2014

Securities Market in Japan 2014

Securities
Marketin Japan

Securities
Marketin Japan
2014

JAPAN SECURITIES RESEARCH INSTITUTE

Securities
Marketin Japan
2014

JAPAN SECURITIES RESEARCH INSTITUTECopyright © 2014 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 2014 edition of The Securities Markets in Japan: An Illustrated
Guide. Robert R. Hamilton, the president of Mediator Corporation, provided
the translation and rewriting of the revised sections, and Howard Brandt, of
H. Brandt Editorial Consulting, handled proofreading and some light editing.
We are also grateful for the cooperation of the authors of the Japanese-language original to The Securities Markets in Japan: An Illustrated Guide inverifying the content of the English translation.
Seldom has there been a period where the function and role of securities
markets have been more in the spotlight. Following the Lehman Shock, orwhat could be better called the runaway market crisis, and the sovereign debt
crisis in Europe, the financial anxiety in markets provided an opportunity for
the world to fundamentally rethink the relationships between markets and financial systems and governments. In recent years, moreover, the impact of
the aggressive monetary easing policies of central banks on financial markets
has been very much in the public eye. To understand such trends in financial
and capital markets, it is essential to understand the systems and functions of
the securities markets, including their regulatory and historical background.
Partially because of the beneficial effects of the government’s so-called
Abenomics economic policies, Japan is emerging from its prolonged periodof economic stagnation and recovering some of its vitality. Recently, foreign
investors have shown rekindled interest in Japan’s securities markets. Amongother positive signs, the number of initial public offerings (IPOs) and thestock trading value of individual investors are on the rise. Additional signs ofchanging times include the steady and pervasive advance of IT systems andthe emphasis on corporate governance.
Japan’
s securities trading systems have evolved and expanded since thepassing of the Financial Instruments and Exchange Act (FIEA) in 2006. FIEA
provides for the comprehensive regulation of investment activities in Japan’sfinancial markets. And adjustments to market systems have come throughsuccessive reforms of FIEA and other measures to keep up with the changes
in financial and capital markets, corporate activities, and other influences.
Since the publishing of the 2012 version of this book, a variety of adjustments have been implemented in the regulatory framework, including establishing systems to support an integrated stock exchange, initiating major reforms to insider trading regulations, upgrading the monetary penalty systemfor violations, and revising the Investment Trust and Investment Corporation
Act.
There also have been major movements on more visible fronts. In January
2014, the Tokyo Stock Exchange Group, Inc., and the Osaka Securities Exchange Co., Ltd., merged their operations, giving birth to the Japan ExchangeGroup, Inc. (JPX). The JPX is integrating its markets and implementing strategies for Asian and other markets. In the asset management market, the government introduced a preferential tax treatment investment system to promote asset formation through investment by individuals. The Nippon
Individual Savings Account (NISA) came into effect in January 2014.
Establishing securities markets with high usability and vitality is an urgent
task to ensure the viability of Japan’s economy. It is our hope 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 findthis book a useful reference.
June 2014

MANABU MORIMOTO
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. Mergers and Acquisitions (M&A) ............................................

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 .....................................

15
17
19
22
25
27
30
32
35
37

CHAPTER III The Stock Issuing Market
1. New Issues of Stocks in the Primary Market ............................. 40
2. Forms of Issuing Shares ............................................................. 42
3. Procedures for Issuing New Shares ........................................... 44
4. The Current State of New Issue Market .................................... 46
5. New Shares Underwriting ......................................................... 48
6. Private Equity Market ................................................................ 50
CHAPTER IV The Stock Trading Market
1. The Structure of the Stock Trading Market ...............................

53

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........................................................................

55
57
59
61
63
65
67
70
72
75
77
79
82
85
87
90

CHAPTER VI The Secondary Markets for Bonds
1. Trading of Bonds ....................................................................... 92
2. Participants in the Secondary Bond Market............................... 94
3. OTC Bond Market Trading ....................................................... 96
4. Publication of Reference Prices for OTC Bond Trading ........... 98
5. Book-Entry Bond Transfer System ............................................ 99
6. Secondary Market Yields and Terms of Bond Issues................. 103
7. Gensaki Market for Bonds (1) ................................................... 105
8. Gensaki Market for Bonds (2) ................................................... 108
9. Bond Lending............................................................................. 110
CHAPTER VII The Derivatives Market
1. Futures Trading .......................................................................... 113
2. Bond Futures Trading ................................................................ 115
3. Stock Index Futures Trading ...................................................... 117
4. Financial Futures Trading .......................................................... 119
5. Options Trading ......................................................................... 121
6. Bond Options Trading ............................................................... 123
7. Stock Index Options Trading ..................................................... 125
8. Securities Options Trading......................................................... 127
9. OTC Derivatives Trading .......................................................... 129
10. Credit Derivatives Trading......................................................... 131

Contentsv

CHAPTER VIII The Securitized Products Market
1. Securitized Products................................................................... 134
2. Basic Mechanism of Issuing Securitized Products .................... 136
3. Description of Major Securitized Products ................................ 137
4. The Size of the Market ............................................................... 140
5. New Issue Market for Securitized Products............................... 142
6. Secondary Market for Securitized Products .............................. 144
7. New Issue and Secondary Markets for the Beneficiary
Certificates of Real Estate Investment Trusts ............................ 146
8. Risks and Credit Enhancement of Securitized Products ............ 148
9. The Enactment of Securitization-Related Laws ........................ 151
CHAPTER IX The Financial Instruments Exchanges (1)1. The Function of the Financial Instruments Exchanges ............. 154
2. The Listing System .................................................................... 157
3. The Listing Management System .............................................. 159
4. The Stock Trading System (1) ................................................... 160
5. The Stock Trading System (2) ................................................... 163
6. The Clearance and Settlement System (1) ................................. 165
7. The Clearance and Settlement System (2) ................................. 167
8. The Book-Entry Transfer System for Stocks, Etc. .................... 168
9. System Development at Financial Instrument Exchanges (1) ... 170
10. System Development at Financial Instrument Exchanges (2) ... 172
CHAPTER X The Financial Instruments Exchanges (2)1. The Evolution of the Start-up Market ........................................ 175
2. Start-up Market Concepts .......................................................... 177
3. Start-up Market Listing Systems ............................................... 179
4. The Listing Administration System ........................................... 181
5. An Outline of the OTC Stock Market ........................................ 183
6. OTC Securities, Etc. .................................................................. 184
7. The Green Sheet System (1) ...................................................... 187
8. The Green Sheet System (2) ...................................................... 189
9. The Green Sheet Issue System (3) ............................................. 192
10. Phoenix Issue System ................................................................ 194
11. Professional Investors Markets—TOKYO PRO Market ........... 195
12. Professional Investors Markets—TOKYO PRO-BOND Market.................................................................................................... 197
CHAPTER XI Prohibited and Regulated Acts of Securities Trading
1. Introduction ................................................................................ 200
2. Regulation of Market Manipulation........................................... 202

vi

Contents

3. Prohibited and Regulated Acts of Corporate Insiders ................ 203
4. Prohibited and Regulated Acts for Financial Instruments Firms(Securities Companies) and Their Employees, Officers, andDirectors..................................................................................... 206
CHAPTER XII Financial Instruments Business (Securities Business)
1. Overview of Financial Instruments Firms(Securities Companies) (1) ........................................................ 209
2. Overview of Financial Instruments Firms(Securities Companies) (2) ........................................................ 211
3. Overview of Financial Instruments Firms(Securities Companies) (3) ........................................................ 214
4. Securities Businesses (1)—The Principal Businesses (1) .......... 217
5. Securities Businesses (2)—The Principal Businesses (2).......... 219
6. Securities Businesses (3)—Incidental Business, Concurrent
Business, and Other Businesses ................................................. 221
7. Revenue and Expenditure of Financial Instruments Firms(Securities Companies) .............................................................. 224
8. Financial Condition of Financial Instruments Firms(Securities Companies) .............................................................. 227
9. Financial Instruments Firms Associations (1)............................ 230
10. Financial Instruments Firms Associations (2)............................ 233
11. Investor Protection Fund ............................................................ 235
12. The Securities Business of Banking Institutions ....................... 238
13. The Competitive Landscape of the Securities Industry ............. 242
CHAPTER XIII Asset Management Service
1. Investment of Individual Financial Assets ................................. 245
2. Pension Fund Management ........................................................ 247
3. Asset Management of Trust Banks ............................................ 249
4. Asset Management of Life Insurance Companies ..................... 251
5. Asset Management of Discretionary Asset Management
Companies.................................................................................. 253
6. Asset Management of Investment Trusts ................................... 256
CHAPTER XIV Investment Trusts
1. Summary .................................................................................... 259
2. History of Investment Trusts...................................................... 261
3. Forms of Investment Trusts ....................................................... 263
4. Investment Trust Products.......................................................... 265
5. Sale of Investment Trusts ........................................................... 267
6. Investment Management of Investment Trusts .......................... 269

Contents

7.
8.
9.
10.

vii

Customer Base of Investment Trusts ......................................... 272
Disclosure of Investment Trusts................................................. 273
Services and Products Based on Investment Trusts ................... 274
Foreign Investment Trusts.......................................................... 277

CHAPTER XV The Information Disclosure System
1. The Information Disclosure System in the Securities Market ... 279
2. The System of Disclosing Corporate Information under the
Financial Instruments and Exchange Act ................................... 281
3. Other Disclosures to Be Made under the Financial Instruments
and Exchange Act ...................................................................... 283
4. Timely Disclosure System of Financial Instruments Exchanges(The Stock Exchanges) .............................................................. 285
5. Electronic Disclosure ................................................................. 288
6. Recent Moves of Information Disclosure .................................. 290
CHAPTER XVI Securities Taxation
1. Transitions in Securities Taxation (1) ........................................ 292
2. Transitions in Securities Taxation (2) ........................................ 294
3. Taxation on Interest.................................................................... 296
4. Taxation of Dividends ................................................................ 299
5. Adjustment of Double Taxation Relating to Dividends ............. 301
6. Capital Gains Taxation (1) ......................................................... 302
7. Capital Gains Taxation (2) ......................................................... 304
8. Taxation of Nonresidents ........................................................... 306
9. Taxation of New Products .......................................................... 308
10. Tax Treatment of Pension-Type Products .................................. 311
CHAPTER XVII The Securities Regulatory System
1. Applicable Laws (1)—The History of the Securities andExchange Law ............................................................................ 314
2. Applicable Laws (2)—Shifting to the Financial Instruments
and Exchange Act ...................................................................... 316
3. Applicable Laws (3)—Securities Market Related Laws andRegulations ................................................................................ 318
4. Enforcement (1)—Transitions in the Regulatory Framework.................................................................................................... 321
5. Enforcement (2)— Financial Services Agency.......................... 323
6. Enforcement (3)—Securities and Exchange SurveillanceCommission ............................................................................... 324
7. Enforcement (4)—Self-Regulatory Organizations .................... 327
8. Enforcement (5)—International Securities Regulations ............ 329

viii

Contents

APPENDIX Chronology of Events Related to Securities .................. 332
INDEX....................................................................................................... 339

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 (at June 30, 2013) ...........................................
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 .............................................
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 Changes in Assets of Stock Investment Trusts and Bond
Investment Trusts (Principal basis) ......................................
II- 5 Categories of Investible Custody Securities andInvestment Uses ...................................................................
II- 6 Changes in Number of Securities Companies ......................
II- 7 Changes in Stock Ownership Among Investor Categories ..
II- 8 Stock Trading Composition by Investor Category ...............
II- 9 Establishment of Securities Subsidiaries of Banking
Institutions ............................................................................
II-10 Schedule for Reforming the Securities Market During the
Big Bang ...............................................................................
CHAPTER III
III- 1 Recent Amendments to the Commercial Code Relating to

2
4
7
9
9
10
11
11
17
17
18
20
21
24
24
29
31
34

x

List of Tables

III- 2
III- 3
III- 4
III- 5
III- 6
III- 7

Equity Financing ..................................................................
Forms of Issuing New Shares...............................................
Funds Raised by Equity Financing.......................................
The State of Issuing New Shares by Listed Companies.......
Number of Lead Managers in Underwriting Shares of
Securities Companies (IPOs) ...............................................
Criteria for Requirement to Submit Securities Registrationor Notification Statements Under the Financial Instruments
and Exchange Act and Cabinet Office Ordinance ................
Green Sheet Issue Designations ...........................................

CHAPTER IV
IV- 1 Trading Volumes of Major Stock Exchanges and the
OTC Market .........................................................................
IV- 2 Stock Split-ups and Changes in Divisor ...............................
IV- 3 Earnings Ratio of the First Section of the TSE(by investment periods and weighted average %) ................
IV- 4 Calculation for PER, PBR, PCFR ........................................
IV- 5 Comparison of Standardized and Negotiable Margin
Transactions..........................................................................
IV- 6 Annual Trading on PTS of Stocks Listed on Financial
Instruments Exchanges (Trading Value)...............................
CHAPTER V
V- 1 The Value of Bonds Issued ...................................................
V- 2 Categories of Government Securities (Notes 1 to 4)............
V- 3 Brief History of Matters Relating to the Corporate Bond
System Reform .....................................................................
V- 4 Definitions of Credit-Rating Symbols..................................
V- 5 Corporate Bonds Offering Amounts by Ratings ..................
V- 6 Appointment, Power, and Liability of the Bond Manager
under the Companies Act .....................................................
V- 7 Kinds of Structured Bonds ...................................................

41
41
43
47
49
51
52

56
60
64
66
70
73
78
80
83
86
87
88
91

CHAPTER VI
VI- 1 The Scale of Bond Purchasing and Selling .......................... 93
VI- 2 The Value of Purchasing and Selling, by Type of Bond....... 93
VI- 3 Trends in Bond Transactions, by Type of Transaction
Parties ................................................................................... 95
VI- 4 Bond Trading by Market ...................................................... 97
VI- 5 Breakdown of Major Bond Categories, by Outstanding
Balance and Number of Issues ............................................. 97

List of Tables

VI- 6
VI- 7
VI- 8
VI- 9
VI-10
VI-11
VI-12

xi

The System of Reference (Yields) Table for OTC Bond
Quotations ............................................................................ 99
History of the Program for Publishing Reference Prices(Yields) for OTC Bond Transactions ................................... 100
Bonds under Custody and Book-Entry Transfer Volume ..... 102
Reforms of Bond Delivery and Settlement System.............. 103
Turnover and Balance of Repurchase Agreements .............. 106
Balance of Repurchase Agreements, by Major Investor
Groups .................................................................................. 107
The Balance of Bond Lending Transactions, by Types ofCollateral (on the basis of delivery and face values)............ 111

CHAPTER VII
VII- 1 Years in Which Major Financial Futures of the World Were
Listed .................................................................................... 114
VII- 2 The Trading Mechanism of Bond Futures............................ 116
VII- 3 Trading in Bond Futures....................................................... 116
VII- 4 The Trading Mechanism of Stock Index Futures ................. 118
VII- 5 The State of Trading in Stock Index Futures........................ 118
VII- 6 The Trading Mechanism of Financial Futures ..................... 120
VII- 7 Financial Futures Trading..................................................... 121
VII- 8 Years in Which Major Financial Options of the World
Were Listed........................................................................... 122
VII- 9 The Trading Mechanism of Bond Options ........................... 124
VII-10 Trading in Bond Options ...................................................... 125
VII-11 The Trading Mechanism of Stock Index Options ................ 126
VII-12 The State of Trading in Stock Index Options ....................... 127
VII-13 The Trading Mechanism of Securities Options .................... 128
VII-14 Trading in Securities Options ............................................... 128
VII-15 OTC Trading in Securities Derivatives ................................ 130
VII-16 Credit Derivatives Trading in Japan ..................................... 132
CHAPTER VIII
VIII- 1 Classification of SPVs .......................................................... 138
VIII- 2 Features of Major Securitized (or Similar) Products............ 139
VIII- 3 Changes in Composition of Collateralized Assets, etc. ....... 141
VIII- 4 The Listing Requirements of the Tokyo Stock Exchange .... 147
VIII- 5 Statistics Relating to REITs Listed on the Tokyo Stock
Exchange .............................................................................. 147
VIII- 6 Main Credit Enhancing Measures ........................................ 149
VIII- 7 Typical Risks of ABS ........................................................... 150
VIII- 8 Chronology Relating to the Securitization of Assets............ 152

xii

List of Tables

CHAPTER IX
IX- 1 The Listing Requirements of the Second Section of theTokyo Stock Exchange ...........................................................158
IX- 2 Outline of Tokyo Stock Exchange’s Code of Corporate
Conduct ................................................................................ 160
IX- 3 Criteria for Delisting Stocks (the Tokyo Stock Exchange) .. 161
IX- 4 Methods of Concluding Transactions ................................... 162
CHAPTER X
X- 1 History of the JASDAQ Market ........................................... 176
X- 2 History of the Mothers Market ............................................. 176
X- 3 Listing Criteria for the Mothers and JASDAQ Markets ...... 180
X- 4 Criteria for Delisting Stocks (Tokyo Stock Exchange) ........ 182
X- 5 A Brief History of the OTC Market ..................................... 185
X- 6 Comparison of the Total Market Capitalization(as of the end of September 2013)........................................ 188
X- 7 Recent Business Results and Dividends of Emerging andOrdinary Issues ..................................................................... 190
X- 8 Comparison of the Green Sheet Issue and Phoenix Issue
Systems................................................................................. 195
X- 9 Comparison of TOKYO PRO Market’s and Other
Markets’Listing Standards ................................................... 196
X-10 Comparison of Disclosure Systems for TOKYO
PRO-BOND Market and Other Japanese Bond Markets ..... 199
CHAPTER XI
XI- 1 Main Provisions Relating to the Ban on Unfair Trading ...... 201
XI- 2 Provisions of the Financial Instruments and Exchange Act
Relating to Market Manipulation ......................................... 203
XI- 3 An Outline of the Targets of Regulations, Materials Facts,
Methods of Announcement Relating to the Regulation of
Insider Trading ..................................................................... 205
CHAPTER XII
XII- 1 The Scope of Business of Securities Companies (Type I
Financial Instruments Business), and Requirements............ 210
XII- 2 The Number of Securities Companies and Their Capitaland Employees ..................................................................... 214
XII- 3 Changes in the Number of Domestic Securities
Companies through New-Entry Mergers andDiscontinuation of Business ................................................. 215
XII- 4 No. of Securities Companies, by Capitalization................... 215

List of Tables

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

XII-17
XII-18
XII-19
XII-20
XII-21
XII-22
XII-23xiii

Business Volume Handled by TSE Member Companies .... 218
PTS Transactions .................................................................. 219
OTC CDF Transactions on Securities .................................. 221
Ranking of Advisors on Published M&As Involving
Japanese Companies (January－June 2013) ........................ 222
Number of Wrap Accounts and Assets Under
Management ......................................................................... 223
Revenue and Expenditure of General Trading Participantsof TSE................................................................................... 225
Major Accounts of Securities Companies (253 companies)
as of the end of March 2013 ................................................. 228
Capital-to-Risk Ratios of Trading Participant Membersof the TSE (97 companies as of the end of June 2013) ........ 229
An Outline of the Risk-to-Capital Ratio Requirements forType I Financial Instruments Firms (Securities companies).............................................................................................. 229
Orders Issued on the Basis of the Primary Capital Ratio toTake an Early Remedial Measure ......................................... 230
Principal Functions of the Japan Securities Dealers
Association ........................................................................... 231
Permissible Forms of Business by Registered
Representatives (JSDA Rules: Article 2, Regulations
Concerning Qualification and Registration, etc., of Sales
Representatives of Association Members) ........................... 232
Numbers of Registered Financial Instruments Firms andRelated Financial Instruments Firms Associations .............. 234
Investors Eligible for Compensation, Compensation
Procedures, and Sources of Funds of the Investor
Protection Fund .................................................................... 236
An Outline of the Investor Protection Fund ......................... 237
Balance of Investment Trusts, by Seller(as of Sept. 30, 2013) ........................................................... 239
Firewall between Parent Bank/Banking Subsidiary andSecurities Subsidiary/Parent Securities Company(Article 44-3, FIEA) ............................................................. 240
Banking and Securities Joint Branch Offices and Financial
Instrument Intermediary Business of the Three Largest
Financial Groups .................................................................. 241
Benefits of Collaboration of Mizuho Bank and Mizuho
Investors Securities .............................................................. 241

xiv

List of Tables

CHAPTER XIII
XIII- 1 Outline of Nippon Individual Savings Account (NISA) ...... 246
XIII- 2 Asset Composition ............................................................... 252
XIII- 3 Composition of Securities under Management .................... 252
XIII- 4 Country and Regional Allocation of Assets Under
Management ......................................................................... 255
XIII- 5 Trends in the Liberalization of Investment Trust
Regulations in Japan............................................................. 257
CHAPTER XIV
XIV- 1 History of the Investment Trust in Japan ............................. 262
XIV- 2 Total Net Assets of Foreign Investment Trusts in Japan(¥100 million) and Their Ratio to Total (public offering)
Investment Trusts ................................................................. 278
CHAPTER XV
XV- 1 Disclosure Systems under the Commercial Code and under
the Financial Instruments and Exchange Act ....................... 280
XV- 2 Statutory Disclosure Documents Required to be Filed ........ 282
XV- 3 Transitions in Tender Offer Bid (TOB) System ................... 284
XV- 4 The Tender Offer Process ..................................................... 285
XV- 5 The Flow of a 5% Shareholding Report ............................... 286
XV- 6 Main Points of Corporate Information Required by Timely
Disclosure (in the case of the Tokyo Stock Exchange) ........ 287
XV- 7 Outline of the Written Confirmation Statements andReports ................................................................................. 291
CHAPTER XVI
XVI- 1 Securities Taxation Evolution Timeline (1949－2002) ......... 293
XVI- 2 Securities Taxation Evolution Timeline (Since 2003) .......... 294
XVI- 3 Outline of Taxes on Dividends and Capital Gains andLosses from Listed Stocks, etc. ........................................... 295
XVI- 4 Outline of Nippon Individual Savings Account (NISA) ...... 295
XVI- 5 Interest Taxation System ...................................................... 297
XVI- 6 The Status of Taxation on Interest Income, Etc. (2011) ....... 298
XVI- 7 An Outline of Dividend Income Taxation ............................ 299
XVI- 8 Taxation of Dividend Income (withheld at source) (2011).............................................................................................. 300
XVI- 9 Outline of the Capital Gains Taxation System for Stocks,
Etc. ....................................................................................... 302
XVI-10 Outline of Matters Related to Taxation of Nonresidents,
Etc. ....................................................................................... 307

List of Tables

XVI-11
XVI-12
XVI-13xv

New Taxation Framework for Investment Trusts ................. 309
Taxation on Stock Options ................................................... 309
Tax Treatment of Defined Contribution Pension Plans ........ 312

CHAPTER XVIIXVII- 1 Major Amendments to the Securities and Exchange Law.... 315
XVII- 2 Banking Act, Insurance Business Act, and Trust BusinessAct ........................................................................................ 319
XVII- 3 FY2013 Administrative Monetary Penalty Payment Orders(At November 28, 2013) ...................................................... 325
XVII- 4 SESC Recommendations by Business Year
(At November 30, 2013) ...................................................... 326
XVII- 5 SRO Disciplinary Action (TSE and the JSDA) from FY2005
to FY2013 ............................................................................. 328
XVII- 6 Major IOSCO Committees ................................................... 329
XVII- 7 Major Areas Addressed by IOSCO Public Documents ........ 330

LIST OF CHARTSCHAPTER I
I- 1 Changes in the Balance of Outstanding Public Securities
and the Degree of Dependence on Public Securities............
I- 2 Classification of Mergers and Acquisitions..........................
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 ......................
CHAPTER III
III- 1 Equity Financing in 1989 by TSE-Listed Companies,
by Type of Financing (Total capital procured : ¥8,529.39
billion) US$=102.50 yen ......................................................

