investors, long- and medium-term bonds and notes combined,
has increased to a total of approximately ¥65 trillion. By region, unlike in thecase of stocks, European investors still hold close to 40% of the total despite
a downward trend, while American investors’share falls short of 20%. On
the other hand, there has been notable growth in the share of domestic debt
securities held by Asian investors, which exceeded 20% at the end of 2013,
approaching the share of European investors.
6. New Developments on Corporate Governance
The importance of corporate governance is strongly recognized particularly
by developed countries in Europe. Basic views on corporate governance arereflected in various principles compiled while securing the effectivenessbased on securities exchange regulations, laws on companies and other relevant rules. New measures on corporate governance have also been implemented in Japan.
In June 2014, the Cabinet approved and announced the“Japan Revitalization Strategy (Revised in 2014).”The revised Strategy strongly proposed theneed to strengthen corporate governance in order to increase mid-long profitability and productivity of Japanese companies and to pass the fruits of suchincrease on to the people widely. In response to this proposal, the Council ofExperts formed jointly by the Financial Services Agency and the Tokyo
Stock Exchange (TSE) released the exposure draft for the Japan’s Corporate
Governance Code in December 2014 and called for public comments. Following this draft, the TSE formulated its Corporate Governance Code (seeSection 6 of Chapter XV) to be part of“Matters to be observed”under the
Code of Corporate Conduct and began operating the Code in June 2015. ThisTSE Code is based on the existing rules and guidelines of the bourse as wellas on the 2004 version of the OECD Principles of Corporate Governance.
Meanwhile, following the announcement of the Japanese Revitalization
Strategy (2013 version), the Council of Experts established within the Financial Services Agency released the Japanese Version of the Stewardship Code(February 2014; see Section 7 of Chapter XII) as a code of conduct for institutional investors, and efforts for implementation are underway. It is anticipated that the TSE Code together with the Stewardship Code will drive effec-

14

Chap. I The Securities Market and the National Economy

Table I-9.
Japan
Principle-based and“comply or explain”
approach applied tocorporate governance code

Corporate Governance Code Structure by Country
United Kingdom○○

Germany○

FranceUnited States○

Rules-based approach
applied to corporate
governance code

Rules that secure Stock exchange Stock exchange Laws on stocks Commercial code
the above:rules (Note)
rules(Companies Act)

Sarbanes-Oxley Act
SEC regulations
Stock exchange rules

Formulating insti- TSE, Financial Financial Report- Ministry of Jus- AFEP (Association Frantution
Services Agency ing Council
ticeçaise des Entreprises Privées) French Association ofPrivate Sector Companies
MEDEF (Mouvement desentreprises de France)
Movement of the FrenchEnterprises
Stewardship Code

○

○

－

－

－

－

Note: The revised Companies Act approved in June 2014 adopts the“Comply or Explain”approach of
requiring listed companies with no outside directors to“explain the reasons for not appointing outside directors.”
Source: Materials issued by Financial Services Agency’s Council of Experts Concerning the Corporate
Governance Code

Table I-10.

Comparison between the 2015 version G20/OECD Principles of Corporate
Governance and the TSE’s Japan’s Corporate Governance Code
G20/OECD Principles

I.

TSE Principles

Ensuring a basis for an effective corporate governance framework
II. The rights and equitable treatment of shareholders and key ownership functions
III. Institutional investors, stock markets, and otherintermediaries
IV. The role of stakeholders in corporate governance

Securing the Rights and Equal Treatment of
Shareholders
Appropriate Cooperation with Stakeholders
Other Than Shareholders
Ensuring Appropriate Information Disclosure
and Transparency
Responsibilities of the Board

V.

Dialogue with Shareholders

Disclosure and transparency

VI. The responsibilities of the board－

tive promotion of corporate governance in Japan.
The OECD Principles of Corporate Governance, originally formulated in
1999, went through revisions in 2004 and were released as the updated G20/
OECD Principles of Corporate Governance in September 2015. The updated

Chap. I The Securities Market and the National Economy

15

Principles reflect enhancements made to the 2014 version of principles andnewly include the following key elements: (1) the role of stock markets insupporting good corporate governance, (2) the use of information technology
at shareholder meetings, (3) proxy advisors, analysts, brokers, rating agencies
and others that provide analysis or advice relevant to decisions by investors
or disclose and minimize conflicts of interest that might compromise the integrity of their analysis or advice, (4) stakeholders’access to information,and (5) disclosure of non-financial information. Points of particular attention
in the updated Principles include the importance of the role of a Say-on-Pay
system where shareholders convey their opinions on remuneration of board
members and key executives as stated in Chapter II (see Table) and the efforts to strengthen functions of the board of directors through (1) having theboard apply high ethical standards and (2) regular board evaluations supported by external facilitators as described in Chapter VI The Responsibilities of
the Board. These elements will likely influence future revisions to the TSE
Code.

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 security 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 joint stock companies in Japan was not related to thehuge capital investments that are required to develop heavy industry. Instead,the joint stock company 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 the stock installment
payment system and stock collateral loans. As a result, the joint stock companies set up in the Meiji era were mostly small companies primarily involved
in light industry. They really could be considered joint stock companies inname only in terms of their generally intended function of raising larger
amounts of capital. The turning point for that function in Japan came with theshift in the composition of industry toward heavy industry prompted byWorld War I. Only then did the country see a sharp increase in large albeit
mainly 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 transactions called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 1882

1886

1890

1894

1898

1902

1906

1910

1914

1918

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).

settlement dealings and margin transactions. Even the main trading issues of
exchanges’stock were subject to speculative investment. For that reason, theprewar stock market can be characterized as 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,

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.

nonurgent industries, 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 in 1943.
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. The GHQ did not approve of this, and the market was
not reopened. The securities industry continued to enthusiastically lobby fora restart of market operations, but GHQ rejected the idea as premature andChap. II The History of the Japanese Securities Market

Chart II-3.

19

Stock Price Movements

(¥)
480
380
280
High
Low

180
80
1949

50

51

52

53

54

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

Table II-3.

Number of Members and Listings 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
189

Kobe Stock Exchange

July 4, 1949

34 members

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).

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

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).

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 commenced the formulation of a new legal framework. In 1947, it promulgatedChap. II The History of the Japanese Securities Market

21

the 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. GHQ, however, instructed Japan’s Securities and Exchange Commission to ensure the strict observance of its Three Principles ofMarket Operation: (1) recognize transactions in order of occurrence, (2) concentrate trading on exchanges, and (3) prohibit future 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 ona cash transaction basis only). Because, however, it was difficult to matchbuys and sells based only on actual demand, a movement got under way inthe industry to push for the revival of prewar margin transactions for the purpose of introducing temporary demand. Since the management of the exchanges and GHQ were against this proposal, a margin trading system modeled 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 last 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. The securities market became such a force in the investment trust market that it was known as“the whale in the pond.”Anotherfactor in the bull market was the system of“investable custody.”Under that

22

Chap. II The History of the Japanese Securities Market

Chart II-4. Stock Price Movements (TSE’s Modified Stock Price Average) (1955－1964)
(¥)
1,840
1,540
1,240
940

High
Low

640
340

1955

56

57

58

59

60

61

62

63

64

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

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

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

Sales
(A)

1961

588,205 155,751

9,810 1,026,845

422,643 244,490

1962

347,116 229,174

14,161 1,130,627

103,781

1963

331,873 274,226

17,884 1,170,388

39,761 109,857

1964

330,158 293,573

45,415 1,161,558

1965

196,829 349,502

42,556

Cancella- 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

71,021－ 171,515

38,836－8,829 122,332

84,811－ 209,036

37,521

966,328 －195,229 120,665

110,132－ 219,569

10,533

Source: Compiled from Shokenshintaku sanjyunen shi (30-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: The Securities Bureau of the Ministry of Finance, Nenpo (Annual Report).

system, securities companies borrowed bank debentures (primarily discountdebentures) 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 and mediumsized financial institutions or in the call money market by using the securities
as collateral and invested it in stocks or bonds through their own proprietary
trading accounts. In this manner, against the backdrop of an expanding economy and bullish securities market, OTC trading value rose sharply, and thenumber 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 Nagoya stock 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 companies. This action placed a great financial burden on the securities companies,

24

Chap. II The History of the Japanese Securities Market

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 city (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 theJapan 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
balance in the stock market. In the latter part of May 1965, however, thenews that Yamaichi 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 Law and announced that Yamaichi Securities would receive a special loan from the Bank of Japan without any required collateraland for an unlimited amount (in actual fact some collateral was secured).
Stock prices continued to fall following the announcement but staged a rally
when the government made clear that it intended to issue deficit-covering
bonds for the first time since the war. 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 Law, introducing a licensing system for securities companies. This forced many securities companies to combine their operations, or merge, to prepare for the new system. In

Chap. II The History of the Japanese Securities Market

Chart II-5.

25

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

(¥)
5,400
4,850
4,300
3,750
3,200 TSE’s Modified Stock Price Average, Nikkei Dow average
2,650
2,100
1,550
1,000
450
400
350
300
250
TOPIX
200
150
100
1965
66
67
68
69
70
71
72

High
Low

73

74

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

combination with the securities companies that had their registration revokedaround the time of the securities panic and those that dissolved their operations, the number of securities companies at the time of the conversion to the
new licensing system declined to 277 companies, compared with 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 become an Article 8 nation 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 Japanese stock by foreigners, which were finally fully lifted with the exception of certain stockcategories on the First Sections of the stock exchanges. The liberalization ofcapital transactions was not limited to foreign investors; foreign issuers andintermediates 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 corporations followed suit and began to offer their sharesin 1972. The Tokyo Stock Exchange established a Foreign Section for themin 1973. Around the same time, foreign securities companies commenced setting up operations in Japan. Merrill Lynch opened a Tokyo branch in 1972,

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: 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

becoming the first foreign securities companies to receive a securities business license in Japan.
The liberalization of capital transactions also meant that it was now possible for foreign companies to acquire Japanese companies. Japanese companies countered this new possibility by focusing on building stable shareholder
bases. If companies held shares in 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 also pursued sharecrossholdings from the point of view of the desirability of high share prices
when floating shares at market value. As a result, there was a change in theshareholding composition of the market, with the proportion of corporateshareholdings increasing and the proportion of individual investor shareholdings declining.
5. Measures Taken to Cope with the Oil Crises (1975−84)
At the end of the previous 10-year period, there had been a succession of major events, including the Nixon Shock (1971), the introduction of a floatingexchange rate system (1973), and the first oil shock (1973). A second oilshock occurred later, in 1979. With Japanese companies practicing energy
conservation management in the face of back-to-back oil crises, the government seemed intent on getting through the crises using a fiscal expansion
strategy. Underpinning that strategy was the massive 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 was purchasing almost all JGBs that had been heldby the financial institutions for more than one year (liquidity policy). The
reason, in fact, that JBG issuance after the oil shocks was called massive wasthat JGB issuance from fiscal 1975 on exceeded growth in the money supply.
With the massive issuance of JBGs, the liquidity policy reached its limits,making it impossible to avoid issuing JGBs in the public market. According-28

Chap. II The History of the Japanese Securities Market

Chart II-6.
(¥)
11,60010,000
8,400
6,800
5,200
3,600
950
850
750
650
550
450
350
250
1975

Stock Price Movement (Nikkei Dow and TOPIX) (1975－1984)

Nikkei Dow average

High
Low

TOPIX

76

77

78

79

80

81

82

83

84

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

Chart II-7.

Change in JGB Issuance and Outstanding Balance

100 billion of yen
160
140
120
100
80
60
40
20
0
1965

100 billion of yen
1‚000
800
600
400
200
70

75

80

Article 4 bonds (left axis)
Others (left axis)

85

90

95

2000

05

10

0

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: The web site of Japan’s Ministry of Finance.

Chap. II The History of the Japanese Securities Market

29

ly, 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 market. The interest rateyields for JGB subscribers, on the other hand, were the base rates given by
the regulated interest rate structure in Japan. To deregulate these rates would
force the government to change its artificially regulated interest rate policy.
For that reason, there was a great deal of resistance to the deregulation of the
JGB market within the government, and deregulation proceeded at a snail’space. 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 the stage for the deregulation of the different types of long-term interest rates.
Yet another type of internationalization besides the massive issuance of
JGBs occurred at this time. During the period from 1975 to 1984, Japan’strade surplus with the United States ballooned, causing trade and economic
friction between the two countries. Perceiving the reason for the problem tobe the closed nature of Japan’s financial, capital, and service markets, theUnited States demanded the overall reform of Japan’s economic structure. Aspart 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 allocationof 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, the two types of 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 a 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.

30

Chap. II The History of the Japanese Securities Market

Chart II-8.

Stock Price Movement (Nikkei Dow and TOPIX) (1985－1989)(¥)
39,00032,000

Nikkei Dow average

High
Low

25,00018,00011,000
2,900

TOPIX

2,400
1,900
1,400
900
1985

86

87

88

89

Sources: Compiled from data from the Nihon Keizai Shimbun and the Shoken tokei yoran (Manualof 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
3.00

200

3.50
3.00

150
100
1985

%
5.50

2.50
86

87

88

89

2.00

Source: Web site of the Bank of Japan.

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
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 internation-

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%

Notes: 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 Tosei yoran (Tokyo Stock Exchange handbook).

al 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 official 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, land, stock, and other prices continued to rise.
Against this backdrop of asset inflation, corporations began taking advantageof their ability to raise capital through 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 capital in 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 were introduced in
1987, and stock index options in 1989. Tokyo’s securities market thus gained
a full complement of cash, future, and option transactions.

32

Chap. II The History of the Japanese Securities Market

Chart II-10.

Stock Price Movement (Nikkei Dow and TOPIX) (1990－1995)(¥)
39,00034,000High
Low

29,00024,000

Nikkei Dow average

19,00014,000
3,000
2,500
2,000

TOPIX

1,500
1,000
1990

91

92

93

94

95

Sources: Compiled from data from the Nihon Keizai Shimbun and the Shoken tokei yoran (Manualof 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 and considered revisions in the specialized financial institution systems that separated 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 entrance into the banking, trust and securities businesses basedon wholly 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 entrance
through subsidiaries on the condition that firewalls were established between

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)

Sources: 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 Supervision Agency”, and“The First Year of the Financial Services Agency.”

subsidiaries and parent companies. And for the time being bank subsidiaries,
including indirectly owned subsidiaries, were prohibited from operating inthe stock brokerage market. The Institutional Reform Law was enforced inJune 1992 based on those conditions, and mutual entrance 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 the discovery through a tax audit that during the financial bubble major securities
companies had been compensating their largest corporate clients for losses
incurred (at 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 through eigyo

34

Chap. II The History of the Japanese Securities Market

tokkin accounts (discretionary accounts managed by the securities company
for tokkin, a form of corporate investment fund). The commonly used methods involved arranging to have the client earn a profit on transactions disguised as bond transactions or shifting losses between corporate clients withdiffering fiscal year-ends to avoid reporting the loss by temporarily transferring securities with losses at book value between their accounts in a process
called tobashi.
Since under the existing law loss compensation for trades after the fact
was not illegal, the Securities and Exchange Law was immediately amended
to ban securities trading under a discretionary account and loss compensation
before or after the fact. Criticism mounted that“excessive profits due to theregulator’s protection of market participants, problematic administration, andfixed rate commissions had made loss compensation possible,”and it wassaid that“what the solution requires is not the banning of loss compensationor 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 entrances, 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’s financial and capital markets.
8. The Debate on, and Enforcement of, the Financial System Reform
Law (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 so-called hollowing out of the financial market areal rather than hypothetical problem. Japan’s way of addressing the issue
was the financial Big Bang initiative proposed by then prime minister Ryutaro Hashimoto in 1996. The goals of the initiative were to wrap up the cleanupof nonperforming loans by 2001 and rebuild the Japanese financial market

Chap. II The History of the Japanese Securities Market

Chart II-11.

35

Stock Price Movement (Nikkei Dow and TOPIX) (1996－2000)(¥)
22,500High
Low

20,50018,500

Nikkei Dow average

16,50014,50012,500
1,700
1,500

TOPIX

1,300
1,100
900
1996

97

98

99

2000

Sources: Compiled from data from the Nihon Keizai Shimbun and the Shoken tokei yoran (Manualof Securities Statistics).

into an international market comparable to the New York and London markets based on the principles of“free, fair, and 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 1988, the Financial System Reform Law increased andimproved asset management methods, 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 commissions on stock brokerage and theshift to a registration system for securities business 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

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”

Securities Co., Ltd., and one of the four major securities companies, Yamaichi Securities Co., Ltd. These companies previously would have been
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 financial regulation 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 to restrict second-tier and small to medium-sized securities companies. Amid such majorchanges as the shift to a registration system and the deregulation of commissions in the securities industry, 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 achange in key market players.

Chap. II The History of the Japanese Securities Market

Chart II-12.
(¥)
19,00017,00015,00013,00011,000
9,000
7,000
1,900
1,700
1,500
1,300
1,100
900
700
2001

37

Stock Price Movement (Nikkei Dow and TOPIX) (2001－2008)
High
Low
Nikkei Dow average

TOPIX

02

03

04

05

06

07

08

Sources: Compiled from data the Nihon Keizai Shimbun, the Tosho tokei geppo (TSE Monthly Report),
Shoken tokei nenpo (Securities Statistics Annual Report), 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. The clearing of nonperforming loans had been proceeding slowly in the banking sector through write offs to bad loan reserves.
A different approach was needed because this method was not providing afundamental solution to the problem. Banks were henceforth permitted to directly dispose of their nonperforming loans and proceeded to remove thesebad debts from their balance sheets. Because unlike the indirect method thisapproach threatened dangerously low levels of capital reserves at banks, arise 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 the financial 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) and the setting up of the Industrial Revitalization Corporation of Japan (IRCJ).

38

Chap. II The History of the Japanese Securities Market

Chart II-13.

Changes in the Composition of Household Assets

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

2001

2003

Cash and deposits

2005
Bonds

Insurance and pension reserves

2007
Investment trusts

2009

2011

2013

Stocks and equity contribution

Other

Source: Web site of the Bank of Japan.

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,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 products and transactions that demanded a comprehensive set of regulations to ensure the thorough obser-

Chap. II The History of the Japanese Securities Market

39vance of investor protection rules and the coverage of an expanding and increasingly diversified range of investment instruments. In response, thegovernment revised the Securities and Exchange Law, reintroducing it as the
Financial Instruments and Exchange Act.
In the aftermath of the financial Big Bang, inter-market competition between exchanges got under way in earnest. The competition was focused on
attracting new listings and more transaction volume. The exchanges started
targeting new listings around 2000, launching start-up company markets andgrowth companies whose shares they successively listed on exchanges. In thebattle for greater transaction volume, Tokyo Stock Exchange quickly took thelead. The TSE introduced electronic stock trading and off-floor trading,strengthening its dominant position. The concentration of stock trading on
the TSE, however, produced a notable decline in support for regional stock
exchanges, leading to successive reorganizations that began around 2000.
10. Developments after the Lehman Shock
The Lehman Shock began with a liquidity crisis among European and U.S.
financial institutions that resulted from a collapse in U.S. housing prices andfrom subprime loan defaults beginning about summer 2007. This market crisis escalated into a global financial crisis and a simultaneous recession in the
global economy after Lehman Brothers Holdings filed for Chapter 11 bankruptcy protection on September 15, 2008. Countries dealt with the crisis
based on huge amounts of public spending and monetary relaxation. The
global economy then turned its sights to a process of recovery fueled by thegrowth of emerging countries. During a change of government in Greece in
October 2009, however, the incoming government discovered a fiscal deficit,
which kicked off the emergence of the Greek sovereign debt problem. Thisissue quickly spread through the five PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain), which had similar large current account and fiscal
deficits. Then financial institutions in the United Kingdom, Germany, andFrance became enveloped in the crisis because they held large amounts of thesovereign debt of these countries, and thus it became a European sovereign
debt crisis. The Greek sovereign debt problem still continues today.
Japanese financial institutions suffered far fewer losses from the subprime
loan problem, European sovereign debt crisis, and other financial shocks thanthose of other nations, but the financial crisis originating in the United Statesand Europe had its impact on the Japanese economy. In fall 2008, the Japanese stock market experienced successive sharp declines. Of the leading 10
day-to-day declines recorded in the TOPIX to July 31, 2015, the top 4 arefrom this period.

40

Chap. II The History of the Japanese Securities Market

Chart II-14.

Stock Price Movement (Nikkei Dow and TOPIX) (2010 onward)(¥)
16,00014,50013,000High

Nikkei Dow average

11,500Low

10,000
8,500
7,000
1,300
1,170
1,040

TOPIX

910
780
650
2009

10

11

12

13

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

Chart II-15.

Transactions on Proprietary Trading Systems

PTS transaction values for off-exchange types of transactions (left)

%
80
60
40
20
0

%
6.0

PTS transaction values for all types of transactions (right)

4.0
2.0
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

5
01

0.0

20

2

Source: Produced based on information on the website of the Japan Securities Dealers Association.

Chart II-16.
(100 billions of yen)

Trading Amounts on TSE and Brokerage Income

Bar graph: Daily average trading amounts (left)
Line graph: Commission income (right)

800,000(100 billions of yen)

30
25
20
15
10
5
0

600,000
400,000
200,000
13
20

10
20

FY

07
20

FY

04

FY

01

20
FY

98

20
FY

19

95

FY

19

92

FY

19

89

FY

19

86
19

FY

83
19

FY

80
19

FY

77
19

FY

FY

FY

19

74

0

Sources: 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.

Chap. II The History of the Japanese Securities Market

41

In recent years, there has been further structural change in the Japanese securities market. In April, 2010, the Tokyo Stock Exchange updated its trading
system, paving the way for the full-scale introduction of high-frequency trading (HFT). The successive liberalization of regulations, moreover, has resulted in an increase in the use of proprietary trading systems (PTS). PTS now
account for about 5% of total stock market trading value and are increasing.
Inter-market competition, meanwhile, has driven up exchanges’system costs.
And trends overseas of a major restructuring of exchanges that goes beyond
country borders has reduced Japan’s share of the global securities market. In
recognition of the changing business climate, Japan’s securities market tooka major step toward increasing its international competitiveness and enhancing accessibility with the January 2013 merger of the Tokyo Stock Exchange
and the Osaka Securities Exchange.
Meanwhile, there have been signs of change in how securities companies
manage their business. Ever since the liberalization of brokerage commissions, the level of commission income has been sluggish. Therefore, securities companies that used to focus on the brokering business shifted their direction to adopting a marketing approach of paying greater attention to asset
management although this conversion did not move easily. Changes, however, began to appear around 2014. By the end of fiscal 2014, the amount of net
assets in investment trusts rose to ¥100 trillion (up 25% year on year) and thebalance of wrap accounts increased to roughly ¥4 trillion (2.8 times higher
than the balance a year earlier), reflecting that the shift to focusing on asset
management services rather than brokering was beginning to become mainstream primarily among large securities companies.

CHAPTER III
The Stock Issuing Market

1. New Issues of Stocks in the Primary Market
For the purpose of the Companies Act, companies are classified into joint
stock companies (kabushiki kaisha); general partnerships (gomei-gaisha);limited partnerships (goshi-gaisha); and limited liability companies (godogaisha). Of these, joint stock companies have a number of advantages against
the others in that i) ownership interest in a company is divided into shares ofstock; ii) investors may recoup contributed capital simply by selling theirshareholdings; iii) investors shall be held liable only to the extent of capital
contributed by them (limited liability); and iv) others. These advantages helpa joint stock company to raise a large amount of capital from various investors.
The shares issued by a joint stock company 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 i) participate in the management of
the company (by attending general shareholder meetings and exercising voting rights that are proportionate to their shareholdings); ii) claim distributionof profits; iii) claim residual corporate assets (shareholders have proportionate rights to claim residual corporate assets upon liquidation); and iv) file derivative suits. Issued shares, unlike bonds, are not redeemable except whenshares are repurchased by the company or upon liquidation. Because contributed equity may not usually be repaid by the company, 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 ofshares and often represented by physical securities, or share certificates. On
the other hand, with corporate bonds, another class of capital securities, therepayment 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, theChap. III The Stock Issuing 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 demand distribution of residual assets
・Right to request purchase of shares
・Right to subscribe for new shares
・Right to request registration of name transfer

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

Table III-2.

Recent Amendments to the Commercial Code Relating to Equity Financing

The amendments made in 2001:
Those 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.
Those 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 classes of stocks(the lifting on the ban of tracking stock＊), etc.
The amendments made in 2002 (enforced in April 2002):
A revision of regulation of the classes of 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 and the introduction of a system of serving
notices by electronic means, etc.
The amendments made 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 the issue 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＊

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 Issuing Market

par value—based tan’i-kabu round-lot system was replaced by the new, discretionary tangen-kabu system. Under the amendments enforced on April 1,
2002, i) new subscription rights/warrants were introduced, ii) the regulationof stock options was relaxed, and iii) multiple classes of stock may now be
issued by a single company.
The Commercial Code as amended in 2004 and the Law Revising the Law
Concerning the Book-Entry Transfer of Corporate Bonds, etc., for Streamlining Settlement of Transactions in Stocks, etc., that was promulgated in thesame year introduced a system allowing electronic bookkeeping for shares,
paving the way for the dematerialization of share certificates of public companies on January 5, 2009. The Companies Act that came into effect on May
1, 2006 allowed transfer restrictions on any and/or all of classes of stock andissuance of class shares subject to wholly call. In the revised Companies Act
enforced on May 1, 2015, the authorities went further by introducing a“cashout”system where controlling shareholders of a company may force minority
shareholders to sell their shares to them.
2. Forms of Issuing Shares
Shares issuance is first carried out when a joint stock company is established.
Joint stock company establishment can be roughly divided into incorporators
only establishment and by subscription establishment. When a company isestablished only with the funds contributed to its capital stock by its promoters, this method of establishing a company 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 company with the capital raised by publicly offering its sharesto an unspecified large number of investors is called“establishment througha public offering of shares.”While a large amount of capital can be raised
through this method, one major drawback is that it takes time to successfullycomplete the public offering, and when its shares are not fully subscribed toby investors during the public offering period, the company cannot be established. Under the old provisions of the Commercial Code, the par value ofshares issued by a company 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.
Issuing new shares after the company was established in order to raise
funds, to transfer the control of its management to a third party, or to enhance
the liquidity of its shares is a general practice followed by joint stock companies. Usually, the method of issuing new shares is divided into paid-in capitalChap. III The Stock Issuing 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
Payment not required
Stock split
Merger
Stock swap
Stock transfer

Table III-4.

Funds Raised by Equity Financing(billions of yen)Year

Rights offering Public offering

Third party
allotment

Exercise ofsubsc. rights

Preferred stockand others

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

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

0
0
0.82
32
0
1.5
2.7
3.7
0
8.1
0.1
0
0.7
0
0.4
0.1
0

8
28
24
18
19
35
78
74
69
60
27
52
50
45
53
114
129

278.2
349.7
494.1
1,201.5
153.3
567.2
750.2
650.8
1,447.7457.0
341.7
4,966.8
3,308.9967.8
451.8
1,113.7
1,378.032
688.0
75 2,347.3
46
922.8
57
477.2
62
484.4
84
223.2
129
572.6
150
778.1
145
416.5
117
662.1
93
395.8
115
714.6
88
535.6
66
395.2
71
159.3
151
371.9
190
392.8

28
62
87
85
78
121
228
336
371
347
240
169
159
171
174
350
412

86.4
252.9
105.6
37.4
276.3
36.6
99.5
166.9
151.3
165.0
20.9
18.8
24.6
26.1
21.8
190.4
108.7

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

471.0
6,989.4
107.3
216.1
996.8
2,532.2
1,362.6
1,167.8
559.7
795.5
593.7
474.0
73.6
69.3
1,275.5
120.0
224.2

73
190
163
168
195
316
486
607
611
537
370
364
308
289
316
619
745

1,523.6
9,939.3
1,629.8
1,932.2
1,910.7
3,359.2
2,784.9
2,763.5
2,575.1
2,079.6
1,352.1
6,174.3
3,942.7
1,458.4
1,908.4
1,797.0
2,103.7

Source: Web page of the Tokyo Stock Exchange.

increase and stock splits (and gratis issues).
Issuing new shares against the payment for them by shareholders is called
paid-in capital increase, and the company can raise its equity capital by thismethod. Paid-in capital increase is also divided on the basis of investors towhom shares are issued into rights offering, allotment of new shares to a

46

Chap. III The Stock Issuing Market

third party, and public offering.
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 the company.
However, new shares issued through a stock split play an important role. The
stock split increases the number of the company’s shares outstanding on themarket, and the fall in the per share price caused thereby enhances their liquidity, making it easier for the company to raise funds through equity financing. Until 2001, there was a rule banning any stock split that reduces theper share, net asset value to less than ¥50,000, but this rule was abolished byvirtue of the 2001 amendment to the Commercial Code. This step was taken
because of widespread complaints among venture businesses—those thathave 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. In a similar vein, the rule
relating to the authorized total number of shares was changed in such a way
as to allow the company to increase its authorized total simply by adopting a
resolution of the board of directors, instead of changing the relevant provisions of its articles of incorporation, which required a special resolution of ageneral meeting of shareholders.
Other cases in which the company is authorized to issue new shares include the exercise of new share subscription rights, 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; and allocationof shares to shareholders of one’s subsidiaries under the stock transfer 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 public offerings, third-party allotments, or rights offerings.
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 tononshareholders 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 when provided for in the Articles of Incorporation may be conducted byordinary resolution. A rights offering to existing shareholders is a means ofcapital raising that is neutral to control of corporations, in that it does not affect proportionate ownership of the shareholders. Offerings of rights at par
used to be the dominant measure of equity financing, but such offerings areChap. III The Stock Issuing Market

47

Chart III-1. 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, Monthly Statistics Reports.

Chart III-2.

Equity Financing in 2014 by TSE-Listed Companies, by Type of Financing(Total capital procured: ¥2,103.70 billion)
Exercise of new share subscription rights¥108.7 billion(5%)
Preferred stock, etc.
Third-party allotments¥224.16 billion¥392.84 billion
(11%)
(19%)

Public offerings¥1,378.0 billion(65%)
Source: Web page of the Tokyo Stock Exchange.

Allotments toshareholders
¥0
(0%)

48

Chap. III The Stock Issuing Market

no longer common, partly due to the elimination of par value under amendments to the Commercial Code in 2001.
Public offerings grant subscription rights to the general public. Public offerings raise more capital for issuers than offerings of rights at par, which
was once prevalent along with par value stock, by the excess of the issue
price over par, while investors were deprived of the opportunity to earn thepremium, which, in turn, lowered their incentive to subscribe. In the buoyant
years from the early seventies to the late eighties, new share issuance dominated equity financing. Although public offerings declined in the nineties,
they are still a primary means of raising equity capital.
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, it has found notable use recently as a measure for fending off
hostile takeovers. Third-party allotments cause dilution of ownership of existing shareholders. They may be approved by board resolution except whenterms of rights are unequivocally advantageous to the grantee(s), where a
special resolution at the general shareholders meeting will be required (advantageous issuance). In accordance with a Cabinet Office Ordinance thatcame into effect as of February 2010, issuers making capital increases by
third party capital allocation have an obligation to explain the rationality andnecessity of the capital increase in their securities registration statements.
Under the revised Companies Act that went into effect in 2015, when newshare issuance by a public company involves any transfer of controllingshareholders (accounting for one-half or more of voting rights), the name andother information of the underwriter must be notified to existing shareholders. Furthermore, if there is opposition by 10% or more of voting rights, theshare issuance is subject to a resolution not only by the board of directors but
also by the general shareholder meeting. Thus the involvement of shareholders in share issuance was strengthened.
4. The Current State of New Issue Market
New shares are usually issued i) in exchange for capital contribution (equity
financing in the forms of public offerings, third-party allotments, rights offerings, exercise of subscription rights, etc.); ii) in conjunction with stock splits(and gratis issues); and iii) for the purpose of corporate acquisitions. (Sharecounts are reduced when treasury stock is cancelled.) In 2014, the leading
source of new shares issued by listed companies was by stock splits and gra-

11,208,343
5,096,356
7,004,703
4,906,531
4,696,470
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

Year

1975
1976
1977
1978
1979
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

10,069,329
3,173,059
5,055,820
2,387,691
1,470,800
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－

Rightsoffering

522,069
986,078
1,218,824
1,071,412
1,151,803
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

Publicoffering

60,95957,080183,356444,375
236,944
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

Third party
allotment

555,986
880,139546,703
1,003,023
1,836,923
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

－
－
－
－
－
－
－
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

Preferred stock,conversion of a
Exercise of
corporate bond cum
equity (stock) warrant equity warrantsof the convertible bondtype into shares, etc.

3,317,692
3,528,729
3,762,386
2,677,987
2,323,957
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

Stock split

The State of Issuing New Shares by Listed Companies

574,654
177,301
65,645△154,435
171,436
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

Others15,100,691
8,802,387
10,832,736
7,430,084
7,191,866
9,206,243
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

Total(in thousands of shares)

Sources: Tokyo Stock Exchange, Shoken tokei nenpo (Annual Report of Securities Statistics) and Shoken tokei geppo (Monthly Report of Securities Statistics).

Paid-in
capitalincrease

Table III-5.

Chap. III The Stock Issuing Market

49

50

Chap. III The Stock Issuing Market

tis issues (8.84 billion shares), followed by equity financing (4.63 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 in conjunction
with such issues.
Recently, equity financing has been the leading source of new shares. Listed companies on the Tokyo Stock Exchange raised approximately ¥2.1 trillion in equity in 2014. By contrast, equity financing, except for initial public
offerings, is more selectively used in the United States and the United Kingdom because it tends to cause earnings dilution and consequently push down
the stock price. Over the past years, equity financing in Japan has undergone
many changes. During the period of rapid economic growth, corporations
mostly used the dependable 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 shortage of funds. (Stockpar value was eliminated in 2001.) In those days, business corporations mostly relied on bank borrowings for their funding requirements, and the stock
market was a marginal marketplace for raising capital. However, as the economy slowed down after the oil shocks, the funding needs of businesses werereduced, and due in part to the necessity of securing a strong stockholder
base, public offerings at market price became the prevalent means of raising
equity among business corporations. Meanwhile, the weight of rights offerings also shifted from that based on par value to that based on a median of
par and market values. In the second half of the 1980s, as debt financing wasincreasingly deregulated, the issuance of corporate bonds with subscription
rights/warrants increased, and so did their conversion and exercise. Particularly, as the banks came under pressure to meet Tier 1 capital requirements
imposed by the Basel regulatory standards, they scrambled to shore up theircapital base and accounted for about half of equity financing in the period.
In the 1990s, there was a marked decline in capital increases because ofstagnant stock prices. At the time, new rules to ensure sound issuing of public stock offerings at market price were instituted. Among them, the Japan
Securities Dealers Association adopted a profit distribution rule in March
1992 that required issuing companies to raise their dividend payout ratio to
30% or more and the Ministry of Finance, which was then responsible for securities regulation, issued guidelines requiring issuing companies to meet or
exceed the threshold of 10% in their return on equity (ROE) in December
1993. These rules were abolished in April 1996, and the stock issuing market
was fully liberalized. The public stock offerings market remained in the doldrums thereafter. However, following the global financial crisis that kicked
off in 2008, the market picked up as companies sought to shore up their
weakened financial bases by public stock offerings which became active inChap. III The Stock Issuing Market

51

2009. Also given the surge in stock prices in the recent years and perhaps the
expansion of investor segments with the introduction of the individual savings account scheme (NISA) scheduled in January 2014, stock splits reached
27 billion shares in 2013, the highest in history.
5. New Shares Underwriting
The method of issuing shares may be divided into direct offering and indirect
offering, public offering, and private placement. When the issuing company
itself performs the administrative procedures necessary for issuing shares andsells 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 shares to an unspecified large number of investors. Whenthe issuing company commissions a specialist intermediary to handle thepublic offering of its shares, this is called“indirect offering.”The intermediary provides the issuing company with expert advice, handles the distributionof 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 offered through theindirect offering method. A“public offering”is the public solicitation of anunspecified large number of investors for the purchase of new shares, and“private placement”is the private solicitation of a specified small number ofinvestors 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, the firm that plays the leadership role in organizing the syndicate
members and in negotiating the terms and conditions of the underwriting
agreement is called“the lead manager.”And the group of securities companies that assumes no underwriting risk and only sells the shares is called“theselling group.”
In an initial or secondary offering, it is necessary to have a strategy forbalancing supply and demand. Using an over-allotment option allows the se-

52

Chap. III The Stock Issuing Market

Table III-6.

Number of Lead Managers in Underwriting Shares of Securities
Companies (IPOs)(Existing stock exchanges and start-up markets in 2014)
Securities companies

Existing Markets
No. of co.

%

Mothers
No. of co.

JASDAQ%

No. of co.

%

Nomura

9

42.9

14

31.8

3

27.3

Mizuho

4

19.0

－

－

3

27.3

Daiwa

3

14.3

16

36.4

2

18.2

Mitsubishi UJF Morgan Stanley

2

9.5

2

4.5

－

－

Tokai Tokyo

2

9.5

－

－

－

－

SMBC Nikko Securities

1

4.8

6

13.6

1

9.1

SBI

－

－

4

9.1

1

9.1

Others

－

－

2

4.5

1

9.1

Total

21

100.0

44

100.0

11

100.0

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

Table III-7.

Flow from additional secondary offering by over-allotment in initial public
offering to syndicate cover transaction

Board of directors’
meeting on issuanceof new shares andsecondary offering
Set OA offering limit

Determine
provisional
terms

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).

curities firm that is the lead manager of an offering to borrow shares fromexisting shareholders and sell them if demand is greater than the originalscheduled number of shares. In Japan, lead managers of offerings have beenable to use the over-allotment option based on the underlying underwritingChap. III The Stock Issuing Market

53

agreement since January 31, 2002. It allows the sales of additional shares up
to 15% of the scheduled number of shares in the initial or secondary offering.
The short position arising when the lead manager uses the over-allotment option is cleared differently depending on whether the price in the secondary
market has risen or fallen compared with the initial offering price after theoffering. When the price of the shares has fallen the lead manager purchasing
the excess shares in the secondary market (syndicate cover). When the priceof the shares has risen, the lead manager exercises a greenshoe option (rightto 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. Far
from it. Equity financing regulations for private companies can be said to beless strict than those for public companies. The notification statement does
not require information concerning the operating performance or financial
conditions of the issuer because, unlike the registration statement, it is not intended to disclose information to investors. Under the Financial Instruments
and Exchange Act and cabinet office ordinance currently in force, furthermore, in cases where the proceeds from a proposed offering (of primary or
secondary shares) are less than ¥100 million, the issuer is exempt from filinga registration statement, and a notification statement 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 tofile a notification statement.
However, when viewed from the standpoint of general investors, private
equity investments, given the limitations on information available to them,
involve higher risks. More than anything else, the problem with private equity investments is that the funds invested in them are not easily recoverable
due to lack of liquidity. Since it was difficult to recover funds until the company went public, investment in private equity was limited to a small numberof investors, such as venture capital funds, which have the economic wherewithal to tolerate the high risks and long investment periods associated withsuch investments.
In recognition of the necessity of stimulating business startups and nurturing venture-type companies, the JSDA relaxed some of its regulations in June

54

Chap. III The Stock Issuing Market

Table III-8. Criteria for Requirement to Submit Securities Registration or Notification
Statements Under the Financial Instruments and Exchange Act and Cabinet
Office Ordinance
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

Securities
Notification
StatementLess than 100 million yen

Not necessary*Notes: 1. Under the current FIEA and Cabinet Office Ordinance, even when the number of investors solicited is less than 50, if the issuer has made an offering of the same type of securities within
six months previously and the combined number of investors solicited is 50 or more, the determination of whether a registration or notification statement is required must be made based on
the total issuance amounts of the offerings.
2. In accordance with a 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 the number of investors being solicited.
(2) In determining the issuance amount for a professional investor private equity offering
where only qualified institutional investors are counterparties and there is little possibilityof 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, theregistration statement 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).

1997, and launched a public quotation system (Green Sheet) for private equity or unlisted shares. Securities companies became able to solicit investmentin private equities for issues of OTC securities that met a certain standard of
information disclosure and for which the securities companies provide publicly announced buy and sell quotes. In May 2015, a new shareholder community system was introduced with the purpose of dissolving the Green
Sheet system to form a better framework by March 31, 2018 (see Chapter X).
Also attracting great attention in 2015 was the issuance of classified stock(“Model AA”shares) by Toyota Motor Corporation. This is a type of preferred stock where after a transfer restriction period of five years, shareholders may convert shares into common shares or demand Toyota to acquire
shares back at issue price. Although the issue price was higher than that ofcommon stock, this classified stock offering stepped-up dividend with aphased increase in the annual dividend rate attracted an adequate amount ofapplications from general investors. There is interest in whether the use ofChap. III The Stock Issuing Market

Table III-9.

55

Green Sheet Issue Designations

Designation by special feature of issuer, indicated by securities company when registering on GreenSheet
1. Emerging issues
A category for the stocks, etc. of issuers that have been determined to appropriate for inclusion in thegreen sheets based on their growth potential and other factors in a review done by the registering securities company.
2. Ordinary issues
A category for the stocks, etc. of issuers that have been determined to appropriate for inclusion in thegreen sheets in a review done by the registering securities company.
3. Investment trust and SPC issues
A category for preferred subscription and investment certificates of issuers that have been determined to appropriate for inclusion in the green sheets in a review done by the registering securities
company.
Note: 1. The Regional system, a category for stocks, etc. of issuers that fit neither into the Emerging or
Phoenix categories, was abolished on April 1, 2005. The Phoenix system, a category for delisted
or deregistered issues that have been determined to appropriate for inclusion in the green sheets
for the purpose of maintaining liquidity in a review done by the registering securities company,
was abolished on March 31, 2008.
2. With the launch of the shareholder community system in May 2015, there is currently no new inclusion of issues.
Source: JSDA website

classified stock will take root as a method of mid-to-long-term financing orbuilding shareholder populations.

CHAPTER IV
The Stock Trading Market

1. The Structure of the Stock Trading Market
The stock trading market on which shares are traded consists of a trading
market opened on a stock exchange, a proprietary trading system (PTS) operated by private companies authorized under the 1998 amendment to the Securities and Exchange Law, and the off-exchange trading of listed stocks thatwas made possible 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 Japan Exchange Group (JPX) formed from the
combination of the Tokyo and Osaka exchanges, Tokyo 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 Law, they are authorized tochange their status as joint stock companies, and the Japan Exchange Groupand the Nagoya Stock Exchange have already done so.
Shares of listed stocks that meet certain listing requirements are traded by
auction during fixed trading hours. With a view to ensuring the fairness of
trading, stock exchanges as self-regulatory organizations manage and supervise the trading process and the business conduct of securities companies.
In addition, shares of companies that are not listed on a stock exchange or
not registered with the over-the-counter (OTC) market are traded over thecounters of securities companies, and such transactions have been are reported to the Japan Securities Dealers Association (JSDA; this is called“thegreen-sheet market”), but the volume of trading in these issues is quite limited. The system for off-exchange 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 Trading Market

Chart IV-1.

57

Inter-market Competition in Japan

Japan Exchange Group(as of November 30, 2015)

Second Section
541companies

Mothers
217 companies

JASDAQ881 companies

Centrex(12 companies)

OTC trading by
securities companies
Listed issues, etc.

Privately
conducted trading by
securities companies
through electroniccommerce [PTS]

N-NETIssues listed on the 1st Sect.
Issues listed on the 2nd Sect.

n
io
tit g
pe in
m ad
Co or trf

Tokyo Pro Market
14 companies

Nagoya Stock Exchange(as of December 1, 2015)
282 companies

OTC trading by
securities companies
Green sheet issues, etc.
(as of November 30, 2015)
23 companies

ToSTNeTFirst Section
1,927 companies

Fukuoka Stock Exchange(as of November 30, 2015)
110 companies

Q-Board(12 companies)

Sapporo Stock Exchange(as of June 24, 2015)
51 companies

Ambitious(6 companies)

Trading in Japanesestocks on overseas
markets

58

Chap. IV The Stock Trading Market

on their own mainly for the purpose of matching orders received after business hours.
Since a few years ago, breakdowns of the trading computer systems haveoccurred at securities companies and stock exchanges, erroneous orders havepassed undetected, and other irregularities such as buy or sell orders with nointention of execution have occurred on repeated occasions. As a result, inJanuary 2010, the Tokyo Stock Exchange introduced its new worldclass highspeed trading system“arrowhead”to enhance confidence in its market.
2. Volume of the Stock Trading Market
As of November 30, 2015, the number of companies listed on the nation’sstock exchanges (including multiple listings) stood at 3,607, of which 3,498
were on the Tokyo Stock Exchange (TSE). The number of shares listed on
the TSE had increased to 427.9 billion, with a total market capitalization of¥596.3 trillion ($ at the rate of ¥115 to the dollar). And the value of listed
shares traded on all of Japan’s stock exchanges (in October) was ¥59,569.5
billion.
The concentration of stock trading on the TSE is extremely high. The TSE
accounts for about 88.3% of the nation’s listed stocks, and the number of issues listed only on regional stock exchanges stood at 124. In terms of value
only, the TSE accounts for almost all of the nation’s stock trading. The heavy
concentration of stock trading on the TSE may be explained by the fact thatthe stock markets have taken on a hierarchical structure, with the First Section of the TSE at the top, and that business corporations that are bent on enhancing their social status have sought to list their stocks on the First Section.
Therefore, blue-chip corporations have tended to converge on the First Section of the TSE. And as shares are actively traded in large volumes and on ahighly liquid market, the externality of the order flow—trading flows towhere shares are actively traded—was at work accelerating the concentrationof orders.
The number of stocks listed on the JASDAQ market (formerly the overthe-counter market), which became a regular stock exchange in December
2004, stood at 799 at November 30, 2015, with a total market capitalizationof ¥8,775.1 billion, and the total value of shares traded on this market during
2014 amounted to ¥23,871.8 billion. These figures far exceeded the Second
Section of the TSE, with which the JASDAQ market competes for businessin terms of the number of shares listed (799 vs. 540); total market capitalization (¥8,775.1 billion vs. ¥6,384.2 billion); and trading volume (¥23,871.8
billion vs. ¥7,739.9 billion).
Other emerging stock markets include the Mothers market opened on the59

Chap. IV The Stock Trading Market

Table IV-1.

Trading volume (in thousands of shares)

Year

Trading Volumes of Major Stock Exchanges and the OTC Market
2006

2007

2008

2009

2010

2011

2012

2013

2014

First Section of
477,894,218 545,835,876 541,576,224 552,098,670 511,695,772 524,646,772 519,754,423 841,857,965 612,851,073
TSE
Second Section
20,822,649 15,146,248 11,775,067 10,202,351
of TSE

7,315,086

9,850,350

7,703,508 22,225,351 36,199,273

First Section ofOSE

5,657,666

5,145,304

5,734,251

6,369,508

4,884,700

6,505,596

5,260,315－－

Second Sectionof OSE

3,946,858

3,178,646

3,879,093

4,428,690

2,763,250

5,827,921

2,702,625－－

JASDAQ

21,306,415 12,291,369 11,288,330 13,461,273

7,780,105 11,627,350 11,347,773 13,237,308 37,019,052

Note: The Tokyo Stock Exchange and the Osaka Securities Exchange were integrated in January 2013
and became the Japan Exchange Group as a result of which the first and the second sections ofthese markets were also combined.
Sources: Japan Securities Dealers Association; Japan Exchange Group, Inc.

Table IV-2.

Trading Volume by Stock Exchanges andPercentage Composition (2014)

Stock Exchanges

Trading Amount (Percentage composition)Tokyo¥643,105.6 billion (99.974%)

Nagoya¥131.428 billion (0.020%)

Fukuoka¥26.633 billion (0.004%)

SapporoTotal¥10.813 billion (0.002%)¥643,274.498 billion (100%)

TSE in November 1999, the NASDAQ Japan market established on the Osaka Securities Exchange in June 2000, the Centrex market of the Nagoya
Stock Exchange, the Ambitious market of the Sapporo Stock Exchange, andthe Q-Board market of the Fukuoka Stock Exchange. Competition among thestock exchanges for winning over candidates for stock listings has since become increasingly fierce. In August 2007, JASDAQ joined the race with
NEO, its version of a new market for venture businesses.
Subsequently, as NASDAQ of the United States withdrew from the market, NASDAQ Japan changed its name to Hercules. And in October 2010,
the Hercules, JASDAQ, and NEO markets merged to become a new JASDAQ market.
In July 2013, the cash markets of the Tokyo Stock Exchange and Osaka
Securities Exchange, forming the Japan Exchange Group (JPX). As a result,
JPX is now part of the same group as JASDAQ, the Mothers market, and theTOKYO PRO Market.

60

Chap. IV The Stock Trading Market

3. The Structure of Share Ownership
Following the liquidation of the zaibatsu (great industrial or financial conglomerates or holding companies) after the war, shares held by them were released to the stock market for distribution among individual investors. And
the ratio of shares held by individual shareholders rose to 69.1% in 1949.
However, as not many of them could afford to hold these shares for the long
haul, they liquidated their holdings soon after they had acquired them, withthe result that the ratio of individuals’shareholdings declined rapidly. And
due in part to the fact that some investors had cornered these shares, groupsof companies that had belonged to former zaibatsu started cross-holding one
another’s shares to strengthen their group solidarity.
In the 1960s, capital transactions were liberalized. For fear of a hostile
takeover by foreign firms taking advantage of liberalized capital transactions,Japanese firms sought to build a strong shareholder base, and the ratio of theshareholdings of business corporations and financial institutions was increased. Subsequently, the system of issuing shares at par value was changed
to one of issuing at market price, making it necessary for them to maintaintheir share prices at a high level if only to enable them to raise equity fundswith the issuance of fewer shares. And this helped push up the ratio of theshareholdings of business corporations in the years to 1975. Meanwhile, encouraged by the long-continuing bull market, financial institutions also continued to build their equity portfolios and increased the ratio of their stock
holdings until the end of the speculative bubble in 1989.
The corporate domination of the shareholdings structure thus brought
about had an important impact on the formation of stock prices. While individuals and institutional investors bought stocks as an investment to earnyields (profit-earning securities), business corporations or financial institutions bought shares for the purpose of strengthening corporate affiliations orbusiness tie-ups as a means of gaining control of the management. Therefore,
these corporations held such shares for the long haul (management-stake securities) without regard to yields on investment, and yields on such sharestended to decline. As a result, the prices of such shares rose to a level thatwas beyond the reach of individual investors who invested in shares on thebasis of the yield they produced. And as individual investors had no choice
but to aim at making capital gains under such circumstances, the rate of turnover of their investments had of necessity to increase. This was why individual 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 steep falls in stock prices after the burst of the speculative bubble,

Chap. IV The Stock Trading Market

Chart IV-2.

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

%
45

%
45

Business corporations, etc.

40

40
Trust banks, life and non-life insurancecompanies, and other financial institutions(including institutional investors)
35

Individuals and others

35

61

30

30

25

25

20

20

15
10

15

Commercial andregional banks

Foreign investors

1050
FY1970

5

75

80

85

90

95

2000

05

0
14

10

Note: Results from FY2004 to FY2009 include the portion of companies listed on JASDAQ.

Chart IV-3.

Ratios of Cross-Shareholdings

%
50
40
30
20
10
FY1949

60

70

80

90

2000

10

14

Note: Percentage of cross-held shares (based on market price) against the total market capitalization of alisted company. Figures up till the end of FY1989 are estimates. Research by Nomura Securities
Co., Ltd.

62

Chap. IV The Stock Trading Market

holding shares was no longer an attractive investment for business corporations. What is worse, stock prices have dropped below their acquisition cost
since the autumn of 2001, and as the system of valuing their shareholdings attheir market prices was introduced applicable to the term that ended September 2001, banks had to deduct 60% of the unrealized losses from their earned
surplus. In the 2000s, cross-shareholdings among nonfinancial companies
started to rise again as defense measures against corporate takeovers and other uninvited contests for corporate control. However, with a growing interestin corporate governance, chiefly megabanks have been selling off shares intheir holdings.
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). As only a small part of such assets is actually bought or sold, the total asset value is computed by multiplying the totalof such assets by the prices formed through such transactions. For instance,
the total market valuation of stocks listed on the First Section of the TSE asof November 30, 2015, was ¥596,285.0 billion ($ at the rate of ¥115 to thedollar), but the value of shares actually traded on that day was ¥2,909.1 billion. This indicates that the total market valuation of stocks listed on the TSE
is computed on the basis of share prices formed through the trading of a little
under ¥3 trillion worth of shares. (Actually, it represents a sum total of themarket valuation of all listed stocks, and the above explanation is intended tosimplify 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 such investment opportunities, equalizes the dividend yield on a given stock to the market rate then prevailing. However, if 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 a larger
portion of their profit as retained earnings. (Typical of this tendency are theformer IBM and Microsoft, which had no dividends until the end of 2002.)
Under such circumstances, dividend yields cannot be computed, and the levelof stock prices becomes irrelevant as an indicator for investment.
As highly profitable business enterprises increase their capital by reinvesting their earnings instead of issuing new shares, their per share profit increases and the price of their stock rises proportionately thereto. If their stockChap. IV The Stock Trading Market

Table IV-3.

Stock Split-ups and Changes in Divisor

Before stock split-ups

Issue

After stock split-ups

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

ModifiedDow
average

1212Sources: J. H. Lorie and M. T. Hamilton, The Stock Market, 1973 (Japan Securities Research Institute, Japanese translation Shoken kenkyu, Vol. 51,
1977, pp. 73ff,)

Chart IV-4.

Stock Price and Capital Increase of Toray Industries

(yen)
350
300

¥314
¥275

250
200

a 1:0.5
○
b 0.5
○

150
100

¥327

¥133

a 1:0.8
○
b 0.2
○

a 1:1
○

¥168

¥161

¥334
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 Trading Market

price rises too high, small investors cannot buy their shares, with the resultthat the marketability and liquidity of their shares suffer. Therefore, suchcompanies seek to recover the marketability of their shares by lowering theirstock prices by means of stock split-ups or stock dividends—forms of issuing
new shares that do not require payment for the new shares.
If a significantly large number of companies follow this capital management policy, such practice is bound to affect the stock price indicator. Assuming that other conditions remain unchanged, a stock split-ups at the rate ofone to two would half the price of such shares. However, as the number ofshares a shareholder of such company holds would increase twice as a resultof the stock split-ups, and the company’s price would be halved, the total
market value of the shares held by such a shareholder would not change. The
Dow scaled average represents the average of original stock prices as seenfrom the standpoint of pre-stock split-ups shareholders. The Dow Jones Industrial Average is computed by changing the divisor each time stock splitups or other dilutions occur.
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 is
an index that measures changes in the stock prices of 225 leading issues listed on the TSE representing various industry groups. Whenever a stock splitups or dividend is reported or whenever any of the 225 issues is replaced byanother issue, the Nikkei average is computed by using a changed divisor.
The Nikkei 225 started with a divisor of 225. Subsequently, however, the divisor has continued to decrease and dropped to 25.492 on November 30,
2015, with the result that its multiple has risen to 8.83. This means that when
the simple average of the stock prices of the 225 issues rises or falls ¥20 ($ atthe rate of ¥115 to the dollar), the Nikkei average will increase or decrease¥176.6. The Dow average is designed to restore the continuity of stock prices
on the basis of the total market value of the original shares (shares before thestock split-ups) held by an investor when shares are issued without requiring
payment therefor (stock split). However, it actually shows a rise or fall several times larger than what occurred in the simple average of stock prices.
Acknowledging that the Nikkei average no longer reflects fairly thechanged market reality brought about by the information technology (IT)boom, in April 2001 the Nihon Keizai Shimbun (Nikkei) replaced as many as
34 issues out of the 225 issues at a stroke. However, as the stock prices of ITrelated issues fell sharply in June of the same year, the new Nikkei average
dropped more sharply than the old Nikkei average would have. As the Nikkei

65

Chap. IV The Stock Trading Market

Chart IV-5.

Transitions in Stock Prices
Nikkei average (left)
JPX Nikkei 400 (left)(Points)

TOPIX (right)(Points)

25,0002,500

20,0002,000

15,0001,500

10,000

1,000

5,000

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14
(Year)

500

Note: The record date of JPX Nikkei 400 is August 30, 2013 (record value of 10,000 points).
Sources: Nikkei Inc., Japan Exchange Group (JPX).

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)(billions of yen)
4,000

800

3,500

700

3,000

600

2,500

500

2,000

400

1,500

300

1,000

200

500

100

0

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14
(Year)

Source: Japan Exchange Group.

066

Chap. IV The Stock Trading Market

average is an unweighted average computed on the basis of simple averagestock price, it is strongly affected by a rise or fall in the prices of scarce
stocks or high-priced stocks. This is why market watchers pointed out thepossibility of a manipulation of the stock index when trading in the Nikkei
stock index futures increased sharply in the first half of the 1990s.
Indexes of total market value that are designed to remedy these shortcomings of the Dow average are the New York Stock Exchange Composite Index, Standard & Poor’s (S&P) 500 index, and the TOPIX. The TOPIX represents the total market value of all issues listed on the First Section of the TSE
computed on the basis of their total market value of 100 as of the TOPIX’sbase day (January 4, 1968).
Characteristics of the TOPIX are (1) that it covers all issues listed on theFirst Section of the TSE and therefore has become an index that reflects
changes occurring in the nation’s industrial structure and stock price trends
and index that can avert the discontinuity that might occur when its component issues are replaced by others; (2) that one can easily determine changes
occurring in the scale of the market as measured in terms of its total market
value; and (3) that it is weighted by the number of shares of listed issues andtherefore is relatively immune to a rise or fall in the prices of scarce stocks or
high-priced stocks. From January 6, 2014, the Japan Exchange Group announces the JPX-NIKKEI 400 Index, which is composed of companies thatmeet requirements of global investment standards, such as efficient use ofcapital and investor-focused management perspectives.
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. Therefore, the comprehensive yield that adds dividends to capital gains has been used. And a growing number of investors have come to attach importance to the price earning
ratio (PER), which is the quotient of the per share stock price divided byprofit, i.e., a reciprocal of return on investment.
The reason that the PER became a popular indicator for investment was
the growth potential of issuing companies. In other words, as companies withhigh-growth potential continued to follow capital management policies that
attached importance to retained earnings and the reinvestment of profit, dividend yield (a traditional indicator for investment) decreased, making it difficult for brokerage firms to put out buy recommendations on such shares. A
phenomenon representative of this was what was known as the yield revolu-

Chap. IV The Stock Trading Market

Chart IV-7.

67

Nikkei Average 1-Year Return on Investment (Year-on-Year Comparison)

Source: Yahoo! Finance.

Chart IV-8.

Transitions in PER

Note: PER figures are estimates for the first section of the TSE.
Source: Japan Exchange Group.

68

Chap. IV The Stock Trading Market

tion—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, the need arose to link the growth potential of a company to the level of its stock price one way or another in order for brokeragefirms 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 theunderlying shares are bought and sold. Therefore, when the shares of a company traded are at a high multiple, it means that the market believes that thecompany has high growth potential. Actually, securities companies compare
the PER of an issue with the industry average or with other issues belonging
to the same industry group, on the basis of which they determine whether theissue is overvalued or undervalued. What is more, the PER is used not only
as an indicator of share prices of individual issues but also as a measure tocompare the stock price level of a country with the levels of other countries.
Today, it has thus become one of the typical indicators of stock prices.
However, while stock yield can be compared with an objective indicator(such as market interest rates), the PER has a drawback in that it can be compared with other indicators only relatively. For instance, as is often pointed
out, the PER of the S&P 500, one of the major stock indexes of the UnitedStates, has moved between 15 and 30 since the war, but the Nikkei 225 of Japan has risen as high as 80 in the past. (At November 30, 2015, the unconsolidated PER of the TSE First Section stood at 15.5.) The difference between
the levels of the PERs of the two countries was attributed to the difference inthe business accounting system (notably, the method of depreciation) and thecross-shareholding system of Japan. To be sure, it is possible that these factors affected the PER level of Japan. More important is the fact that there wasno 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 charges are deducted from taxable income (which,therefore, cuts into earnings), but investment in plants and equipment underlying such depreciation contributes 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 company based in its share price. The PCFR is computed by dividing the stock price then prevailing by the sum of the after-tax in-Chap. IV The Stock Trading Market

Chart IV-9.

69

Dividend Yields of TSE First Section Companies and Long-Term Interest
Rates

Sources: Tokyo Stock Exchange, Bank of Japan.

Chart IV-10.

TOPIX and PBR Ratios of TSE First Section Companies

Source: Tokyo Stock Exchange.

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 Trading Market

come and depreciation charges for the term, minus any dividends and officers’bonuses. As depreciation charges are retained and reinvested at a later
date, they are an important factor to take into account in assessing the growthpotential of the company, as they indicate its real earnings and cash flow.
The PCFR is generally used in comparing the stock price of a company
with the stock prices of other companies belonging to the same industry
group and particularly in evaluating the stock prices of high-tech companies
whose future competitiveness is largely determined by the scale and components of their capital investment.
Another frequently used indicator for investment is the price book value
ratio (PBR), which shows the relationship between net asset value owned by
a company and its stock price. The PBR of a company is computed by dividing its stock price by its per share net assets. The net assets of a company
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 thetotal assets listed on the debit side of the balance sheet. In other words, it is
the net assets that would remain after repaying all the debts of a company outof the proceeds of its assets when the company is dissolved at a certain pointof time. The PBR is an indicator that compares the stock price of a company
prevailing at a given time with its per share liquidation net asset value.
Therefore, when the PBR of any company falls below one (or below its per
share liquidation net asset value), the stock price of such company 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 per share bookvalue of its issuing If the actual asset value of the land and shareholdings of acompany falls below 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, companies will have toactively seek to merge with, or acquire, another company. In fact, a string ofcorporate mergers and acquisitions (M&A) did happen 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 1.3 on November 30, 2015.
8. The Margin Trading System (1)Shin’yo 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 buys a certain num-Chap. IV The Stock Trading Market

Chart IV-11.

Financial
institution,
etc.

Bank ofJapan

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

Outline of Margin Trading and Stock Lending Transactions

Financial instruments
business operator

Margin transaction
purchasing customer(Purchase
consignment)
Loan application

71◦Margin Trading (between a customer and a financial instruments company)
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.
◦Stock lending transaction (between a financial instruments company 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 substitute security 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 stock lending transaction received bya 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, Inc. 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.
This deposit receipt also serves as collateral security when a call money dealer borrows funds from the
Bank of Japan. In other words, a system is in place to have the funds necessary for the loan transaction
to be provided by the Bank of Japan to a securities finance company through a call money dealer withstock certificates as substantial collateral security.
Note: The margin rate and the ratio of collateral value above may change based on margin transaction
regulations.

72

Chap. IV The Stock Trading Market

Table IV-4.