6
13

16
16
18
20
23
26
26
28
28
30
33
35
36
38
38

45

List of Charts

xviiIII- 2 Equity Financing in 2012 by TSE-Listed Companies,
by Type of Financing (Total capital procured : ¥1,908.9
billion) US$=102.50 yen ......................................................

45

CHAPTER IV
IV- 1 Inter-market Competition in Japan .......................................
IV- 2 Trading Volume, by Stock Exchanges (2011) ......................
IV- 3 Changes in the Ratio of Shares Held by Different
Categories of Investors .........................................................
IV- 4 Ratios of Cross-Shareholdings .............................................
IV- 5 Stock Price and Capital Increase of Toray Industries...........
IV- 6 Changes in the TOPIX and Trading Volume ........................
IV- 7 Forward Looking PER of the First Section of the TSE ........
IV- 8 Dividend Yields of TSE First Section Companies andLong-Term Interest Rates .....................................................
IV- 9 Average Consolidated PBR Ratios of TSE First Section
Companies ............................................................................
IV-10 Outline of Margin Trading and Stock Lending
Transactions..........................................................................
IV-11 Proportion of Margin Loan Trading in Overall Trading
Value .....................................................................................
IV-12 Margin Transactions and Stock Lending Balances ..............

54
56
58
58
60
62
64
66
66
68
71
71

CHAPTER V
V- 1 Types of Bonds ..................................................................... 76
V- 2 Organization of Underwriting Publicly Offered
Municipal Bonds at a Glance ............................................... 81
V- 3 Mechanism of Underwriting Corporate Bonds .................... 84
CHAPTER VI
VI- 1 Structure of Book-Entry Transfer System ............................ 101
VI- 2 Changes in Issue Terms of Bonds (yields) ........................... 104
VI- 3 Changes in the Difference in Issue Terms and SecondaryMarket Yields between Publicly Offered, Jointly Issued
Municipal Bonds and Government-Guaranteed Bonds........ 104
VI- 4 Trading Mechanism of Repurchase Agreements.................. 106
VI- 5 Working Mechanism of the New Gensaki Transaction
System .................................................................................. 109
VI- 6 Working Mechanism of Bond Lending(secured with cash deposit) .................................................. 111

xviii

List of Charts

CHAPTER VIII
VIII- 1 Conceptual Chart of Securitized Products............................ 135
VIII- 2 General Working Mechanism for Issuing Securitized
Products ................................................................................ 137
VIII- 3 The Balance of Claims Liquidization-Related Products ...... 141
VIII- 4 Securitized Products Issuance .............................................. 143
VIII- 5 Component Ratios of Collateral Assets ................................ 143
VIII- 6 The Amount of Specified Corporate Bonds Traded ............. 145
VIII- 7 Yield to Subscribers of the Housing Loan Corporation
Bonds .................................................................................... 145
VIII- 8 Breakdown of Buyers ........................................................... 145
CHAPTER IX
IX- 1 Organizational Structure of the Japan Exchange Group(Holding Company).............................................................. 155
IX- 2 Organizational Structure of the Tokyo Stock Exchange(Market Operator)................................................................. 155
IX- 3 Organizational Structure of Osaka Securities Exchange(Market Operator)................................................................. 156
IX- 4 Organizational Structure of Tokyo Stock Exchange
Regulation (SRO) ................................................................. 156
IX- 5 A Comparison of the Trading Value of Floor Trading and
Off-Floor Trading of the Tokyo Stock Exchange ................. 164
IX- 6 Delivery and Settlement Using JSCC
(Exchange Transactions) ...................................................... 166
IX- 7 Delivery and Settlement Using JSCC
(OTC Derivatives Transactions)........................................... 167
IX- 8 DVP Settlement Timetable ................................................... 169
IX- 9 The DVP Scheme ................................................................. 169
IX-10 System Integration Schedule for JPX Group ....................... 171
IX-11 JPX Group Systems .............................................................. 173
CHAPTER X
X- 1 Positioning of Mothers and JASDAQ Markets within
Tokyo Stock Exchange ......................................................... 178
X- 2 Form of Trading in OTC Stocks ........................................... 184
X- 3 The Concept of OTC Securities ........................................... 186
X- 4 The Relationship between the Green Sheet System Issue
System and the Stock Exchange........................................... 188
X- 5 Changes in the Green Sheet Market ..................................... 188
X- 6 Amounts of Capital Raised at the Time the Issue was
Categorized as Emerging and Ordinary Issues..................... 190

List of Chartsxix

X- 7 The Flow of Solicitation for Investment in Green Sheet
Issues .................................................................................... 193
X- 8 An Outline of Trading in Green Sheet Issues andConfirmation Note................................................................ 193
X- 9 Role of J-Adviser ................................................................. 196
X-10 Benefits of Using the TOKYO PRO-BOND Market ........... 198
CHAPTER XI
XI- 1 Prohibited and Regulated Acts of Securities Companies(Duties and Prohibited Acts) ................................................ 207
CHAPTER XII
XII- 1 An Outline of Securities Agents ........................................... 212
XII- 2 OTC FOREX Margin Transactions ...................................... 220
XII- 3 Changes in the Number of M&As Involving JapaneseCompanies ............................................................................ 222
XII- 4 Expense Structure of General Trading Participants of
the TSE ................................................................................. 226
XII- 5 Mega-Bank Securities Subsidiaries and Independent
Securities Companies ........................................................... 243
CHAPTER XIII
XIII- 1 Composition of Household Assets (at March 31, 2013) ...... 246
XIII- 2 Structure of Pension System ................................................ 248
XIII- 3 Asset Allocation at the End of FY 2012 ............................... 248
XIII- 4 Trust Scheme ........................................................................ 250
XIII- 5 Fund-Type Company Pension Plan Trust Scheme ............... 250
XIII- 6 Investment of Pension Assets by Investment Advisory
Service Companies ............................................................... 255
XIII- 7 The Structure of Investment Trusts with Instructions
from Trustors ........................................................................ 257
CHAPTER XIV
XIV- 1 Investment Trust Concept..................................................... 260
XIV- 2 Trend of Total Net Assets of Publicly Offered Investment
Trusts and Their Positions .................................................... 260
XIV- 3 The Structure of Investment Trusts with Instructions fromTrustors ................................................................................. 264
XIV- 4 The Structure of Corporate-Type (investment corporation)
Investment Trusts ................................................................. 265
XIV- 5 Overview of Investment Trusts (as of the end of
September 2013) .................................................................. 266

xx

List of Charts

XIV- 6 Breakdown of Total Net Assets of Public Offering
Investment Trusts by Distribution Channel(as of the end of September 2013)........................................ 268
XIV- 7 Trend in Breakdown of Total Net Assets of Public Offering
Stock Investment Trusts by Distribution Channel................ 268
XIV- 8 Trend in Breakdown of Total Net Assets of Total Private
Placement Investment Trusts by Distribution Channel ........ 268
XIV- 9 Distribution of Assets of Investment Trusts in Japan(as of the end of September 2013, total publicly offeredsecurities investment trusts) ................................................. 270
XIV-10 Ratio of Foreign Investments to Total Investments in Japan(Total publicly offered securities investment trusts) ............ 270
XIV-11 Breakdown of Industry Groups among Domestic Stock
Held by Investment Trusts (publicly offered stock
investment trusts as of the end of September 2013)............. 270
XIV-12 Breakdown of Holders of Investment Trusts(as of the end of 2012).......................................................... 273
XIV-13 Outline of a Securities General Account .............................. 275
XIV-14 Flow of Investment Trust Wrap Accounts (example)........... 275
CHAPTER XV
XV- 1 The Scheme of the Disclosure System on the Securities
Market .................................................................................. 280
XV- 2 Conceptual Chart of the EDINET System ........................... 289
XV- 3 Flow of Information Disclosure via TDnet .......................... 289
CHAPTER XVI
XVI- 1 Illustration of the Special Brokerage Account ..................... 303
XVI- 2 Withholding Taxes on Capital Gains on the Sale of Listed
Stock, Etc., Managed in Special Brokerage Accounts ......... 303
XVI- 3 An Outline of the Angels Taxation System .......................... 305
XVI- 4 Beneficiaries of Defined Contribution Pension, Ceiling onContributions, and the Existing Pension System ................. 311
CHAPTER XVIIXVII- 1 Transition from Securities and Exchange Law to Financial
Instruments and Exchange Act ............................................. 317
XVII- 2 Enhancement of Civil Liability for Sales of Financial
Products ................................................................................ 320
XVII- 3 Conceptual Flowchart of Securities Trading Surveillance ... 322
XVII- 4 Process Leading to Issue of Administrative Monetary
Penalty Payment Order......................................................... 324

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 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

Table I-2.

Percentage of Funds Raised and Invested by the Corporate Sector(balances at fiscal year-end)
1985

1990

1995

2000

2005

2010

2012

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

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

18.4
6.2
2.0
0.3
0.2
23.3
20.2
3.1
24.5
25.0

Total

483.5

835.7

783.2

738.9

950.3

792.6

840.6

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

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

29.0
46.7
40.5
5.1
0.7
0.4
13.9
10.4

Total

760.6 1,358.7 1,351.7 1,198.0 1,421.8 1,056.7 1,135.1

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 for fiscal 1995
through 2012 is based on the market prices.
Source: Compiled from the Flow of Funds Account data published on the web site of the Bank of Japan.

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

Chap. I The Securities Market and the National Economy

5shows that bank borrowings have tended to decrease since 1990. 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 may be
explained by the fact (1) that following the liberalization and internationalization of the financial markets since the 1980s, businesses have actively
sought to raise funds by selling new shares and bonds on the market and (2)that large-scale companies in particular have sought to improve their financial structure by repaying loans. Although at one point the proportion of loan
financing rose after the financial crisis in 2008 curtailed the functioning of
the capital market, currently financing through securities, mainly equity, issteadily recovering. With the establishment of emerging markets and the liberalization and abolition of regulations on the issue of debt securities, smallto-medium-sized firms can now obtain financing through the capital market.
Consequently, financing through the issue of securities is expected to retain
its importance in future.
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.) andpublic 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 ($693 billion*). 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6

Chap. I The Securities Market and the National Economy

Chart I-1.

Changes in the Balance of Outstanding Public Securities and the Degree ofDependence on Public Securities(in trillions of yen)
800
700
600

(%)
60
50

Bond dependency ratio(the scale on the right)

Total balance ofoutstanding public
securities

500
400

40
30

300

20

200
Balance of construction
bonds

100
0
End of FY1965 70

75

80

85

90

95

00

05

10

10
0
13

Notes: 1. The figures and percentages for fiscal years up to 2009 are on an actual basis, while those for the
fiscal year 2010 are forecasts. The bond dependency ratio for fiscal 2011 is calculated on the basisof the original budget while the total balance of outstanding public securities is calculated on thebasis of the budget after supplementary budgets.
2. On the basis of ordinary government bonds.
Source: Compiled on the basis of the data drawn from the Ministry of Finance.

financial condition, the government has adopted a fiscal restructuring policy
since fiscal 1981. Helped by economic recovery, the government had succeeded in lowering the dependency on deficit financing and in curbing increases in the balance of outstanding public securities in the second half ofthe 1980s. Since the 1990s, however, the bond dependency ratio has risen
sharply due to a contraction of tax revenues caused by a prolonged recession
and the implementation of a series of fiscal stimulus packages. As a result,the balance of outstanding government debt securities is expected to reachabout ¥750 trillion ($7.3 trillion) at the end of fiscal 2013 (ended March2014).
*US dollar conversions from yen are at the exchange rate of ¥102.50 to US$1 prevailingon January 31, 2014.

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 has risen dramatically from 30% to 60% since the end of fiscal
2007. The sharp rise can be attributed to the inclusion of postal savings (Japan Post Bank) and postal insurance (Japan Post Insurance) under the categories of banks and life, nonlife, and other insurance companies. At the end of
FY2012, the market value of Japan Post Bank’s JGB holdings amounted toabout ¥144.0 trillion ($1.4 trillion) while Japan Post Insurance’s holdings

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

FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012

General government

1.3

2.4

3.5

4.0

3.4

2.1

1.6

2.9

1.6

2.6

Public pension funds

7.1

7.8

8.1

8.8

9.8

10.1

9.2

8.3

7.5

7.1

Fiscal loan funds

9.8

9.0

8.0

4.5

2.5

1.1

0.2

0.1

0.1

0.7

Postal savings funds

13.7

15.4

17.2

18.9

－

－

－

－

－

－

Postal insurance funds

7.8

7.8

7.9

8.4

－

－

－

－

－

－

Bank of Japan

14.8

13.5

12.2

9.9

8.5

8.2

8.9

9.0

9.7

12.0

Private financial institutions

38.6

35.9

33.5

33.3

61.8

64.5

67.8

67.8

68.1

64.9

Banks

24.0

20.8

19.7

18.3

36.6

38.5

40.8

41.5

41.3

37.5

Life, nonlife, and otherinsurance companies

7.2

7.6

7.7

8.1

16.6

17.9

18.5

18.4

19.2

19.2

Pension funds

3.0

2.9

3.1

3.4

3.4

3.2

3.4

3.2

3.1

3.0

Other private financial
intermediaries

4.4

4.6

3.0

3.4

5.2

4.9

5.2

4.7

4.5

5.2

Overseas

3.6

4.0

4.4

5.9

7.4

7.0

5.6

7.1

8.3

8.7

Households

2.2

3.0

3.7

4.3

4.5

4.5

4.1

3.6

3.0

2.5

Others

1.1

1.3

1.7

2.0

2.1

2.5

2.6

1.4

1.7

1.4

Notes: 1. Since fiscal 2007, figures for Banks and for Life, nonlife, and other insurance companies haveincluded figures for Japan Post Bank Co., Ltd., and Japan Post Insurance Co., Ltd.
2. Other private financial intermediaries 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 March 25, 2013.
6. Figures for fiscal 2012 are preliminary figures.
Source: Ministry of Finance, Saimu kanri ripoto 2013 (Debt Management Report 2013), p. 158. Compiled from the Flow of Funds Account data published on the web site of the Bank of Japan.

amounted to about ¥65.2 trillion ($636 billion). While banks, including theJapan Post Bank, remain the leader in JBG ownership, their share is declining. Premising their investments on long-term ownership, public pension
funds; life, non-life and other insurance companies; and private pension
funds have become a stable investor base with a total JBG ownership of
29.3% at the end of FY2012. Among other JGB ownership categories, thepercentage held by overseas investors has been rising since FY2010. This increase is likely due to growth in demand for JGBs as safe assets in the light

8

Chap. I The Securities Market and the National Economyof the sovereign debt crisis in Europe and other factors. In contrast, the upward trend in percentage ownership of Japanese households that had existed
since the introduction of JGBs (10-year, variable rate) for individuals in 2002
has fallen into decline due to lower interest rates and the start of maturity redemptions of the JGBs for individuals in January 2011.
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, it had remained stable at about 8% prior to that. The prolonged over saving hasbrought about a huge accumulation of households’financial assets, at the endof FY2012 standing at close to ¥1,600 trillion ($15.6 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 has been falling since the 1990s. The decline can be primarily attributed to the low levelsof the stock market that has struggled since the bursting of the Japanese economic bubble. There was an especially large decline in the weight of securities in household financial assets, particularly for stocks, following the Lehman Shock in September 2008. Even considering the recent sharp jump in
stock prices since November 2012, it is difficult to say that there has been arecovery in the weight of securities in household financial assets.
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 March2013 shows a large difference in the preference of investors for types of assets. While Japanese households invest 81.4% of their funds in cash deposits,
insurance funds, and pension funds and 14.6% of their funds in securities (including investment trusts), their American counterparts invest 45.2% of theirfunds in the former and 51.9% in the latter. While it is necessary to take thesocial security systems, retail loan services, and other differences between

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

2012

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

24.0
30.0
0.1
27.6
4.5
8.1
7.8
1.9
5.6

Total

372.0

626.8 1,017.5 1,256.5 1,388.8 1,516.6 1,480.6 1,568.4

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 (at June 30, 2013)
Japan

United States

Cash and demand deposits

54.1%

Bonds

2.0%

13.0%
8.7%

Investment trusts

4.5%

11.1%

Securities and equity
subscriptions

8.1%

32.1%

Insurance funds

27.3%

32.2%

Others4.1%

3.0%

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”(October 4, 2013).

the two countries into account, these figures suggest that while Japanesehouseholds prefer assets that guarantee principal, their American counterpartschoose investment performance.
A caveat to this argument may be that we have already seen signs ofchange in the risk preferences of Japanese households, as witnessed by the10Chap. I The Securities Market and the National Economy

Table I-6.

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

CY

Equity securities
BoughtSold

1997

325,5761998

310,360

1999

Debt securities (excluding bills)

Net balance

Net

BoughtSold

Net

292,457

33,119245,763

217,889

27,87460,993291,119

19,241

244,564

236,268

8,296

27,538620,385

508,397

111,988472,872

495,751－22,879

89,109

2000

835,593

837,932－2,339571,013470,246

100,767

98,429

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

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

21,67642,948

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.

increased popularity of the online trading of stocks and foreign currencies
since the 1990s. Moreover, a stronger direct link has been forged between
households and the 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, inJanuary 2014. On the flip side, financial products and services are becoming
increasingly complex, requiring 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

11

Chap. I The Securities Market and the National Economy

Table I-7.
Year-end

Balance of Inbound Investment and Related Indicators
TOPIX

Interest rate (%)

2000

Equity securities (¥b)
63,222(30.4)

Debt securities (¥b)
32,981(15.8)

1,283.67

1.640¥/$ (¥)
114.902001

49,563(24.7)

33,546(16.7)

1,032.14

1.365

131.47

2002

40,757(21.4)

27,799(14.6)

843.290.900

119.37

2003

60,085(28.2)

27,108(12.7)

1,043.69

1.360

106.97

2004

77,393(31.2)

33,846(13.6)

1,149.63

1.435

103.78

2005

132,842(40.8)

41,428(12.7)

1,649.76

1.470

117.48

2006

149,277(43.5)

49,579(14.5)

1,681.07

1.675

118.92

2007

142,031(39.4)

60,203(16.7)

1,475.68

1.500

113.12

2008

68,625(23.4)

50,650(17.3)

859.24

1.165

90.28

2009

76,372(26.6)

42,236(14.7)

907.59

1.285

92.13

2010

80,537(26.5)

42,877(14.1)

898.80

1.110

81.51

2011

65,841(20.8)

45,730(14.5)

728.61

0.980

77.57

2012

83,556(22.9)

49,504(13.5)

859.80

0.795

86.32

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.
Year-end

Percentages of Japanese Stocks and Bonds Held by Investors
of Different Regions
U.S.A.

EuropeAsia

Others

2006

41.5

50.3

2.0

6.2

2007

44.2

45.1

3.1

7.6

2008

49.8

37.6

3.6

8.9

2009

53.9

36.5

1.7

7.9

2010

46.6

36.0

7.7

9.7

2011

46.0

35.5

8.9

9.6

2012

44.3

37.2

8.4

10.1

Equity securities

Debt securities (bonds and notes)
2006

12.7

59.7

14.2

13.4

2007

12.5

60.7

13.9

12.9

2008

13.2

53.0

15.4

18.4

2009

16.4

47.5

19.4

16.6

2010

14.9

43.1

21.8

20.2

2011

11.0

39.3

30.7

19.0

2012

8.9

38.0

31.4

21.7

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

(%)

12

Chap. I The Securities Market and the National Economy

transactions were banned, in principle. However, since the Foreign Exchange
and Foreign 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. The sharp increase in the trading volume of stock seems to reflect their rediscovery of the investment value of Japanese stocks when theuncertainties of Japan’s financial system receded. Foreign investors also haveconsistently net bought Japanese debt securities (both bonds and notes).
There has been net selling of debt securities by foreign investors in someyears, but these temporary reversals involved selling to cover arbitrage positions. This situation happened in 1999 after the abolition of securities transaction taxes, during the depreciation of the yen in 2003, and during the financial turmoil in 2008 and 2009. As was the case with stocks, the volume ofbond transactions has stepped up since 1999—with the result that the difference between purchases and sales has fluctuated substantially. This trend
may be explained by active arbitrage trading by foreign hedge funds and the
expanded market for medium-term government notes (with a maturity of two
to five years).
Looking at the trend in stock (debt), the total market capitalization ofstocks increased sharply in 1999 from in the previous year. However, in the
period following the bursting of the IT bubble to the end of 2002, the balance
declined. Although the balance turned upward again toward the end of 2003
due to a recovery in stock prices, increasing to ¥149 trillion ($1.5 trillion) at
the end of 2006, by 2010 it had dropped to ¥81 trillion ($790 billion) becauseof the Lehman Shock. In terms of regional breakdown, the share of American
investors has remained at a high level while the share of European investors,
on the other hand, has consistently declined. The total amount of domestic
debt securities held by overseas investors, long- and medium-term bonds andnotes combined, has increased to approximately ¥50 trillion ($488 billion) inrecent years from ¥30 trillion ($293 billion). This trend probably reflects theChap. I The Securities Market and the National Economy

Chart I-2.

Merger

The overall
succession type

13

Classification of Mergers and Acquisitions
Merger
－Succession of all rights and obligations of the merged company－Paid for in stock, cash, and/or others
Partial merger－Succession of part of the rights and obligations of the merged company－Paid for in stock, cash, and/or others
Purchase of shares－Acquisition of management control through a purchase of majority
shares－Ordinarily payable in cash, but can be paid with shares of the merging
company

The sharepurchasing type

Swap of shares－A system for buying out a company as a wholly owned subsidiary－Paid for in stock, cash, and/or others
Transfer of shares－A system for establishing a wholly owned parent company－Payable in shares

Acquisition
The assetacquiring type

Assignment of business－Acquisition of the entire business of another company－Payable in cash, etc.

Source: Mikako Maekawa, Daisuke Nodera, and Madoka Matsushita,“M&A no kihon”(The Basics of
M&A), Nikkei Bunko, p. 73, Nihon Keizai Shinbun.

expansion in arbitrage positions by foreign hedge funds. By region, unlike inthe case of stocks, European investors still hold close to 40% of the total despite a downward trend, while American investors’share has fallen under
10%. On the other hand, there has been notable growth in the share of domestic debt securities held by Asian investors, which exceeded 30% at theend of 2012, approaching the share of European investors.
6. Mergers and Acquisitions (M&A)
In practice,“M&A”means a transaction through which the management of
one company is transferred to another company or by virtue of which one
company participates in the management of another company—for the purpose of managing the existing resources of both companies involved. In the
United States, the merger and acquisition (M&A) market has developed sincethe 19th century. In Japan, due to amendments to the M&A-related laws andother factors, the number of M&A deals picked up sharply after 1999. Although the number of deals started to decline following 2007 because of financial crises, it has been back on the rise recently. M&A deals have gonefrom 834 in 1998 to 1,848 in 2012 according to a survey conducted by

14

Chap. I The Securities Market and the National Economy

RECOF Corporation.
Acquisitions are divided into those aimed at purchasing the controllingshares and those aimed at acquiring the underlying assets of another company. As all joint-stock companies, more particularly publicly held companies,
face the potential risk of being acquired by another company through a hostile takeover bid (TOB), they have to have hostile M&A defense measures.
However, as overly defensive measures carry the risk of shutting out potential takeover bidders who are willing to offer higher stock prices for suchcompanies or could undermine management’s efforts to maximize their corporate (or share) value, such defense measures do not go down well withshareholders in Western countries. In the United States, corporations use
court decisions, such as the Unocal standard and the Revlon standard, as ayardstick to weigh the advisability of their defense measures. The former isbased on the idea that the appropriateness of defense measures should be balanced against threats to the corporate value, while the latter represents a
judgment modifying the advisability of defense measures.
In Japan, the Companies Act was enacted in June 2005 and was enforced
in May 2006. Under this law, a Japanese subsidiary of a foreign company canacquire a Japanese company in exchange for the shares of its foreign parent(this is called“a triangular merger”). This provision came into force in May
2007, establishing the necessary conditions for cross-border M&As. On theother hand, this law also provides for M&A defense measures, allowing companies to resort to most of the defense measures. However, as few Japanesecompanies have experienced hostile M&A, it has become necessary to maintain a balance between the protection of shareholders’interests, defense
against hostile takeover, and disclosure of corporate affairs. To meet such necessity, the Ministry of Economy, Trade and Industry (METI) and the Ministry of Justice jointly released Guidelines for Defending Corporate Value in
May 2005. It contains three principles: (1) The principle of securing and improving corporate value and the common interests of the company and its
shareholders (the adoption, invocation, and abolition of takeover defense
measures will be effected with the aim of ensuring and improving corporate
value); (2) the principle of prior disclosure of such defense measures and therespect of the will of shareholders (prior to the adoption of a defense measure, its objectives and contents must be disclosed, and its adoption should bemade subject to the reasonable consent of the shareholders); and (3) the principle of the justification and advisability of such defense measures (defense
measures should be justifiable and appropriate for the prevention of a takeover). METI’s Corporate Value Study Group followed up on these principles,
releasing a report in June 2008 (Takeover Defense Measures in Light of Recent Environmental Changes).

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

16

Chap. II The History of the Japanese Securities Market

Chart II-1.

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,

Chap. II The History of the Japanese Securities Market

Table II-1.

17

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.
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18Chap. II The History of the Japanese Securities Market

Chart II-3.

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

Members

Listings
681

Tokyo Stock Exchange

May 16, 1949

116 official members,
12 specialists

Osaka Securities Exchange

May 16, 1949

76 official members,
11 specialists

523

Nagoya Stock Exchange

May 16, 1949

50 official members,
8 specialists

268

Kyoto Stock Exchange

July 4, 1949

41 members

217

Kobe Stock Exchange

July 4, 1949

34 members

189

Hiroshima Stock Exchange

July 4, 1949

28 members

119

Fukuoka Stock Exchange

July 4, 1949

29 members

181

Niigata Stock Exchange

July 4, 1949

24 members

176

Sapporo Securities Exchange

April 1, 1950

17 members

103

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

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.
Despite trading being halted on the floors of the stock exchanges and official secondary market, the demand for securities trading persisted even in theChap. II The History of the Japanese Securities Market

19

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 promulgatedthe Securities and Exchange Law, which drew on the Securities and Exchange Act of the United States. Initially, only those articles of the law dealing with the Securities and Exchange Commission, which was patterned after
the U.S. Securities and Exchange Commission (SEC), were enforced. Then afull-scale revision of the law was promulgated in 1948. This amended law
formed the legal framework for the new postwar securities market, replacing
the licensing system for securities companies with a system of registration
with the regulatory authority and putting in place such regulations as the separation of banking and securities businesses.
Stock exchanges were established in Tokyo, Osaka, Nagoya, and other cities from May 1949. 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

20

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-4.

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

87,945－604,202

Sales
(A)

1960

362,066

1961

588,205 155,751

9,810 1,026,845

422,643 244,490

1962

347,116 229,174

14,161 1,130,627

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

Net assetchange(D=A–(B+C)－ 156,020

156,020

274,12088,47083,819 107,160－ 132,679 －23,341

1963

331,873 274,226

17,884 1,170,388

39,761 109,857

71,021－ 171,515

38,836

1964

330,158 293,573

45,415 1,161,558－8,829 122,332

84,811－ 209,036

37,521

1965

196,829 349,502

42,556966,328 －195,229 120,665

110,132－ 219,569

10,533

Source: Compiled from Shokenshintaku sanjyunen shi (30-year History of Securities Investment Trusts).

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 of

21

Chap. II The History of the Japanese Securities Market

Table II-5.

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).

favorable 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 thatsystem, 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 the22Chap. II The History of the Japanese Securities Market

interest 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,
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

Chap. II The History of the Japanese Securities Market

Chart II-5.

23

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).

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 andExchange Law, introducing a licensing system for securities companies. This
forced many securities companies to combine their operations, or merge, toprepare for the new system. In combination with the securities companies
that had their registration revoked around the time of the securities panic andthose 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

24

Chap. II The History of the Japanese Securities Market

Table II-6.

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-7.

Changes in Stock Ownership Among Investor Categories

FY
1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975
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

25

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,
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,

26

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 Balancebillion of yen
160
140
120
100
80
60
40
20
0
1949

70

billion of yen

75

80

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

85

90

95

2000

05

10

800
700
600
500
400
300
200
100
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.
4. Article 4 bonds are public bonds issued to cover national expenditures in accordancewith Article 4 of the Public Finance Act.
Source: The web site of Japan’s Ministry of Finance.

Chap. II The History of the Japanese Securities Market

27

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. Accordingly, the government approved, with some restrictions, JGB sales on the bondmarket in 1977. Following this change, the restrictions on sales were liberalized in stages, resulting in the deregulation of the 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 deregulating

28

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.

interest 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.
The deregulation of interest rates began in 1985 with the deregulation ofinterest rates on large deposits. After that, the deregulation of interest rates onChap. II The History of the Japanese Securities Market

Table II-8.
Total
Brokerage
Trading29

Stock Trading Composition by Investor Category

Life and
Non-Life
Individuals Foreigners
Insurance
Companies

Banks

Investment
TrustsCorporations

Others

1983

1,250.7

59.5%

15.9%

1.3%

3.5%

4.4%

9.3%

6.1%

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).

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 international operations. They also began planning to enter the securities business, creating friction between the banking and securities industries.
In 1985, the Plaza Accord was signed, after which the yen appreciatedsharply against the U.S. dollar. The rate movement raised concerns about astrong yen-related economic recession in highly export-dependent Japan. The
Bank of Japan’s reaction was to implement successive reductions in the 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

30

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).

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.
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 based

Chap. II The History of the Japanese Securities Market

Table II-9.

31

Establishment of Securities Subsidiaries of Banking Institutions
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.”

on 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
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32

Chap. II The History of the Japanese Securities Market

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 13 second-tier 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 tokkin accounts (discretionary accounts managed by the securities company for tokkin, a form ofcorporate 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 with differing fiscal year-ends to
avoid reporting the loss by temporarily transferring securities with losses atbook 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, foreignChap. II The History of the Japanese Securities Market

Chart II-11.

33

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).

companies 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
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

34

Chap. II The History of the Japanese Securities Market

Table II-10.

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”

competition between markets.
Almost at the same time as the financial Big Bang initiative was being
proposed, major financial institutions experienced business and financial crises that led to bankruptcies. Among troubled banks were Hokkaido Takushoku Bank, Ltd., the Long-Term Credit Bank of Japan, Ltd., and the Nippon
Credit Bank, Ltd. The list of securities companies included second-tier Sanyo
Securities Co., Ltd., and one of the four major securities companies, Yamaichi Securities Co., Ltd. These companies previously would have been
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, the major financial institutions reorganizedbeyond traditional corporate lines, condensing into four major financialgroups. The new groups also, furthermore, began reorganizing their affiliatedsecurities companies to restrict second-tier and small to medium-sized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

35

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.

securities companies. Amid such major changes 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 a change in key market players.
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,

36

Chap. II The History of the Japanese Securities Market

Chart II-13.

Changes in the Composition of Household Assets

%
100
90
80
70

Other

60

Insurance and pension reserves

50

Stocks and equity contribution

40

Investment trusts
Bonds

30

Cash and deposits

20
10

20

01

0

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

Source: Web site of the Bank of Japan.

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).
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 toChap. II The History of the Japanese Securities Market

37

their 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 observance 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. Countries dealt with the crisis based on huge amounts ofpublic spending and monetary relaxation. The global economy then turned its
sights to a process of recovery fueled by the growth of emerging countries.
During a change of government in Greece in October 2009, however, theincoming government discovered that the ratio of public debt to gross domestic product (GDP) for fiscal 2009 was not the 4% level publicly asserted
by the outgoing government but, in fact, was going to rise to 12.7%. This discovery kicked off the emergence of the Greek sovereign debt problem, an issue that quickly spread through the 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, and France
became enveloped in the crisis because they held large amounts of the sovereign debt of these countries, and thus it became a European sovereign debt
crisis. The holding out of the opposition party in the United States against the38

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

%
70
60
50

%
6.0
PTS transaction values for off-exchange types of transactions (left)
PTS transaction values for all types of transactions (right)

5.0
4.0

40

3.0

30

2.0

20

20
20 12
13
/1
-8

20
11

20
10

20
09

20
08

20
07

20
06

20
05

20
04

0.0
20
03

0
20
02

1.0

20
01

10

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

raising of the national debt ceiling to avoid a U.S. default only served to aggravate the situation. Although agreement was reached on raising the debt
ceiling, Standard and Poor’s reduced the U.S.’s credit rating on long-termbonds from AAA to AA+. The global economy continues to hover in a stateChap. II The History of the Japanese Securities Market

39of instability because of these and other factors.
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 the end of 2011, the top 4 arefrom this period. The Nikkei average also fell to the point of breaking
through 7,000.
In recent years, there has been further structural change in the Japanese securities market. On January 4, 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’systemcosts. And trends overseas of a major restructuring of exchanges that goesbeyond country borders has reduced Japan’s share of the global securities
market. In recognition of the changing business climate, Japan’s securities
market took a major step toward increasing its international competitivenessand reducing system costs with the January 2013 merger of the Tokyo Stock
Exchange and the Osaka Securities Exchange.

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.

41

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 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.

Table III-2.

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

42Chap. 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 2013 outline of revisions of the Companies Act, the authorities went further by also consideredintroducing a“squeeze out”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 done when a joint stock company is established. Joint
stock company establishment can be roughly divided into incorporators only
establishment or by subscription establishment. When a company is established 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 canissue is limited to the funds its promoters can raise. On the other hand, establishing a company with the capital raised by publicly offering its shares to anunspecified large number of investors is called“establishment through a public offering of shares.”While a large amount of capital can be raised throughthis method, one major drawback is that it takes time to successfully complete the public offering, and when its shares are not fully subscribed to by
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.

Chap. III The Stock Issuing Market

Table III-3.

43

Funds Raised by Equity Financing(Billions of yen)

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

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

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

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

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
3,308.9
967.8
451.8

32
688.0
75 2,347.3
46
922.8
477.2
57
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

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

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

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

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

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

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

Source: Web page of the Tokyo Stock Exchange.

Usually, the method of issuing new shares is divided into paid-in capitalincrease and stock splits (and gratis issues). Issuing new shares against thepayment for them by shareholders is called paid-in capital increase, and thecompany can raise its equity capital by this method. Paid-in capital increaseis also divided on the basis of investors to whom shares are issued into rights
offering, allotment of new shares to a 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

44

Chap. III The Stock Issuing Market

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
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.

Chap. III The Stock Issuing Market

45

Chart III-1. Equity Financing in 1989 by TSE-Listed Companies, by Type of Financing(Total capital procured : ¥8,529.39 billion) US$=102.50 yen

Corporate bonds with subscription
rights/warrants (cash paid-in)¥2,104.76 billion($20.53 billion)(25%)

Rights offerings¥689.54 billion($6.73 billion)(8%)

Third-party allotments¥89.14 billion($869.7 million)(1%)

Public offerings¥5,645.95 billion($55.08 billion)(66%)

Source: Tokyo Stock Exchange, Monthly Statistics Reports.

Chart III-2.

Equity Financing in 2012 by TSE-Listed Companies, by Type of Financing(Total capital procured : ¥1,908.9 billion) US$=102.50 yen
Rights offerings¥0.41 billion($4 million)(0%)

Preferred stock and others¥1,277.51 billion($12.46 billion)(69%)

Public offerings¥451.77 billion($4.41 billion)(24%)

New share subscription rights¥21.78 billion($212.5 million)(1%)
Source: Web page of Tokyo Stock Exchange.

Third-party allotments¥159.33 billion($1.55 billion)
(8%)

46

Chap. III The Stock Issuing Market

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.
Other changes for new share issuance procedures under the Companies
Act that was enforced in 2006 include i) the replacement of subscription dateby a subscription period system; ii) the prohibition of reinstitution of rights
offerings; and iii) the unified procedures for approval for issuance (determination, etc. of classes, issuance amount, floor on issue price) and advantageous issuance of new shares by way of third-party allotments.
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 2012, the leading
source of new shares issued by listed companies was equity financing (4.31
billion shares), followed by stock splits and gratis issues (3.76 billion shares).
The amendments to the Commercial Code in 1991 defined stock splits as a
notion that encompasses stock dividends, gratis issues, and reclassification ofpaid-in capital in excess of par into capital stock in conjunction with such issues.
Recently, equity financing is the leading source of new shares. Listed companies on the Tokyo Stock Exchange raised ¥1.9 trillion ($18.5 billion*) inequity in 2012. 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 thestock 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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

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

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－
34,504Rightsoffering

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

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

Allotment
to a thirdparty
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

Preferred stock,conversion of acorporate bond cum
equity (stock)
warrant of theconvertible bondtype into shares, etc.

－
－
－
－
－
－
－
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

The exerciseof equity
warrants
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

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

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

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-4.

Chap. III The Stock Issuing Market

47

48

Chap. III The Stock Issuing Market

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 eighties, as debt financing
was increasingly 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
their capital base and accounted for about half of equity financing in the period.
*US dollar conversions from yen are at the exchange rate of ¥102.50 to US$1
prevailing on January 31, 2014.
In the nineties, 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 March 1994, and the stock issuing market was fully liberalized. For all that, the public stock offerings market remained in the doldrums. However, following the global financial crisis thatkicked off in 2008, the market picked up as companies sought to shore up
their weakened financial bases by making paid-in capital increases. The public stock offerings market was particularly active in 2009, with the number ofshares issued in public offerings reaching a record high of 12.0 billion shares.
However, this figure fell to 750 million shares the following year.
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 and sells them to investors, this is called“direct
offering (or self-offering).”Although this method helps the issuing company
save the fees payable to an intermediary, it is not an easy task to perform thetechnically complicated procedures and sell the shares to an unspecified large

49

Chap. III The Stock Issuing Market

Table III-5.

Number of Lead Managers in Underwriting Shares of Securities
Companies (IPOs)

Existing stock exchanges and start-up markets in 2012
Securities Company
NomuraExisting Markets
No. of co.

%

Mothers
No. of co.

2

28.6

8

JASDAQ%

No. of co.

34.8

%

7

50.0

Daiwa

4

57.1

6

26.1

5

35.7

SBI

－

－

5

21.7

－

－

SMBC Nikko

－

－

2

8.7

－

－

Mitsubishi UJF Morgan Stanley

1

14.3

1

4.3

－

－

Mizuho

－

－

1

4.3

－

－

Mizuho Investors

－

－

－

－

1

7.1

SMBC Friend

－

－

－

－

1

7.1

Total

7

100.0

23

100.0

14

100.0

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

number of investors. When the issuing company commissions a specialist intermediary to handle the public offering of its shares, this is called“indirect
offering.”The intermediary provides the issuing company with expert advice, handles the distribution of shares and performs the necessary administrative procedures on behalf of the issuing company, and takes over theshares remaining unsold after the public offering period. At present, almost
all shares are offered through the indirect offering method.
A“public offering”is the public solicitation of an unspecified large number of investors for the purchase of new shares, and“private placement”is
the private solicitation of a specified small number of investors to purchasethem. 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

50

Chap. III The Stock Issuing Market

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 securities 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
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,Chap. III The Stock Issuing Market

51

Table III-6. 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).

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. At one time, not only was there no market, but also
securities companies themselves were prohibited by regulations from tradingin private equity shares and, in practical terms, trading was even difficult on
the OTC market. Since it was difficult to recover funds until the company
went public, investment in private equity was limited to a small number ofinvestors, 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
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

52

Chap. III The Stock Issuing Market

Table III-7.

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: 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 orderegistered issues that have been determined to appropriate for inclusion in the green sheets forthe purpose of maintaining liquidity in a review done by the registering securities company, wasabolished on March 31, 2008.
Source: JSDA website

information disclosure and for which the securities companies provide publicly announced buy and sell quotes. The Green Sheet market provided a newway for companies to source capital in their pre-public listing stage. Moreover, as part of the reform of the securities market, efforts were made tostrengthen and expand the Green Sheet market. In addition, Green Sheet issues were incorporated into the Securities and Exchange Law (now the
FIEA) on April 1, 2005, making them subject to insider trading regulations.
Through this process, Japan established a market for private equities. At
the same time, fierce competition grew up among stock markets resulting insuccessive lowering of listing requirements. These factors combined to greatly reduce the time required to go from corporate establishment to public listing of shares.

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 1988 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. Off-exchange trading of shares listed on the Tokyo Stock Exchange(ToSTNeT) accounts for 8.0% of all trading in listed shares. Certain securities companies have opened a proprietary trading system (PTSs) 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 no54

Chap. IV The Stock Trading Market

Chart IV-1.