Comparison of Standardized and Negotiable Margin Transactions
Standardized margin transactions

Negotiable margin transactions
30% or more of trade

Margin deposit

30% or more of trade

Loan rate (negative interest)

Rate set by financial instruments Agreement by parties
exchange

Repayment due date

Up to six months

Eligible issues

Issues approved by exchange

In principle, all listed stocks

Rights processing

As determined by exchange

Agreement by parties

Financing

Available

Not available

Agreement by parties

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

ber of shares of a stock, or sells unowned shares, with funds borrowed from afinancial instruments company (securities company) by depositing a margin
with such financial instruments company. This method thus gives the investor the advantage of buying or selling a certain number of shares without
owning the full amount of funds required to pay for such shares or the fullnumber of shares to be sold. On the other hand, the financial instruments
company that receives such an order from its customer must settle the transaction on the fourth business day from the date of such transaction. As there
was no stock lending market or securities financing market in the early days,
a securities finance company was created to help financial instruments companies reduce their burden of having to provide cash or stock certificates forthe settlement of such margin trading. This is called a stock lending transaction.
The lending transaction is one in which a securities finance company lends
a financial instruments company, through the settlement organization of astock exchange, funds or stock certificates that are approved as“margin trading issues”under an exchange’s system and that are needed to settle a margintransaction. The securities finance company can save costs and expenses byinternally offsetting applications for a loan of shares of a certain stock against
those for lending shares of the same stock—more specifically, by lending themoney it collects 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 shortageby borrowing the amount of such shortage from a bank, the call market, or
the Bank of Japan. When a shortage of stock certificates develops after offsetting, it can borrow them by inviting bids from financial instruments companies and institutional investors (see the chart on the next page ). Stocks thatcan be margin traded or lent for margin trading purposes are called margin

Chap. IV The Stock Trading Market

73

trading issues or loanable issues. Margin trading issues are selected fromamong listed stocks, etc., based on standards set by the financial instruments
exchange. On the other hand, loanable issues are selected from the perspective of ensuring liquidity to handle speculative demand based on their liquidity or the number of holders. Moreover, there are added restrictions on theamounts that can be borrowed.
The securities finance companies are the successors to the agencies that
had handled the deferred settlement of short-term futures transactions (timebargains) before the war and that were recognized as moneylenders after the
war under the Law Concerning the Regulation of the Money-Lending Business. These agencies filled the gap created by deferred settlement by making
the payment (or by delivering stock certificates) on behalf of the buyer (orthe seller) and by taking delivery of stock certificates (or funds) as collateralas the case may be. Because the role securities finance companies play in themarket has grown along with expansion in margin trading, to strengthen theirfunction the government made them subject to licensing by the Minister ofFinance (currently the Prime Minister) in April 1956. Since then, there has
been significant consolidation among securities finance companies serving
each regional stock exchange. Presently, they have been consolidated into
two firms: Japan Securities Finance (Tokyo) and Chubu Securities Finance(Nagoya).
9. The Margin Trading System (2)In 1998, the restrictions on financial instruments companies 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 transactions, allowing financial instruments companies to freely determine prices,interest rates, and contract terms between themselves and their customers. At
this juncture, financial instruments exchanges also began to determine prices,interest rates, and contract terms, etc., for margin transactions on their markets, leading to these transactions being called standardized margin transactions (see Table IV-6 above). Negotiable margin transactions became increasingly popular after they started to be used in Internet trading in Japan in
2003, and account for about 20% of all margin purchase balances in recent
years.
Looking at the proportion of stock lending loan balances in margin stockbuying balances, the dependency of financial instruments companies on stock
lending transactions almost uniformly declined up to 1988 because of theirgrowing ability to finance themselves out of internal reserves. However, the74

Chap. IV The Stock Trading Market

Chart IV-12.

Proportion of Margin Loan Trading in Overall Trading Value(trillions of yen)
100
90
80
70
60
50
40
30
20
10
0

(%)
60
50
40
30
20
10

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Margin buying balance

Stock lending loan balance0

Loan balance/selling balance(units on right axis)

Note: Margin buying balance is total of standardized and negotiable system balances.
Source: Complied using data from the Web site of the Tokyo Stock Exchange.

Chart IV-13.

Margin Transactions and Stock Lending Balances(trillions of yen)

(%)

16
14
12
10
8
6
4
2
0

90
80
70
60
50
40
30
20
10
0

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Margin selling balance

Stock lending loan balance

Stock lending balance/selling balance(units on right axis)

Note: Margin selling balance is total of standardized and negotiable system balances.
Source: Complied using data from the Web site of the Tokyo Stock Exchange.

market’s dependency on stock lending transactions began to rise again in the
1990s. Factors included the deterioration in the financial positions of financial instruments companies following the bursting of the economic bubble,
the emergence of Internet trading, and a recovery in stock market prices starting in April 1999. In 2005, the dependency of financial instrument companies
on stock lending transactions neared the 50% mark. Since then, the depen-Chap. IV The Stock Trading Market

75

dency on stock lending transactions has taken a downward path because of
the greater diversification of financing sources for financial instruments companies. On the other hand, looking at the balance of shares used in lendingtransactions, the traditionally small amount of margin sales began to rise in
the latter half of the 1990s as institutionalization became active and cases offinancial instruments companies borrowing shares from securities financecompanies on their own proprietary accounts to settle buy orders increased.
By 2000, financial instruments companies’dependency on stock lendingtransaction had risen to 70%. Since then, this dependency has continued tofall because of the expanding number of sources of stock lending following
the lifting of restrictions on the stock lending market.
The margin transaction system and margin deposit operations havechanged and diversified along with the development of the securities market
in Japan. The margin transaction system was revised frequently to expand thenumber of available issues as a measure for controlling volatility in the market, with Second Section issues being added in December 1991 and the OTC
introducing a margin transaction system in October 1997. Margin deposit operations have changed as well. Stock lending transactions became available
for the JASDAQ market in April 2004 and a stock lending finance issues system for non-loanable issues was introduced in October 1995. Moreover, acommercial financing system became available for financial instruments
companies that needed cash to settle their margin buying trades in negotiablemargin transactions.
In addition to their licensed-based stock lending business, securities finance companies also (1) offer collateral loans for public bonds and generalcollateral loans to financial instrument companies or their clients, (2) run acommercial stock lending business other than the stock lending business forfinancial instruments companies, and (3) act as intermediates in bond lendingtransactions.
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 supply available. At astage in which information technology (IT) had not developed fully, securities trading necessarily had to be concentrated in one place in order toachieve that purpose. In fact, a number of stock exchanges had been established in different regions where there was a need for securities trading large
enough to justify their establishment, and trading in listed securities was required to be conducted on these stock exchanges. However, if there was alack of pertinent information or costs or delays in the transmission and exe-

76

Chap. IV The Stock Trading Market

Chart IV-14.

Trading Amounts of Exchange Transactions and OTC Transactions(trillions of yen)
1,200

(%)
12

OTC transaction
Exchange transaction

1,000

10

Percentage of OTC transactions to total transactions (right axis)

800

8

600

6

400

4

200

2

0

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0
(year)

Source: Produced by Daiwa Institute of Research Ltd. based on data of the Japan Securities Dealers
Association.

Chart IV-15.

Breakdowns of OTC Transactions(%)(trillions of yen)
80

80

Amounts of PTS trades
Amounts of trades other than PTS
Percentage of PTS against OTC transactions (right axis)

60

60

40

40

20

20

0

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0

(year)
Note: The sum of amounts of PTS trades and amounts of trades other than PTS equals the value of OTC
transactions in Figure 2.
Source: Produced by Daiwa Institute of Research Ltd. based on data of the Japan Securities Dealers
Association.

Chap. IV The Stock Trading Market

77

cution of orders, no arbitrage transaction—a practice that plays the role ofeliminating a price difference—took place even when an opportunity to makea profit by taking advantage of a difference in the price of one and the same
stock between stock exchanges arose. Under such circumstances, the duty toconcentrate securities trading on the stock exchange was necessary 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 integration
information transmission and execution of orders; delivery of securities, settlement, and custody are integrated by the computer networks and processedin real time, realizing a situation in which balanced prices can be foundthrough the computer networks installed at a plural number of markets. The
idea of market operation based on such an infrastructure of securities trading
is called inter-market competition. Meanwhile, as the number of institutional
investors in the securities market has grown, the need for a guarantee of anonymity and for a trading system designed to minimize the market impact costhas increased, and special forms of trading (large-lot transactions and basket
trade) also have increased. As complex trading rules can be instituted without
difficulty in the case of a computerized trading system, a trading system capable of meeting such 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. In Japan, the regulators haveauthorized negotiated trading in listed securities following the lifting of theban against off-exchange securities trading and have added a Proprietary
Trading System (PTS) to the types of 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 six to ten years), or superlong-term bonds (maturing in ten years or more)
to distinguish an issue’s term to maturity. In fiscal 2002 (ended on March 31,2003), the government introduced the STRIPS and (variable-rate) retail tenyear Japanese government bond (JGB) programs. Under the former program,the principal and individual interest payment components of JGBs designatedby the Ministry of Finance as“book-entry securities eligible to strip”may be
traded as separate zero-coupon government bonds (All fixed-rate JGBs issued on and after January 27, 2003, are eligible for the program). Subsequently, the government started issuing ten-year CPI (consumer price index)linked bonds, five-year bonds for retail investors, forty-year fixed-rate bonds,
and three-year bonds for retail investors in fiscal 2003, 2005, 2007, and 2010
respectively. Municipal debt securities can be roughly divided by type offunds into“public sector funds”and“private sector funds.”The former areraised through treasury investment or loan agencies or municipal government
and financial institutions, while the latter are raised in the public market orunderwritten by banks and other financial institutions. Among these funds,
the funds raised in public markets are divided into nationally placed municipal bonds, jointly offered local government bonds, and municipal bonds targeting local residents (mini-local bonds). While the municipal bonds under-

Bank debentures

Yen-denominatedforeign bonds andforeign currency
denominated foreign bonds

Bank debentures

Kinko 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 Bank
Shinsei 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

written by banks and other financial institutions are called bank, etc.
underwritten bonds, they come in two types, funds borrowed on deeds frombanks and other financial institutions or debt securities issued in the market.
Government agency bonds are debt securities issued by various governmentaffiliated entities, such as independent administrative institutions. Agency issues can be categorized into government-guaranteed debts and non-guaranteed debt, with the latter being further divided into Fiscal Investment and
Loan Program (FILP) bonds that are publicly placed bonds and privately
placed bonds issued by certain special public 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 theform and maturities of five-year interest-bearing and one-year discount debentures. In addition, as bank debentures and government agency bonds fallwithin the category of“bonds issued by special public institutions, etc., under
special laws”stipulated in Article 2, Paragraph 1, Item 3 of the Financial Instruments and Exchange Act, they are sometimes called“special bonds(tokushusai).”Corporate bonds are those issued by private-sector companies
and are also known as industrial bonds. In addition to nonfinancial enterprises, banks and consumer finance companies may also issue corporate bonds.
Foreign bonds are defined as debt securities issued in Japan by non-Japanese
governments or corporations. Those denominated in yen, in particular, areseparately classified as yen-denominated foreign bonds.
2. The Present State of the Bond Issuing Market
The total value of public and corporate bonds issued in fiscal 2014 (ended
March 31, 2013) decreased 2.6% from the previous year to ¥204.6 trillion.
The breakdown of issuance is described below. Of this amount, ¥176.1 trillion, or 86% of the total value, was accounted for by government bonds, underscoring their dominant presence in the public and corporate bond market
in Japan. Up until fiscal 2008, JGB issuance had been on the decline alongwith the upswing in the central government’s financial position, but given thedeterioration in the government’s finances caused by the slump in the economy following the Lehman Shock in September 2008, it has been on the upswing since fiscal 2009. JGB issuance can be broken down into superlongterm government bonds (¥31.8 trillion); long-term government bonds, including those sold to individual investors and those whose interest rates arelinked to the consumer price index (¥33.6 trillion); medium-term government
notes (¥68.4 trillion); treasury bills (¥26.7 trillion), and bonds for retail investors (¥2.6 trillion).

Chap. V New Issues of Bonds in the Primary Market

Table V-1.

81

The Value of Bonds Issued(¥100 million)

Total of public
Government
Government
Superlong-term
Inflation-indexedbonds publicly
securities sold on
Long-term bonds
bonds
bonds
bonds
offeredthe market
FY
No. of Amount No. of Amount No. of Amount No. of Amount No. of Amount No. of Amountissues issued issues issued issues issued
issuesissuedissuesissuedissues issued
2013
774 1,969,786
72 1,801,712
72 1,684,633
11 291,620
5 337,268
1
6,467
2014
756 1,912,241
82 1,760,647
82 1,649,641
9 308,563
5 336,070
2
19,135
Medium term
Medium term Individual investor Short-term discount Bonds subscribed tobonds (5 year)
bonds (4, 2 year)
bonds
bonds
by the Bank of Japan
No. of Amount No. of Amount No. of Amount No. of Amount No. of Amountissues issued issues issued issues issued
issuesissuedissuesissued2013
8 352,157
12 361,763
24
33,491
12 299,994－
117,080
2014
6 351,582
12 331,765
36
26,326
12 267,000－
111,006
FY

GovernmentFILP agency
guaranteed bonds
bonds
No. of Amount No. of Amount No. of Amountissues issued issues issued issues issued
2013
421
70,69469
50,597212
46,783
2014
407
69,42668
42,197
199
39,997FY

Municipal bonds

Corporate bonds withconvertible bonds
type new share
FY
subscription rights
No. of Amount No. of Amount No. of Amount No. of Amountissues issued issues issued issues issued
issuesissued2013
473
82,688462
81,423
1
500
10
765
2014
445
88,125439
87,1551600
5370
Total of privatebonds publicly
offered

Straight bonds

Asset backed
corporate bonds

Discount bank
Interest-bearing
debenturesbank debentures
No. of Amount No. of Amount No. of Amountissues issued issues issued issues issued
2013
121
26,18300121
26,1832014
121
24,99200
121
24,992FYBank debentures

Nonresident bonds Yen-denominated(yen denominated) foreign bonds
No. of Amount No. of Amountissues issued issues issued
2013
90
21,742
90
21,742
2014
75
20,86175
20,861FY

Total of bonds
No. of Amountissues issued
2013 1,458 2,100,399
2014 1,397 2,046,218
FY

Notes: 1. Amounts are in hundreds of million yen and decimal points have been rounded off.
2. The total of bonds is the aggregate of public bonds publicly offered, private bonds publicly offered, bank debentures,and nonresident bonds.
3. Public bonds publicly offered include government securities, municipal bonds, government-guaranteed bonds, andbonds issued by investment and loan agencies.
4. Private bonds publicly offered include straight bonds, asset backed corporate bonds, and corporate bonds with convertible bonds type new share subscription rights.
Source: Japan Securities Dealers Association.

82

Chap. V New Issues of Bonds in the Primary Market

In fiscal 2014, ¥6.9 trillion worth of municipal bonds were publicly offered— approximately 7 times greater than the volume (¥940 billion) of
those issued 20 years ago (fiscal 1990). The increase is basically due to thedeterioration in the fiscal position of local governments, resulting in the introduction of publicly offered municipal bonds targeting local residents infiscal 2001 and publicly offered joint local government bonds in fiscal 2003.
Among debt securities issued by government agencies, government-guaranteed bonds amounted to (¥4.2 trillion) and FILP agency bonds (¥4.0 trillion). Following the reform of the fiscal investment and loan program, theGovernment Housing Loan Corporation issued ¥50 billion worth of the first
FILP agency bonds in fiscal 2000. Since then, the combined value of FILP
agency bonds issued has grown considerably.
The amount of bank debentures issued stood at ¥2.5 trillion, continuing to
decline from the ¥43 trillion recorded in fiscal 1995. These were all discountdebentures the issuance of which has decreased sharply from the ¥30 trillion
issued in fiscal 1995. No discount debentures have been issued since fiscal
2013. Behind this drop was the steady decline in operations of long-term
credit banks as suppliers of long-term capital to industry. Bank of TokyoMitsubishi (now the Bank of Mitsubishi-Tokyo UFJ)’s ceased issuing bankdebentures in March 2002, followed by similar decisions by Mizuho Corporate Bank in March 2007 and Aozora Bank in September 2011.
The total issue value of corporate straight bonds has followed an upward
trend in issuance, reaching ¥10 trillion. The desire of companies to obtain asafe source of funding in the aftermath of the Lehman Shock has prompted
an increase in issuance. However, in recent years, issuance has dropped a little, to ¥8.7 trillion.
After recovering from the default on Argentine government debt in 2002,
the issuance of yen-denominated foreign bonds increased for several years.
Recently, however, issuance has fluctuated strongly under the influence ofsuch external factors as exchange rates and the amount issued in fiscal 2014was ¥2.1 trillion.
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 (oron yield, the same hereafter), as underwriting by syndicates was discontinued
in fiscal 2006. In accordance with the terms of offering set forth by the Ministry of Finance, auction participants submit their bid prices and amounts,

Chap. V New Issues of Bonds in the Primary Market

Table V-2.
MaturityType of issue

Categories of Government Securities (Notes 1 to 4)

Short term (Discount)

Medium term bonds

Long term

6-month, 1-year

2-year, 5-year

10-year

Discount

Interest-bearing bonds

Minimum denomi- ¥10,000,000
nation¥50,000

Issuance method

Public auction BOJ switch

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

Price-competitive auction
Conventional style

Price-competitive auction Conventional styleNon-price Competi- Non-price Competitive Auction I
tive Auction

Non-price Competitive Auction
Non-price Competitive Auction I
Non-price Competitive Auction II

Transfer restriction Yes (Note 2)No

Issuance frequency 1-year discount bonds: monthly(FY2014 Plan)

Monthly

Maturity

83

Superlong-term bonds
20-Year

30-YearType of issue

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

15-year 1

Interest-bearing bonds

Minimum denomi- ¥50,000
nation¥10,000

Issuance method

Public auction

OTC sales (based Public auction
on subscriptions tooffering)

Auction method

Price-competitive auction
Conventional style

Yield-competi- －tive auction
Dutch auction¥100,000－

Dutch auction－
Price-competitive
auctionNon-price Competi- Non-price Competitive Auction I Non-pricetive Auction
Non-price Competitive Auction II Competitive
Auction II－

Non-price
Competitive
Auction II－

Transfer restriction No

Yes (Note 2)(Note 3)

No

Monthly

Quarterly

Not scheduled

Issuance frequency Monthly (Note 4)(FY2014 Plan)

Quarterly(Note 4)

Notes: 1. There have been no additional issues of 15-year floating rate JGBs or inflation-indexed JGBs since they were first issued in May 2008 and October 2008, respectively.
2. Short-term discount bonds are transferable only to corporations (including certain trustees); JGBs for individual investors are transferable only to individuals (including certain trustees).
3. Although inflation-linked bonds are not transferable to individuals, the transfer restriction has been lifted for inflationlinked bonds maturing in January 2016 and thereon effective January 2015, allowing holding of such bonds by individuals. The restriction on transfer to individuals applies to inflation-linked bonds maturing on or before December 31,
2015 even in and after January 2015.
4. The fiscal 2014 issuances of 20-year and 30-year bonds were, in principle, reopenings; bonds issued in March, April,and May were reopenings of the March issuance; those in June, July, and August were reopenings of the June issuance;
those in September, October, and November reopenings of the September issuance; and the issuances in January andFebruary 2015 were reopenings of the December 2014 issuance. The March 2015 issuance was partially the same issue
as the fiscal 2015 issuance. For 40-year bonds issuance, the May, August, November 2014 and February 2015 issuances were in principal all reopenings of the May 2014 issuance.
Source: Based on Ministry of Finance, Debt Management Report 2014, p. 44.

84

Chap. V New Issues of Bonds in the Primary Market

Chart V-2. Organization of Underwriting Publicly Offered Municipal Bonds at a GlanceIssuerPublic offering agreement(back-office work related
to the issuance of bonds)

Underwriting and distribution agreement(underwriting of publicly offeredmunicipal bonds)
Municipal bond underwriting syndicate

Trustee
Subscription certificates and payment

Underwriting
agreement

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

Purchase and payment

Distribution handlingagents (memorandumon handling
distribution)

Handling of distribution

Investors (institutional and individual investors)
Source: Daiwa Securities SMBC, Saiken-no joshiki (What Bonds are All About), 2009.

which are aggregated to determine the issue price and amount. Depending on
the type of securities to be auctioned, the issue price is set either in a conventional auction, where bonds are issued to successful bidders at their respective bid prices, or in a Dutch auction, where the issue price (yield) is set atthe lowest price (highest yield) among accepted bids. Other than competitive
bidding, two-, five-, and ten-year fixed rate JGBs are also offered through anoncompetitive bidding process that facilitates small and medium-sized bidders and through Non-price Competitive Auctions I and II reserved for special participants (22 companies are designated as of January 2014). Private
financial institutions handle subscriptions for individuals in offering JGBs forindividuals and in offering two-, five-, and ten-year interest-bearing JGBs
under the new over-the-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Chap. V New Issues of Bonds in the Primary Market

85

debts, etc. As of fiscal 2014, 34 prefectures and 20 cities that have been designated by an ordinance of the Ministry of Internal Affairs and Communications “( designated cities”) have issued municipal bonds through public offerings. In most cases, the issuer negotiates the terms of issue with anunderwriting syndicate that handles its public offering, under which the underwriting syndicate buys up whatever bonds remain unsold after the public
offering. Municipal bonds publicly offered on the joint issuing 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 price auctions. In thelatter, the terms are bid for competitively along with the lead manager position for the offering. FILP agency bonds are also issued as interest-bearing
bonds, and in issuing them, the issuing agency usually selects a lead manager
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 regulation, 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, the banks
had an extremely strong influence on individual corporate straight bond issues under the corporate bond trustee system. Even in the overall corporatebond market, banks had a greater voice than securities companies. However,as the role played by the bond trustee company system declined in the 1980s,
the Commercial Code was amended in 1993 to drastically change the system,and the regulations on the issuance of corporate bonds have been substantially eased.
The issuing corporation appoints managing securities companies and other
underwriters that together constitute an underwriting syndicate, a bond manager or a fiscal agent, and providers of other relevant services and obtains apreliminary credit rating. When preparations are completed, the underwriting
syndicate, under the leadership of managers, conducts pre-marketing in orderto build a book for the bonds. Along with this process, the issue terms of the86Chap. V New Issues of Bonds in the Primary Market

Table V-3.

Corporate Bonds Offering Amounts by Ratings(millions of yen, %)FY 2009

FY 2010

FY 2011

No. ofIssue
Proportion No. of
Issue
Proportion No. of
Issue
Proportion
issues Amount of issuance issues Amount of issuance issues Amount of issuanceAAA26745,000

7.6

59 1,360,000

14.1

23

480,000

6.0

AA＋

33

680,000

6.9

35

7.0

24

620,000

7.7

675,000AA

53 1,471,000

14.9

46 1,654,000

17.2

41

888,000

11.1

AA－

87 3,259,200

33.1

59 1,956,000

20.3

66 2,140,400

26.7

A＋

62 1,648,000

16.7

43

937,200

9.7

59 1,546,000

19.3

A

47

719,000

7.3

78 1,377,300

14.3

73 1,219,000

15.2

A－

42

928,700

9.4

53

9.1

44

8.3

BBB＋

16

195,000

2.0

42676,600

7.0

28

321,000

4.0

BBB

9

204,300

2.1

12

105,100

1.1

17

147,600

1.8

BBB－

0

0

0.0

2

10,000

0.1

0

0

0.0

375 9,850,200

100.0

429 9,629,000

100.0

375 8,027,000

100.0

Total

FY 2012877,800

FY2013665,000

FY2014

No. ofIssue
Proportion No. of
Issue
Proportion No. of
Issue
Proportion
issues Amount of issuance issues Amount of issuance issues Amount of issuanceAAA270,0000.9

260,0000.8

345,000

0.5

AA＋

41

965,000

12.0

53 1,170,000

14.8

34

845,000

9.9

AA

76 1,648,000

20.6

60 1,240,000

15.7

50

900,000

10.5

AA－

79 2,171,400

27.1

71 1,527,000

19.4

69 1,450,000

16.9

A＋

46

896,000

11.2

66 1,089,000

13.8

81 1,487,000

17.3
15.7

A

80 1,569,000

19.6

77 1,611,000

20.4

67 1,349,600

A－

37

338,000

4.2

54

767,000

9.7

63 1,352,000

15.8

BBB＋

23

278,100

3.5

24

265,000

3.4

25 1,071,000

12.5

BBB

10

78,4001.0

13

153,600

1.9

6

73,000

0.9

BBB－

0

0

0.0

1

1,400

0.0

0

0

0.0

394 8,013,900

100.0

421 7,884,000

100.0

398 8,572,600

100.0

Total

Note: Compiled on terms of issue date basis. Transportation and broadcast bonds included. Highest credit
ranking from an agency used.
Source: I-N INFORMATION SYSTEMS, LTD.

bonds are finalized and the offering begins. The book-building method is one
under which the lead manager asks syndicate member companies to survey
investors’interest in the bonds and then decides on the issuing terms on thebasis of the findings of that survey. Recently, many issuers employ“spread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 SMBC, Saiken no joshiki (What Bonds Are All About), 2009.

pricing,”a method under which the interest of investors is measured in termsof a spread over the yield of a JGB or an interest rate swap with the same
term, to determine the issuing rate.
During recent years, annual corporate straight bond issuance has remained
around the ¥8 trillion mark and featured mainly issues with high ratings anda notably small proportion of issues with low rating. The reason behind thistrend is that major institutional investors have limited their investment in corporate bonds to issues with ratings of A or higher. Conversely, most of the issuers of BBB rated bonds are infrastructure-related companies, such as railways and telecommunications, some of which target the retail investor
market. Furthermore, in contrast to the United States, there are hardly any
BB rated issues with high yields circulating in the market. In 2009, to stimulate the overall corporate bond market, JSDA formed the Study Group to Vitalize the Corporate Bond Market, in which a wide range of measures are being discussed by representatives of securities companies, financial
institutions, institutional investors, and related bodies.
Among bank debentures, the Aozora Bank, Shinsei Bank, and other longterm credit-related banks had issued discount bank debentures in the past but
issuance has been on the wane in recent years. Among other categories, interest-bearing bank debentures are issued in two ways: issuing debentures
through a public bond offering on a fixed day and selling them during a certain selling period. The selling period for the latter method is normally established twice a month. Debentures issued through a public offering are sold to88

Chap. V New Issues of Bonds in the Primary Market

institutional investors in units of ¥10 million or more, while those soldthrough a selling method are sold to individual investors in units of ¥10,000.
However, issuance of these debentures has been on the decline recently because of the increased diversification of funding sources.
5. Credit-Rating Agencies and the Credit Rating of Bonds
Credit rating is a classification of credit risk, indicated by a rating symbol
based on investigations of the certainty of payment of the principal of, andinterest on, a bond, and it is ordinarily given by an credit rating agency specializing in rating credit. Originally, the system developed in the bond marketof the United States and is believed to have taken root during the Depressionof the 1930s. It was introduced to Japan in the 1980s, and obtaining a credit
rating has become 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;and assigns a symbol shown in table V-4 on the basis of findings of such investigations. Normally, any debt security with an AAA rating indicates thatits issuer has the highest credit standing and is virtually free from the uncertainties of paying the principal of and interest on the obligation. The creditworthiness of a bond declines as its rating goes down, in order, from AAA to
AA, A, and BBB, and a 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 market has developed on a relatively large scale in the UnitedStates. This type of junk bond primary market did not exist in Japan becauseof a policy that excluded bonds that did not meet the eligibility standards
from the market. However, today no such regulations restrict the issuance ofjunk bonds because the eligibility standards were abolished in 1996. Nevertheless, few BBB-rated bonds, let alone junk bonds, have been offered on themarket.
Designated rating agencies now include both domestic players, such as
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. They recently also started rating municipal and FILP agency
bonds. In Japan, a new registration system of the credit rating agencies replaced the conventional system based on the Act for Partial Amendment ofChap. V New Issues of Bonds in the Primary Market

Table V-4.

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

Credit Rating
AAA

89

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
C

Creditworthiness is questionable and some factors require constant attention.
Creditworthiness is highly questionable and issuer is likely to default on financial obligations.
Issuer is likely to default on all financial obligations.
R&I believes that all of the financial obligations of an issuer are in default.

Japan Credit Rating Agency, Ltd. (JCR)
Credit Rating
DefinitionsAAA
The highest capacity of the obligor to honor its obligation to its financial commitment.
AA
A
BBB
BB
B

A very high capacity to honor its obligation to its financial commitment.
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.

CCC

There are factors of uncertainty that the obligation to financial commitment will be honored, and a possibility of default.

CCCD

A high default risk.
A very high default risk.
In default.

Credit Rating

Moody’s Investor Service
Definitions

Aaa
Aa
A

Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
Obligations rated A are considered upper-medium grade and are subject to low credit risk.

Baa
Ba

Obligations rated Baa are subject to moderate credit risk. They are considered medium grade and as such may possess certain
speculative characteristics.
Obligations rated Ba are judged to be speculative elements and are subject to substantial credit risk.

B

Obligations rated B are considered speculative and are subject to high credit risk.

Caa

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

Ca
C

Standard & Poor’s
Credit Rating
AAA
AA
A
BBB
BB
B
CCC
CC
C

D

NR

Definitions
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.

90Chap. V New Issues of Bonds in the Primary Market

the Financial Instruments and Exchange Act enforced in April 2010.
The outbreak of the U.S. subprime loan problem raised strong doubts over
the way ratings were given since credit rating agencies had underestimatedthe credit risk associated with subprime-related securities products and issued
high ratings. To begin with, there were criticisms pointing out that credit rating agencies tended to give generous ratings because their source of income
was rating fees collected from issuers. Meanwhile, from a different 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. Bond Management
A drastic reform of the conventional corporate bond trustee system was carried out by amending the Commercial Code in June 1993. Under this amendment, the conventional name“bond trustee company”was changed to“bondmanagement company,”and its function was clarified. More specifically, (1)the establishment of a bond management company was made mandatory, inprinciple, and the eligibility for becoming one is restricted to banks, trust
companies, and companies that have received a license under the Mortgage
Bond Trust Law; (2) services to be provided by a bond management company are restricted to the management of bonds that have been issued and areoutstanding; and (3) the power, duty, and liability of the bond managementcompany has been clarified. Put another way, the back-office services provided by the trust company at the time a bond is offered will not become thecore services of the bond management company, and the services to be provided by the bond management company after a bond 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 bonds of individual issuers has been legally
removed, and the power of the conventional bond trustee system regulating
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 sharply lowered; (2) by instituting exceptional provisions with respect to the mandatory establishment of abond management company (this applies when the face value of a bond certificate is in excess of ¥100 million), issuers can appoint a fiscal agent in lieu
of a bond management company, and instances of making do with a fiscal
agent have since increased; and (3) as the services to be provided by the bondmanagement company have been clarified, the lump purchases of defaulted

Chap. V New Issues of Bonds in the Primary Market

91

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

Substance

ArticleAppointment and Power
When a bond manager has A corporation issuing a bond must appoint a bond manager. However, when the face value Article 702 of the New
to be appointed
of a bond certificate is in excess of ¥100 million, and in such other cases as may be pre- Companies Act
scribed by an ordinance of the Ministry of Justice as one which poses no threat to the protection of bondholders, the issuer need not appoint a bond manager.
Qualifications for becom- Banks, trust companies, and equivalent financial institutions
Article 703
ing a bond manager
Matters commissioned
The bond manager will be commissioned to receive payments, to safeguard credit, and to Article 702
take other steps necessary for the management of bonds on behalf of bondholders.
Duty of the bond manager The bond manager must manage the bonds fairly and honestly on behalf of bondholders Article 704(). The bond manager owes a duty to bondholders“the fair and honest management duty”
to manage the bonds with a good manager’s care “( fiduciary duty as a good manager”).
The exercise of contracted power based on an agreement commissioning the managementof the bond is included in the management of the bond.
Power of the bond manager The bond manager has the power to receive payments related to the bonds and to take any Paragraphs 1 and 4 ofand all steps in and out of court that are necessary to safeguard the exercise of rights relat- Article 705
ed to the bonds on behalf of bondholders. When the bond manager deems it necessary totake such steps, it has the power to investigate the state of business and property of the issuer with the permission of the court.
Special regulation of the When the bond manager plans to take the steps described below, it must obtain a resolution Paragraphs 1 and 2 ofpower of the bond manager of a bondholders meeting.
Article 706(1) A moratorium on the payment for the entire bond, exemption from liability, or settlement(2) Actions taken to file a lawsuit relative to the entire bond, bankruptcy proceedings, reha- Item 8, Article 676
bilitation proceedings, or special liquidation of its issuer “( lawsuit”includes court-mediated settlement)
Under the law, the bond manager has the power to take these actions 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 must obtain a res- Paragraghs 1 and 2,
in taking steps for the pro- olution of a bondholders meeting, in principle, but the bond manager can express its objec- Article 740
tion on behalf of bondholders. To do this, however, the agreement commissioning bondtection of creditors
management can institute a provision otherwise.
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 liable for damages.
710
Legal special liability
The bond manager is liable for damages:
Paragraph 2 of Article(damages)(1) When the bond manager has received from the issuer of a bond collateral for the obli- 710
gation represented by such a bond or when the issuer has taken an action extinguishingsuch 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 issuer and a bondholders’meet- Article 711
manager and its liability
ing. (However, the bond manager must appoint in advance a successor who will takeover its job.)(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 commissioning the management of the bond. (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.

92

Chap. V New Issues of Bonds in the Primary Market

bonds that trustee banks had been making were discontinued, and this practice has since become established.
Under the New Companies Act adopted in June 2005 (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 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., commissioning the management of bonds (contractual power); under the new
Companies Act, however, the exercise of the contractual power is included in“the management of bonds”and the bond manager owes the duty of impartiality and good faith and the duty to exercise reasonable care and skill in exercising such contractual power; (2) when the agreement commissioning themanagement 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 the bond as a whole without obtaining a resolution of thebondholders’meeting; and (3) in taking steps to protect the creditors in thecase of a capital reduction or a merger, the bond manager may, in principle,
object to such capital reduction or merger without obtaining a resolution of
the bondholders, meeting.
The Study Group to Vitalize the Corporate Bond Market previously described takes into consideration the current situation in which a bond manager is not assigned and discusses in its report a wide of range of roles that abond manager may possibly undertake.
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 correspond to the former
and refer to bonds (1) from which the rights cannot be detached or separatelytransferred, (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 the subscription rights are 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 conver-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.
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 call 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

sion price of rights may be revised downward when the price of its underlying stock falls. Among these cases, bonds issued under the condition that theconversion price can be adjusted downward with a frequency of one or moretimes every six months are called“corporate bond with subscription rights
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 theother hand, as corporate bonds issued with detachable warrants are deemed aconcurrent 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, the money to be paid upon theexercise of warrants should be paid additionally, and the bond remains out-

94

Chap. V New Issues of Bonds in the Primary Market

standing.
“Structured bond”is the name popularly given to a bond structured with
derivatives. In recent years, various types of structured bonds have been issued. A bond linked to the Nikkei average is a structured bond that incorporates Nikkei average options trading. In general, when the Nikkei averagerises, the deal generates a higher return, but when it falls, the option is exercised, causing a loss, and the bond price falls below its par value. A corporatebond with a clause to convert it into shares of another company “( exchangeable bond”or EB) is a bond that incorporates a stock option of a company. In
general, when the stock price of such company rises, the deal generates ahigher return because the holder can acquire the option fee, but when theprice of its stock falls, the option is exercised, and the holder has to accept
the share at a fallen price and suffers a loss. However, unlike in the case of abond linked to the Nikkei average, the holder can hold the share until its
price recovers. Recently there have been fewer issuances of structured bonds
because of repeated cases of these bonds being sold to investors who did notadequately understand the risks involved, resulting in occasional court cases
contesting whether securities companies had violated their obligation toproperly explain these products before selling them.

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.
Conventionally, the trading volume on the bond secondary market waslimited and amounted to only ¥58 trillion in fiscal 1975, but subsequently
continued to increase and topped the quadrillion level in 2007. Although thetrading volume declined thereafter to levels around ¥7,500 trillion, it turned
upward in recent years and broke the quadrillion level again in 2014.
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 remained constant in recent years. Of an increase of ¥2,630
trillion in the trading volume of bonds from 2010 to 2014, JGBs accountedfor ¥2,623 trillion. As such, government securities outweigh by far other categories of bonds in overall fixed income trading volume. The dominance ofgovernment debts stems mostly likely from the difference in liquidity, which
in turn is mainly because government debts are considered risk free in Japanand 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(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 as well as proposed specific measures to creating a more efficient corporate bond market with higher transparency and liquidity. The re-96Chap. VI The Secondary Markets for Bonds

Chart VI-1.

Annual Amount of Purchasing and Selling of Public and Corporate Bonds(Face Value Basis) and Share of OTC Trades(trillions of yen)
14,00012,00010,000
8,000
6,000
4,000
2,000
0

Amounts of public and corporate bond trades (left)
Share of OTC trades (right)
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

100.000%
99.999%99.998%99.997%99.996%99.995%99.994%99.993%99.992%99.991%99.990%Note: Figures include gensaki trades and exclude corporate bonds with equity warrants.
Sources: Japan Securities Dealers Association, Japan Exchange Group.

port went 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 investors or transaction parties,
trading is dominated by bond dealers, such as securities companies. In trading bonds, it is important that the transaction needs of market participants be
met as quickly as reasonably possible. That said, due to the large number ofissues and wide variety of transaction forms, it is not easy to rapidly locate amatching counter party for a particular transaction. Therefore, in most bondtransactions, securities companies or dealer banks act as the counterparty,
buying or selling as principal to facilitate client trading. Furthermore, securities companies trade bonds based on their own market view, which adds totheir overall trading volume. 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 as well as buying and selling a range of debt securities as part of its
open market operations. Nonresident investors also are playing an increasingly large role in the Japanese bond market as a means of investing in yen.

Chap. VI The Secondary Markets for Bonds

Table VI-1.

97

Trends in Bond Transactions, by Type of Transaction Parties(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)
FY2005

FY2006

FY2007

FY2008FY2009City (commercial) banks

23,335(7,458)17,714(2,636)25,102(990)

28,411(2,553)29,087(3,706)29,10546,51140,14918,59925,407(－193) (－1,997) (－2,861) (－2,837) (－2,630)

Regional banks

2,741
(652)

2,419
(456)

3,264
(604)

3,733
(1,002)

4,479(1,172)

4,858(1,130)5,894(1,021)

5,768
(647)

4,140
(482)

4,550
(304)

Trust banks

19,656(4,182)

21,287(4,411)

24,190(4,086)20,089(3,976)24,176(7,599)24,931(6,411)

24,793(8,251)

22,322(8,137)

16,816(5,494)

14,183(1,301)Agriculture-related banking
institutions

2,012
(580)

2,698
(178)

1,814
(32)

2,665
(1,336)4,430(2,999)4,993(4,002)

3,356(2,221)

3,098(2,126)

1,764
(779)

1,307
(486)

Other banking institutions

5,534(2,253)6,801(2,926)

8,917(3,649)7,708(3,258)

5,794(3,277)

5,602(3,274)

5,437(2,334)

4,259(2,595)3,475(2,016)

2,636
(790)

Life and property casualty
insurance companies

3,281
(770)

3,577
(841)

3,756
(941)

4,594
(1,234)

3,651(1,743)

4,186(1,457)

4,583(1,896)

4,838(1,629)4,260(1,389)

2,703
(908)

Investment Trusts

3,265(2,398)3,377(2,271)

3,220(1,978)2,920(1,498)2,856(1,890)2,883(1,960)2,881(2,101)

3,080(2,281)

4,302(3,149)4,372(3,045)

Public employees mutual
aid associations

917
(591)

822
(564)

786
(611)

635
(459)

368
(245)

311
(208)

277
(166)

299
(213)

210
(151)

114
(54)

Corporations

916
(709)

1,216
(1,029)

1,130
(960)

1,113
(886)

1,301
(1,250)1,439(1,340)

1,013
(932)

1,209
(1,098)

1,282(1,105)695(630)

Entities not domiciled inJapan

20,642(3,346)24,860(5,057)30,233(5,808)28,834(8,184)

26,835(8,473)31,074(11,213)36,902(14,891)

34,133(15,995)

34,800(16,300)

35,730(20,103)

Others

FY2010FY2011FY2012FY2013

FY201442,40945,76344,84545,85653,33050,18752,737
58,91862,35560,973(－20,232) (－21,096) (－22,043) (－25,859) (－34,211) (－30,591) (－31,389) (－30,366) (－26,365) (－23,756)

Bond dealers

150,900(－298)

174,716(－187)

195,292(－450)

173,876(182)

168,735(248)

181,423(－315)

179,035 164,804(－570) (－1,173)

162,073(－661)

187,339(－223)

Total(including other investors)

280,468(4,693)308,814(948)

347,880(－36)

326,109(1,552)331,212(1,319)347,491(1,843)369,000(1,253)

318,446(2,222)

344,034(1,984)

348,505(1,432)

Note: These figures exclude the purchasing and selling value of repurchase agreements.
Source: Japan Securities Dealers Association.

They are active players in the short-term JGB market, trading T-bills, andothers. Among other categories, city banks (large commercial banks) andtrust banks trade large volumes of bonds. In response to the recent difficult
investment environment, city banks vigorously engage in bond trading inpursuit of trading profits as well as resell municipal and other bonds underwritten by them based on their own market view. It should also be noted thattrust banks have traditionally allocated large shares of assets under management or administration, including pension assets, to bonds.

98

Chap. VI The Secondary Markets for Bonds

When measured in terms of difference between transactions, almost all
business categories have been net buyers of bonds in recent years. The backdrop to this trend has been ongoing low interest rate climate caused by thestagnation in the economy, various financial crises, and other issues. The
continued trend among many business categories to be net buyers of bonds
can be attributed to financial institutions’reduced risk tolerance in their loan
portfolios. Another contributing factor to the net buyer trend has been theflight of risk money into the low-risk, high-liquidity JGB market in reaction
to the depressed stock market and the turmoil in the securitization and commodity markets. Interestingly, amid this net buyer trend, city (commercial)banks have become net sellers since fiscal 2010. This reversal likely reflects
the commercial banks desire to capture some profit given recent stable bondprices. On the other hand, the“others”category has become a consistent andsubstantial net seller of bonds because primary JGBs issued by auction are
settled via the BOJ and reported as sales by the central bank.
3. OTC Bond Trading Market
Depending on where transactions take place, the circulation of corporate
bonds may be 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 transaction forms and other specifications 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 inlarge lots and often carry out complex transactions involving more than one
issue; and 4) tax on bond interest varies according to the tax profiles of bondholders. Due to these reasons, bond transactions 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 security areconcentrated in a single marketplace, OTC trading, in essence, is a decentralized transaction process based on one-to-one negotiation 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 andthat there are as many OTC markets as there are securities companies. A wide
variety of transactions may be executed over the counter once an investor

Chap. VI The Secondary Markets for Bonds

Table VI-2.

99

Bond Trading by Market(¥10 billion)
Corporate bonds withequity warrant

Govt. bonds
FY2005
FY2006
FY2007
FY2008FY2009FY2010FY2011FY2012FY2013
FY2014

Othersstock exchanges

0

108

0

Over the counter

690,063146

32,171stock exchanges

0

102

0

Over the counter

956,614118

24,097stock exchanges

0

48

0

Over the counter

1,232,317

62

21,059stock exchanges

0

66

0

Over the counter

1,036,073

72

15,042stock exchanges

0

112

0

Over the counter

781,28652

9,175

stock exchanges

0

56

0

Over the counter

761,95070

10,175stock exchanges

0

40

0

Over the counter

829,983

46

10,773stock exchanges

0

30

0

Over the counter

841,74345

9,759

stock exchanges

0

27

0

Over the counter

936,753

24

9,231

stock exchanges

0

8

0

Over the counter

1,039,157

11

11,273

Note: The figures for exchange trading volume are double those actually reported by exchanges to account for both buy and sell sides of transactions.
Source: The Japan Securities Dealers Association and stock exchanges.

and a securities company agree on their terms. Private placement bonds aswell as publicly offered bonds may be traded, and the delivery and settlement
procedures are to be agreed upon between the buyer and the seller. The transaction price can also be decided between the two parties, often in reference tothe prices of other relevant financial products.
In OTC trading, a securities company 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 inventory or sells short. These types oftransactions are generally referred to as“principal transactions.”

100

Chap. VI The Secondary Markets for Bonds

Table VI-3. Breakdown of Major Bond Categories, by Outstanding Balance andNumber of Issues(¥10 billion, No. of issues)
Government Municipal
securities
bonds(public
offering)

FY2005 No. of issues
Outstanding balance
FY2006 No. of issues
Outstanding balance
FY2007 No. of issues
Outstanding balance
FY2008 No. of issues
Outstanding balance
FY2009 No. of issues
Outstanding balance
FY2010 No. of issues
Outstanding balance
FY2011 No. of issues
Outstanding balance
FY2012 No. of issues
Outstanding balance
FY2013 No. of issues
Outstanding balance
FY2014 No. of issues
Outstanding balance

GovernmentStraight bonds Corporate
guaranteed
Asset backed
bonds withbonds
corporate bonds equity
Bonds issued bywarrant
investment andloan agenciesBanddebentures(interest
bearing anddiscount)

332

1,386

925

2,560

110

2,247

666

31

53

53

1

26
2,143

357

1,620

1,005

2,500

96

671

34

55

53

2

23

372

1,836

1,108

2,560

84

1,978

681

38

57

55

1

22

395

2,010

1,200

2,486

55

1,838

677

41

58

57

1

21

410

2,208

1,350

2,513

41

1,664

716

45

61

60

1

19

423

2,376

1,474

2,614

32

1,514

755

48

63

63

1

17

449

2,525

1,634

2,684

21

1,272

781

52

64

63

1

15

470

2,655

1,772

2,733

17

1,163

814

55

66

61

1

14
900

476

2,805

1,916

2,844

18

848

57

69

61

0

12

493

2,917

2,021

2,883

22

789

873

58

69

60

0

12

Note: Outstanding balance figures are in trillions of yen.
Source: The Japan Securities Dealers Association.

4. Publication of Reference Prices for OTC Bond Trading (1)As OTC bond trading is a negotiated process between a securities company
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 ofChap. VI The Secondary Markets for Bonds

Table VI-4.

101

The System of Reference (Yields) Table for OTC Bond Quotations

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 Prices for OTC Bond Trading
The JSDA receives reports from its member companies affiliated with the system (18 securities companies as of September 30, 2015) 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.

bonds 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 Program for Publishing Reference Prices (Yields) for OTC Bond Transactions, which publishes (midpoint
between buy and sell quotes) quotes for publicly offered public and corporate
bonds that meet certain criteria. The program 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 the
publication of OTC Quotes for Public and Corporate 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. The program has since undergone many changes and improvements in response to the changing environment surrounding the bond market. During that period, the number ofpublished issues has ballooned from about 300 when the system was introduced to approximately 8,300. In August 2002, the JSDA changed the nameof the data to reference prices (yields) from standard quotes with the intent toclearly indicate that it is for reference purposes. At the same time, the program was enhanced by publishing high, low, and median values of surveyed
quotes in addition to their averages, which was the only data previously published.
Since the program started publishing bond quotes 50 years ago, its use has

102

Chap. VI The Secondary Markets for Bonds

Table VI-5.

History of the Program for Publishing Reference Prices (Yields) for OTC
Bond Transactions

Mar.1966
Over-the-counter quotes announced･ Date of announcement (Thursday ofeach week)

January 1977
･ Announcement of benchmark andstandard quotes (the benchmark
quotes are announced every day except Saturday and the standard quotes
are announced once a week, on
Thursday)Kinds of selectable issues
Government securities, municipal bonds,
government-guaranteed bonds, couponbank debentures, corporate bonds, telegraph and telephone (TT) coupon bonds
subscribed to by subscribers, discount TT
bonds, and such other bonds as may berecognized by the Japan Securities Dealers
Association (JSDA)(1) Benchmark quotes (for institutional investors) are selected from such issues
whose volume of trading correctly reflects the movement of the market.
(2) Standard quotes (for small-lot investors) are selected from one of government securities, municipal bonds, special bonds, bank debentures, corporate
bonds, and yen-denominated foreign
bonds, other than those listed in (1)above in terms of maturities and interest rates.
The same as above.

August 1978
･ The method of announcing benchmark quotes was changed (bid quotations and asked quotations are announced). Benchmark quotes areannounced daily (except on Saturday), and standard quotes are announced once a week (Thursday).
One of the government securities, municiJanuary 1992
･ Standard quotes on OTC issues are pal bonds, government-guaranteed bonds,
bank debentures, corporate bonds, andannounced daily.
yen-denominated foreign bonds that are
not listed is selected in terms of kinds,
maturities, and interest rates.
Publicly offered but unlisted bonds (with a
April 1997
･ No. of selectable issues was sharply remaining life of one year or longer) that
increased (the new system started op- maintain a fixed interest rate throughout
their life and redeem their principal in aerating.)lump sum were selected.
Publicly offered bonds (with paid-in prinDecember 1998
･ The duty to concentrate its trading on cipal, interest, and redemption money all
the exchange market was abolished. paid in yen) are selected.
August 2002
The same as above.
･ Name of system changed to“Reference (Yields) Table for OTC Bond
Quotations.”In addition to averagevalues, highs, lows, and midpoints
are published.
The same as above.
December 2013
･ Decision made to revise the calculation method for corporate straight andother bonds and announce quotes earlier.
November 2015
The same as above.
･ Start of operation of revised system

No. of selected issues
No. of issues announced:
280(as of May 12, 1966)(1) Benchmark quotes:
Issues announced: 14(as of January 31, 1977)(2) Standard quotes:
Issues announced: 77(as of January 27, 1977)(1) Benchmark quotes:
Issues announced: 19(as of Aug. 31, 1978)(2) Standard quotes:
Issues announced: 137(as of Aug. 31, 1978)
Issues announced: 298(as of January 31, 1992)

Issues announced: 1,746(as of May 1, 1997)

Issues announced: 2,867(as of December 1, 1998)
Issued announced: 4,198(as of August 1, 2002)

Issued announced: 7,931(as of December 2, 2013)

Issued announced: 8,257(as of November 2, 2015)

Note: Selected issues reported on and after August 5, 2002, were transferred to the system of publishingreference statistical data on OTC bond trading.

Chap. VI The Secondary Markets for Bonds

103

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. This expanded function demands an even greater degree of confidence in the system.
As a result, in 2013 a review was made of the quotation system primarily
with regard to publishing reference prices for corporate straight bonds. The
new system arising from that review began operation in November 2015.
5. Publication of Reference Prices for OTC Bond Trading (2)To provide reference information on bond prices, the JSDA publishes Reference Statistical Prices for OTC Bond Transactions each business day basedon the values of quotations for trades with a face value of roughly ¥500 million reported as of 3:00 p.m. by Designated-Reporting Members (securities
companies and banks registered as members of the JSDA). This publication
system serves as an important infrastructure widely used by investors andmarket participants. With calls for further increasing the reliability of thispublication system, however, the JSDA made revisions primarily to the corporate bond part of the system and began operating the new system 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
Prices for OTC Bond Trading, stricter designation standards, such as themember’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-Reporting Members, the JSDA performs checks to detect (i) any inappropriate
quotations for each business day and (ii) any problems with the reporting
system of each Designated-Reporting Member.
(3) Revised calculation method for Reference Prices for OTC Bond Trading: When the reported bond quotations are relatively dispersed and there is amajor movement on the market, quotations that deviate significantly from theaverage 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 of reported quotations previously donemechanically would no longer be performed.

104

Chap. VI The Secondary Markets for Bonds

Chart VI-2.

Illustrated Flow of Procedure Up To the Publication of Reference Prices
for OTC Bond Trading
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 JSDA 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 of Publication of Reference Prices for OTC
Bond Trading and has the intent 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.

(4) Pushing back the time of reporting deadline and the time of announcement: This change was in consideration of non-reporting members who
voiced the need to push back the time of reporting deadline in order to become reporting members.
(5) Promoting better understanding of Reference Prices for OTC Bond
Trading: Easier-to-understand explanations on the nature, etc. of Reference
Prices for OTC Bond Trading, e.g., Reference Prices are values of mid-pricequotations for buys and sells, are provided on the JSDA website, etc.
6. Reporting and Announcement of Bond Transaction Information
Recognizing the importance of increasing transparency of information on
bond prices and securing reliability through providing bond trading data in
an aim to vitalize the bond market, the JSDA decided to publicize actual
prices of 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 bond transaction information: JSDA set out report-Chap. VI The Secondary Markets for Bonds

Table VI-7.
Revision measures(1) Stricter designation
standards for Designated-Reporting
Members

105

Revisions to Reference Prices for OTC Bond Trading
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-denominatedforeign bonds
the operations for OTC bond trades.”･ 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 manager.

(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
systems of Designated-Reporting Members
the JSDA･ 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
lowest quotations reported
bonds, yen-denominatedmethod of calculaforeign bonds
tion of reference
prices for OTC bondtrading(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
etc. of Reference Prices for OTC Bond Trading,derstanding of Refsuch as the possible deviation from actual tradeerence Prices forprices, on the JSDA website, etc.
OTC Bond Trading

ing requirements in its Self-Regulatory Regulations against securities companies (JSDA members) when they are on one side of a bond transaction. Reporting is required for the following bonds: (i) bonds are subject to public
offering or secondary distribution in Japan, (ii) bonds are issued in Japan, (iii)
all the principal, interest, and redeemed principal are yen-denominated (excluding short-term corporate bonds and corporate bonds with equity warrant).
Transactions subject to reporting include the following: (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; provid-

106

Chap. VI The Secondary Markets for Bonds

Chart VI-3.

Illustrated Flow of Reporting & Announcement of Bond Trading
Information

JSDA members
Transaction
information (*1)

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

JSDA

Announcement at
9:00 a.m. thefollowing day

Internet 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-4.

Information announced○Announced on November 5, 2015
Trade contract date: November 4, 2015
Issue code Issue name

Redemption Coupon Transaction vol- Transaction vol- Contracted [Reference]
date
rate
ume (face value ume (face value unit price Reference Stabasis) of ¥500 basis) of less (¥)
tistical Prices
million or above than ¥500 mil(Average Price)lion

000039023 XX Industries 3 2016/09/20

Chart VI-5.

✓

1.9

102.－－✓

102.××✓

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)Chap. VI The Secondary Markets for Bonds

107

ed, however, that transactions with a face value of less than ¥10 million may
be omitted from reporting).
(2) System of publicizing bond transaction information: The JSDA sets astandard of publicizing information on corporate bonds with“a rating of AA
or its equivalent and above”and discloses information on bond trades (limited to trades with a face value of ¥100 million or above) on its website on thebusiness day following the day on which reports on trades are received. Items
reported are: (i) contract date, (ii) issue code, (iii) name of issue, (iv) due
date, (v) coupon rate, (vi) trading value (face value is ¥500 million or above,or not), and (vii) unit price (unit price per face value of ¥100).
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 bondtransaction information on the liquidity of corporate bonds and to consider
revising the system if needed.
7. Book-Entry Bond Transfer System
In the past, investors have held bonds in various forms—more specifically, in
physical certificates that had been issued by the issuer; in registered form,
where bondholders are registered on the registry at the registrar designatedfor 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 (withina system established in 1980) among the accounts of brokers and other system participants (account management institutions).
In recent years, however, with the increasing bond trading volume and a
growing call for a flexible framework and an expedited process for the settlement of transactions, certificates, which need to be physically delivered, or
registered bonds, whose transfer requires amendment in records of bond-specific registries, hardly stood the test of practical use, while the book-entry
transfer system for JGBs had several shortcomings. This situation first led tothe argument for the review of the current settlement procedures for bonds
and, later, for the complete overhaul of the securities settlement system in Japan. There was a growing perception that Japan urgently needed to renovate
the existing system to create a safer and more efficient infrastructure thatwould make the country’s securities markets globally competitive. Against
this background, the securities settlement system reform law was enacted inJune 2002, and, pursuant to its provisions, the existing legislation for bookentry transfer was later amended and renamed the Law Concerning the BookEntry Transfer of Corporate Bonds and Other Securities with objectives in-

108

Chap. VI The Secondary Markets for Bonds

Chart VI-6.

Structure of Book-Entry Transfer System

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)

cluding the complete dematerialization of securities, the shortening ofsettlement cycles, and the reduction in settlement risk. The amended law provided for the legal framework of new book-entry transfer systems for corporate and government securities. On the basis of that framework, the BOJ renovated the existing JGB book-entry system in January 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.
These book-entry transfer systems have a multitier, tree-like structure, witha central custody and transfer agent–the BOJ in the case of JGBs, TBs, andFBs and JASDEC, in the case of the other eligible securities–on the top tier,from which account management institutions, securities companies, and otherinstitutions with respective master accounts in the system and system participants, other securities companies, and investors that have an account at oneof the account management institutions cascade down as subsequent tiers or
branches. Bond holdings of system participants are registered or recorded in
the transfer account book kept by the account management institution atwhich they have an account. In principle, all bonds are deposited with thecentral custody agency at the time of issuance, and the entire issue is demate-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:
new issues

Decrease:
Transfer
redemptions andretirement bypurchase

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

9,931

－

13,92019,270

Amount

6,406,615－

8,947,334

6,406,61

FY2006

No. of acc.

38,7401,210

211,083

65,45634,215,248

721,180

99,748,483

181,334,701

FY2007

No. of acc.

33,245

15,128484,041

72,81740,491,108

12,840,198

240,536,068

241,002,170

FY2005

No. of acc.

AmountAmount
FY2008

No. of acc.
Amount

FY2009No. of acc.
AmountFiscal 2010 No. of acc.
AmountFiscal 2011

No. of acc.
AmountFiscal 2012 No. of acc.
Amount
FY2013

No. of acc.

FY2014

No. of acc.

AmountAmount33,961

38,830492,394

73,29837,812,077

38,539,738

223,475,737

240,274,559

31,642

38,176411,272

71,202

38,124,350

32,846,953

132,878,030

245,552,257

29,501

36,849439,327

67,78837,212,947

32,691,251

146,347,996

250,073,952

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

Note: The JGB book-entry system began on January 10, 2006.
Source: JASDEC.

rialized. None of those book-entry bonds may be withdrawn over their life in
the form of either physical certificates or registered bonds.
The previously mentioned Securities Settlement System Reform Law also
provided measures to affect the abolition of the Corporate Bond Registration
Law following the setup of the book-entry transfer systems.

110Chap. VI The Secondary Markets for Bonds

Table VI-9.
Date

Reforms of Bond Delivery and Settlement System
Changes effected

April 1994 Delivery versus payment (DVP) of government bonds through the Bank of Japan
network starts.
April 1997 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 Transfer of Corporate Debt Securities Law (paperless trading in bonds, 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
are scheduled.
April 2012 Settlement of JGBs scheduled to be shortened (T+2)
1st half of FY2018 Target timing of enforcing shortened settlement of JGBs (T+1)

8. Secondary Market Yields and Terms of Bond Issues
Those who raise funds (fund raising party) by issuing bonds look for a method that offers the lowest possible cost. On the other hand, investors who buy
bonds choose issues that offer the highest possible return within the range oftolerable risk. In theory, the issue terms of a new bond (subscriber’s yield tomaturity) are determined at a certain level where opportunities for arbitraging
its subscriber’s yield to maturity and the secondary market yield (yield to maturity) of outstanding issues of a nature similar to that of the bond are balanced. When such a point of balance is achieved, it is said that“issue terms
that adequately reflect the secondary market conditions have been established.”Important conditions 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 can be said that in the Japanese bond market yields at the issueof bonds have come into line with yields of comparable bonds as the amountof new issues of the bonds and secondary trading volume of such bonds increased.
More specifically, while JGBs had been issued through the syndicated underwriting program for smooth and stable financing, the proportion of bondissuance through competitive auctions that more closely reflect market con-

111

Chap. VI The Secondary Markets for Bonds

Chart VI-7.

Changes in Issue Terms of Public and Corporate Bonds (yields)

(%)
1.1

Long-term government bonds

1.0

Publicly offered local government bonds – jointly issued

0.9

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

Government-guaranteed bonds

0.8
0.7
0.6
0.5
0.4
0.3
0.2
’13/4 5

6

7

8

9

10 11 12 ’14/1 2

3

4

5

6

7

8

9

10 11 12 ’15/1 2

3(year/month)

Chart VI-8.

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

(%)
0.35
0.30
0.25
0.20
0.15

Spread in secondary market yields

0.10
0.05
0.00
−0.05

Difference in issue terms (subscriber yield)

−0.10
−0.15
−0.20
−0.25
’13/4 5

6

7

8

9

10 11 12 ’14/1 2

3

4

5

6

7

8

9

10 11 12 ’15/1 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).

112

Chap. VI The Secondary Markets for Bonds

ditions 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 were determined in reference to the yield at issue of 10-year JGBs that had been issued earlier in the month. From time to time in the past, the spreads of issues
among the three classes of bonds deviated from market spreads. In recent
years, however, as investors started to focus more on differences in credit
quality, the spreads of issues among the three classes have increasingly tended to move more in line with credit spreads prevailing in the market. Anothercase in point that demonstrates the increased market orientation in bond issuance is that 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 and other factors. In response 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 (a conditional purchase or sale) is a form of trading
between a seller and a buyer of debt securities whereby the seller (or the buyer) agrees to repurchase (or resell) the securities at an agreed-upon price at astated time. When the holder of bonds sells them to a buyer under an agreement to buy them back (a gensaki sell transaction), the holder can raise funds
temporarily. When an investor buys bonds from a seller under a repurchaseagreement to sell them back to the seller (a gensaki buy transaction), the investor can earn a certain amount of interest by investing funds for a short period. When a securities company acts as an intermediary and arranges a repurchase agreement by introducing a buyer which wants to invest idle cash inbonds to a seller which wants to raise funds by selling bond holdings, such adeal is called a brokered repurchase agreement. When a securities company
that is in need of short-term cash sells bonds out of its inventory to an investor under a repurchase agreement, it is called a proprietary repurchase agreement. As the repurchase (or resale) price includes an amount equivalent to areturn on investment or financing charge based on an agreement by the buyer

Chap. VI The Secondary Markets for Bonds

Chart VI-9.

Trading Mechanism of Repurchase Agreements

Securities
company

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

113[Proprietary repurchase agreement]

Investor[Brokered repurchase agreement]

Selling
investor

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

Table VI-10.

Securities
company

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

Buyinginvestor

Turnover and Balance of Repurchase Agreements(¥10 billion)

Turnover ofbonds (A)

Turnover of repos
(B)

B/A

Balance ofrepos

FY2005722,379

441,714

61.1

3,017

FY2006

980,829

671,883

68.5

3,418

FY20071,253,438

905,505

72.2

4,953

FY20081,051,186

724,941

69.0

2,326

FY2009790,513459,243

58.1

1,589

FY2010772,195

424,664

55.0

1,518

FY2011

840,802471,756

56.1

2,538

FY2012

852,118

503,564

59.1

2,354

FY2013

946,008

627,538

66.3

2,641

FY2014

1,050,441

706,429

67.3

3,079

Source: Japan Securities Dealers Association.

and seller, the price does not usually tally with the market price of the bondprevailing at the time of its repurchase (or resale). Repurchase agreements
can also be concluded for commercial paper (CP) and certificates of deposit(CDs) and CPs issued overseas.
Despite some annual fluctuation, gensaki transactions have maintained asignificant level of trading volume because they conveniently meet the shortterm funding and cash management needs of investors. The outstanding balance of gensaki transactions reached almost ¥50 trillion at the end of fiscal

114

Chap. VI The Secondary Markets for Bonds

Table VI-11.

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

FY2005

FY2006

FY2007

FY2008FY2009FY2010FY2011FY2012FY2013

FY2014

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

21

0

12

0

18

0

8

0

68

0

88

0

97

0

13

0

0

0

2

Other banking
institutions

91

66

52

25

21

15

15

26

0

12

0

3

0

111

0

86

0

56

3

4

Investment Trusts

0

73

0

73

0

92

0

92

0

75

0

65

0 143

0 206

0

84

0

33

Corporations

1

55

1

37

3

31

0

31

0

47

0

43

0

0

0

31

0

25

Entities not
domiciled in Japan
Others82

50

1,147 1,255 1,728 1,012 1,960 1,760 678 466 446 446 538 560 616 1,200 511 1,293 588 1,759 865 1,951
62 24614 466 179 874 173 1,006 210 496 155 220 121 288

70 19655 12299 188Bond dealers

1,716 1,300 1,623 1,794 2,790 2,163 1,460 697 933 446 825 539 1,800 618 1,772 511 1,998 588 2,111 876

Total

3,017 3,017 3,418 3,418 4,953 4,953 2,326 2,326 1,589 1,589 1,518 1,518 2,538 2,538 2,354 2,354 2,641 2,641 3,079 3,079

Source: Japan Securities Dealers Association.

2007, compared with ¥7 trillion in the late 1980s. Although there have beensome dips in the balance since then due primarily to the effects of the global
financial crisis, the balance turned upward in 2010 and since has been at the¥30 trillion level.
Previously, the overwhelming majority of gensaki transactions were forshort-term government securities (TBs and FBs). Despite intensifying competition against other increasingly diversified money market instruments
these government bills have dominated the gensaki market, as the bills,
which have maturities and credit quality more suitable for gensaki transactions, have been increasingly issued to the public. More specifically, theseshort-term government securities dominated the market because 1) in 1986
the BOJ stopped reselling FBs that it had underwritten in the secondary market, shifting this operation to the gensaki market; 2) since 1999 the government has been issuing all FBs, in principle, directly to investors through public auctions; 3) the TB program got started in 1986; and 4) the issuance ofboth TBs and FBs has been regular and of large volume. Although the gensaki market developed 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 the massive overall issuance of government bonds.

Chap. VI The Secondary Markets for Bonds

115

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 werebought 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. By thisreform, new measures were instituted and existing provisions were enhanced
for risk management and other purposes, establishing the gensaki market inaccordance with global standards.
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.
1. The application of the ratio for computing the purchase/sale value ofbonds (the haircut clause): Under this clause, the unit price of bonds(collateral), on the basis of which a repurchase agreement is concluded is fixed at a level that is a certain percentage point lower thanthe price prevailing at the time the repurchase agreement is concluded, so that the value of the collateral will not be affected even whenthe market price of the underlying bonds falls.
2. The introduction of management of collateral, etc. (the margin callclause)Under this clause, when the market value of the underlying bonds
changes during the period of the repurchase agreement, the amount ofcredit extended to a party to the repurchase agreement is maintained byadjusting the collateral.
3. The introduction of the repricing system
In a case in which the market price of the underlying bonds falls
sharply from that which prevailed at the time of the repurchaseagreement, the parties to the agreement agree to cancel the agreement and renegotiate a new agreement on the basis of a price thenprevailing, on terms and conditions identical to those of the agreement thus canceled.
(2) Substitution of underlying bonds

116

Chap. VI The Secondary Markets for Bonds

Working Mechanism of the New Gensaki Transaction System

Chart VI-10.
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.

Chap. VI The Secondary Markets for Bonds

117

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. Such transactions are also known as saiken repo (bond repos) in Japan. When the collateral is cash, bond lending is
also used to procure or invest money on a short-term basis similar to gensaki
transactions.
Since market participants can obtain bonds through bond lending facilities
after trades are consummated, they can sell bonds that they do not own (sellshort) when they feel that the bond market is too expensive or particular issues are overvalued. Such operations contribute to greater liquidity in themarket.
Bond lending was instituted by legislation in 1989, following the lifting of
the practical ban on bond short selling. In fear of potential effects on the financial health of brokers and dealers and bond pricing, market participants
had previously been requested to refrain from selling bonds short. The ban,however, was lifted to help encourage active market making in cash bonds,
and arbitrage between cash bonds and futures and bond borrowing and lending was introduced as one of the means to locate bonds to deliver. 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“unsecured transactions”and“secured transactions”depending on whether they are collateral-

118

Chap. VI The Secondary Markets for Bonds

Chart VI-11.

Working Mechanism of Bond Lending (secured with cash deposit)

Start of transaction
Bonds
The seller of bonds(the lender)

The buyer of bonds(the borrower)
Cash

End of transaction
Bonds
Bond lending rates
The seller of bonds(the lender)

The buyer of bonds(the borrower)
CashInterest accrued fromthe cash deposit

Table VI-12.

The Balance of Bond Lending Transactions, by Types of Collateral (onthe basis of delivery and face values)(¥10 billion)
Bonds lent

Bonds borrowed

SecuredSecured by Unsecuredtransactions cash deposit transactions
7,534

239

Total

FY2005

7,658

7,897

FY2006

8,190

7,834

363

8,552

FY2007

9,478

8,669

395

9,872

FY2008

6,863

6,679

246

7,109

FY2009

8,227

8,005

275

FY2010

7,333

7,128

284

FY2011

8,296

8,286

207

FY2012

8,239

8,200

227

FY2013

10,0859,984

267

FY2014

10,483

10,310322

10,805

SecuredSecured by Unsecuredtransactions cash deposit transactions
8,547

Total

8,426

979

9,526

8,838

8,579

1,061

9,899

9,944

9,664

667

10,611

6,863

6,679

246

7,109

8,502

8,227

8,005

275

8,502

7,617

7,333

7,128

284

7,617

8,503

8,296

8,286

207

8,503

8,467

8,239

8,200

227

8,467

10,352

10,085

9,984

267

10,352

10,483

10,310322

10,805

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: Japan Securities Dealers Association.

Chap. VI The Secondary Markets for Bonds

119

ized 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 for financing and cash management without such specification are termed GC torihiki (general collateral trades). The size of the bondlending market (in terms of the balance of outstanding loans) has generally
been growing 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 ¥108 trillion at the end of fiscal 2014 (including approximately¥103 trillion in cash-collateralized transactions). The majority of bond lending transactions are conducted with government securities.

CHAPTER VII
The 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 as old as that of commodities trading.
However, it is generally believed that the precursor of today’s fully developed futures market emerged in Japan as the account-balancing trading inrice (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 in theform of margin transactions on the stock exchange in Japan in prewar years.
After the war, margin transactions were prohibited by the General Headquarters (GHQ) of the Supreme Commander for the Allied Powers (SCAP) in Japan in order to curb speculative transactions, but some people claim thatmargin trading with individual investors had been partly revived 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 the stock exchanges of 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’s“Osaka Stock Futures 50 (OSF50)”in 1987; the OSE’s
Nikkei 225 futures trading and the TSE’s TOPIX futures trading in 1988; andthe Tokyo Financial Exchange Inc. (TFX)’
s Japanese yen short-term interestrate futures, U.S. dollar short-term interest rate futures, and yen-dollar currency futures in 1989.

Chap. VII The Derivatives Market

Table VII-1.
Year
1972
1976
1977
1981
1982

1984
1985
1986

1987
1988
1989
1990
1991
1992
1996
1997
1998
1999
2000
2001
2002
2004
2005
2006
2008
2010

121

Years in Which Major Financial Futures of the World Were Listed

Other countries
Currency futures (mark-dollar and yen-dollar) (Chicago Mercantile Exchange, CME)
TB futures (CME)
Treasury bond futures (Chicago Board ofTrade, CBOT)
Eurodollar interest rate futures (CME)
S&P 500 futures (CME); T-note futures(CBOT); U.K. government bond futures andpound interest rate futures (London International Financial Futures and Options Exchange, LIFFE)FTSE 100 futures (LIFFE)Japan

Long-term government bond futures (Tokyo
Stock Exchange, TSE)

French government bond futures (Marché à
Terme International de France, MATIF), Nikkei average futures (Singapore International
Monetary Exchange, SIMEX)Japanese government bond futures (LIFFE)
CAC40 futures; PIBOR (Paris interbank of- TOPIX futures (TSE), Nikkei 225 futures
fered rate) futures (MATIF); BUND futures (Osaka Securities exchange, OSE)
(LIFFE)
Euroyen interest rate futures (SIMEX)
Euroyen short-term interest rate futures (Tokyo International Financial Futures Exchange, TIFFE)
Euromark interest rate futures (LIFFE); Nikkei average futures (CME); DAX futures and
BUND futures (Deutsche Terminborse, DTB)
Interbank interest rate futures (BM&F)
USD/RUB currency futures (MICEX)Euroyen interest rate futures (LIFFE); NAS- Medium-term government bond futures
DAQ 100 futures (CME); KOSPI 200 futures (TSE)(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), E Mini Russell
2000 futures (CME)
Single stock futures (One Chicago)
VIX index futures (CFE)RTS stock price index futures (RTS)
Exchange FOREX margin contracts (TFX)
Russell 2000 futures (ICE)
Nikkei 225 mini (OSE)
CSI 300 futures (CFFEX)

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).

122

Chap. VII The Derivatives Market

Strictly speaking, futures contracts are traded on the exchange. However,while a futures contract can be assigned to a third party, a margin has to bedeposited to provide against nonperformance of the contract. A forward contract is a transaction made between parties. While it cannot be assigned to athird party, it does not require the deposit of a margin. Transactions in currency or interest-rate futures are forward contracts often negotiated between
a bank and its client, and they are called forward-exchange agreements(FXA) or forward-rate agreements (FRA). Along with swap trading, these
two types of transactions played a leading 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 was conducted on the Tokyo Stock Exchange in
1985—the year in which they were issued in massive amounts—which was
the first financial futures trading in Japan. In 1988, superlong-term (20-year)
government bond futures (discontinued in 2002, but resumed in 2014) werelisted on 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 believed 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-

Chap. VII The Derivatives Market

Table VII-2.

123

The Trading Mechanism of Bond Futures

Medium-term govt. note Long-term govt. bond fu- Superlong-term govt. bondfuturestures
futures
Object of tradingStandardized 3%, 5-yr. Standardized 6%, 10-yr. Standardized 6%, 20-yr.
Japanese govt. bondJapanese govt. bondJapanese govt. bondObject of delivery Interest-bearing 5-yr. govt. Interest-bearing 10-yr. Interest-bearing 20-yr.
notes with a remaining life govt. bonds with a remain- govt. bonds with a remainof 4–5 yrs and 3 mos.
ing life of 7–11 yrs.
ing life of 19 and 3 mos.–
21 yrs.
Contract monthMar, Jun, Sep, Dec
Mar, Jun, Sep, Dec
Mar, Jun, Sep, Dec
cycle (3 contract months cycle (3 contract months cycle (3 contract months
traded at any one time)traded at any one time)traded at any one time)

Delivery date

20th day of Mar, Jun, 20th day of Mar, Jun, 20th day of Mar, Jun,
Sept, or Dec
Sept, or Dec
Sept, or Dec

Last trading day

7 business days preceding 7 business days preceding 7 business days preceding
the delivery datethe delivery datethe delivery dateTrading hours

0845–1102, 1230–1502, 0845–1102, 1230–1502, 0845–1102, 1230–1502,
1530–0300 the following 1530–0300 the following 1530–0300 the following
day
day
day

Trading unit

¥100 million in par value

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

Daily price limit

Standard: Base price±¥2.00Maximum: Base price±¥3.00Circuit breakermechanismIf, following a buy (sell) order for the central contract month placed (or contracted)
at the upper (lower) price limit, there is no trade execution at a price outside theprice range from the upper (lower price) limit to the immediately executable pricerange (for medium-term and long-term JGB futures, last traded price plus or minus
0.1 yen, for superlong-term JGB futures, last traded price plus or minus 0.3 yen) forone (1) minute, trading is suspended for 10 minutes.

Table VII-3.

¥100 million in par valueStandard: Base price±¥2.00Maximum: Base price±¥3.00¥100 million in par valueStandard: Base price±¥4.00Maximum: Base price±¥6.00The Trading Mechanism of Bond Futures

Medium-term govt. note fu- Long-term govt. bond fu- Superlong-term govt. bond
tures
tures
futures

2011
2012
2013
2014
2015

No. ofdeals

No. ofcontracts

0
0
0
0
0

0
0
0
0
0

Source: Website of JPX

No. ofdeals
6,802,032
8,769,717
9,132,122
8,791,553
8,677,576

No. ofcontracts

No. ofdeals

No. ofcontracts

74,43977,546
98,94496,722
95,509

－
－
－
5,041
2,978

－
－
－
1,117
127

124

Chap. VII The Derivatives Market

tures trading is usually compared with other countries in terms of the numberof 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. This
reflects the fact that the maturities of government bonds, though to a lesser
extent than before, tend to be heavily concentrated in 10-year issues, as withcash bond trading, which is not unique to the bond futures market.
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 kabusaki 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, High-Tech
40, Financial 25, and Consumer 40 stock index futures started to be traded on
the Osaka Securities Exchange and sector index futures contracts for threeindustries, electric appliances, transportation equipment, and banks, werelisted on the Tokyo Stock Exchange. The Tokyo Stock Exchange launched
S&P/TOPIX 150 stock index futures in 2001, while three futures contracts
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 futures,and in 2014, CNX Nifty futures were listed on the Osaka Exchange. Prior toChap. VII The Derivatives Market

Table VII-4.

125

The Trading Mechanism of Stock Index Futures

Nikkei 225 mini futures
Object of trading Nikkei stock average

Nikkei 225 futures
Nikkei stock average

TOPIX futures
TOPIX

Contract 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× TOPIX×¥10,000
1,000

Price asked

In units of ¥5

In units of ¥10

In units of 0.5 point

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

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

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

Last trading day One business day preceding One business day preceding One business day preceding
maturity
maturity
maturity
Trading hours

0900–1515, 1630–0300 the 0900–1515, 1630–0300 the 0900–1515, 1630–0300 thefollowing day
following day
following day

Daily price limit Standard: Base price±8%
1st Expansion: Base price±12%
Maximum: Base price±16%
Circuit breakermechanism

Standard: Base price±8%
1st Expansion: Base price±12%
Maximum: Base price±16%

If, following a contract or buy (sell) order for the central contract month for a futurestransaction 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 VII-5.

2011
2012
2013
2014
2015

Standard: Base price±8%
1st Expansion: Base price±12%
Maximum: Base price±16%

The State of Trading in Stock Index Futures

Nikkei 225 mini futures

Nikkei 225 futures

No. ofdeals

No. ofdeals

117,905,210
130,443,680
233,860,478
199,121,967
247,159,359

Sources: Website of JPX

No. ofcontracts
474,854
688,044673,736
622,140
370,373

19,294,064
19,523,347
30,907,691
25,917,773
27,678,234

No. ofcontracts
304,054378,804
420,037
439,623
416,961

TOPIX futures
No. ofdeals
14,608,165
15,192,439
22,714,121
20,877,250
22,303,956

No. ofcontracts
366,543
427,564594,299561,657
602,235

126

Chap. VII The Derivatives Market

all these domestic listings for Nikkei 225 futures, the Singapore International
Monetary Exchange (SIMEX, now SGX-DT) started trading SIMEX Nikkei
225 futures in 1986, followed in 1992 by dollar- and yen-denominated Nikkei 225 futures on the Chicago Mercantile Exchange (CME). In addition,
SIMEX now also trades mini-futures.
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. (In recent years, the U.S. and Germany are also experiencing a similar situation in which there is more than one contract having
good liquidity among 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)
applicable not to the cash market but to stock index futures trading, which
gives them the power to suspend trading when stock prices fluctuate violently. This system imposes restrictions on changes in stock prices in a manner
different from the circuit breaker system of the United States, which suspends both cash and futures markets at the same time.
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 Swapnotes 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Chap. VII The Derivatives Market

Table VII-6.

Trading unit

127

The Trading Mechanism of Financial Futures

3-month Euroyeninterest rate futures

U.S. dollar-Japanese yen Nikkei 225 margin conexchange FOREX margin tracts
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(%, 90/360 day basis)
dollarprice index
Price asked

0.005 (¥1,250)

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

0.01 (¥100)

No

Last trading day

Two business days pre- No
ceding the third Wednesday of the contract month(transactions effected on
the day of maturity must
be done by 11:00)

No

Final settlement
date

Business day following No
the last trading day

No

Final settlement
methodMaking up differences Making up differences(the final settlement priceis equal to ¥100 less TIBOR rounded to four decimal places)

Making up differences

Daily price limit

No

No

Trading hours

0845–1130, 1230–1530, Mon. 7:10 am to 6:55 am
1530–2000
following day
Tues. to Thurs. 7:55 am to6:55 am following day
Fri. 7:10 am to 6:00 am
following dayNo¥1 (¥100)

Fri. 7:55 am to 6:00 am
the following day
8:30 am–6:00 am the following day(5:00 am during U.S. Daylight Savings Time)(Click 365) 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, the market is split
with bond and stock futures and futures options trading on the stock exchanges, while interbank interest rate and currency futures and options aretraded on the TFX, a separate market established by some banks and securities companies.
On the TFX, trading has born concentrated from the start in yen short-term
rate futures, with little trading in other futures. To increase the liquidity ofthese financial futures, the market-making system was introduced for dollar

128

Chap. VII The Derivatives Market

Table VII-7.
3-month Euroyeninterest rate futures
No. of
deals
2011
2012
2013
2014
2015

7,201,901
4,734,503
5,044,236
2,708,318
2,000,289

No. ofcontracts
533,328
393,954410,310
243,219
175,190

Financial Futures Trading
U.S. dollar-Japanese yen ex- Nikkei 225 margin contracts
change FOREX margin contracts
No. ofdeals
31,441,164
9,212,876
20,120,943
12,550,958
12,919,505

No. ofcontracts
228,004
162,674
161,213461,345
718,119

No. ofdeals
812,346
1,609,751
5,153,821
5,065,037
7,840,578

No. ofcontracts
10,71738,793
123,761
139,036
159,146

Source: Tokyo International Financial Futures Exchange, Annual Statistics.

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 has not improved 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 Click365,
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, has been increasing.
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 option trading goes back to antiquity. According to Aristotle, the first known option agreement was written by Thales (ca. 620–ca. 555
BC), a Greek philosopher, on the sale of an olive press. The Chicago Board

Chap. VII The Derivatives Market

Table VII-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

129

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); PIBOR futures op- options (TSE)tions (MATIF); Euromark interest rate futures options(LIFFE); DAX options and BUND futures options (DTB)
Euroyen short-term rate futures options (TFX)
Nikkei average futures options (SIMEX)
NASDAQ100 options (CBOE), Japanese government
bond 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)

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 Financial Futures Exchange (presently Tokyo Financial Exchange).

130

Chap. VII The Derivatives Market

Options Exchange (CBOE) established in 1973 is the first fully developed
option market. By organizing individual deals negotiated between parties, amechanism of cash settlement was created, as is the case with futures trading,to enable investors to participate in transactions without requiring the delivery of the underlying commodity or financial instrument. And this was an epoch-making idea in the history of options trading.
The options trading started by the CBOE in 1973 spread to other financial
products, such as currency options trading, bond options trading, and bondfutures options trading, in 1982; stock index options trading in 1983; and tocurrency futures options trading in 1984. And it has since spread to major financial markets worldwide. In Japan, OTC bond options trading (trading inbonds 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 long-term government bond futures options in 1990,
and 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 stock index options (High-Tech
40, Consumer 40, and Financial 25).
Listed options are traded on exchanges. While they can be assigned 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 assigned 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) conducted simultaneously in 1982 constituted the first trading in listed bond options. And T-bond futures options were traded on the Chicago Board of Tradefor the first time in 1982. In Japan, the first bond options trading was conducted on the OTC market in the name of“trading in bonds with options”inApril 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.

Chap. VII The Derivatives Market

Table VII-9.

131

The Trading Mechanism of Bond Options

OTC bond options

Long-term government
bond futures options

Medium-term government
note futures options

Object oftrading

All debt securities other Call options or put options on Call options and put options
than convertible bonds long-term government bond on medium-sterm government
and warrant bonds
futuresnote futures

ContractmonthsFree

Last trading ―day

2 closest of Mar, Jun, Sep,
and Dec. (quarterly months)
plus a maximum of two otherclosest contract months

2 closest of Mar, Jun, Sep,
and Dec. (quarterly months)
plus a maximum of two otherclosest contract months

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 The business day following The business day following
months from the date of the date of trading
the date of trading
contract

Trading
unit¥100 million in par value One contract on long-term One contract on long-term
government bond futures
government bond futures

Price asked ―¥0.01 per par value of ¥100

¥0.01 per par value of ¥100

Exercise
price

21 prices at ¥0.5 intervals, additional prices set according
to price movement in underlying futures.

21 prices at ¥0.5 intervals, additional prices set according
to price movement in underlying futures.

Standard: Base price ±¥2.10
Maximum: Base price±¥3.00Standard: Base price ±¥2.10
Maximum: Base price±¥3.00Free

Daily price ―limit
Circuitbreakers―

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

Free

American option

American option

Unlike bond futures trading, which is conducted on the basis of a benchmark 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 assigned
to a third party (most of the transactions are for government bonds). As withgovernment bond futures trading, bond options are traded in units of ¥100
million in par value. Because their life (from the date of contract to the dateof delivery) is restricted to a maximum period of one year and three months,
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132

Chap. VII The Derivatives Market

Table VII-10.
OTC bond options
Value oftrading
2011
2012
2013
2014
2015

2,848,750
1,821,819
1,872,963
1,898,342
1,884,439

Priceoutstanding
38,08639,37236,001
27,471
17,090

Trading in Bond Options
Long-term government
bond futures options
No. ofdeals
1,853,672
2,283,839
1,692,752
1,133,723
1,142,738

No. ofcontracts
12,455
15,954
13,415
20,105
10,664

Medium-term government
note futures options
No. ofdeals

No. ofcontracts
－
－
－
－
－

－
－
－
－
－

Sources: The websites of the Tokyo Stock Exchange and the Japan Securities Dealers Association.

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. VII The Derivatives Market

Table VII-11.

133

The Trading Mechanism of Stock Index Options
Nikkei 225 options

TOPIX options

Object of trading

Call options and put options on Nikkei Call options and put options on TOPIX
stock average
Call options

Contract months

Jun and Dec contracts are nearest 10 5 closest of Mar, Jun, Sep, and Decmonths, Mar and Sept contracts are (quarterly months) plus a maximum ofnearest 3 months, other contract 3 other closest contract months
months are 6 months, nearest four
weekly contracts

Trading unit

Nikkei stock average×1,000

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

Maturity

The 2nd Fri. of the delivery month

The 2nd Fri. of the delivery month

Last trading day

One business day preceding maturity

One business day preceding maturity
Trading hours

Trading hours

0900–1515, 1630–0300
the following day

0900–1515, 1630–0300
the following day

Exercise price

Initially, 16 strike prices at ¥250 inter- Over-4 month contracts: ±6 prices atvals; 16 strike prices for closest con- 50-point intervals (if 4 months, same
tract months at ¥125 intervals
as 4 months or less), contracts of 4months or less: ±9 prices at 25-pointintervals

Method of exercising European option
the right

TOPIX×¥10,000

European option

Daily price limit

Normal: Base price ±11%
1st Expansion: Base price ±14%
1st Expansion: Base price ±17%

Normal: Base price ±11%
1st Expansion: Base price ±14%
1st Expansion: Base price ±17%

Circuit breakers

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

Possible interruption in connection
with the actuation of the circuit breaker mechanism for TOPIX futurestransactionsever) 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, Consumer 40, and Financial 25, discontinued in 2002) werealso introduced on the Osaka Securities Exchange in 1998, and S&P/TOPIX
150 options (discontinued in 2002) were listed on the Tokyo Stock Exchange

134

Chap. VII The Derivatives Market

Table VII-12.

The State of Trading in Stock Index Options

Nikkei 225 options
No. of deals
2011
2012
2013
2014
2015

TOPIX options

No. of contracts

46,192,519
48,763,723
57,269,727
43,958,283
37,806,896

2,031,140
3,179,067
3,212,114
2,430,568
1,778,198

No. of deals
21,342
22,683386,231
320,313329,529

No. of contracts
2,704
5,267
40,40647,805
19,145

Sources: Website of JPX

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 virtually not traded in Japan. (The liquidity of
the Nikkei average futures options traded on the SGX is quite low comparedwith that of the Nikkei average futures traded on the SGX.)
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 meeting 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. Among market
measures, 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 listed on the Chicago Board Options Exchange
in 1973 were the first call options on individual stocks. 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 othercountries, in Japan stock index options were introduced in 1989 first and eq-

Chap. VII The Derivatives Market

Table VII-13.

135

The Trading Mechanism of Securities Options

Marketable securities options (TSE)Marketable securities options (OSE)

Object of trading

Call options and put options on domesti- Call options and put options on domestically listed marketable securities
cally listed marketable securities

Contract month

4 (current & next month + 2 closest of 4 (current & next month + 2 closest ofMar, Jun, Sep, and Dec)
Mar, Jun, Sep, and Dec)

Delivery date

5th day from the exercise of the right

5th day from the exercise of the right

Maturity

The 2nd Fri. of the delivery month

The 2nd Fri. of the delivery month

Last trading day

One business day preceding maturity

One business day preceding maturity

Trading unit

The trading unit of the underlying stock

The trading unit of the underlying stock

Price asked

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

Exercise price

5 prices at 16 stages from ¥25 to ¥5 million depending on the price of the underlying stock, with additional prices available after based on market

Daily price limit

Movement above and below the base The value derived by taking the baseprice (price limit of eligible securities + price of the security for the option tradeallowable range for asking price)on the designated market as of the tradedate and multiplying it by 25%

Position limit

Set for each eligible security

A trading position equivalent to 1% of
the number of listed securities (truncate
figures below the unit of 100)

Trading hours

0900–1135, 1230–1515

0900–1135, 1230–1515

Method of exer- European option
cising the right

Table VII-14.

European option

Trading in Securities Options

TSE Securities Options
No. of deals
2011
2012
2013
2014
2015

601,156
433,3021,129,358－－

5 prices at 16 stages from ¥25 to ¥5 million depending on the price of the underlying stock, with additional prices available after based on market

OSE Securities Options

No. of contracts
30,56560,962
136,525－－

No. of deals
408,752
390,805
1,231,796
1,062,389
834,886

Sources: The websites of the Tokyo Stock Exchange and the Osaka Exchange.

No. of contracts
20,907
179,947
6,172
171,176
69,594

136

Chap. VII The Derivatives Market

uity options on 20 individual stocks were listed afterward on the Tokyo Stock
Exchange and the Osaka Securities Exchange in 1997 (seven of them werelisted on both exchanges). Since then, option trading has been extended to alllisted securities along with a name change to“securities options.”On March24, 2014, the derivatives market on the Tokyo Stock Exchange was mergedwith the derivatives market on the Osaka Exchange, and individual securities
options trading on the Osaka Exchange was integrated with the marketablesecurities options trading on the Tokyo Stock Exchange as of that date.
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 adopted by the
TSE and the OSE is similar. It is 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
certificate.
Although it was thought that securities options might compete with margin
trading, they were not as actively traded as they were in Western countries.
This is because there is no tradition of 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 tradedin combination with their underlying assets. In Japan, capital gains earned
from trading underlying equities and from securities options are subject toseparate taxation. However, investors are not allowed to offset gains andlosses between these two categories. This is believed to have discouraged individual investors from participating in securities options trading. In othercountries, brokers and dealers are granted preferential treatment for theirmarket making in relatively illiquid securities options. In the 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 in Japan.
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 liberalization of interest rates, the interest rate swap trad-

Chap. VII The Derivatives Market

Table VII-15.

OTC Trading in Securities Derivatives

Number oftransactions

Total

Forwardtrading

FY2010FY2011FY2012FY2013
FY2014

3,484,893 25.8%
3,216,317 －7.7%
2,361,235 －26.6%
2,788,876 18.1%
2,898,768
3.9%

Value oftrading

Total

Trading

FY2010FY2011FY2012FY2013
FY2014(presumed capital, ¥100 million)

10,8787,491
297
32,76088,204

Forward tradingin OTC index, etc.
0% 3,165,082
0% 2,864,886
0% 2,052,821
1% 2,302,773
3% 2,483,307

Forwardtrading

Total

Forwardtrading

FY2010FY2011FY2012FY2013
FY2014

175,808 12.1%
176,5720.4%
126,452 －28.4%
135,679
7.3%
386,987 185.2%

474
373
345
6,295
7,717

91%
89%
87%
83%
86%

Forward tradingin OTC index, etc.

794,200 －19.5%
3,340 0%694,677 －12.5%
1,828 0%440,416 －36.6%
1,265 0%1,365,035 209.9% 97,242 7%
1,229,462 －9.9% 178,068 14%

Term-endbalance

447,230
348,191
231,222238,575
120,961

56%
50%
53%
17%
10%

Forward tradingin OTC index, etc.
0%
0%
0%
5%
2%

10,721
7,784
2,609
3,196
3,752

6%
4%
2%
2%
1%

The State of Brokered Trading

OTC options
trading

OTC index
swaps

305,223
335,667
298,054443,455
296,602

3,710
8,273
10,0639,888
30,655

9%
10%
13%
16%
10%

0%
0%
0%
0%
1%

OTC options
trading

OTC index
swaps

316,721
321,668
178,515
976,406
614,448

26,908 3%
22,991 3%
29,413 7%
52,814 4%315,983 26%

40%
46%
41%
72%
50%

OTC options
trading

OTC index
swaps

124,259
128,886
86,23376,424
163,205

40,35639,531
37,26449,765
212,313

71%
73%
68%
56%
42%

23%
22%
29%
37%
55%

(presumed principal, ¥100 million)

Number oftransactions

Total

Forwardtrading

FY2010FY2011FY2012FY2013
FY2014

878,841 －37.6%
60,460 －93.1%
33,079 －45.3%
62,711 89.6%
174,089 177.6%

203 0%
349 1%
277 1%
32,633 52%
86,969 50%

Value oftrading

Total

Forwardtrading

FY2010FY2011FY2012FY2013
FY2014137

1,460,524 －32.5%
2,005 0%1,272,317 －12.9%
401 0%
1,180,976 －7.2%
1,592 0%1,223,374
3.6% 88,863 7%
1,338,691
9.4% 143,579 11%

Forward tradingin OTC index, etc.
7,439
7,527
4,527
5,702
2,326

1%
12%
14%
9%
1%

Forward tradingin OTC index, etc.
407,624
371,352
345,161
450,920
366,430

28%
29%
29%
37%
27%

OTC options
trading

OTC index
swaps

58,39845,79622,16817,63926,547

812,801
6,788
6,107
6,737
58,247

7%
76%
67%
28%
15%

92%
11%
18%
11%
33%

OTC options
trading

OTC index
swaps

933,077
831,031759,661575,350
740,164

117,819
69,53574,562
108,240
88,515

64%
65%
64%
47%
55%

8%
5%
6%
9%
7%

Note: Figures next to annual total amounts represent percentage changes from the previous fiscal year.
Percentages in parentheses elsewhere represent shares of respective types of transaction in the total
for the year.
Source: The web site of the Japan Securities Dealers Association.

138

Chap. VII The Derivatives Market

ing that started 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
have been well kept, it is easy to follow changes occurring in their trading,but because there is no organization that keeps track of the derivatives trading conducted on the OTC market, it is extremely difficult to find out how it
is 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 foreign exchange markets to grasp the state of trading in derivatives on the OTC
market worldwide.
According to a survey of the OTC derivatives market, including FX spottransactions, conducted in April 2013, the daily average notional value of
OTC derivatives traded in Japan was $374.2 billion, representing an increaseof 20% from the figure in the previous survey in April 2010 (the results compare against a daily global total of $7.688 trillion and an increase of 28%).
By contract type, FX swaps were $169.6 billion (up 1% from the 2010 survey); interest rate swaps were $55.9 billion (up 32%); FX forwards were$35.2 billion (up 11%); interest rate options were $8.6 billion (up 52%); currency options were $6.4 billion (up 27%); currency swaps were $6.4 billion(up 186%); forward-rate agreements (FRA) were $2.7 billion (up 36%). The
total notional value of the outstanding OTC derivatives contracts of financial
institutions in Japan as of the end of June 2013 stood at $50.0 trillion, up
27% from June 2010, relative to the total of $693 trillion and a 9% increase
worldwide. The breakdown of the total by contract type was 71.5% in interest rate swaps (compared with 70.6% in the 2010 survey); 8.3% in interest
rate options (vs. 8.6% previously); 6.3% in foreign exchange forwards andswaps (vs. 5.4%); 4.9% in FRAs (vs. 5.3%); 3.9% in currency swaps (vs.
3.4%); and 5.1% in others (vs. 6.7%). By underlying instrument, foreign exchange and interest rate derivatives contracts increased 36% and 28%, while
credit derivatives fell 5%. Equity and commodity derivative contracts also
decreased 35% and 48%, respectively.
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 transactions in July 2011, followed by clearing of interest rate swaps transactions starting in October 2012. JSCC settles¥2 to ¥3 trillion worth of yen-denominated interest rate swaps transactions ona daily basis.

Chap. VII The Derivatives Market

139

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. A CDS derives its name from theform in which the payment of a premium is swapped. A TRS is a deal thatswaps the total profit or loss (coupon and evaluated profit or loss) with themarket 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 can be concluded regardless of thecredit standing of the investor.
According to the data published by the Bank of Japan, the total notional
value of outstanding credit derivatives in Japan has been accelerating in
growth since 2003, increasing by a factor of 83 from the end of December
2002 to the end of June 2011. Subsequently, however, the value declined almost constantly and was down to half or less of its peak by the end of June
2015. The notional value of outstanding credit derivatives has also been on adecrease in the U.S. after hitting a peak in 2008, but the degree of decline has
not been as significant as that of Japan. During the period from 2008 to 2011
when the nominal value of outstanding credit derivatives recorded its peak in
the U.S., the outstanding balance of credit derivatives in Japan doubled.
However, the outstanding balance halved in four years from the end of June
2011 to June 2015, reflecting erratic movements on the market.

349
384

382,395 178,986 203,409

275,229

389,231562,222

390,160

Dec. 2007

June 2008

Dec. 2008

June 2009

87,896

95,3191,110,429 549,404 561,025

1,137,087 559,653 577,434

1,151,536 571,934 579,602

1,098,890 551,253 547,637

1,040,913 511,460 529,453

1,055,263 518,435 536,828

1,116,517

Dec. 2010 1,144,710

1,157,661

1,116,847

1,105,389

853,899785,138

710,060

563,688

June 2011

Dec. 2011

June 2012

Dec. 2012 1,047,913

1,061,005

June 2010

June 2013

Dec. 2013

June 2014

Dec. 2014

June 2015

43

112

261

367

455

542

473

209

195

278

2,001

207

522

631

820

814

0

0

112

157

244

336

399

99

13

13

12

900

11

10

10

0

0

0

48

20

44

Sell
3

3

0

104

123

119

143

374

196

182

266

1,101

196

512

374

349

631

850

766

23

47

Buy

0

0

0

0

130

0

0

0

0

0

0

0

0

0

0

0

0

0

14

16

26

Total

0

0

0

0

65

0

0

0

0

0

0

0

0

0

0

0

0

0

7

9

14

Sell

0

0

0

0

65

0

0

0

0

0

0

0

0

0

0

0

0

0

7

7

12

Buy

6,144

5,664

5,999

4,815

4,868

6,302

6,038

4,649

5,642

5,215

5,344

5,661

5,662

7,201

7,342

6,427

3,004

1,605

1,085

1,162

1,415

3,280

3,193

3,683

3,000

3,030

2,792

2,864

2,471

2,316

1,815

1,838

3,510

3,933

4,068

581
2,105

4,915

4,745

4,874

5,258

5,280

6,853

7,179

6,344

3,004

1,605

1,085

1,162

1,415

727

470

470

403

382

348

163

33

0

0

0

0

0

270

444

514

132

203

226

252

386

204

407

537

689

890

215

42

35

24

13

4

4

60

0

0

0

0

0

0

0

0

49

50

59

57

117

133

145

187

68

282

418

575

620

Sell

221

394

455

75

86

93

107

199

136

125

119

114

270

215

42

35

24

13

4

4

60

Buy

Other products

Issue Purchase Total

Credit-linked bond
Total

Source: Bank of Japan,“A Survey of Regular Market Reports Concerning Derivatives Trading.”(http://www.boj.or.jp/en/statistics/bis/yoshi/index.htm/)

557,162 274,400 282,762

703,691 347,293 356,398

778,259 388,359 389,900

848,496 420,923 427,573

1,111,618 557,963 553,655

887,258 435,314 451,944

1,022,920 497,235 525,685

894,196Dec. 2009 1,029,791

554,208 260,369 293,839

381,949 180,054 201,895

271,386 125,760 145,656

183,2153
91

184,879

50,79673,756

June 2007

47,184

69,667

Dec. 2006

143,423

97,9803

Total

99,16544,656

Buy

144,617

34,106

Sell

Credit spread product(outstanding balance of presumed principal in millions of dollars)

Credit Derivatives Trading in Japan

Total return swap

June 2006

78,762

Total

Credit default swap

Dec. 2005

80,266

June 2005

Total

OTC trading

Table VII-16.

140
Chap. VII The Derivatives Market

CHAPTER VIIIThe Securitized Products Market

1. Securitized Products
The income-generating assets of a company are pooled 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.”Business enterprises use their assets—such as auto loans, mortgage loans, leases
receivable, business loans, and commercial real estate—as collateral to backup their securitized products. As defined by the Asset Liquidation Law, 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. At the same time, the practice offers asset holders the advantage
of freeing them from the risk of a fall in the price of their assets. 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 alarger number of small investors.
When viewed from the standpoint of investors, securitized products givethem an additional choice of investments that have a new character. Morespecifically, first, 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
outright with a small sum of money. Second, as asset holders can issue different classes, or tranches, of securities “( the senior/subordinated structure”) at
one and the same time with varying levels of credit risks, they offer investors
the opportunity to purchase a security that meets their needs. The issuers ofasset-backed securities—Security 1 to Security N on chart VIII-1—simply
tailors their terms of issue to best suit the needs of Investor 1 to Investor N,

142

Chap. VIII The Securitized Products Market

Chart VIII-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

Asset N・・・Security N Investor N

Assets pooled by the special-purpose vehicle

Chap. VIII The Securitized Products Market

143

instead of making them uniform. For instance, by issuing securities with different characters—differentiation of the order of priority for the payment ofinterest 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 of assets “( originator”) 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 Asset Liquidation Law iscalled tokutei mokuteki kaisha (TMK, or a specific-purpose company). To
ensure bankruptcy remoteness (no impact even if the company, etc., held by
the SPC goes bankrupt), an overseas SPC is generally set up as a subsidiarythrough 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, 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 with respect to the payment of interest and redemption of principal, by varying maturities, or by offering the guarantee of aproperty and casualty insurance company. By adding such variation, the originator can issue securities that meet the diverse needs of investors. In the order of priority for payment, such securities 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, whomanage assets that have been assigned to an SPV and securitized and also re-144

Chap. VIII The Securitized Products Market

Chart VIII-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

cover 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 character of the securities issued. Thosebelonging to the group of products that are backed by real estate and theChap. VIII The Securitized Products Market

Table VIII-1.

145

Classification of SPVs

Types

SPVs established under basic laws

SPVs established under special laws

Company typeSpecial-purpose company (SPC)
Domestic:－Joint stock company (Commercial
Code)－Limited liability company (Limited Liability Companies Act)
Overseas:－SPC (foreign governing law)

Specific-purpose company–TMK (Asset
Liquidation Law)
Investment corporation (Investment Trust
Law)

Trust type

General trust (Trust Law and Trust Busi- Specific-purpose trust (SPT) (Asset Liqness Law)uidation Law)
Investment trust (Investment Trust Law)

Partnership type

Silent partnership (Commercial Code), Silent partnership, general partnershipgeneral partnership (Civil Code)(Real Estate Specified Business Law)

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 Investment Trust andInvestment Corporation Law in May 2000 is an investment trust in that it 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 following theenforcement 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 is more, as the laws governing the products have since been developed, they are securitized more extensively than the real estate backed group.

Table VIII-2. Features of Major Securitized (or Similar) Products

Securities issued
Originator
Governing laws
Basic scheme
Residential mortgage- Banks and other finan- Asset Liquidation Law, Trust Law, A banking institution that holds mortgage credits assigns
backed securities
cial institutions
Trust Business Law, and Financial In- them to an SPC; the SPC, in turn, issues a bond backed bystruments 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 - Japan Housing Finance Agency Law Housing loans receivable held by the Japan Housing FiAgency bonds backed nance Agency
and Financial Instruments and Ex- nance Agency are given in trust to a trust bank, and a speciby housing loans rechange Act
fied corporate bond backed by the beneficiary certificates
ceivable (RMBS)
of a trust is issued at that time through an SPC.
Commercial mortgage- Business corporations, Asset Liquidation Law, Trust Law, The originator assigns the commercial mortgage credits andCommercial mortgage backed
securities
banks, and banking in- Trust Business Law, and Financial In- rental revenues, etc., to an SPC, the SPC, in turn, issues acredits and rental
stitutions
struments and Exchange Act
bond backed by such credits or entrusts them to a trust bank,revenues
which, in turn, issues beneficiary certificates backed by them.
Real estate–specific Authorized or regis- Special law (Real Estate–Specific An equity contribution is invited from a large number of rejoint venture products tered firms
Joint Venture Law)
tail 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 Investment Trust and Investment Cor- An investment company issues units of investment and purtrusts (REIT)
purchased by an in- porations Act and Financial Instru- chases a piece of real estate and real estate loan claims withvestment trust
ments and Exchange Act
the proceeds of such units in accordance with instructions
given by a management company.
Mortgage loans receivable Mortgage securities
Mortgage securities Mortgage Securities Law and Finan- Mortgage securities are issued by registering mortgage loancreated on land, buildings,
companies
cial Instruments and Exchange Act
receivables of the mortgage securities company, and jointly
and superficies
held equity in mortgage securities is sold to investors.
Fiscal Loan Fund loan- Government
Asset Liquidation Law and Financial The government entrusts the loan receivables from its FisFiscal Loan Fund loan
backed securities
Instruments and Exchange Act
cal Loan Fund to a trust company. Beneficiary certificatesreceivables
issued on the loans are then sold to an SPC, which issues
securities with the loans as the underlying assets.
Leases receivable,
Asset-backed securities Business corporations Asset Liquidation Law, Trust Law, A business corporation that holds lease credits assigns them
credit card receivables, (ABS), (ABCP)
Trust Business Law, and Financial In- to an SPC; the SPC, in turn, issues a bond backed by suchand 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
Asset Liquidation Law, Trust Law, A banking institution that holds mortgage credits assigns
ligations (CLO)
Trust Business Law, and Financial In- them to an SPC; the SPC, in turn, issues a bond backed byGeneral loans
such credits or entrusts them to a trust bank, which, in turn,struments and Exchange Act
issues beneficiary certificates backed by them.
Collateralized bond ob- Banks and other bond- Asset Liquidation Law, Trust Law, The banks and other bondholders that hold a number ofligations (CBO)
holders
Trust Business Law, and Financial In- bonds assign them to an SPC; the SPC, in turn, issues a bondBonds
backed by such credits or entrusts them to a trust bank,struments and Exchange Act
which, in turn, issues beneficiary certificates backed by them.

Underlying claims

146
Chap. VIII The Securitized Products Market

Chap. VIII The Securitized Products Market

147

Other securitized products are called collateralized debt obligations(CDO), which are securities issued against the collateral of general loans,
corporate bonds, credit risks of loans that are held by banking institutions).
For instance, loans to small and medium-sized business enterprises that are
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).
4. The Size of the Market
In 2011, the Bank of Japan announced retroactively balances for securitized
products back to fiscal 2007, which were previously unavailable figures. According to these statistics, the balance of securitized products outstanding asof March 31, 2014, stood at almost ¥33 trillion. When compared with that ofstocks and equity investment (¥1,056 trillion); industrial bonds (¥72 trillion);and bank debentures (¥12 trillion), their share of private-sector financing as awhole is still not very large. In contrast, a similar balance (of ABS and government agency mortgage pools combined) in the United States, which isconsidered the most advanced in securitizing claims, stood at about ¥364 trillion at the end of fiscal 2014.
However, it is noteworthy that the scale of the securitized products market
that stood at a mere ¥400 billion ($3.90 billion) at the end of fiscal 1989 has
increased sharply thanks to the enforcement of the Specified Claims Law in1993 (repealed in 2004) and the Special-Purpose Companies Law in 1998
and the Asset Liquidation Law in 2000. This also suggests that assets that canbe 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 theseassets have short maturities and can be readily pooled for diversification,
they carry relatively low risks and can be securitized, and such attributes
have been a factor in expanding the scale of the market for them. Since 2000,
following the enforcement of the Asset Liquidation Law, the securitization ofmortgage loans, as well 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
BIS requirements, as well as in response to the prompt corrective measures
issued by the Financial Services Agency, banks have sought to unload loan
assets from their balance sheets. After reaching a peak in fiscal 2006, the vol-148

Chap. VIII The Securitized Products Market

Chart VIII-3.

The Balance of Claims Liquidization-Related Products

trillions of yen
50
45
Claims liquidation-related products
40
Securitization products
35
30
25
20
15
10
5
0
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14(fiscal year-end)(balances at fiscal year-end) 91
92
93
94
95
96
97
98
99
00
01
02
Asset-liquidation products
0.5 0.6 0.7 1.3 1.4 2.7 9.8 11.9 11.9 13.7 17.8 24.0
Securitized Products
－
－
－
－
－
－
－
－
－
－
－
－
(balances at fiscal year-end) 03
04
05
06
07
08
09
10
11
12
13
14
Asset-liquidation products 27.2 30.1 35.5 38.5 34.2 31.3 27.7 25.5 24.8 22.2 20.8 20.2
Securitized Products－－－－ 45.7 43.1 40.0 37.8 37.6 34.9 33.2 33.0
Source: Complied on the basis of the data drawn from Nichigin shikin junkan-hyo (Flow-of-Funds Statement of the Bank of Japan).

Table VIII-3.

Changes in Composition of Collateralized Assets, etc.
(trillions of yen)

Asset-liquidation products
Loans
Loans made by private-sectorbanking institutions
Residential mortgages
Consumer loans
Loans to business enterprises
and the government
Installment credits
Securities other than stocks
Claims liquidation-related products
Deposits
Intercompany and trade credits
RMBS issued by the Japan
Finance Housing Agency

2009

2010

2011

2012

2013

2014

Ratio to net
operating income

27.7
19.8

25.5
17.7

24.8
16.5

22.2
14.7

20.8
14.1

20.2
14.2

61.1
43.2

16.2

14.8

14.0

12.5

12.0

11.9

36.1

9.3
1.6

8.8
1.3

8.6
1.1

7.9
1.0

7.8
0.9

7.8
1.0

23.6
3.0

5.3

4.7

4.2

3.6

3.2

3.1

9.5

3.5
1.3
1.3
0.5
6.1

2.9
1.1
1.1
0.3
6.4

2.5
1.1
1.1
0.4
6.8

2.2
1.0
1.0
0.5
6.0

2.1
1.1
1.1
0.5
5.1

2.3
1.1
1.1
0.5
4.3

7.1
3.2
3.2
1.6
13.1

8.4

9.0

10.1

10.6

10.9

11.0

33.3

Real estate-related credits

3.9

3.3

2.7

2.1

1.5

1.8

5.5

Total

40.0

37.8

37.6

34.9

33.2

33.0

100.0

Source: Compiled on the basis of the data drawn from Nichigin shikin junkan-hyo (Flow-of-Funds Statistics of the Bank of Japan).

Chap. VIII The Securitized Products Market

149

ume of securitized products has gone into decline under the impact, etc., of
the weakening of the economy set off by the subprime loan crisis.
Looking at the composition of assets, etc., underlying securitized products
at the end of fiscal 2014, RMBS issued by the Japan Housing Finance Agency (JHF) had the largest share, followed in order by residential mortgages,
intercompany and trade credits, and loans to business enterprises and thegovernment.
“Securitized products”are defined as the total of claims liquidation-related
products, RMBS issued by the JHF, and real-estate related securities. Claims
liquidation-related products is an item on the Flow-of-Funds Statistics compiled by the Bank of Japan including asset-backed securities (ABS) issued bystructured financing SPCs and trusts, asset-backed securities (ABS) and beneficiary rights in monetary claim trusts. Although RMBS issued by the JHF
and real-estate related securities are not issued by SPCs and trusts, they areinclude in“securitized products”because they are considered to be securitized products in practical terms.
5. New Issue 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 their market. The 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 2014 reached ¥2.6 trillion. Although securitized
products issuance reached a peak of ¥9.8 trillion in fiscal 2006, it went
through a period of decline under the impact of the weakening of the economy kicked off by the subprime loan problem and has remained level since.
Even considering securitized products by types of collateral, issuance levels have tended to be flat over the past few years. However, while residential
mortgage loans, shopping credits, accounts receivable and commercial bills
have exhibited a recovery trend, commercial real estate loans and leases havedeclined—a result that reflects the differences in the underlying assets. Residential mortgage loans account for a further increasing percentage of the underlying assets used as collateral, a trend that has not changed over the past
few years. This trend reflects that lending banks are actively securitizedmortgage loans of their own origination and that the issuance of RMBS by
the Japan Housing Finance Agency has remained at a high level.
According to the data on issuance compiled by the Japan Securities Deal-

150

Chap. VIII The Securitized Products Market

Chart VIII-4.

Securitized Products Issuancetrillions of yen
109

Accounts receivable,commercial bills
Lease receivables

87Credit card receivables

6

Consumer loans

5

Residential loans

43Real estate related

2

CDOs

1
0

Others
04

05

06

07

08

09

10

11

12

13

14

Source: Securitization department of Deutsche Securities Inc.

Chart VIII-5.
2014

Component Ratios of Collateral Assets
1%

0%

1%

Others

4%
1%

17%

CDOs
Real estate related
Residential loans
Consumer loans

76%

Credit card receivables
Lease receivables

2013

3%
4%

0%

0%

1%

21%

71%

Source: Securitization department of Deutsche Securities Inc.

Chap. VIII The Securitized Products Market

151

ers Association, the total value of such publicly offered securitization products had steadily increased since 1997, the year in which the association
started tracking the data. After hitting a peak of ¥0.52 trillion in fiscal 2002,
however, the total has declined, falling to ¥0.06 trillion in fiscal 2014. The
popularity of privately placed ABSs is thought to be the result of considerations with regard to investor protection framework, taxes, and disclosure
cost.
The underwriting of these securitized products is concentrated in major
brokers/dealers and bank-affiliated securities companies. According toThomson-Reuters Corporation, a major information provider, top underwriters of those securitized products in fiscal 2014 were, in order of total underwriting volume, Mizuho Financial Group, Mitsubishi UFJ Morgan Stanley,
Sumitomo Mitsui Financial Group, Nomura Holdings, and Sumitomo Mitsui
Trust Holdings. Although the list has shown some movement over the past
few years, it has been minor. It may be said that the results reflect their capabilities in distributing securitized products and procuring collateral assets, aswell as securitization expertise that meets client needs.
6. Secondary Market for Securitized Products
With the exception of beneficiary certificates of real estate investment trusts(REITs; to be discussed later), trading in securitized products is not concentrated in stock exchanges at present. This is perhaps because, as is the casewith bonds, securitized products and their transactions are too complex andvaried to lend themselves to exchange trading. And this has led to the dependence on an over-the-counter interdealer market for their trading. In this section, we will overview the present state of the interdealer market of securitized products by use of data on“TMK bonds”published by the Japan
Securities Dealers Association (JSDA), which is in a position to obtain dataon interdealer transactions.
Data on the trading amounts of TMK bonds compiled on the basis of JSDA
reports for the years prior to 1998 are not available. According to these reports, the trading amount of TMK bonds has fluctuated frequently, reaching apeak in 2014. A comparison of TMK trading amounts with those of otherbonds in 2014 shows that TMK bond trading amounted to approximately¥1.6 trillion, and those of corporate straight bonds and utility bonds stood at¥30.8 trillion and ¥2.3 trillion, respectively. Although these issues constituteonly a part of the securitized products market, it may be said that the assetbacked securities market of this country still remains underdeveloped. The
number of securities companies that offer them is quite limited, and their liquidity is considerably low. On the other hand, a large number of securities

152

Chap. VIII The Securitized Products Market¥100 million
18,000Chart VIII-6.

The Amount of Specified Corporate Bonds Traded

16,00015,903

14,53914,00010,912

12,00010,000

7,324

8,000
6,000
4,000
2,000
0

9,686

0
98

1,561

3,001 2,930

99

00

01

7,048

5,749

4,518

3,797

2,735 2,986

02

03

04

05

06

07

08

09

10

11

5,274

12

3,838

13

14

Source: Compiled on the basis of the data drawn from the Japan Securities Dealers Association.
(%)
2.5

Chart VIII-7.

Yield to Subscribers of the Housing Loan Corporation Bonds

2.0
1.5
1.0
0.5

Housing Loan Corporation bonds backed by mortgage loans
10-year government-guaranteed bonds (secondary market yield)

0.02001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Compiled on the basis of the data drawn from Kinyu keizai tokei geppo (Monthly Report on
Financial and Economic Statistics) of the Bank of Japan.

Chart VIII-8.

FY2014

Breakdown of Buyers

FY2010Overseas

Overseas
Nonfinancial
corporations

Nonfinancial
corporations

Financial
institutions

Financial
institutions

Source: Compiled on the basis of the data drawn from Shikin junkan kanjo (Flow-of-Funds Chart)of the Bank of Japan.

Chap. VIII The Securitized Products Market

153

companies make market in RMBS issued by the Japan Housing FinanceAgency, the bonds are classified as FILP bonds for statistical purposes, andtheir market seems to have a certain degree of liquidity.
As their trading market is yet to attain maturity, it is difficult to precisely
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
Housing Loan Corporation 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 government guarantee may be a factor behind this.
According to the balance of financial assets and liabilities of the Flow-ofFunds Accounts of the Bank of Japan, most of the holders of credit securitization–related products (securitized products) are nonfinancial corporations
and banking institutions. This is due to the fact that it is difficult to sell themto households because of the complexity of their structure and the lack of adequate explanation of their mechanism. As a result, few individual investors
hold credit securitization–related products at present, but it may be said thatinvestment trusts incorporating securitized products have the potential of
meeting their investment needs in the coming years.
7. New Issue 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
trusts (REITs) in Japan. These real estate investment trusts owe their birth tothe amendment of the Investment Trust Law enforced in November 2000,
which makes it possible to form trust funds through a real estate investment
trust scheme. In addition, the Tokyo Stock Exchange instituted a rule granting a special exception to the securities listing regulations in favor of real estate investment trust certificates and enforced it on March 1, 2001. By December 31, 2014, the number of listed issues increased to 51.
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 Investment Trust Law—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 by real estate investment trusts. The first

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Chap. VIII The Securitized Products Market

Table VIII-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 Trust Association.
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 financial statements for the two immediately preceding terms arefair 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.”
Expected to increase to 4,000 or more by the time it is listed.

No. of units 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 home page of the Tokyo Stock Exchange.

Table VIII-5.
Fiscal year

Statistics Relating to REITs Listed on the Tokyo Stock Exchange

No. of issues Total net asset value
listed(¥100 mil)Trading volume(in 10,000 units)

Amount of certificatestraded (¥100 mil)
2,061

2001

2

2,314

2002

6

4,451

46

810

2003

10

7,088

100

5,057

2004

14

11,062

182

11,791
20,551

2005

26

18,937

297

2006

39

29,539472

35,0402007

41

35,910811

74,4282008

40

38,405779

39,926

2009

40

38,733618

22,423

2010

35

38,811881

26,6452011

34

40,211

1,058

28,6642012

37

43,644

1,384

32,2132013

45

53,2003,570

87,8002014

51

62,364

4,099

79,369

Chap. VIII The Securitized Products Market

155

type of trust is managed by a trust company that holds the assets in custodyin accordance with instructions given by the management company. The second type is managed by a trust bank in 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 are investment 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 companies through a general meeting of investors.
8. 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 underly-

156

Chap. VIII The Securitized Products Market

Table VIII-6.

Creditenhancement(external)

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 swap

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

Financial guaranty in- A property and casualty insurance company provides insursurance
ance covering the entire default risk.

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 the security is enhanced by selling suchpart of the underlying assets whose value is in excess of theamount of the security issued to the special-purpose vehicle(SPV).

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

ing 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 inChap. VIII The Securitized Products Market

Table VIII-7.
Overall risksof ABS

157

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 from The development of a market for trading ABSs
the market, the holder cannot sell the is a must. And the subordinated security can be
security in a timely manner because the traded widely among the investors.
liquidity of the securitized product is
not adequate, and the holder is thus exposed to a liquidity crunch.

Risks of theparties
concerned

OutlineMeasures Necessary to Avoid Risks

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

The transfer of the claims is not for securing aloan but is their true sale. The assets have been
separated from the balance sheet, and the transaction has conditions necessary for counteracting against a third party.

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

The designation of a backup servicer capableof putting up excess collateral. Payment of remittances received from debtors directly into
the account of the SPV. Management of a lockbox account.

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 commencementof bankruptcy proceedings must be averted bymaking the charitable trust its beneficial shareholder.

SPC risk

the 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 VIII-7.

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Chap. VIII The Securitized Products Market

9. The Enactment of Securitization-Related Laws
The existing legal system of Japan is built around business-specific laws, andthe regulatory system of financial products 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 have to be amended, and new laws must be enacted.
As regards the securitization of assets, the Specified Claims Law was enacted as an independent law in 1993. Since the enforcement of this law, thelegal infrastructure has been developed steadily. Under and thanks to theSpecified 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 the capital ratio requirements imposed by the Bank for International
Settlements (BIS) and to encourage the securitization of their assets to deal
with the bad loan problem that had become serious since the turn of the decade of the 1990s.
Under the Special-Purpose Company (SPC) Law and Asset Liquidation
Law 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 the provisions of
the said laws (real estate, designated money claims, and beneficiary certificates issued against such assets in trust) in the form of asset-backed securities(such as senior subscription certificates, specified corporate bonds, and specified promissory notes, etc.). Under the SPC Law, the system of disclosing an
asset liquidation plan and individual liquidation projects was introduced, in
addition to the disclosure requirements of the Securities and Exchange Law(the Financial Instruments and Exchange Act now).
In 1998 the Perfection Law was enacted as a law prescribing exceptions torequirements under the Civil Code for the perfection of the assignment of receivables and other properties, and it was amended in 2005. The Civil Codeprovides 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 Servicer Law, enacted to account for exceptions to the provisions of
the Practicing Attorney Law, allows accredited joint stock companies to provide the services of administering and collecting debts. Under the Servicer
Law, a debt collection company may be established to provide a bad debt

Chap. VIII The Securitized Products Market

Table VIII-8.
Aug. 31
June 73
Sept. 74
Jan. 88
Apr. 92
Apr. 93
June 93
July 93
Apr. 95
Apr. 96
June 97
Feb. 98
Apr. 98
June 98
Sept. 98
Oct. 98
Jan. 99
Feb. 99
May 99Nov. 00
Nov. 00
Sept. 01
Dec. 04
Dec. 04
Oct. 05
May 06
Dec. 06
Oct. 07
Nov. 11159

Chronology Relating to the Securitization of Assets

The Mortgage Securities Law is enacted.
Housing loan companies raise funds by offering beneficiary certificates of housing loan
claim trusts.
Housing loan companies raise funds by offering mortgage-backed securities.
The Law Concerning the Regulation of Mortgage-Backed Securities Business is enforced.
The Law Concerning the Regulation of Business Relating to Commodity Investment (theCommodity Fund Law) is enforced.
The Securities and Exchange Law designates beneficiary certificates of housing loan claim
trusts as securities.
The Law Concerning the Regulation of Business Relating to Specified Claims, etc. (theSpecified Claims Law) is enforced.
The ban on the issuance of CPs by nonbanks is lifted.
The Specified Real Estate Joint Venture Law is enforced.
As a method of liquidizing assets under the Specified Claims Law, the issuance of assetbacked securities (ABS and ABCP) is authorized, making it possible to issue them otherthan under the Specified Claims Law.
Beneficiary certificates of general loan claim trusts (including loans secured by real estate)
are designated as securities under the Securities and Exchange Law.
The Securities Investment Trust Law is amended (and the ban on company type investment
trusts and privately placed investment trusts is lifted).
A total plan for the liquidation of land and claims is announced.
A total plan for financial rehabilitation is announced.
The Law Concerning Securitization of Specified Assets by Special-Purpose Companies(the SPC Law) is enforced.
The Law Concerning Exceptions to Requirements under the Civil Code for the Perfectionof Assignment of Receivables and Other Properties (the Perfection Law) is enforced.
A statement of opinion on establishing accounting standards for financial products is published. (The financial component approach to conditional transfer of financial assets is
adopted.)The Act on Special Measures Concerning Debt Administration and Collection Business(the Servicer Law) is enforced.
The Law Concerning Corporate Bond Issuance, etc., by Nonbank Financial Companies for
Lending Operations (the Nonbank Bond Law) is enforced.
With the enforcement of the Asset Liquidation Law, the scope of assets eligible for securitization is expanded to include a broad range of property rights.
The Law Concerning Investment Trusts and Investment Corporations (the Revised Investment Trust Law) is enforced, expanding the assets that can be securitized to real estate, etc.
The revised Servicer Law is enforced.
The Trust Business Law is amended, and the system requiring trust companies of the management type to register is launched.
The Specified Claims Law is repealed.
The Exceptional-Case Law of Assignment of Obligations was amended to the ExceptionalCase Law of Assignment of Movables and Obligations.
The Companies Act is enforced.
The Trust Law is amended and provided for business, personal, and purpose trusts.
The Financial Instruments and Exchange Act is enforced.
Revised Asset Liquidation Law enforced.

160

Chap. VIII The Securitized Products Market

collection service without conflicts with the Practicing Attorney Law. By
amending the Equity Contribution Law, the Nonbank Bond Law conditionally lifted the ban imposed on nonbanks on the issuance 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 as requiredby the Financial System Reform Law and the 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 Asset Liquidation Law and mortgage certificates under the Mortgage Securities Law are now legally considered securities. Furthermore,pursuant to the enactment of the Investment Trust Law as revised, real estate
was included in eligible assets, which paved the way for the issuance of
REIT securities.

CHAPTER IXThe Financial Instruments Exchanges (1)1. The Function of the Financial Instruments Exchanges
The basic function of a stock exchange is to enhance the liquidity of securities, to help form fair prices that reflect supply and demand, and to promptly
publish the prices thus formed by establishing a highly organized market andconcentrating supply and demand in a single market.
The purpose of a stock exchange is to establish a securities market fortrading securities and to run the securities market in such a way as to facilitate the fair and efficient trading of securities in the public interest and for theprotection of investors. Its basic mission is to provide a fair and transparent
market. The securities market operated by a stock exchange, moreover, has
the function of providing a marketplace that enhances the liquidity of securities and helps form fair securities prices so that investors can invest in securities free from anxiety and businesses can raise funds smoothly by issuing securities. Furthermore, published prices serve as a base for assessing thecollateral or asset value of securities and as an important indicator of generalbusiness trends. Because securities markets operated by stock exchanges perform an important role in supporting the economic activities of the nation, alicense must be obtained from the prime minister to open an exchange, andthe operation of that exchange must be subject to the supervision of the prime
minister.
Stock exchanges were required to be membership organizations under theold Securities and Exchange Law. An amendment of that law that went into
effect in December 2000, however, allowed stock exchanges to change theirlegal status to that of a joint stock company. Starting with the Osaka Securities Exchange (OSE) in April 2001, the Tokyo Stock Exchange (TSE), Nagoya Stock Exchange, and JASDAQ reorganized as joint stock companies.
The enforcement, furthermore, of the Financial Instruments and Exchange
Act (the former version) in September 2007 provided for the establishment
by an exchange of either a self-regulatory committee or a self-regulatory corporation. Subsequently, in October of the same year, the Tokyo Stock Exchange founded a self-regulatory corporation with a shareholding company

Audit Committee Office

Executive Officers

Senior Executive
Officer & COO

Representative Executive
Officer & CEO

CSR Promotion Office

Corporate Communications
Department

IT Planning Department

Treasury Department

Human Resources Department

General Administration
Department

Yangon Stock Exchange
Business Support Office

New Business Development
OfficeCorporate Strategy Department

Secretary Office

Audit Committee OfficeCompensation Committee

Audit Committee

Board of Executive Officers

Board of Directors

Nomination Committee

General Meeting of Shareholders

Japan Exchange Group, Inc.

Hong Kong Representative Office

Beijing Representative Office

Singapore Branch
Advisory Committees
Discipline Committee

Board of Executive
Officers

Board of Governors

Auditors

International Surveillance OfficeMarket Surveillance & ComplianceDepartment

Trading Participants Examination &Inspection Department

Listed Company Compliance Department

Listing Examination Department

General Administration Office

Auditors Office

General Meeting of Members

New York Representative OfficeLondon Representative Office

IT Promotion Office

Japan Exchange Regulation

President

IT Services Department

IT Development Department

IT Administration OfficeMarket Business Development Department

IT Department

Market Planning Department

New Listings Department

Information Services Office

Trading Participants OfficeMarket Administration OfficeMarket Operations Department

General Administration Office

Auditors Office

Trading Participants Office

Advisory Committees
Market Operating Committee

Board of Executive Officers

President & CEO

Board of Directors

Board of Auditors/Auditors

General Meeting of Shareholders

Settlement Control Department

Information Services Department

Equities Department

Listing Department

General Administration Office

Auditors OfficeOsaka Exchange, Inc.

Global Offices of the Group

Advisory Committees
Market Operating Committee

Board of Executive Officers

President & CEO

Board of Directors

Board of Auditors/Auditors

General Meeting of Shareholders

Tokyo Stock Exchange, Inc.