Inter-market Competition in Japan

Japan Exchange Group(as of November 30, 2013)

Second Section
561companies

Mothers
185 companies

JASDAQ881 companies

Centrex(14 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
6 companies

Nagoya Stock Exchange(as of November 30, 2013)292 companies

OTC trading by
securities companies
Green sheet issues, etc.
(as of November 30, 2013)36 companies

ToSTNeTFirst Section
1,768 companies

Fukuoka Stock Exchange(as of November 30, 2013)110 companies

Q-Board(10 companies)

Sapporo Stock Exchange(as of November 30, 2013)
55 companies

Ambitious(5 companies)

Trading in Japanesestocks on overseas
markets

Chap. IV The Stock Trading Market

55

intention 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 December 31, 2011, the number of companies listed on the nation’sstock exchanges (including multiple listings) stood at 3,592, of which 2,279
were on the Tokyo Stock Exchange (TSE). The number of shares listed on
the TSE had increased to 383.3 billion, with a total market capitalization of¥255.9 trillion ($2.50 trillion*). And the value of listed shares traded on all ofJapan’
s stock exchanges was ¥255.8 trillion ($2.50 trillion).
*US dollar conversions from yen are at the exchange rate of ¥102.50 to US$1 prevailingon January 31, 2014.

The concentration of stock trading on the TSE is extremely high. The TSE
accounts for about 60% of the nation’s listed stocks, and the number of issues
listed only on regional stock exchanges stood at 1,292. In terms of value
only, the TSE accounts for a little under 90% of the nation’s stock trading.
The heavy concentration of stock trading on the TSE may be explained by
the fact that the stock markets have taken on a hierarchical structure, with theFirst Section of the TSE at the top, and that business corporations that are
bent on enhancing their social status have sought to list their stocks on theFirst 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 a highly liquid market, the externality of the order flow—trading flows to where shares are actively traded—was at work accelerating theconcentration of orders.
The number of stocks listed on the JASDAQ market (formerly the overthe-counter market), which had become a regular stock exchange in December 2004, stood at 881 at November 30, 2013, with a total market capitalization of ¥11.47 trillion ($111.9 billion), and the total value of shares traded on
this market during 2012 amounted to ¥5.10 trillion ($49.7 billion). These figures far exceeded the Second Section of the TSE, with which the JASDAQ
market competes for business in terms of the number of shares listed (881 vs.
561); total market capitalization (¥11.47 trillion vs. ¥5.44 trillion); and trading volume (¥5.10 trillion vs. ¥901.2 billion).
Other emerging stock markets include the Mothers market opened on the
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 the56

Chap. IV The Stock Trading Market

Table IV-1.
Year

Trading Volumes of Major Stock Exchanges and the OTC Market
2004

2005

2006

2007

2008

2009

2010

2011

2012

Trading Volume(in 1,000 shares)

TSE 1st Sect. 357,034,276 508,310,426 477,894,218 545,835,876 541,576,224 552,098,670 511,695,772 524,646,772 519,754,423
TSE 2nd Sect. 18,313,846 39,978,729 20,822,649 15,146,248 11,775,067 10,202,351
5,919,585

7,940,742

5,657,666

5,145,304

5,734,251

6,369,508

OSE 2nd Sect.

4,203,150

6,199,427

3,946,858

3,178,646

3,879,093

4,428,690

JASDAQ

10,749,746 37,179,736 21,306,415 12,291,369 11,288,330 13,461,273

OSE 1st Sect.

7,315,086

9,850,350

7,703,508

4,884,700

6,505,596

5,260,315

2,763,250

5,827,921

2,702,625

7,780,105 11,627,350 11,347,773

Sources: Japan Securities Dealers Association, Tokyo Stock Exchange, Osaka Securities Exchange.

Chart IV-2.

Trading Volume, by Stock Exchanges (2011)

Sapporo 0.001%

Off-exchange trading 7.835%

Fukuoka 0.002%
Nagoya 0.0019%
Osaka 3.956%

Tokyo 88.188%

Source: Tokyo Stock Exchange, Toshi yoran (TSE Fact Book), 2012.

stock 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.

Chap. IV The Stock Trading Market

57

US dollar conversions from yen are at the exchange rate of ¥102.50 to
US$1 prevailing on January 31, 2014.
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

58

Chap. IV The Stock Trading Market

Chart IV-3.

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

Business corporations, etc.

45
40

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

Individuals and others

35

45
40
35

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
10 12

Source: Kabushiki bunpu jokyo chosa (A Survey of the State of Distribution of Shares), FY2012.

Chart IV-4.

Ratios of Cross-Shareholdings%* Nomura Securities survey. Figures before 1989 are provisional.

60

Life and non-life insurance
and listed companies

50
40
30
Listed companies excluding lifeand non-life insurance companies

20
100
FY197075

8085

Source: Sankei Biz, September 5, 2013.

90

95

2000

05

10 12

Chap. IV The Stock Trading Market

59

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,
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 defensive measures against corporate takeovers andother uninvited contests for corporate control. Although stock prices jumped
recently beginning at the end of 2012, the cross-shareholdings ratio has remained level.
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 28, 2013, was ¥446.16 trillion ($4.35 trillion), but the value ofshares actually traded on that day was ¥1.97 trillion ($19.20 billion). This indicates that the total market valuation of stocks listed on the TSE is computedon the basis of share prices formed through the trading of a little under ¥2trillion worth of shares. (Actually, it represents a sum total of the market valuation of all listed stocks, and the above explanation is intended to simplify
the picture.)
At this stage, whether the given price of a stock is high or low is judged bycomparing its dividend yield with the market interest rate then prevailing. In
other words, an investment opportunity to generate better-than-average earnings, working through competition among investors who seek 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.

60

Chap. IV The Stock Trading Market

Table IV-2.

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-5.

Stock Price and Capital Increase of Toray Industries

(yen)
350
300
250
200
150
100

¥314

¥327

¥275
a 1:0.5
○
b 0.5
○

¥133

a 1:0.8 ○
○
a 1:1
b 0.2
○

¥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.
○

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
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Chap. IV The Stock Trading Market

61

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 therate of one to two would half the price of such shares. However, as the number of shares a shareholder of such company holds would increase twice as aresult of 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
seen from 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 25.480 on November 28,
2013, with the result that its multiple has risen to 8.830. This means thatwhen the simple average of the stock prices of the 225 issues rises or falls¥20, the Nikkei average will increase or decrease ¥176.6 The Dow average isdesigned to restore the continuity of stock prices on the basis of the total
market value of the original shares (shares before the stock split-ups) held byan 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. Such being the case, the Nikkei average is misleading, and mounting demand for its replacement with another index is being voiced among investors.
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, and this also
drew the strong criticism of investors.
As the Nikkei average is an unweighted average computed on the basis of

2,900

2,800

2,700

2,600

2,500

2,400

2,300

2,200

2,100

2,000

1,900

1,800

0

1991

’93

1,100

1,000

900

800

700

600

500

400

300

’95

1,700

1,600

1,500

1,400

1,300

1,200

’97

’99

2001

’03

’05

’07

’09

Great East Japan Earthquake (Mar. 11)

TSE launches arrowhead trading system (Jan. 4).

Credit rating agencies decide to lower ratings of subprime loan=related
securities (July 10)
Failure of Lehman Brother’s U.S.’s 4th largest securities firm (Sept. 15).
GDP wins election in a landslide, Japan’s government changes (Aug. 30).

Bank of Japan decides to end its zero interest rate policy (July 14).

Bank of Japan scraps the zero interest rate policy (Aug. 11).
Terrorist attacks occur in the United States (Sept. 11).
The government announces that the economy has bottomed
The Financial Services Agency announcesout (May 17).
a policy strengthen the restrictions on the shortJapan’s prime minister terminates the blanket government
selling to shares (Feb. 8).
Bank of Japan decides to directly buy shares held by guarantee of deposits (Oct. 7).
Fall of Baghdad, Hussein’s Regime ends (Apr. 9)banking institutions (Sept. 18).
The FRB raises the federal funds (FF) rate for the first time in four years−by 0.25% to 1.25% (June 30).
Bank of Japan releases findings of Tankan (a quarterly survey of business confidence)
showing business sentiment of manufacturers to be the highest since the bursting of theeconomic bubble (July 1).
Oil future price in New York soars to an all-time high of $70 per bbl (Aug. 28).
NY crude oil futures reach all time high of $70 per barrel (Aug. 28)

Bank of Japan tolerates 0% overnight unsecured call money rate (Feb. 17).
Japan’s brokerage commissions are liberalized (Oct. 1).

Amended Foreign Exchange law is enforced (Apr. 1).
Government announces an emergency fiscal stimulus package (Nov. 16).

Prime minister announces Japan’s Big Bang in financial markets (Nov. 11).
Consumption tax raised to 5% (Apr. 1) Yamaichi Securities fails (Nov. 24)

Devastating earthquake hits the Kobe area (Jan. 17).
Government announces a fiscal stimulus package (Sept. 20).

Government announces a comprehensive fiscal stimulus package that includes
an income tax cut (Feb. 8).

Chart IV-6.

TSE closes its trading floor(Apr. 30).
TSE opens the “Mothers”
market (Nov. 11).

3,000

Government announces a comprehensive
fiscal stimulus package (Apr. 24).
Financial System Reform Law is enforced(Dec. 1).

(points)

End of Soviet Union (Aug. 19)
Government announces a seven-point emergency fiscal stimulus package(Mar. 31).
Government announces a comprehensive fiscal stimulus package (Aug. 28).
Government announces a comprehensive fiscal stimulus package (Apr. 13).

62
Chap. IV The Stock Trading Market

Changes in the TOPIX and Trading Volume

TOPIX: Jan. 4, 1968 = 100 points, end-of-month figure
The Tokyo Stock Price Index (TOPIX) calculates the total value of the market
by multiplying the price of each domestic stock on the First Section of the TSEby the number of shares issued and outstanding and indicates share pricemovement based on total movement in capitalization.

(billionsof yen)

200

100

’11

40,00035,00030,00025,00020,00015,00010,0005,000

Chap. IV The Stock Trading Market

63

simple average stock price, it is strongly affected by a rise or fall in the pricesof scarce stocks or high-priced stocks. This is why market watchers pointed
out the possibility of a manipulation of the stock index when trading in the
Nikkei stock index futures increased sharply in the first half of the 1990s. As
a result, the Nihon Keizai Shimbun developed a new index called the Nikkei
300 in 1994 to supersede the Nikkei 225.
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 the First Section of the TSE and therefore has become
an index that reflects changes occurring in the nation’s industrial structureand stock price trends and index that can avert the discontinuity that mightoccur when its component issues are replaced by others; (2) that one can easily determine changes occurring in the scale of the market as measured interms of its total market value; and (3) that it is weighted by the number ofshares of listed issues and therefore is relatively immune to a rise or fall in
the prices of scarce stocks or high-priced stocks.
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; that is, 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 revolution—in which dividend yield fell below bond yield—that occurred in the
United States in 1958. In Japan, also, a similar situation occurred in the
1960s.

64

Chap. IV The Stock Trading Market

Table IV-3. Earnings Ratio of the First Section of the TSE(by investment periods and weighted average %)
Year
sold
1995 1996
Yearbought

1994
1995

－13.1

1996
1997
1998
1999
2000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

1.1 －2.5 －4.5
17.7 3.2 －1.4

0.5
4.2

3.4
7.1

0.5 －1.4 －1.6
3.0 0.3 0.0

1.0
2.7

2.4
4.1

4.5
6.2

4.5
6.1

1.9
3.2

－9.4 －9.8
－10.2

0.1
5.2
23.1

4.6
9.7
21.3
19.5

0.3 －2.3 －2.3 1.0
2.9 －0.8 －1.1 2.6
7.7 1.7 0.9 4.9
0.7 －4.6 －4.1 1.5－15.1 －14.7 －10.8 －2.5

2.7
4.3
6.5
4.0
1.1

5.2
6.9
9.3
7.4
5.5

5.1
6.7
8.7
7.1
5.4

2.0 0.1 0.4 0.2 0.2
3.2 0.9 1.2 0.9 0.8
4.6 2.0 2.2 1.8 1.7
2.7 0.1 0.5 0.2 0.2
0.8 －1.9 －1.3 －1.4 －1.3

－14.3 －8.6
－2.5

5.7
13.3
22.1
17.1

10.2
17.4
24.9
23.6
30.5

9.3
14.7
19.4
16.9
16.8

3.3 －0.1 0.4 0.1 0.1
6.6 2.1 2.4 1.9 1.6
8.5 2.9 3.1 2.4 2.1
4.2 －1.4 －0.4 －0.7 －0.7
0.2 －5.5 －3.6 －3.4 －3.0

2001
2002
2003
2004
2005

2.1
11.4
27.4

0.2
1.2

0.5
1.4

0.3
1.2

4.5 －12.2 －15.1 －10.6 －9.0
－26.2 －23.5 －15.2 －12.2－20.8 －9.1 －6.9
4.4 0.9
－2.4

2006
2007
2008
2009
2010

0.3
1.1

－7.7
－9.9
－5.3
0.5
－1.4
－0.4

2011

Source: Japan Securities Research Institute, Kabushiki toshishuekiritsu (Rates of Return on Common
Stocks), 2012.

Chart IV-7.

Forward Looking PER of the First Section of the TSE(times)
50
40
30
20
10
2008/01

2009/01

2010/01

2011/01

2011/122012/12Source: Compiled by Daiwa Institute of Research based on data from Tokyo Stock Exchange and Toyo
Keizai magazine.

Chap. IV The Stock Trading Market

65

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 29, 2013, the unconsolidated PER of the TSE First Section stood at 25.68.) 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 income 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 growth

66

Chap. IV The Stock Trading Market

Chart IV-8.

Dividend Yields of TSE First Section Companies and Long-Term
Interest Rates%
3.0
Forecast dividend yield(TSE 1st Section)

2.5
2.0
1.5
1.0

Long-term interest rate
(Yield on 10-year JGBs)

0.5
0

2006

07

08

09

10

11

12

13

Note: Figures include period up to April 30, 2014.
Sources: Tokyo Stock Exchange and Bank of Japan.

Chart IV-9.

Average Consolidated PBR Ratios of TSE First Section Companies(times)
1.6
1.4
1.2
1.0
0.8

2008

09

10

11

12

Note: Figures for 2013 are at the end of April, all others are at the end of December.
Source: Tokyo Stock Exchange.

Table IV-4.

Calculation for PER, PBR, PCFR

Stock price
Per share after-tax income
Stock price
PBR＝Per share net asset value
PER＝

PCFR＝

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

13

Chap. IV The Stock Trading Market

67

potential 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 company. If the actual asset value of the land and shareholdings of a company falls below book value of the land and shareholdingson account of an 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 the stock market functions efficiently to a certain degree, companies
will have to actively seek to merge with, or acquire, another company. In
fact, a string of corporate 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 1.1 on November
29, 2013.
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 number of shares of a stock, or sells unowned shares, with funds borrowed from afinancial instruments company (securities company) by depositing a margin68

Chap. IV The Stock Trading Market

Chart IV-10.

Outline of Margin Trading and Stock Lending Transactions

Call money
dealerLoanapplication

Call money

Loan application

Call money

Companies affiliated with thedeposit receipt system (banks, etc.)

Financial instruments
company

Loan application
for stock certificates

Securities finance co.

Stock certificatesborrowed

Loan application forstock certificates

Financial instruments company

MarketFinancial
instruments
company

Financial instruments
company

Margin selling customer

Stocks lent

Loan

Call money(other secured loans)

Loan

Loan application

Loan

Loan application

Execution of a buy order
Execution of a sell order
Loan of stock
certificates

Loanapplication forstock
certificates(sell order)

Loan application

Loan

Loan of funds

Financial instruments
company

Margin buying customer(buy order)
loan
application

Bank of
Japan

Bank

Banking
institution

Loan application

・Margin Trading (between a customer and a financial instruments company)
Collateral: Shares bought (or the proceeds from the sale of the 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: The shares bought by a customer (or the proceeds from the sale of such shares).
Guarantee deposit: 30% or more of the market price of the shares bought or sold by the customer.
(When a substitute security is deposited, such security will have a collateral value of up to
80% or less of its market price.)
Note: The margin rates and the percentage of the collateral value of securities mentioned above are subject to change from time to time.

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Chap. IV The Stock Trading Market

69

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
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 Ministry of
Finance 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).

70

Chap. IV The Stock Trading Market

Table IV-5.

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 Web site of the Tokyo Stock Exchange.

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 rapidly became
popular after they started to be used in Internet trading in Japan in 2003, andrecently account for about 20% of all margin purchase balances.
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, themarket’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 dependency on stock lending transactions has taken a downward path because of
the decline of stock market prices and the greater diversification of financing
sources for financial instrument companies. On the other hand, looking at thebalance of shares used in lending transactions, the traditionally small amount71

Chap. IV The Stock Trading Market

Chart IV-11.

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

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-12.

Margin Transactions and Stock Lending Balances(trillions of yen)

(%)

14

80

16

90
70

12

60

10

50

8

40

6

30

4

20

2
0

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

Margin selling balance

Stock lending loan balance0

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.

of margin sales began to rise in the latter half of the 1990s as cases of financial instruments companies borrowing shares from securities finance companies on their own proprietary accounts to settle buy orders increased. By
2000, financial instrument 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.

72

Chap. IV The Stock Trading 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 themarket, with Second Section issues being added in December 1991 and the
OTC introducing a margin transaction system in 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 2005. Moreover, a commercial financing system became available for financial instruments companies that needed cash to settle their margin buying trades in negotiable margin 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 execution 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, set-74,204,639
225,238,725
209,229,406
255,342,134
357,286,089
534,774,213
725,688,187
795,118,610
605,409,781
390,224,627
375,467,734
362,765,321
322,994,625
45,154,874
48,921,558
54,736,404
77,287,224
91,839,171
61,660,546
60,106,118
47,106,560
47,948,554
54,742,103

Source: Japan Securities Dealers Association.

Sept.-Dec. 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Jan. 2013
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.

6,379,023
19,964,909
15,971,952
15,938,880
21,149,823
27,302,434
39,685,779
50,594,459
42,565,639
23,843,769
22,641,307
30,840,688
32,813,879
3,492,853
3,838,261
6,102,130
6,361,727
7,041,176
5,881,935
5,699,034
5,015,118
6,749,696
6,171,098

2,167
40,516
156,798
101,578
115,983
227,916
724,671
1,952,081
2,148,689
2,992,802
3,135,641
12,871,938
17,832,055
2,484,956
2,516,894
3,038,332
3,997,961
4,613,133
3,503,019
3,861,741
3,172,471
3,044,733
4,116,058

Of that amount,trading value on
PTS (C)

Off-exchange transactions (B)80,583,662
245,203,634
225,201,358
271,281,014
378,435,912
562,076,916
765,373,966
845,713,069
647,975,420
414,068,396
398,109,041
393,606,004
355,808,504
48,647,727
52,759,819
60,838,534
83,648,951
98,880,347
67,542,481
65,805,152
52,121,678
54,698,250
60,913,201

Total
(A+B)
0.003
0.018
0.075
0.040
0.032
0.043
0.100
0.246
0.355
0.767
0.835
3.548
5.521
5.503
5.145
5.551
5.173
5.023
5.681
6.425
6.735
6.350
7.519

0.034
0.203
0.982
0.637
0.548
0.835
1.826
3.858
5.048
12.552
13.84941.73754.34371.14465.57449.79162.84465.51759.55667.76163.25845.10966.699Proportion of PTS Proportion of PTS
trading in
trading in
exchange transacoff-exchangetions (C/A)
transactions (B/A)

Proportion of PTS
trading in total of
exchange andoff-exchangetransactions (C/A)
0.003
0.017
0.070
0.037
0.031
0.041
0.095
0.231
0.332
0.723
0.788
3.270
5.012
5.108
4.770
4.994
4.779
4.665
5.186
5.868
6.087
5.566
6.757

(millions of yen, %)Annual Trading on PTS of Stocks Listed on Financial Instruments Exchanges (Trading Value)

Exchangetransactions(A)

Table IV-6.

Chap. IV The Stock Trading Market

73

74

Chap. IV The Stock Trading Market

tlement, 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 that provided by the traditional
securities exchanges. In the United States, the Securities and Exchange Commission (SEC) has acknowledged the similarity of functions performed by
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, also, the regulators
have authorized negotiated trading in listed securities following the lifting of
the ban against off-exchange securities trading and have added a PTS to thetypes 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 of funds into
“public sector funds”and“private sector funds.”The former are raised
through treasury investment or loan agencies or municipal government andfinancial institutions, while the latter are raised in the public market or underwritten by banks and other financial institutions. Among these funds, thefunds raised in public markets are divided into nationally placed municipal
bonds, jointly offered local government bonds, and municipal bonds targeting

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.

76
Chap. V New Issues of Bonds in the Primary Market

Chap. V New Issues of Bonds in the Primary Market

77

local residents (mini-local bonds). While the municipal bonds underwritten
by banks and other financial institutions are called bank, etc. underwrittenbonds, they come in two types, funds borrowed on deeds from banks andother financial institutions or debt securities issued in the market.
Government agency bonds are debt securities issued by various government-affiliated entities, such as independent administrative institutions.
Agency issues can be categorized into government-guaranteed debts andnon-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 the form and maturities offive-year interest-bearing and one-year discount debentures. In addition, asbank debentures and government agency bonds fall within 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 aredefined as debt securities issued in Japan by non-Japanese governments or
corporations. Those denominated in yen, in particular, are separately 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 2012 (ended
March 31, 2013) increased 3.6% from the previous year to ¥204.1 trillion($1.99 trillion). Of this amount, ¥175.0 trillion, or 86% of the total value, wasaccounted for by government bonds, underscoring their dominant presence inthe public and corporate bond market in Japan. Up until fiscal 2008, JGB issuance had been on the decline along with the upswing in the central government’s financial position, but given the deterioration 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 issuancecan be broken down into superlong-term government bonds (¥28.0 trillion, or$273 billion); long-term government bonds, including those sold to individual investors and those whose interest rates are linked to the consumer priceindex (¥31.9 trillion, or $311 billion); medium-term government notes (¥66.4

78

Chap. V New Issues of Bonds in the Primary Market

Table V-1.

The Value of Bonds Issued(¥100 million)

FY

Total of publicbonds publicly
offeredGovernment
securities

Government
securities sold on
the market

No. of Amount No. of Amount No. of Amountissues issued issues issued issues issued

Superlong-termbondsLong-term bonds

Inflation-indexedbonds

No. ofissuesAmountissuedNo. ofissuesAmountissuedNo. of Amountissues issued

2011

739 1,830,126

72 1,672,834

72 1,554,703

12

261,360

8

313,600

0

0

2012

742 1,915,680

73 1,749,568

73 1,582,430

12

280,6817

318,72000FYMedium term
bonds (5 year)

Medium term Individual investor Short-term discount Bonds subscribed tobonds (4, 2 year)
bonds
bonds
by the Bank of Japan

No. of Amount No. of Amount No. of Amountissues issued issues issued issues issued

No. ofissuesAmountissuedNo. ofissuesAmountissued2011

8

310,358

12

345,138

20

24,257

12299,990－

118,1312012

6324,20912

340,082

24

18,74812299,991－

167,138FY

Municipal bonds

Governmentguaranteed bonds

Bonds issued byinvestment andloan agencies

No. of Amount No. of Amount No. of Amountissues issued issues issued issues issued

2011

394

66,627

61

33,311

212

57,353

2012

392

65,76871

47,221

206

53,122

FY

Total of privatebonds publicly
offered

Straight bonds

Asset backed
corporate bonds

No. of Amount No. of Amount No. of Amountissues issued issues issued issues issued

Corporate bonds withconvertible bonds
type new sharesubscription rights
No. ofissuesAmountissued2011

401

85,098394

82,773

5

2,000

2

325

2012

423

83,809416

81,524

4

2,000

3

285

FY

Bank debentures

Discount bankdebentures

Interest-bearing
bank debentures

No. of Amount No. of Amount No. of Amountissues issued issues issued issues issued

2011

284

34,377

48

5,174

236

29,2032012

220

30,002

18

3,068

202

26,934FY

Nonresident bonds Yen-denominated(yen denominated) foreign bonds
No. of Amount No. of Amountissues issued issues issued

2011

76

19,93976

19,9392012

51

11,421

51

11,421FY

Total of bonds
No. of Amountissues issued

2011 1,500 1,969,540
2012 1,436 2,040,912

Chap. V New Issues of Bonds in the Primary Market

79

trillion, or $648 billion); Treasury bills (¥30.0 trillion, or $293 billion), andbonds for retail investors (¥1.9 trillion or $18.5 billion). In fiscal 2012, ¥6.6
trillion ($64.4 billion) worth of municipal bonds were publicly offered—7
times greater than the volume (¥940 billion) of those issued 20 years ago(fiscal 1990). The increase is basically due to the deterioration in the fiscal
position of local governments, resulting in the introduction of publicly offered municipal bonds targeting local residents in fiscal 2001 and publicly
offered joint local government bonds in fiscal 2003.
In fiscal 2012, among debt securities issued by government agencies, government-guaranteed bonds amounted to (¥4.7 trillion) and FILP agency
bonds (¥5.3 trillion). Following the reform of the fiscal investment and loan
program, the Government 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 notably.
The amount of bank debentures issued in fiscal 2012 stood at ¥3.0 trillion($29.3 billion), continuing to decline from the ¥43 trillion ($419.5 billion) recorded in fiscal 1995. Looking at issuance by category, discount debentures
were (¥0.3 trillion, or $2.9 billion) and coupon debentures (¥2.7 trillion, or$26.3 billion). In particular, the annual value of discount debentures issued
has decreased sharply from the ¥30 trillion ($292.7 billion) issued in fiscal
1995. 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 ($97.6 billion). The desire of companies to obtain a safe source of funding in the aftermath of the Lehman Shockhas prompted an increase in issuance. However, in recent years, issuance has
dropped a little, to ¥8.2 trillion ($80 billion).
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.
*US dollar conversions from yen are at the exchange rate of ¥102.50 to US$1 prevailingon January 31, 2014.

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 the80

Chap. V New Issues of Bonds in the Primary Market

Table V-2.

Categories of Government Securities (Notes 1 to 4)

Maturity

Short term (Discount)
6 month, 1 year
Type of issue
Discount
Minimum denomi- ¥10,000,000
nationIssuance method
Public offering BOJ switch
Auction method

Price-competitive auction
Conventional styleNon-price Competi- Non-pricetive Auction
Competitive Auction I
Transfer restriction Yes2
Issuance frequency 1-year discount bonds: monthly(FY2012 Plan)
6-month discount bonds: up to
total of ¥0.9 trillion
Maturity

Superlong term
20 yearType of issue
Minimum denomi- ￥50,000
nationIssuance method
Public auction
Auction method

Price-competitive auction
Conventionalstyle
Non-price Competi- Non-pricetive Auction
Competitive
Auction I
Non-price
Competitive
Auction II
Transfer restriction No
Issuance frequency Monthly(FY2011 Plan)

30 year￥50,000
Public auction

Medium term
2 year, 5 year
Interest-bearing bonds¥50,000

Long term
10 year¥50,000

Public auction
Public auction
OTC sales (based on subscriptions OTC sales (based on subscriptions
to offering)
to offering)
Price-competitive auction
Price-competitive auction
Conventional style
Conventional style
Non-Competitive Bidding
Non-Competitive Bidding
Non-price Competitive Auction I Non-price Competitive Auction I
Non-price Competitive Auction II Non-price Competitive Auction II
No
NoMonthlyMonthly

JGBs for individu- Inflation-indexed Floating interal investorsbonds
est rate bonds
40 year3 - y e a r, 5 - y e a r 10 year 1
15-year 1
fixed rate, 10-year
floating rate
Interest-bearing bonds￥50,000￥10,000￥100,000￥100,000
Public auction OTC sales (based －on subscriptions tooffering)
Yield-competi－
tive auction
3
Dutch auction

Price-competitive auction
Conventionalstyle
Non-price
Non-price
Competitive
Competitive
Auction I
Auction II
Non-price
Competitive
Auction IINoNo
8 times annually Quarterly

－

Yes 2
Yes 2
3-year fixed inter- Note 4
est: monthly 5-year
fixed and 10-year
floating rate: quarterly

－
－

－

No
Not scheduled

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; and inflation-linked bonds are transferable only to qualified corporations.
Short-term discount bonds are transferable only to corporations (including certain trustees); JGBs for individual investors are transferable only to individuals; and inflation-linked bonds are transferable only to qualified corporations.
3. The fiscal 2012 issuances of 30-year bonds in April, June, and July were in principle all reopenings of the March 2012
issuance, while the issuances in October, December, and January 2013 were in principle all reopenings of the September 2013 issuance. The March 2013 issuance was partially the same issue as the fiscal 2013 issuance. For 40-yearbonds issuance in fiscal 2012, the May, August, and November 2012 and February 2013 issuances were in principle allreopenings of the May 2012 issuance.
4. The government is considering revisions to make these issues more marketable, such as offering a principle guarantee
on maturity, and may start reissuing these bonds in future depending on market conditions.
Source: Based on Ministry of Finance, Debt Management Report 2012, p. 38.

Chap. V New Issues of Bonds in the Primary Market

81

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.

former 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,
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 (23 companies are designated as of July 2013).
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 such

82

Chap. V New Issues of Bonds in the Primary Market

bonds can be used only for authorized projects—to finance a publicly run
corporation, for equity contributions and loans, and to roll over maturing
debts, etc. As of fiscal 2012, 32 prefectures and 20 cities that have been designated by an ordinance of the Ministry of General Management “( designatedcities”) have issued municipal bonds through public offerings. In most cases,
the issuer negotiates the terms of issue with an underwriting syndicate that
handles its public offering, under which the underwriting syndicate buys up
whatever bonds remain unsold after the public offering. Municipal bonds
publicly offered on the joint issuing market (municipal bonds jointly issuedby 35 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 tohandle 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 orderChap. V New Issues of Bonds in the Primary Market

Table V-3.

83

Brief History of Matters Relating to the Corporate Bond System Reform

Date

Matters

Apr. 1985
Apr. 1987
Apr. 1988

Bond credit-rating agency starts working
A proposal method is introduced in deciding on terms of issue of NTT bonds
The proposal method is recognized as one applicable to the issuance of all corporate
bonds. With the adoption of this method, the Bond Issuing Association finally goes out ofexistence. (The Bond Issuing Consultation Meeting established in 1949 was renamed theBond Issuing Association in 1968. It served as a bond-issuing control organization composed of trustee companies [banks] and lead-managing securities companies. Under its
control, there was no room for one-on-one negotiation for issuing terms between an issuer
and an underwriting securities company.)
Requirements for issuing bonds are changed to abolish the quantitative requirements, andconditions are unified into rating requirements.
The Institutional Reform Law is promulgated.
The same law is enforced.
Following the enforcement of this law, the Industrial Bank of Japan, the Long-Term Credit Bank, and the Central Cooperative Bank for Agriculture and Forestry enter the bond underwriting market by establishing their securities subsidiaries. Subsequently, trust banks,
city (commercial) banks, and regional banks follow suit.
The Diet (parliament) passes an amendment to the Commercial Code.
With the enforcement of the amendment, the regulation putting a ceiling on the issuanceof bonds is abolished, and a bond management company system is introduced in the placeof the bond trustee company system.
A five-year corporate note is issued for the first time.
A corporate bond is issued without establishing a bond management company by taking
advantage of the proviso to the article prescribing the establishment of a bond management company.
The requirements for issuing bonds are abolished, and the requirements for issuing unsecured bonds and the duty to establish a debt restriction clause are also abolished.
The period of delivery and settlement for bonds, etc., is shortened from T + 7 to T + 5.
The Diet passes the bill on nonbank corporate bonds (The law went into effect on May
20).
The period of delivery and settlement for bonds, etc., is shortened from T + 5 to T + 3.
The ban on the issuance of straight bonds by commercial banks is lifted.
The Diet passes the Bill on the Transfer of Short-Term Bills (commercial paper, etc.) (TheLaw was enforced on April 2003.)
The Diet passes the Bill concerning the Establishment of Relevant Laws to Improve Securities Markets through the Reform of the Securities Settlement System (The Securities
Settlement System Reform Law). (The Law was enforced in Jan. 2003.) As a result, theBond Registration Law will be repealed within five years from Jan. 2003.
The Law Concerning Transfer of Bonds and Stocks (the amended Bond Transfer Law)
was adopted and is to be enforced within the next five years. By virtue of this law, a bookentry share system will be instituted, obviating the need to issue stock certificates andbonds with an equity warrant.
The Law for Partially Amending the Securities and Exchange Law, etc. (Financial Instruments and Exchange Act) was enacted and enforced.
The Financial Instruments and Exchange Act was fully enforced.
The Corporate Bond Registration Law and related government ordinances and regulations
were repealed. (Jan. 4)

Nov. 1990
June 1992
Apr. 1993
July 1993

June 1993
Oct. 1993
Nov. 1993
Sept. 1995
Jan. 1996
June 1998
Apr. 1999
Oct. 1999
Oct. 1999
June 2001
June 2002

June 2004

June 2006
Sept. 2007
Jan. 2008

Source: Takeshi Goto, Shasai shijo no shin-tenkai (New Developments in the Bond Market), Japan Securities Research Institute, Shoken keizai kenkyu (JSRI Journal of Financial and Securities Markets), Vol. 18, March 1999.

84

Chap. V New Issues of Bonds in the Primary Market

Chart V-3.
IssuerUnderwriting

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.

to build a book for the bonds. Along with this process, the issue terms of thebonds 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“spreadpricing,”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 ($78.0 billion) and featured mainly issues withhigh ratings and a notably small proportion of issues with low rating. The
reason behind this trend is that major institutional investors have limited theirinvestment in corporate bonds to issues with ratings of A or higher. Conversely, most of the issuers of BBB rated bonds are infrastructure-relatedcompanies, 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

Chap. V New Issues of Bonds in the Primary Market

85

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 toinstitutional 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 had developed in the bondmarket of the United States and is believed to have taken root during the Depression of the 1930s. It was introduced to Japan in the 1980s, and 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.
Having suffered severely from the financial crisis, corporate bond issuance

86

Chap. V New Issues of Bonds in the Primary Market

Table V-4.

Definitions of Credit-Rating Symbols

Symbol Rating and Investment Information

SymbolMoody’s Investor Service

AAA

Highest creditworthiness supported
by many excellent factors.

Aaa

Obligations rated Aaa are judged to be of thehighest quality, with minimal credit risk

AA

Very high creditworthiness supported by some excellent factors.

Aa

Obligations rated Aa are judged to be of highquality and are subject to very low credit risk.

AHigh creditworthiness supported bya few excellent factors.

A

Obligations rated A are considered upper-medium grade and are subject to low credit risk.

BBB

Creditworthiness is sufficient,though some factors require attention in times of major environmental changes.

Bbb

Obligations rated Baa are subject to moderatecredit risk. They are considered medium grade
and as such may possess certain speculative
characteristics.

BB

Creditworthiness is sufficient for
the time being, though some factors
require due attention in times of environmental changes.

Bb

Obligations rated Ba are judged to have speculative elements and are subject to substantial
credit risk.

B

Creditworthiness is questionable
and some factors require constantattention.

B

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

CCC

Creditworthiness is highly questionable and a financial obligation of anissuer is likely to default.

Ccc

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

CC

All of the financial obligations of anissuer are likely to default.

Cc

Obligations rated Ca are highly speculative
and are likely in, or very near, default, withsome prospect of recovery of principal and interest.

C

R&I believes that all of the financial
obligations of an issuer are in default.

C

Obligations rated C are the lowest rated classand are typically in default, with little prospect for recovery of principal or interest.

Source: Taken from the websites of Ratings and Investment Information, Inc., and Moody’s Corporation.

began to show signs of recovery globally from summer 2009. In Japan aswell, the recovery trend in corporate performances and robust demand fromfinancial institutions, particularly regional financial institutions, supported arebound in demand for corporate bonds with credit ratings of A or higher.
However, with the exception of bonds with relatively stable earnings, such as
railway companies, bonds with low credit ratings have not received the same
positive treatment in Japan, despite the reverse trend in Europe and the United States, and their issuance remains at low ebb. One explanation is that—
fearful of default and averse to risk—most of the institutional investors in Japan do not invest their funds in assets other than those with a credit rating ofA or higher.
Designated rating agencies now include both domestic players, such as theChap. V New Issues of Bonds in the Primary Market

Table V-5.

87

Corporate Bonds Offering Amounts by Ratings(millions of yen, %)FY2008FY2009FY2010No. Issuance Proportion No. Issuance Proportion No. Issuance Proportion
Issues amount of issuance Issues amount of issuance Issues amount of issuanceAAA
54 1,985,000
21.4
26 745,000
7.6
59 1,360,000
14.1
AA＋
46 1,371,000
14.8
33 680,000
6.9
35 675,000
7.0
AA
63 1,483,900
16.0
53 1,471,000
14.9
46 1,654,000
17.2
20.3
AA－
55 2,440,800
26.4
87 3,259,200
33.1
59 1,956,000
A＋
36 1,343,200
14.5
62 1,648,000
16.7
43 937,200
9.7
A
19 275,000
3.0
47 719,000
7.3
78 1,377,300
14.3
A－
19 253,000
2.7
42 928,700
9.4
53 877,800
9.1
BBB＋
5
50,0000.5
16 195,000
2.0
42 676,600
7.0
BBB
5
60,0000.6
9 204,300
2.1
12 105,100
1.1
BBB－
0
0
0.0
0
0
0.0
2
10,0000.1
Total
302 9,261,900
100.0
375 9,850,200
100.0
429 9,629,000
100.0
FY2011FY2012
No. Issuance Proportion No. Issuance Proportion
Issues amount of issuance Issues amount of issuanceAAA
23 480,000
6.0
2
70,0000.9
AA＋
24 620,000
7.7
41 965,000
12.0
AA
41 888,000
11.1
76 1,648,000
20.6
AA－
66 2,140,400
26.7
79 2,171,400
27.1
A＋
59 1,546,000
19.3
46 896,000
11.2
A
73 1,219,000
15.2
80 1,569,000
19.6
A－
44 665,000
8.3
37 338,000
4.2
BBB＋
28 321,000
4.0
23 278,100
3.5
BBB
17 147,600
1.8
1078,400
1.0
BBB－
0
0
0.0
0
0
0.0
100.0
Total
375 8,027,000
100.0
394 8,013,900
Note: Complied on terms of issue date basis. Transportation and broadcast bonds included. Highest credit
ranking from an agency used.
Source: I-N INFORMATION SYSTEMS, LTD.

Rating and Investment Information (R&I) and the Japan Credit Rating Agency (JCR), and global agencies, such as Standard & Poor’s and Moody’s andFitch. They recently also started rating municipal and FILP agency bonds.
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“bond88

Chap. V New Issues of Bonds in the Primary Market

Table V-6. 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.

Chap. V New Issues of Bonds in the Primary Market

89

management 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
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,

90

Chap. V New Issues of Bonds in the Primary Market

object to such capital reduction or merger without obtaining a resolution of
the bondholders, meeting.
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 conversion 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 outstanding.
“Structured bond”is the name popularly given to a bond structured with
derivatives. In recent years, various types of structured bonds have been issued. 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 aChap. V New Issues of Bonds in the Primary Market

Table V-7.

91

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 web site of Hephaistos Investment Research.

higher 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
Not many investors acquire bonds at the time of issuance and hold them until
maturity. Instead, after holding the bonds for some time, investors usuallysell their holdings for the purpose of realizing profits. Some also trade bonds
in circulation according to changing conditions in financial markets. While
there is no such central location, the conceptual marketplace where bonds
change hands from one investor to another is referred to as the bond secondary market. The size of this market is usually measured in terms of trading
volume or the value of bonds traded there.
In recent years, the bond trading volume in the secondary market has continued to increase. It grew by a factor of almost 50 from ¥58 trillion ($565.9
billion) in fiscal 1975 to ¥2,672 trillion ($26.1 trillion) in fiscal 1985, and byalmost 70 to ¥3,989 trillion ($38.9 trillion) in fiscal 1995. After a slight decline in the trading volume to levels around ¥3,000 trillion ($29.3 trillion) in
the late 1990s, the trading volume turned upward again, reaching ¥4,153 trillion ($40.5 trillion) in fiscal 2000 and breaking into the quadrillion level at¥12,535 trillion ($122.3 trillion) in fiscal 2007. Since then the trading volume
has edged down somewhat, but even recently has maintained a high level ofnearly ¥8,000 trillion ($78.5 trillion).
The sharp increase in the trading volume of bonds may be explained by anumber of factors, including the following. First, the government has continuously been issuing massive amounts of JGBs, resulting in a large increase in
those outstanding in the market. Second, brokers/dealers and other financial
institutions started to actively deal in bonds for trading gains (banks were authorized to deal in JGBs and other bonds in 1984). Third, the government
started to auction off financial bills (FB) and treasury bills (TB) (integrated
into T-bills in 2009), which are now actively traded by market participants
with short-term cash management needs. The growing so-called flight-toquality trend among investors amid a worsening in Japan’s investment environment against the backdrop of the turmoil in financial markets and otherfactors also played a part.

Chap. VI The Secondary Markets for Bonds

Table VI-1.

93

The Scale of Bond Purchasing and Selling(trillions of yen, %)Fiscal year

Over the counter

Exchange

56 ( 96.6)

2 (3.4)

1975

Total
58 (100.0)

1980

281 ( 96.9)

9 (3.1)290 (100.0)

1985

2,515 ( 94.1)

157 (5.9)

2,672 (100.0)

1995

3,935 ( 98.6)

54 (1.4)

3,989 (100.0)

2000

4,148 ( 99.9)

5 (0.1)

4,154 (100.0)

2005

7,224 (100.0)

1 (0.0)7,225 (100.0)

2007

12,534 (100.0)

0 (0.0)12,534 (100.0)
10,513 (100.0)

2008

10,512 (100.0)

1 (0.0)2009

7,905 (100.0)

1 (0.0)7,906 (100.0)

2010

7,723 (100.0)

1 (0.0)7,724 (100.0)

2011

8,408 (100.0)

0 (0.0)8,408 (100.0)

2012

8,515 (100.0)

0 (0.0)8,516 (100.0)

Notes: 1. The bond purchasing and selling value of exchanges ＝ their trading volume on the exchanges
× 2.
2. These figures include the purchasing and selling value of repurchase agreements.
Source: The Japan Securities Dealers Association and stock exchanges.

Table VI-2.