Chart IX-1. Organization Chart (as of September 1, 2015)

162
Chap. IX The Financial Instruments Exchanges (1)Chap. IX The Financial Instruments Exchanges (1)163

as the promoter, while the Osaka Securities Exchange formed a self-regulatory committee. These moves were prompted by potential conflicts of interest
between the public role of a securities exchange as a self-regulating body andthe for-profit orientation of an exchange as a joint stock company, where exchanges sought to reinforce the independence of their highly public function
to ensure self-regulation of the market.
Also on the backdrop of an intensifying competition among markets acrossborders resulting from the advancement of financial transaction systems, inJanuary 2013 the TSE and OSE combined their operations to solidify theirpositions in the domestic market and to enhance their global competitivenessby upgrading the appeal and convenience of their markets.
2. The Listing System
The Listing System The stock exchange imposes listing requirements fromthe viewpoint of investor protection and examines the listing applications of
securities companies to see whether they satisfy the listing requirements. The
listing requirements comprise technical and eligibility requirements. Afterthe stock exchange receives an application from a company wishing to list its
stock, the exchange checks first whether or not the listing applicant meets thetechnical requirements and then the eligibility requirements.
The technical requirements include (1) those relating to the number ofshareholders; tradable shares (number of shares owned by shareholders otherthan large shareholders and other specified persons, market value of tradable
shares, ratio of tradable shares); and market capitalization of the shares listedfrom the standpoint of ensuring smooth trading in shares and forming fair
prices; (2) those relating to the number of years that have elapsed since theestablishment of the issuing company; the net worth; and the amount of profit earned from the standpoint of maintaining the suitability for listing in termsof continuity of business, financial position, and profitability, etc. ; those relating to the appointment of a transfer agent, the tangen trading unit, theclasses of shares, restricted shares, and appointment of a designated custodyand transfer agent from the standpoint of preventing forgeries and other troubles in the share transfer process as well as ensuring smooth operation inconnection with transactions.
The eligibility requirements are (1) that the issuing company is a going
concern and has a stable earnings base, (2) that it carries out its business fairly and in good faith, (3) that it has in place an adequate and functional framework for corporate governance and internal control, (4) that it is in a position
to make a fair corporate disclosure, and (5) that it complies with the conditions that are deemed necessary by the stock exchange from the standpoint of

164

Chap. IX The Financial Instruments Exchanges (1)Table IX-1.

The Listing Requirements of the Second Section of the Tokyo Stock(as of September 2015)
Quantitative Criteria (Formal Requirements)

Amount of net assets1)(Expected at listing)Consolidated: ¥1 billion or more (plus positive value for non-consolidated
net assets)

Amount of profit2)

Consolidated: ¥500 million or more for the most recent two years

No. of shareholders3)(Expected at listing)

800 or more

Tradable shares4)(Expected at listing)a. No. of tradable shares: 4,000 units or more5)b. Market value of tradable shares: ¥1 billion or morec. Ratio of tradable shares: 30% or more of the listed stocks

Market capitalization of ¥2 billion or more
the shares listed(Expected at listing)
No. of years in existence Three years or more in continuous operation with a board of directors inplace, calculated from the end of the prior business year
Financial statements, etc. The financial statements for the latest two years contain no false statements
Auditor’s opinion“Unqualified opinion”or“qualified opinion”for the latest two years“Unqualified opinion”for the latest year

OthersAudited by a registered listed company audit firm6)
Appointment of a shareholder services agent
Number of shares in Tangen trading units
Restriction on stock transfer
Restriction on stock transfer
Appointment of designated custody and transfer agent

Notes: 1. Amount of net assets＝Total net assets＋reserves－stock subscription rights (indicated in thesection of net assets).
2. The amount of profit is the amount derived by adding or subtracting minority interests in subsidiaries to/from the amount of ordinary income (loss). If market capitalization of the shares
listed is ¥50 billion or more (excluding when net sales in the latest year amounted to less than
¥10 billion), there is no need to meet the standard on the amount of profit.
3. No. of shareholders means the number of shareholders who own one or more units of shares.
4.“Tradable Shares”refers to listed shares excluding shares held by parties with a special interest
such as officers, shares owned by the company itself, and shares held by persons who individually own 10% or more of listed shares.
5. One unit is the minimum number of shares necessary for 1 voting right.
6. 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).
(as of September 2015)
Qualitative Criteria (Eligibility Requirements)
Corporate continuity and profitability:
A business is operated continuously and a stable revenue base is present.
(Soundness of corporate management)
The company is carrying out business in a fair and faithful manner.
(Effectiveness of corporate governance and internal management system of an enterprise)
Corporate governance and internal management system are properly prepared and functioning.
(Adequate corporate disclosure)
The company has the organization and systems to make proper disclosure of its business details, etc.
Other matters deemed necessary by the Exchange from the viewpoint of the public interest or theprotection of investors.

Chap. IX The Financial Instruments Exchanges (1)165

public interest and investor protection. Examination of fulfillment of these
eligibility requirements is made on the basis of the documents submitted by,
and hearings conducted on, the issuing company.
Generally, a newly listing company is first listed on the Second Section,
and when it meets the listing requirements for the First Section it is allowed
to transfer to the First Section. However, if the company is judged to be capable of meeting the technical listing requirements of having 2,200 or moreshareholders, 20,000 units or more of tradable shares, a ratio of tradable
shares of 35% or more, and a market capitalization of ¥25 billion or more by
the time it actually lists, it will be allowed to list directly on the First Section.
3. The Listing Management System
With a view to carrying out the proper management of listed securities andtheir issuers as well as to protecting investors, stock exchanges have instituted various rules relating to the management of listings and have sought toensure the effectiveness of these rules by requiring issuers to promise to observe them in the listing agreement they sign at the time of listing.
In the case of the Tokyo Stock Exchange, its listing regulations include
rules requiring listed companies to make timely disclosure of information regarding any material corporate matters, a code of conduct requiring companies to adhere to appropriate behavior, and rules concerning changes in market section classification and the delisting of securities.
Rules Requiring Timely Disclosure of Material Corporate Matters: To
ensure the formation of fair market prices and to foster the sound development of a financial instruments market, it is extremely important for listedcompanies to make proper disclosure in a timely manner of information concerning material corporate matters that may influence the investment decision making of investors, the very basis on which stock prices are formed.
The Tokyo Stock Exchange has established rules as part of its listing regulations requiring listed companies to make timely disclosure of material corporate information.
Code of Corporate Conduct: The Tokyo Stock Exchange has introduced
a code of corporate conduct in its regulations. The multifold purposes of requiring proper conduct by listed companies are to raise awareness of theirrole as members of the financial instruments market, to ensure greater transparency by enhancing the disclosure of corporate information, and to achieve
the proper operation of investor protection measures and market functions.
Changing Section Classifications: The Second Section of the Tokyo
Stock Exchange was established separately from the First Section in 1961
initially with a view to better protecting investors with regard to problems

166

Chap. IX The Financial Instruments Exchanges (1)Table IX-2.

Outline of Tokyo Stock Exchange’s Code of Corporate Conduct(as of September 2015)

Compliance Items (Violations may be subject to action) Desirable Items (Observance voluntary)• Third-party capital increase rules• Effort to transition to and maintain a desirable• Prohibition of stock split, etc., that could cause turmoil investment unit level, etc.
in the secondary market• Make efforts to unify trading unit
• Rules pertaining to issue of MSCB, etc.
• Respect the Corporate Governance Code• Create management structure that includes• Duty to exercise of voting rights in writing, etc.
• 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 appoint an independent director
functioning of independent directors• Duty to explain the reasons for implementing or not • Provide information on independent directors,
implementing the corporate governance codeetc.
• 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 • Issue documents to holders of nonvoting
audit firm to provide the audit certificate of the ac- stock
counting auditor• Framework improvement to prevent insider• Duty to carry out necessary structural development for trading
ensuring the appropriateness of activities• Framework improvement, etc., to eliminate• Rules pertaining to introduction of takeover defense influence of criminal and extremist elements• Establish a system for proper response tomeasureschanges in accounting standards, etc.
• Rules pertaining to disclosure of MBOs, etc.
• Rules pertaining to significant transactions, etc., with • Fair provision of supplementary explanatory
materials on details of business performance
controlling shareholderss Listed• Audit by an audit firm placed on the TSE’
Company Audit Firm Register• Prevention of insider trading• Elimination of any influence by criminal and extremist
elements• Prohibition of behavior destructive to the functioningof the secondary market or the rights of shareholders

with being attracted from the then immature over-the-counter market into theexchange market. At present, the principal difference between the First andSecond Sections is generally perceived as liquidity. The Tokyo Stock Exchange’s listing regulations stipulate the criteria for assignment to the First
Section and the criteria for reassignment from the First Section to the Second
Section.
Criteria for Delisting Stocks: A stock may be delisted whenever it meets
any of the conditions set forth in the criteria for delisting stocks in the listing
regulations.
When any stock is in danger of falling within the purview of the criteria
for delisting stocks, the issue will be put on the watch list to notify generalinvestors. When any stock actually falls within the purview of the delisting
criteria, the issue will be put on the liquidation list to publicize the information and allow the trading of such issue to continue for a specified period (or-Chap. IX The Financial Instruments Exchanges (1)Table IX-3.

167

Criteria for Delisting Stocks (the Tokyo Stock Exchange)(as of September 2015)

Item① No. of shareholders② Tradable shares

Delisting criteriaLess than 400 (with a grace period of one year)
a. No. of tradable shares: less than 2,000 units (with a grace period of one
year)
b. Market value of tradable shares: less than ¥500 million (with a grace period of one year)
c. Ratio of tradable shares: less than 5% of the shares listed (except whenprescribed documents are submitted)③ Trading volume
Either the average monthly trading volume over the past one year is less thanten units or no trades were made for the past three months④ Market capitalization When the market capitalization of the shares listed falls short of ¥1 billion
and if it fails to increase to ¥1 billion within the succeeding nine months (orthree months if recovery plans are not submitted)⑤ Negative net worth
If the issuer falls into negative net worth for two consecutive terms (Thegrace period is extended for another year if such issuer has a credible plan towipe out the negative net worth within a year through rehabilitation proceedings.)⑥ Bankruptcy, etc.
When the issuer becomes insolvent or falls into a situation requiring rehabilitation or reorganization proceedings or liquidation or an equivalent situation(However, if such issuer discloses a rehabilitation/reorganization plan and themarket capitalization over one month thereafter remains above ¥1 billion, thelisting will be maintained.)⑦ Suspension of business When a listed issuer suspends its business activities or falls into a situation
similar thereto
activities⑧ Inappropriate mergers When the stock exchange determines that a listed company that acquired another company has in effect failed to survive the merger and that the surviving company has failed to meet standards equivalent to the initial listing requirements within three years of such merger⑨ Deterioration in sound- When the stock exchange determines that there has been a marked deterioraness of transactions tion in the soundness of transactions between the company and its controllingwith controlling share- shareholder within three years of a change in the controlling shareholder due
to a third-party allotment
holder⑩ Delays in securities fil- When a listed issuer fails to file an annual or quarterly securities report toings
gether with an auditor’s report or quarterly review report within one monthfollowing the statutory deadline (if another deadline has been approved forfiling, when the listed issuers fails to file within 8 days following that deadline)⑪ False statements or ad- - When a false statement is made in a securities filing and the competentverse opinion
stock exchange finds that maintaining order on the exchange could be difficult without immediate delisting of the issue- When an audit report contains an improper opinion or no auditors’opinion
and the competent stock exchange finds that maintaining order on the exchange could be difficult without immediate delisting of the issue⑫ Securities on Alert• When despite the issue meeting criteria to be designated as securities onalert, the competent stock exchange determines that there is no likelihoodof improvement in the issuing company’s internal control system, etc.
• When during the process of designating the issue as securities on alert, thecompetent stock exchange determines that there is no likelihood of improvement in the issuing company’s internal control system, etc.,• When despite having designated the issue as securities on alert, the competent stock exchange determines that there is no likelihood of improvementin the issuing company’s internal control system, etc.
⑬ Breach of the listing When a listed company seriously violates the listing agreement or pledge
agreement
concerning timely disclosure or when it becomes no longer a party to the listing agreement⑭ Undue restrictions on When shareholders’rights or exercise thereof are unduly restricted
shareholders’rights⑮ Others
Suspension of a listed issuer by the bank, failure to appoint a shareholder services agent, certain restrictions on share transfers, becoming a wholly owned
subsidiary of another company, cancellation of the custody and transfer agent
agreement, wholly call, involvement with antisocial groups, and when thecompetent stock exchange finds that the delisting of a given stock is in the
public interest or appropriate for the protection of investors

168

Chap. IX The Financial Instruments Exchanges (1)dinarily one month).
4. The Stock Trading System (1)Floor auction is the most widely used trading method on the stock exchanges.
In the case of the Tokyo Stock Exchange, the trading hours are divided into
two sessions: the morning session, from 9 a.m. to 11:30 a.m., and the afternoon session, from 12:30 p.m. to 3 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 pricepriority 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. By thismethod, a newly placed buy/sell order is matched against the existing sell/buy order that has the highest precedence based on price priority and then ontime priority in order to determine the execution price.

Chap. IX The Financial Instruments Exchanges (1)Table IX-4.

169

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. Letters represent securities companies.
2. Figures given in parentheses represent the number of trading units, each consisting of 1,000 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 6,000 shares at a market-asked price without limit (2,000 shares by H securities company
and 4,000 shares by I securities company) is matched against buy orders for 4,000 shares at a market-bid pricewithout limit (1,000 shares by K securities company and 3,000 shares by M securities company). At this point,
2,000 shares at a market-asked price without limit are left unmatched.
b. Then, assuming that the opening price will be ¥500, the remaining unfilled sell orders for 2,000 shares at a market-asked price without limit and those for 6,000 shares at an asked price of ¥499 or less (2,000 shares by S securities company and 4,000 shares by R securities company) are matched against buy orders for 8,000 shares at abid price of ¥501 or more (5,000 shares by P securities company and 2,000 shares by N securities company and
1,000 shares by T securities company). As a result, sell orders for 12,000 shares at an asked price and buy orders
for 12,000 shares at the bid price are matched.
c. Lastly, a sell order for 3,000 shares at an asked price of ¥500 (1,000 shares by E securities company, 1,000 shares
by F securities company, and 1,000 shares by G securities company) are matched against buy orders for 10,000
shares at a bid price of ¥500 (4,000 shares by A securities company, 3,000 shares by B securities company, 2,000
shares by C securities company, and 1,000 shares by D securities company). However, there are only 3,000 shares
offered for sale at an asked price of ¥500, while there are buy orders for 10,000 shares at a bid price of ¥500. In
such cases, all the sell orders for 3,000 shares at an asked price of ¥500 are matched against the buy orders for
1,000 shares each from A, B, and C securities company at an asked price of ¥500. As a result, the opening price isdecided at ¥500, and orders for a total of 15,000 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 M securities company for 2,000
shares at a bid price of ¥500 can be consummated by matching the sell order of A securities company for 2,000
shares out of its original sell order for 3,000 shares.
b. When N securities company places a buy order for 10,000 shares at a bid price without limit, it can be consummated by matching it against the remaining 1,000 shares offered for sale by A securities company at an asked
price of ¥500 and a sell order of B securities company for 3,000 shares at an asked price of ¥500 and then a sellorder of C securities company for 4,000 shares at an asked price of ¥501 and a sell order of D securities company
for 2,000 shares at an asked price of ¥501.
c. If K securities company places a sell order for 5,000 shares at an asked price of ¥499, a contract can be concluded
by matching it against a buy order of F securities company for 3,000 shares at a bid price of ¥499 and a buy orderof G securities company for 2,000 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
A securities company
M securities company¥500
2,000 shares
A securities company
N securities company¥500
1,000 〃
B securities company
N securities company¥500
3,000 〃C securities company
N securities company¥501
4,000 〃
D securities company
N securities company¥501
2,000 〃
K securities company
F securities company¥499
3,000 〃
K securities company
G securities company¥499
2,000 〃
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.

170

Chap. IX The Financial Instruments Exchanges (1)5. The Stock Trading System (2)Floor trading is the predominant form of securities trading conducted on thestock exchange. To complement the floor trading system, stock exchanges
introduced off-floor trading systems in the second half of the 1990s.
During the initial period that followed the introduction of these systems,
the systems were used solely for executing cross transactions due in part to
the restriction that required orders to be placed via fax However, the Tokyo
Stock Exchange automated its off-floor 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.
The Tokyo Stock Exchange has continuously improved this trading system
to meet the various transaction needs of investors, including the extension of
its trading hours in January 2008 and establishing it as an independent market from the trading floor.
ToSTNet, the off-floor 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-hourorders of investors are matched based on time priority before the morningand afternoon sessions and after the afternoon sessions at the closing pricesof the preceding session of floor trading (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-Floor Corporate Share Repurchases: This is a method of trading
shares off the floor before the morning session at the previous day’s closingprices or some other reference price as specified. Buyers eligible for the facility are limited to listed companies that intend to repurchase their own
shares.

0.0%

0

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2.0%

2012.01 12.03 12.05 12.07 12.09 12.11 13.01 13.03 13.05 13.07 13.09 13.11 14.01 14.03 14.05 14.07 14.09 14.11 15.01 15.03 15.05 15.07

Ratio of off-floor/floor trading volumes

Off-floor trading

Floor trading

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

(billion yen)
4,500

Chart IX-2. A Comparison of the Trading Value of Floor Trading and Off-Floor Trading of the Tokyo Stock Exchange

Chap. IX The Financial Instruments Exchanges (1)

171

172

Chap. IX The Financial Instruments Exchanges (1)6. The Clearance and Settlement System (1)Securities trading executed on the exchanges is cleared and settled throughthe Japan Securities Clearing Corporation (JSCC). Since January 2003, all
the clearing and settlement carried out for each market has been unified under the JSCC.
Those who are qualified for handling clearing and settling securities transactions through the JSCC are called“clearing participants.”Clearing participants settle with the JSCC the securities transactions that have been conducted on participating exchanges. Meanwhile, securities transactions conductedby those not qualified “( non-clearing participants”) are first settled withclearing participants designated by respective non-clearing participants,
which, in turn, clear such transactions with the JSCC on behalf of non-clearing participants. The main functions performed by the JSCC are (1) to assume obligations, (2) to permit the netting of security positions and fundtransfers, (3) to issue transfer instructions, and (4) to make a settlement guarantee.
Upon the execution of a transaction on a stock exchange, the JSCC assumes associated obligations (for the seller to deliver the securities sold andfor the buyer to make payment for them) and, at the same time, acquires
claims corresponding to both obligations. The JSCC nets long and short positions (by issue) and the proceeds and payments (of all transactions) for eachclearing participant and settles the net balances. Based on this process, the
JSCC helps to enhance efficiency in securities deliveries and fund payments
and to streamline operations. Following netting, the JSCC instructs “( transfer
instructions”) the Japan Securities Depository Center to make transfers of net
securities positions and the Bank of Japan or a bank designated by JSCC as() to make a transfer of the netted amount between“the fund settlement bank”
the accounts of the JSCC and each clearing participant. Throughout the seriesof netting and settlement processes, the JSCC performs and guarantees thesettlement of a trade as the settlement counterparty against the trade counterparty “( settlement guarantee”). Thanks to this arrangement, parties can trade
securities without regard to the settlement risk of original trade counterparties.
The JSCC also performs clearing and settlement functions for OTC trading. It has expanded its scope in recent years, offering clearing and settlement
services for securities traded on proprietary trading systems (PTSs) in 2010.
After the global financial crisis, moreover, the regulatory reform of OTC derivatives transactions has proceeded in all countries, with each country being
obligated to clear and settle standardized OTC derivative transactions
through a central clearing house (central counterparty clearing). For its part,Chap. IX The Financial Instruments Exchanges (1)Chart IX-3.

173

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)

DVP settlement(delivery of securities and payment of proceeds are linked)
Custody and transfer agency
Account ofclearing
participants

Account ofclearing
agencies

Account ofclearing
participants

Settlement banks
Account ofclearing
participants

Account ofclearing
agencies

Account ofparticipants

Notes: 1. As transactions were settled and the account transfer of securities and proceeds was carriedout independently at each stock exchange, the system of delivery of securities and paymentof their proceeds varied from one stock exchange to another.
2. As of July 2010, the JSCC began assuming obligations of transactions done on PTSs.

the JSCC commenced clearing and settlement services for credit default
swaps (CDS) transactions in 2011 and for interest rate swaps in 2012. In October 2013, the JSCC merged with the Japan Government Bond Clearing
Corporation and thereby added OTC JGB transaction clearing and settlement
services.
7. The Clearance 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.
To lessen the risk and to ensure the efficiency of settlement, the JSCC has
incorporated various features into its DVP system. Among other things, it has

174

Chap. IX The Financial Instruments Exchanges (1)Chart IX-4.
Clearing
participants

Delivery and Settlement Using JSCC (OTC Derivatives Transactions)
OTC market(CDS and interest rate swaps)

Contract
concluded

Verification platform

Verification andassumption of
obligation

Post-verificationtransaction data

Clearing
participants/
Non-clearing
participants*

Contract
concluded

Verification andassumption of
obligation

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* 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.

added the netting facility to its version. Under the traditional DVP system, abuyer basically cannot take delivery of shares until such time as payment forthem (via fund transfer) has been verified. This, however, could undermine
the overall efficiency of settlement, including payment and delivery between
clearing participants and non-clearing participants or customers, etc., so improvements have been made so that buyers can take delivery of the sharesearlier. More specifically, a buyer’s clearing participant may take delivery of
securities of a value equivalent to the following three amounts:(1) The provisional net purchase amount deposited with the JSCC as cash
collateral. The provisional net amounts will be adjusted by the amountof failed deliveries, if any, at 2:15 p.m., when cash is due from paying
participants, and at 2:45 p.m., when cash is paid to receiving participants).
(2) The deposit for the facilitation of DVP settlement (voluntarily deposited with the JSCC).
(3) The securities delivered to the JSCC for settlement purposes.
In the event that a participant should fail to deliver a security on the settlement date of a DVP trade (known as a“fail”), the JSCC will carry over thedelivery of and payment for the security to the following day, when delivery
and payment are netted for settlement against the deliveries and payments fortransactions of the said participant due to be settled on that day. However, as,Chap. IX The Financial Instruments Exchanges (1)Chart IX-5.

175

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 IX-6.

The DVP Scheme

Japan Securities Clearing Corporation

Securities company X–13:00 hours (a)B shares (¥1.2m)
after delivery of A sharesand transfer of an estimatedpurchase money

Cash (estimated purchasemoney) ¥300,000–13:00 hours (a)AB¥–14:15hours (b)A shares (¥900,000)
after delivery of B shares
B shares (¥1.2m)–13:00 hours (a)Funds (purchase money)¥300,000
14:45 hours (c)Time to establish the amountof purchase money

Securities company Y

A shares (¥900,000)

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.

176

Chap. IX The Financial Instruments Exchanges (1)in principle, trades are supposed to be settled on the settlement date, prolonged fails cannot be tolerated. For this reason, the DVP settlement rules
also provide for penalties for damages resulting from settlement delays andthe right of a buyer participant who has been assigned a failed position to buyin (or to force the failing seller to buy and deliver the required security).
8. The Book-Entry Transfer System for Stocks, Etc.
Following the computerization of stock certificates for publicly listed companies, stock certificate shares are being electronically deposited and transferred based on the collaboration of the Japan Securities Depository Center,
Inc. (JASDEC), the central depository for shareholder ownership rights, andaccount management institutions, which are securities firms, etc., that have
set up transfer accounts.
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, new share subscription rights, beneficiary certificates of exchange-traded funds (ETFs), Japanese depositary receipts (JDR), and others.
The features and functions of the book-entry transfer system for stocks,
etc., are(1) Shareholders’ownership rights are administered based on the recordsof the transfer account book, with transfers of shares being processed throughthe transfer account. (2) Account management institutions inform JASDEC
of the identification of beneficiary shareholders, including their names andaddresses along with their share ownership data. JASDEC then compiles theinformation to periodically report to respective issuers (general shareholder
notification). (3) Companies produce their records of voting rights for general meetings of shareholders and retained earnings distributions based on aregister 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 theirshareholdings, duration of ownership, and other particulars (individual shareholder notification). They can then exercise their rights for a limited periodof 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 change

Chap. IX The Financial Instruments Exchanges (1)Chart IX-7.

177

Relationships Among Participants, JASDEC and Issuers in the Book-Entry
Transfer System for Stocks, etc.

Book-entry institution(Book-entry AccountRegister)(4) Notice on shareholder
and number of shares

Issuing company(Shareholder Register Controller)(5) Creation of Shareholder Register(3) Notice on shareholder
and number of shares(2) Recording ofshares in theaccount

Account management institution(securities company, bank, etc.)(Book-entry Account Register)(1) Recording of sharesin the accountMember(Shareholder)(6) Voting rights exercise(6) Various notices concerning the general
meeting of shareholders, etc.
(6) Dividend payment

or 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, stock exchanges, stock transfers) for collecting old certificates and distributing newones; and (3) securities companies can reduce the risks and costs associatedwith the storage and transport of certificates.
9. System Development at Financial Instrument Exchanges (1)The following is a summary of the trading system, the market information
system, and the settlement and clearance system that support the stock market.
The system processes stock, corporate bonds with subscription rights, etc.
(convertible bonds), and other transactions from floor trading and the offfloor ToSTNeT market. Orders from a trading participant are mainly enteredthrough the trading partner’s in-house system or through a direct connection

178

Chap. IX The Financial Instruments Exchanges (1)Chart IX-8. Major Changes in the System Before & After Implementation of Electronic
Share Certificate System
Securities Custody and Book-Entry Trans- Book-Entry Transfer System (current)
fer System (prior to going paperless)Share
certificates• Share certificates• No share certificates• Stock certificates deposited with JASDEC
are centrally stored at JASDEC and issued upon request• Stock 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 stock certificates (outside the recorded in the book-entry account regisBook-Entry System)ter• Party recorded in the account register isregarded as the owner of stock certificates

Form of• Managed by shareholder register (outside • Uniformly managed by shareholder registhe Book-Entry System)
tershareholder
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)to the TSE’s trading system.
The computerization of securities trading at the TSE started with the TSE2
trading system (the old stock trading system) that went into operation in January 1982. The current stock trading platform consists of arrowhead, renewed in September 2015, and the ToSTNeT system, which came online in
November 2011. With the basic policy of enhancing three features - reliability, convenience and processing capacity - arrowhead was renewed by adding
enhancements to the original system in order to accommodate the further development of electronic trading, a continuing increase in the number of orders, and other changes in the market environment as well as to respond better to risks that the development of electronic trading can cause on themarket.
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 objective of the market information system is to provide investors

Next-Generation
JSCC Clearing System

OSE Clearing
System

JSCC
Clearing System

Next-Generation
derivatives trading system(Futures/Options)

J-GATE(TSE Futures/Options)

Tdex+ System(Cash)

Next-Generation
arrowhead

OSE cash trading System

PartialIntegration

RP

Discussion of Future Policies

Integration

PartialIntegration

Development

LaunchLaunchFY2016Integration

Within 2014 Integration ofclearing systems (planned)

Integration

Replace

Replace

RP

FY20152014.3 Integration ofderivatives trading systems

Integration

2005.2 2013.7
Unification of margin system

Launch2006.1

Launch2011.2

Launch2011.11

Launch2006.1 (2012.12 Replace devices)
Development

2013.7 Integration of cash
trading systems
Integration

LaunchIntegration

FY20142010.1FY2013

LaunchFY2012

System Integration Schedule of Japan Exchange Group, Inc.

Source: IT Master Plan, Japan Exchange Group, April 2015

Clearing
SystemDerivatives
SystemCash
Trading
System(Cash)

arrowhead

Chart IX-9.

Chap. IX The Financial Instruments Exchanges (1)

179

180

Chap. IX The Financial Instruments Exchanges (1)with information on security prices, thereby facilitating fair price formationand smooth trading of securities. The system furnishes market information
concerning issues eligible for the trading system to trading participants (financial institutions), information venders, newspapers, and news agencies.
The settlement and clearance system for stocks and CBs is designed tosupport delivery and other operations for the settlement and clearance oftransactions executed on the TSE and other markets. Since January 2003, the
JSCC has acted as the cross-market clearing organization for all domestic exchanges. The data for this process from trading participants, etc., is passed
through the TSE’s dedicated arrownet network.
10. System Development at Financial Instrument Exchanges (2)The following is a summary of the trading system and the settlement andclearance 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 derivative market of the OSE. The system processes futures, options, and other transactions from floor trading and the off-floor
market. Orders from a trading participant are mainly entered through thetrading partner’s in-house system or through a direct connection to the TSE’strading system.
The OSE’s trading system for derivatives, J-GATE, has the same functions
and transaction formats used by the systems of major overseas markets. In
introducing the system, the OSE reviewed the complex transaction systempeculiar to Japan to address the shift among investors to algorithmic and other advanced and diversified trading methods. The system is based on the
CLICK XT™ system of the NASDAQ OMX Group to promote the further
globalization of the market and demonstrates world-class performance aswell as a high degree of stability and reliability.
Following the launch of JPX in January 2013, the derivatives markets of
the TSE and 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.
Although the OSE had been using the OSE clearing system while the TSE
used the JSCC clearing system, the clearing organizations were integrated
into JSCC in July 2013 and all margin operations relating to derivates transactions 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.

2

AP

1

AP

3

AP

arrownet

Other Systems

Clearing Systems

Trading Systems

Secondary Center

Other Systems

Clearing Systems

Trading Systems

Primary Center

Image Diagram of Japan Exchange Group’s System

Source: IT Master Plan, Japan Exchange Group, March 2013

Back-up OfficeOsaka Securities
Exchange (Kitahama)Tokyo Stock Exchange(Kabuto-cho)

Securities Cos.
and Other Users

Dedicated VPN, etc.

Chart IX-10.

Chap. IX The Financial Instruments Exchanges (1)181CHAPTER X
The Financial Instruments Exchanges (2)1. The Evolution of the Start-up Market
During the period after World War II when all stock exchanges were closed,
stock trading was done on the OTC market and it becomes more organized ingroup transactions. In fact, the OTC market remained active even after thecountry’s stock exchanges were reopened, resulting in the establishment of
an OTC authorization system in June 1949 to provide some control over active trading. That system was abolished in 1961 after the Tokyo Stock Exchange, Osaka Securities Exchange, and Nagoya Stock Exchange set up Second Sections that absorbed almost all authorized OTC issues. Amid Japan’shigh economic growth, however, there remained a need for unlisted companies to procure funding. So the JSDA introduced the OTC registration system(equity OTC market) in 1963. This was the origin of today’s JASDAQ market. The OTC registration system became the new OTC market in 1983 andserved to complement the conventional stock exchanges, particularly as acapital market for growth and start-up companies.
In 1998, the Securities and Exchange Act was amended, and it redefined
the equity OTC market from a market to complement the conventional stock
exchanges to an OTC securities market in parallel with other exchange markets. In 2004, the market became a securities exchange called the JASDAQ
Securities Exchange, which was subsequently merged with the OSE-operated
Hercules in 2010. As a result of the management integration of the TSE andthe OSE, the exchange has been operated as JASDAQ by the TSE since July2013.
In 1999, though, the Tokyo Stock Exchange created a start-up market
called Mothers. This new market strengthened investor protection throughenhanced disclosure requirements, making it possible for companies withhigh growth prospects to list even if they had negative net worth or were not
yet profitable. Start-up companies were thus able to obtain funding throughsecurities issued at an early stage of their development, while investors were
given an opportunity to invest early in these growth companies. Scandals
among some of the listed companies, however, quickly overrode the merits

Chap. X The Financial Instruments Exchanges (2)Table X-1.

183

History of the JASDAQ Market

Nov. 1983 New over-the-counter (OTC) market is launched.
Dec. 1998 The Securities and Exchange Law defines the JASDAQ market as an OTC securities market (in parallel with other exchange markets).
Apr. 2002 JASDAQ selects J-Stocks and starts publishing the J-Stock index.
Dec. 2004 JASDAQ acquires a stock exchange license and changes its name to the JASDAQ Securities Exchange.
Aug. 2007 JASDAQ establishes the NEO market.
Oct. 2010 JASDAQ, NEO, and Hercules markets merge, forming the new JASDAQ market.
JASDASQ-TOP20 issues selected and publication of index begins.
July 2013 TSE and OSE combine their businesses, with the TSE continuing to operate JASDAQ

Table X-2.

History of the Mothers Market

Nov. 1999 Mothers market is launched.
Nov. 2000 Listing system for foreign companies established.
To ensure a sound market:• Require check prior to listing application (verification of soundness of business between
company and underwriter).
• Enhance degree of detail of inspections in listing screening (increased scope of survey ofrelationships with anti-social forces, etc.).
May 2002 Mothers listing criteria reviewed:• Newly establish delisting criteria regarding sales.
• Newly establish listing screening standards and delisting criteria regarding market capitalization.
• Newly establish requirements for first public offering.
Sep. 2003 Start publishing TSE Mothers Index.
Dec. 2006 Undertake first phase of a comprehensive listing system improvement program.
• Require new applicants to obtain a letter of recommendation from the managing underwriter.
Nov. 2007 Undertake second phase of a comprehensive listing system improvement program.
• Abolish provisions for moving from main exchange to Mothers market (clarify Mothers’
position as a start-up market).
• Abolish sales-related listing criteria.
• Liberalize sales-related delisting criteria (no longer applicable after 5 years on market).
Nov. 2009 Take steps to raise confidence in market.
• Newly establish“appropriateness of business plan”as a listing criteria.
• Newly establish stock price related delisting criteria.
• Require holding of information meeting at least twice a year.
Mar. 2011 Take steps to raise confidence in market and stimulate market• 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).

184

Chap. X The Financial Instruments Exchanges (2)of the Mothers market and prompted the TSE to raise the listing requirements. Investor protection was further fortified under the Financial Instruments Exchange Act with the introduction of quarterly financial reporting requirements and the mandatory establishment of internal control systems.
Listings on Mothers peaked in 2004 and have continued to fall ever since.
The discovery in 2010 of multiple cases of companies submitting false performance reports on an ongoing basis and starting even before their listings,
moreover, dramatically deteriorated confidence in the market. Consequently,
in 2011, the Tokyo Stock Exchange undertook a review of the Mothers’listing system and implemented measures to raise 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 of companies seeking
to list were achievable in the long term. As a result, new listings have been
increasing.
2. Start-up Market Concepts
Mothers Market Concept
In 1999, the Tokyo Stock Exchange launched its Mothers market for start-up
companies under a concept that differentiated Mothers from the TSE’s Firstand Second Sections. The TSE established a listing system for Mothers tobring out the special characteristics of, to increase investor confidence in, andto vitalize trading on this new market. Companies wishing to list on Mothers
are required to demonstrate high growth potential based on their businessmodels, business environment, or other means. Eligibility for listing andthereby accessing the capital market is open to a broad range and number ofgrowth companies and is not restricted by business scale or category. Among
Mothers’listed companies are those with only several tens of employees andthose in such infrastructure fields as information and telecommunications
that boast thousands of employees.
To clarify its start-up market concept, the Tokyo Stock Exchange in 2011
established a process of verifying whether companies listed on the Mothers
market matched that concept. Companies enjoy relatively lax listing criteria
for the first 10 years, after which they are compelled to choose whether tostay on the Mothers market under more strict criteria or move to the Second
Section of the TSE. To stay on Mothers, they must have a total market capitalization of ¥4 billion ($ at the rate of ¥115 to the dollar) or more or submit
a report prepared by an independent specialist affirming the company’s continued high growth potential.

546 companies

213 companies

Market selection
after 10 years
on Mothers

Start-Up Market for
Mid-Sized Companies

TSE, Second
SectionChangeDesignation

Start-Up Market for
Growth Companies

Transfer

1st Section
Designation

Blue Chip Company Market
1,900 companies

Transfer

Transfer

Group ofcompanies thathave special
technologies orbusiness models
with highgrowth potential

Group ofcompanies thatmeet certain
business scale
and performancestandards andhave businessexpansion
potential(As of August 2015)

817 companies

Market for companies in various
business categories and growth stages

JASDAQ
GrowthJASDAQ
Standard

Positioning of Mothers and JASDAQ Markets within Tokyo Stock Exchange

TSE, First Section

Chart X-1.

Chap. X The Financial Instruments Exchanges (2)

185

186

Chap. X The Financial Instruments Exchanges (2)JASDAQ Market Concept
JASDAQ’s policy as the largest start-up market in Japan is“to support thegrowth of new industries and small to midsized start-up companies by providing them with access to equity capital and to offer attractive investment
opportunities for investors.”Based on this policy, JASDAQ is divided into
the two sections of JASDAQ Standard and JASDAQ Growth to enable thesupply of equity capital to a broad range of companies.
JASDAQ Standard is for companies of a certain business size and resultsthat are expected to expand. JASDAQ Growth is for companies with outstanding technology or business models and ample growth potential.
Underlying the JASDAQ market are the concepts of confidence, innovation, and regional and global business. These three concepts guide JASDAQ’scontinuous development as the largest start-up market in Japan and as an
original benchmark for start-up markets globally.
3. Start-up Market Listing Systems
Outline of Listing Criteria for Start-up Markets
The listing criteria for start-up markets are similar to those for the First andSecond Sections of exchanges in that they comprise qualitative (formal requirements) and quantitative (eligibility requirements) criteria. When a stock
exchange receives an application from a company wishing to list on the startup market, it screens for eligibility based on these qualitative and quantitative
criteria.
Mothers Listing Criteria
The Mothers market targets growth companies that have an eye on moving
up to the First Section of the exchange as soon as possible. A requirement forlisting, therefore, is that the company have high growth potential and a letterof recommendation to that effect from its managing underwriter.
As with the First and Second Sections, the formal requirements for listingon Mothers include liquidity-related standards, such as the number of shareholders and tradable shares; the market capitalization; and such going concern related standards as the number of consecutive years in business, regular
audits by a listed audit firm, and compliance with standards related to thedisclosure of business information. Among the notable points about the requirements is that the initial public offering must be 500 trading units ormore and the lack of standards regarding profits and net assets.
The eligibility requirements for the Mothers market take into account themarket concept. They revolve around whether the company seeking to list isin a position to disclose its business, its risk, and other of its relevant infor-

Chap. X The Financial Instruments Exchanges (2)Table X-3.

187

Listing Criteria for the Mothers and JASDAQ Markets

As of September 2015

Quantitative Criteria (Formal Requirements)
Mothers

JASDAQ
Standard

GrowthAmount of net assets(Expected at listing)—¥200 million ($ at the rate of¥115 to the dollar) or more

Correct amountAmount of profit(or market capitalization attime of listing)—(Consolidated)
Profits of at least ¥100 million
over the most recent year (ormarket capitalization of ¥5 billion or more—

No. of shareholders1)(Expected at listing)

300 shareholders or more

Tradable shares2)(Expected at listing)Market value of floating shares: ¥500 million ora through c must be satisfied.
more
a. No. of tradable shares: 2,000 units or moreb. Market value of tradable shares: ¥500 million or morec. Ratio of tradable shares: 25% or more of thelisted stocks

Public or secondaryoffering

Public offering of at least 500 trading units by Public or secondary offering of at least 1,000 tradthe time of listinging units or 10% of listed shares which ever islarger by the time of listing

Market capitalization of the ¥1 billion or moreshares listed(Expected at listing)—

No. of years in existence—

Established a board of directors and have had
continuous operations for more than a year
counting backward from the listing application
date

Financial statements, etc.

The financial statements for the latest two years contain no false statements

Auditor’s opinion“Unqualified opinion”or“qualified opinion”for the latest two years“Unqualified opinion”for the latest year

Others- Audited by a registered listed company audit firm4)- Appointment of a shareholder services agent- Number of shares in Tangen trading units- Restriction on stock transfer- Appointment of designated custody and transfer agent

Notes: 1. No. of shareholders means the number of shareholders who own one or more units of shares.
2.“Tradable Shares”refers to listed shares excluding shares held by parties with a special interest such as officers, shares
owned by the company itself, and shares held by persons who individually own 10% or more of listed shares.
3. One unit is the minimum number of shares necessary for 1 voting right.
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)
Qualitative Criteria (Eligibility Requirements)
Mothers

JASDAQ Standard

JASDAQ Growth(Going concern)(Company growth potential)(Reasonableness of the business plan)
The listing applicant has developed rea- No obstacles to continuing business oper- Have high growth potential
sonable and suitable business plans, and ations
has developed the operating base necessary for executing such business plans, orthere is reasonable expectation that it willdevelop such operating base.
(Reliability of corporate conduct)(Soundness of corporate management)s conduct will disrupt the market.
The company is carrying out business in a No suggestion that the company’fair and faithful manner.
(Effectiveness of corporate governance (Establishment of sound corporate gover- (Establishment of sound corporate governance and effective internal control)and internal management system of an nance and effective internal control)
enterprise)
Company has established a corporate Company has established a corporate
Corporate governance and internal man- governance and internal control system in governance and internal control system inagement system are developed in accor- line with its size and the system functions accordance with its stage of development.
dance with the size, corporate maturity, effectively.
etc. of the enterprise, and functioning
properly.
(Appropriateness of the disclosure of cor- (Adequate corporate disclosure)porate information, risk information, etc.) The company has the organization and systems to make proper disclosure of its
The company is able to make disclosure business details, etc.
of the corporate information, risk information, etc. may be carried out in an appropriate manner.
Other matters deemed necessary by the Exchange from the viewpoint of the public interest or the protection of investors

188

Chap. X The Financial Instruments Exchanges (2)mation and the reasonableness of its business plan and whether it has or is
expected to develop the operating base necessary to execute that plan.
JASDAQ Listing Criteria
The new listing requirements for JASDAQ are those of the First and Second
Sections for the number of shareholders, the market capitalization of tradable
shares, net assets, and profits. JASDAQ also requires a ¥500 million or moremarket capitalization of tradable shares on the initial day of listing, but has
no requirements for the number of tradable shares or the ratio of tradable
shares to issued shares. JASDAQ also accommodates the special characteristics of its JASDAQ Standard and JASDAQ Growth sections by setting separate net assets and profits criteria.
The eligibility requirements for JASDAQ also consider the special characteristics of each section. They include such criteria as the lack of obstacles tocontinuing business operations and evidence of high growth potential. In addition, there are different net asset and profit criteria for JASDAQ Standard
and JASDAQ Growth.
4. The Listing Administration System for Start-up Market
The listing administration system for the start-up market operates much likethe system for First and Second Sections. Stock exchanges have establishedlisting administration rules and conclude an agreement with listing companies regarding compliance with those rules.
Timely Disclosure of Business Information
The Tokyo Stock Exchange has established rules as part of its listing regulations requiring listed companies to make timely disclosure of material corporate information.
It requires listed companies to provide timely and accurate disclosure ofany material corporate information. Timely disclosure requirements are basically the same whether companies list on the First and Second Sections, onMothers, or on JASDAQ. One difference for companies on the Mothers market is the requirement to hold an investor information meeting at least twice ayear. And JASDAQ Growth section companies are obliged to formulate andsubmit a medium-term business plan to the exchange, to hold an investor information meeting about that plan, and to and make the plan public.
Corporate Code of Conduct
Start-up markets and First and Second Sections have similar codes of conduct. The JASDAQ Growth section, however, grants listed companies a

Chap. X The Financial Instruments Exchanges (2)Table X-4.

189

Criteria for Delisting Stocks (Tokyo Stock Exchange)

As of September 2015

Mothers

JASDAQ① No. of shareholders

Less than 150 (with a grace period of one year)② Tradable shares

When either a or b occur.
When any of a through c occur.
a. No. of tradable shares: 1,000 units or more (with a. No. of tradable shares: less than 500 units (withone year grace period)
one year grace period)b. Market value of tradable shares: ¥250 million b.B. Market value of tradable shares: less ¥250
million or more (with one year grace period)or more (with one year grace period)c. Ratio of tradable shares: 5% or more of the listed stocks③ Negative net worth

If the issuer falls into negative net worth for two If the issuer falls into negative net worth for two
consecutive terms1) (The grace period is extended consecutive terms (The grace period is extended
for another year if such issuer has a credible plan for another year if such issuer has a credible plan
to wipe out the negative net worth within a year to wipe out the negative net worth within a year
through rehabilitation proceedings.)
through rehabilitation proceedings.)④ Trading volume

Either the average monthly trading volume overthe past one year is less than ten units or no trades
were made for the past three months⑤ Sales

Less than ¥100 million for the most recent one
year.2)—⑥ Market capitalization When the market capitalization of the shares listed
falls short of ¥500 million and if it fails to increaseto ¥500 billion within the succeeding nine months(or three months if recovery plans are not submitted)—⑦ Stock price—

When the stock price falls below 10% of the pub- When the stock price falls below ¥10 yen andlic offering price at the time of initial listing after does not recover to ¥10 or above within three
3 years have elapsed since listing and fails to in- months.
crease back to 10% or more within 9 months (orthree months if recovery plans are not submitted).3)⑧ Performance—

When the operating income and the cash flow in
operating activities for the 4 most recent consolidated fiscal years are negative and this state is not
resolved within 1 year.4)⑨ Profits—(Only for Growth Section)
When consolidated operating income of a company that had negative operating income for the consolidated fiscal year of a listing application does
not become positive within 1 year after remaining
negative for 9 fiscal years after listing.

⑩ Bankruptcy, etc.

When the issuer becomes insolvent or falls into a situation requiring rehabilitation or reorganization
proceedings or liquidation or an equivalent situation (However, if such issuer discloses a rehabilitation/reorganization plan and the market capitalization over one month thereafter remains above ¥500
million, the listing will be maintained.)⑪ Suspension of busi- When a listed issuer suspends its business activities or falls into a situation similar thereto
ness activities⑫ Inappropriate merg- When the stock exchange determines that a listed company that acquired another company has in efers
fect failed to survive the merger and that the surviving company has failed to meet standards equivalent to the initial listing requirements within three years of such merger
When the stock exchange determines that there has been a marked deterioration in the soundness of⑬ Deterioration insoundness of transac- transactions between the company and its controlling shareholder within three years of a change intions with controlling the controlling shareholder due to a third-party allotment
shareholder⑭ Delays in securities When a listed issuer fails to file an annual or quarterly securities report together with an auditor’s refilings
port or quarterly review report within one month following the statutory deadline (if another deadline
has been approved for filing, when the listed issuers fails to file within 8 days following that deadline)⑮ False statements or • When a false statement is made in a securities filing and the competent stock exchange finds thatadverse opinion
maintaining order on the exchange could be difficult without immediate delisting of the issue• When an audit report contains an improper opinion or no auditors’
opinion and the competent stock
exchange finds that maintaining order on the exchange could be difficult without immediate delisting of the issue⑯ Securities on Alert• When despite the issue meeting criteria to be designated as securities on alert, the competent stock
exchange determines that there is no likelihood of improvement in the issuing company’s internal
control system, etc.
• When during the process of designating the issue as securities on alert, the competent stock exchange determines that there is no likelihood of improvement in the issuing company’s internal control system, etc.
• When despite having designated the issue as securities on alert, the competent stock exchange determines that there is no likelihood of improvement in the issuing company’s internal control system,etc.

⑰ Breach of the listing When a listed company seriously violates the listing agreement or pledge concerning timely discloagreement
sure or when it becomes no longer a party to the listing agreement⑱ Undue restrictions on When shareholders’rights or exercise thereof are unduly restricted
shareholders’rights
Suspension of a listed issuer by the bank, failure to appoint a shareholder services agent, certain restrictions on share transfers, becoming a wholly owned subsidiary of another company, cancellationof the custody and transfer agent agreement, wholly call, involvement with antisocial groups, andwhen the competent stock exchange finds that the delisting of a given stock is in the public interest or
appropriate for the protection of investors⑲ Others

Notes: 1. Excluding cases where negative worth has continued for three years following listing.
2. Excluding cases where the company has posted a profit and where the company’s sales have been less than ¥100 million for five years following listing.
3. Limited to Mothers-listed companies listed on or after November 9, 2009.
4. Excluding JASDAQ Growth-listed companies in their first consolidated fiscal year following that of the listing application.

190

Chap. X The Financial Instruments Exchanges (2)grace period in the application of some aspects of its code of conduct.
Criteria for Delisting Stocks
The Tokyo Stock Exchange has delisting criteria built into its listing regulations. An issuing company that meets any of those criteria may be delisted.
Securities under supervision and securities on alert on its Mothers start-up
market face the same conditions for avoiding delisting as those on the TSE’sFirst and Second Sections.
After reviewing its Mothers listing system, the exchange has established
new delisting criteria for sales and stock prices on the Mothers market. The
exchange took this step to earn greater trust among Mothers’investors, to enhance the appeal of the Mothers market, and to prevent any sudden changes
in the quality of the management of a company following its listing on Mothers.
Similarly, JASDAQ’s delisting criteria are designed to maintain or improve the overall quality of its issuers. Newly established criteria include
business performance standards to ensure investor confidence in the market
and stock price standards that eliminate issues with stock prices that havelanguished at low levels for a certain period of time. Following, moreover,the separation of issuers into the JASDAQ Standard and JASDAQ Growth
sections, the exchange revised its delisting criteria in line with the special
characteristics of each section.
5. An Outline of the OTC Stock Market(1) What Is OTC Trading?: In addition to shares traded on stock exchanges, shares are also traded over the counter. As only those listed issues thatmeet certain listing standards may be traded on exchanges, issues that are noteligible for exchange trading need to be traded elsewhere, outside listed exchanges. Such shares are traded between brokers/dealers or between customers and brokers/dealers over the counter in negotiated transactions known as“over-the-counter (OTC) transactions.”While trading and other activities involving listed shares are regulated by the competent stock exchange, OTC
stock trading is regulated by the“Regulations Concerning Over-the-Counter
Securities”of the 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-exchangetransactions 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 the market becomes more organized.

Chap. X The Financial Instruments Exchanges (2)Table X-5.

191

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 regulations of theJSDA.
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 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 Law.
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 Law (now FIEA) 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 Shareholder Community System are established in May.
2018 The Green Sheet System is scheduled to be abolished in March.

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 tradedover the counter to such an extent, in fact, that an OTC stock market, an organized market where OTC securities that meet the registration requirementsof 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 Law, and, in 1983,
the OTC stock market was defined as a market that complements exchange
markets and was reorganized drastically into the JASDAQ market for trading
shares of small to medium-sized companies with reasonable track records.
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 Law in 1998, but it exists only in law following the up-

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Chap. X The Financial Instruments Exchanges (2)grading of the JASDAQ market into the JASDAQ Securities Exchange inDecember 2004.
Because a need arose for trading unregistered or unlisted stocks, the JSDA
established the green sheet system in July 1997 and in May 2003 created asystem for equity crowdfunding and the shareholder community, enablingsales solicitations for such issues. Another category of traded unregistered or
unlisted stocks is the Aozora issues or private equity issues.
6. OTC Securities, Etc.
(1) Aozora Issues: Issuers of unlisted or unregistered stocks are not requiredby law to disclose their corporate information, and, in principle, JSDA rules
prohibit securities companies from soliciting investment in such issues. Thisis because soliciting the investing public, including individual investors, for
an order to buy or sell a security on which no pertinent corporate information
is available would subject the public to significant risks and cause various
problems from the standpoint of the protection of investors, and such selfregulations have been in place for a long time.
However, brokers/dealers may accept unsolicited orders for such issues
and trade them with customers as so-called Aozora issues (OTC securities) innegotiated transactions. The regulations pertaining to such transactions (including those prohibiting them from accepting market orders or affecting
when-issued or margin transactions) are contained in the Regulations Concerning Over-the-Counter Securities of the JSDA.
The April 2004 amendment to the Securities and Exchange Law 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 a“Corporate Information
Memorandum”are considered to carry less risk than other unregistered issues. And the regulations of the JSDA define them as“over-the-counter-handled securities,”or OTC securities eligible for solicitation by promoting brokers/dealers.
A Corporate Information Memorandum 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

Chap. X The Financial Instruments Exchanges (2)Chart X-2.

193

Relationships Between OTC Securities and Listed/Registered Issues
Exchange markets Listed issues(Tokyo, Osaka, Nagoya, Sapporo, and Fukuoka)

OTC market Registered issues(At present, there is no market or issue falling within the purview of this category)OTC securities(Unlisted/unregistered issues)
Equity Crowdfunding

Shareholder Community

OTC-handled securities

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 shareholder community

Shares and other securities
issued by companies incompliance with continuous
disclosure requirements or
those disclosing specified
corporate information in a
Corporate Information
Memorandum

Restrictions apply in termsof the amount of funds
raised per issuer and theamount of investment perinvestor

Green sheet issues
Phoenix issues
Tradable securities under
the Financial Instruments
and Exchange Act
Issues for which securities companies that havebeen designated by the
JSDA present quotations
and solicit investments

accountants or persons with equivalent designation that the company’s financial statements are unqualified or qualified in light of the provisions of the
Financial Instruments and Exchange Act or in conformity with those of theCompanies Act. Such memorandum shall also contain forward-looking statements as to the outline of the company’s business plan, its feasibility, andother aspects. In the case of a company in compliance with continuous disclosure requirements, a securities report or a securities registration statement

194

Chap. X The Financial Instruments Exchanges (2)with an unqualified or qualified opinion of the auditor can be substituted for
the Corporate Information Memorandum.
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 a Corporate Information Memorandum. The ban is fully
lifted for unlisted securities of listed companies based on the condition thatthe issuer publishes a Corporate Information Memorandum.
7. Equity Crowdfunding (1)(1) What is Equity Crowdfunding?: The term“crowdfunding”is a coined
word composed of“crowd”and raising funds“funding.”It refers to the practice of funding start-ups and growth companies by asking a large number ofpeople to each contribute a small amount of money, often performed via Internet-mediated registries.
With the use of the Internet, crowdfunding enables raising funds, even ona small scale, at low cost and over a wide range by collecting a small amountof money from a large number of contributors. Thus crowdfunding has rapidly become a popular option for raising capital in the last few years. Given thecircumstances, an equity crowdfunding system was introduced in May 2015
with a view to promoting provision of risk money to start-ups and growthcompanies and enabling such companies to raise funds 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 Subscription Handling Agents) that areregistered as Type I Financial Instruments Business Operators.
(2) Amount Restrictions and Prohibition of Non-Online Solicitation
Methods: In light of the nature of the crowdfunding scheme of raising asmall 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 ($ at the rate of ¥115 to thedollar) 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Chap. X The Financial Instruments Exchanges (2)Chart X-3.

195

Crowdfunding Patterns

Contribution-type

Purchase-type
Crowdfunding
Loan-type

Equity-type
Subject to self-regulatory rules of the JSDA

Investment-type
Fund-type
Subject to self-regulatory rules of Type II
Financial Instruments Firms Association

Chart X-4.
IssuerConcept Diagram of Equity Crowdfunding
Crowdfunding vendor

Portal site

• Business contents• Application of funds, etc.

Investor

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Chap. X The Financial Instruments Exchanges (2)the equity crowdfunding scheme, securities companies, etc. may carefully
examine each issuer and verify the nature of their business, financial standing, appropriateness of business plan, intended use of funds, etc. in accordance with their internal rules and may handle only such issuers they recognize to be proper. Securities companies, etc. also enter into a contract witheach issuer 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.
8. 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 (suchas no obligation to provide disclosure comparable to that prescribed by the
Financial Instruments and Exchange Act or to the timely disclosure requiredby stock exchanges) via the website for inspection 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 issue pre-contract documents 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: After completing the handling of investment under the equity crowdfunding scheme, securities companies, etc. must enter into an agreement with each respective issuer with regard to the proper offering of information on a periodic basis by thefunds-raising issuer to the investors who purchased the OTC securities andmust ensure that the issuer provides such information in accordance with theagreement.
(6) Reporting and Announcement of Investment Status: Securities companies, etc. must report the status of investments made under the equity
crowdfunding scheme on a monthly basis to the JSDA, and the JSDA publishes the information reported.
(7) Establishment of Operation Management System: Securities companies, etc. must formulate internal regulations and put in place an operation
management system necessary for properly carrying out equity crowdfunding
while complying with laws and regulations and their self-regulatory regula-Chap. X The Financial Instruments Exchanges (2)197Table X-6. JSDA’s Self-Regulatory Regulations
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 pre-contract documents
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

Chart X-5.

Provision of Information to Investors and Receipt/Delivery of Documents
in Equity Crowdfunding

During the term of crowdfunding (during the offering period)

Securities firm
Intermediary specializing
in small-amountequity funding

Securities firm
Intermediary specializing
in small-amountequity funding

Securities firm
Intermediary specializing
in small-amountequity funding

Provision of information
via website• Information on issues
and issuers• Information on
financing• Risk information• OtherRequest for a letter ofintent from investors
purchasing OTC
securities through theequity crowdfunding
scheme for the firsttime

Issuance of pre-contract
documents• Information on issues
and issuers• Information on
financing• Risk information• Other

After completion of
crowdfunding(periodically)

IssuerInformation on businessconditions

198

Chap. X The Financial Instruments Exchanges (2)tions. 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 or such party is requested to make improvements, etc. to its operation management system due to a violation of law or
its self-regulatory regulation or to other reasons, the securities company orsuch party must not be engaged in equity crowdfunding until the requested
improvements, etc. are completed.
9. Shareholder Community (1)(1) What is Shareholder Community?: The JSDA has been operating theGreen Sheet Issue System, a mechanism for promoting the smooth circulation of unlisted securities. However, the use of the system has become stagnant, due to the weakening significance of the system as a function to complement stock exchanges as listing criteria for emerging markets becominglax and to the disclosure burden imposed, which is comparable to that of listed companies (explanations on the company and its business similar to thoserequired by the Financial Instruments and Exchange Act and the timely disclosure obligation associated with the application of insider trading regulations). Meanwhile, needs for trading and conversion of unlisted stocks of locally operating firms, etc. continued to exist at a certain level, and there werecalls for a system to accommodate these needs.
Under these circumstances, the Shareholder Community System was introduced in May 2015 as a system for unlisted stock trading and fund-raising to
replace the Green Sheet System.
With a view to restricting distribution, Shareholder Community was established as a mechanism in which a securities company creates a shareholder
community by OTC issue and accepts investments only from investors thatproactively declare and participate in the community. Since distribution ofunlisted issues is restricted under the Shareholder Community System because the scope of solicitation and trading is limited to participants of theshareholder community, 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 shareholder community, it must register with the JSDA and receive designation as an operating
member. The JSDA designates and announces a securities company as an operating member if it finds no fault in the registration documents, but may decide not to grant designation if the securities company is found to be in violation of law or self-regulatory regulations.

Chap. X The Financial Instruments Exchanges (2)Table X-7.

199

Major Components of the JSDA’s Self-Regulatory Rules regarding theShareholder Community System

1 . Securities firms construct a shareholder community for an unlisted stock. Investors intending to invest in the unlisted stock participate in the shareholder community.
• Assumed principal participants include officers and employees and their families of the issuer;s business.
shareholders and business partners of the issuer; and users and customers of the issuer’
2 . Securities firms structuring and operating a shareholder community receive designation by JSDA as
operating members.
3 . Solicitation for investment is allowed only toward investors who participate in a shareholder community.
• No solicitation for investment to investors who are not participants.
• No solicitation for participation to investors who are not participants.
• Investors not participating in a shareholder community are provided with only the basic information concerning the shareholder community issue.
4 . The issuer is screened and measures for eliminating antisocial forces are put in place.
5 . Investors participating in a shareholder community are provided with financial statements, business
reports and other information based on the Companies Act in regard to the issuer.
6 . Pre-contract documents are issued.
7 . Investors who participate in a shareholder community for the first time are requested to submit aletter of intent.
8 . An operations control structure is established.
9 . Weekly reporting and public disclosure of trades are made.
10. The Green Sheet Issue System will be abolished as of March 31, 2018.

Chart X-6.

Basic Mechanism of Shareholder Community
Operating members (securities firms)

Internet

Telephone

Face-to-face

Solicitation

Solicitation

Solicitation

Solicitation

Solicitation

Solicitation

Internet

Telephone

Face-to-faceOperating members may solicit investors who participate
in a shareholder community to make investments.

Operating members are prohibited from soliciting investors
who are not shareholder community participants to participate
in a shareholder community or to make investments.

Shareholder community

200

Chap. X The Financial Instruments Exchanges (2)Cancellation of designation as operating member is normally based on notification submitted by the operating member. If, however, the JSDA findsthat an operating member is in violation of law or self-regulatory regulations,etc. it may cancel the designation altogether or suspend the designation for acertain period of time even without the aforesaid notification.
(3) Prohibition of Solicitation for Participation in Shareholder Community and of Solicitation for Investment: Participation in the shareholder
community is based on an investor’s proactive declaration. Therefore, operating members may not solicit investors who are not shareholder community
participants to participate in a shareholder community or to make investments.
OTC trading of shareholder community issues must be executed between
participants of a shareholder community operated by an operating member or
between a participant and the operating member.
10. Shareholder Community (2)(4) Examination of Issues and Issuers: In handling OTC securities forwhich shareholder community is to be created, operating members may
strictly examine each issuer and verify the nature of their business, financial
standing, etc. in accordance with their internal rules and may handle only
such issuers they recognize to be proper. Operating members also enter into acontract with each issuer to the effect that the issuer is not an antisocial force,and must dissolve the shareholder community if it is recognized that an issuer
corresponds to an antisocial force.
(5) Provision of Information on Shareholder Community and Receipt/
Delivery of Documents: Operating members are to provide investors with
the necessary information on shareholder community issues depending on
the magnitude of involvement (participation or declaration of participation in
the shareholder community, or not) by each investor with the shareholder
community.
Furthermore, in order to receive confirmation from investors executing
OTC transactions of shareholder 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 issue pre-contract documents containing at minimum therisks specific to such OTC transactions and other matters (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 for every OTC transaction.

Chap. X The Financial Instruments Exchanges (2)Chart X-7.

201

Provision of information regarding shareholder community issues
Operating Member (securities company)
Shareholder Community

In order to have an investor who intends
to participate in a shareholder community
for the first time understand the contentsof risks, commission, etc. and to receive
confirmation to the effect that the investor
will execute transactions on its judgment
and responsibility, a document indicating
the contents of pre-contract documents
is issued and an explanation on the
document is given. Then the investor is
asked to submit a confirmation note.

Chart X-8.

The following is addressed to a participant(investor) who executes transactions ofshareholder community issues:(1) Issue pre-contract documents, and(2) Convey to the participant that theparticipant
may request explanations on the contentsof documents prescribed under the Financial
Instruments and Exchange Act and theCompanies Act provided to investors
participating in a shareholder community.

Receipt/delivery of documents regarding shareholder community issues
Operating Member (securities company)
Shareholder Community

To an investor who does notparticipate in a shareholder
community:(1) Name of issue(2) URL of issuer s website (ortelephone number, if theissuer does not have aparticular website)(3) Benefits for shareholders(shareholder incentives)(4) If handling an offering,private placement or
secondary distribution, thefact thereof and theapplication period

To an investor who intends toparticipate in a shareholder
community:(1) Basic information on issuersof shareholder community
issues, such as business year,
timing of annual general
meeting of shareholders,
and record date of voting
rights of annual general
meeting of shareholders(2) Information on the methodof receiving information on
issuers of shareholder
community issues or the
method of inspecting suchinformation

To an investor participating in a shareholder
community:(1) Disclosure documents provided for in the
Financial Instruments and Exchange Act(Securities Registration Report, Securities
Report, etc.)(2) Financial statements and business reportprovided for in the Companies Act
Information conforming to Businessrisks, etc. and Overview of stock
administration of the submitting companyof the Securities Report(3) If handling an offering, etc., information
conforming to Securities information of
the Securities Registration Report(4) Other information recognized as necessary
by the operating member

202

Chap. X The Financial Instruments Exchanges (2)(6) Withdrawal from and Dissolution of Shareholder Community: Operating members shall perform the withdrawal procedure when notified by aparticipant of the shareholder community of the participant’s intent to withdraw 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 shareholder communities it operates.
(7) Reporting and Announcement of Handling Status: Operating members
must report the status of OTC trading of shareholder community issues theyhandle on a weekly basis to the JSDA, and the JSDA must publish the information reported.
(8) Establishment of Operation Management System: Operating members
and securities companies intending to become operating members must formulate internal regulations and put in place an operation management system
necessary for properly operating shareholder communities. In addition, operating members are required to prepare an outline of their shareholder community operating method, etc. and publish the outline.
11. The Green Sheet System (1)(1) An Outline of the Green Sheet System: Even after the listing standardsof exchanges had been eased to allow some of the loss-making companies togo public, it was deemed necessary to improve the market for issuing andtrading unlisted shares in order to improve the financing environment for
venture businesses. Aware of this, the JSDA amended its regulations concerning OTC securities in July 1997 to allow its member brokers to solicit customers for investment in securities, including OTC-handled securities, filinga Corporate Information Memorandum so that brokers may market such securities at times, including, but not limited to, the course of a primary or secondary offering or private placement, provided that the brokers continuously
publish quotes and other relevant market information for the securities. This
trading framework is called the green sheet system.
When a securities company wishes to solicit customers for investment in asecurity as a green sheet issue, it must, after having conducted a preliminary
review, file an application with the JSDA. The JSDA will then designate such
issue to one of the categories for green sheet issues according to its attributes,
after having verified (1) that the issuer does not restrict the transfer of the security in question, (2) that stock certificates conform to the form designatedby the JSDA, and (3) that the issuer has appointed a transfer agent for shareadministration services.
Green sheet issues are divided into three categories: emerging issues (securities issued by emerging venture companies that have growth potential

203

Chap. X The Financial Instruments Exchanges (2)Table X-8.

Number of Green Sheet Issues and Its Breakdown
and Number of Phoenix Issues
Division, etc.