The Value of Purchasing and Selling, by Type of Bond(trillions of yen, %)

FY

Govt.
bonds

Municipal
Govt.Corporate
bonds
guaranteed bonds(incl. private bonds
placement)Bankdebentures

Corporatebonds withequitywarrant

Total,
includingothers2000

3,972(95.6)

44
(1.1)

33
(0.8)

44
(1.1)

45
(1.1)

9
(0.2)

4,154
(100.0)

2005

6,901
(95.5)

56
(0.8)

81
(1.1)

80
(1.1)

30
(0.4)

1
(0.0)

7,225
(100.0)2007

12,323(98.3)

75
(0.6)

34
(0.3)

51
(0.4)

18
(0.1)

1
(0.0)

12,534(100.0)2008

10,361(98.6)

39
(0.4)

19
(0.2)

52
(0.5)

13
(0.1)

1
(0.0)

10,513(100.0)

2009

7,813
(98.8)

23
(0.3)

15
(0.2)

28
(0.4)

11
(0.1)

2
(0.0)

7,906
(100.0)

2010

7,620
(98.7)

22
(0.3)

15
(0.2)

35
(0.5)

12
(0.2)

1
(0.0)

7,724
(100.0)

2011

8,300
(98.7)

19
(0.2)

16
(0.2)

40
(0.5)

10
(0.1)

1
(0.0)

8,408
(100.0)

2012

8,417
(98.8)

16
(0.2)

15
(0.2)

36
(0.4)

14
(0.2)

1
(0.0)

8,516
(100.0)Notes: 1. The bond purchasing and selling value of exchanges = their trading volume on the exchanges
× 2.
2. These figures include the purchasing a selling value of repurchase agreements.
Source: The same as above.

94

Chap. VI The Secondary Markets for Bonds

Additionally, government securities outweigh by far other categories ofbonds in overall fixed income trading volume. The dominance of government
debts stems mostly from the difference in liquidity, which in turn is mainly
because government debts are considered risk free in Japan.
*US dollar conversions from yen are at the exchange rate of ¥102.50 to US$1 prevailingon January 31, 2014.

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 counterparty 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.
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.
When measured in terms of net trading volume, almost all business categories have been net buyers of bonds in recent years. The backdrop to thistrend has been ongoing low interest rate climate caused by the stagnation 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 the flight of riskmoney into the low-risk, high-liquidity JGB market in reaction to the depressed stock market and the turmoil in the securitization and commodity

Chap. VI The Secondary Markets for Bonds

Table VI-3.

95

Trends in Bond Transactions, by Type of Transaction Parties(¥10 billion)
FY2000FY2005

FY2007

FY2008City (commercial) banks

15,978(3,454)23,335(7,458)25,102(990)

28,411(2,553)29,08728,47946,51140,149(3,706) (－1,267) (－1,997) (－2,861)

Regional banks

2,739
(615)

2,741
(652)

3,624
(604)

3,733
(1,002)

4,479(1,172)

4,794(1,210)5,894(1,021)

5,768
(647)

Trust banks

11,611(1,683)

19,656(4,182)

24,190(4,086)20,089(3,976)24,176(7,599)25,044(6,481)

24,793(8,251)

22,322(8,137)

Agriculture-related banking
institutions

1,997
(686)

2,012
(580)

1,814
(32)

2,665
(1,336)4,430(2,999)4,699(3,722)

3,356(2,221)

3,098(2,126)

Other banking institutions

5,839(1,322)5,534(2,253)

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

5,794(3,277)

5,792(3,140)5,437(2,334)

4,259(2,595)

Life and property casualty
insurance companies

5,512(1,074)

3,281
(770)

3,756
(941)

4,594
(1,234)

3,651(1,743)4,204(1,472)

4,583(1,896)

4,838(1,629)Investment trusts

4,821(3,107)3,265(2,398)3,220(1,978)2,920(1,498)2,856(1,890)2,981(2,100)2,881(2,101)

3,080(2,281)

Public employees mutual
aid associations

498
(－25)

917
(591)

786
(611)

635
(459)

368
(245)

309
(206)

277
(166)

299
(213)

Business corporations

480
(341)

916
(709)

1,130
(960)

1,113
(886)

1,301
(1,250)1,360(1,261)

1,013
(932)

1,209
(1,098)

Nonresident investors

12,948(2,815)

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

26,835(8,473)31,992(11,901)

36,902(14,891)

34,133(15,995)

Others

FY2009FY2010FY2011FY2012

22,40342,40944,84545,85653,33049,322
52,737
58,918(－15,871) (－20,232) (－22,043) (－25,859) (－34,211) (－29,842) (－31,389) (－30,366)

Bond dealers

118,334(149)

150,900(－298)

195,292(－450)

173,876(182)

168,735(248)

176,958(－395)

179,035 164,804(－570) (－1,173)

Total(including other investors)

206,892(847)

280,468(4,693)

347,880(－36)

326,109(1,552)331,212(1,319)341,953(1,880)369,000(1,253)

348,505(1,432)

Notes: 1. The figures given in the upper line represent the total of purchases and sales of bonds, and thosegiven in parentheses in the lower line represent the difference between purchases and sales ofbonds.
2. Figures exclude those of gensaki transactions.
Source: The Japan Securities Dealers Association.

96

Chap. VI The Secondary Markets for Bonds

markets. Interestingly, amid this net buyer trend, city (commercial) banks
have become net sellers since fiscal 2010. This reversal likely reflects thecommercial 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 Market Trading
Depending on where transactions take place, the secondary market for bonds
may be divided into exchange markets and over-the-counter markets wheresecurities are traded over-the-counter by securities companies and other investors.
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) tax on bond interest varies according to the tax profiles of bondholders; and 4) 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. On account of these reasons, bond transactions do not lend themselves
to trading on exchanges, where the terms of transactions need to be standardized. Bonds are rather more efficiently traded over the counter, where trades
are executed based on the terms individually negotiated between buyers andsellers.
The Tokyo Stock Exchange and the Nagoya Stock Exchange have bondtrading facilities, but very few issues except for JGBs and corporate bonds
with subscription rights and warrants are listed there.
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. In that sense, it may besaid that the counter of each securities company is a market in itself and that
there are as many OTC markets as there are securities companies. A wide variety of transactions may be executed over the counter once an investor and asecurities company agree on their terms. Private placement bonds as well 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 to the97Chap. VI The Secondary Markets for Bonds

Table VI-4.

Bond Trading by Market

Government bonds(¥10 billion, %)Bonds with subscription
rights/warrants

Others

FY2006

ExchangeOTC

0956,614107
118

0
24,097

FY2007

ExchangeOTC01,232,317

62
62

0
21,059FY2008Exchange
OTC01,036,070

60
72

0
15,042

FY2009Exchange
OTC
Exchange

0781,286
0

56
52
28

0
9,175
0

OTC
Exchange
OTC762,02970

10,174FY2011FY2012

Exchange

0829,983
0

40
46
30

0
10,7730OTC841,74345

9,759

FY2010Note: 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.

Table VI-5. Breakdown of Major Bond Categories, by Outstanding Balance andNumber of Issues(¥10 billion, No. of issues)

Government
bonds

End of
FY2000End of
FY2005End of
FY2007

End of
FY2008Governmentguaranteedbonds andinvestment
and loanbonds

Straight
bonds and
asset-backed
bonds

Bonds with
subscription
rights/warrants

Banddebentures(interest
bearing anddiscount)

Number ofissues

266

728

504

2,807

711

2,619

Outstandingbalance
Number ofissuesOutstandingbalance
Number ofissuesOutstandingbalance
Number ofissuesOutstandingbalance

367

16

35

50

10

48

332

1,386

925

2,560

110

2,247

End of
FY2009Number ofissuesOutstandingbalanceEnd of
FY2010

Number ofissuesOutstandingbalanceEnd of
FY2011

Number ofissuesOutstandingbalance
Number ofissuesOutstandingbalanceEnd of
FY2012

Municipal
bonds(public
offering)

666

31

53

52

1

25

372

1,836

1,108

2,561

84

1,978

681

37

55

54

1

22

396

2,010

1,200

2,489

55

1,838

676

40

58

56

1

20

411

2,208

1,350

2,524

41

1,664

716

44

61

60

1

18

424

2,376

1,474

2,636

32

1,514

754

48

63

62

1

16

449

2,501

1,634

2,684

21

1,272

781

51

64

63

1

15

470

2,643

1,772

2,733

17

1,163

814

54

66

61

1

14

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

98

Chap. VI The Secondary Markets for Bonds

prices of the 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.”
4. Publication of Reference Prices for OTC Bond Trading
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 ofbonds but is also of critical importance from the standpoint of investor protection by promoting the formation of fair prices and facilitating investors’
access to trading at the best possible price. Publication of bond prices is thus
indispensable for the development of bond markets.
With a view to providing investors, securities companies, and others withreference information, the JSDA instituted the 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 7,900. 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. That system continues today.
Since the program started publishing bond quotes 40 years ago, its use has
evolved from the original purpose of providing price references for OTC
bond trading in Japan. In addition to that role, it has become widely used formark to market valuation for financial reporting and tax accounting purposesChap. VI The Secondary Markets for Bonds

Table VI-6.

99

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) Computation of reference price (yields) table for OTC bond transactions
The JSDA receives reports from its member companies affiliated with the system (18 securities companies as of December 31, 2013) on quotations as of 15 hours of each trading day. And 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.

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 is expected to start up in 2015.
5. 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.
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

100

Chap. VI The Secondary Markets for Bonds

Table VI-7.

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

Over-the-counter quotes announced
in March 1966
-Date of announcement (Thursday
of each week)

No. of selected issues

Government securities, municipal bonds, No. of issues announced:
government-guaranteed bonds, coupon bank 280 (as of May 12, 1966)
debentures, corporate bonds, telegraph andtelephone (TT) coupon bonds subscribed toby subscribers, discount TT bonds, and suchother bonds as may be recognized by the Japan Securities Dealers Association (JSDA)

January 1977
(1) Benchmark quotes (for institutional inves- (1) Benchmark quotes:
Announcement of benchmark andtors) are selected from such issues whose
Issues announced: 14
standard quotes (the benchmark
volume of trading correctly reflects the(as of January 31, 1977)
quotes are announced every day exmovement of the market.
(2) Standard quotes:
cept Saturday), and the standard (2) Standard quotes (for small-lot investors)
Issues announced: 77
quotes are announced once a week
are selected from one of government se(as of January 27, 1977)(Thursday)
curities, municipal bonds, special bonds,
bank debentures, corporate bonds, andyen-denominated foreign bonds, otherthan those listed in (1) above in terms of
maturities and interest rates.
August 1978
The same as above.
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).

(1) Benchmark quotes:
Issues announced: 19(as of Aug. 31, 1978)(2) Standard quotes:
Issues announced: 137(as of Aug. 31, 1978)

January 1992
One of the government securities, municipal Issues announced: 208
Standard quotes on OTC issues are bonds, government-guaranteed bonds, bank (as of January 31, 1992)
announced daily.
debentures, corporate bonds, and yen-denominated foreign bonds that are not listed is selected in terms of kinds, maturities, and interest rates.
April 1997
No. of selectable issues was sharply
increased (the new system started
operating.)

Publicly offered but unlisted bonds (with a Issues announced: 1,746
remaining life of one year or longer) that (as of May 1, 1992)
maintain a fixed interest rate throughout theirlife and redeem their principal in a lump sum
were selected.

December 1998
Publicly offered bonds (with paid-in princi- Issues announced: 2,867
The duty to concentrate its trading on pal, interest, and redemption money all paid (as of December 1, 1998)
the exchange market was abolished. 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.

Issued announced: 4,198(as of August 1, 2002)

Decision made to revise the calcula- The same as abovetion method for corporate straightand other bonds and announce quotes
earlier (to be implemented in 2015).

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

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

Chap. VI The Secondary Markets for Bonds

Chart VI-1.

101

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)

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 including 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 one

102

Chap. VI The Secondary Markets for Bonds

Table VI-8.

Bonds under Custody and Book-Entry Transfer Volume(No. of transactions, millions of yen)
Increase:
new issues

FY2005

FY2006

FY2007

FY2008FY2009FY2010FY2011FY2012

Decrease:
Transfer
redemptions andretirement by purchase

Number ofparticipating
issues (at fiscal
year-end)

Number oftransactions

9,931

－

13,92019,270Transaction
volume6,406,615－

8,947,334

6,406,615

Number oftransactions

38,7401,210

211,083

65,456

Transaction
volume34,215,248

721,180

99,748,483

181,334,701

Number oftransactions

33,245

15,128484,041

72,817

Transaction
volume40,491,108

12,840,198

240,536,068

241,002,170

Number oftransactions

33,961

38,830492,394

73,298Transaction
volume37,812,077

38,539,738

223,475,737

240,274,559

Number oftransactions

31,642

38,176411,272

71,202

Transaction
volume38,124,350

32,846,953

132,878,030

245,552,257

Number oftransactions

29,501

36,849439,327

67,788Transaction
volume37,212,947

32,691,251

146,347,996

250,073,952

Number oftransactions

26,66435,619439,867

60,701

Transaction
volume32,955,046

30,589,808

156,713,049

252,439,190

Number oftransactions

27,32633,476

471,798

58,486

Transaction
volume33,558,410

33,213,581

143,537,681

252,784,020

Note: The JGB book-entry system began on January 10, 2005.
Source: JASDEC.

Chap. VI The Secondary Markets for Bonds

Table VI-9.
Date

103

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 arescheduled.
April 2012 Settlement of JGBs scheduled to be shortened (T+2)

of 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 dematerialized. 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 set up of the book-entry transfer systems.
6. Secondary Market Yields and Terms of Bond Issues
Those who raise funds by issuing bonds look for a method that offers thelowest-possible cost. On the other hand, investors who buy bonds choose issues that offer the highest-possible return at the lowest-possible risk. In theory, the issue terms of a bond (subscriber’s yield to maturity) are determined at
a level where opportunities for arbitraging its subscriber’s yield to maturity
and the secondary market yield of outstanding issues of a nature similar tothat of the bond are exhausted. When such opportunities are exhausted, it issaid that“issue terms that adequately reflect the secondary market conditions
have been established.”
Important conditions for efficient arbitrage to occur include the following:

104

Chap. VI The Secondary Markets for Bonds

Chart VI-2.

Changes in Issue Terms of Bonds (yields)

(% )
1.4

Long-term government bonds
Government-guaranteed bonds
Publicly offered, jointly issued municipal bonds
Publicly offered, independently issued municipal bonds(Tokyo metropolitan bonds)

1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
0.5
’11/4

5

6

7

8

9

10 11 12 ’12/1 2

3

4

5

6

7

8

9

10 11 12 ’13/1 2

3(year/month)

Chart VI-3.

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

(%)

0.35
0.30
0.25
0.20

Difference in secondary market yields

0.15
0.10
0.05
0.00

−0.05
−0.10

Difference in issue terms(subscriber’s yield to maturity)

−0.15
−0.20
−0.25
’11/4 5

6

7

8

9

10 11 12 ’12/1 2

3

4

5

6

7

8

9

10 11 12 ’13/1 2

3(issue year/month)
Notes: 1. The difference in secondary market yields are the differences in the Reference Prices for OTC Bond
Trading on the day before determining the issue terms for jointly issued municipal bonds and government-guaranteed bonds (both10-year bonds).
2. The difference in issue terms (subscriber’s yield to maturity) is the yield on jointly issued municipal
bonds minus the yield on government-guaranteed bonds (both10-year bonds).

Chap. VI The Secondary Markets for Bonds105

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. This has been demonstrated in the bond market in Japan in thatyields at the issue of particular types of bonds have come into line with yieldsof their comparables as the amount of new issues of the bonds and secondary
trading volume of the comparables increased.
More specifically, amid the continued massive issue of government bonds,
the proportion of bond issuance through public auctions that more closely reflect market conditions has steadily increased under a market-oriented national debt management policy, replacing the previous emphasis on noncompetitive, syndicated underwriting, where issue terms were based on theofficial discount rate or other 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.
7. 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 repurchase106

Chap. VI The Secondary Markets for Bonds

Chart VI-4.

Trading Mechanism of Repurchase Agreements

Securities
company

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

FY

Turnover ofbonds (A)

Turnover of repos
(B)

B/A

Balance of
repos

2000

414,783

209,710

50.5

2,686

2005

722,379

441,714

61.1

3,017

2007

1,253,438

905,505

72.2

4,953

2008

1,051,184

724,941

69.0

2,326

2009

790,513410,389

51.9

1,589

2010

772,273435,882

56.4

1,891

2011

840,802471,755

56.1

2,538

2012

851,547

502,992

59.1

2,354

Source: The Japan Securities Dealers Association.

agreement 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 who wants to invest idle cash inbonds to a seller who 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

107

Chap. VI The Secondary Markets for Bonds

Table VI-11.

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

Fiscal year-end

FY2005

FY2006

FY2007

FY2008FY2009FY2010FY2011FY2012

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

Regional banks

0

2

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Trust banks

0

21

0

12

0

18

0

8

0

68

0

88

0

97

0

13

Agriculture-relatedbanking institutions

0

0

0

1

0

1

0

0

0

2

0

2

0

6

0

2

Other banking
institutions

91

64

52

24

21

14

15

26

0

11

0

1

0

105

0

84

Investment trusts

0

73

0

73

0

92

0

92

0

75

0

65

0

143

0

206

Business corporations

1

55

1

37

3

31

0

31

0

47

0

43

0

82

0

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

173

985

210

494

155

219

121

70

195

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

Nonresident investors
OthersBond dealers
Total

62

227

14

454

179

866

264

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

Source: The 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 ¥27 trillion ($263.3 billion) at
the end of fiscal 2000, compared with ¥7 trillion ($68.3 billion) in the late1980s. Although there have been some dips in the balance since then due toan accommodative monetary policy, the balance has grown overall, partiallybecause of the massive issuance of JGBs. Along with the BOJ’s lifting ofquantitative easing measures and other factors, the balance reached ¥50 trillion ($487.8 billion) at the end of fiscal 2007. Recently, the balance has beenaround ¥24 trillion ($234.1 billion).
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

108

Chap. VI The Secondary Markets for Bonds

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.
8. Gensaki Market for Bonds (2)In an effort to modernize and strengthen the international competitiveness ofJapan’s money market, the gensaki market underwent a reform to improve its
functions as a repo market that facilitates the need for both short-term financing and bond borrowing, and thus what came to be called new gensaki transactions started in April 2001.
Up to that point, gensaki transactions were bought and sold much like thetransactions commonly known as repo trades in the U.S. and Europe but hadvarious 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 this reform, new measures were instituted and existing provisions were enhanced for risk management and otherpurposes, establishing the gensaki market in accordance 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 ofwhich a repurchase agreement is concluded is fixed at a level that isa certain percentage point lower than the price prevailing at the time
the repurchase agreement is concluded, so that the value of the collateral will not be affected even when the market price of the underlying bonds falls.
2) The introduction of management of collateral, etc. (the margin callclause)Chap. VI The Secondary Markets for Bonds

Chart VI-5.

109

Working Mechanism of the New Gensaki Transaction System

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)
× number of 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

Interest on the
repurchaseagreement
Purchase money

The transaction starts

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).
- 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
is consummated.
- The money of the buyer is needed to purchase the bonds at the time the transaction
started + interest accrued on the repurchase agreement.

110Chap. VI The Secondary Markets for Bonds

Under this clause, when the market value of the underlying bonds
changes during the period of the repurchase agreement, the amountof credit extended to a party to the repurchase agreement is maintained by adjusting 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
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.
9. 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 (sell short) when they feel that the bond market is too expensive or
particular issues are overvalued. Such operations contribute to greater liquidity in the market.
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

111

Chap. VI The Secondary Markets for Bonds

Chart VI-6.

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)(billion yen)

Bonds lentYear and
SecuredSecured by UnsecuredMonthtransactions cash deposit transactions
FY1996
1,661
1,451
575
year-end
FY2000
5,823
5,713
181
year-end
FY2005
7,658
7,534
239
year-end
FY2006
8,190
7,834
363
year-end
FY2007
9,478
8,669
395
year-end
FY2008
6,863
6,679
246
year-end
FY2009
8,227
8,005
275
year-end
FY2010
7,360
7,155
284
year-end
FY2011
8,357
8,347
207
year-end
FY2012
8,357
8,318
227
year-end

Bonds borrowed
Total Secured
Secured by Unsecuredtransactions cash deposit transactions
2,236
2,073
1,704
1,313

Total

6,004

4,438

4,276

687

5,125

7,897

8,547

8,426

979

9,526

8,552

8,838

8,579

1,061

9,899

9,872

9,944

9,664

667

10,611

7,109

6,863

6,674

246

7,109

8,502

8,227

8,005

275

8,502

7,644

7,360

7,155

284

7,644

8,565

8,357

8,347

207

8,565

8,584

8,357

8,318

227

8,584

3,386

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: The Japan Securities Dealers Association.

112

Chap. VI The Secondary Markets for Bonds

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 collateralized or not. Secured bond lending transactions may be further divided into
“cash-collateralized transactions”and“securities-collateralized transactions”
by the type of collateral being pledged. Cash-collateralized transactions used
to borrow specific bond issues are called SC torihiki (specified collateral
trades), while those 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 ($331.7 billion)at the end of fiscal 1996 (including approximately ¥17 trillion in cash-collateralized transactions) to ¥86 trillion ($839.0 billion) at the end of fiscal 2012
(including approximately ¥83 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.

114

Chap. VII The Derivatives Market

Table VII-1.

Years in Which Major Financial Futures of the World Were Listed

Year

Other countries

1972

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)

1976
1977
1981
1982

1984
1985
1986

1987
1988
1989
1990
1993
1996
1997
1998
1999
2000
2001
2004
2005
2006
2008
2010

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)
Japanese government bond futures (SIMEX)
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)
S&P CNX Nifty Index futures (NSE)Single stock futures (LIFFE), E Mini Russell
2000 futures (CME)
Single stock futures (One Chicago)
VIX index futures (CFE)
Exchange FOREX margin contracts (TFX)
RTS index futures (RTS)
Nikkei 225 mini (OSE)
CSI 300 futures (CFFEX)

Note: 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 NYSE Liffe), MATIF: Marché à Terme International de France (presently NYSE Liffe), 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; TFX:Tokyo Financial Exchange.