No. of issues

Green sheet issues

24 issues

Emerging issues

8 issues

Ordinary issues

16 issues

Investment trust and SPC issues

0 issue

Phoenix issues

2 issues

As of September 30, 2015

Chart X-9.

Changes in the Green Sheet Market(thousands of yen)(issues)

600,000

Trading volume
No. of designated issues

500,000

120
100

400,000

80

300,000

60

200,000

40

100,000

20

0

0
015
e2
Jun 2014c.
De 2014e
Jun 013c. 2
De 2013eJun 2012c.
De 2012e
Jun 011c. 2
De 2011e
Jun 010c. 2
De 2010eJun 2009c.
De 2009e
Jun 008c. 2
De 2008e
Jun 2007c.
De 2007e
Jun 2006c.
De 2006e
Jun 005c. 2
De 2005e
Jun 2004c.
De 2004e
Jun 2003c.
De 2003e
Jun 002c. 2
De 2002e
Jun 2001c.
De 2001e
Jun 2000c.
De 2000e
Jun

Table X-9.

Comparison of the Total Market Capitalization(billions of yen)

Green Sheet

14.2

Q-Board (Fukuoka)

21.3

Mothers (TSE)

3,155.6

Ambitious (Sapporo)

74.2

JASDAQ (TSE)

8,468.6

TOKYO PRO Market

9.0

Centrex (Nagoya)24.3

as of the end of September 2015 (The figure for the green sheet market is based on the last trade prices.)

204

Chap. X The Financial Instruments Exchanges (2)and aspire to go public); investment trust/SPC issues (certificates of investment trusts, including real estate investment trusts, or REITs); and ordinary
issues (other securities). The JSDA spun off the previously included Phoenix
issues into a separate system in 2008. A handling member sponsoring issues
for green sheet designation is required to review the issuer of such security
with respect to specified criteria in accordance with independent guidelines
of its own.
Regulations on insider trading in green sheet issues and Phoenix issues(both defined as“tradable securities”in Article 67, Paragraph 18, of the Financial Instruments and Exchange Act) were set out in the amendment to the
Securities and Exchange Law of April 2005. Based on the regulations, handling members are charged with responsibility for guiding the issuers of securities that they sponsor into making timely disclosure of corporate information, including quarterly reports, on an equivalent basis with listedcompanies, as well as publishing such information through the TDnet disclosure service of the TSE.
In the past, only sponsoring members that had applied for green sheet designation of an issue were allowed to make solicitation for investment in theissue in question. Under the April 2005 amendment to the relevant regulations, however, the JSDA newly created associate handling memberships thatallow member companies other than handling members to make solicitations
involving such issues by merely publishing their quotes and reporting trades.
In addition, other member brokers are allowed to trade in green sheet issues
within the framework of the system.
12. The Green Sheet System (2)(2) Termination of Green Sheet System: As previously described, in conjunction with the establishment of the Shareholder Community System, a
new system for promoting unlisted stocks, the Green Sheet System will beabolished as of March 31, 2018. Until then, no new issue designation and no
additional member designation will be made.
(3) Handling After Designation of Issues: With a view to ensuring fair priceformation of green sheet issues and promoting sound development of the system, it is extremely important for listed companies to make proper disclosurein a timely manner of information concerning material corporate matters that
may influence the investment decision making of investors, the very basis onwhich stock prices are formed. Therefore, handling members are required to
guide issuers to disclose information on green sheet issues along with corporate information in a timely fashion, and such corporate information must be
disclosed via the TDnet in a timely fashion.

Chap. X The Financial Instruments Exchanges (2)Table X-10.

205

Recent Business Results and Dividends of Emerging and Ordinary Issues

Levels of profit

Operating profit

Current profit

After-tax profits¥30 million or more

6/12

6/12

4/8

¥10 million to less than ¥30 million

1/4

1/3

1/4

¥0 to less than ¥10 million

0/2

0/3

2/6

A deficit of ¥0 to ¥10 million

0/0

0/0

0/0

A deficit of ¥50 million to ¥10 million

0/3

0/2

0/2

A deficit of ¥100 million to ¥50 million

1/3

1/4

0/3

A deficit of more than ¥100 million

0/0

0/0

1/1

Figures in parentheses denote“the number of companies that paid dividends/the number of companies
falling into the category.”*The study covers 24 issues under green sheet designation as of September 30, 2015 and information disclosed as of the said date.

Chart X-10.

Amounts of Capital Raised at the Time the Issue was Categorized as
Emerging and Ordinary Issues
1 companies¥100 m or more

6 companies¥90 m plus
2 companies¥80 m plus
¥70 m plus 0 companies

2 companies¥60 m plus
¥50 m plus 0 companies

2 companies¥40 m plus
¥30 m plus 0 companies¥20 m plus

1 companies¥10 m plus

1 companies

Less than ¥10 m 0 companies
0

1

2

3

4

5

6

7
companies

The survey covers 18 issues that underwent financing at the point of designation as of September 30, 2015.
*Reasons why there are many small-amount fund-raising(1) When any firm makes a public offering of its shares with a total value of ¥100 million or above, theissuer must file a securities report, and this disqualifies the issuer for the status of green sheet.
(2) For small firms that need no large-scale financing, a cheaper financing cost and speedy financing areimportant.

206

Chap. X The Financial Instruments Exchanges (2)Currently, there are three types of green sheet issue designation. Of thesethree types, given that issues in the emerging category must be recognized tohave growth potential not only at the time of new designation but also thereafter, if an issuer of an emerging issue fails to record earnings half as large as
initially projected for the fiscal year following the year of designation, or if asponsoring handling member finds an emerging issue unfit for inclusion in
the category upon biennial reviews conducted every two years thereafter,such issues will be reassigned to the category of ordinary issues.
(4) Revocation of Green Sheet Designation: In the past, designation as agreen sheet issue was revoked only when there was no longer a sponsoring
handling member. Subsequently, however, green sheet issues have come under the jurisdiction of various laws and regulations, and it was decided in
April 2005 that the JSDA may revoke the green sheet designation of an issue
contingent upon certain events occurring to the issue or its issuer. Such
events, as mentioned above, include listing on stock exchanges, the commencement of bankruptcy proceedings, rehabilitation or reorganization proceedings or corporate liquidation, bank suspension, discontinuation of business activities, delays in filing the Corporate Information Memorandum,
false statements in disclosure documents, failure to obtain an unqualified or
qualified opinion from the auditor, failure of a handling member to makeproper and timely reports of corporate information concerning an issue itsponsors, termination of the transfer agent, restricting transfer of shares, becoming a wholly owned subsidiary, and when revocation is considered appropriate in the light of the public interest or investor protection.
13. The Green Sheet System (3)(5) Trading in Green Sheet Issues: Because they are OTC trading, green
sheet issues usually take the form of negotiated transactions. Japan Securities
Agents, Ltd., did launch a proprietary trading system (PTS) in July 2003, butsince PTS operations were later terminated in June 2010, most trades continue to be negotiated transactions between securities companies and their customers.
Trading in green sheet issues is conducted from 9 a.m. to 3 p.m., including
the intersession period of listed markets between 11:31 a.m. and 12:29 p.m.
Securities companies may make investment solicitation and accept orders forgreen sheet issues at any time.
A broker shall obtain from the customer who conducts a transaction ingreen sheet issues for the first time a letter confirming that he or she will invest with full understanding of the green sheet system and the risks associated with green sheet issues. In addition, in soliciting customers for investment

Chap. X The Financial Instruments Exchanges (2)Chart X-11.

207

The Flow of Solicitation for Investment in Green Sheet Issues

Customer executing a green sheet issue transaction for the first time

Request for a
confirmation
note

Chart X-12.

Issuance ofpre-contract
documents(Explanation using acompany description
sheet)
Solicitation of
investment

Indication thatthe issue isa green sheet
issue ofXX category

Delivery/Settlement

An Outline of Trading in Green Sheet Issues and Confirmation Note
Quotations andreport of contracts

Handling member company(the PTS is not used, and acontract is concluded
within the company)

Customers

Order receipt/
Contract

Acceptance of an orderand confirmation note

Japan Securities
Dealers Association(JSDA)

General securities
companies

Customers

in a green sheet security, a broker must give a full and fair explanation of theissue and issuer using the Corporate Information Memorandum as well as deliver and make explanation about a document that is required to be delivered
prior to the conclusion of a contract under Article 37, Paragraph 3, of the Financial Instruments and Exchange Act.
Handling members and associate handling members shall publish nonbinding bid or offer quotes and other market information concerning the green
sheet issues they sponsor, in principle, on every business day, and the JSDA
shall compile such information for public dissemination. (Please note thatmembers of the green sheet system do not have obligations to execute trades
according to their quotes.)
Securities companies that have accepted orders from, or have entered into

208

Chap. X The Financial Instruments Exchanges (2)transactions with, their customers must report such orders or transactions to
the JSDA by 5 p.m. on the same day, and the JSDA, in turn, must publish
such information on its website and elsewhere.
In addition to the application of insider trading regulations as provided forin the amendment to the Securities and Exchange Act of April 2005, theJSDA regulations concerning green sheet issues was adopted, banning member brokers/dealers from accepting market orders; effecting margin or whenissued transactions with customers; prearranging trades with other brokers/
dealers; or engaging in excessive trading, kiting, bear-raiding, or other improper trading practices.
Transactions in green sheet issues shall be settled and the securities tradedshall be delivered, in principle, on the fourth business day counting from andincluding the trade date (T+3 settlement). As green sheet issues are not eligible for custody with the Japan Securities Depository Center, Inc., share delivery and trade settlement take place directly between buyers and sellers. Starting April 2005, the JSDA has been monitoring trading in green sheet issues
for irregularities, including insider trading. In response to such irregularities,
the JSDA will suspend trading in the issue, and no transactions may be conducted during the trading suspension.
14. Phoenix Issue System
The Phoenix issue system is an OTC trading system launched by the JSDA
on March 31, 2008, to provide a marketplace for issues that had been delistedfrom stock exchanges. Phoenix issues started off as a category in the green
sheet issue system. In response to the successive delisting of large-cap issues,
such as Seibu Railway, Kanebo, and Livedoor, however, the JSDA established a separate system for Phoenix issues to improve investors’opportunities to cash out of delisted issues and to provide the necessary framework fordelisted companies to have a second chance at re-listing (nevertheless, they
are still handled issues).
Traditionally, many issuers of shares that were delisted from stock exchanges provided an inadequate degree of disclosure on their business activities compared with listed companies, which were obliged to provide disclosure according to the regulations, etc., of the Financial Instruments andExchange Act. As a result, securities companies were, in principle, prohibitedby the JSDA from soliciting sales of securities issued by delisted companies.
For that reason, investors holding these delisted shares could not utilize securities companies in their search for buyers. Unable to discover buyers on theirown, individual investors in particular were stuck with holding the shares until the company revitalized itself and re-listed.

Chap. X The Financial Instruments Exchanges (2)Table X-11.

209

Comparison of the Green Sheet Issue and Phoenix Issue Systems
Green sheet issue system

Phoenix issue system

Eligible securities

Stocks, share option certificates, Stocks and bonds with new sharebonds with new share subscrip- subscription rights attached thattion rights, preferred notes, in- have been delisted
vestment securities, and investment equity subscription rightcertificates

Designation required

Yes

Yes

Obligation for handling mem- Yes
ber to review issue

No

Criteria for losing designation

Yes

Yes

Investment solicitation

Handling members and associate With the exception of investors
handling members
selling on their on own volition,
only handling members and associate handling members

Confirmation

Yes

Yes (unnecessary for sales)

Trading process

Negotiated transaction

Yes

Delivery and settlement

Direct delivery and settlement (in Directly through JASDEC’s transprinciple, 4 business days or T+3) fer system (in principle T+3)

Trading hours

0900 to 1500

Yes

Reporting and disclosure obli- Yes
gations for quotes and orders

Yes

Disclosure materials

Yes(Financial statements with only
an auditor’s opinion stating fair
representation for the previous
term are acceptable)

Corporate Information Memorandum and securities report(Financial statements for the two
previous terms must be accompanied by an auditor’s opinion stating fair representation)

Timely disclosure requirements Disclosure items specified by the Yes
JSDA
Insider trading rules

AppliedYes

As in the green sheet issue system, handling members apply for designation of issues as Phoenix issues by notifying the JSDA of OTC securities
covered by its self-regulatory rules that have been delisted from stock exchanges after verifying that the issues meet certain conditions with regard to
the commissioning, etc., of share administration. The notification must also
have an unqualified or qualified opinion from the auditor of the delisted company attached. In sponsoring these issues, handling members have an obligation to provide buy and sell quotes on a continuous basis. In addition, companies with Phoenix issues are obligated to provide disclosure in the samemanner as when listed. The Phoenix system differs substantially from the210

Chap. X The Financial Instruments Exchanges (2)green sheet system in that it utilizes the stock, etc., transfer system to give investors an opportunity to cash out their holdings through the stock exchangeeven after the decision to delist the stock.
15. Professional Investors Markets (1) - TOKYO PRO Market
The TOKYO PRO Market is a market for professional investors operated by
the Tokyo Stock Exchange. It is based on the TOKYO AIM market launchedby the TSE in June 2009 in collaboration with the London Stock Exchange(LSE). TOKYO AIM, Inc., was originally operated as a partnership (ownership: TSE 51%; LSE, 49%). In March 2012, however, the TSE acquiredLSE’s stake and merged Tokyo AIM with the TSE in July 2012. TOKYOAIM is operated under the professional investor market system provided forby 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 investors market system, conversely, restricts trading to specified investors and nonresidents. Where fund procurement is limited to professional investors, securities registration statements are
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 securities reports and need only make public financial information, etc. (issuer information), using the TSE-stipulated format and method.
The submission of internal control system reports and quarterly disclosure
are 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 reduced in 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 as tothe large shareholdings reporting and tender offer systems. Details how theTOKYO PRO Market aims to provide a flexible but disciplined market system for issuers and investors through the J-Adviser 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 to fulfill a duty to provide advice and instruction on timely disclosure and other regulatory matters following listing.

Chap. X The Financial Instruments Exchanges (2)Table X-12.

211

Overview of TOKYO PRO Market Listing System

Disclosure language

Japanese or English

Accounting Standards• Japanese accounting principles• International accounting standards• U.S. accounting principles• Other(Standards determined as appropriate by J-Adviser and accounting
corporation and those acknowledged by the exchange)

Listing Criteria

No numerical criteria
J-Adviser evaluates listing eligibility

Period from listing application As a general rule, ten (10) business days (confirmation procedure beto listing approval
tween exchanges prior to application)
Audit period before listing

Last one (1) year

Internal control report

Optional

Quarterly disclosure

Optional

Investors

Professional investors

Note: Professional investor refers to:nSpecified investors (Tokutei Toushika)
Qualified institutional investors (financial institutions, etc.), listed companies and stock comü
panies with paid-in-capital of no less than ¥500 million
ü National government, Bank of Japann“Deemed”specified investors
ü Stock companies other than specified investors
Individuals with financial assets and net assets worth no less than ¥300 million and with theüexperience of dealing with financial instruments for one (1) year or morenNon-residents

Chart X-13.
Entrustment ofcertainself-regulatory
operations

Tokyo Stock
Exchange

Role of J-Adviser
J-Adviser

Investigates and confirms listingeligibility on behalf of the TSE

Judgment oflisting eligibility;
Support after
listing

Legal due diligence
Business due diligence

Listing applicant
company/
Listed company

Financial due diligence

Notes: What is the J-Adviser System?
 Roles• Listing companies are obligated to maintain one (1) responsible J-Adviser at all times• The J-Adviser performs assessments on listing eligibility and pledges an oath to theexchange for new listings• Provides continuous support to ensure that listing eligibility can be maintained evenafter listing Requirements• The applicant company must have experience in corporate finance advisory operations
and human resources well versed in such operations and must be authorized by theexchange.

List of approved J-Advisers today(8 companies; in alphabetical order)• Daiwa Securities Co., Ltd.
• Leading Securities Co., Ltd.
• Mitsubishi UFJ Morgan Stanley
Securities Co., Ltd.
• Mizuho Securities Co., Ltd.
• Nomura Securities Co., Ltd.
• OKINAWA J-Adviser Co., Ltd.
• Phillip Securities Japan, Ltd.
• SMBC Nikko Securities Inc.
*As of End of September 2015

212

Chap. X The Financial Instruments Exchanges (2)As of September 30, 2015, the TOKYO PRO Market had eight J-Advisersand 13 listed companies.
16. Professional Investors Markets (2) - TOKYO PRO-BOND Market
The TOKYO PRO-BOND Market is a bond market for professional investors
operated by the Tokyo Stock Exchange.
Professional investors dominate the domestic bond market, but the disclosure system and business practices stipulated in the Financial Instruments
and Exchange Act are protective of investors in general. Foreign issuers facea particularly high hurdle because of the costs of at least twice-yearly disclosure in Japanese.
In consideration of these conditions, the TOKYO PRO-BOND Market wasestablished in May 2011 with the goal of enabling the flexible and expeditious issue of bonds similar to the Euromarket. It also sought to further enhance the convenience of the market for such participants as foreign and domestic issuers, investors, and securities companies and other related industry
bodies, thereby contributing to the development of Japan’s bond market asAsia’s core market. The market is separate from TOKYO AIM’s equity market and does not follow the same rules. For example, there is no J-Nomad
Chart X-14.
Issuers

Benefits of Using the TOKYO PRO-BOND Market

Japanesedomesticbond
issuers• Concise disclosure
requirements• Shorter
documentation
procedureJapanese
Eurobond
issuers• Program listing
similar to theEurobond format• Foreign currency
issuance

SamuraiBond
issuers• English language
documentation• US-GAAP and
IFRS acceptable• Wider issuancewindow

Investors
Increase ofinvestment
opportunities

Japanese
professional
investors

Access to
Englishdisclosure
documents

Foreigninvestors

TOKYO
PRO-BOND
MarketConcise due diligence
Emergence of Japanese bond market as inter-regional Asian bond issuance market
Expansion of client base to overseas issuers and investors
Securities Companies

Chap. X The Financial Instruments Exchanges (2)213

Table X-13. Comparison of Disclosure Systems for TOKYO PRO-BOND Market
and Other Japanese Bond Markets
Other Japanese bond markets
Disclosure target group

TOKYO PRO-BOND Market

Investors, including general in- Specified investors, etc.
vestors

Main regulator of disclosure Government
Tokyo Stock Exchangematerials(format as specified by Japan (Euro and other formats possible)
FSA)
Language

JapaneseJapanese, English or both

Accounting standards

J-GAAP, International Financial J-GAAP, IFRS, US-GAAP, andReporting Standards (IFRS)*
other standards the Tokyo Stock
Exchange recognizes as equivalents

Issuance disclosure documents

Securities registration statement Specified securities informationor shelf registration statement

Regular disclosure documents• Securities report
Issuer information• Quarterly or interim business report

Regular disclosure frequency

Interim or quarterly

Annually

Note: Conditional to establishment of proper procedures and systems for the preparation of consolidated
financial statements based on IFRS, the use of IFRS for consolidated statements is optional.
In addition, a company may use financial statements produced for disclosure in their own country
or another country if the JAPAN FSA has approved the documents as“meeting standards of public
interest and investor protection.”

system. Trading is restricted to specified investors, and nonresidents and individual investors are, in principle, excluded.
The TOKYO PRO-BOND Market requires listed issuers to provide information disclosure on their bonds consisting of specified securities information at the time of issue and issuer filing information annually on an ongoingbasis. These disclosure documents must be prepared using the method andformat stipulated by the Tokyo Stock Exchange. However, since they can beprovided in English, they feature a high degree of flexibility and freedom,such as allowing the use of the disclosure format used in the Euromarket.
In particular, the disclosure system enables significant cost savings for foreign issuers because the point of issue and ongoing filing of disclosure information can be provided entirely in English. The system offers the additional
advantage of a much wider issue window compared with the private or Samurai foreign bond issuance market because no lag time is required for thetranslation of the issue’s disclosure documents.
In principle, there are only two listing requirements for the TOKYO PROBOND Market. They are (1) that the issue or program must have a credit rat-

214

Chap. X The Financial Instruments Exchanges (2)ing from a rating agency (no specific grade required) and (2) that the lead underwriter of the issue must be on the Lead Managing Underwriter List of theTokyo Stock Exchange. In addition, similar to euro medium-term notes(MTNs) debt issuance programs can be listed on the market, allowing for expeditious and flexible bond issuance in response to interest and exchange rate
movements.
The TOKYO PRO-BOND Market system is designed on the assumption
that, as with other publically offered bonds, trading is done on the OTC market. Consequently, those trades also are included in the JSDA’s Reference
Prices (Yield) for OTC Transactions.

CHAPTER XI
Financial Instruments Business (Securities Business)

1. Overview of Financial Instruments Firms (Securities Companies) (1)While the Financial Instruments and Exchange Act (FIEA), a comprehensive
overhaul of the former Securities and Exchange Law, was fully enforced in
September 2007, the basic legal framework regulating securities companies
remains intact. The FIEA defines the financial instruments businesses as including Type I and Type II Financial Instruments Businesses, Investment Advisory and Agency Business, and Investment Management Business (Article
28 of the FIEA). What has traditionally been known as securities business is
included in Type I Financial Instruments Business, and, accordingly, securities companies are required to register with the prime minister as financial
instruments firms (Article 29).
The securities business registration system that had been in place since1948, when the Securities and Exchange Law 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 nonsecurities 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.
As the securities market developed, the types of financial products handled
by securities companies became increasingly diverse. Furthermore, as theyears 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 ofdrawbacks, including a detriment to creativity in business approaches, suchas branch network management and the development of new products and216

Chap. XI Financial Instruments Business (Securities Business)

Table XI-1.

The Scope of Business of Securities Companies (Type I Financial Instruments Business), and Requirements

1. Type I Financial Instruments Business (Article 28 Paragraph 1, Refusal of Registration (＝registration requirements) (Article 29-4, ParaItems 1–5 of the FIEA)
graph 1 of the FIEA, Article15 of the FIEA Enforcement Order)(1) Proprietary trading, intermediary, brokerage, or agency service (1) An applicant who had his/her registration rescinded and for whom
five years have not passed since the rescission; an applicant who hasof securities, market transactions of derivatives or foreign marbeen punished by a fine for violating the provision of any applicableket derivatives transactions; intermediary, brokerage, or agency
law or regulation and for whom five years have not passed since theservice for the entrustment of the transactions listed above; broimposition of the finekerage for the clearing of securities, etc.; secondary distributionof securities; or the handling of public, primary offering or sec- (2) An applicant with an officer, etc., who is bankrupt or has received
certain criminal punishment and for whom five years have not passed
ondary distribution of securities or the handling of the private
placement of securities
since the completion of the sentence(2) Intermediary, brokerage, or agency service of commodity-relat- (3) An applicant without appropriate personnel resources to properly
ed market derivatives transactions; intermediary, brokerage, or
conduct the financial instruments businessagency service for the entrustment of the transactions listed (4) An applicant with stated capital or net worth of less than ¥50 million
above; or brokerage for clearing(5) An applicant that is not a stock company(3) Intermediary, brokerage, or agency service of OTC derivatives (6) An applicant whose additional business other than incidental or registrading and brokerage for clearing of such transactions
tered/approved concurrent business is found to be against the public(4)“Underwriting”of securities
interest or to pose difficulty in risk management(5) Sale or purchase of securities or intermediary, brokerage, or (7) An applicant whose major shareholder (with 20% or more of voting
rights) is disqualified for registration
agency service therefor, which is conducted through an electronic data processing system and in which a large number of (8) An applicant with a capital-to-risk ratio less than 120%
persons participate simultaneously as a party or parties of the (9) An applicant with a trade name that is the same as or similar to thatof an already existing financial instruments firmtransaction (business of operating a proprietary trading system(PTS business)
Minimum Capital Requirement (Article 15, Paragraphs 7 and 11 of the(6) Acceptance of deposit of securities, etc., in relation to the trans- FIEA Enforcement Order)
actions, etc., listed above “( safekeeping”)or book-entry transfer(1) Business of conducting wholesale underwritings as a lead manager
of stocks or corporate bonds¥3 billion(2) All other underwriters
Notes:¥500 million
1. An authorization from the prime minister is required for conducting acts provided in (5) above (Art. 30, Paragraph1). PTS refers (3) Business of operating PTS¥300 million
to Proprietary Trading System.
2. Acts provided in (6) above are defined as primary business in the (4) All other Type I financial instrument businesses¥50 million
FIEA rather than as incidental business in the former SEL.
2. Incidental businesses (Article 35, Paragraph1, Items 1–15)(1) Lending or borrowing of securities, or intermediary or agency The following items are newly included as incidental businesses under
the FIEA.
service thereof(10) Custody of assets of a registered investment corporation(2) Making a loan of money incidental to a margin transaction(3) Making a loan of money secured by securities held in safekeep- (11) Provision of consultation to any other business with regard to assignment of a business, merger, spin-off, share exchange or shareing for customers
transfer or intermediation thereof(4) Agency service for customers concerning securities(5) Agency service of the business pertaining to the payment of (12) Provision of management consultation to any other businessprofit distribution or proceeds from redemption at maturity or at (13) Sale or purchase of currencies and other assets related to derivative
the request of an investment trusttransactions or intermediary, brokerage, or agency service thereof(6) Agency service of the business pertaining to the payment of (14) Sale or purchase of negotiable deposits or other monetary claims orintermediary, brokerage, or agency service thereof
dividends or refunds or distribution of residual assets with regard to investment certificates of an investment corporation (15) Management of assets under its management as investment in specified assets defined in the Investment Trust Law(company-type investment trust)(7) Conclusion of a cumulative investment contract(8) Provision of information or advice in relation to securities(9) Agency service of the business of any other financial instruments firm, etc.
3. Other businesses requiring registration (Article 35, Paragraph 2 of the FIEA; Article 68 of the Cabinet Office Ordinance Concerning Financial Instruments Business, etc.)
business; (vi) real estate leasing business; (vii) rental and leasing(1) Conducting a transaction on a commodity exchange
business; (viii) production, sale, and commissioned operation of com(2) Conducting a transaction in a derivative contract on a commodity price or other benchmark
puter programs; (ix) defined contribution plan operation and manage(3) Money-lending business or intermediary service for money
ment business; (x) trust agreements agency business; (xi) intermedilending
ary service for forming a trust by will or concluding a contract for the(4) Business pertaining to real estate transactions or real estate leases
disposition of deceased estate; (xii) financial institution agency business; (xiii) management of real estate; (xiv) real estate investment ad(5) Real estate specified joint enterprise
visory business; (xv) execution and brokering, etc. of emission trad(6) Commodity portfolio management business(7) Business of investing property entrusted under an investment
ing and emission derivatives trading (xvi) administrative operation
management contract in assets other than securities or rights
entrusted by an investment corporation or a special purpose company;
pertaining to derivative transactions(xvii) business of managing investment of assets other than rights
Among the businesses designated by a cabinet office ordinance,
concerning securities and derivatives transactions on behalf of anoththe main business include:er party; (xviii) guarantee or assumption of debt or intermediary orother service thereof; (xix) introduction or referral to any other busi(i) intermediary, brokerage, or agency service for trading gold, including agreements or intermediary, brokerage, or agency service
ness for a customer; (xx) promotion or advertisement of any otherfor concluding agreements for (ii) partnerships (iii) anonymous
business; and (xxi) funds transfer business.
partnerships, and (iv) loan participation; (v) insurance agency

Notes: 1. A financial instruments firm may, in addition to the above, engage in a business for which approval has been obtained from the prime minister (approved business, Article 35, Paragraph 4of the FIEA).
2. A discretionary investment contract is now included as one of investment management services
that a financial instruments firm may provide without special approval from the prime minister.

Chap. XI Financial Instruments Business (Securities Business)

217

services 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 Financial System
Reform Act, and a new registration system replaced the licensing system 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 derivative transactions. The FIEA is comprehensive legislation that combines the Securities and Exchange Law, theFinancial Futures Trading Law, and the Law for Regulating the Securities Investment Advisory Business (Investment Advisor Law) and aims at achieving
effective regulation of a unified financial instruments business across a securities-related industry once vertically segmented into securities business, financial futures trading business, and investment advisory business. Also as aresult of amendments to the Financial Instruments and Exchange Act in 2012,
commodity derivatives transactions were added to the Type I Financial Instruments Business.
2. Overview of Financial Instruments Firms (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 financial instruments firm, an investment management business, or a registered financial institution (see section
12 of this chapter): (i) intermediation for the sale or purchase of securities;(ii) intermediation for the sale or purchase of securities conducted in an exchange market or market transactions of derivatives; (iii) handling of a public, primary offering or secondary distribution of securities or handling of a
private placement of securities; and (iv) agency or intermediary service forthe conclusion of an investment advisory contract or a discretionary investment contract (Article 2, Paragraph 11 of the FIEA). As is common with theitems listed above, the provider of the service does not have customer accounts but solicits customers and redirects their orders for transactions tobrokers/dealers, etc., from which it receives a commission.
Compared with the former definition, intermediary service for derivativetransactions and agency or intermediary service for the 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, underlying regulatory principles remain intact.

218

Chap. XI Financial Instruments Business (Securities Business)

Chart XI-1.

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 them

An Outline of Securities Agents

Affiliated 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. XI Financial Instruments Business (Securities Business)

219

The provisions of the FIEA are designed to ensure the protection of investors
by instituting a number of preventive measures. More specifically, they require all financial instruments intermediary service agents to be registeredand prevent any disqualified person from becoming an agent. The FIEA
makes all agents subject to the same set of prohibited and regulated acts thatare applicable to financial instruments firms (the prohibition of loss compensation, the duty to observe the principle of suitability, 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 under the former law. The requirements areless stringent than those for financial instruments firms to facilitate their market entry. More specifically, 1) either an individual or a legal entity can register as an agent and a legal entity does not need to be a stock company and 2)
there are no minimum requirements for capital, net worth, or capital-to-riskratio. However, they can only solicit investors for orders and redirect suchorders to their broker/dealer. They are not allowed to take a deposit of cash
or securities from their customers. (For this reason, they are exempt fromjoining an investor protection fund.) As is the case with registered representatives of financial instruments firms, salespersons of financial instruments
agents shall be qualified as registered representatives and register with theJapan Securities Dealers Association (JSDA) (as an authorized Financial Instruments Firms Association).
Agents may be affiliated with one or more securities companies. As of theend of July 2015, for example, there were 810 actual financial instruments
agents (518 companies and 292 individuals) acting as a total of 1,107 agents(775 companies and 335 individuals). According to the FSA’s“Sales Agentsfor Financial Instrument Firms,”many agents are affiliated with mid- andsmall-sized securities companies and Internet securities companies seeking to
expand their sales networks, such as the 330 agents affiliated with Ace Securities and the 185 agents affiliated with SBI Securities. As registered financial
institutions may also conduct financial instruments agency business, banking
institutions may provide a securities agency service with respect to stocks,
corporate bonds, and foreign bonds (please see section 12 of this chapter). As
a result, major securities companies are eager to conclude securities agency
service contracts with regional financial institutions.

220

Chap. XI Financial Instruments Business (Securities Business)

3. Overview of Financial Instruments Firms (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
Table XI-2.

The Number of Securities Companies and Their Capital and Employees

Securities companies (head office)Year-end Members of Nonmembers
the Stockof the Stock
Exchange
Exchange

Total

No. of employees
No. ofNo. ofBusiness
Total Capital No. of Office
Registered
Offices (incl.
(in ¥ bil)
Bound
Representahead offices)
Employees
tives

2008

123
(12)

199
(16)

322
(28)

2,336
(32)

22,63818,002

81,198

2009

118
(11)

189
(14)

307
(25)

2,254
(27)

18,856

16,043

77,265

2010

115
(10)

184
(13)

299
(23)

2,220
(24)

18,28916,14375,913

2011

113
(8)

179
(14)

292
(22)

2,211
(24)

19,585

15,911

76,776

2012

103
(6)

168
(11)

271
(17)

2,138
(17)

17,34913,372

69,684

2013

101
(6)

157
(10)

258
(16)

2,106
(17)

17,37812,25682,976

2014

253
(16)

2,107
(18)

17,53913,01685,358

2015

252
(14)

2,123
(16)

17,672

13,123

88,977

Notes: 1. Figures in parentheses represent the number of branches of foreign securities companies in Japan included in the figures above them. Their Tokyo branches are counted as head offices.
2. In terms of 2015 figures, the number of branches, the total amount of capital, and the number of
employees are as of the end of June. The number of employees is as of does not include 3,350
registered representatives employed by financial instruments intermediary service agents (as ofthe end of June 2015).
3. Foreign securities firms are excluded from the amount of capital.
4. By virtue of an amendment dated April 16, 2003, the definition of“commissioned registeredrepresentative”and qualification requirements were abolished, and the indication of category ofmembers of the stock exchange was abolished at the end of March 2014.
Source: Japan Securities Dealers Association, Shoken gyoho (JSDA Monthly Report), Gyomu houkousho(JSDA Operation Report), etc.

Chap. XI Financial Instruments Business (Securities Business)

Table XI-3.

JSDA Member Categories

SecuritiesrelatedNonsecuritiesAsset
relatedManagement
Service

221

Breakdown
FX (FOREX
MarginTransactions)

Domestic brokers: 185 firms

145

40

21

15

Foreign brokers:

41

25

20

5

66 firms

Others4Notes:“Nonsecurities-related”refers to brokers not engaged in securities-related businesses.“AssetManagement Service”refers to investment management and sale of structured funds and securitized products. The number of foreign brokers is estimated by the author.

Table XI-4.

Breakdown of 145 Japanese Brokers (securities-related) by Controlling
Shareholder, Size, Region and Business Characteristics

Listed securities companies
16

Megabank-affiliatedSecond tier small &Online brokers
midsize (face-to-face)
886
6

Regional bank-affiliated 13
Other bank-affiliated3

Breakdown

Bank-affiliated22
Breakdown

Large securities companies (2Nomura-affiliated, Daiwa): 3

Tokyo
Osaka

23 PTS specialists
7
8

Other regions

55

Others3companies that relied on the brokerage business generated by registered representatives working on commission, 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 inall segments of the securities business. And they had gained an oligopolistic
control of the market as a group by creating a network of affiliated small securities companies. This was a characteristic of the postwar securities market
of Japan, unknown before the war or in other countries. And this structure
was maintained until the latter half of the 1990s with only minor changes.
However, in the early 1990s, after the speculative bubble finally burst, thesecurities slump worsened and Yamaichi Securities and a number of smaller
securities companies went bankrupt in the process. In addition, large securities companies abandoned the strategy of forming a network of affiliatedsmall and midsize securities companies, making the management of securities companies increasingly fluid. Around the same time, large banks, etc. acquired the right to manage securities companies while a number of firms thatwere armed with a unique business style and focused on selected segments ofthe securities business have entered the market. In 1997, securities companies registered as members of the JSDA totaled 291, a number comparable to222

Chap. XI Financial Instruments Business (Securities Business)that of today (252; see the table on the right above). During this time between
1997 and today, however, about 220 domestic firms newly entered the market while about 230 exited the business by voluntary dissolution, a merger
with another company and so on.
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
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.
With the enforcement of the Financial Instruments and Exchange Act in2007, entities that do not engage in securities-related businesses can registeras the Type I Financial Instruments Business Operator and become membersof the JSDA. While there are 14 foreign securities companies with operatingsites in Japan, many more foreign entities are actually in operation throughthe establishment of a Japanese subsidiary, conversion to a Japanese corporation, or acquisition of a domestic securities company (see table below ZZ ).
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 brokerage, a growing number of firms not engaged in securities-related businesses
have entered the market.
4. Securities Businesses (1)̶The Principal Businesses (1)The principal businesses that securities companies are authorized to conduct
under the FIEA have been expanded to include safekeeping and book-entry
transfer services. By product, principal businesses may be largely divided
into those relating to stocks, bonds, investment trusts, and derivatives. By
type of service, they may be largely divided into those relating to (1) dealing—proprietary trading; (2) brokerage—agency trading; (3) investmentbanking—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 executed

223

Chap. XI Financial Instruments Business (Securities Business)

Table XI-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.)

2003/3

180

236

14

1,006

2004/3

262

402

19

1,210

2005/3

287

503

20

1,421

2006/3

441

886

21

2,007

2007/3

525

982

18

2,273

2008/3

552

1,036

16

2,776

2009/3

381

665

18

1,846

2010/3

291

540

21

1,467

2011/3

243

595

16

1,632

2012/3

152

537

15

1,420

2013/3

177

672

17

1,888

2014/3

273

1,348

21

2,295

2015/3

249

1,174

18

2,381

Notes: 1. The accounting year runs from April 1 to March 31 of the following year.
2. Figures are double actual volume because both sales and purchases are included.
3. Cash stock transaction volumes are those handled by 94 general members (including foreign securities companies, as of March 31, 2015).
4. Of these members, 83 members also participate in derivatives trading on the OSE.
5. In addition, 27 financial institutions participate in JGB futures trading on the OSE.
6. Derivatives transactions include those executed on the former TSE prior to the integration.
Source: Compiled from statistical data issued by Japan Exchange Group, Inc.

on 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 business corporations,and equity securities (stocks and bonds with subscription rights) of publiccompanies, securities companies also underwrite the shares of companies tobe listed on exchanges, etc., in the process of initial public 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. More specifically, the224

Chap. XI Financial Instruments Business (Securities Business)

Table XI-6.

PTS Transactions(millions of yen)

Trading on
Exchange(A)

Trading off
Exchange(B)

Mar. 2007 723,734,608 42,810,934

Total
(A+B)

PTS
Proportion oftransactions PTS Trading on(C)Exchange (C/B)

Proportion of
PTS Trading
off Exchange(C/(A+B))

766,545,542

854,916

2.0%

0.1%
0.3%

Mar.2008 762,223,285 49,610,445

811,833,730

2,140,465

4.3%

Mar. 2009 521,094,825 36,357,081

557,451,906

2,073,204

5.7%

0.4%

Mar. 2010 395,500,588 24,483,714

419,984,302

3,089,794

12.6%

0.7%

Mar. 2011 397,576,761 24,801,215

422,377,976

4,937,196

19.9%

1.2%

Mar. 2012 335,080,193 32,298,843

367,379,035

15,202,634

47.1%

4.1%

Mar.2013 382,653,161 36,328,078

418,981,239

21,246,585

58.5%

5.1%

Mar. 2014 722,201,619 72,361,055

794,562,674

44,003,829

60.8%

5.5%

Mar.2015 655,513,963 72,505,492

728,019,455

36,176,677

49.9%

5.0%

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.
Source: Compiled on the basis of statistical data from the PTS Information Network.

act of acquiring new security from the issuer is called“wholesale underwriting”(and the securities company that negotiates a wholesale underwriting
agreement with the issuer is called“the managing underwriter”), and acquiring the security from a wholesale underwriter is called“sub-underwriting.”
Beneficiary certificates of investment trusts are also 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 salesof major shareholders, etc.
Under the 1998 amendment to the Securities and Exchange Law, over-thecounter derivative trading and PTS services were newly authorized. The former refers to an act of effecting or entrusting to effect with a customer a forward or options transaction of a stock or a stock index or a swap contract
involving, for example, a stock index and an interest rate off the exchange.
Actually, most of these OTC derivative contracts are embedded in and soldas structured bonds (such as equity-linked bonds). The PTS service matchesorders from investors by utilizing an electronic information processing system. As the PTS service requires specialized technical expertise and advanced risk management skills, securities companies wishing to provide the
PTS service must be authorized to do so by the prime minister (see section 1of this chapter).

Chap. XI Financial Instruments Business (Securities Business)

225

5. Securities Businesses (2)̶The Principal Businesses (2)Because the Financial Instruments and Exchange Law combined the Securities and Exchange Law and the Financial Futures Trading Act, Type 1 Financial Instruments Business includes financial futures, etc., as well as securities
derivatives. 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 7.)
The underlying assets of derivatives can comprise financial products, suchas securities, deposits, and currencies (Article 2, Paragraph 24) and financial
indexes, such as price, interest rate, and weather indexes (Article 2, Paragraph 25). In the 2012 amendment of the FIEA, the definition of financial
product was expanded to include commodities (excluding rice). The main
customers for derivatives are financial institutions or institutional investors.
In addition to acting as swap intermediaries, securities companies typicallyuse OTC stock options as sweeteners for structured bond issues or conclude
interest rate or currency swap agreements with companies issuing foreign
currency denominated bonds when underwriting the issue.
Although individual investors are not frequently users of OTC derivatives,
other than Nikkei 225 mini-futures (Osaka Securities Exchange), foreign exChart XI-2.

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

05

20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
1
1
1
1
1
1
1
1
1
1
1
0
0
0
0
0
0
0
0
3Q 6 1Q 6 3Q 7 1Q 7 3Q 8 1Q 8 3Q 9 1Q 9 3Q 0 1Q 0 3Q 1 1Q 1 3Q 2 1Q 2 3Q 3 1Q 3 3Q 4 1Q 4 3Q 5 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.

226

Chap. XI Financial Instruments Business (Securities Business)

Table XI-7.

OTC CDF Transactions on Securities

Sept. 2010 Mar. 2011 Mar. 2012 Mar. 2013 Mar. 2014 Mar. 2015
Number of Accounts

109,260

136,446

145,258

101,196

102,939

105,790

67

66

82

63

77

107

Bond
elatedOther
securities
relatedMargin Deposit Balance(Transactions)Individual Stock index
stock-related
related

Total

Fiscal 2012
Transaction amount (100 millions of yen)
Number of transactions
Open interest (100 millions of yen)

2,900

48,6981,739

2053,357

175,639

1,821,359

32,925394 2,030,317

15

120

111

0

246
66,046FY2013
Transaction amount (100 millions of yen)
Number of transactions
Open interest (100 millions of yen)

881

63,5561,608

1127,351

2,126,665

18,18068 2,272,264

16

144

44

0

204

807

83,7371,460

1186,015

102,4632,354,873

7,867

603 2,465,806

20

196

61

FY2014
Transaction amount (100 millions of yen)
Number of transactions
Open interest (100 millions of yen)1278

Note: Transaction amounts and open interest are on a notational principal basis. Open interest is as of endof fiscal year. Figures represent the sum of transaction value, etc. of JSDA regular and special
members.
Source: The Financial Futures Association of Japan.

change (FX) transactions are among the products that they use relatively often. Investors use OTC FX transactions to purchase or sell currencies by depositing 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. 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, problems did occur in the FX market, resulting in the 2005 revision of the Financial Futures Trading Act, currently
included in the Financial Instruments and Exchange Act. The revised law introduced a registration system for FX business, which steadily eliminatedmany of the bad operators. As a result, there was a sharp expansion in the useof FX transactions, as can be seen in chart XII-2. Moreover, in a bid to makeChap. XI Financial Instruments Business (Securities Business)

227

FX transactions more transparent, the Tokyo 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, investors have shifted from face-to-face transactions with brokers
to online brokers for FX transactions, with Internet trading specialist FX
firms, such as Kawase Dot Com and Kawase Online, 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 fordifference (CFD transaction) and is available not only for FX but for securities, indexes, interest rates, and commodities. First emerging in the United
Kingdom, CFDs are now available from a number of brokers in Japan (seetable XII-6).
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). The registration requirements,
however, are equivalent to those for Type I Financial Instruments Business.
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 in and after 2004 it has been accounting for approximately 20% of agency transactions (see table XII-5 ). The term“securities lending and borrowing”refers to the lending and borrowing of stock orbond certificates and is also known as stock lending or bond repurchaseagreements (repo). As a lending broker demands a borrowing investor topledge cash collateral, these transactions may also be considered financing
secured by stock or bond certificates. 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 theformation of fair prices of securities and improves the liquidity of the market.
Particularly, the balance of bonds lent under repurchase agreements outstanding at the end of March 2015 amounted to ¥108 trillion ($ at the rate of ¥115
to the dollar) and the repo market has grown to become one of the largest se-

228

Chap. XI Financial Instruments Business (Securities Business)

Chart XI-3.

Changes in the Number of M&As Involving Japanese Companies

3,000
Out-InIn-Out
In-In

2,500
2,000
1,500
1,000
500
0

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
1‑6

Note: In-In signifies M&A between Japanese firms. In-Out signifies M&A initiated by a Japanese firm
against a foreign firm while Out-In signifies M&A initiated by a foreign firm with respect to a
Japanese firm. Figures for 2015 are for January through June.
Source: Compiled from the data section of MARR magazine, RECOF Corporation.

Table XI-8.

Number of Wrap Accounts and Assets Under Management(¥100 million)

Discretionary investment
No. of acc.

AmountInvestment advisory
No. of acc.

Total

AmountNo. of acc.

AmountMarch end 2008

41,615

7,469

496

40

42,111

7,508

March end 2009

37,138

4,571

417

22

37,555

4,593

March end 2010

41,773

5,696

317

22

42,0905,718

March end 2011

43,509

5,890

260

17

43,7695,907

March end 2012

42,467

5,799

5

6

42,472

5,805

March 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

38,973June end 2015

369,673

47,54100369,673

47,541

Note: A wrap account is an account that is managed for a flat fee covering management, administrative,
and trading commission expenses.
Source: Compiled from statistics produced by the Japan Securities Investment Advisers Association.

Chap. XI Financial Instruments Business (Securities Business)229

curities markets. By“consultation to any other business operator with regard
to a business assignment, merger, company split, share exchange or sharetransfer, or intermediation for these matters”is meant the M&A consulting
service that an investment bank provides to its clients with respect to thespinning off of a business division, the computation of an IPO price, or an
acquisition offer, etc.
Major securities companies, including the Big Three and second-tier brokers, also registered as investment management service providers 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 June 2015, according to asurvey by the Japan Securities Investment Advisers Association, there were atotal of 369,673 wrap accounts in the industry, holding approximately¥4,754.1 billion, a sixfold increase from two years before. Major brokers,
foreign affiliates, and securities subsidiaries of mega-banks focus on M&A;
structuring of private equity funds; and securitization (defined as business totrade 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 stockbrokers offering service overthe Internet have emerged, and their share of the market has been increasing
rapidly. The number of online brokers stood at 61, with the number of accounts rising to 20.88 million at the end of March 2015. The value of cash
stock and margin transactions of these online brokers during the period between October 2014 and March 2015 amounted to ¥171,102.6 billion, accounting for 23.2% of the total value of agency transactions, and the online
brokers sold ¥1,105.3 billion worth of investment trust units according to the
JSDA Monthly Report for June 2013. Growth in the business of Internet brokers was particularly notable.
7. Revenue and Expenditure of Financial Instruments Firms (Securities
Companies)
Sources of revenue for securities companies include 1) brokerage commission; 2) management and underwriting fees; 3) selling concessions from public 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 transactions and lending fees on shares lent to customers,
lending fees on shares and bonds lent in conjunction with transactions otherthan margin transactions (such as repos), interest on the cash deposited as

230

Chap. XI Financial Instruments Business (Securities Business)

Table XI-9.

General Trading Participants of TSE

Non-Participants of TSE

No. of companies

Term ending Term ending Change Term ending Term ending Change
March 2005 March 2015
March 2005 March 2015
ratio
ratio
(%)
(%)
108
94
159
157

Operating revenue

3,203,367

3,588,200

12.0%

185,398

568,110206.4%

Commissions received

2,069,420

2,015,975－2.6%

152,380

277,929

82.4%

Brokerage comm.

890,021640,712 －28.0%

58,77247,280 －19.6%

Underwriting fees

214,503

161,064 －24.9%

1,586

1,204 －24.1%(100 millions of yen)

Selling concession

219,315426,008

94.2%

9,015

39,448337.6%

Other fees and commissions

745,441
23.3%

788,079
22.0%

5.7%

83,14744.8%

190,10933.5%

128.6%

Trading Profit/loss

713,500

1,049,912

47.1%

9,854

187,261 1800.4%

Financial profit

416,964

516,62123.9%

17,584

61,744251.1%(Profit from margin trading)

70,096

94,067

34.2%

4,291

2,525 －41.2%

Financial expenses

326,639

307,606

－5.8%

8,407

41,534(Margin trading expenses)

22,92815,822 －31.0%

3,226

1,317 －59.2%

394.0%(Interest expense)

35,811

69,016

92.7%

591

Other operating revenue

3,483
0.1%

5,692
0.2%

63.4%

5,580
3.0%

41,176
7.2%

8,683 1369.2%
637.9%
195.8%Net operating revenue

2,876,677

3,283,424

14.1%

177,039523,745

Total of operating revenue

2,160,916

2,347,898

8.7%

159,006

465,238

192.6%(Transaction-related expenses)

399,271463,297

16.0%

23,562

254,390979.7%(Personnel expenses)

1,020,725

1,003,740－1.7%

85,240113,056

32.6%

Operating income (loss)

712,329

935,486

31.3%

21,46558,547172.8%

Note: The figure at the bottom of the“Other fees and commissions”column and“Other operating revenue”column represents the ratio to operating revenue.
Source: Compiled from Financial Overview of Regular Member Firms, JSDA and Earnings Summary ofGeneral Trading Participants, TSE.

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.
On the other hand, expenditures of securities companies consist of 1) selling and administrative expenses (personnel expenses, rent and other real estate expenses, administrative costs, trade-related expenses, etc., and 2) finan-Chap. XI Financial Instruments Business (Securities Business)

Table XI-10.

231

Profitability Comparison by Member, Domestic or Foreign and BusinessCharacteristics (Term ended March 2015)
No. ofReturn on
OperatingTurnovercompanies
equityprofit on sales
rate

Leverageratio

All-company

251

13.4%

26.1%

2.7%

18.8

of which General Trading Participants
Non-Trading Participants

95
156

14.3%
5.4%

28.6%
8.9%

2.6%
4.0%

19.3
14.9

of which Japanese securities-related
Foreign securities-related
Japanese non-securities related
Foreign non-securities-related

145
41
40
25

16.0%
7.3%
13.1%
17.6%

29.3%
17.9%
16.0%
15.8%

3.6%
1.1%
24.1%
53.7%

15.3
37.8
3.4
2.1

Notes: Return on equity＝Operating profit/Net assets＝(1)×(2)×(3)(1) Operating profit on sales＝Operating profit/Net operating profit (2) Turnover rate＝Net operating margin/Total assets (3) Leverage＝Total assets/Net assets Difference in profitability is moreclearly reflected on comparison by domestic or foreign and by business characteristics rather thanby Trading Participant or not.
Source: Calculated based on data issued by the JSDA.

cial expenses (interest and fees on brokers’loan and stock certificatesborrowed from securities finance companies in connection with margin transactions, 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 and administrative expense is called“operating profit.”Nonoperating income or loss is added to operating profit
to reach“current (or recurring) profit.”Profit or loss, if any, from the sale ofinvestment 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.
Looking at fluctuations in profit over the past decade, brokerage and underwriting fees have decreased, while selling concession and other fees andcommissions have increased. The majority of underwriting fees comes fromselling investment trust units. The increase of market shares of online brokers
offering discount brokerage services has been pressuring agency commission
revenue, while interest and fees on margin transactions have been growing.
“Other fees and commissions”form the largest source of income today while“other operating revenue”that represents revenues from operations otherthan the securities business is also on a rise. The trend is evident namely for
brokers that are not members of the TSE. Major components are agency
commission, intra-group fees and information and advice fees as well as for-

232

Chap. XI Financial Instruments Business (Securities Business)

eign exchange margin trading commission, fees for management of assets ofinvestment trusts and investment advisory fees for discretionary investment
contracts.
As mentioned in Section 3, a total of 65 Japanese and foreign investment
managers, fund and securitization structuring managers, and FX specialists
have entered the market. Most of these players are not members of the TSE.
It appears that there is a growing diversity in the types of businesses handled.
8. Financial Condition of Financial Instruments Firms (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
account 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, andunrealized 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, andan amount equivalent to the value of securities purchased is entered on thecredit side. Securities companies hold both long and short positions in a 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 the trade-dateaccounting 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 borrowed securities deposit. On the other hand, the cash for conducting margin trading is borrowed from a securities finance company, and it isequivalent 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 from

Chap. XI Financial Instruments Business (Securities Business)

Table XI-11.

233

Major Accounts of Securities Companies in Japan (252 firms) as of March
31, 2015
AssetsCash and deposits
Deposit
Customer-specific money in trust
Trading products(Trading securities, etc.)(Derivatives trading)Collateral-for-contract account
Assets for margin trading(Money lent for margin trading)(Cash collateral deposited to secure thesecurities lent for margin trading)
Loans made against the collateral of
securities
Short-term guarantee money submitted
Short-term loans
Total of current assets

In ¥ milLiabilities and capital

6,635,574
5,434,724(4,705,211)
45,168,334(31,379,139)(13,789,182)
2,967,593

In ¥ milTrading 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)
23,516,756 Money borrowed to secure
securities(3,108,703) Deposit received(407,988) Guarantee money received

33,483,626(20,729,662)(12,753,950)
701,280
1,466,704(643,846)(822,800)

67,793,767 Short-term debt

14,636,438

4,777,508 Total of current liabilities

126,928,540

703,574 Long-term liabilities

5,665,761

138,427,525 Total liabilities

65,526,479
3,775,966
4,555,620

132,709,070

Tangible fixed assets
Intangible fixed assets
Investment, etc.
(Investment securities)

164,999 Capital
344,795 Capital surplus
1,249,203 Retained earnings(905,576)

1,951,255
3,145,977
2,227,652

Total of fixed assets

1,759,225 Total capital

7,477,831

Total of assets

140,187,015 Total of liabilities and capital

140,187,015

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. Capital-to-Risk Ratios of Trading Participant Members of the TSE.

their 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 Wall Street), the industry
and the authorities became painfully aware of the need to control risk on a
total basis. At the same time, the International Organization 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 adequacy ratio. (The requirements
were put into effect in 1990, and a law institutionalizing them was enacted in
1992.)

234

Chap. XI Financial Instruments Business (Securities Business)

Table XI-12.

Capital-to-Risk Ratio of General Trading Participant Members of theTSE (97 companies) as of June 30, 2015
The minimum ratio
The maximum ratio
The median ratio
The average ratio

200.5
1343.8463.9
497.3

Distribution
Those in the range of
100%

0 company

200% to 299%

15 companies

300% to 399%

25 companies

400% to 499%

17 companies

500% to 599%

16 companies

600% to 699%

7 companies

700% to 799%

6 companies

800% or higher

9 companies

Source: Compiled from materials produced by the Tokyo Stock
Exchange.

Table XI-13. An Outline of the Risk-to-Capital Ratio Requirements for Type I Financial Instruments Firms (Securities companies)(Article 46-1, Paragraph 1 of the FIEA and Article 178 of the Cabinet Office Ordinance Concerning Financial Instruments Business, etc.)
Primary capital 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+custoital) + complementary item (reserve for subordinat- mer risk + fundamental risks
ed debt)－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 ratio regulations on a consolidated basis (Article 57-2, Paragraph 1 of the FIEA; as of June 30, 2014; 18 companies) Amongsuch companies, 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 primary capital ratio under the Basel III Accord.

Chap. XI Financial Instruments Business (Securities Business)

Table XI-14.

235

Orders Issued on the Basis of the Primary Capital Ratio to Take an Early
Remedial Measure

Primary capital ratio
140% or lessRequired to notify the regulatory Art. 179 of the Cabinet Office Ordiagency
nance Concerning 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. 1–6 and Art. 53, Para.
plication
1 of the FIEA
- Orders to change the method ofbusiness 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

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.
9. Financial Instruments Firms Associations (1)The Japan Securities Dealers Association is regarded as the Authorized Financial Instruments Firms Association under the FIEA. Under the FIEA, anauthorized association may be established only by financial instruments firms(securities companies, etc.) and shall be authorized by the prime minister(Article 67-2, Paragraph 2 of the FIEA). The JSDA aims to ensure the fairand smooth sale and purchase of securities, etc., and to contribute to the protection of investors and to enable the establishment of a market where overthe-counter securities are traded (Article 67, Paragraph 1 and 2). The principal functions of the association are (1) to undertake self-regulation andmarket administration and (2) to serve as a trade association of securities
dealers (see table XII-15 ). At present, the Japan Securities Dealers Association (JSDA) is the only organization established 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 Federation

236

Chap. XI Financial Instruments Business (Securities Business)

1. Self-Regulatory Operations

Table XI-15.

Principal Functions of the Japan Securities Dealers Association(1) Drawing up and enforcing
self-regulatory rules

With a view to facilitating the efficient operation of the securities market, the JSDA establishes various forms of self-regulatory rules applicable to securities companies andendeavors to ensure the fairness and efficiency of securities trading.
The principal rules regulate: OTC trading in stocks and bonds, underwriting of securities, off-exchange trading in listed stocks, safe custody of securities, code of conductof directors and officers, internal control system of member companies, qualifications
and registration of registered representatives, advertising of member companies, solicitation and management of customers of member companies, financial instrument agent
business, segregation and management of customers’assets, settlement of disputes withcustomers, and standardized accounting methods of securities-related businesses.

(2) Auditing, monitoring, andself-regulating

The JSDA inspects member companies to see whether their employees observe thelaws and regulations (compliance) and the rules of self-regulation in carrying out business activities and whether they have an adequate internal control system; monitors theoperation of member companies and checks to see whether they segregate customers’
assets; and takes actions to discipline their directors and employees who have violated
the laws, regulations, and self-regulation rules(3) Qualification tests, qualifica- The JSDA conducts qualification tests of registered representatives; of the personnel intion renewal training and charge of management and control and carries out training for the renewal of qualificaregistration of registered rep- tions. (The administrative work relating to the registration of registered representatives
resentative
is commissioned by the Commissioner of the FSA).
(4) Settlement of securitiesrelated disputes through themediation of the JSDA andthe handling of trade-related
complaints of investors

Consultation regarding a complaint concerning the business carried out by a member
firm or by financial instruments intermediary service agents and mediation of a dispute
between a member firm and a customer pertaining to securities transactions (Complaint
consultation and dispute mediation have been commissioned to the Financial Instruments Mediation Assistance Center (FINMAC), a non-profit organization)(5) Services provided by the The organization provides services for the proper handling of personal information ofrecognized personal informa- members of the JSDA as a recognized personal information protection organization untion protection organization der the Act on the Protection of Personal Information
In addition to general improvement of the securities market, such as a securities settlement reform, changes and amendments to the trading rules of the equity market, and measures to deal with new financial products (including new types ofinvestment trusts and securitization-related products), the JSDA performs the following market administration functions.
(6) Enhancement and improve- 1. JSDA establishes and reviews the rules concerning transactions and practices in thement of the bond market
over-the-counter market of bonds
2. JSDA publishes reference prices (yields) for OTC bond transactions
3. JSDA collects materials and compiles statistics concerning the bond market(7) Management of off-exchange 1. JSDA takes steps to ensure the fairness and efficiency of off-exchange trading in listtrading of listed stocks
ed stocks and the protection of investors
2. JSDA collects and publishes data on the volume of listed stocks traded off exchange
and publicly announces in real time price quotations, contract, and other information
on listed shares traded on PTSs

2. Collective duty of securities
companies, organizations(8) The expansion of the Green 1. JSDA manages Green Sheet and Phoenix issues (designation and cancellation)
Sheet market
2. Publishes information concerning Green Sheet issues (corporate information of theirissuers, quotations, and trading volume, etc.)
3. Takes steps to improve the Green Sheet system and the unlisted securities trading
systemServices to promote the sound 1. Investigates and studies the financial instruments market and publishes opinions
development of financial instru- 2. Establishes a common platform for the securities market
ments business and financial in- 3. Makes public statistical material, etc., on the stock and bond markets
struments market
4. Disseminates knowledge about financial instruments, indexes, and markets and educates investors
5. Communicates and exchanges views with market-related organizations
6. Implements education and training programs
7. Supports actions to eliminate antisocial forces
8. Conducts international business and international exchange

Note: Self Regulatory Organization is responsible for self-regulatory operations and market administration while Securities Strategy Board is responsible for operations that promote the sound development of the securities market and the securities business.

Chap. XI Financial Instruments Business (Securities Business)

Table XI-16.

237

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
Margin Transaction Sales Sales representative who is authorized to engage in all Acts of a Sales RepRepresentative
resentative by a Class 2 Sales Representative and acts of a sales representative relating to margin transactions (including“when-issued”transactions)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 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 margintransactions)
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, 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 derivative transactions 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”(marketing of investment trusts and other specified acts of an insurance company orother financial institution)

Note: Qualification tests for Margin Trading Registered Representatives and Special Member Class IV
registered representatives are not performed (as of September 2015).

of Securities Dealers Association was established in 1949 as a national federation. Subsequently, however, there emerged a body of opinion that in orderto improve the self-regulatory functions of the securities industry it was necessary and proper to consolidate the securities dealers associations into a single body. In deference to this view, 33 associations were consolidated into 10
in 1968, and a single national body, the JSDA, was formed, with the former
10 associations reorganized as regional subdivisions of the JSDA. 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 in 1991, pressure tostrengthen the self-regulatory function of the JSDA has mounted, and the status of the JSDA was changed from a public-service corporation under the238

Chap. XI Financial Instruments Business (Securities Business)

Civil Code to a legal entity under the Securities and Exchange Law in 1992,
and the Ministry of Finance (currently, the Prime Minister) commissioned the
JSDA to handle the registration of registered representatives. This helped define the status of the JSDA as a self-regulatory organization of the securities
industry. Under the regulations of the JSDA, registered representative qualifications are classified into Class I registered representatives; margin trading
registered representatives; Class II registered representatives; Special Member Class I registered representatives, Special Member Class II registeredrepresentatives, and Special Member Class IV registered representatives.
(The definition of commission-registered representatives and their qualification requirements were abolished by virtue of the 2003 amendment to theregulations.) In July 1998, the Bond Underwriters Association of Japan was
consolidated into the JSDA, and in July 2004 the JSDA was reorganized intoa structure consisting of the Self-Regulation Division, the Securities Strategy
Division, and the General and Administration Division. As the JASDAQ
Stock Exchange was established (see chapter 10) in December 2004, theOTC securities market was closed, and the JSDA consolidated the Securities
Information Center under its wing in April 2005.
Financial institutions that are engaged in the securities business under registration made pursuant to the provisions of Article 33-2 of the FIEA (seesection 10) have joined the JSDA as special members since 1994. As of August 2015, the JSDA had 251 regular members and 213 special members (including 133 banks, 15 foreign banks, 39 shinkin banks (credit unions), 10 life
insurance companies, 4 property and casualty insurance companies, and 12
others).
10. Financial Instruments Firms Associations (2)Unlike the Securities and Exchange Law, the Financial Instruments and Exchange Act (FIEA) provides for the comprehensive regulation of a diverse
range of collective investment schemes (so-called funds) and investment trust
beneficiary certificate sales businesses. Self-offerings by funds, sales of investment trust beneficiary certificates, and some other businesses are defined
under the FIEA as Type II Financial Instrument Businesses “( Type II businesses”). Because financial instruments, such as funds, etc., are not highly
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 covera wide range of real estate, specified instrument, and other assets. Registered
Type II businesses, therefore, are not solely securities companies; many realestate companies also have entered the market.

Chap. XI Financial Instruments Business (Securities Business)

Table XI-17.
Business
Category
Type I

239

Numbers of Registered Financial Instruments Firms and Related Financial Instruments Firms Associations
Number of
Related Financial Instruments Firms Associations
Registered Firms(as of July 31, 2015)277 (Approved) Japan Securities 251 Regular members
Dealers Association(at Aug. 31, 2015)(Recognized) Financial Fu- 147 Regular memberstures Association of Japan(at May 31, 2015)

Type II

1,189 (Recognized) Type II Financial 313 Regular members
Instruments Firms Association (Aug. 2015)

Investment advisory and agency

986 (Recognized) Japan Invest- 489 Investment advisory andment Advisers Association
agency members(Sept. 2015)

Investment management330

274 Investment management
members (Sept. 2015)(Recognized) The Investment 91 Investment trust members
Trusts Association, Japan(Sept. 2015)
61 REIT members(Sept. 2015)

Total

2,782 (total numberof registrants)
1,959 (actual numberof firms)

Note: Of the 277 Type I businesses, 26 (FX specialists) are not members of JSDA, but have joined the Financial Futures Association of Japan. Because some firms are registered under multiple businesscategories and with multiple associations, the totals do not match the sum of the individual numbers.
Sources: Produced using the Financial Services Agency’s“List of Recognized Financial Instruments
Firms Association”and“List of Registered Financial Instruments Firms”and data from associations’websites.
• In addition to the above, there are firms deemed to be Qualified Institutional Investors (the so-calledfirms handling funds for professional investors) that are not required to register, most of which are notmembers 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.
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 Qualified Institutional Investor and 49
individual investors with the intention of using the provisions as a legal loophole to avoid registration ofa 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 for enforcement within a year.

240

Chap. XI Financial Instruments Business (Securities Business)

As a result, the number of registered Type II businesses had risen to 1,189
as of the end of August 2015, exceeding by four times the number of Type I
Financial Instruments Businesses (securities companies, financial futurescompanies, etc., hereinafter referred to as“Type I Businesses”). 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 a recognized 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 already in place self-regulatory systemsof the self-regulatory organizations (SROs) for Type II businesses, investment trust businesses, agency businesses, etc.
Establishing an“approved”association in Japan requires the consent of theprime minister of Japan. But“recognized”associations need only be acknowledged by the prime minister following their establishment. The Japan
Securities Dealers Association is the only“approved”association in Japan’ssecurities market. The country’s“recognized”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“approved”associations are able
to establish and operate OTC markets (refer to section 9).
Other than that single difference,“approved”and“recognized”associations carry out the same self-regulatory operations. The associations are responsible for (1) forming rules and regulations, (2) inspecting members todetermine their state of compliance with laws and ordinances and self-regulation rules, (3) disciplining members that have violated laws and ordinancesand self-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. Acting as a trade association is anotherpossible function of these associations.
There are 1,959 registered financial instruments firms in Japan, with somefirms being registered under multiple business categories and some being
members of multiple SROs. In contrast, there are 2,799 organizations classified as Qualified Institutional Investors that are not registered despite carrying out self-offerings of funds just like Type II businesses. Almost all of these
Qualified Institutional Investors are not covered by self-regulatory rules.

Chap. XI Financial Instruments Business (Securities Business)241

11. Investor Protection FundThe purpose of an investor protection fund is to protect the claims that general customers have on the securities companies they deal with. As we saw insection 1 of this chapter, the 1998 amendment to the Securities and Exchange
Law changed the licensing system of securities companies to a less-demanding registration system, encouraging nonsecurities 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 Law (the present FIEA) with a view (1) topreventing bankruptcy of securities companies, empowering the Financial
Services Agency to take an early remedial measure on the basis of the capital-to-risk ratio (Article 53 of the FIEA; see section 8 of this chapter) and asa framework to protect investors in case the securities companies they deal
with went bankrupt; (2) to requiring securities companies to manage theircustomer assets separately (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 Special Exception to the Bankruptcy Proceedings of Financial Institutions (the Law Dealing with the Bankruptcy of Financial Institutions, for short) was amended, and this amended law is applicable to securities 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 kept separately and 2), with respect to a customer’s cash and substitute securities deposited with the securities company as collateral for
margin trading, etc., that are impossible to physically identify when they arerehypothecated, the securities company deposits in an outside account anamount equal to its customers’claim, net of their liability, to the securities
company (this is called“customers’separate 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 customers’separate 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242

Chap. XI Financial Instruments Business (Securities Business)

Source of funds

Compensation proceduresThose eligible for compensation

Table XI-18. Investors Eligible for Compensation, Compensation Procedures, andSources of Funds of the Investor Protection Fund
(1) Eligible“General Customer”that conducts a Subject Securities-Related Transaction withpersons (Art.
a Financial Instruments Firm (excluding a Qualified Institutional Investor, central
79-20, Para. 1) or local government, or any other person specified by a 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 transactions, etc.; ii) money belonging to the account of or deposited by a customer
with regard to a transaction pertaining to Financial Instruments Business (such asadvance payment for purchase, proceeds from a sale that has 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 and-54)

When the Fund receives a notice from a financial instruments firm or the Prime
Minister, it shall recognize whether or not there is any difficulty for the firm toperform 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 financial
recognition
instruments firm “( Notifying Financial Instruments Firm”) to perform the obliga(Art. 79-55)
tion to return or refund customer assets, it shall give 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

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
firm through bankruptcy proceedings.

Loans to a
“Notifying
Financial
Instruments
Firm”(Art. 79-59)

When the financial position of a“Notifying Financial Instruments Firm”has deteriorated to such a point that, while it does not yet face difficulties in returningand refunding customer assets, loans from the Fund could facilitate expedited return or refund, the Fund may make loans to such“Notifying Financial Instruments Firm.”

Investor
Burden charges collected from member financial instruments firms shall be theProtection Fund 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.

Exchange Law (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 ($ at the rate of ¥115 to thedollar)) per customer to insure the repayment of his/her assets in the case ofbankruptcy 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 held

Chap. XI Financial Instruments Business (Securities Business)

Table XI-19.

243

Comparison Between New and Former System
Former System

New System

Name, Year of Estab- Deposit Compensation Fund Japan Investor Protection Fund (December
lishment(August 1969)
1998)
Underlying Entity

Incorporate foundation with Corporation defined under the Securities andno legal basis
Exchange Law (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 secu- ¥10 million per customer
as indemnity (Note) rities company
7 cases in and after May 1997 ・Minami Securities (went bankrupt in March
2000); indemnity amount of approximately(succeeded by the new fund¥5.9 billion (including ¥2.4 billion returnedin December 1998)
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 Law).

Table XI-20.

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 bil at the time of establishment (¥3 bil
ment, and ¥50 billion at the end of in cash and ¥7 bil guaranteed) and ¥5 bil
in cash and ¥5 bil guaranteed after April
March 2001
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 ¥4bil.

Remarks

The fund has taken over the compen- Members are required to have their books
sation service provided by the Depos- audited by outside auditors.
ited Securities Compensation Fundand its 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 bil or more short of ¥10 bil,members are asked to contribute an additional burden charge.

The two organizations were consolidated in July 2002 into the Japan Investor Protection Fund. As of 2015, there were 247 member firms (September) and the sizeof the fund was approximately ¥56.4 billion (end of March).

244

Chap. XI Financial Instruments Business (Securities Business)by securities companies, 2) become a trust manager of securities companies,
and 3) create a fund for the protection of investors to secure the necessary
funds and collect burden charges from its member companies. Members of
the fund must be financial instruments firms. More than one investor protection fund may be created, and securities companies (Type 1 Financial Instruments Firms) must participate in one of them.
12. The Securities Business of Banking Institutions
Since 1948 banking institutions had been prohibited, in principle, from doing
securities business under Article 65, Paragraph 1 of the Securities and Exchange Law (SEL). As the Banking Law did not explicitly authorize banking
institutions to conduct certain business related to public bonds or brokeragewith written orders, which were provided for as exceptions to the above prohibition (Article 65, Paragraph 2 of the Securities and Exchange Law), banking institutions (except for trust banks, which could pass their customer orders on to a securities company) did not conduct securities business. Since
1975, the government has issued massive amounts of debt securities. With aview to facilitating the sale of its debt securities, the government enacted a
new Banking Law in 1981 explicitly authorizing banking institutions to tradein bonds, and it also correspondingly amended the Securities and Exchange
Law. Accordingly, banking institutions started selling public bonds over thecounter in 1983 and dealing in 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 (1988); 2) trading, etc., and involvement in 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). Moreover, the registration system of securities companies and thesystem of authorizing certain securities businesses instituted in 1998 are also
applied to banking institutions. And banking institutions that have registeredunder this system are called“registered financial institutions.”The provisions remained intact under the FIEA after its full enforcement in 2007, withthe only change being the number of the article (Article 65, Paragraph 1 and
2 of SEL became Article 33, Paragraph 1 and 2 of the FIEA).
These were the types of securities business that financial institutions wereallowed to directly engage in. On the other hand, the 1992 Financial System
Reform Law authorized banks, securities companies, and trust banks to enter
one another’s markets through subsidiaries. And over the period between

245

Chap. XI Financial Instruments Business (Securities Business)

Table XI-21.

Balance of Investment Trusts, by Seller (as of August 31, 2015)(¥100 million)
Direct sales (investment
trust managementcompanies)

Securities companies

Banks (registeredfinancial institutions)

Stock investment trusts

500,64062.5%

294,229

36.7%

6,106

0.8%

800,975

Bond investment trusts

158,835

96.0%

6,549

4.0%

28

0.0%

165,412(MMF)

13,262

70.0%

5,653

29.9%

20

0.1%

18,936

Total

659,47668.2%

300,778

31.1%

6,134

0.6%

966,387

Total

Note: These figures are based only on beneficiary certificates publicly offered, and those for bond investment trusts include MMFs.
Source: Compiled from statistic produced by the Investment Trusts Association, Japan.

Table XI-22.

Banking and Securities Joint Branch Offices and Financial Instrument Intermediary Business of the Three Largest Financial Groups
Customer Introduction and Intermediary Services of Megabanks

banks

Securities companies

Mizuho Bank, Ltd.

Mizuho Securities

Joint branch offices
Planet Booth 165 (as of March 2015)

The Bank of Tokyo-Mit- Mitsubishi UFJ Morgan Stanley Se- MUFG Plaza 27 (as of March 2015)
subishi UFJ, Ltd.
curities
Sumitomo-Mitsui Bank- SMBC Nikko Securities
ing Corporation

Customer introduction service (expanded to all branches from 2014)

Source: Compiled based on IR information, etc. of each company. The collaborative business between
Sumitomo-Mitsui Banking Corporation and SMBC Friend Securities were transfered and integrated with SMBC Nikko in 2011.
Contribution from Intermediary Business to the Retail Operation of Mitsubishi UFJ Morgan Stanley Securities (FY2015/3)(¥100 million)
Total% of total

Asset undercustody

Number ofoutstanding
accounts(in thousands)

Sale of investment trusts

Individual
investor bonds

Sale of retail
foreign bonds

26,180 (25,308)

271 (269)

4,074 (3,344)

134 (236)

7,272 (5,852)

9.7% (10.4%)

20.8% (20.2%)

19.1% (16.7%)

14.6% (29.6%)

55.7% (49.8%)

Note: Assets in custody and number of outstanding accounts figures are as of the end of March 2015.
Percentages are of total amounts. Assets under custody pertain to domestic sales divisions (including financial institutions). Figures below in parentheses are for the fiscal term ended March 2014.
Source: Compiled from the databook provided for the FY2014 investor information meeting of the Mitsubishi UFJ Financial Group.

246

Chap. XI Financial Instruments Business (Securities Business)

Table XI-23.

Major Regional Bank-Affiliated Securities Companies

Parent bank
Name of company(investment ratio)

Year establishedYear established(or the year of
Parent bank(or the year of
Name of company
making it a(investment ratio)
making it asubsidiary)
subsidiary)

The Shizuoka
Bank Group(85.1%)

December 2000

Nishi-Nippon City
Nishi-Nippon City
Tokai Tokyo
Bank, Ltd. (60%)
Securities Co., Ltd.

May 2010

Niigata Securities The Daishi Bank,
Co., Ltd.
Ltd. (47.0%)

March 2006

Chibagin
The Chiba Bank,
Securities Co., Ltd.
Ltd. (100%)January 2011

Hachijuni
The Hachijuni
Securities Co., Ltd. Bank, Ltd. (100%)

April 2006

Iyogin Securities The Iyo Bank, Ltd.
February 2012
Co., Ltd.
(100%)YM Securities
Co., Ltd.

Yamaguchi
Financial Group,
Inc. (60%)

July 2007

Fukuoka Securities
The Bank ofCo., Ltd.
Fukuoka (100%)

April 2012

The Joyo
Securities
Co., Ltd.

Joyo Bank, Ltd.
(100%)

November 2007

Senshu Ikeda
The Senshu Ikeda
Tokai Tokyo
Bank, Ltd. (60%)
Securities Co., Ltd.

January 2013

Hamagin Tokai
Tokyo Securities
Co., Ltd.

The Bank of
Yokohama, Ltd.
(51%)

July 2008

The San-In Godo
Bank, Ltd.

February 2015

Chugin Securities
The Chugoku
Co., Ltd.
Bank, Ltd. (81%)

June 2009

Hyakugo
The Hyakugo
Securities Co., Ltd. Bank, Ltd. (100%)

August 2009

Shizugin TM
Securities Co., Ltd.

Gogin Securities
Co., Ltd. (100%)

Source: Compiled based on websites of companies and newspaper coverage

1993 and 1995, banking institutions established 19 securities subsidiaries.
(Subsequently, the number has decreased to 2 on account of bankruptcies ofparent banks, mergers, business combinations, or other reasons.) 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 have been lifted in stages, and the stock
brokerage business was deregulated in October 1999.
With respect to the firewall, the prohibition of making joint visits (of representatives from both parent and subsidiary companies) and the lead manager restrictions on securities subsidiaries for public offerings of securities issued by a certain customer of their parent bank have been relaxed, and theban on opening banking and securities joint branch offices was lifted in September 2002. At the same time, the interpretation of provisions relating toChap. XI Financial Instruments Business (Securities Business)247

brokerage with written orders was relaxed. In March 2005, banks were allowed to introduce customers to securities companies as initial public offering (IPO) candidates (business lead service). In June 2009, the joint position
regulations prohibiting officers and employees of securities companies andbanks from working on both sides of the firewall were lifted, allowing themto share confidential information of corporate customers as long as the clients
did not opt out of this arrangement. Recently, not only megabank groups but
also regional banks have been entering into financial instruments brokerage
agreements with securities companies in developing joint banking and securities businesses through introducing customers, opening accounts and handling orders.
13. The Competitive Landscape of the Securities Industry
In the securities industry of Japan, given that the Big Four securities companies had commanded the largest share in all segments of the market and had
many small and midsized securities companies as their affiliates (called“keiretsu companies”), the structure of competition used to be characterized asthe“Big Four oligopoly.”However, the Big Four oligopoly broke down in
the 1990s as (1) Yamaichi Securities went bankrupt in 1997; (2) Daiwa andNikko split up their companies into two divisions in 1998—the wholesale division (providing underwriting, M&A, and other services to corporate customers as well as catering to the needs of institutional investors by, for example, providing liquidity by use of proprietary capital) and the retail division(providing individual investors with a brokerage service and offering the saleof investment trusts) (Daiwa later reintegrated the divisions); and (3) Nomura, Nikko (later changed name to Nikko Cordial), and Daiwa liquidated theirholdings 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 business strategy of the former Big Four was to increase their sharesin the brokerage market and win the mandate as the lead manager of equity
financing by taking advantage of their share in brokerage. To achieve suchgoals, they sought to build a nationwide network of branches, hire a large
number of employees loyal to their company, and lure many member 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248

Chap. XI Financial Instruments Business (Securities Business)

Chart XI-4.

Mega-Bank Securities Subsidiaries and Independent Securities Companies

Mega-bank affiliations (keiretsu)

Independents

Mitsubishi UFJ Groupaffiliations

Mitsubishi UFJ Morgan Stanley Securities(60% owned by Mitsubishi UFJ Securities Holdings)

Mitsubishi UFJ Securities(securities subsidiary)(Former Bank of Tokyo→
Mitsubishi keiretsu)

Nomura Securities

Daiwa Securities

Merged in
Kokusai (former Nomura→ (Acquired shares in 1999)→ 2002
Merged inSecurities keiretsu)(Mitsubishi → October 2005 →(Mitsubishi
Securities)
Ryoko (former Mitsubishi→ Merged in 1999
UFJ
Bank keiretsu)
Securities)(becoming→
Tokyo-Mitsubishi
Dainana (former Bank of→
Personal Securities)
Tokyo keiretsu)(Former Sanwa Bank keiretsu)→

UFJ Capital Markets(securities subsidiary)

Universal (former Daiwa→
Securities keiretsu)
Sanwa Bank acquired
shares of Universal,
Taiheiyo (former Yamaichi
Taiheiyo, and→Securities keiretsu)
Daiichi in 1999.
→
The four securities
Daiichi (former Long-Termcompanies merged→
Credit Bank keiretsu)
to become Tsubasa
Securities in 2000.
Towa (former Sanwa→
Bank keiretsu)

BecameMitsubishi
UFJ Morgan
Stanley
Securities in
May 2010

Mito Securities→→

Merged in 2000
(Sakura Friend
Securities)

SBI Securities

Merged in 1999
(Meiko National
Securities)(Rakuten acquired DLJ Direct Securities
Rakuten Securities in July 2004, establishing its wholly
owned Rakuten Securities)
Monex Securities→

Acquired
Izumi
Securities
in 2004(Softbank acquired Ozawa Securities in
1999; Fides Securities, formerly Nissho
Iwai Securities, in 2005; and SBI
Securities (former World Nichiei
Frontier Securities) in 2007, folding
these into one company, and changed
the name to SBI Securities. In 2009,it acquired the business of Nihon
Investors Securities.)

Matsui Securities→
Merged in
2003
(SMBC
→
Friend→ Securities)

etc.

Online brokers (5 firms)

SMBC Nikko Securities (100% owned by SMBC)

National (former Matsushita→
Electric keiretsu)
Izumi (former Sumitomo
Life keiretsu)

Iwai Cosmo Securities (Iwai and Cosmo merged in May 2012)

Aizawa Securities→

Shin ei Ishino (former
Taiyo-Kobe Bank keiretsu) →Meiko (former
Sumitomo keiretsu)(Since 2010, absorbed Tamaki, Iida,
Ichiyoshi Securities Sasebo, Ise, Daihoku and Nishiwaki
securities firms in mergers)

Tachibana Securities(SMBC acquired business in
SMBC Nikko
2009 and merged Nikko Citi
Securities
Nikko Cordial Securities → (Was made a subsidiary in → Securities underwriting and→ (changed name2007 by Citigroup)
investment banking advisory
in April 2011)
operations with its operations)
SMBC Friend Securities (100% owned by Sumitomo Mitsui Financial Group)
Yamatane (former
Mitsui Bank keiretsu)(Merged with Toyota Financial Services
Securities in April 2010)

Toyo Securities

Mizuho Securities (95.8% owned by Mizuho Financial Group)
Acquired management
Mizuho Securities
control of Norin Chukin →(securities subsidiary)
Securities in 2004
Merged in
Shin Nihon (former Industrial
2009
Bank of Japan (IBJ) keiretsu) →(Mizuho →Securities)
Merged in 2000→
(Shinko Securities)
MizuhoWako (former IBJ keiretsu) →Securities
andMizuhoInvestors
Mizuho Investors Securities (100% owned by Mizuho Bank)
Securities
merged in
Kankaku (former Daiichi
January 2013
Kangyo Bank (DKB) keiretsu) →(MizuhoMerged in 2000
Securities)(Mizuho Investors→ Absorbed
Kokyo (former→ Securities)
DKB keiretsu)
Taito in→
2001

Sumitomo Mitsui Groupaffiliations

Tokai Tokyo
Securities
Marusan Securities→(Ref.) Merged with the Investment Banking
Division of Morgan Stanley Japan
Merged in Securities
2002
(UFJ
Tsubasa
Securities)

Mizuho affiliations

Daito (former
Fuji Bank keiretsu)

Okasan Securities(Terminated business alliance with
Sumitomo Mitsui Financial Group in
2009, and acquired shares of the joint
venture Daiwa Securities SMBC
from the Financial Group (currently
Daiwa Securities Capital Markets))→

SMBC
FriendSecurities(sold its
collaborativebanking andsecurities
operations
to SMBC
Nikko
Securities
in 2011)

Kabu.Com(Acquired Saison Securities in 2001 andmerged with: Nikko-Beans in 2005,
Orix Securities in 2010, and Sony Bank
Securities in 2013)(In 2000, e-Wing Securities (former
Sanwa keiretsu) and Nihon Online
Securities (former Itochu affiliate)
merged, establishing Kabu.Com
Securities. Absorbed Me Net Securities
in 2005. Tokyo-Mitsubishi UFJ Bank
has a 44.87% share and Mitsubishi UFJ
Securities Holdings has 11.85%.)

Chap. XI Financial Instruments Business (Securities Business)

249

Japanese-style employment system with many affiliated brokers.
Their business strategies and management systems had played an important role during the rapid economic growth period as mechanisms nimbly
supplying large amounts of capital to cash-starved industries of the country.
As the years rolled on into the 1990s, however, the basic structure of the Japanese economy drastically changed, causing a mismatch between their business strategy and reality. The challenges facing today’s Japanese economy
are to improve the effectiveness of the use of funds to reorient the structureof its industries and to provide for the aging of its population. The roles the
securities industry is expected to play in the coming years are 1) to find andincubate emerging companies by promoting private equity investments; 2) tohelp legacy industries and incumbent businesses expedite their renovationand streamlining by advising them on the securitization of assets, M&A, andother measures and by underwriting the securities they issue; and 3) to direct
household savings into the securities markets by offering investment advice
based on quality research and professional investment management services.
To accomplish this, it is necessary for securities companies to train and secure specialists by spinning off business divisions according to their specialties. What is more, the practice of maintaining an extensive network of affiliates no longer makes economic sense, and the shares of affiliates the parent
securities companies hold will have to be liquidated. Meanwhile, banks andother corporations that are keen to enter the securities business have bought
the shares that parent securities companies wanted to dispose of, and reorganization of the banking industry has resulted in the merger and consolidationof bank-affiliated brokers. Some brokers also have been bought out by the
management (MBO). The keiretsu of brokers, therefore, is no longer rigid.

CHAPTER XII
Asset Management Service

1. Investment of Individual Financial Assets
According to a 2015 first-quarter survey by the Bank of Japan,“Comparisonof the Flow of Funds between Japan, the United States, and Europe,”at theend of March 2015 individuals in Japan had ¥1,708 trillion worth of financial
assets. Of this amount, 51.7% was invested in cash and deposits and 18.0%
in securities investments (stocks and equity contributions, 10.8%; investment
trusts, 5.6%; and bonds, 1.6%). Compared with the United States, with
13.3% in cash and deposits and 51.7% in securities investments, and Europe,with 35.0% in cash and deposits and 29.7% in securities investments, Japan’sindividual financial assets are heavily skewed toward cash and deposits andthinly invested in securities. In the 2014 survey by Japan FSA’s Central
Council for Financial Services Information, 45.7% of respondents said thatthey focus on“security”as their reason for selecting financial products,
while 25.1% said“liquidity.”Only 16.7% of respondents said that they focus
on“profitability.”
Individual financial assets in Japan thus are mainly invested in low-riskbank deposits, with little preference for more profitable securities, particularly stocks. Certainly during Japan’s era of deflation the heavy investment inbank deposits probably turned out to be the right call. With, however, the introduction of an inflation target in Japan and the implementation of massive
quantitative easing to achieve that target, it is possible that the focus on safety carries with it the risk that the real value of cash will erode because of inflation. As a countermeasure, the government introduced a preferential tax
treatment investment system in January 2014 to promote the shift from“Savings to Investment”(NISA, a small-amount investment tax exemption
scheme). The goal of the system is to support asset formation and to expand
the supply of growth capital from households.
Asset management companies include trust banks, life insurance companies, and discretionary asset management firms that manage the pension andinsurance reserves of individuals. Representing people’s insurance for the future, those reserves account for 26.0% of individual financial assets. Invest-

Chap. XII Asset Management Service

Chart XII-1.

Composition of Household Assets (at March 31, 2015)
Stocks and Insurance
Investment equity and pension
Bonds trusts contribution reserves Others total

Cash anddepositsJapan(51.7%)(13.3％)(3.1％)(4.3%)(12.9％)(34.3％)(2.8%)(16.8%)(35.0%)

0

10

20($69.4 trillion)(32.1%)(4.5％)
EuropeArea(¥1,708 trillion)(26.0%)(1.6%) (5.6%) (10.8%)

U.S.A

251

30

(4.9%) (8.0%)
40
50( 21.1 trillion)(32.6%)

60

70

80

(2.7%)
90
100

Percentages of the total financial assets

Source: Bank of Japan

Table XII-1.

Points of Focus When Selecting Financial Products<Households Holding Financial Assets>

(%)
2005

Profitability

2006

2007

2008

2009

2010

2011

2012

2013

2014

14.7

17.6

16.5

15.8

16.6

15.8

18.7

16.9

14.7

16.7

High return

11.2

14.0

13.7

12.6

13.8

13.2

13.8

12.1

9.8

11.7

Anticipated price increase in the
future

3.6

3.5

2.8

3.1

2.8

2.6

4.9

4.9

4.9

4.9

Safety

49.0

46.7

46.5

45.7

44.9

48.4

48.0

46.7

47.0

45.7

Principal is guaranteed

33.9

31.0

28.4

28.7

30.1

29.8

30.3

28.7

29.6

29.5

Financial institution handling the
product is reliable and secure

15.1

15.6

18.1

17.0

14.8

18.6

17.6

18.0

17.4

16.3

26.9

29.0

28.1

29.4

30.9

28.5

23.7

24.7

25.0

25.1

Easy to convert to cash

5.1

5.4

6.3

6.7

5.3

4.5

4.6

5.3

5.9

6.0

Free to deposit/withdraw even insmall amounts

21.8

23.7

21.7

22.7

25.7

24.0

19.0

19.4

19.1

19.1

Liquidity

Product content is easy to understand

2.0

2.5

2.4

2.0

2.0

1.8

2.2

2.5

2.5

3.1

Others

3.0

2.9

4.1

4.5

4.3

4.4

5.4

6.7

8.5

7.9

No response

4.3

1.4

2.4

2.5

1.3

1.0

2.0

2.4

2.2

1.5

Source: Japan FSA’s Central Council for Financial Services Information

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Chap. XII Asset Management Service

ment trust management companies are also asset management companies,
handling investment trusts that account for 5.6% of individual financial assets. Either indirectly or directly, asset management companies play an important role in financial asset formation by individuals in a society with low
birth and mortality rates.
These asset management companies also contribute to growth in corporate
performances and to the sound development of the economy—and therefore
society—through the following two functions. To begin with, they fulfill arole 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 and beneficiaries
on a mid-long basis, thereby contributing to enhancing the 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) common to all citizens supplementedby (2) employee pension plans (employee pension and mutual aid association
pensions) and (3) corporate pension plans (employee pension funds, definedbenefit corporate pension, and individual-type defined-contribution pension)for civil servants and private-sector salaried employees. Of these plans, thenational pension and employee pension plans utilize a pay-as-you-go systemthat provides support shared among generations in the form of public pensions, while corporate pension plans use a funding system in the form of private pensions.
Employee pension funds comprise a substitutional portion received fromthe public employees’pension insurance system and their own fund termed
the“plus alpha”portion. In the past, the substitutional portion formed thecore of these funds. Following the bursting of the economic bubble in Japan,
however, difficult asset management conditions resulted in the substitutional
portion placing a heavy burden on employee pension funds. Companies one
after the other reacted by either terminating the funds or returning the substitutional portion to the government and converting their funds to defined benefit pension funds. Defined benefit pension funds do not have this substitutional portion, allowing for flexible system planning with the agreement of
the labor force. The corporate type of defined contribution pension plan differs from the previous pension system with fixed benefits (defined benefit
corporate pension) in that the contributed premium of each individual isclearly segregated, with pension benefits being determined based on the totalof a fixed premium and investment income.

Chap. XII Asset Management Service

Chart XII-2.

253

Structure of Pension System

Employee pension
funds
4.08 million
subscribers

Defined benefit
corporate pension
7.88 million
subscribers

Defined contribution
pension(corporate type)4.64 million
subscribers

Defined contribution pension(individual type)0.18 million
subscribers

Additional
pension
0.8 million
subscribers

National Pension Funds
0.48 million subscribers(Figures as of March 31, 2014)(Workplaceoriented
addition)(Substitution
portion)

Employees Pension
Insurance
35.27 million
subscribers

Mutual Aid
Association
Pension
4.39 million
subscribers

National Pension (basic pension)
67.18 million subscribers
Dependent spouses of
Self-employed persons, etc.
category-2 insured
persons
Category-3 insured
persons
9.45 million

Private sector salaried workers

Category -1 insured persons
18.05 million

Public officers,
etc.

Category-2 insured persons, etc.
39.67 million

Source: Pension Fund Association.

Chart XII-3.

GPIF’s Investment Assets and Portfolio Allocation (total reserve funds) (asof June 30, 2015)
Short-term assets
3.27%
Foreign stocks
22.32%

Domestic bonds
37.95%

Foreign bonds
13.08%

Domestic stocks
23.39%
Source: GPIF

254

Chap. XII Asset Management Service

The management of pension plans must be safe and efficient in the interestof protecting future benefits. With the exception, therefore, of a few largescale pension funds that manage investments in-house, asset management of
the pension fund is commissioned to outside investment companies. According to the 2013 fiscal year asset management survey by the Pension Fund Association, the allocation of corporate pension funds (employees’pension fundand defined contribution corporate pension plans) to asset managers was trustbanks, 52.0%; discretionary asset management companies, 26.3%; and life
insurance companies, 21.7%. By composition of fund assets, domestic bonds
accounted for 27.9%, foreign stock for 16.3%, domestic stock for 14.5%, thegeneral account of life insurance companies for 13.7%, foreign bonds for
13.3%, and others for 9.8%. There is a need particularly for thorough risk
management and diversified portfolio investment for employee pension funds
that address the concerns raised by the separately managed substitutional
portion.
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 the first quarter of fiscal 2015), domestic bonds accounted for 37.95%, domestic stock for 23.39%, foreign stock for 22.32%,
and foreign bonds for 13.08%. Although previously pension funds were managed primarily by domestic bonds, steps are taken to promote diversified investment by investing also in stocks and foreign-denominated assets as theJapanese economy pulls out of deflation and domestic bond interests decline
to a low level.
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 care,of prudent management, of loyalty, and 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–typetrust) or not become involved in management without administering the assets (specified asset management–type trust), or be an intermediary trustee

Chap. XII Asset Management Service

Chart XII-4.

Trust Scheme

Trustee

Trust Contract or
Will

255

Monitoring andSupervision
Trust Income

Transfer ofAssetsBeneficiary

Trustee

Administration and
Disposition

Fiduciary Duties andSegregation ofAssets, etc.

Trust Assets

Source: Trust Companies Association of Japan

Chart XII-5.

Fund-Type Company Pension Plan Trust Scheme① Employee pension fundcontract

Business

Employees andbeneficiaries

Employee contributions
Contributions by employer and employees

Company Pension Fund (Trustor and Beneficiaries)② Authorization③ Pension plan agreement

Ministry of Health,
Labor and Welfare
Source: Trust Companies Association of Japan

Contributions by
employer andemployees
Trust Bank (Trustee)④ Pension plan benefits

256

Chap. XII Asset Management Service(general manager) representing the trustees and insurers in acting as the general manager for dealings with the trustor when the administration function iscommissioned to multiple trust banks and insurance companies.
The two main features of trust bank operations are the high proportion ofpooled asset management and passive investment policies in comparison
with discretionary asset management. Pooled asset management combines
the assets of multiple funds into one account. Compared with the independent management of assets, where the assets entrusted by each fund are kept
separate and investment is made in specific securities, etc., this system enables even small-scale funds to diversify their investments. Another advantage is that the asset management fees and transaction costs are cheaper. On
the other hand, with independent management it is easier to manage assets
according to the needs of each fund involved than it is with pooled asset
management.
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. Moreover, incontrast with discretionary asset management companies, trust banks’businesses encompass not only asset management but also fund administration.
Synergies between these two businesses scale up the economic benefits to thetrust bank, as do the relatively large assets under management and theamount of business involved. These benefits combine to provide an advantage to the client in terms of lower asset management fees. With passive
management, on the other hand, clients can only expect benchmark asset performance.
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. The
general account guarantees the policyholder a certain fixed amount of benefits regardless of how the general account performs, while the special accountChap. XII Asset Management Service

Table XII-2.

257

Asset Composition(%)

Cash andCall loans
depositsMoneytrustsSecurities

Loans

Tangible
fixed
assetsOthersTotal
assets

FY2009

1.6

0.7

0.7

76.7

14.7

2.1

3.5

100.0

2010

1.8

0.6

0.6

77.3

13.7

2.1

3.8

100.0

2011

1.1

0.8

0.6

78.8

12.9

2.0

3.8

100.0

2012

1.0

0.8

0.6

80.7

11.7

1.9

3.4

100.0

2013

1.3

0.8

0.7

81.3

10.9

1.8

3.3

100.0

Figures excluding Japan Post Insurance Co., Ltd.
2009

1.2

0.8

0.9

75.3

14.1

3.1

4.5

100.0

2010

1.6

0.6

0.8

76.3

13.1

3.0

4.6

100.0

2011

1.0

0.8

0.8

78.4

12.1

2.8

4.1

100.0

2012

1.1

1.0

0.7

80.8

10.8

2.5

3.0

100.0

2013

1.0

0.9

0.7

81.8

10.3

2.4

2.8

100.0

Source: Trust Companies Association of Japan

Table XII-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

FY2009 1,279,887 52.4 109,678 4.5 264,538 10.8 186,618 7.6 429,571 17.6 171,206 7.0 2,441,501
2010

1,323,987 53.4 119,164 4.8 252,835 10.2 162,149 6.5 457,384 18.4 164,288 6.6 2,479,809

2011

1,412,757 54.9 131,630 5.1 253,429 9.8 147,444 5.7 469,267 18.2 161,074 6.3 2,575,603

2012

1,487,692 53.5 139,346 5.0 251,551 9.0 167,256 6.0 559,864 20.1 176,735 6.4 2,782,448

2013

1,498,157 52.6 140,089 4.9 248,959 8.7 180,299 6.3 614,509 21.6 168,303 5.9 2,850,317

Figures excluding Japan Post Insurance Co., Ltd.
2009603,711 36.9

58,396 3.6 195,162 11.9 186,618 11.4 422,989 25.8 171,206 10.5 1,638,086

2010

682,957 40.0

56,606 3.3 191,930 11.2 162,149 9.5 450,147 26.4 164,288 9.6 1,708,079

2011

813,135 44.4

53,851 2.9 191,154 10.4 147,434 8.1 463,081 25.3 161,074 8.8 1,829,732

2012

922,966 44.9

52,361 2.5 186,713 9.1 167,246 8.1 550,842 26.8 176,735 8.6 2,056,866

2013

972,928 45.1

48,351 2.2 184,540 8.6 180,289 8.4 602,114 27.9 168,303 7.8 2,156,527

Source: Trust Companies Association of Japan

258

Chap. XII Asset Management Service

policies pay out benefits that vary based on 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 2014 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 2013, securities
accounted for 81.3%, while loans accounted for 10.9%. The recent trend has
been an increase in the amount of securities coupled with a decrease in loan
holdings. Looking at the breakdown of securities, Japanese government
bonds made up the greatest portion (52.6%), followed by foreign securities(21.6%, of which equities accounted for 1.9% and bonds, etc., 19.7%); Japanese corporate bonds (8.7%); Japanese equities (6.3%); and Japanese regional bonds (4.9%).
In recent years, insurance companies have come to focus more on asset liability management (ALM) because of the introduction of mark-to-market
accounting and stricter regulations on solvency margins. Liability reserves,which account for most of insurance company liabilities, are superlong liabilities with a duration (average) of more than 10 years. As such, in their asset
management strategies, the insurance companies have increasingly favoredinvestment in 20-year and other superlong Japanese government bonds. On
the other hand, insurance companies also are cautiously investing in highprice volatility risk stocks and foreign bonds, which carry an exchange raterisk. In addition, there is a trend toward using currency hedges to avoid currency risk when investing in foreign securities.
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 polices that reflect the wishes of
the individual customer. Within a Class 1 rider policy, there also are balanced-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.

Chap. XII Asset Management Service

259

5. Asset Management of Discretionary Asset Management Companies
Discretionary asset management companies manage the assets of customers
based on a discretionary management 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, such as public pensions, pension funds, financial companies, business companies, and sovereign wealth funds. Discretionary management companies can be considered the business sector where
liberalization and internationalization has progressed the most, even in the financial industry, which has low barriers to entry for non-financial or foreigncompanies. As a category for investment specialists, the asset managementcompany category includes investment trust management companies andfund managers that sell units in group investment schemes, such as venture
capital funds, as well as discretionary management companies.
The Japan Securities Investment Advisers Association is a self-regulatory
body for the discretionary asset management industry. It is designed to protect investors by ensuring the fair and smooth operation of members’asset
management business. It also contributes to the sound development of the asset management business and related matters. The asset 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 corporate governance, 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 pension funds, these funds are
not limited 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 rela-

260

Chap. XII Asset Management Service

Chart XII-6. Investment of Pension Assets by Investment Advisory Service Companies

Pension fund,etc. customer

Discretionary
investment contract

Investment advisory
company

Tripartite agreement

Tokkin specified money trust

Trust bank(custody and management of assets)

Purchase/saleand delivery of
securities

Investment instructions
Placing orders

Table XII-4.
Traditional discretionary
investment contract
Customer

Institutional investors

Securities companies,
etc.

Scheme comparison
Real estate private
placement fundWrap AccountFund

Individual investors

Minimum 100 million yen or moreamount

100 million yen or more

Several million yen or
more

Investment
targetReal estate trust beneficiary rights

Traditional securities

Traditional securities

Managing Specialized management
entitycompany

Specialized management Company concurrently
company
engaged in securities
business

tive 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 are also attracting attention in the last few years.

Chap. XII Asset Management Service

261

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 more than one thousand stocks and over 40 countries
starts from about ¥10,000. The second feature is that investment trusts aremanaged by professionals. Building the optimum investment portfolio basedon macroeconomic analysis as well as financial trends and stock price analysis 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 marked-to-market net asset value of these funds ispublished on a daily basis, and Japanese laws have beefed up disclosure requirements.
An investment trust with instructions from trustors is representative ofschemes 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, over the 60-year
history of the industry the investment regulations have gradually been liberalized, and today it is possible to create a truly wide range of investment instruments based on the products available. For example, by including shortterm money products, they can structure investment trusts, such as money
reserve funds (MRFs), that mimic bank deposits. Furthermore, since the approval of investment in real estate and commodities, individual investors cantake a stake in office buildings, gold, oil, and other investments through investment trusts.
Entry into the market has also been liberalized from a limitation to only
approved companies associated with major securities companies to a registration system that requires only that companies meet certain conditions. As aresult, the industry has grown from only about 10 companies at one time toover 100 investment trust management companies. Moreover, with the liftingof the bans on outsourcing asset management and on investing in a fund offunds, investment trusts can also indirectly offer their customers access to theChap. XII Asset Management Service

Table XII-5.

1998

1999
2001
2007
2008

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)
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 to registration system
Ban on inclusion of commodities lifted

Chart XII-7.
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

262

Investment

Investment

Main
investment
objectives
Securities

Real estate

OthersChap. XII Asset Management Service

263

investment services of foreign asset management companies. Although sales
are still restricted to securities companies, sales access points have been expanded through direct distribution by investment management companies
and by agency sales by banks and other registered financial institutions.
7. Stewardship CodeGiven the Cabinet’s approval of the Japan Revitalization Strategy in June
2013, the Principles for Responsible Institutional Investors (Japan’s Stewardship Code) formulated by the Council of Experts Concerning the Japanese
Version of the Stewardship Code (secretariat placed at the FSA) were announced on February 27, 2014. The Stewardship Code defines the principles
considered to be helpful for institutional investors in fulfilling their stewardship responsibilities of enhancing the medium- to long-term investment return for their clients and beneficiaries 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. The Stewardship Code and the Corporate Governance Code (seeSection 6 of Chapter 1 and Section 6 of Chapter 15) serve as two wheels of a
cart so-to-speak, and in expectation that broad penetration and implementation of these two Codes will contribute to realizing effective corporate governance in Japan, nearly 200 institutional investors have also adopted the Stewardship Code.
The Stewardship Code is not a law or a legally binding regulation. It also
adopts a principles-based approach instead of a rule-based approach. 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).
According to the Code, institutional investors should monitor investee
companies so that institutional investors can fulfill their stewardship responsibilities with an orientation towards the sustainable growth of the companies. Monitoring should be performed continuously and effectively, andshould cover a variety of factors, including non-financial matters.
Engagement refers to having“purposeful dialog”with investee companies
in order to arrive at an understanding in common with investee companies
and work to solve problems. Institutional investors are expected to have aclear policy in advance on how they design dialog with investee companies.
Further, institutional investors should seek to vote on all shares held. They
are expected to decide on the vote in light of the results of the monitoring ofinvestee companies and the contents of dialog with them. Institutional investors should also have a clear policy on voting and publicly disclose it.

264

Chap. XII Asset Management Service

Table XII-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 and disclosure of voting activity. The policy on voting 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 have in-depth knowledge of the investee companies and their business environment and skills
and resources needed to appropriately engage with the companies and make proper judgments in fulfilling their stewardship activities.

CHAPTER XIII
Investment Trusts

1. Summary
An investment trust is a financial instrument that raises money from two or
more investors in order to establish a large fund that it invests in a variety ofassets, such as stocks and bonds, under the management of an investment
specialist, and the profits earned through that investment are then distributed
among the investors in proportion to their contributions.
The 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, an
approved self-regulatory organization under the Financial Instruments andExchange Act.
Investment trusts play a major role in making investments for the generalpublic and have the economic benefit of helping companies to raise money.
They also perform the function of contributing to the reasonable determination of prices in the securities markets as an institutional investor.
Chart XIV-2 shows the growth of the total net assets of publicly offeredinvestment trusts in Japan. The total net assets reached a peak in 1989 and266

Chap. XIII Investment Trusts

Chart XIII-1.

Investment Trust Concept

Contributions from two or more investors

○

○

○

Investment and administration byasset management specialists
Diversified investment
Domestic and foreign stock markets
Domestic and foreign bond markets
Domestic and foreign real estate markets
Money markets, derivatives, etc.

A return of profits to investors

Establishment of a large fund

Chart XIII-2. Trend of Total Net Assets of Publicly Offered Investment Trusts and Their
Positions
100
90
80

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

10%
9%
8%

70

7%

60

6%

50

5%

40

4%

30

3%

20

2%

10

1%

0

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 150%Note: Figures for 2015 are as of the end of September (percentages in individual financial assets are as ofthe end of June).
Sources: 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 .

Chap. XIII Investment Trusts

267

declined after the bubble economy burst. The market rebounded temporarily
around 2005 along with the recovery of the stock market and other factors,
only to drop 35% year on year again after the global financial crisis in 2008.
Nevertheless, the decline in the market bottomed out in January 2009 andtopped the ¥100 trillion level for the first time in May 2015. Still, in 2014 Japan accounted for only 2.5% of the global investment trusts net asset total ofmore than $31.38 trillion (¥3,700 trillion), a small portion compared withJapan’
s approximate 6% share of the world gross domestic product (GDP).
This suggests that there is a high growth potential for investment trusts in Japan, so it is expected that investment trusts will grow as a core product, accelerating the shift from“saving”to“investing”in the future.
2. History of Investment Trusts
The investment trust, a collective investment scheme, has penetrated both developed countries as well as emerging countries in various forms since its
birth in the U.K. in the late nineteenth century.
In Japan, investment trusts existed before the war, but the current systembegan with the enforcement of the Securities Investment Trust Law in June
1951. It was not naturally generated from demands from investors as in theWest but was politically introduced for a supply-and-demand adjustment ofstocks substantially released as a result of the break-up of the zaibatsu conglomerates (democratization of securities) and in order to raise money for revivifying industries during the postwar period, when there was a severe lackof funds. Legislated in reference to the prewar investment trust, it was
launched in the form of both the contractual-type stock investment trust andthe unit-type stock investment trust.
The Securities Investment Trust Law 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 large amendments to the law made in 1998 were associated with implementation of the Financial System Reform Law under“free, fair, andglobal”principles. As a result of the amendments, the corporate-type investment trust, the mainstream in the U.S. and Europe, was introduced from thestandpoint of promoting the globalization of the investment trust business,deregulating the establishment of new funds by changing from an approval

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Chap. XIII Investment Trusts

Table XIII-1.

History of the Investment Trust in Japan

SystemProducts
MarketingManagement
The Securities Investment Trust Investment trusts were Investment trusts were avail- The assets were invested mainLaw was implemented (1951) launched in the form of unit- able at securities companies ly in domestic stocks
type investment trusts (1951)
Launch of open-type investment trust (1952)
Investment trust management Bond investment trusts werebusiness was separated from established (1961)
securities companies (beginning operations in 1960)
The Securities Investment Trust
Law was amended to add provisions for the duties 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 established
Investment trust management
Bank affiliates entered invest- (1992)
ment trust management busicompanies started to sell inness (1993)
vestment trusts directly (1993)
Investment trust reform wasdetermined (1994) and implemented (1995)
Nikkei 300 Exchange Traded Fund was established(1995)The Financial System Reform
Banks and insurance compaLaw was implemented (1998)
nies started to sell investment
trusts (1998)

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

Private placement investment trusts were launched(1999)The Act on Investment Trusts Corporate-type investment
and Investment Corporations trusts were established
was implemented (2000)(2000)

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

Portfolio valuation method of Real estate investment trusts
bond investment trusts shifted were established (2001)
to market value accounting(2001)
In-kind contribution ETFs
were listed (2001)

The Law on the Sales of Fi- Some MMFs’net asset value
nancial Products was imple- fell below their principle
amount (2001)
mented (2001)

The Financial Instruments andExchange Act was implemented (2007)

Source: Author of the chapter.

Sales of investment trusts
started at post offices (2005)
Target of investment trusts expanded to commodities (2008)
Credit risk regulations wereintroduced (2014)

Chap. XIII Investment Trusts

269

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 distribute investment trusts. Disclosure was enhanced by obligating
investment trusts to disclosure requirements under the Securities and Exchange Law.
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 duties of reasonable care and skill (investment fund management companies are required to give instructions on
asset management of investment trusts as good managers) in the rules 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.
3. Forms of Investment Trusts
Investment trusts are broadly classified into the contractual type and the corporate type.
Contractual Type (Investment Trust)Some contractual-type investment trusts take such legal form as a trust or acommon fund in most of the world; however, in Japan the contractual type ofinvestment trust takes the legal form of a trust and is subclassified into investment trusts with investment instructions from trustors or without investment instructions from trustors.
An investment trust with investment instructions from trustors consists ofthree entities: 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 authority, 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Chap. XIII Investment Trusts

The Structure of Investment Trusts with Instructions from Trustors

Beneficiaries

Purchase/holding
Investors

Investors

Investors

Sales/
Redemption
Sales/

Distributing
companies
Handling ofsubscription
Securities
firms

TrusteeSafekeeping,etc.

Distribution
Registered agreement

financial

Redemption institutions
Sales/

TrustorInstructions on
management,
etc.

DirectRedemption marketing

Investment

Trust
agreement

Trust banks, etc.

Chart XIII-3.

Investment trust
management companies

270

Investment

Investment

Main
investment
objectives
Securities

Real estate

Others

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

the profits arising from investment management as dividends or by redeeming the certificate.
In the case of investment trusts without investment instructions from trustors, the trustee enters into a trust agreement with two or more investors andcombines their funds into a trust asset, which is then invested mainly in certain assets excluding securities and held and administrated by the trustee
without instructions from the trustors.
Chart XIV-3 shows the structure of an investment trust with instructions
from trustors that is generally adopted in Japan.
Corporate Type (Investment Corporation)
The corporate type is operated in a legal form that is similar to a corporation.
In Japan, an investment corporation with a corporate veil is established andoperated 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, to outsidecompanies. Investors obtain the position of shareholder by accepting sharecertificates (investment certificates) issued by the investment corporation andreceive the profits arising from the investment management as dividends.
Chart XIV-4 illustrates such a structure.
Both the contractual type and the corporate type include the open-end type
and the closed-end type. Which type they are grouped into depends on theclaims 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Chap. XIII Investment Trusts

Chart XIII-4.

271

The Structure of Corporate-Type (investment corporation) Investment
TrustsInvestment company

Appointment
Auditor(Certified public accountant,accounting firm)
Auditing
Entrustment of
Asset custody company safekeeping(trust bank, securities
firm, etc.)

General meetingof investors

Board of directors
Executive directors andsupervisory directors

Entrustment ofmanagement

Entrustmentof generalbusiness
administrations

Investment adviser(Financial instruments
business operators)

Administration
service providers

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

Investor

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

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 corporate-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¥157 trillion in Japan as of the end of September 2015. They are classified bya 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 eligible investors or professional
investors stipulated in the Financial Instruments and Exchange Act or to fewer than 50 investors. A private placement, the establishment of which wasmade possible by the 1998 amendment to the Order for Enforcement of theInvestment Trust and Investment Corporation Act, has the margin to freely
design products only with the approval of the investors, because a private

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Chap. XIII Investment Trusts

Chart XIII-5.

Overview of Investment Trusts (as of the end of September 2015)
Figures refer to total net asset value (billions of yen)
Figures in parenthesis indicate the number of funds
Shaded area represents publicly offered securities investment trusts

Contractual-type
investment trusts
93,067(5,722)

Securities investment
trusts
93,067(5,722)

Stock investment
trusts77,081(5,562)

1,708
(342)

Open-type investment trusts 75,373(5,220)ETFs 14,461(140)
Others 60,912(5,080)Public offering
investment
trusts100,204(5,776)

Bond investment
trusts15,986(160)

Total investment
trusts157,797(9,627)

Investment trusts other than 0
securities investment trusts (0)Investmentcompanies
7,136
(54)

Privateplacement
investment trusts
57,593(3,851)

Unit-type investment trusts

Contractual-type
investment trusts
56,741(3,834)
Investmentcompanies
852(17)

Securities investment companies

13(21)
Open-type investment trusts 15,973
(139)
MRFs
10,715
(12)
MMFs
1,893
(14)
Others3,366(113)
Unit-type investment trusts

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

3
(1)

Real estate investment companies (Note) 7,133(53)
Stock investment trusts 54,393(3,499)Securities investment trusts
56,741(3,834)

Bond investment trusts 2,348(335)

Investment trusts other than securities investment trusts
Securities investment companies

39(3)

Real estate investment companies (Note)

812
(14)

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

placement is subject to less-rigid investment restrictions than a public offering. Therefore, privately placed funds attract the attention of large investors,
in particular institutional investors, and rapidly increase in volume as funds
invested 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 Management Funds (MMF) andMoney Reserve Funds (MRF) that invest in short-term money market vehicles.

Chap. XIII Investment Trusts

273

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 financial instrument, just as in foreigncountries.
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 funds clearly describes into which classification the funds fall.
Exchange-Traded Funds (ETF)
Among open-type funds, funds whose net asset value fluctuates closely withsecurities price indexes, including the stock index, and whose units are listed
and traded on exchanges like stocks are called ETF. They are formed by thein-kind contribution of stocks by designated participants and others, and theunits/shares of many ETFs can be exchanged for the component stocks held
in a timely manner. This creates arbitrage opportunities with the component
stocks, a mechanism that keeps the gap between the traded prices of the fundon the exchange and the indexes targeted by the fund within a small range.
5. Sale of Investment Trusts
The subscription and sale of investment trusts had been engaged in only by
securities firms 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, in 1998 andsome post offices in October 2005 expanded the distribution network rapidly.
As a result, there was a substantial change in the breakdown of the total net
assets of investment trusts by distribution channels, as described in Table ZZ.
Financial institutions, including banks, accounted for 32% of public offeringsof investment trusts and 37% of public offerings of stock investment trusts asof the end of September 2015. Banks had no less than 70% share in private
offerings of investment trusts. In contrast, investment trust management companies saw weak growth in direct marketing, partially due to the exit of large
companies related to securities firms (as such companies absorbed the sales).

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Chap. XIII Investment Trusts

Chart XIII-6.

Breakdown of Total Net Assets of Public Offering Investment Trusts byDistribution Channel (as of the end of September 2015)

Total public offering investment trusts

Public offering stock investment trusts

Direct marketing 0.6%

Direct marketing 0.8%

Banks, etc
31.5% Securities
firms
67.9%

Banks, etc Securities
37.1%
firms
62.2%

Chart XIII-7.

Trend in Breakdown of Total Net Assets of Public Offering Stock Investment Trusts by Distribution Channel
Banks, etc

Securities firms
2000

Direct marketing

85.9%

02

76.9%

04

57.3%

42.1%

08

56.8%

42.7%

61.3%

0.6%
0.5%
0.6%

38.1%

67.9%

Chart XIII-8.

0.8%

33.9%

06

15/9

1.5%

21.5%

65.4%

12

3.1%

11.0%

0.6%

31.5%

Trend in Breakdown of Total Net Assets of Total Private Placement
Investment Trusts by Distribution Channel
Securities firms

2000

Banks, etc

Direct marketing

37.8%

47.7%

14.5%

02

36.1%

57.1%

6.8%

04

33.6%

60.5%

5.8%

06
08
10

26.1%
25.1%
21.1%

68.5%
70.2%

5.5%
4.7%

71.4%

7.5%

12

19.5%

71.4%

9.1%

15/9

16.5%

76.1%

7.4%

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

Chap. XIII Investment Trusts

275

Investment trusts are generally available over the counter in distributing
companies and through their sales agents. Recently, the number of onlinetransactions has also grown. According to a survey conducted by the Investment Trusts Association, Japan, in 2014, 8.6% of all respondents answeredthat they had acquired investment trusts online.
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 toward customers”not to conduct“prohibited activities”atthe time 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 before concluding contracts”was introduced. It is not required toperform the duty when the eligible prospectus has been delivered to customers. For investment trusts, the requirement is satisfied by delivering the eligible prospectus.
The sales commission for investment trusts, which had been determinedby the funds, 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 2015, the specified assets consist of 12 types of assets, including securities, real estate, and rights on derivatives.) Funds investing
mainly in securities are called securities investment trusts.
Chart ZZ shows the distribution of assets under the management of publicly offered securities investment funds as of September 2015. Reflecting a276

Chap. XIII Investment Trusts

Chart XIII-9.

Distribution of Assets of Investment Trusts in Japan (as of the end of
September 2015, total publicly offered securities investment trusts)
Others12.7%

Investment trust
beneficiary securities &investment securities
33.9%

Chart XIII-10.

Stocks 27.5%
Bonds 25.9%

Breakdown of Industry Groups among Domestic Stock Held by Investment Trusts (publicly offered stock investment trusts as of the end of
September 2015)
Others 37.2%

Electrical equipment 13.6%
Transportation-related
equipment
8.9%
Retail 8.8%

Machinery 4.7%
Pharmaceuticals 5.7%

Banking
5.7%

Information andCommunications
8.5%
Chemical 6.9%

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

growth in the total net assets of monthly distribution funds, bonds hold alarge share in assets under management. With an increase in funds of funds,
the percentage of investment trust certificates and investment corporation
certificates is also high. Although it is not shown in the table, foreign investment ratio heightened since the 2000s, reflecting the difference in the investment environment of Japan and that of abroad. Moreover, blue-chip stocks
are being given preference in the selection of the domestic stocks included in
the funds, such as electric and transportation machinery (automobiles, etc.)
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 duties of sincerity to customers, loyalty to the beneficiaries, and reasonable care and skill; they also are prohibited from undertaking these activities: (a) transactions between managing assets and the investment trust management company or its directors/executive officers; (b)Chap. XIII Investment Trusts

Table XIII-2.

277

Exercise of Voting Rights for Domestic Stocks at General Shareholder
Meetings by Investment Trust Management Companies (2015)— Voting on Items Proposed by Companies, Total for 87 Companies thatManage Securities Investment Trusts —Name of proposal

For
(A)

Total of
Total
Percentage
Againstnumber ofof voting
Against Abstain
and Abstain proposals
against,
(B)
(C)
(D)
(E)
etc.
(B)+(C) (A)+(B)+(C)(D)/(E)(1) Appropriation of surplus

30,409

1,272

19

1,291

31,7004%(2) Election of Directors*1

92,335

13,38850

13,438105,77313%(3) Election of Auditors*1

34,419

9,672

29

9,701

44,12022%(4) Partial amendment to the Articles ofIncorporation

23,575

1,040

15

1,055

24,6304%(5) Payment of retirement benefits

2,956

2,226

7

2,233

5,189

43%

(6) Revision of amounts of remuneration
for corporate officers

12,719

604

15

619

13,3385%(7) Issuance of subscription warrants

3,178

634

7

641

3,819

17%

(8) Election of accounting auditor

234

0

2

2

236

1%

(9) Reconstruction related*2

634

26

0

26

660

4%

(10) Other proposals by the company*3

4,518

1,971

4

1,975

6,493

30%

204,977

30,833148

30,981

235,958

13%

Total

*1 If for a proposal on election of multiple candidates, a vote against one candidate is made, the vote forthe proposal is recognized as“against”for data compilation purposes.
*2 Merger, business transfer/acquisition, share exchange, share transfer, company split*3 Proposals other than (1) to (9) above (takeover defense measures, capital increase by third-party allotment, decrease in statutory reserve, purchase of treasury shares, capital decrease, share consolidation,etc.)
Sources: JSDA“Results of Questionnaire Survey on Exercise of Voting Rights by Investment Trust Management Companies”

transactions among funds under management (excluding certain portions); (c)transactions for the purpose of its own benefit or the benefit of other parties
by taking advantage of the changes in price of specific financial instruments
resulting from such transactions; (d) transactions whose terms are different
from those of ordinary transactions and that affect adversely the benefits ofbeneficiaries; (e) transactions of securities and other transactions for its own
account by using information obtained through transactions for investment
management; and (f) cases in which an investment trust management company or some third party provides beneficiaries or a third party with compensation to offset a loss or increase profit. As firewalls to promote profits of otherbusinesses or of the parent company, subsidiaries, etc., executing unneces-

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Chap. XIII Investment Trusts

sary transactions in light of the investment management policy, the amountof assets managed and market conditions, was prohibited. Additionally, theAct on Investment Trusts and Investment Corporations imposes a restriction
on investment trust management companies prohibiting them from giving instructions to acquire stocks of the same issuing company when the number ofstocks 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 voluntary rules concerning investment instruments and investment
methods in addition to those concerning credit risk regulations.
The Act on Investment Trust and Investment Corporations stipulates thatan investment trust management company exercises the rights of shareholders, including voting rights, on portfolio stocks. Investment trust management companies disclose their basic policies on and the results of the exercise
of voting rights on their web sites.
7. Customer Base of Investment Trusts
Chart XIV-12 shows the breakdown of beneficiaries of investment trusts (interms of value). About 60% of investment trust assets are held by households,
with the remaining 40% accounted for by insurance companies, pension
funds, business firms, and financial institutions. Japanese households hold ahigh share of investment trusts, much like U.S. households, but privately held
pensions are thought to account for a lower share compared with the UnitedStates, while business firms and financial institutions account for a higher
proportion.
Though households are a core holder of investment trusts, the penetrationof investment trusts into household financial assets is low. A 2012 survey thatwas conducted by the Japan Securities Dealers Association indicates that
holders of investment trusts include only 7.7% of the adult population. That
ratio is extremely down from the level of more than 16% in 1988 during the
bubble economy. The penetration shows a sign of recovery after reaching a
low of 6.1% in 2003. By age group, the holding rate of investment trusts is
10% in people aged 60 or more, while it is only 0 to 3% for people in their
20s. It is noticeable that the holding rate is extremely low in young people.
This indicates an environment in Japan in which financial assets held by individuals are concentrated among the elderly. In the U.S., though the groupsof those aged 45 - 54 and 55 - 64 comprise the top groups, the groups of
those aged 35 - 44 and those less than 35 stood at 49% and 34%, respectively, demonstrating an environment in which the average penetration of investment trusts among households is above 40% (as of 2014). It is desired also in279

Chap. XIII Investment Trusts

Chart XIII-11.

Breakdown of Holders of Investment Trusts (as of the end of 2014)
Japan

Central banks
Financial
institutions(Reference) U.S.

Business
corporations Others

4.4%

3.9%

Business
corporations

2.0%

Financialcorporations

Households
63.0%

9.0%

2.0%

Insurancecompanies andpension funds
17.7%

Households
58.5%

Private pension plans
22.1%

Source: Bank of Japan, Flow of Funds Accounts .

Table XIII-3.

Source: FRB, Flow of Funds Accounts.

Profiles of Individual Investors Holding Investment Trusts

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

5.0%

Others

12.4%

0.0%
2.8%
3.1%
6.1%
5.5%
7.6%
8.9%
9.6%
11.0%
17.1%
12.6%
12.2%
16.8%
10.3%
0.0%

Female
0.0%
1.2%
2.3%
4.0%
4.8%
6.0%
7.9%
8.8%
11.3%
12.1%
11.3%
9.6%
7.1%
1.7%
0.0%

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

Overall average

5.4%
6.6%
9.3%
6.3%
11.5%
12.9%
17.3%
11.9%

7.7%

Source: JSDA“Nationwide Survey (on individuals) concerning Securities Investment Trusts)”FY2012
issue

Japan that the launch of NISA in 2014, the scheduled introduction of Junior
NISA in 2016 and further enhancement of the defined contribution pension
plan will drive an increase in the holding of investment trusts among theyounger age groups.
In 2014, the amount subscribed by individuals averaged ¥4.19 million for
unit-type publicly offered stock investment trusts for which statistics areavailable, while in terms of the numbers of subscribers, the category of ¥0.5

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Chap. XIII Investment Trusts

Table XIII-4.

Purpose of Purchasing Investment Trusts by Individual Investors
Japan

No particular purpose but to increase funds
Living costs after retirement
Diversification of risks associated with assets
Learning about economics
Education funds for children or grandchildren
Leisure funds
Housing funds(Reference) U.S.A.
36.7%
30.4%
17.7%
10.5%
8.4%
5.5%
1.7%

Funds after retirement
Supplementary to current revenue
To prepare for emergencies
Education funds
Reduction of taxable income
Funds to purchase house or other large item
Others

74%
6%
6%
5%
3%
3%
3%

Source: JSDA“Questionnaire Survey on Investment Trusts”2014; multiple answers allowed; indicationof top items only
U.S.A.: ICI (2014), Profile of Mutual Fund Shareholders; response to“primary financial goal”

million - ¥1 million accounted for 32% and that of ¥1 million - ¥3 million accounted for 26% of the total subscribers.
Many investors previously answered that they had no specific investment
purpose as their reason for buying investment trusts (Japanese people traditionally save money for unexpected purposes, i.e.,“for a rainy day”). Recently, however, more and more individuals are buying investment trusts for“post-retirement living expenses.”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 assets 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 specificpurpose in Japan. In many cases, they do not make monthly payments into
investment trusts; rather, they invest a good sum of money at one time, whichis estimated to be largely dependent on the movement of the securities markets.
8. Disclosure of Investment Trusts
Until 1997, disclosure of investment trusts was covered not by the Securities
and Exchange Law but by the framework defined in the Securities Investment Trust Law (now the Act on Investment Trusts and Investment Corporations). Following the deregulation of the establishment of funds, in which thefiling system replaced the approval system, as a result of the enforcement of
the Financial System Reform Law in 1998, the Securities and Exchange Law(now the Financial Instruments and Exchange 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 and Investment Corporation Act

Chap. XIII Investment Trusts

281

Table XIII-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)

Notice on
Correction ofRegistration
Statements

Act on Investment Trusts andInvestment
Corporations
Registration oncontents of the
Articles ofIncorporation

Periodic
Securities report Financial report
Semi-annual(investment
Disclosure(disclosure while securities report report)
Extraordinary
management)
securities report

Individual disclosure forinvestors

FIEA
Prospectus(Summary
prospectus)(Detailedprospectus)

Public disclosurefor investors

Act on Invest- The Investment
ment Trusts andTrustsInvestment
Association,
Corporations Japan Rules, etc.
Document
Define thesummarizing the Guidelines oncontents ofPreparation 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: Author of the chapter.

and the Financial Instruments and Exchange Act in terms of disclosure. Details of disclosure are summarized as follows.
Issuance Disclosure
As issuance disclosure, the Financial Instruments and Exchange Act requires
investment trust management companies to file“securities registration statements”with the regulatory authorities (for public inspection) and to deliver
the“prospectus”to individual investors at the time of subscription. Given theunique characteristics of the way in which investment trusts are sold (while
offering for subscription of stocks is made only at initial public offering andcapital increases, and at other times, investors purchase issued stocks on thesecondary market, investment trusts are continuously offered after establishment of funds by initial subscription), the prospectuses were split into twovolumes to“provide investors with information in an easy-to-understandmanner”in 2004. That is, the two volumes consist of a“summary prospectus,”which distributing companies are required to deliver in advance to all
investors entering into contracts, and a“detailed prospectus,”which distributing companies deliver to investors when requested.

282

Chap. XIII Investment Trusts

Table XIII-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(2) Information on investment trust Statement and product category in the Guidelines Concerning
management company, etc.
Product Categories set forth by the JSDA.
Name of investment trust management company, date of establishment, paid-in capital, total net assets value of investment
trusts managed, website address, telephone number, name oftrustee, etc.
(Items recorded in the main text)(1) Fund objective and characteristics(2) Investment risks(3) Investment performance(4) Procedure, commission, etc.