Chap. VII The Derivatives Market

115

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) first 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 1989, superlongterm (20-year) government bond futures (discontinued in 2002) were listedon the Tokyo Stock Exchange, and trading in U.S. Treasury bond futures—
which had the largest trading volume in the world—started on the Tokyo
Stock Exchange in 1989. (The trading of treasury bond futures was suspended in Japan in 1998.) 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 ($0.98
million), about 10 times as large as that of other countries. (This compareswith $100,000 in the case of treasury bond futures traded on the Chicago
Board of Trade, or 100,000 Eurodollars in the case of BUND futures tradedon 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

116

Chap. VII The Derivatives Market

Table VII-2.

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 re- govt. bonds with a remainof 4–5 yrs and 3 mos.
maining life of 7–11 yrs. ing life of 15–21 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,
1530–2300
1530–2300
1530–2300

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±¥1.00
1st Expansion: Base price±¥2.00Maximum: Base price±¥3.00Circuit breakermechanism

If there is no trade execution at a price outside the upper (lower price) limit for fiveminutes following a buy (sell) order for the central contract month placed (or executed) at the upper (lower) price limit, trading is suspended for 10 minutes.

Table VII-3.

¥100 million in par valueStandard: Base price±¥1.00
1st Expansion: Base price±¥2.00Maximum: Base price±¥3.00¥100 million in par valueStandard: Base price±¥1.50
1st Expansion: Base price±¥3.00Maximum: Base price±¥4.50

Trading in Bond Futures

Medium-term government Long-term government bond Superlong-term government
note futures
futuresbond futures

2009
2010
2011
2012
2013

No. ofdeals

No. ofcontracts

0
0
0
0
0

0
0
0
0
0

No. ofdeals
6,765,074
8,021,458
6,883,210
8,769,717
9,132,122

Source: The web site of the Tokyo Stock Exchange.

No. ofcontracts

No. ofdeals

No. ofcontracts

57,22049,33571,292
77,546
98,944

－
－
－
－
－

－
－
－
－
－

Chap. VII The Derivatives Market

117

unit. As bond futures trading is usually compared with other countries interms of the number of contracts, futures traded in Japan tend to be underestimated. It is said that another characteristic of the bond futures market of Japan is that it is concentrated in trading in long-term government bond futures.
This reflects the fact that the maturities of government bonds are heavily
concentrated in 10-year issues, as with cash bond trading, which is notunique 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.
*US dollar conversions from yen are at the exchange rate of ¥102.50 to US$1 prevailingon January 31, 2014.

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 TSE introduced the Nikkei Stock Average,
TOPIX, and TOPIC 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

118

Chap. VII The Derivatives Market

Table VII-4.

The Trading Mechanism of Stock Index Futures

Nikkei 225 mini futures

Nikkei 225 futures

Object of trading

Nikkei stock averageContract monthMar, Jun, Sep, Dec
Mar, Jun, Sep, Dec
Mar, Jun, Sep, Dec
cycle (2 contract months cycle (5 contract months cycle (5 contract months
traded at any one time)traded at any one time)traded at any one time)

Trading unit

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

Price asked

In units of ¥5

MaturityOn the 2nd Friday of Mar, On the 2nd Friday of Mar, On the 2nd Friday of Mar,
Jun, Sept, or Dec
Jun, Sept, or Dec
Jun, Sept, or Dec

Last trading day

One business day preced- One business day preced- One business day preceding maturity
ing maturity
ing maturity

Trading hours

0900–1315, 1630–0300
next day

0900–1315, 1630–0300
next day

0900–1135, 1145–1515
1630–2330

Daily price limit

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

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

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

Circuit breakermechanism

If there is no trade execution at a price outside the upper (lower price) limit for fiveminutes following a buy (sell) order for the central contract month placed (or executed) at the upper (lower) price limit, trading is suspended for 10 minutes.

Table VII-5.

2009
2010
2011
2012
2013

Nikkei stock average

TOPIX futures

In units of ¥10

In units of 0.5 point

The State of Trading in Stock Index Futures

Nikkei 225 mini futures

Nikkei 225 futures

No. ofdeals

No. ofdeals

104,738,309
125,113,769
117,905,210
130,443,680
233,860,478

TOPIX

No. ofcontracts
303,508
357,736
469,198
688,044673,736

25,368,919
22,483,722
19,294,064
19,523,347
30,907,691

No. ofcontracts
330,664
378,651
305,212378,804
420,037

TOPIX futures
No. ofdeals
15,190,781
14,902,519
14,608,165
15,192,439
22,714,121

No. ofcontracts
338,228
368,395
367,394
427,564594,299

Sources: The web site of the Tokyo Stock Exchange and the Osaka Securities Exchange, Futures &Options Report.

Industrial Average futures. Prior to all these domestic listings for Nikkei 225
futures, the Singapore International Monetary Exchange (SIMEX, now SGXDT) started trading SIMEX Nikkei 225 futures in 1986, followed in 1992 by

Chap. VII The Derivatives Market

119

dollar-denominated Nikkei 225 futures on the Chicago Mercantile Exchange(CME). There were also yen-denominated Nikkei 225 futures on the CME,
but they no longer exist. In addition to dollar-denominated Nikkei 225 futures, 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 United States and German markets have also come to have multiple stock index future contracts with goodliquidity.
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(Click 365) in 2010.

120

Chap. VII The Derivatives Market

Table VII-6.

The Trading Mechanism of Financial Futures

3-month Euroyeninterest rate futures

U.S. dollar-Japanese yen Australian dollar-Japaneseexchange FOREX margin yen exchange FOREX
contracts
margin contracts

Principal ¥100 million

US$10,000

A$10,000

Indicating method 100 minus rate of interest

Exchange rate in yen

Exchange rate in yen

Bid and asked

0.005 (¥1,250)

0.01 (¥100)

0.01 (¥100)

Contract monthMar, Jun, Sep, Dec, cycle None
(20 contract months traded at any one time)

None

Last trading day

Two business days pre- Noneceding the third Wednesday of the contract month(transactions effected on
the day of maturity must
be done by 11:00)

None

Final settlement
date

Business day following None
the last trading day

None

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

Price limit

None

None

None

Trading hours

0845–1130, 1230–1530,
1530–2000

Mon. 7:10 am to 6:55 am
following day
Tues. to Thurs. 7:55 am to6:55 am following day
Fri. 7:10 am to 6:00 am
following day

Mon. 7:10 am to 6:55 am
following day
Tues. to Thurs. 7:55 am to6:55 am following day
Fri. 7:10 am to 6:00 am
following day

Trading unit

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
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.

Chap. VII The Derivatives Market

Table VII-7.
3-month Euroyeninterest rate futures

2009
2010
2011
2012
2013

121

Financial Futures Trading
U.S. dollar-Japanese yen ex- Australian dollar-Japanesechange FOREX margin con- yen exchange FOREX martracts
gin contracts

No. ofdeals

No. ofcontracts

No. ofdeals

13,066,020
11,274,925
7,201,901
4,734,503
5,044,236

962,534
11,742,991
533,328
393,954410,310

20,198,781
27,551,634
31,441,164
9,212,876
20,120,943

No. ofcontracts
216,080
287,035
228,004
162,674
161,213

No. ofdeals
17,793,787
34,272,436
41,589,199
16,500,368
10,256,158

No. ofcontracts
109,895
179,005
246,374
126,604
136,975

Source: Tokyo International Financial Futures Exchange, Annual Statistics.

However, their liquidity has not improved much.
Meanwhile, in April 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 to stimulate financial futures trading, it linked the prices of its products
to those of the London International Financial Futures and Options Exchange
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 and by extending the night-trading hours in 1998. 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.
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 toAristotle, 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 Options Exchange (CBOE) established in 1973 is the first fully developed option market. By organizing individual deals negotiated between parties, a mechanism 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122

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

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)
U.S., options on individual stocks (ISE)S&P CNX Nifty Index options
VIX index options (CBOE)

Note: 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 NYSE Liffe), MATIF: Marché à Terme International de France (presently NYSE Liffe), 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; TFX:Tokyo Financial Exchange.

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 bond

Chap. VII The Derivatives Market

123

futures 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 world wide. 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.
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 ($0.98 million) in par value. Because their life (from the date of contract to the date of delivery) is restricted to a maximum period of one year,

124

Chap. VII The Derivatives Market

Table VII-9.

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

Unit oftrading

Par value of ¥100 million One contract on long-term One contract on long-term
government bond futures
government bond futures

Price asked ―¥1 per par value of ¥100

¥1 per par value of ¥100

Exercise
price

Free

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.

Price limit―

Up or down ¥3 from the margin requirement reference
standard price prevailing on
the immediately preceding
trading day

Up or down ¥3 from the margin requirement reference
standard price prevailing on
the immediately preceding
trading day

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

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
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

Chap. VII The Derivatives Market

Table VII-10.
OTC bond options(¥100 million)
Value oftrading
2009
2010
2011
2012
2013

2,523,151
1,535,838
1,703,814
1,821,819
1,872,723

Priceoutstanding
33,49340,04438,08639,372
37,841

125

Trading in Bond Options
Long-term government
bond futures options
No. ofdeals
2,433,217
1,999,282
1,853,672
2,283,839
1,692,752

No. ofcontracts
3,338
3,779
12,455
15,954
13,415

Medium-term government
note futures options
No. ofdeals

No. ofcontracts
－
－
－
－
－

－
－
－
－
－

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

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 optionsever) 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126

Chap. VII The Derivatives Market

Table VII-11.

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 Sep contracts are (quarterly months) plus a maximum ofnearest 3 months, other contract 3 other closest contract months
months are 6 months

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

Last trading day

The 1st business day prior to the matu- The 1st business day prior to the maturity
rity

Trading hours

0900–1515, 1630–0300
the next day

Strike price

Initially, 16 strike prices at ¥250 inter- Quarterly month contract: 13 prices atvals; 16 strike prices for closest con- 50-point intervals (in case of the
tract months at ¥125 intervals
month prior to the latest trading month,same as in non-quarterly month contract) Non-quarterly month contract:
19 prices at 25-point intervals

Method of exercising European option
the right
Price limit

Standard: Base price ±13%
1st Expansion: Base price ±17%
Maximum: Base price ±21%

TOPIX×¥10,000

The 2nd Fri. of the delivery month

0900–1130, 1145–1510, 1630–2325

European option
Movement above and below the baseprice (TOPIX futures price limit + allowable range for asking price)

Circuit breaker mech- In principle, when futures prices reach Circuit breaker triggered when TOPIX
anism
daily upper or lower limits, a halt is futures trading is halted.
called in trading.

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
in 2001. Meanwhile, trading in the Nikkei average futures options started in
1992 on the Singapore International Monetary Exchange (SIMEX, or thepresent SGX-DT).
In Japan, listed stock index options (the Nikkei 225 options) are mostactively 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 comparedChap. VII The Derivatives Market

Table VII-12.

The State of Trading in Stock Index Options

Nikkei 225 options
No. of deals
2009
2010
2011
2012
2013

127

TOPIX options

No. of contracts

34,986,005
43,791,011
45,192,519
48,763,723
57,269,727

1,590,726
1,762,715
1,977,396
3,179,067
3,212,114

No. of deals

No. of contracts

52,523120,040
21,342
22,683386,231

17,608
9,677
2,704
5,267
40,406

Sources: The web sites of the Tokyo Stock Exchange and the Osaka Securities Exchange.

with 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. In addition, the trading method and the trading unit are the same as
those of stock index futures. In computing the amount of margins, all exchanges have adopted the method of meeting margins in accordance withrisks 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 istripped 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 options on 20 individual stocks (officially called equity options) were listed afterward on the Tokyo Stock Exchange and the Osaka Securities Exchange inJuly 1997 (seven of them were listed on both exchanges). Since then, option
trading has been extended to all listed securities along with a name change to“securities options.”As of the end of 2013, 170 issues are traded on the Tokyo Stock Exchange and 154 issues (of which 111 issues are also listed onanother exchange) are traded the Osaka Securities Exchange.

128

Chap. VII The Derivatives Market

Table VII-13.

The Trading Mechanism of Securities Options

Marketable securities options (TSE)

Individual 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)

Date of delivery

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

The 1st business day prior to maturity

The 1st business day prior to maturity

Trading unit

The trading unit of the underlying stock

The trading unit of the underlying stock

Price asked

7 stages from ¥0.5 to ¥5,000 depending 16 stages from ¥0.1 to ¥20,000 dependon the price of the underlying security
ing on the price of the underlying stock

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

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

Position limit

A trading position equivalent to 1% of
the number of listed securities (0.7%
when the annual turnover volume of thelisted security going back 1 year fromthe record date is less than 10% of theoutstanding number of said security)

A trading position equivalent to 1% of
the number of listed securities (0.7%
when the annual turnover volume of thelisted security going back 1 year fromthe record date is less than 10% of theoutstanding number of said security)

Trading hours

0900–1130
1230–1510

0900–1515
1630–0300 next day

Method of exer- European option
cising the right

Table VII-14.

European option

Trading in Securities Options

TSE securities options
No. of deals
2009
2010
2011
2012
2013

662,813834,941
601,156
433,6021,129,358

OSE securities options

No. of contracts
103,340
299,216
30,56560,962
136,525

No. of deals
408,752
390,805
1,231,796
120,545
23,723

No. of contracts
20,907
179,947
6,152
2,565
957

Sources: The web site of the Tokyo Stock Exchange and the Osaka Securities Exchange, Futures &Options Report.

Chap. VII The Derivatives Market

129

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 securities options adopted by the TSE andthe OSE is more or less the same. It is basically identical to that of stock index options but differs from that of stock index options trading in that the securities certificate underlying an option must be delivered to the buyer andthat 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 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 trading 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

130

Chap. VII The Derivatives Market

Table VII-15.

OTC Trading in Securities Derivatives

No. oftransactions

Total

Forwardtrading

FY2008FY2009FY2010FY2011FY2012570,254 564.0%
2,770,912 385.9%
3,484,893 25.8%
3,216,317 －7.7%
2,361,235 －26.6%

Amount oftransactions

Total

Forwardtrading

FY2008FY2009FY2010FY2011FY2012880,211 －40.4%
986,973 12.1%
794,200 －19.5%
694,677 －12.5%
440,416 －36.6%

2,170
2,321
3,340
1,828
1,265

Term-endbalance

Total

Forwardtrading

FY2008FY2009FY2010FY2011FY2012692,908 －4.8%
355,640 －48.7%
351,568 －1.1%
176,572 －49.8%
126,452 －28.4%

698
1,074
1,014
373
345

Trading(presumed capital, ¥100 million)

698
12,975
10,8787,491
297

Forward tradingin OTC index, etc.
0% 145,234
0% 1,889,671
0% 3,165,082
0% 2,864,886
0% 2,052,821

25%
68%
91%
89%
87%

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

238,815
490,547
447,230
348,191
231,222

27%
50%
56%
50%
53%

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

34,42031,467
23,799
7,784
2,609

5%
9%
7%
4%
2%

The State of Brokered Trading
No. oftransactions

Total

FY2008FY2009FY2010FY2011FY2012

1,092,238 90.2%
1,408,246 28.9%
878,841 －37.6%
60,367 －93.1%
32,686 －45.9%

Amount oftransactions

Total

FY2008FY2009FY2010FY2011FY2012

3,933,794 19.1%
2,162,877 －45.0%
1,460,524 －32.5%
1,271,939 －12.9%
1,166,949 －8.3%

OTC options
trading

OTC index
swaps

49,345 9%298,051 11%305,223 9%
335,667 10%297,054 13%

374,977 66%
570,215 21%
3,710 0%8,273 0%10,063 0%

OTC options
trading

OTC index
swaps

601,710459,655
601,710
321,668
178,515

37,51634,44937,51622,991
29,413

68%
47%
68%
46%
41%

OTC options
trading
562,821237,269
244,861
128,886
86,233

4%
3%
4%
3%
7%

OTC index
swaps

81%
94,96967%
85,832
70% 8,148,969
73%
39,531
68%
37,264

14%
24%
23%
22%
29%

(presumed principal, ¥100 million)
Forwardtrading
548
94,993203
349
277

Forward tradingin OTC index, etc.
0%
7%
0%
1%
1%

Forwardtrading
39,188
4,180
2,005
401
1,592

76,324
114,767
7,439
7,527
4,527

7%
8%
1%
12%
14%

Forward tradingin OTC index, etc.
1%
0%
0%
0%
0%

432,340
494,092
407,624
371,352
345,161

OTC options
trading

OTC index
swaps

207,172 19% 808,194 74%
45,571 3% 1,150,915 82%
58,398 7% 812,801 92%
45,706 76%
6,785 11%21,834 67%
6,048 19%
OTC options
trading

11% 3,214,731
23% 834,086
28% 933,077
29% 830,656
30% 754,986

82%
39%
64%
65%
65%

OTC index
swaps
247,534 6%
830,520 38%
117,819 8%
69,532 5%65,210 6%

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.

Chap. VII The Derivatives Market

131

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 world wide.
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 $8.5 billion (up 52%); currency options were $6.4 billion (up 27%); currency swaps were $6.4 billion(up 186%); forward-rate agreements (FRA) were $36% 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 and swaps(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.
Meanwhile, the JSDA has been publishing the current state of OTC derivatives trading on a semiannual basis since the second half of fiscal 1999.
These statistics divide OTC derivatives transactions into two categories:
those conducted by securities companies for their own accounts (the state ofprincipal trading) and those between clients brokered by securities companies(the state of agency trading). The former shows the number and total value oftransactions and the ending balance of contracts in each term, while the lattershows the number and total value of transactions. The data is further divided
into forward transactions in securities, forward transactions in OTC securities
indexes and others, OTC options transactions (excluding bond options transactions) in securities, and swap transactions in OTC securities indexes andothers.
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

1,098,892 551,264 547,628

1,040,913 511,460 529,453

1,055,263 518,435 536,828

1,116,847

1,105,391

Dec. 2011

June 2012

Dec. 2012 1,047,913

June 2013

542

473

209

195

278

2,001

207

522

384

349

631

820

814

43

91

3

3

3

3

11

377

Total

0

0

0

0

0

0

399

99

13

13

12

900

11

10

10

0

0

0

48

20

44

Sell

143

374

196

182

266

1,101

196

512

374

349

631

850

766

23

47

3

3

3

3

11

377

Buy

Total return swap

130

0

0

0

0

0

0

0

0

0

0

0

0

0

14

16

26

24

23

31

21

Total

65

0

0

0

0

0

0

0

0

0

0

0

0

0

7

9

14

13

11

15

10

Sell

65

0

0

0

0

0

0

0

0

0

0

0

0

0

7

7

12

11

12

16

11

Buy

Credit spread product

4,868

6,302

6,038

4,649

5,642

3,030

2,792

2,105

581

727

470

470

5,344
5,215

403

382

348

163

33

0

0

0

0

0

0

0

0

0

1,838

3,510

3,933

4,068

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

1,512

1,470

955

734

203

226

252

386

204

407

537

689

890

215

42

117

133

145

187

68

282

418

575

620

0

0

0

0

24
35

0

0

0

0

55

55

55

55

13

4

4

60

60

60

55

55

Sell

5

5

0

0

86

93

107

199

136

125

119

114

270

215

42

35

24

13

4

4

60

Buy

Other products

Issue Purchase Total

5,661

5,662

7,201

7,342

6,427

3,004

1,605

1,085

1,162

1,415

1,512

1,470

955

734

Total

Credit-linked bond(outstanding balance of presumed principal in millions of dollars)

Credit Derivatives Trading in Japan

Source: Bank of Japan, A Survey of Regular Market Reports Concerning Derivatives Trading.

1,061,005

1,151,536 571,934 579,602

1,111,618 557,973 553,645

1,137,087 559,653 577,434

1,157,661

June 2011

1,110,429 549,404 561,025

1,116,517

June 2010

Dec. 2010 1,144,710

887,258 435,314 451,944

June 2009

382,395 178,986 203,409

554,208 260,369 293,839

381,949 180,054 201,895

1,022,920 497,235 525,685

390,160

Dec. 2008

95,31973,75650,79644,656

26,826

19,06916,954

14,754

Buy894,196562,222

June 2008

87,896

69,66747,184

34,106

18,275

9,854

6,586

6,973

Sell

271,386 125,760 145,656

183,215

143,423

97,98078,76245,101

28,922

23,54021,727

Total

Credit default swap

Dec. 2009 1,029,791

275,229

389,231

June 2007

Dec. 2007

184,879

Dec. 2006

80,266

June 2005

99,16546,701

Dec. 2004

144,61730,478June 2004

June 2006

24,592

Dec. 2003

Dec. 2005

22,914

June 2003

Total

OTC trading

Table VII-16.

132
Chap. VII The Derivatives Market

Chap. VII The Derivatives Market

133

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, multiplying by a factor of 83 from the end of December
2002 to the end of June 2011. The total notional value amounted to $1.1 trillion, or 4.4% of the global total of $24.8 trillion according to the June 30,2010 estimates published by the BIS. However, at June 30, 2007, the Japanese market only accounted for $275.2 billion, or 0.5%, of the global total of$51 trillion, suggesting that Japan’s credit derivative market is finally drawing in line with its OTC derivative market, which accounts for 7.2% of global
totals.

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.”And 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 toback up 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,

Chap. VIII The Securitized Products Market

Chart VIII-1.