(5) Additional information

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
Factors underlying fluctuations in standard price, risk management system, comparison with other assets( 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( 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
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 Ordinance on Disbursement of Information, etc. on Regulated Securities and the
JSDA Rules on Preparation of Summary Prospectus (as of September 2015)

As issuance disclosure, the Investment Trust and Investment Corporation
Act requires investment trust management companies to“notify the details oftrust deeds”to the regulatory authorities and to“deliver documents describing the details of trust deeds”to the investors. Descriptions in the prospectus
are substituted for the latter.

Chap. XIII Investment Trusts

283

Periodic Disclosure
In terms of disclosure after the establishment of investment trust funds, theFinancial Instruments and Exchange Act requires investment trust management companies to file their“securities reports”to the regulatory authorities
after the end of each accounting period (for public inspection). (Semiannual
reports are also filed when funds settle accounts once a year.)
As for periodic disclosure, the Investment Trust and Investment Corporation Act requires investment trust management companies to deliver“financial reports”to individual investors. In 2014, it was decided that these financial reports would be made available in two phases based on an approachsimilar to having two volumes of prospectuses as described above: a financial report issued to all beneficiaries and a financial report (full version) publicized on the website of the management company and issued to beneficiaries upon request.
In addition, the Investment Trusts Association, Japan, has establishedtimelydisclosure”provisions as self-regulatory rules that should be posted“on the web site of each investment trust management company, and this disclosure is performed at least monthly for each fund.
9. Services and Products Based on Investment Trusts
Comprehensive securities accounts
The account is to combine the securities trading accounts of securities firms
and money reserve funds (MRFs), open-end bond investment trusts for theaccount, via auto transfer. Recently, the MRFs are replaced with bank accounts in some cases. The account invests its remaining idle monies, including the interest on bonds, dividends on stocks, and proceeds from the sale ofsecurities, in MRFs and also offers such services as payment on the acquisition of securities, cash advance on ATMs, and securities- backed loans. The
accounts were established in October 1997 on the model of the CMA (CashManagement 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 the average maturity of
portfolio assets should be restricted to 90 days or a shorter period in light ofliquidity and security.
Investment Trust Wrap Accounts
A wrap account is a product that securities firms bundle and for which 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 for annual fees to customers’balance of assets (no284

Chap. XIII Investment Trusts

Chart XIII-12.

Outline of a Securities General AccountSalary and annuity
Transfer

ATMs atbanks andpost offices

Deposit andwithdrawal

Automatic transfer ofpurchase money or theproceeds of sale
Investment instocks, bonds, andinvestment trusts

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

Settlement

Withdrawal

Credit cards

Utility bills, etc.

Source: Author of chapter.

Chart XIII-13.

Flow of Investment Trust Wrap Accounts (example)

Investment counseling
Investment proposal (asset allocation, etc.)
Discretionary contract
Asset management

Investment

Group of invested funds

Management reports
Review of the investment plan
Source: The above chart is based upon information on the web site of Nomura Securities Co., Ltd.

Chap. XIII Investment Trusts

285

commission resulting from trading). Investment trust wrap accounts, whichinvest their assets in investment trusts only, were commercialized following
liberalization of sales commissions for investment trusts in 1998 and after
obtaining permission to engage in discretionary investment managementbusiness by securities firms. Wrap accounts are also commercialized to offer
asset management services with individual issues, such as stocks, as a resultof the complete liberalization of stock trading commissions in October 1999.
Defined Contribution Pension Plans (Japanese 401k)
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 October 2001. The participants in corporate DC plans invest theircompany contributions (contributions to the reserves by employees havebeen permitted as of January 2012), and participants in individual DC plans
invest their own distributions in investment instruments, including investment trusts, stocks, bonds, and bank deposits, on their own responsibility.
Their performances are reflected in future receivable pensions. Many investment trust companies offer low-cost funds exclusively for defined contribution pension funds.
Variable Annuities
Variable annuities, which were launched in 1999, are products offered by insurance companies. Just as with the defined contribution pension plan, theyalso invest premiums from policyholders in investment trusts, and receivablepension amounts are determined by their performance. In addition to securities firms, banks have also begun selling these products.
10. Foreign Investment Trusts
The sale of foreign investment trusts established under foreign laws in foreign countries was liberalized in 1972. Initially, foreign investment trusts
were subject to regulations stating that they should be invested mainly in foreign currency denominated assets and that a weighting of yen-denominatedassets was limited 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 Law. At that time, privateplacement investment trusts had yet to be recognized in Japan.
As a result of amendments to the Securities Investment Trust Law in 1998,
foreign investment trusts have become subject to the same regulations as286

Chap. XIII Investment Trusts

Table XIII-7.

Year-end
1995
96
97
98
99
2000
01
02
03
04
05
06
07
08
09
10
11
12
13
14
September 2015

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)

5,365
5,795
15,23629,35235,09936,084
41,42647,14754,42762,411
79,67087,10482,42751,47359,30658,80052,35857,83961,29062,89657,651

479,571486,680
406,495
327,393
513,536
493,992
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
935,045
930,673

Total (C)484,936
492,475
421,731356,745548,635
530,076494,233
407,307428,783
472,378
633,146776,380880,033
572,938
673,857
696,001
625,632
698,439
876,490997,941
988,324(A)/(C)
1.1%
1.2%
3.6%
8.2%
6.4%
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%
5.8%

Note: The total net assets of domestic investment trusts are the total net assets of publicly offered securities investment trusts in Japan.
Sources: 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.

Japanese investment trusts under the revised act. Namely, the amendments
require foreign investment trust management companies to file the same notification as Japanese investment trusts at the sale of foreign investment trusts
in Japan and to allow Japanese courts to issue an order to prohibit or stop thesale of foreign investment trusts if inappropriate investment management offoreign investment trusts impairs the profits of domestic investors and if
there is an emergent necessity to prevent further losses to investors. It is also
permitted to introduce yen-denominated funds into Japan, for which fundamentally the same tax system as Japanese investment trusts is applied to foreign investment trusts. The disclosure system is common to Japanese andforeign investment trusts, including preparation and delivery of a prospectus
and financial reports. The Japan Securities Dealers Association establishesChap. XIII Investment Trusts

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

287

Breakdown of Total Net Assets of Foreign Investment Trusts in Japanby Product Category
Other
MMF
Bond-type(excluding MMF)
Equity-type

03

04

05

06

07

08

09

10

11

12

13

14

15/9

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

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

Breakdown of Total Net Assets of Foreign Investment Trusts in Japanby Presentation Currency
Other
Yen
Euro
US dollar

03

04

05

06

07

08

09

10

11

12

13

14

15/9

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

“standards on the selection of foreign investment trusts”in the fair,“conventional regulations on dealing in foreign securities”to set the requirements forforeign funds available in Japan.
Table XIV-2 shows the trend of total net assets of foreign investment trusts
sold in Japan for 20 years. The total net assets had been dependent on the effects of exchange rates, etc. Foreign investment trusts surged in sales in Japan after 1997, reflecting a higher demand in high-yield foreign bonds and atendency 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, thegrowth in sales of overseas registered investment trusts came to a halt due tothe recovered popularity of domestic stock funds and an increase in monthly
distribution funds registered in Japan. Stock investment trusts increased at288

Chap. XIII Investment Trusts

one point as shown on Graph ZZ, and real estate and alternative funds grew
also, after 2004 when stock prices recovered globally though broadly definedbond funds, including MMFs, 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 2015, Luxembourg, Cayman, and other investment trusts accounted
for 46.1%, 41.5%, and 12.4% in terms of total net assets, respectively.

CHAPTER XIV
Prohibited and Regulated Acts of Securities Trading

1. Introduction
With a view to establishing a fair securities market and enhancing its credibility, the Financial Instruments and Exchange Act (FIEA) has establishedvarious prohibited and regulated acts. They include a ban on market manipulation (see section 2 below); insider trading by persons associated with thecompanies concerned (see section 3 below); and discretionary-account trading and massive promotional campaigns on particular securities by brokers/
dealers (see section 4 below). In addition, the Financial Instruments and Exchange Act requires trade participants to disclose certain transaction-related
information, such as filing large shareholding reports to ensure the fairness of
securities transactions (see section 5 below).
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 transactions are complex and their structurechanges rapidly, new methods that were unforeseeable at the time of legislation could emerge later. Faced with such issues, the Financial Instruments
and Exchange Act’s Article 157 bans unfair transactions in broad terms. Morespecifically, it prohibits the use of wrongful means, schemes, or techniqueswith regard to the sale, purchase, or other transaction of securities, etc. (Item
1 of the article); the acquisition of money or other property by misrepresenting important matters or omitting important matters necessary for avoiding
misunderstanding with regard to the sale, purchase, or other transaction of
securities, etc. (Item 2); and the use of false quotations in order to induce thesale, purchase, or other transaction of securities, etc. (Item 3). The article isconsidered 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 ofcarrying 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

290

Chap. XIV Prohibited and Regulated Acts of Securities Trading

Table XIV-1.

Main Provisions Relating to the Ban on Unfair Trading
Contents

Generalprovisions

・Prohibition of wrongful acts

Article of the Financial Products
and Exchange Act
Art. 157

・Prohibition of wash transactions or prear- Art. 159, Para. 1
ranged transactions
・Prohibition of transactions aimed at manipu- Art. 159, Para. 2, Item 1
lating securities prices
・Prohibition of making a representation with Art. 159, Para. 2, Items 2 and 3
the aim of manipulating securities prices
・Prohibition, in principle, of stabilization Art. 159, Para. 3, and Art. 20―26 of theOrder for Enforcement of the Lawtransactions
・Prohibition of purchase for own account dur- Art. 117, Para. 1, Item 22 of the Cabinet
Market
ing the stabilization period
Office Ordinance Concerning Financial
manipulation
Instruments 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 20 of the Cabinet
ting involved in an artificial formation of Office Ordinance Concerning Financial
stock prices
Instruments Business, Etc.
・Prevention of use of corporate share repur- Art. 162, Para. 2
chase for manipulating stock prices
・Prohibition of insider trading
Art. 166 and 167
・Duty of officers to report securities transac- Art. 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 13 of the Cabinet
pected to be in violation of insider trading Office Ordinance for Enforcement ofregulations
the FIEA
・Prohibition of public notice, etc., of false Art. 168
quotations
・Restriction on the expression of opinion in Art. 169
newspapers, etc., for consideration
False
representation ・Prohibition of representation of an advanta- Art. 170
geous purchase, etc.
・Prohibition of representation of a fixed Art. 171
amount of dividends, etc.
・Regulations on tender offersArt. 27, Para. 2 through 22
Tender offers
・Filing of large shareholding reports
Art. 27, Para. 23 through 28
・Prohibition of loss compensation
Art. 39
・Restriction on proprietary trading and exces- Art. 161
sive trading
・Regulations on short sellingArt. 162
・Prohibition of massive promotional campaign Art. 117, Para. 1, Item 17 of the Cabinet
Office Ordinance Concerning Financialof particular securities
Instruments Business, Etc.
Others・Restriction of front-running
Art. 117, Para. 1, Item 10 of the Cabinet
Office Ordinance Concerning Financial
Instruments Business, Etc.
・Ban on deliberate market manipulation by Art. 117, Para. 1, Item 19 of the Cabinet
means of trading securities for own account Office Ordinance Concerning Financial
Instruments Business, Etc.

Chap. XIV Prohibited and Regulated Acts of Securities Trading291

on expression of opinions in newspapers, etc., in exchange for consideration
are stipulated in Article 169, while Articles 170 and 171 prohibit representation of an advantageous purchase, etc., and that of a fixed amount of dividends, etc., respectively.
Although OTC-handled securities (Green Sheet issues) also became subject to unfair trading regulations based on the amendment enforced in 2004,
given the scheduled termination of the Green Sheet System on March 31,
2018, new designation has been terminated.
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) wash transactions, 2) prearranged transactions, 3) price manipulation, 4) representation made for the purpose of manipulating securities prices,and 5) stabilization transactions.
A wash transaction is a transaction in which the same person places purchase and sale orders during the same time frame with no actual change inownership occurring. With prearranged trades, similar transactions are carried out in collusion with different persons. In both cases, the intention is tomislead other investors into thinking trading in the security is very active; therequisite for being deemed a wash transaction is the existence of someone
who’s purpose is to mislead other investors regarding trading status. Pricemanipulation 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 the concern thatflooding 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, stabilization transactions are only permitted with primary offering or secondary distribution of securities pursuant to the provisions of a cabinet order.

292

Chap. XIV Prohibited and Regulated Acts of Securities Trading

Table XIV-2. Provisions of the Financial Instruments and Exchange Act Relating toMarket Manipulation
Wash transactions

No person shall, for the purpose of misleading other persons about the stateof securities transactions, conduct fake sale and purchase of securities without purpose of transfer of right (Art. 159, Para. 1, Items 1 through 3).

No person shall, for the purpose of misleading other persons about the stateof securities transactions, conduct sale and purchase of securities at the same
Prearranged transactions
time and price, etc., based on collusion with another party (Art. 159, Para. 1,
Items 4 through 8).
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 1).

(False)Representation

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.
2, Item 2) or(2) intentionally make misrepresentation or a representation that would mislead other parties with regard to important matters when making sale andpurchase of securities (Art. 159, Para. 2, Item 3).

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).

The offence of market manipulation carries a punishment of imprisonment
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 Monetary Penalty
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).
By the Cabinet Office Ordinance Concerning the 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 andare required to have in place trading surveillance systems for the preventionof such violations.

Chap. XIV Prohibited and Regulated Acts of Securities Trading293

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.
The Prohibition of Insider Trading“Insider trading”refers to acts of effecting the sale, purchase, or other typeof transaction of securities pertaining to any unpublished corporate information that may significantly influence the decision making of investors before
such information is publicized by an insider of a listed company who hascome to know the information through the performance of his/her duties ordue to his/her position. If such transactions were to take place, the investing
public would be put at a significant disadvantage and the credibility of the
securities markets would be seriously undermined.
With a view to effectively checking insider trading and in keeping with themodernization of the securities market, Japan’s insider trading regulations
were introduced in an amendment to the Securities and Exchange Law inApril 1989. The regulation framework has since been extended to include
company splits, corporate share repurchases and other activities, with the relevant legislative changes effected thereafter. In 2013, further amendments
expanded the scope of criminal charges and Administrative Monetary Penalty
Payment Orders to include 1) disclosure of information and inducement of
insider trading by a corporate insider and 2) expand the scope of regulation
to include REIT transactions.
Since the introduction of the regulation, penalties for insider trading havebeen increased stepwise to punishment 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 with a fine of not more than ¥500 million in
the case of a legal entity. And the property gained through insider trading
shall be confiscated and any deficient amount collected from the offender. In
addition, when receiving an Administrative Monetary Penalty Payment Order, the offender must pay an amount equivalent to the profit made (half the
profit in the case of 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 to the company any short-term trading profit they have made in the294

Chap. XIV Prohibited and Regulated Acts of Securities Trading

Table XIV-3. An Outline of the Targets of Regulations, Materials Facts, Methods ofAnnouncement Relating to the Regulation of Insider Trading
Item

Outline1. Targets of regulation (1) Directors of a listed company (directors, officers, agents, key employees)→ information not announced to the public that came to their knowledge(1) Persons associatedwith the company (2) Persons who have the right to inspect the books and accounting records of the company (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(3) 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(4) Persons who have concluded a contract with a 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.
(5) In case any person referred to in (2) or (4) 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(1) Persons who have received information concerning a material fact from persons asinformationsociated with the company(2) 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(2) New facts(3) Information on
settlement ofaccounts(4) Others(5) Material facts
related tosubsidiaries
3. Methods ofannouncing
information

A decision made by a decision-making body of a 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 and assignment or acquisition of fixed assets
When any of the facts set forth below has occurred:
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.
When newly announced results, projected or actual, are significantly at variance withthose announced earlier:
Sales (10% or more up or down); recurring 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)
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(1) to (4) above apply
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 offered the information thus 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.

Chap. XIV Prohibited and Regulated Acts of Securities Trading

295

shares of the company held for a period of six months or less, and they areprohibited from selling the securities, etc., of the company in excess of theshare 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
J-IRISS play a critical role in preventing insider trading. J-IRSS stands forJapan-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. Prohibited and Regulated Acts for Financial Instruments Firms (Securities Companies) and Their Employees, Officers, and Directors
Various regulations, mainly items as follows, have been set out for securities
companies and their employees, officers, and directors from the standpoint of
ensuring the protection of investors, the fairness of transactions, and otheraspects of trading.
Business Relationship with Customers
From the perspective of investor protection, securities companies must execute business with customers in good faith and fairly. Securities company
personnel have a duty to provide customers with appropriate information andthe use of false notifications or disclosure, fraudulent means, violence orthreats or other unfair methods to gain access to customers’assets is banned
as is the use of excessive solicitation. Meanwhile, to ensure fairness in transactions, personnel are barred from compensating customers for losses, providing them with extraordinary profits or concluding a discretionary investment contract with customers without establishing the appropriate
management system—even if the customer requests such services. Securities
company personnel are also prohibited from receiving consignment when being aware that a customer transaction corresponds to insider trading or market manipulation.
Securities companies must conduct their business operations in such a way
as to avoid being deficient in protecting investors, such as solicitations thatare recognized as inappropriate for the customer in light of his/her level ofknowledge, experience, and financial resources and the purpose of concluding the financial instruments transaction contract (Suitability Principle).
Management of Sensitive Corporate Information
Through their underwriting and M&A-related advisory and other businesses,

296

Chap. XIV Prohibited and Regulated Acts of Securities Trading

Chart XIV-1.

Major Prohibited and Regulated Acts of Securities Companies (Duties
and Prohibited 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: 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)Chap. XIV Prohibited and Regulated Acts of Securities Trading

297

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
cam set up an information barrier or Chinese wall between the investmentbanking and similar divisions that regularly deal with sensitive corporate information and the rest of their operating divisions to enable proper management of information sharing in-house. In addition, personnel are forbidden touse sensitive corporate information to solicit customers or to engage in trading.
Management to Prevent Erroneous Orders
Securities companies are required to establish management systems to prevent erroneous orders (name of issue, number of shares, share prices, etc.).
Management of Information Processing Systems
Securities companies are tasked with adequately managing the information
processing systems (computer systems) used to conduct their businesses.
Besides the previously mentioned areas, Article 117, Paragraph 1 and Article 123, Paragraph 1 of the Cabinet Order for Enforcement of the FIEA andthe 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 Acts
Information Disclosure to Protect Fairness of Transactions
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 apply-

298

Chap. XIV Prohibited and Regulated Acts of Securities Trading

Table XIV-4.

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. on the 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 XIV-5.

Flow on 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
・A Large Volume Holder, if after submitting the Report of Possession of Large Volume, its holding
ratio of share certificates, etc. increases or decreases by 1% or more, 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.

Chap. XIV Prohibited and Regulated Acts of Securities Trading299

ing 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
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 Substantial Shareholding Report to the Prime Minister. In addition, such a person or entity, after having become a Substantial
Shareholder, is required to file an Amendment Report addressed to the Prime
Minister if its shareholding ratio in the entity covered by the aforesaid Reportincreases or decreases by 1% or more or there is a material change to any
other entry in the Report. The Substantial Shareholding Reports and Amendment Reports are publicly disclosed. This system was put in place with theaim of further protecting investors by encouraging timely and accurate disclosure of information on large-scale purchase, holding and secondary offering of shares, etc. to investors and promoting high fairness and transparency
in the securities market.

CHAPTER XVThe Information Disclosure System

1. The Information Disclosure System in the Securities Market
When a company lists its security on the securities market opened on a stock
exchange, the issuer of such security is required by the Financial Instruments
and Exchange Act and by the regulations of the stock exchange to disclose
information concerning certain matters of its business. Such regulations arecalled disclosure regulations, 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: (1) issuance disclosure,which requires companies to disclose information concerning certain matterswhen 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 acontinuing and regular basis; (3) tender offer disclosure; and (4) large holding disclosure (shareholdings of 5% or more). The latter two types of statutory disclosure are required under the Financial Instruments and Exchange Act.
On the other hand, timely disclosure, which is required by the exchanges,
obliges companies to continuously disclose their information after listing
their securities on the exchanges, and the type of information required is classified into (1) information on listed companies; (2) information on subsidiaries; and (3) other information, such as supplemental information on majority
shareholders, etc. The type of information is categorized as (1) determinations, (2) occurrences, and (3) information on financial results. At present,
both statutory and timely disclosures are disclosed via an electronic disclosure system using the Internet. Statutory disclosure is made via the EDINET(Electronic Disclosure of Investors’NETwork) while timely disclosure ismade using the TDnet (Timely Disclosure network).
Companies that are required to make the issuance disclosure and the periodic disclosure are also required by the Companies Act to disclose certain information. The disclosure of accounting documents required to be made by
the Companies Act is aimed at protecting the interest of shareholders andChap. XV The Information Disclosure System

Chart XV-1.
Statutory disclosure

301

The Scheme of the Disclosure System on the Securities Market
Disclosure of corporate
affairs

Disclosure for the new-issues market- Registration statement of securities- Shelf registration statement of securities- Supplementary documents for shelfregistration- Prospectus(- Notification of securities)
Continuous disclosure on the trading market- Securities report- Semiannual securities report- Interim securities report- Report on the status of acquisition of one’s
own shares(
Disclosure of information
concerning a tender offer)

A tender offer for a security conducted bypersons other than its issuer- Registration statement of tender offer- Report on tender offer- Report on the representation of views
A tender offer for a security conducted by
its issuer- Registration statement of tender offer- Report on tender offer

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 XV-1. Disclosure Systems under the Commercial Code and under the Financial
Instruments and Exchange Act
Disclosure System under the Financial Instruments and Exchange Act

Disclosure System under the Commercial
Code

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 Preparation of computing documents,
NET and stock exchanges, replying
keeping of such documents at the head ofto investor requests for disclosure
fice, and publication of a summary of annual settlement of accounts

302

Chap. XV The Information Disclosure Systembondholders 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 the state of business of listed companies to help theinvestors to make informed and reasonable investment decisions.
2. The System of Disclosing Corporate Information under the Financial
Instruments and Exchange Act
Issuance Disclosure
When a company publicly offers, or makes a secondary distribution of, a security whose aggregate value is ¥100 million or more, the issuer of such security must, in principle, file a securities registration statement with theprime minister. On the primary market, information is disclosed through thesecurities registration statement. Concretely, the statement shall describe (1)matters pertaining to said offering or sale, (2) the trade name of the issuing
company, (3) the name of the business group to which it belongs, (4) the financial position of the issuing company, and (5) important information onother material matters concerning its business. In addition, when a securities
company solicits customers for the purchase of a newly issued security, it isrequired 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
The issuer of securities listed on an exchange must file with the prime minister a securities report for each business year within three months after the expiration of such business year. The securities report constitutes the main document of statutory disclosure for the secondary market. More specifically, it
must provide (1) the name of the issuer, (2) the name of the business group towhich it belongs, (3) information concerning the state of its finances, and (4)information on other material matters concerning its business. In turn, the securities report thus filed is made available for public inspection through the
EDINET. Moreover, companies that are required to make continuous disclosure must regularly file quarterly reports, interim reports, and reports on thestate of a repurchase of their own shares, where necessary.
Issuers of securities that are traded on the financial instruments market are
expected to disclose sufficient information concerning their corporate affairs,on the basis of which the prices of securities will be formed. If they do notdisclose information that is to their disadvantage, the prices of their securities
will be formed on the basis of an erroneous assessment of their value that

Chap. XV The Information Disclosure System

Table XV-2.

Disclosure of corporate affairs

Issuance Disclosure

Division

303

Statutory Disclosure Documents Required to be Filed

Documents filed

Cases requiring the filing of documents (a summary)

If a company issuing new shares or selling outstanding sharesthrough a public offering whose total issuing or selling price is ¥100
million or more and such company 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 purchase of outstanding shares on uniform
terms and conditions, it must file a registration statement.
* Small amount offering: In the case of a company issuing newshares or selling outstanding shares through a public offering whose
total issuing or selling price is less than ¥500 million the contents of
the registration statement of securities required to be filed by suchcompany are simplified.
Securities Registration* Incorporating system: A company that has been filing securities reStatement
ports continuously for one year may substitute a registration statement of securities other than matters relating to the securities publicly offered or distributed on the secondary market with a securities
report and a semiannual securities report 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 securities reports for a year and the issuer’s corporate
information has broadly been disclosed, the description that one
should refer to the last securities reports, etc., may be substituted
with a registration statement of securities concerning matters otherthan the offer or sale of securities.
When any issuer who is authorized to file a registration statement of
securities under the reference system plans to issue new shares or sell
Shelf-registration
outstanding shares through a public offering whose total issuing orstatement
selling prices are ¥100 million or more, such issuer may file a shelfregistration statement of its shares.
When a shelf-registration statement of a security has taken effect,
Supplementary docuand when the issuer of such security plans to issue new shares or sellments to be filed withoutstanding shares whose total issuing or sell prices are ¥100 million
a shelf-registration
or more, such issuer is required to file supplementary documents restatement
lating thereto.

Periodic disclosure

Securities report

Any company that is (1) the issuer of a security to be listed on astock exchange; (2) the issuer of securities stipulated by cabinet order as those similar to distribution conditions in (1); (3) the issuer ofa security who is required to file a registration statement of securities
when it issues new shares or sells outstanding shares through a public offering; or (4) the issuer of a security 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.

Among companies required to submit a securities report, issuers ofQuarterly securities securities listed on stock exchanges or or stipulated by cabinet orderreportas being similar in terms of distribution conditions must file quarterly
securities reports.
Extraordinary securi- If any material fact has occurred in a company, that company mustties report
file an extraordinary securities reports.
Any issuer of a security listed on a stock exchange or stipulated by
Report on the state of cabinet order as being similar in terms of distribution conditions andacquisition of one’s 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 fileown sharesa report.

304

Chap. XV The Information Disclosure Systemdoes not reflect such withheld information. This is why the law requires theissuers of securities to disclose all pertinent information, good or bad, in theirsecurities reports, and why it contains penal provisions to discipline issuers
who file a 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 of the exchange is called a“tender offer.”purchase such shares through atender offer. If any person other than the issuer of a listed stock who is required to file a securities report proposes the purchase of such shares outside
the market of a stock exchange, he must, except in cases that fall within thepurview of certain requirements, such as the purchase will result in the ownership of more than 5% of the securities, etc., The tender offerer is obligatedto serve a public notice of (1) the purpose of the tender offer; (2) the purchaseprices, etc.; (3) the number of stocks to be purchased; (4) the period during
which stocks 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 offerer 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 sell offers received, the number of shares it has actually purchased, and the method of payment to be made to sellers and filewith the prime minister a tender offer report furnishing information aboutsuch 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 Large Shareholdings
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 principally
required to file a large shareholdings report 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 large shareholdings report must furnish informa-Chap. XV The Information Disclosure System

Table XV-3.

305

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• Obligation introduced for investor purchasing large stake in company during TOB by another party to also make a TOB• Details given for lowering TOB price when share split occurs• Reasons for withdrawing TOB expanded• Obligation introduced for targeted company to submit an opinion report• Obligation introduced for investor making TOB to answer targeted company’s questions(reply to submitted questions) for the purpose of making the opinion report• Calculation of duration of TOB set using business days
• Targeted company allowed to demand extension of TOB• Obligation introduced for TOB investor to acquire all tendered shares

2008• Specified listed securities added to securities eligible for TOBs
• Monetary penalty system introduced regarding TOB regulations

tion concerning (1) matters relating to the ratio of shares held by such person,(2) matters relating to the funds acquired by such person for the purpose ofpurchasing such shares; and (3) the purpose for which such person has acquired such shares. And when the percentage of shareholdings of such person
increases or decreases by 1% or more, such person must file a revised 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 the market.

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Chap. XV The Information Disclosure System

4. Timely Disclosure System of Financial Instruments Exchanges (TheStock Exchanges)
As described at the start of this chapter, stock exchanges require listed companies to disclose corporate information according to their regulations. For
example, the Tokyo Stock Exchange stipulates in the regulations of the exchange governing the listing of securities that listed companies shall, in atimely fashion, disclose information having effects on investors’decisions
and defines concrete matters to be disclosed and procedures for disclosing
such matters (see table XV-6). These 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 developments caused byexternal factors at the time the companies had learned of such developments.
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 summaries of financial results according to the given format. The earnings summaries carry more importance in terms of helping investors to learn about financial results because the earnings summaries are released earlier than the
securities reports.
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 securities exchanges deem it necessary and proper. For example, in the casewhere there is a broadcast or rumor regarding corporate information but theaccuracy 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 Appropriateness of Information Disclosure
In order to ensure the effectiveness of securities listing regulations, including
rules on timely disclosure, stock exchanges may implement prescribed mea-Chap. XV The Information Disclosure System

307

Table XV-4. Main Points of Corporate Information Required by Timely Disclosure (inthe case of the Tokyo Stock Exchange)
1. Decisions taken
by a listed company

1. Offering of new shares to be issued, treasury stocks to be allocated, and new share subscription
rights to be issued or treasury new share subscription rights to be transferred and sale of shares andnew share subscription rights
2. Shelf registration and the commencement of a survey of demand
3. Decrease in capital
4. Decrease in capital reserve or profit reserve
5. Acquisition of one’s own shares
6. Allotment of shares or equity warrants without change
7. Free allotment of shares or new share subscription rights
8. Stock split or consolidation
9. Change in the amount of dividends (a change in dividends)
10. Swap of shares
11. Stock transfers
12. Corporate merger
13. Breakup of the company
14. Assignment or acquisition of business, in whole or in part
15. Liquidation (except in the case of a merger)
16. Commercialization of a new product or technology
17. Business tie-up or termination of business tie-up
18. Transfer or acquisition of shares or equities involving changes in the scope of subsidiaries or othermatters involving a change in a scope of subsidiaries
19. Transfer or acquisition of fixed assets
20. Borrowing of fixed assets based on a lease
21. Suspension or abolishment of all or part of a business(es)22. Application for delisting the shares of the company
23. Petition for bankruptcy, commencement of rehabilitation proceedings, or commencement of reorganization proceedings
24. Commencement of new business
25. Tender offer for the purchase of shares of the company by another person or for the purchase of its
own shares
26. Representation of views on a proposed tender offer
27. Granting stock options
31. Change in the number of shares constituting a trading unit of shares, the abolition, or the institution,of the regulation providing for the number of shares constituting a trading unit
32. Change in fiscal year (Change in the end of the business year)
33. Application to the prime minister of the Cabinet of possibility of negative worth or default on repayment of deposits held in trust, etc. (Notification under the provision of Article 74.5 of the Deposit Insurance Law)
34. Application for intercession in line with procedures for special mediation according to the Special
Mediation Act
35. Important matters concerning early redemption of listed bonds, etc. or calling a general meeting of
bondholders and other important matters concerning rights of listed bonds
36. Change in appointed certified public accountant, etc.
37. Annotation of matters relating to assumptions of a going concern
38. Submission of request to extend submission deadline for securities report or quarter report
39. Termination of commission of stock transfer agency
40. Submission of internal control report indicating lack of disclosure of material items or non-disclosure of evaluation results
41. Amendments to the articles of incorporation
42. Acquisition of entire class shares subject to wholly call
43. Approval or disapproval of request for sale of shares, etc. by special controlling shareholder
44. Other material matters relating to the management, business, property, or the listed stock of the company

2. Facts arising relative to a listedcompany

1. Losses caused by a disaster or those suffered in the course of business2. Change in major shareholders or in the largest shareholder
3. Facts that could cause a delisting of the shares of the company
4. Filing of a law suit or decision by the court against the company
5. Provisional disposition order or decision, etc.
6. Administrative disciplinary action taken against the company, such a the termination of license orsuspension of business operations or their equivalent, or a charge of a violation of a law or regulation
brought against the company by a regulatory agency
7. Changes in the status of controlling shareholders or of other associated companies
8. Start of bankruptcy procedures, tendering procedures, or rehabilitation procedures or application or
notification of the foreclosing of corporate security rights
9. Default on promissory note, etc. or suspension from making transactions in note factoring market.
10. Commencement of bankruptcy proceedings, rehabilitation proceedings, reorganization proceedings,
or liquidation or a petition or notice of the exercise of a security right by the parent company
11. Inability to collect on or extend collection on debts
12. Termination of business with customer
13. Receiving financial aid, such as forgiveness of debt
14. Discovery of natural resources
15. Request to sell shares, etc. by special controlling shareholder
16. Request to hold general meeting of shareholders
17. Unrealized loss on securities investments
18. Forfeiture of benefit of time on maturing corporate bonds
19. Material facts regarding rights to call a meeting of holders of listed security debt, such as bonds, orother rights regarding listed security debt
20. A change in the certified public accountant employed by the company
21. Approval of extension or prolonging of submission of securities report or quarterly business report
22. Qualified opinion or non-disclosed opinion or qualified opinion with an exception relating to assumptions of a going concern in the external audit of the financial statements
23. Qualified opinion or non-disclosed opinion in an internal control audit report
24. Receipt of a notice of cancellation of an agreement for commissioning stock administration service
25. Other material matters relating to the management, business, property, or the listed stock of the company
26. Receipt of a notice of cancellation of an agreement for commissioning stock administration service
27. Other material facts relating to the management, business, property, or the listed stock of the company

3. Information concerning the settlement of accounts of a listedcompany

1. The substance of settlement of accounts (annual, semiannual, and quarterly)
2. Modification of projected sales and earnings
3. Modification of a projected dividend

Note: In addition to the above, listed companies are required to disclose material decisions and new developments
related to subsidiaries and other items related to shareholders, etc., with a controlling interest
Source: Tokyo Stock Exchange, Securities Listing Requirements, Guidebook for the Timely Disclosure of Corporate
Information.

308

Chap. XV The Information Disclosure System

Chart XV-2.

Flow from Designation as Securities Under Supervision/Alert to Removalof Designation

No improvement
can be expected

Applicable to designation as a security
under supervision/alert
Improvement can be expected
Designation as a security under supervision/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 isdelisted.

sures against violations found, such as when the disclosed information contains false statements or when there is a violation of matters to be observed
under the Code of Corporate Conduct. These measures to ensure the effectiveness are classified into two categories: improvement measures and penalties. The former requires the listed company concerned to make improvements while the latter imposes a monetary fine or public announcement
penalty on the listed company.
For example, if a listed company has made a false statement in its securities 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 under
supervision/alert.”The designation as a security under supervision/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Chap. XV The Information Disclosure System309

improvement, the company will be delisted. The Securities on Alert System
is a mechanism for having the listed companies concerned make proper improvements while removing the possibility of delisting in the future, and has
been introduced as a measure equivalent 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
under supervision/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 under supervision/
alert, which is a measure leading to possible delisting, the stock exchange
may require the listed 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 timely 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 each stock
exchange.
Meanwhile, penalties are imposed with the purpose of heightening the effectiveness of securities listing regulations and may be applied simultaneously with the aforesaid improvement measures.
6. Recent Moves of Information Disclosure
Formulation of the Corporate Governance CodeFollowing the government’s growth strategy“Japan Revitalization Strategy(Revised in 2014),”the Corporate Governance Code, a set of key principles
that contribute to realizing effective corporate governance of listed companies (hereafter, the Code), has been applied to listed companies from June
2015.
The Code consists of a total of 73 principles, including general principles,
principles, and supplementary principles, and adopts the“comply or explain”(either comply with the principles or explain the reasons for non-compliance)
approach. Since it would be desirable for companies to disclose and explain
matters in a standardized framework, the status of adoption of the Code bylisted companies is to be described in the Corporate Governance Report,
which the listed companies are required to submit.
If any change arises in the content of the Corporate Governance Report,
listed companies shall reflect the change each time, as a general rule, and the310

Chap. XV The Information Disclosure System

Table XV-5.

Overview of the Corporate Governance Code・Formulated as part of the growth strategy, the Code seeks“growth-oriented governance”that contributes to demonstrating healthy corporate entrepreneurship
・The Code calls for the enhancement of corporate value through appropriate cooperation with not
only shareholders but also with a wide range of stakeholders
・Shareholders with mid- to long-term holdings are likely to be important partners for companies andthe Code encourages sufficient constructive dialogue between companies and their shareholders⇒ Promotes sustainable corporate growth and increased mid- to long-term corporate value ofcompanies, thereby contributing to the development of overall economic growth・Principles-Based Approach: Review activities
against the aim and spirit of the principles, notagainst the literal wording and statement in judging whether or not the activities are truly appropriate・Comply or Explain: The Code adopts the approach of not requiring companies to comply
with all of its principles uniformly since, unlike
laws and regulations, the Code is not legallybinding. Instead, the Code asks companies tocomply with a principle, or, if not, explain thereasons for non-compliance.
1. Securing the Rights and Equal Treatment of
Shareholders
Companies should take measures to fully securerights and equal treatment of shareholders.
Securing substantial rights of shareholders⇒ Efforts to give shareholders sufficient time toconsider the agenda of general shareholder
meetings (early sending of convening notices, etc.)
Cross-shareholdings⇒ Disclosure of the policy with respect tocross-shareholding
Explanation of the objective and rationale forshareholding based on the verification of
economic rationale, formulation and disclosure of standards for the exercise of voting
rights
2. Stakeholders Other Than Shareholders
Companies should recognize that their sustainablegrowth is brought about as a result of contributions made by a range 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
Ensuring diversity, including active participation of
women in companies
Source: The FSA.

3. Information Disclosure
Companies should appropriately make information disclosure in compliance with the relevantlaws and regulations, and ensure that such information is accurate, clear and highly useful.
4. Responsibilities of the Board
In order to promote sustainable corporate growthand enhance earnings power and capital efficiency, the board of directors 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
If a management decision causes unexpected damage to the company, there is a risk of shareholder
derivative lawsuit, etc. In such court cases, there isfocus on the reasonableness of management’s decision making process.
⇒ Supporting the company’s sound risk-taking
from the side
Use of independent/outside directors that contributeto sustainable corporate growth⇒ Appoint two or more persons who can contribute to constructive discussions*If a company in its own judgment believes
it needs to appoint at least one-third of directors as independent directors, it should
disclose a roadmap for doing so.
5. Dialogue with Shareholders
In order to contribute to sustainable growth, companies should engage in constructive dialogue
with shareholders.

Chap. XV The Information Disclosure System

Chart XV-3.

311

Number of Companies Adopting IFRS in Japan and Their Market Capitalization
Total of 75 companies

2(Number of companies)(Trillions of yen)
companies 11075
108 trillion
70
100
73
65
companies
90
60
Number of companies voluntarily adopting or planning2
to adopt IFRS (Left axis)
companies
55
80
Listed company
50
2
70
69
trillion
Non-listed company
companies
45
Total market capitalization of listed companies
52
60
40
57 trillion
companies(Right axis)
35
42
50
45 trillion
companies30
140
company
25
29 trillion
30
20
24
companies
20
15
10
20
companies
companies
7
10
3
4
4
companies
10companies
companies
companies
5
2 trillion 2 trillion 2 trillion
7 trillion 10 trillion
0
0

De

c.

31

Jun

,2

.3

01

0

0,

De

c.

20

11

31

Jun

,2

.3

01

1

0,

De

c.

20

12

31

Jun

,2

.3

01

2

0,

De

c.

20

13

31

Jun

,2

.3

01

3

0,

De

c.

20

14

31

Ma

,2

r. 3

01

4

1,

20

15

Source: IFRS Adoption Report (April 2015)

Corporate Governance Report of each company is made available on thewebsite of each relevant stock exchange for public inspection. When achange arises in connection with the capital structure, corporate attributes, ormatters concerning the Code, the change is to be reflected after the general
meeting of shareholders arriving at the earliest timing.
Movement toward Introduction of International Financial ReportingStandards (IFRS)
n recent years, there has been progressive movement internationally toward
the introduction of International Financial Reporting Standards (IFRS), accounting standards developed by the International Accounting Standards
Board (IASB).
In total, over 100 countries now use or plan to use the IFRS as their own
accounting standards. In the EU, companies listed in the region have been required to use the IFRS since 2005. And financial statements prepared basedon the IFRS are accepted in the United States.
Japan is also moving toward the introduction of the IFRS. Since 2010, listing companies have been allowed to voluntarily adopt IFRS on condition,
among other requirements, that the companies conduct international financial
or business activities. However, in fact, only a few companies took advantageof this option. In response, in 2013, with a view to expanding voluntary
adoption of IFRS, the requirements were relaxed. As a result, the number ofcompanies adopting IFRS has been increasing.

CHAPTER XVISecurities Taxation

1. Transitions in Securities Taxation (1)Basically, the income tax system of Japan is based on comprehensive taxation (taxation upon the total income). It traces its origin to a recommendation
made soon after the war by the Shoup Report on Japanese Taxation. Under
the Shoup taxation system enforced in 1950, not just interest and dividends
but also capital gains from the sale of securities (the whole amount of a capital loss from the sale of securities was deductible) were subject to comprehensive taxation. After the end of the Allied military occupation, however,the Japanese government authorized separate taxation on interest and exempted from tax, in principle, capital gains from the sale of securities primarily from the 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 reform of 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 structure of income taxation was changed
from one consisting of 15 brackets (10.5%–70%) to a flat one consisting offive brackets (10%–50%), and the financial income taxation system wasoverhauled 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 was amended 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 the income redistribution function,
starting with income tax for 2015, the rate for taxable income in excess of¥40 million ($ at the rate of ¥115 to the dollar) was set at 45%. In the fiscal
2015 tax reform, the basic corporate income tax rate was reduced to 23.9%
from the existing 25.5%. The basic corporate tax rate was also cut. As a result, the tax rate for national and local combined (the effective corporate taxrate) as of April 2015 was 32.11%.
Looking at major trends in Japan’s securities taxation system during theChap. XVI Securities Taxation

Table XVI-1.
Year

313

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 (20% to 15%).
1955 Interest is exempted from income tax.
The withholding tax on dividends is lowered (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 (10% to 5%).
1965 The withholding tax rate on interest and dividends is raised (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 (10% to 15%).
The optional withholding tax on dividends is raised (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 (20% to 25%).
The securities transaction tax is raised (0.15% to 0.3%).
1976 The optional withholding tax on interest and dividends is raised (25% to 30%).
1978 The withholding tax rate on interest and dividends is raised (15% to 20%).
The optional withholding tax rate on interest and dividends is raised (30% to 35%).
The securities transaction tax is raised (0.3% to 0.45%).
1981 The securities transaction tax is raised (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
products 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 (0.55% to 0.3%).
1995
1996 Securities capital gains tax is normalized (5% of deemed capital gains to 5.25%).
The securities transaction tax is lowered (0.3% to 0.12%).
1998 The securities transaction tax is lowered (0.12% to 0.06%).

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.)1999 The securities transaction tax is abolished.
4 brackets (10%－37%)
2001 A tax exemption system launched for small-amount capital gains from the sale ofstocks held long term.
2002 Special brokerage account system established (implemented January 2003).

late 1990s and early 2000s, the government built taxation systems for stock
options, special-purpose companies, and corporate-type investment trusts.
Effective April 1999, it abolished the securities transaction tax and the exchange tax (imposed on futures and option transactions), which had long
been issues of concern. Further measures followed with the introduction of

314

Chap. XVI Securities Taxation

the Angles taxation system in 2000 and the tax-exemption system for profits
on small sales amounts of stocks being held for the long term (a ¥1 million
special tax exemption on stocks, etc., held for one year or more) and an
emergency investment tax break (a tax exemption on up to ¥10 million ofprincipal) 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 taxexemption system for small-sum savings of the elderly, etc. (Maruyu savings
system for the elderly, etc.), converting it into a small-amount tax-exemption
system for handicapped persons, etc.
2. Transitions in Securities Taxation (2)In recent years, the reforms in the securities taxation system have focused
mainly on revisions in the preferential tax system for dividends and capitalgains on listed stocks, etc., and expanding the scope of offsetting losses
against gains.
During this period, there have been regular revisions in the tax rate. In thefiscal 2003 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 inhabitants’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% covering the period up to the end of 2007, or fiscal 2007. In the fiscal
Table XVI-2.
Year

Securities Taxation Evolution Timeline (Since 2003)
Major amendments

2003 Non-declaration system introduced for dividends from dividends and capital gains
from listed stocks, etc.
The tax exemption system for small-amount capital gains from the sale of stocks
held long term abolished2004 Preferential tax rate on dividends and capital gains from publicly offered stock investment trusts
Tax rate reduced on capital gains from the sale of unlisted stock (26%→20%).
2007 The expiration date of application for a preferential tax rate extended for a year for
dividends on and capital gains from the sale of listed stocks, etc.
2009 Mechanism 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. extended forthree more years
2011 Preferential tax rate on dividends and capital gains of listed stocks, etc. extended fortwo more years
2013 Tax system for public bonds, etc., changed and scope of profit and loss netting expanded (starting 2016)2014 Nippon Individual Savings Account (NISA) is introduced
2015 Junior NISA is introduced (from 2016)

Income tax brackets

6 brackets (5%－40%)

7 brackets (5%－45%)

Chap. XVI Securities Taxation

315

Chart XVI-1. An Outline of Taxation on Listed Stocks, etc. (from 2016)
Distribution of interest/dividend/income
on listed stocks, etc.

Transfer of listed stocks, etc.
(including cancellation/redemption)
SelectSelectSpecified accountTax withholding
account

Simplified declarationaccount

Financial instruments business operator,etc., calculate the annual capital gain/
loss, and interest income/dividend
income (net of capital loss)

Financial instruments business
operator, etc., calculate the annual
capital gain/loss(Specified Account Annual
Transaction Report)(Specified Account Annual Transaction Report)

General accountCalculate the annual
capital gain/loss
on ownSelect(Not for interest income)Tax returnNo need for
declaration(5% to 45% income tax; 10%
inhabitants tax)
*Comprehensive taxation cannot
be selected for interest income*Dividend deduction possible(Withholding
at source
only)(Comprehensive taxation)
Total income including
dividend income
×Progressive tax rate

Tax return(Separate self-assessment taxation)
Dividend income, etc.,• Sum of capital loss
Capital gain, etc.,
associated with listed associated with listed
and dividend income,stocks, etc.,
etc.
stocks, etc.,
×20%• Carry-over deduction
×20%(15% income tax; 5%(15% income tax; 5%of capital loss
inhabitants tax)
inhabitants tax)
(3 years)*No dividend deduction

Note: A special income tax for reconstruction (as a general rule, 2.1% of the income tax amount) is leviedagainst income arising between 2013 and 2037 at the time of income tax return filing or withholding.
Source: Compiled based on data issued by the National Tax Administration Agency.

2004 tax reform, the government extended this preferential tax rate to cover
taxable gains from publicly offered stock investment trusts. In the fiscal 2007
tax reform, the government carried over the preferential tax treatment for
dividends and capital gains from listed stocks etc., for another year. From thepoint of view of abolishing the preferential tax rate at the end of 2008 andsmoothly transitioning to the new system, the government also introduced a
special two-year measure extending the preferential tax rate on capital gainsof ¥5 million ($ at the rate of ¥115 to the dollar) or less and dividends of ¥1
million or less to 2009 and 2010, respectively. However, the fiscal 2009 tax
system reform extended the preferential tax rate to December 31, 2011, andthe tax reform for fiscal 2011 extended it another two years. To help fund therestoration of the area stricken by 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 loss-

316

Chap. XVI Securities Taxation

es on redemptions (terminating agreement) of publicly offered stock investment trusts on equities, etc., for the year. The fiscal 2004 tax reform added atax deduction carryforward system (three years) for capital losses on publicly
offered stock investment trusts. To reduce the risk of investing in equities forindividual investors, the fiscal 2008 tax reform added a mechanism allowing
investors to offset capital losses on listed stocks, etc., against dividends beginning with 2009. Although application of this mechanism was limited toinvestors who chose to declare their securities income, from 2010 it became
possible to also do so using an income tax withholding account. Furthermore,
the fiscal 2013 tax reform made it possible to offset income against losses forinterest and capital gains or losses from public bonds, etc., and income fromlisted stocks starting in 2016.
The revision concerning tax exemption system introduced NISA in 2014,
followed by an enhancement and expansion based on tax system revisions of2014 and 2015 (see Section 8.)
Effective January 2016, the My Number System will be launched.
3. Taxation on Interest
Until 2015, interest on deposits, savings, and bonds and on profits distributedby jointly invested trust accounts and bond investment trusts are treated asinterest income, and a tax is withheld at a uniform rate of 20% (20.315% including the special income tax for reconstruction) separately from other incomes. For specified discount bonds or debentures, an 18% separate withholding tax (18.378% including the special income tax for reconstruction) is
imposed on the discount portion (redemption gain) at their issuance. Similarly, redemption gains on discount bonds issued by the Trans-Tokyo Bay Highway Corporation and the Organization for Promoting Urban Development
are subject to a 16% separate withholding tax at issuance (16.336% including
the special income tax for reconstruction).
Based on the fiscal 2013 tax reform, investors are able, from 2016, tochoose the separate taxation method or non-declaration for interest on specified corporate bonds and profits distributed by publicly offered bond investment trusts after paying a 20% withholding tax (20.315% including the special income tax for reconstruction). As for redemption gains from discountbonds issued on or after January 1, 2016, tax withholding at the time of issuance will not be applied with the exception for certain discount bonds. Instead, tax is withheld at a rate of 20% (20.315% including the special income
tax for reconstruction) at redemption, and redemption gains are subject to theseparate taxation method at a tax rate of 20% (20.315% including the special
income tax for reconstruction.)Chap. XVI Securities Taxation

Table XVI-3.
Division

317

Interest Taxation System (2015)

Division ofincomeOutlineInterest on deposits, savings, Interest income
and bonds
Profits distributed by jointly
Separate withholding tax (20%, including 5% in inhabitmanaged investment trusts,
ants’tax)
bond investment trusts, andinvestment trusts managing
publicly offered bonds
Redemption gains from dis- Miscellaneous Comprehensive taxation(A separate withholding tax of, in principle, 18% is levcount bonds and debentures income
ied on specified discount bonds and debentures, whichthat do not qualify as specified discount bonds and deare not subject to inhabitants’tax; the tax is 16% for cerbentures
tain bonds or debentures)

Tax-exempt savings system

Tax-exempt interest income earned from a small-amountdeposit by the handicapped (on principal of up to ￥3.5
million)Tax-exempt interest income earned from a small-amountinvestment in public bonds by the handicapped (on principal of up to ￥3.5 million)
Tax-exempt interest income earned from postal savings
by the handicapped＊ (on a principal of up to ￥3.5 million)
Tax-exempt saving-for-housing (pension) system (onprincipal up to ￥5.5 million)

Note: Special income tax for reconstruction levied from 2013 to 2037.

Tax-exempt systems of interest income include the tax-exempt smallamount savings system for handicapped persons and the tax-exempt system
of interest income for employee assets formation savings system (tax-exempt
system for assets formation).
The tax-exempt small-amount savings system for handicapped persons includes a tax-exempt system for interest income on small-sum savings forhandicapped persons (Maruyu savings for handicapped persons, etc.) and one
for interest income on small-amount public bonds for handicapped persons(special Maruyu for handicapped persons, etc.). Both of these systems havean upper limit of ¥3.5 million ($ at the rate of ¥115 to the dollar) for tax-exempt principal, making earnings on a total of ¥7 million or less of principal
tax free when both types of systems are used. The government abolished apreviously available tax-exempt system for interest income on postal savingsfor handicapped persons, etc., after the privatization of postal services. Now
qualified handicapped persons include persons with a physical disability certificate, wives of insured persons receiving survivors’basic pension benefits,318

Chap. XVI Securities Taxation

Table XVI-4.

The Status of Taxation on Interest Income, Etc. (2013)(millions of yen)

Division

Amount paid

Taxable amount

Withholding tax

Public bonds

10,914,382

811,227

44,727

Corporate bonds

3,248,656

665,541

100,718

Deposits (Banks)

791,838

679,198

103,336

Deposits (Others)

634,539

403,554

61,246

Jointly invested trusts

25,62015,506

1,914

Bond investment trusts

92,69386,45011,843

937

937

172

Others1,308,745

1,200,138

115,133

Total

17,017,411

3,862,552

439,088

Redemption gains from discount bonds

Notes: 1. Taxable amount includes not only that paid to individuals but also that to corporations.
2. As fractions were rounded to the nearest whole number, the figures may not add up to the actual
total amounts.
Source: Compiled on the basis of the data drawn from the web site of the National Tax Agency of Japan(http://www.nta.go.jp).

and recipients of widow’s pension benefits.
The tax-system system for asset formation includes the workers’asset-formation savings for homes (asset formation for home-building savings) andthe workers’asset-formation pension savings plan (asset-formation pension
savings). These savings are designed to encourage workers below 55 years ofage to buy houses and stabilize their retirement lives, and the interest on
combined principals of ¥5,500,000 or less would be nontaxable. However,
the asset-formation pension savings investing in life insurance and property
insurance, etc., have a nontaxable upper limit of ¥3,850,000.
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 securities income earned
by stockholders or investors after the payment of a 20% withholding tax(15% in income tax and 5% in local inhabitants’tax) is subject to comprehensive taxation. When the comprehensive tax is levied on dividend income,the income tax law allows the deduction of a certain percentage of dividend
income (tax credits for dividends) to avoid double taxation.

Chap. XVI Securities Taxation

Table XVI-5.
Division

319

An Outline of Dividend Income Taxation (2015)
OutlineDistributions from publicly offered investment ・Comprehensive taxation
trusts, etc.
Dividends paid on listed stocks×10% to 55%(5% to 45% in income tax; 10% inhabitants’tax)
Dividend paid on listed(may apply tax credits for dividends)
stocks (excluding large
・Separate taxation on the basis of self-assessment
shareholdings) (Note 1)
Dividends paid on listed stocks×20%(15% income tax; 5% inhabitant tax) Select either
Dividend of sur(non-declaration is also possible)
plus, dividend of
Other
than
above
Comprehensive taxation dividend tax credit
profits, distribu(5% to 45% income tax, 10% inhabitants’tax)
tion of surplus,
Dividend paid at one time
(20% withholding tax)
etc.
less or equal to:(20% income tax)
¥100,000×
Dividend computational period
No declaration necessary(20% withholding tax)
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.

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 had the option of paying
a comprehensive tax or non-declaration of dividend income (those who preferred the payment of a withholding tax on their dividend income). For a limited period, stockholders and investors have enjoyed a preferential tax rate of
10% (10.147% in 2013) on this income. However, from 2014 to 2037, therate will be 20.315%, after which a tax rate of 20% will be applied. In addition, as a result of being able to offset capital losses on stocks against dividends, investors have been able to choose the separate taxation method since2009, which also carried a preferential tax rate of 10% (10.147% in 2013) fora limited period, to be bumped up to 20.315% from 2014 to 2037, after
which it will be 20%. Moreover, as of 2010, investors are 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 such shares as ETFs (exchange-tradedfunds).
Meanwhile, dividends on stocks other than listed stocks (unlisted stocks)
and those received by large individual shareholders are subject to compre-

320

Chap. XVI Securities Taxation

Table XVI-6.

Taxation of Dividend Income (withheld at source) (2013)(millions of yen)Amount paid

Division

Generaltaxation

Special tax
rate applied

Withholding
tax

Dividends on profit or interest income, distribution of retained earnings, and dividends,
etc.,/ on interest on fund corporations

16,318,182

9,407,195

3,443,414

2,167,050

Distributions of profits of investment trusts(excluding bond investment trusts and publicly offered asset management bond investment trusts, etc.) and distributions, etc., of
profits of investment trusts with specific investment purposes

3,694,110

2,425

3,140,384

224,815

Remittance to optional withholding tax account2,589,368－

2,589,368

185,061

Total

22,601,660

9,409,619

9,173,166

2,576,926

Notes: 1. Bond investment trusts and management investment trusts of publicly offered public bonds,
etc., are not included in“investment trusts.”
2.“General taxation”and“Special tax rate applied”include dividends received by corporations.
3. As fractions were rounded to the nearest whole number, the figures may not add up to the actual
total amounts.
Source: Compiled on the basis of the data drawn from the web site of the National Tax Agency of Japan(http://www.nta.go.jp).

hensive 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 less or equal to the amount divided by¥100,000 ($ at the rate of ¥115 to the dollar) by a dividend-computation period. However, local inhabitants’tax is subject to comprehensive taxation.
Distributions of publicly offered stock investment trusts are treated as adividend income when investors opt for the comprehensive tax method, entitling the investor to tax credits, but the rate of deduction varies depending on
the ratio of foreign currency denominated assets and non-stock assets of thestock investment trust concerned. If the percentage of either foreign currency
denominated assets or non-stock assets is 75% or more, the deduction of dividends is not allowed. For profits distributed by a privately placed stock investment trust (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 recognized only when the investor chooses the nondeclaration method (comprehensive taxation).

Chap. XVI Securities Taxation

321

5. Adjustment of Double Taxation Relating to Dividends
Profits generated by a business corporation through its business activities
should, basically, be returned to the owner of that corporation. However, corporate income is usually taxed twice: corporate income tax and individual income tax (dividend tax and capital gains tax). Ultimately, it is individuals
who have the duty of paying taxes. Therefore, some adjustments have to bemade to avoid double taxation. This is the question of consolidating corporate tax and an individual’s income tax. Ideally, all forms of double taxationof corporate income—be it retained earnings or dividends—should be rectified. However, adjustments are chiefly made to the dividend portion.
The method employed to adjust for double taxation related to dividends
varies according to whether the recipients are individuals or corporations. In
the case of individual shareholders, a dividend tax credit system is appliedthat makes 10% of their dividend income (and 2.8% for inhabitants’tax) deductible from their tax liability. However, in the case of those whose taxable
income exceeds ¥10 million ($ at the rate of ¥115 to the dollar), 5% of suchpart of their dividend income that pushes their taxable income over andabove ¥10 million (and 1.4% for inhabitants’tax) is deductible. For instance,
when individual shareholders have a total taxable income of ¥13 million (¥9million in general income and ¥4 million in dividend income), they are entitled to a tax deduction of ¥250,000 (¥100,000 (=(¥10 m－¥9 m)×0.1)＋¥150,000 (=(¥13 m－¥10 m)×0.05). In regard to dividends received by corporate shareholders, the scope of taxable income was revised in the fiscal
2015 tax reform. As for investments in stocks with a high shareholding ratio,
revisions were made to the criteria on shareholding ratio, while the entire
amount of dividends received on such shares were not to be counted as taxable income. On the other hand, in regard to investments in stocks, etc. witha low shareholding ratio, a new category was established and the ratio for notcounting as taxable income was partially lowered.
In foreign countries, the imputation system has broadly been adopted as amethod to adjust for double taxation. The method of dividend-received deductions employed in Japan and the partial imputation method employed in
the United Kingdom 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.

322

Chap. XVI Securities Taxation

Table XVI-7.

Adjustment of Double Taxation in Major Countries(As of April 2015)

Corporation level

U.K.

○When selecting no declaration necessary or separation tax based on selfassessment
No adjustment treatment○When selecting comprehensive taxation
Dividend credit(dividend-received deduction method)

Shareholding ratio Profit exclusion ratio
5% or less:
20%
More than 5% to one-third:
50%
More than one-third:
100%

Corporate tax rate: 35%

No adjustment treatment

Shareholding ratio Profit exclusion ratioLess than 20%:70%
20% or higher but less than 80%:80%
80% or higher:
100%

Corporate tax rate: 20%

Partial imputation method

No adjustment treatment
Corporate tax rate: 15%
Germany +5.5% of tax amount as solidarity surcharge

FranceDividend between corporations

Corporate tax rate: 23.9%

Japan

UnitedStatesAdjustment at the individual
shareholder level

Profit exclusion in full
Shareholding ratioLess than 10%:
10% or higher:

Profit exclusion ratio
0%95%

Corporate tax rate: 33 1/3% Dividend-received partial Shareholding ratioLess than 10%:
deduction method(60% of dividends received 10% or higher:
are included in shareholder’staxable income)

Profit exclusion ratio
0%95%

Notes: 1. In the U.S., a preferential tax rate similar to the capital gain tax is applied to a certain level ofdividend income at the individual shareholder level.
2. Imputation method is the method of adding dividends received and all or part of the amount ofcorporate tax corresponding to the dividends received to the income of individual shareholder
and deducting the added amount from the income tax amount calculated based on the aforesaid
income. In the case of full imputation where the entire amount of corporate tax corresponding to
the dividends received is attributed to the shareholder, double taxation is fully eliminated for the
portion of income of a corporation appropriated to dividends. Under the partial imputation method employed in the United Kingdom, dividends received plus 1/9 of dividends are included intaxable income and 1/9 of the amount of dividends received is deducted from the calculated tax
amount.
3. In Germany, under the comprehensive taxation system, the dividend-received partial deduction
method (50% of dividends received are included in shareholder’s taxable income) was employed
until 2008. However, non-declaration (separation tax) treatment for a uniform 25% rate on interest, dividends and capital gains was introduced in 2009 as a result of which adjustment between
corporate tax and income tax at the individual shareholder level was abolished.
4. In France, under the comprehensive taxation system, the dividend-received partial deduction
method (60% of dividends received are included in shareholder’s taxable income) was employed
until 2007. However, with the introduction of a method to allow selecting of comprehensive taxation or separation tax in 2008, no adjustment between corporate tax and income tax at the individual shareholder level was made when the separation taxation method was selected. Based on
the 2013 budget bill, the system of selecting separation tax for interests, dividends and capitalgains was terminated. As a result, a progressive tax rate has been employed uniformly startingwith the 2013 income.
Source: Illustrated Taxation System of Japan, 2015 edition, page 301, compiled by Kazuhiko EjimaChap. XVI Securities Taxation

323

6. Capital Gains Taxation (1)In 2003, the system of opting for a separate withholding tax or for the separate filing of an income tax return on the sale of stocks, etc., was abolished,
and these taxes were unified into the separate filing system. In other words,
not taking into account the special income tax for reconstruction, a 20% tax
rate (a 15% income tax and a 5% inhabitants’tax) is applied to an amount ofincome arrived at by deducting the cost of acquiring or selling the security
and interest paid on the fund used for the purchase of such security from theproceeds of such security. The capital gains from the sale of listed stocks, etc.
may be treated so as to deal with taxable income related issues based onwithholding tax only. Previous to 2003, capital losses from the sale of stocks,
etc., were deductible only from capital gains from the sale of other stocks,
etc., if any, made during the same year, and it was not permissible to carryforward any unused losses. However, from 2003 on, investors have been able
to carry forward capital losses from the sales 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.
Along with the abolition of the separate withholding tax system, the authorities sought to lessen the reporting burden on investors by establishing a
special brokerage account system. Under this type of account, a securities
company computes capital gains or losses, as the case may be, for its customer from the 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 need for the investor to file an income tax return. Furthermore, from2010, it became possible for the securities company to deposit listed stock,etc., dividends of customers that are subject to withholding tax in the income
tax withholding account set up for the customers, enabling the customer toinclude capital gains or offset capital losses against dividend income. 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 thesale of such shares through another account. When an investor opts for theincome tax withholding account and does not file a final return, the capitalgains are not included in the total amount of his income for the purpose ofincome tax and local inhabitants’tax, and 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324

Chap. XVI Securities Taxation

Table XVI-8.

Outline of the Capital Gains Taxation System for Stocks, Etc. (2015)
OutlineSeparate taxation on the basis of self-assessment
Capital gains on listed stocks, etc. ×20%
(15% income tax and 5% inhabitants’tax)*Special exception on no declaration necessary for withholding tax
account

Listed stock, etc.
・Listed stock・ETF
・Publicly placed stock
investment trusts

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.
*Carrying-forward of unused deductible losses relating to unlisted
stocks, etc.
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 stocks,
etc. (Note 3) and the amount of dividend income from listed stocks,
etc.

Other stocks, etc

Separate taxation on the basis of self-assessment
Capital gains×20% (15% income tax, 5% inhabitants’tax)

Notes: 1. Losses from the sale of listed stocks, etc. may be deducted from the amount of dividend income
on listed stocks, etc.
2. In addition, from January 2013 to December 2037, a 2.1% special income tax for reconstruction is levied against the amount of income tax as a time-limited measure.
3. Investor may carry forward unused deductible losses from the amount of capital gains, etc. relating to listed stocks and that of dividend income on listed stocks, etc. from January 1, 2016.
Source: Based on the web site of the Ministry of Finance.

by attaching to it an annual statement of stock trading made under a special
brokerage account received from his securities company. Currently, securities
companies must send an annual statement of stock trading to the customer
and the tax office no matter what type of special brokerage account is selected by the customer.
Furthermore, starting in 2016, it is possible to offset income against losses
for interest and capital gains or losses from public bonds, etc., and income,etc., from listed stocks, and the scope of application of the special account isalso widened.
7. Capital Gains Taxation (2)Capital gains from the sale of bonds are tax deductible as a general rule untilChap. XVI Securities Taxation

Chart XVI-2.

325

Withholding Taxes on Capital Gains on the Sale of Listed Stock, Etc.,
Managed in Special Brokerage Accounts(millions of yen)
600,000
516,579

500,000
400,000
300,000

254,672

200,000

223,942 210,356

100,000
0

2005

2006

2007

49,65250,44946,81738,89543,371

2008

2009

2010

2011

2012

2013

Source: Based on the website of the National Tax Agency of Japan.

2015. However, capital gains on the sale of bonds issued by the Japan Housing Finance Agency, Okinawa Development Finance Corporation, Urban Renaissance Agency, and foreign government bodies and discount bonds issued
overseas (zero-coupon bonds) are subject to comprehensive taxation. Bonds
similar to zero-coupons bonds, including bonds with an extremely low rate
(deep discount bonds); bonds whose principal and interests are separately
traded (STRIPS bonds); and bonds with an interest computation period of
one year or more (deferred payment bonds) are also are subject to comprehensive taxation. From 2016, however, a separate income tax is levied on
self-assessed capital gains on the sale of specified bonds.
Created under the 1997 amendment to the taxation system, the“Angels
taxation system”is a special measure designed to encourage individual investors (angels) to invest in venture-stage firms or start-ups. The special
measure applies to shares (specified shares) of venture-stage firms or startups (specified small-to-midsize firms) that meet certain requirements. The
taxation system has been revised several times since the establishment of thisplan. Most recently, the special tax treatment reducing the rate on capitalgains for specified small-to-midsize firms to 50% was extended for two years
in the fiscal 2005 tax revisions. The fiscal 2007 tax revisions added anothertwo years and liberalized the eligibility requirements for the special tax treatment and rationalized the approval process. This special tax treatment was
abolished by the fiscal 2008 tax revisions. However, at the same time, thegovernment set up a contributions tax deduction system for investors that in-326

Chap. XVI Securities Taxation

Chart XVI-3.

An Outline of the Angels Taxation System

Preferential tax measures for start-up investment (selective application of methods 1 and 2)
1. When an investment is made in any venture-stage firm (specified small-to-midsize firm), the investor may
apply the contributions tax deduction for up to ¥10 million (implemented in the fiscal 2008 tax revisions).
Total employment
income, etc.
( ¥13 million)

Investment amount(¥5 million)
Application of contributions
tax deduction

Taxable amount¥ 8 million

10%−50%comprehensive taxation

2. There is a reduction in capital gains on the stock when an investment is made in a start-up firm (specified
small-to-midsize firm).
Capital gains on stock(¥13 million)

Investment amount(¥5 million)
Deduction from capital gains
on stock in same year

Taxable amount¥ 8 million

20 (10)%separate taxation

Note: 1. When preferential tax measures 1 or 2 are applied, the acquisition costs of the stock of the start-up firm isthe amount less the tax deduction stated above.
2. Tax exemption on capital gains on general stock, etc., or on listed stocks, etc. (starting with fiscal 2016
income).

Preferential tax measures following investment
3. Should the business of the start-up firm (specified small-to-midsized firm) fail, and a loss to be suffered from the sale,etc., of stock prior to listing, etc., the investor may carry forward unused deductible losses for a three-year period.

Stock capital gain

Loss

Stock capital gain

Stock capital gain

Stock capital gain

Following year

Second year

Third year

1. Capital loss occurring in the year is netted again any capital gain from general stock, etc.,
and any remaining capital loss may be netted with capital gain on listed stock, etc., to a
maximum of the capital gain for the year.
2. Carryforward unused deductible losses may be netted with remaining capital gain to a
maximum of the remaining capital loss on general stock, etc., and listed stock, etc.
(1. and 2. Above start with fiscal 2016 portion)

Note: When an investor sells specified shares acquired before April 30, 2008, and held for more than three years
within three years of listing or before listing by reason of a merger, the resulting capital gains are reducedby half.
Source: Illustrated Taxation System of Japan, 2015 edition, page 111, compiled by Hirotaka Unami.

vest in these types of venture companies (specified start-up small-to-middle
sized firms) during their start-up period. Specified start-up small-to-middle
sized firms also of necessity qualify as specified small-to-middle sized firms.
The current features of the Angels taxation system are: (1) since April 1,
2008, investors that have acquired stock in a specified small-to-midsize firm
through direct investment may apply the contributions tax deduction for up
to ¥10 million ($ at the rate of ¥115 to the dollar) of the amount invested inChap. XVI Securities Taxation

327

said company (investors may choose to apply either (1) or (2) per stock issue); (2) investors may deduct the acquisition costs of shares of a specified
small-to-midsize firm from their capital gains in the same year; and (3) wheninvestors suffer losses from the sale of the specified stocks up to a day before
listing date, or when they suffer losses from the dissolution and liquidation ofissuers, these losses are deductible from gains on the sale of stocks in thesame year. Unused deductible losses may be carried forward for three years
starting with the next year.
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 models 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 to as theJapanese-version ISA. The“N”in NISA stands for NIPPON (Japan).
The outline of NISA is provided below. Dividends, coupons, and capitalgains 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. Although the amount of annual investment was initially set at a maximum of ¥1 million ($ at the rate of ¥115
to the dollar) making the total tax-exemption investment amount at ¥5 million (¥1 million×5 years), the fiscal 2015 tax reform increases the annual investment amount to a maximum of ¥1.2 million with the total tax-exemption
investment amount at ¥6 million (¥1.2 million×5 years) starting in 2016.
The NISA account may be maintained for 10 years from 2014 to 2023, with amaximum tax-exempt period of five years. Stocks, etc. may be freely soldduring the period but the tax-exempt coverage of the sold portion cannot bereused. Although initially account-holders were not permitted to switch thefinancial institution at which the NISA account is opened for a maximum offour years, the fiscal 2014 reform changed the rule to allow switching of thefinancial institution on a yearly basis effective January 1, 2015.
According to the FSA’s Research on the Use of NISA Accounts (as of June30, 2015), the number of NISA accounts totaled 7,273,667 as of the end ofJune 2014, and 9,212,167 as of the end of June 2015. Investments throughthe NISA accounts (the total of investments within the 2014 and 2015 tax-exempt coverage) amounted to ¥5,193,644.34 million at the end of June 2015
with investments for 2015 totaling ¥2,216,675.22 million.
Furthermore, based on the fiscal 2015 tax reform, Junior NISA (a small

328

Chap. XVI Securities Taxation

Table XVI-9.
Tax-Exempt Income

Outline of Nippon Individual Savings Account (NISA)
Small amounts of dividends and capital gains on listed stocks in tax-free
NISA accountEligible account openers Residents of Japan aged 20 years or older on January 1 of the year of ac(investors)
count opening
Maximum annual invest¥1 million (¥1.2 million from 2016)
ment
Tax-Exempt Investment
Maximum of ¥5 million (¥6 million from 2016)
AmountsTax Exempt Period

10 years from 2014 to 2023

Tax Exempt Period

Maximum of 5 years

Source: Compiled based on various data issued by the National Tax Administration Agency and the Ministry of Finance

Table XVI-10.
Tax-Exempt Income

Outline of Junior NISA

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
AmountsTax Exempt 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 Administration Agency and the Ministry of Financeamount investment tax-exemption scheme on dividends and capital gains on
small investments in listed stocks, etc., in tax-free accounts of underaged persons) is introduced from 2016. Under the Junior NISA scheme, 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 theage of 20. The maximum annual investment amount is ¥800,000, making the
maximum tax-exempt investment amount at ¥4 million (¥800,000×5 years).
The account may be opened for 8 years from 2016 to 2023 and the maximumChap. XVI Securities Taxation

Chart XVI-4.

Expansion of NISA under the Fiscal 2015 Tax Reform<Present><Post-Expansion>
Cumulatively up to¥10 million per adult[Husband]¥1 million

Cumulative totalof ¥5 million
Individuals
aged under
20 are noteligible

Adult

Child

329

Cumulatively up to¥10 million per adult(Maximum annual investment
amount of ¥2 million)(Maximum annual investment
amount of ¥2 million)[Wife]¥1 million[Husband]Monthly fixed
investment amount[Wife]
Monthly fixed
investment amountIndividuals
aged under
20 are noteligible¥800,000
Cumulative totalof ¥4 million

Cumulative totalof ¥5 million¥1.2 million(¥100,000 ×12 months)
Cumulative total of¥6 million

Junior
NISA

Adult

Child

¥1.2 million(¥100,000 ×12 months)
Cumulative total of¥6 million

Junior
NISA¥800,000
Cumulative totalof ¥4 million

Source: Compiled based on data in Pamphlet on FY2015 Tax Revisions issued by the Ministry of Finance(2015).

tax-exempt period is set at five years. Investments are made by an agency orupon concurrence of a person with parental authority and, in principle, no
withdrawal can be made until the account holder reaches the age of 18.
9. Taxation of Nonresidents
The Income Tax Law of Japan divides individuals into residents and nonresidents, and in the case of nonresidents, etc., taxes are imposed only on incomes they earn from domestic sources. Residents are individuals who havea 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. The method of imposition of income tax varies depending onwhether the nonresident has a permanent establishment (PE) in Japan or not.
In principle, when a non-resident has established a PE in Japan, the individual is subject to the same declaration-based (withholding tax applies to someincome) tax treatment as a resident. In other cases, the individual is subject tothe separate withholding tax system, which deals with taxable income related
issues based on withholding tax only. To be deemed to have established a PE
in Japan, a party must (i) have a fixed office or other designated place ofbusiness or (ii) be engaged in construction, installation, or assembly work formore than one year or be an agent or other representative meeting certain
stipulated requirements.
Looking at the taxation for 2015, (1) for nonresidents with PE, a 15.315%
separate withholding tax is imposed on interests on deposits and savings. As

330

Chap. XVI Securities Taxation

Table XVI-11.

Outline of Matters Related to Taxation of Nonresidents, Etc. (2015)

Non resident category Nonresidents with a permanent establishment in Japan

Type of income

Nonresidents, etc.,with a fixed officeor other designatedplace of business

Withholding
tax
Nonresidents, etc., engaged inNonresidents
construction, installation, or without a permanent (including thespecialassembly work for more thanestablishment inincome tax for
one year or as an agent or otherJapan
reconstrucrepresentative meeting certaintion)
stipulated requirements.

Business income
Asset income
Other income sourced in Japan
Distribution of business profitof partnership
Compensation for sales of land,
etc.

Comprehensive taxation(Note 1, 2)

Tax deductible

None

Comprehensive
taxation (Note 2, 3)

None(Note 1, 2)
None
20.42%Tax deductible
Separate withholding tax followed by comprehensive taxation(Note 4)Compensation for personal
services
Rental income, etc., from realestateInterest, etc.
Dividends, etc.
Separate withholding tax followed by
Separate withholding tax
comprehensive taxation(notes 5, 6, 7)
Loan interest
Usage fees, etc.
Salary or other remuneration
Attributable
Notfor personal services, public
to domestic attributable topension income, severance
businessdomestic
pay, etc.
business
Prize money from business advertising and promotion
Annuity income, etc., from life
insurance contract
Interest payment from investment savings plan
Distribution of profit fromanonymous partnership, etc.

10.21%
20.42%
20.42%

15.315%20.42%(Notes 6, 7)
20.42%
20.42%
20.42%

20.42%
20.42%
15.135%20.42%

Notes: 1. Income from the sale of stocks, etc., by nonresidents with a permanent establishment in Japan issubject to a 15.135% tax under the separate taxation system.
2. Redemption gains from discount bonds are subject to a 18.378% (16.336% in part) separate
withholding tax.
3. Income from the sale of stocks, etc., by nonresidents without a permanent establishment in Japan is subject to a 15.135% tax under the separate taxation system.
4. Compensation for sales of land, etc. is subject to self-assessed separate taxation at a rate of
15.315% (long term) or 30.63% (short term) after tax withholding.
5. Interest and interest payments from investment savings plans received by nonresidents with apermanent establishment in Japan is subject to a 15.135% tax under the separate withholding
tax system.
6. Dividends relating to listed stocks are subject to a 15.315% tax.
7. Nonresidents with a permanent establishment in Japan use the comprehensive tax system basedon income tax return filing or non-declaration tax system (for 2009 income and thereafter) for
dividends (excluding those subject to the separate withholding tax system).
Source: Complied from“Withholding Tax Basics,”FY2015 edition, National Tax Agency of Japan.

Chap. XVI Securities Taxation331

for dividends on listed stocks in the case of a PE based on (i) above or a PE
based on (ii) where the income can be attributable to the domestic business,the dividends are subject to comprehensive taxation after withholding at thesource of 15.315%. However, it is possible to apply for the non-declaration
system where there is no need for comprehensive taxation based on tax return filing or separate taxation system. In the case of a PE based on (ii) above
where the income cannot be attributable to the domestic business the separate
withholding tax method applies. (2) Nonresidents without a PE in Japan: On
interests on deposits and savings, a 15.315% separate withholding tax is imposed just as in (1) above. As with case (ii) in (1) above where the income
cannot be attributed to the domestic business, dividends, etc., on listed
stocks, etc., of domestic corporations are subject to the separate withholding
tax. The above tax rates include the special income tax for reconstruction (asa general rule, 2.1% of the income tax amount).
Japanese government securities owned by nonresidents are tax exempt.
For instance, interest on government securities held by a nonresident withouta permanent establishment in an account with a specified central custody andtransfer agent or a qualified foreign intermediary is exempted from income
tax under certain conditions.
In addition to the foregoing, income tax rates applied to nonresidents andforeign corporations are finally determined in accordance with the tax treaties Japan has signed with various countries, and nonresidents should study
these treaties.
10. Taxation of New Products(1) New Types of Investment
Taxation for 2015 is as follows. 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 otherincomes of the recipients of such profits. The tax credit for dividends is also
applied, and when the recipient meets certain requirements, he is exemptedfrom the requirement of filing an income tax return. Capital gains made by
selling beneficiary certificates of such investment trusts are subject to a withholding tax. Profits received from an investment trust managing privately
placed bonds and redemption gains are subject to a withholding tax, and capital gains are tax exempt (from 2016, subject to separate taxation.) Tax rates
related to open-ended investment trusts of the company type are the same as
those applied to listed stocks. In other words, on dividends received fromopen-end investment trusts, a withholding tax of 20.315% is imposed before
comprehensive taxation, separate taxation on the basis of self-assessment, or332

Chap. XVI Securities Taxation

Table XVI-12.

Outline of New Taxation Framework for Investment Trusts (2015)

Corporate type

Contractual typeClassification

Cancellation (redemption)
gains (Note 1)

Capital gains

Taxable as dividend income(20% separate withholding tax).
Separate taxation method applies
to portion deemed capital gains.

20% of the capitalgains is taxed separately on the basisof self-assessment

Profit distribution

Privately placed stock Taxable as dividend
investment trusts
income (20% separate withholdingtax)

Privately placed as- 20% separate withholding tax
set-management trust

Tax deductible

Publicly Open-end
offered type

Taxable as dividend
income (20% separate withholdingtax)

Taxable as dividend income(20% separate withholding tax).
Separate taxation method applies
to portion deemed capital gains.

20% of the capitalgains is taxed separately on the basisof self-assessment

Closed-end Taxed as a dividend
type
income (20% (Note2) of the dividends
Privately placed
is withheld)

Taxed as dividend income (withholding at source of 20% (Note2)). A portion deemed as capitalgains or losses from the sale issubject to separate taxation,
based on self-assessment.

20% of the capitalgains is taxed separately on the basisof self-assessment

Notes: 1. Since contract cancellations are not possible with closed-end trusts, this applies only to liquidations or redemptions.
2. A 15% income tax rate and a 5% inhabitants’tax rate apply to closed-end investment trusts thatare listed. A 20% income tax rate for others.
3. Special income tax for reconstruction levied from 2013 to 2037.
Source: Primer on Taxation, 2014 edition, page 183, Daiwa Institute of Research Ltd.

Table XVI-13.

Taxation on Stock Options

At grant ofstock options

At exercise of stock options

At the sale of stocks

Qualified stock
options－－

Separate taxation on (selling price exercise price) on the basis of selfassessment

Non-qualified
stock options－

Comprehensive taxation on Separate taxation on (selling price (market value of stocks at market value of stocks at exercise)on the basis of self-assessment
exercise-exercise price)

Note: Taxed as income on the sale of stocks.

non-declaration. A credit for dividends is not applied when the comprehensive taxation is selected on dividends. Capital gains from the sale of company-type investment trusts are subject to the separate taxation based on selfassessment. On the other hand, dividends received from closed-end or
privately placed investment trusts are subject to a withholding tax 0f 20.42%
and then to comprehensive taxation. In general, a taxation system is selected

Chap. XVI Securities Taxation

333

that does not require the declaration 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 from the sale of company-type investment trusts are subject to the separate taxation based on selfassessment. For REITs (real estate investment trusts), dividends and capitalgains from the sale of listed REITs are subject to the same taxation as listed
stocks. However, a credit for dividends is not applied when comprehensive
taxation is selected on dividends.
(2) Stock Options
The stock option is a system under which a company grants its officers andemployees the right to purchase its stocks at a certain price (exercise price)
for a certain period (exercise period). The company then pays its officers andemployees remunerations linked to any increase in its stock price. The stock
option is classified into a qualified stock option and a non-qualified stock option, depending on whether it satisfies requirements stipulated in the Special
Taxation Measures Law or not. The former is tax deductible on economic
benefits gained from its exercise (the difference between the market priceand the exercise price). Separate taxation is imposed on the difference between the selling price and the exercise price of stocks issued on the exercise
based on self-assessment when the stocks are sold. For the latter, comprehensive taxation is imposed on economic benefits gained from its exercise. Separate taxation is imposed on the selling price of stocks issued on the exercise,
deducting the market price of the exercise based on self-assessment when thestocks are sold.
11. Tax Treatment of Pension-Type Products
To cope with the changes that have occurred in recent years—a swollen unfunded corporate pension obligation, a growing shortage of public pension
funds, the introduction of international accounting standards, and an increasing slackness in the job market—a defined contribution pension plan (theJapanese 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 understanding that pension benefits may vary depending on the results of such investment. It is divided into the individual type, inwhich the individual himself makes contributions, and the corporate type, inwhich the company in principle makes contributions on behalf of its employees. In order to encourage the spread of pension products based on such asystem and to enhance the efficiency of the management of such plans, it is334

Chap. XVI Securities Taxation

Chart XVI-5.

¥68,000 per month※
Persons notcoveredby the plan
In case there isa defined
benefits planand nocorporate-typedefinedcontribution
plan

Beneficiaries of Defined Contribution Pension, Ceiling on Contributions,and the Existing Pension System
Corporate
type

Individual
type(Contributions by participants only)
Self-employedpersons(Category 1)

The ceiling on contributions: ¥68,000(An annual sum of¥816,000) minus
premiums paid
to theNational
PensionFund)

National Pension Fund

In case there is neither adefined benefits plan or a
corporate-type defined
contribution plan
(Category 2)

The ceiling oncontributions:¥23,000 per month(¥276,000 a year)

In case there isno defined
benefit plan

The ceiling oncontributions:¥55,000 per
month(¥660,000 a
year)

In case there isa defined
benefit plan※
Persons notcoveredby the plan
In case there isa defined
benefits planand nocorporate-typedefinedcontribution
plan

The ceiling oncontributions:¥27,500 per month(¥330,000 a year)
National public
officers mutual
aid association(Employee pension funds,
Regional publicdefined benefit corporate pension, officers mutual
private mutual aid association, etc.) aid association

Defined benefit plan pension
systems

Employees welfare pension insurance and mutual-aid pension plans

Basic pension
Employees’
dependent spouses(Wife of office
worker, etc.)

Self-employedpersons

Employees(Office workers)

No. 3 insured persons

No. 1 insured

No. 2 insured persons

Civil
servants

Source: The web site of the Ministry of Health, Labor and Welfare (http://www.mhlw.go.jp).

essential to give a fixed tax incentive. And in devising such a taxation system, due care must be exercised in striking a suitable balance between the
taxation system for such pension plans and that for other pension plans aswell as in the transferability of pension assets when changing jobs. The government has taken the following tax measures applicable to defined contribution pension plans.
Tax measures for defined contribution plans are as follows.
(1) At the contribution stage: Premiums paid to a pension plan of the individual type by a self-employed person are eligible for income deduction (deduction for small-scale enterprise mutual aid premium). Premiums paid tocorporate pension plans by a company are counted as a loss of such company
and are not counted as an income of the employee for whom such premiums
are paid. As of January 2012, matching contributions by employees havebeen approved for corporate pension plans. Therefore, the entire amount ofcontributions by employees is eligible for the deduction for the small-scale
enterprise mutual aid premium.
(2) At the management stage: The balance of reserves for a pension plan ofChap. XVI Securities Taxation

Table XVI-14.
Division

335

Tax Treatment of Defined Contribution Pension Plans
Individual type

Contribution stage:

Corporate typeCounted as a loss of theemployer and not added tothe salary of the employee

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
Note: Premium payments by employees for Corporate type of plan started in January 2012.

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, 2017.
(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. The amountdeductible varies according to the age of the beneficiary and the amount ofincome the beneficiary receives from publicly managed pension plans. However, a minimum benefit of ¥1.2 million ($ at the rate of ¥115 to the dollar) is
recognized for those who are 65 years of age or older or ¥700,000 for those
who are less than 65 years of age. Benefits paid in a lump sum are eligible
for retirement income deductions. (ii) Benefits for the physically handicapped: When a beneficiary is seriously disabled, the beneficiary can receive
the payment of benefits from the month in which he or she is disabled, andthe benefits are exempted from income tax and inhabitants’tax. (iii) Deathbenefits: Death benefits paid in a lump sum to the survivors when the subscriber died are deemed as an inherited property, and up to ¥5 million foreach legal heir is exempted from inheritance tax. (iv) Withdrawal benefits:
Benefits paid in a lump sum upon withdrawal from a pension plan are subject
to income tax and inhabitants’tax.

CHAPTER XVIIThe Securities Regulatory System

1. Financial Instruments and Exchange Act
In 2006, the Securities and Exchange Law underwent major revisions andwas 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 revising the conventional vertically-segmented regulations
and applying the same types of 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 many of the same aspects were subject to similar rules.
Another move to cross-sectional application was the standardization of theregistration of sales and solicitation, investment advisory, asset management,
and asset administration, etc., businesses under the umbrella of financial instruments firms 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, they placed strict disclosure
obligations on highly liquid securities, strengthening the disclosure system
by requiring listed companies to provide quarterly reports, internal control
system reports, and verification statements from auditors. In contrast, illiquid
securities, in principle, are exempt from these disclosure regulations. While
all financial instruments businesses are required to register under the comprehensive industry regulations, businesses are classified into the three categories of Type I and Type II Financial Instruments Businesses, Investment Advisory and Agency Business, and Asset Management Business, with separate

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, etc., obligation to explain
products to customers→ estimated amount of civil liability(loss 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 Law 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 System

rules applying for each category. In addition, customers are classified into
professional investors and general investors, with various exceptions to thegeneral 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 and establishment of a procedure for handling of unlisted
stock transactions based on the revisions enforced in 2011. In the 2015 revision, regulations on funds for professionals (business operations specificallypermitted for qualified institutional investors) were amended in relation primarily to the following: (i) regulations on participation of fund operators, (ii)regulations on conduct of business by fund operators, (iii) information disclosure by fund operators, and (iv) strengthening of penalty regulations onfund operators.
2. Securities Market Related Laws and Regulations
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, perhaps themost important area for customer protection. Specifically, these laws haveadvertising and other regulations; disclosure obligations relating to transactions; pre-contract document issuance rules; behavior prohibitions; loss compensation prohibitions; and best execution policy.
The Act on Sales of Financial Instruments governing sales, etc., of financial instruments was formulated to provide cross-sectional regulations regarding the sale and solicitation of sales for deposits, investment trusts, insurance, securities, and other financial instruments. The law was revised in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 (Tokkin or special Insurance Business Act (Speci- Trust Business Act (Specimoney deposits, etc.)
fied policies, etc.)
fied trust contracts)
Advertising, etc.,• In the case of derivative deregulations
posits, if the bank has theright to extend the term of thedeposit, it must indicate to thecustomer that the interest rate
could fall below the market
rate to the detriment of thecustomer.
Deliver written• Exceptions to the obligation • Documentation delivered pri- • Exceptions to the obligadocumentation- When a foreign currency or to contract must contain tion to deliver prior-to-conobligation
deposit, etc., document was notes on material items in ac- tract documentationdelivered within the past cordance with provisions in (Documentation regardingyear
supervisory guidelines re- a similar contract has previ- When a similar document garding the contract outline ously been delivered, thewas delivered within the and cautionary information.
customer has made clear
past year
Eg.: The contract outline is that no documentation isNote: Stages established for dictated on the statutory level, necessary, etc.)
contract process (de- while cautionary information
liverable before sign- is dictated on the cabinet ofing, deliverable within fice ordinance level.
3 months of signing) • Items covered in documents• In the case of derivative em- delivered at time of signingbedded deposits, the prior-to- policy can be adjusted in line
contract documentation must with items included in thecontain the same content as policy, etc.
the items shown in advertise- Eg.: Items regarding the typeand content of the policy canments, etc.
be omitted from the delivered
documentation if contained in
the policy, etc.
Prohibited behavior • Generally prohibited behavior • Generally prohibited behavior • Generally prohibited befor banking businessfor concluding or soliciting havior for underwriting• Concluding a contract with- purchase of insurance policy
trustsout adequate explanation nec- • Concluding a policy without • C o n c l u d i n g a c o n t r a c tessary for understanding pri- adequate explanation neces- without adequate explanaor-to-contact documentation sary for understanding prior- tion necessary for underor foreign currency deposits, to-policy documentation
standing prior-to-contract
etc., documentation
documentation
Specified investors • One type (Tokkin, etc.,• One type (Specified policy, • One type (Specified trust(contract classes)
contract)
etc.)
contract, etc.)
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
asset management contracts (banks only).
• Expanded to include emissions rights derivativetransactions (intermediary and consulting services foremissions rights trading also permitted as auxiliary
businesses).

• Business scope of securities subsidiaries expanded(full scope of financial instruments businesses).
• Scope of financial-related businesses expanded (private placements, investment advisory, asset management of funds, emissions rights trading, emissions
right derivatives trading, etc.).

Source: The FSA.

340

Chap. XVII The Securities Regulatory System

Chart XVII-2.

Enhancement of Civil Liability for Sales of Financial Products

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.

2006 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 (Art. 3, Para. 1, Items 2, 4, 6) andadded a suitability rule (Art. 3, Para. 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 (Art. 6).
The Commodity Exchange Act (currently the Commodity Futures TradingAct) 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 was prohibited and made punishable
by penalties.
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 Investment Trustand Investment Corporation Act (Investment Trust Act) was left to 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. For example,
issuing of bonds by public and other entities is approved based on the provi-

Chap. XVII The Securities Regulatory System341

sions of the Public Finance Act and the Local Government Finance Act while
deficit-covering bonds are governed by the special law of each fiscal year.
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, the Secured
Bonds Trust Act and the Enterprise Mortgage Act are separately enforced inregard to collateral. In addition, the Act on Securitization of Assets, etc. are
in place regarding the issuance of asset-backed securities.
3. Organization of the Securities Regulatory System
During the period after the war, the Securities and Exchange Law was inplace and the Securities and Exchange Commission, which was modeled after the U.S. Securities and Exchange Commission (SEC) and established as
an external bureau of the Ministry of Finance, oversaw 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 Division in the Finance Bureau of the Ministry of Finance.
Then in 1964, the Securities Bureau was established within the Ministry of
Finance. The Securities Bureau oversaw the securities regulatory system as acore entity for operating the license system for securities business operators
over a period of about 30 years under the revised Securities and Exchange
Law of 1965. During Japan’s bubble economy years, the country’s securities
market demonstrated significant growth to become one of the major markets
on a global level. On the other hand, the market came under severe criticism
for lacking openness and being 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 Organization Act)of the Prime Minister’s Office, to which the Ministry of Finance transferred
the SESC. Subsequently, with the enforcement of the Financial System Reform Act in December 1998, the Financial Supervisory Agency took over therole of overseeing the securities regulatory system. Concurrently, the Financial Reconstruction Commission, which was established around the sametime, was given the highest responsibility over the financial and securities
regulatory system.
In 2000, the Financial Supervisory Agency was reorganized as the Finan-

342

Chap. XVII The Securities Regulatory System

Chart XVII-3. Shift from Securities and Exchange Law to Financial Instruments andExchange Act
CourtsAppointment of chairman
and commissioners

Orders prohibiting or
suspending violations(Note 3)(Note 1)
Recommendation

Prime Minister

Reporting of measures taken based on

PeopleResults ofinspection
Administrative Monetary
Penalty DivisionInspection Division,
Inspection Administrator

Executive Bureau
Market Surveillance Division

Coordination Division

Supervisory bureau

Inspection bureau(Note 2)
Planning and
Coordination bureau

Prosecutor
Liaison &cooperation
Independent
regulatory agencies(Note 1)
Recommendation
Report on measures taken based onrecommendations
Policy proposal

Investigation Division

Commissioner of
the Financial
Services
Agency(Note 1)
Policy proposal

Results ofinvestigation

Minister ofFinancePublication of Annual
ReportConviction of suspect’s
guilt and filing of report

Disclosure Statements
Inspection Division

Minister for
Financial Services

Securities and Exchange
Surveillance Commission

Policy proposal

Note: Recommendations can be filed with the prime minister or the FSA commissioner. Policy
proposals can be filed with the prime minister, the FSA commissioner, or the minister ofFinance (Articles 20 and 21 of the Establishment Law).
Source: Compiled on the basis of the data drawn from the materials of the Securities and Exchange
Surveillance Commission.

cial Services Agency (FSA) to which the Ministry of Finance transferred thefinancial system planning and law drafting functions in 2001, the same year
as the Financial Reconstruction Commission was transferred to the FSA andthe SESC also became part of the FSA. Through this process, the major portion of securities regulation in Japan was consolidated into a system administered by the FSA and the SESC. And the policy on securities regulation shifted from preventative administration to regulatory violation surveillance.

Chap. XVII The Securities Regulatory System

343

While the government was formulating the Financial Instruments and Exchange Act under this new structure, the way to ensure the effectiveness ofregulations became an issue and was discussed in various venues (Achieving
Rule Enforcement, Financial System Council, announced in March 2005).
Because the architects of the former Securities and Exchange Law had designed it to be enforced mainly through criminal litigation, regulatory authorities had to proceed with caution, resulting in an insufficient degree of enforcement. Taking this experience into consideration, the formulators of the
Financial Instruments and Exchange Act aimed to reduce the degree of dependence on criminal litigation and achieve a framework in keeping with thetrend toward enforcement through surveillance. Two of the main points to beparticularly noted in the process were upgrading the monetary penalty system(revisions in 2008 included widening the scope of application was expanded
and raising monetary penalties based on a review of calculation methods) andestablishing a financial alternate dispute resolution (ADR) system.
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 an Order to Improve Business Operations to Financial Instrument
Firms and Registered Financial Institutions (Art. 51, Art. 51-2) or an order tosuspend operations or rescind their registration or approval (Art. 52, Art. 522). The FSA commissioner is also required to issue an Administrative Monetary Penalty Payment Order if certain conditions are met. Primary examples
subject to the issuance of the Administrative Monetary Penalty Payment Order include non-submission or misrepresentation of Securities Registration
Statement and other reports (Art. 172, Art. 172-2, Art. 172-3, Art. 172-4) andnon-submission or misrepresentation of the public announcement of the startof an offering or the Tender Offer Notification (Art. 172-5, Art. 172-6). When
any case of unfair trading practice is noted based on facts or circulating rumors, fraud, market manipulation, or insider trading (Art. 173, Art. 174, Art.
174-2, Art. 174-3, Art. 175), an Administrative Monetary Penalty is normallydecided through a trial procedure and based on a draft produced by examiners (Art. 178, Art. 185-6, Art. 185-7).
In addition, the following inspection authority for issuing disciplinary ac-

344

Chap. XVII The Securities Regulatory System

Chart XVII-4.

Process Leading to Issue of Administrative Monetary Penalty Payment
Order

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)
ReportExecutive 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: Assigned staff are selected by the FSA Commissioner to assert and verify the violations, etc., in thetrial proceedings. They submit preparatory documents and give evidence, etc.
Source: Financial Services Agency

tion 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.
(i) The authority to require financial instruments firms and parties executing transactions with financial instruments firms to produce or submit for inspection reports related to such operators, and similar authority over Financial Instruments Intermediary Service Providers(ii) Similar authority over Authorized Transaction-at-Exchange Operators(Foreign Securities Companies), etc.
(iii) Similar authority over public-interest organizations or parties thathave received consignment of operations from such organizations(iv) The authority to require authorized associations or issuers of OTC securities to produce or submit for inspection reports(v) The authority to require financial instruments exchanges and their subsidiaries, issuers of securities listed on respective exchanges and foreign fi-

Chap. XVII The Securities Regulatory System

Table XVII-2.

345

Major Legal Basis of Inspection and Supervision by the FSA

Financial Instruments and Exchange Act
Article 56-2
Financial Instruments Firms, etc.
Article 60-11
Authorized Transaction-at-Exchange Operators, etc.
Art. 63 Para. 8
Specially Permitted Business Notifying Persons, etc.
Article 66-22
Financial Instruments Intermediary Service Providers, etc.
Article 75
Approved Financial Instruments Firms Associations, etc.
Article 79-77
Investor Protection Fund, etc.
Article 106-16
Major Shareholders, etc. of Financial Instruments Exchanges and Their
Holding Companies
Article 151
Financial Instruments Exchange, etc.
Article 153-4
Self-Regulatory Organizations
Article 155
Foreign Financial Instruments Exchange, etc.
Article 156-5-8
Major Shareholders, etc. of Clearing Organization
Investment Trust and Investment Corporation Act
Article 22
Investment Trust Management Companies and Trustee Companies, etc.
Article 213
Investment Corporations, etc.

nancial instruments exchanges to produce or submit inspection reports(vi) The authority to require related parties of incidents subject to monetary penalties to produce or submit inspection reports
The commission members carry out their investigations within the permissible scope and when considered necessary, the commission may report thematter to the prime minister or the FSA commissioner for administrative disciplinary action (Law for Establishing the Financial Services Agency, Art.
20) and other measures.
5. Securities and Exchange Surveillance Commission
The Securities and Exchange Surveillance Commission comprises a chairman and two other committee members appointed by the prime minister withthe approval of the upper and lower houses of parliament (Law for Establishing 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
firms 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. 156-34, etc.) The commission also has the authority to demand the production or submission for inspection of reports and materials from the submitters of Securities Registration Statements or Large Shareholdings Reports and tender offers (FIEA Art.

346

Chap. XVII The Securities Regulatory System

Table XVII-3.
Business YearSESC Recommendations by Business Year (as of July 31, 2015)
92－09

2010

2011

2012

2013

2014

2015

Total

134

8

15

7

3

6

2

Falsifying Securities
Reports, etc.

30

2

4

0

0

2

1

Spreading rumors andother interventions

16

1

4

1

1

1

1

Market manipulationor price fixing

20

1

1

0

1

2

0

Insider trading

61

4

6

2

1

1

1

Others

7

0

0

4

0

0

0

Source: Materials available on the website of the Securities and Exchange Surveillance Commission

26, Art. 27-22, Art. 27-30, etc.)
Based on this process, the commission mainly carries out the following
tasks: (i) market analysis screening (daily market surveillance) involving areview of the securities trading activity of financial instruments firms; (ii) securities inspections involving wide-ranging and detailed branch inspectionsof financial instruments firms and registered financial institutions; (iii) disclosure inspections to ensure the appropriateness of disclosure by submittersof Securities Registration Statements and reports; and (iv) monetary penalty
investigations undertaken to determine whether certain behavior requiring an
Administrative Monetary Penalty Payment Order, such as unfair trading
practices or disclosure violations, has occurred. Furthermore, in the case of acriminal investigation, such as the misrepresentation of material facts in a
Securities Registration Statement or report submitted or market manipulation, officials of the commission are authorized to arbitrarily investigate byquestioning, inspecting, and keeping documents in custody (FIEA Art. 210).
In such criminal investigations, the officials also have search and seizure authority within the scope of the warrant issued by a judge (FIEA Art. 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 ofits monetary penalty investigations, the commissioner issues an Administrative Monetary Penalty Payment Order when he/she is convinced that regulations have been violated. Furthermore, when the commission is convincedthat irregularities have been committed following a criminal investigation, it
must report the case to the Public Prosecutors Office pursuant to the provision of Article 226, Paragraph (1) of the FIEA.

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, spreading of rumors
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-5.

347

Investigation of infringement cases
Insider trading (including tipping, trading recommendations and other acts),
market manipulation, spreading rumors, fraudulent means, submission offalse 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

One area that is receiving attention in recent years is business injunctions
or suspension orders (Art. 192 Para. (1)) issued by the courts based on a petition made by the SESC. In the 2008 revision of the FIEA, the Securities andExchange Surveillance Commission was given the authority to petition forthese legal actions. It first used this power to deal with a business operator
not registered as a financial instruments business operator in 2010 (Nov. 17,
Daikei Co., Ltd.). It has continued to do so (for example, SRI Brain Co., Ltd.,in August 2015).

348

Chap. XVII The Securities Regulatory System

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.
The Financial Services Agency (FSA) acknowledges the money lenders’associations, authorized payment services 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 (Art. 67-2) and recognized financial instruments firms associations designated by the prime
minister under the FIEA (Art. 78). The JSDA is currently the only approved
financial instruments firms association and its members comprise financial
instruments firms and registered financial institutions. The JSDA has in place
Articles of Association; fair, conventional regulations; board resolutions; anddispute handling rules; and its members are required to carry out 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 includes reprimand, imposition of monetary penalties, suspension or limitation of membership or expulsion, or the issuing of a formal warning (JSDA Articles of Association, Art.
28, Art. 29). Recognized financial instruments firms associations include investment trust management companies, trust companies, etc. that serve as
trustees in investment trusts without instruction by trustor, investment trust
associations with securities companies, and registered financial institutions
that purchase and sell beneficiary certificates of investment trusts as members, and Japan Investment Advisors Association having investment advisory
companies as members.
The Financial Instruments and Exchange Act (FIEA) distinguishes“stockcompany which establishes financial instruments exchange market”from“self-regulatory organization”and recognizes a“financial instruments exchange”or“its self-regulatory organization”as a self-regulatory organization
relating to the exchange market. With the authorization of the prime minister,
the self-regulation-related services of exchanges in Japan have been commissioned to Japan Exchange Regulation pursuant to Article 85 of the FIEA.
Those services include the listing and delisting of financial instruments, in-Chap. XVII The Securities Regulatory System

Table XVII-4.

349

List of Self-Regulatory Organizations Governed by FIEA (September
2015)
Rules, etc.

Organization

Financial instruments
exchange

LicensedJapan Exchange Regulation
Same as above
Nagoya Stock Exchange
Same as above
Fukuoka Stock Exchange
Same as above
Sapporo Securities Exchange
Note: JASDAQ Securities Exchange was transferred to the Tokyo Stock Exchange.
Financial Instruments
Firms Associations

Approved(Recognized)
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

Investor Protection Fund

(Recognized)

Financial Instruments
Mediation Assistance Center (FINMAC), a non-profit
organization

Source: Compiled based on data available on the website of the FSA, etc.

Table XVII-5.

Principal Regulations of the Japan Securities Dealers Association (as of
September 2015)

Self-Regulatory Regulations
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 Internal Administrators, etc. of 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 Employees of Association Members
Rules Concerning Qualification and Registration, etc., of Sales Representatives of Association
Members
Rules Concerning Distributions, etc. of Securitized Products
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 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

spections of compliance of members with laws and regulations, etc., and other measures specified by cabinet office ordinance for the purpose of ensuring
fair trading practices (Art. 84 Para. (2)). Japan Exchange Regulation’s organizational structure contains a listing examination department that screens
listing applicants for suitability; a listing compliance department that maintains and improves the quality of the financial instruments listed on the exchange; 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 disciplinary action. Under rule 34 of the Trading Participant Regulations, violations of laws or rules and regulations by participants are punishable by revocation of trading qualifications, suspension or restriction of trading, andmonetary penalties or official warnings, etc.
7. International Securities Regulations
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, implementation, and compliance of internationally recognized securities regulations. In the process of implementing reforms to the internationalrules 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. There are currently 198 member organizations,representing the regulators of 90% or more of the world’s securities markets.
The Securities Bureau of Japan’s Ministry of Finance became a regular member in 1988. The FSA succeeded the position thereafter and is a regular member at present. The Securities and Exchange Surveillance Commission also
holds membership as an associate member. In addition, the Ministry of Economy, Trade and Industry and the Ministry of Agriculture, Forestry and Fisheries that share jurisdiction over commodity futures are associate members of
the organization. Meanwhile, Japan Exchange Group, Inc. and the JSDA are
associate 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’sdocuments are important also for Japan’s securities regulators, which havetaken steps to implement policies through defining laws and self-regulatory
systems. The Financial Services Agency closely follows IOSCO trends andChap. XVII The Securities Regulatory System

Chart XVII-6.

351

IOSCO Organization Chart (as of June 2015)

Presidents Committee
Asia-Pacific Regional
Committee

Inter-American
Regional Committee

European Regional
Committee

Africa/Middle-East
Regional Committee

IOSCO Board
Task Force on Financial
Market Benchmarks
Growth and Emerging
Markets Committee

GeneralSecretariat

Assessment
Committee

Affiliate Members
Consultative Committee

Committee on Emerging Risks
Capacity Building and Resource Committee
Task Force on OTC Derivatives Regulation
Task Force on Cross-Border Regulation

Committee 1

Committee 2

Committee 3

Committee 4

Committee 5

Committee 6

Committee 7

Committee 8

Issuer accounting,auditing anddisclosure

Regulation of
secondarymarkets

Regulation ofmarketintermediaries

Enforcement
and information
sharing

Investment
management

Credit rating
agencies

Commodity
futures markets

Retail investors

Table XVII-6.

Major IOSCO Committees

Presidents Committee

Meeting once a year during the IOSCO Annual Conference, the Presidents
Committee is attended by ordinary and associate members, as well as by affiliate members in some specific cases.

The IOSCO Board

The Board oversees the entire IOSCO organization and is comprised of theregulatory authorities of 32 countries, including Japan. Surveys and discussions on policies are carried out by eight IOSCO committees: Issuer accounting, auditing and disclosure; Regulation of Secondary Markets; Regulation ofMarket Intermediaries; Enforcement and Exchange of Information; Investment
Management; Credit Rating Agencies; Commodities Derivatives Markets, andIndividual Investors.

Growth and Emerging This is the largest IOSCO committee at IOSCO, made up of 88 members. With
the goal of promoting the development and efficiency of emerging markets,
Markets Committee
the committee makes recommendations on establishing principles and minimum levels of regulation requiring compliance, the provision of educational
programs and technical support, the exchange of information, and the transfer
of technology and expertise.
Regional Committees

There are four regional committees—Africa/Middle East, Asia-Pacific, European, and Inter-American—that discuss specific issues pertinent to their own
regions.

Sources: Prepared using information from the websites of IOSCO and the FSA.

352

Chap. XVII The Securities Regulatory Systempublishes them on its web page.
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 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, theBank for International Settlements (BIS), and the Basel Committee on Banking Supervision are also members of the FSB. From Japan, the Bank of Japan, the FSA and the Ministry of Finance are participating members. According to the FSB Charter, the organization is responsible for the monitoring andassessment of vulnerabilities affecting the global financial system and for
identifying and reviewing regulations, supervisory and related actions neededto address these vulnerabilities and their outcomes. Particularly importanttasks of the FSB include the authorization of global systemically importantfinancial institutions (G-SIFI) crucial for systems that are in place across borders and the formulation of guidelines for establishing the supervisory college. The organization also examines international standards and principles
relating to the shadow banking system and other activities that have not been
subject to regulations thus far, and serves as an intermediary function to coordinate matters among related entities. The outcomes of activities of the
FSB are reported and addressed as recommendations when appropriate at theG20 summit.

APPENDIX
Chronology of Events Related to Securities(1870−2015)

Yea

Date

Event

Apr. 23, 1870 The Japanese government publicly offers 9% coupon bondson the London market (the first government bond ever to be
so offered).
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 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 Joint Stock Companies Act).
The Russo-Japanese War breaks out.

Feb.10, 1904

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).

354

APPENDIX Chronology of Events Related to Securities

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 breaks out.
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 breaks out, setting off the Second 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.

APPENDIX Chronology of Events Related to Securities

Sept. 3, 1939

355

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 Debentures, etc. is
promulgated.
Mar. 11, 1943 The Japan Securities and Exchange Law is promulgated. On
June 30, the Japan Securities Exchange is established, andthe 11 stock exchanges are abolished to become branch exchanges of the Japan Securities Exchange.
Oct. 19, 1943 Exchange Member Administration Guidelines issued; Securities Business Administration Guidelines 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

Act Concerning Adjustment, etc. of Disposal of Securities
is promulgated.

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.
Apr. 13, 1948 The Securities and Exchange Law (of 1948) is promulgated,
and it makes securities companies subject to registration.
Nov. 7, 1948

Article 65 of the Securities and Exchange Law is enforced.

Jan. 31, 1949

The GHQ announces a policy authorizing the resumption of
securities trading.

356

APPENDIX Chronology of Events Related to Securities

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

Japan Securities Dealers Association is founded.

May 16, 1949 The stock exchanges of Tokyo, Osaka, and Nagoya begin
operation.
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 Law is promulgated andenforced, 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 Security 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 being in critical condition.

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 reachthe 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.

APPENDIX Chronology of Events Related to Securities

357

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 Law 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.

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.

358

APPENDIX Chronology of Events Related to Securities

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 securities, 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 Law is enforced, and in- and outbound securities investment is liberalized, 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.
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.

APPENDIX Chronology of Events Related to Securities

359

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 trading in stock index
futures in earnest.

June 12, 1989 The stock exchanges in Osaka (the Nikkei 225); Nagoya(Option 25, on Oct. 17); and Tokyo (TOPIX) start trading
stock index 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.
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

The brokerage commission securities companies charge on
block trading is liberalized.

Oct. 1, 1994

Amendment to the Commercial Code for deregulating treasury stock purchases is enforced.

360

APPENDIX Chronology of Events Related to Securities

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 Services 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 Law is enforced, and the brokerage commission on a trade worth ¥50 million ($476,000)
or more and less than ¥1 billion ($9.52 million) is liberalized.

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 Financial System Reform Law is enforced.

APPENDIX Chronology of Events Related to Securities

361

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

The brokerage commission on stock transactions is liberalized.

Nov. 11, 1999 The Tokyo Stock Exchange launches Mothers, a market 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 Law as amended in 2000 is
promulgated, and the portion of the Securities and Exchange Law that provides for reorganizing stock exchanges
into joint stock companies is enforced on Dec. 1. The Law
Concerning the Sale of Financial Products is promulgated.
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 expires, and the blanket government guaranteeof deposits is partially lifted.

Apr. 1, 2001

The Osaka Securities Exchange reorganizes itself into a
joint stock company.

June 1, 2001

The system of electronically disclosing the contents of securities reports (EDINET), etc., 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.

362

APPENDIX Chronology of Events Related to Securities

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.
Apr. 1, 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.

June 5, 2002

The Securities Settlement System Reform Law is enacted.

Jan. 30, 2002

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.
Dec. 1, 2004

The ban on banking institutions against engaging in the securities agent 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).

Dec. 8, 2005

A trading error involving shares of the newly listed J-Com
Co. occurs. The related transactions are settled in cash forinvestors on Dec. 13.

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.
Aug. 2007

Subprime mortgage loan problem looms large in U.S. markets and spreads to European markets as well.

Sept. 15, 2008 Lehman Brothers Holdings Inc. files for protection under
Chapter 11 of the U.S. Bankruptcy Code, creating the Lehman Shock that spins the world into financial crisis.
Jan. 5, 2009

Japan implements a fully dematerialized registration system
for stocks.

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.

APPENDIX Chronology of Events Related to Securities

Feb. 4, 2010363

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.

Oct. 31, 2014 The Bank of Japan decides on additional monetary easing at
its monetary policy meeting.
Apr. 10, 2015 The Tokyo Stock Exchange temporarily recovers to the¥20,000 level for the first time in 15 years, since April
2000.
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) (http://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
Events from 1989 to 2011 are published as“Chronology of Events Related
to Securities”in“Shoken Shiryo”each year for the events of the previous
year.

INDEX

abolition of securities transaction taxes
11
Act on Sales, etc. of Financial Instruments 338
active management 256
agency commission 231
agency trading (brokerage business)
222
ALM 258
Alternative Trading System (ATS) regulations 77
Angels Taxation System 325
Aozora issues 192
approved association 240
arranger 144
arrowhead 58, 178
arrownet 180
asset formation for home-building savings 318
Asset Liquidation Law 160
asset management 215
asset management services 41
asset-backed commercial paper (ABCP)
147
asset-backed securities 145
asset-formation pension savings 318
asset securitization 215
Authorized Financial Instruments Firms
Association 219, 235, 348
balance of outstanding public securities
6bank debentures 55, 78
banking and securities joint branch offices 246
Banking Law 339
Basel regulatory standards 50
basket trading 170
Big Four 221
Big Four oligopoly 247
bond dealing 223

bond dependency ratio 7
bond futures trading 122
bond investment trusts 272
bond management, bond manager andbond management company 90, 92
bond repurchase agreements (repo) 227
Bond Underwriters Association 238
bondholders meeting 92
book-building method 86
book-entry securities eligible to strip
78
book-entry transfer system for securities
108, 176, 177
breakdown of beneficiaries of investment
trusts 278
brokerage commission 229
brokered repurchase agreement 112
build a strong shareholder base 60
business lead service 247
buy in 176
call option 128
capital increase, equity financing 46,
48
capital securities 42
capital-to-risk ratio 235
cash collateral deposited to secure the securities lent 232
CDS 139
central clearing organizations 138
circuit breaker 126, 134
Class 1 rider policy 258
Class 2 rider policy 258
classified stock 55
clearing participants 172
Click 365 126, 227
closed-end type 271
closing-price trading 170
Code of Corporate Conduct 165, 166
collateralized bond obligations (CBO)147

Indexcollateralized debt obligations (CDO)
147
collateralized loan obligations (CLO)
147
collective duty of securities companies,
organizations 236
collective investment schemes (fund)217, 227, 238, 337
commercial mortgage-backed securities
145
commissioned registered representative
220
commodity derivatives transactions
217
Companies Act 193, 201Competitive Auction 84
comprehensive business income tax
321
Comprehensive securities accounts 283
comprehensive yield 66
concurrent business 227
construction bonds 6
contract basis 232
contract for difference (CFD) transaction
227
Contractual Type (Investment Trust)269
conventional auction 84
conversion factor 122
corporate bonds 82
corporate bonds with subscription rights
92
corporate debt securities 4
corporate governance 13
corporate governance code 13
Corporate Information Memorandum
192, 202, 207
Corporate Type (Investment Corporation)270
credit default swap (CDF) 139
credit derivatives 138, 139
credit enhancement 143, 155
credit rating 88, 155
credit rating agency 88
credit-linked note 139
currency swap 225
current profit 231
Customer Base of Investment Trusts
278
customers’separate fund 241

segregated customer asset trust

365

233

dealing in bonds 244
debt 233
debt securities issued by government
agencies 82
deemed securities 3
default risk 155
defined benefit pension funds 252
defined contribution pension funds, defined contribution pension plan, defined contribution pension plan (theJapanese version of the 401 (k) plan)
252, 285, 333delisting criteria 166
delisting of securities 165
dematerialization of share certificates
44
Deposit Compensation Fund 243
derivative transactions 217, 232
Designated-Reporting Members 103
detailed prospectus 281
direct financing 1
direct offering 51
disclosure of information 293
Disclosure of Investment Trusts 280
Disclosure of Large Shareholdings 304
Disclosure Relating to a Tender Offer
304
discretionary asset management companies 259
discretionary management contract 259
discretionary investment service 229
dividend paid deduction method 321
dividends of investment trusts 230
divisor 64
Dow scaled average 64
Dutch auction 84
DVP settlement 176
early remedial measure 235, 241
ECN (Electronic Communication Network) 77
eigyo tokkin accounts 33
employee pension funds 252
engagement 263
enhancing internal credit 156
equity crowdfunding 192, 193, 194,
196, 197
erroneous orders 297

366

Index

establishment through a public offeringof shares 44
exchangeable bond (EB) 94
exchange-traded funds (ETF) 10, 273
exercise of voting rights 263
exercise price 128
external credit enhancement 156
external funds 3
externality of the order flow 58
extraordinary profit 231
Extraordinary securities report 303
fail 174
fees from investment banking customers
for the provision of information andadvice 230
financial alternate dispute resolution(ADR) 343
financial Big Bang 35
financial expenses 231
Financial Futures Association of Japan240
financial futures companies 217
financial futures trading 128, 224
Financial Futures Trading Law 217
financial indexes 225
Financial Instruments and Exchange Act
39, 193, 204, 336
financial instruments exchange 161
financial instruments firms 215, 336
Financial Instruments Firms Associations
348
financial instruments intermediary service 217
financial profit 230
Financial Reconstruction Commission
342
financial report, financial report (full version) 283
financial results 306
Financial Services Agency (FSA) 341
Financial Stability Board (FSB) 350
Financial Stability Forum (FSF) 352
Financial Supervisory Agency 341
Financial System Reform Law 35, 280,
341
firewall 246
fiscal agent 90
Fiscal Investment and Loan Program(FILP) bonds 80, 85

floor auction 168
Foreign Exchange and Foreign Trade
Control Law was amended (the new
Foreign Exchange Control Law) 21
foreign exchange margin transactions(FX transactions) 128, 225
foreign investment trusts 285
Forms of Investment Trusts 269
forward contract 122
fragmentation of the market 77
full deregulation of brokerage commissions 229
funds for professionals (business operations specifically permitted for qualified institutional investors) 338
futures contracts 122
Futures Trading 120
general account 256
General and Administration Division238
general investors 338
gensaki buy transaction 112
gensaki sell transaction 112
government 6
Government Pension Investment Fund(GPIF) 8
government debt securities 78, 82
government-guaranteed bonds 85
Greek sovereign debt problem 39
Green Sheet 202, 204
Green Sheet issues 202, 204, 206
Green Sheet System 54, 191, 192, 198,
202, 204, 206, 209
greenshoe option 52
group transactions 20
growth potential 66
handled securities 202
HFT 41high-yield bonds 88
History of Investment Trusts 267
hollowing out of the financial market
34
IFRS (International Financial ReportingStandards) 311
imputation system 321
incidental business 216, 227
incorporators only establishment 44

Indexincrease authorized capital 46
increase of capital 3
independent management 256
Independent Securities Companies 248
indirect financing 1
indirect offering 51
indirect security 1
individual issues 112
inducement of insider trading 293
Information Disclosure System 300
information processing systems 297
insider trading 210
installation of a firewall 246
Institutional Reform Law 33, 244
Insurance Business Act 339
inter-market competition 39
internal funds 3International Organization of Securities
Commissions (IOSCO) 233, 350
Internet trading 227
investable custody 21
Investment Advisory and Agency Business 215, 336
investment advisory business 217
investment banking services 229
investment certificates 270
Investment Corporation 270
Investment Management Business 215
Investment Management of Investment
Trusts 275
investment management service providers 229
Investment Trusts Association, Japan
240, 275, 278, 348
investment trust with investment instructions 269
investment trust without instruction
269
Investment Trust Wrap Accounts 283
investment trust 265
investment-grade bond 88
Investor Protection Fund 241
Issuance Disclosure 302
issue market 1
issuing new shares 46
issuing of public stock offerings at market price 50
Itayose method 168, 169
its self-regulatory organization 348

367

J-Adviser system (approved adviser system) 210
Japan Exchange 348
Japan Exchange Regulation 348
Japan Investment Advisers Association
240, 259, 348
Japan Investor Protection Fund 243
Japan Joint Securities 24
Japan Securities Dealers Association(JSDA) 219, 235, 348
Japan Securities Exchange 18
Japan Securities Holding Association
24
Japanese-style employment system 249
Japan-U.S. Yen/Dollar Committee Report
29
JASDAQ 186
JASDAQ Growth 186
JASDAQ market 191
JASDAQ Standard 186
J-GATE 180
joint banking and securities businesses
247
joint stock company 42
joint visits 246
jointly offered local government bonds
78
JPX-NIKKEI 400 Index 66
Junior NISA 327
junk bonds 88
Law Concerning Investment Trusts andInvestment Corporations (Investment
Trust Law) 265, 340
Law Dealing with the Bankruptcy of Financial Institutions 241
Law for Establishing the Financial Services Agency 345
Law for Regulating the Securities Investment Advisory Business (Investment
Advisor Law) 217
lead manager 51
lending transaction 72
liability reserve 256
licensing system 215
limit order 168
liquidation of the zaibatsu 60
Listing Management System 165
listing requirements 163
loans against the collateral of securities

368

Index

232
loan to facilitate margin trading 232
long-term government bonds 79
loss compensation 34
M&A 215, 222
management and underwriting fees 229
managing securities companies 85
managing underwriter 224
margin trading 26, 70, 136, 227
margin transactions 120
market administration 235
market information system 177
market manipulation 291
market orders 168
Maruyu for handicapped persons, etc.
317
massive issuance of deficit-covering Japanese government bonds 27
medium-term government securities 79
Mega-Bank Securities Subsidiaries 248
method of dividend-received deductions
321
mezzanine securities 143
money received for margin trading 233
Mothers 184
municipal bonds 78, 82, 84
municipal bonds targeting local residents
78
My Number System 316
nationally placed municipal bonds 78
negotiable margin transactions 73
net operating income 231
netting 172
new gensaki transactions 115
new share subscription rights 46
New York Stock Exchange Composite
Index 66
Nikkei 225 64
Nikkei 225 mini 225
NISA 10, 327
no par value stock 42
non-clearing participants 172
Non-price Competitive Auction 84
Notifying Financial Instruments Firm
242
OECD Principles of Corporate Governance 13

off-floor trading system (ToSTNet) 170
online brokerage 215
online brokers 231
online brokers for FX transactions 227
open-end type 271
open-type (investment trust) 273
operating profit 231
operating revenue 231
options Trading 128
originator 143
OTC derivatives business 225
OTC derivative trading 224
OTC-handled securities 193, 194
OTC securities 190, 192, 193, 194,
196, 197
OTC securities market 191
OTC stock market 190
OTC trading 98
OTC transactions 200, 206
Other fees and commissions 231
outline of the capital-to-risk ratio 234
over-allotment option 53
panic in the securities market 28
par value stock 42
participate in the management of thecompany 42
passive management 256
pension plan 252
PER 68Periodic Disclosure 283
permanent establishment 331
Phoenix Issue System 191, 208, 209
Phoenix issues 193, 203, 204pooled asset management 256
pre-marketing 85
price book value ratio (PBR) 70
price/cash flow ratio (PCFR) 68
primary security 1
private companies, private equities 53
Private Placement of Investment Trusts
271
private placement 51
privately placed bonds 80
professional investor market system
210
professional investors 338
programs can be listed 214
Prohibited and Regulated Acts 289
proprietary repurchase agreement 112

Index

proprietary trading (dealing) 222
Prospectus 281
PTS (proprietary trading systems) 41,
56, 77, 224
PTS services 224
public bond 87
public finance 5
Public offering 51
public offerings (distribution of securities) 222
public offerings and secondary distributions 229
public offerings of stock at market prices
27
public stock offering 50
Public Offering of Investment Trusts
271
publicly offered municipal bonds 82
purchasing the excess shares in the secondary market (syndicate cover) 53
put option 128
Qualified Institutional Investor
242

240,

real estate investment trusts (REIT)
145, 153, 269
reason for buying investment trusts 280
Recognized Financial Instruments Firms
Association 240, 348
refusal of registration (＝registration requirements) 216
regional associations 237
Regional Bank-Affiliated Securities
Companies 246
registered financial institution 217, 244
registered representative qualifications
238
registration of registered representatives
238
registration requirements for Financial
Instruments Intermediary Service Providers 217
regulations for securities companies
295
regulations on conduct of business by Financial Instruments Intermediary Service Providers 217
Reporting and Announcement of Bond
Transaction Information 104369

requires notification 229
requiring securities companies to manage
their customer assets separately 241
residential mortgage-backed securities(RMBS) 145
restrictions on the scope of business
246
retail 247
Right to bring representative suit 43
Right to claim dividend of surplus 43
Right to demand distribution of residual
assets 43
Rights for common interest 43
Rights for personal interest 43
rights offering 338
Rights offering, rights offering at par toraise equity capital issues to existing
shareholders at par value 27, 45, 48
RMBS issued by the Japan Finance
Housing Agency 153
S&P500 66
secondary distribution 224
sale of foreign investment trusts in Japan
285
Sale of Investment Trusts 273
sales of investment trust beneficiary certificates 238
Scope of Business of Financial Instruments Intermediary Service Providers
217
Scope of Business of Securities Companies (Type I Financial Instruments
Business), and Requirements 216
security 1
Securities and Exchange Commission
341
Securities and Exchange Law 191, 193,
204
Securities and Exchange SurveillanceCommission (SESC) 341, 345
Securities Bureau of the Ministry of Finance 341
securities business 215
securities business registration system
215
securities companies 1, 215, 220
Securities Dealers Association 235
securities derivatives 225
securities finance company 72

370

Index

securities intermediary service 217
securities investment trusts 275
Securities Investors Protection Fund243
securities lending and borrowing 227
Securities Notification Statement 53
Securities Registration Statement 193,
281
Securities report 192, 303
Securities Strategy Division 238
securities-related businesses 222
Self-Regulation Division 238
self-regulatory 161
self-regulation 235
Self-Regulatory Organizations 348
selling and administrative expenses
230
selling group 51
selling public bonds over the counter244
senior securities 143
senior/subordinated structure 141
sensitive corporate information 297
servicer 143
Services and Products Based on Investment Trusts 283
settlement guarantee 172
Shareholder Community 192, 193, 198,
199, 200, 201, 202, 204
shareholder community issues 200,
201, 202
short-term government bonds 79
Shoup recommendation 313
simple average of the stock prices 64
single-stock trading 170
small and midsize securities companies
220
special account policies 256
special brokerage account system 323
special bonds 80
special financial contract 88
Special Financial Instruments Business
Operators 234
special government bonds (deficit-financing) 6
special Maruyu for handicapped persons,etc. 317
special members 238
special-purpose company (SPC) 143
Special-Purpose Company (SPC) Law

158
special-purpose vehicle (SPV) 141
specific-purpose trust (SPT) 145
specified assets 275
spread pricing 86
standardized margin transactions 73
standards on the selection of foreign investment trusts 287
statutory disclosure 300
Stewardship Code (Japanese version)
13, 263
stock dividends 50
Stock Index Futures Trading 124
stock installment payment system 16
stock investment trust 272
stock lending 227
stock options 333
stock split 39, 48
strategy of forming a network of affiliated small and midsize securities companies 221
structured bonds 92, 224
subordinated securities 143
subprime loan 39
sub-underwriting 224
Suitability Principle 295, 340
summary financial report 281
Summary Prospectus 281
superlong-term government bonds 79
Supplementary documents to be filedwith a shelf-registration statement
303
syndicates 82
tangen-kabu system 44
tax credits for dividends, dividend tax
credit system 318, 321
Third party allotment 48
Three Principles of Market Operation
21
timely disclosure of material corporate
information 165
TMK bonds 151
tokutei mokuteki kaisha (TMK, or a specific-purpose company) 143
TOKYO PRO Market 210
TOKYO PRO-BOND Market 212
Tokyo Financial Futures Exchange 227
Tokyo Stock Exchange 56
TOPIX 66

Index

total net assets of foreign investment
trust 287
total return swaps 139
trading account 232
trading in bonds with options 130
trading market 1
trading income 229
trading securities 233
tranche 143transfer instructions 172
Trust Business Act 338
two types of internationalization 29
Type I Financial Instruments Business
215, 336
Type II Financial Instruments Business
215, 238, 336
Type II Financial Instruments Firms Association 240

371

underwriting 224
underwriting syndicate 51, 85
underwriting to be listed on exchanges
223
Unfair Trading 290
par value stock 42
unit-type (investment trust) 273
unlisted stock transactions 338
Variable Annuities

272

wholesale 247
wholesale underwriting 224
wrap account 228, 229
yield revolution

66

Zaraba method

168

2016

Securities Market in Japan 2016

Securities
Marketin Japan

Securities
Marketin Japan
2016

JAPAN SECURITIES RESEARCH INSTITUTE