Conceptual Chart of Securitized Products

At the time a securitized product is issued

・・・

Assignment/saleof the asset

Asset N

Security 1
Special-purpose vehicle (SPV)

Asset 2

Cash flow
The holder of the asset

Asset 1

Money for thepurchase of the
security

Proceeds of theassignment/saleof the asset

Acquisitionof the asset

135

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

136

Chap. VIII The Securitized Products Market

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Chap. VIII The Securitized Products Market

Chart VIII-2.

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

Servicer

Payment ofprincipal andinterest

Credit-rating
agency137

Domestic SPC

Payment of principal
and interest
Payment ofprincipal andinterest

Issuance of securitized products

Credit 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

recover funds under commission from the SPV, and bond management companies, which administer the securitized products (corporate bonds) purchased by investors. Firms that propose such a mechanism for securitizing
assets and that 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

138

Chap. VIII The Securitized Products Market

Table VIII-1.

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.

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 specified corporate bond backed by the beneficiary certificatesby housing loans rechange Act
of a trust is issued at that time through an SPC.
ceivable (RMBS)
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

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

Chap. VIII The Securitized Products Market

139

140

Chap. VIII The Securitized Products Market

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, 2012, stood at almost ¥36 trillion ($351.2 billion). When compared with that of stocks and equity investment (¥678 trillion or $6.61 trillion); industrial bonds (¥74 trillion or $722.0 billion); and bank debentures(¥14 trillion or $136.6 billion), their share of private-sector financing as awhole is not very large. In contrast, the similar balance (of ABS and government agency mortgage pools combined) in the United States, which is considered the most advanced in securitizing claims, stood at about ¥299 trillion($2.9 trillion) at the end of fiscal 2012.
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Chap. VIII The Securitized Products Market

Chart VIII-3.

141

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 12Year-end
Asset-liquidation products
Securitized products
Year-end
Asset-liquidation products
Securitized products

91
92
93
94
95
96
97
98
99
00
01
0.5 0.6 0.7 1.3 1.4 2.7 9.8 11.9 11.9 13.7 17.8
－
－
－
－
－
－
－
－
－
－
－
02
03
04
05
06
07
08
09
10
11
12
24.0 27.2 30.1 35.5 38.5 35.5 33.8 29.6 26.7 25.8 23.2－－－－
－ 46.9 45.5 41.9 39.0 38.6 35.8

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.

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
Industrial debentures
Deposits
Intercompany and trade credits
RMBS issued by the Japan
Finance Housing Agency

2007

2008

2009

2010

2011

2012

Percentage
composition

35.4
24.3

33.7
23.4

29.6
20.9

26.7
18.6

25.8
17.5

23.2
15.7

64.8
44.0

20.7

19.6

17.6

16.0

15.2

13.6

38.1

9.1
1.8

8.9
1.8

8.3
1.5

7.7
1.2

7.4
1.1

6.6
0.9

18.5
2.5

9.8

8.9

7.8

7.1

6.7

6.1

17.1

3.6
0.3
0.3
1.7
9.1

3.8
0.3
0.3
2.8
7.3

3.3
0.0
0.0
2.1
6.6

2.6
0.0
0.0
1.3
6.8

2.3
0.0
0.0
1.2
7.1

2.1
0.0
0.0
1.2
6.3

5.9
0.0
0.0
3.2
17.5

6.8

7.6

8.4

9.0

10.1

10.6

29.6

Real estate-related credits

4.6

4.2

3.9

3.3

2.7

2.1

5.9

Total

46.9

45.5

41.9

39.0

38.6

35.8

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).

142

Chap. VIII The Securitized Products Market

assets from their balance sheets. After reaching a peak in fiscal 2006, the volume 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 2012, 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.
*US dollar conversions from yen are at the exchange rate of ¥102.50 to US$1 prevailingon January 31, 2014.

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. To remedy this shortcoming, underwriters that are involvedin the transactions and credit rating agencies have been tracking the market
on their own. According to Deutsche Securities Inc., a leading underwriter,
the total value of securitized products issued in Japan was about ¥4.5 trillion($43.9 billion) in 2012. Although securitized products issuance reached apeak of ¥11 trillion ($107.3 billion) in 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 and credit card credits have exhibited a recovery trend, realestate-related, lease, and other credits have declined—a result that reflects
the differences in the underlying assets. Residential mortgage loans accountfor nearly 50% of the underlying assets used as collateral, a trend that has notchanged over the past few years. This trend reflects that lending banks areactively securitized mortgage loans of their own origination and that the issuance of RMBS by the Japan Housing Finance Agency has remained at a highChap. VIII The Securitized Products Market

Chart VIII-4.

143

Securitized Products Issuancetrillions of yen
1210

Lease receivables

8

Credit card receivables

6

Consumer loans
Residential loans

4Real estate related

2
0

CDOs
Others94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Source: Securitization department of Deutsche Securities Inc.

Chart VIII-5.

Component Ratios of Collateral Assets
2012

2%

5%

11%

4%

Lease receivables

10%

Credit card receivables
14%

Consumer loans
Residential loans
Real estate related

54%

CDOs
Others

5%

1%

2011
12%

6%
16%
8%
52%

Source: Securitization department of Deutsche Securities Inc.

144

Chap. VIII The Securitized Products Market

level.
According to the data compiled by the Japan Securities Dealers Association, the total value of such publicly offered securitization products had
steadily increased since 1997, the year in which the association had started
tracking the data. After hitting a peak of ¥0.58 trillion ($5.7 billion) in 2002,
however, the total has declined, falling to ¥0.2 trillion ($2.0 billion) in 2012.
This figure represents only 4.0% of privately placed ABSs. The popularity ofprivately placed ABSs is thought to be the result of considerations with regard to investor protection framework, taxes, and disclosure cost.
It appears that the underwriting of these securitized products is concentrated in major brokers/dealers and bank-affiliated securities companies. According to a league table posted on Mizuho Securities’website published byThomson-Reuters Corporation, a major information provider, top underwriters of those securitized products in 2012 were, in order of total underwriting
volume, Mizuho Financial Group, Mitsubishi UFJ Morgan Stanley, Nomura
Holdings, Sumitomo Mitsui Financial Group, and Daiwa Securities Group.
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, as well 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 2008.
A comparison of TMK trading amounts with those of other bonds in 2012shows that TMK bond trading amounted to ¥0.5 trillion ($4.88 billion), andthose of corporate straight bonds and utility bonds stood at ¥34.9 trillion($340.5 billion) and ¥3.1 trillion ($30.2 billion), respectively. Although these145

Chap. VIII The Securitized Products Market

Chart VIII-6.

The Amount of Specified Corporate Bonds Tradedbillions of dollars
16,00014,53914,00012,00010,912

9,686

10,000
7,324

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

0

1,561

3,000 2,930

4,518

5,749

7,048
3,797

2,735 2,986

5,274

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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
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.

FY2012

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.

146

Chap. VIII The Securitized Products Market

issues constitute only a part of the securitized products market, it may be said
that the asset-backed 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 companies make market in RMBS issued by the Japan Housing Finance Agency, the bonds are classified as FILP bonds for statistical purposes,
and their 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 and lower liquidity 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 theend of 2010, the number of listed issues increased to 35.
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Chap. VIII The Securitized Products Market

Table VIII-4.
Item

147

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
Per unit net asset value

Expected to increase to ¥50,000 or more by the time it is listed.

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)Amount of certificatestraded (¥100 mil)

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

2,061

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

38,813881

26,6452011

34

40,211

1,058

28,6642012

37

43,644

1,384

32,213

148

Chap. VIII The Securitized Products Market

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 type of trust is managed by a trust company that holds the assets incustody in 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

Chap. VIII The Securitized Products Market

Table VIII-6.

Creditenhancement(external)

149

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.

is determined by the credit risk of their issuers, the credit rating of a securitized product must be based on the results of examinations of assets underlying each product. The arranger who underwrites and markets the securitized
product and the originator negotiate with a credit-rating agency to obtain ahigh rating. There are various credit-enhancing measures to choose from fordifferent schemes employed for issuing a securitized product, but they may
be largely divided into two: an external credit-enhancing measure that utilizes external credit (such as banking institutions) and an internal credit-enhancing measure that gives the structure of the security the function of enhancing
its credit. There are two methods of external credit enhancement: indirect anddirect. The former complements cash flows from underlying loan assets, andthe latter complements that of a securitized product. The indirect method has
a drawback in that it cannot eliminate risks associated with a servicer or any
other party involved in securitization. As a means of enhancing internal credit, a senior subordinated structure is commonly used. In Japan, however, thesubordinated securities are often held by the originator because, among otherreasons, there are few investors who are willing to purchase them.
A large part of the risk of changes in cash flows from underlying assets
can be covered by credit enhancing measures. However, the risk of bankruptcy of the parties involved in securitization is a serious problem. As assigned
claims and receivables of a bankrupt originator are typically subject to bank-

150

Chap. VIII The Securitized Products Market

Table VIII-7.
Overall risksof ABS

Typical Risks of ABS

OutlineMeasures necessary to avoid risks

Credit risk

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

Prepaymentrisk

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

Liquidity
risk

When the funds flow out rapidly 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

ruptcy proceedings, investors carry the risk of nonpayment of their principal
and interest. Therefore, it is important to check whether there is any risk inthe business of any party concerned or whether the party is shielded from therisk of other parties concerned. Risks are complexly intertwined, and they aresummed up in table VIII-7.

Chap. VIII The Securitized Products Market

151

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

152

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 96Feb. 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. 11Chronology 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.

Chap. VIII The Securitized Products Market

153

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 Law 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 the collateralor asset value of securities and as an important indicator of general businesstrends. Because securities markets operated by stock exchanges perform an
important role in supporting the economic activities of the nation, a licensemust be obtained from the prime minister to open an exchange, and the 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, however, allowed stock exchanges to change their legal status to that of a joint stockcompany. Starting with the Osaka Securities Exchange (OSE) in April 2000,
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 in September 2007 provided for theestablishment of either a self-regulatory committee or a self-regulatory corporation by an exchange. Subsequently, in October of the same year, the Tokyo Stock Exchange founded a self-regulatory corporation, while the OsakaChap. IX The Financial Instruments Exchanges (1)155Chart IX-1. Organizational Structure of the Japan Exchange Group (Holding Company)
General Meeting of Shareholders
Nomination Committee
Board of Directors

Audit Committee

Audit Committee OfficeCompensation Committee
Secretary OfficeInternal Auditing Office

Corporate Strategy
Group CEOGroup COO

Executive Officers

General Administration
Human Resources

Board of
Executive Officers

Treasury
IT Planning
System Quality Control
Corporate Communications
CSR Promotion

Chart IX-2.

Organizational Structure of the Tokyo Stock Exchange (Market Operator)

General Meeting of Shareholders
Board of Auditors

Auditors Office

Auditors

General Administration

Board of Directors

President & CEO

New York Overseas Office

Advisory Committees
Market Operating
Committee

Board of
Executive Officers

Singapore Overseas OfficeLondon Overseas Office
Beijing Overseas Office
Listing
Equities
Derivatives
Information Services
Clearing & Settlement
Trading Participants
New Listings
Market Business Development
IT Administration
System Quality Control
IT Development
IT Services

156

Chap. IX The Financial Instruments Exchanges (1)Chart IX-3.

Organizational Structure of Osaka Securities Exchange (Market Operator)
General Meeting of Shareholders

Board of Directors

Board of Auditors

Auditors Office

Auditors

General Administration

President & CEO

Market Operations
Market Administration

Advisory Committees
Ad Hoc Committees
Market Operating Committee
Special Committee

Board of
Executive Officers

Trading Participants
Information Services
Market Planning
IT

Chart IX-4.

Organizational Structure of Tokyo Stock Exchange Regulation (SRO)

General Meeting of Members
Auditors

Auditors Office
General Administration

Board of Govemors
Advisory Committees
Discipline

President

Listing Examination
Listed Company Compliance

Board of
Executive Officers

Participants Examination& Inspection
Market Surveillance& Compliance(As of July 16, 2013)

Public Offering Investigation Office

Securities Exchange formed a self-regulatory committee.
These moves were prompted by potential conflicts of interests between the
public role of a securities exchange as a self-regulating body and the forprofit orientation of an exchange as a joint stock company, where exchanges
sought to reinforce the independence of their highly public function to ensureself-regulation of the market.
Recently, the intensifying cross-border market competition created by thedevelopment of electronic financial trading systems has led to many alliancesand mergers among exchanges overseas. To respond to this trend, in January
2013 the TSE and OSE combined their operations to solidify their positionsin the domestic market and to enhance their global competitiveness by upgrading the appeal and convenience of their markets.

Chap. IX The Financial Instruments Exchanges (1)157

2. The Listing System
The stock exchange imposes listing requirements from the 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. After the stock
exchange receives an application from a company wishing to list its stock,
the exchange checks first whether or not the listing applicant meets the technical 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.; (3) thoserelating to absence of opinion acknowledging false or improper statements
and being audited by an audit firm included in the Japanese Institute of Certified Public Accountants’(JICPA) Listed Company Audit Firm Register fromthe standpoint of ensuring proper disclosure of the state of the company’sbusiness; and (4) those relating to the appointment of a transfer agent, thetangen trading unit, the classes of shares, restricted shares, and appointmentof a designated custody and transfer agent from the standpoint of preventing
forgeries and other troubles in the share transfer process as well as ensuringsmooth operation in connection 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 ofpublic 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

158

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

The Listing Requirements of the Second Section of the Tokyo Stock
Exchange
October 22, 2013
Criteria

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

Amount of profit

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

No. of shareholders(Expected at listing)

800 or more1)

Tradable shares2)(Expected at listing)

At the time of initial listinga. No. of tradable shares: 4,000 units or moreb. Market value of tradable shares: ¥1 billion or morec. Ratio of tradable shares: 30% or more of the shares listed

Market capitalization of ¥200 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 (orthree years for those whose amount of profit falls within the purview of b
above)“Unqualified opinion”for the latest year

Others- Audited by a registered listed company audit firm
- 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 mean shares listed except for those held by directors and other officers of theissuer and by shareholders who own 10% or more of shares listed and shares held in treasury, if
any.
October 22, 2013
Eligibility Requirements
Corporate continuity and profitability:
A business is operated continuously and a stable revenue base is present.
Soundness of corporate management:
A business is carried out fairly and faithfully.
Effectiveness of corporate governance and internal management system of an enterprise:
Corporate governance and internal management system are properly prepared and functioning.
Appropriateness of disclosure of corporate information, etc.:
The applicant is in a state where disclosure of the corporate 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 theprotection of investors

Chap. IX The Financial Instruments Exchanges (1)159

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
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

160

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

Outline of Tokyo Stock Exchange’s Code of Corporate Conduct
October 22, 2013

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.
• Create management structure that includes• Duty to exercise of voting rights in writing, etc.
independent directors• Duty to carry out framework improvement to facilitate • Framework improvement to enable proper
exercise of voting rights for listed foreign companies
functioning of independent directors• Provide information on independent directors,• Duty to appoint an independent director• Duty to appoint a board of directors, an audit board or etc.
• Framework improvement to facilitate exercise
committee, and an accounting auditor• Duty to select a certified public accountant or public of voting rights
audit firm to provide the audit certificate of the ac- • Issue documents to holders of nonvoting
stockcounting auditor• Duty to carry out necessary structural development for • Framework improvement to prevent insider
ensuring the appropriateness of activities
trading• Rules pertaining to introduction of takeover defense • Framework improvement, etc., to eliminate
measuresinfluence of criminal and extremist elements• Rules pertaining to disclosure of MBOs, etc.
• Respect for the TSE’s corporate governance• Rules pertaining to significant transactions, etc., with principles for listed companies
controlling shareholders• Establish a system for proper response to• Audit by an audit firm placed on the TSE’s Listed changes in accounting standards, etc.
• Fair provision of supplementary explanatory
Company Audit Firm Registermaterials on details of business performance• 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

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 (ordinarily 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 a.m., and the afternoon
session, from 12:30 p.m. to 3 p.m.

Chap. IX The Financial Instruments Exchanges (1)Table IX-3.

161

Criteria for Delisting Stocks (the Tokyo Stock Exchange)
October 22, 2013

Item
① 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
activities
similar thereto⑧ 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

162

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

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.

Chap. IX The Financial Instruments Exchanges (1)163There 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 price increments being determined according to the price range of the stock. As of January 2014, the smallest price increment is ¥1. However, to enable the execution of even smaller increments the Tokyo Stock Exchange plans to introduce
one decimal point limit trades (¥0.1) as the smallest trading increment in July
2014. The allowable price for a limit order is restricted to a 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).
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 sellorders for a given issue are matched according to the price-priority rule tofind a single price that clears all market orders and meets certain other conditions.
The Zaraba method is a system by which, following the establishment of
the opening price by the Itayose method, trades are executed in a continuous
auction, in principle, through the end of a session. By this method, 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 on time priority inorder to determine the execution price.
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.

Floor trading
Off-floor trading
Ratio of off-floor/floor trading volumes

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Note: The ratio of off-floor/floor trading volumes denotes the ratio of the yen trading volume of off-floor transactions to that of on-floortransactions (units on right axis).

0.0%
02010.01 10.03 10.05 10.07 10.09 10.11 11.01 11.03 11.05 11.07 11.09 11.011 12.01 12.03 12.05 12.07 12.09 12.011 13.01 13.03 13.05 13.07 13.09

200,000

400,000

600,000

800,000(billion yen)
1,000,000

Chart IX-5. A Comparison of the Trading Value of Floor Trading and Off-Floor Trading of the Tokyo Stock Exchange

164
Chap. IX The Financial Instruments Exchanges (1)Chap. IX The Financial Instruments Exchanges (1)165

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.
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

166

Chap. IX The Financial Instruments Exchanges (1)Chart IX-6.

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

Netting
Instruction to transfer

Clearing participant
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.

participants. The main functions performed by the JSCC are (1) to assume
obligations, (2) to permit the netting of security positions and fund transfers,(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( the fund settlement bank”) to make a transfer of the netted amount between“
the accounts of the JSCC and each clearing participant. Throughout the seriesof netting and settlement processes, the JSCC performs and guarantees theChap. IX The Financial Instruments Exchanges (1)Chart IX-7.
Clearing
participants

167

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.

settlement 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,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 transactions

168

Chap. IX The Financial Instruments Exchanges (1)in 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
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,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 abolishment 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, and account management institutions, which are securities firms, etc., that have set
up transfer accounts.

Chap. IX The Financial Instruments Exchanges (1)Chart IX-8.

169

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-9.

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

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

Securities company Y

A shares (¥900,000)

170

Chap. IX The Financial Instruments Exchanges (1)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 sharesubscription 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 identificationof beneficiary shareholders, including their names and addresses along with
their share ownership data. JASDEC then compiles the information to periodically report to respective issuers (general shareholder notification).
(3) Companies produce their records of voting rights for general meetingsof shareholders and retained earnings distributions based on a register of beneficiary shareholders drawn up from the general shareholder notification.
(4) Minority shareholders, etc., can exercise their rights by applying to
JASDEC to have a notification sent to the issuer verifying their shareholdings, duration of ownership, and other particulars (individual shareholder notification). They can then exercise their rights for a limited period of time
following receipt of the notification.
The main benefits that are expected from transition to the electronic bookentry transfer system include (1) shareholders can eliminate the risks of loss,
theft, or forgery of certificates that are held at their own risk, and they also do
not need to submit certificates to the issuer for replacement in the event of acorporate name change or change in the share trading unit; (2) issuers cansave costs associated with issuance, such as printing costs and stamp duties,
as well as those associated with corporate reorganization (such events as corporate mergers, stock exchanges, stock transfers) for collecting old certificates and distributing new ones; and (3) securities companies can reduce therisks and costs associated with 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 trading system for the TSE’s cash equity market is a system for entering and matching orders, preparing transaction reports, and inquiring into the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

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

LaunchDevelopment

LaunchOSE cash trading System
2006.1 (2012.12 Replace devices)

2013.7 Integration of cash
trading systems
Integration

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

Clearing
SystemDerivatives
SystemCash
Trading
SystemIntegration

FY20142010.1FY2013

LaunchFY2012

System Integration Schedule for JPX Group(Cash)

arrowhead

Chart IX-10.

Chap. IX The Financial Instruments Exchanges (1)

171

172

Chap. IX The Financial Instruments Exchanges (1)state of the order book. The system processes stock, corporate bonds with
subscription rights, etc. (convertible bonds), and other transactions from floor
trading and the off-floor ToSTNeT market. Orders from a trading participant
are mainly entered through the trading partner’s in-house system or through a
direct connection to the TSE’s trading system.
The computerization of securities trading at the TSE started with the TSE2
trading system (the old stock trading system) that went into operation in January 1982. The current stock trading platform consists of arrowhead,launched in January 2010, and the ToSTNeT system, which came online in
November 2011. In handling the floor trading transactions, arrowhead utilizes triple redundant servers to provide the high-speed processing of orders,with an average response time of one millisecond, and of such trading information as orders, transactions, and the order book. These features make it ahighly reliable system with flexible scalability for rising volume capacity.
The TSE plans to upgrade arrowhead’s processing power and to expand andimprove its other functions during the system’s renewal, which is scheduledfor FY 2015. The other system of the trading platform, the ToSTNeT system,
handles off-floor transactions.
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
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 markets of the OSE and TSE. The system

2

AP

1

AP

arrownet

Trading
Systems

Secondary Center

Trading
Systems

Primary Center

Trading
Systems

Secondary Center

Trading
Systems

Primary Center

JPX Group Systems

GATENET

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.

2013.7 time (after spot market integration)

Chart IX-11.

Clearing
Systems

Clearing
Systems

Clearing
Systems

Clearing
Systems

Other
Systems

Other
Systems

Other
Systems

Other
Systems

Chap. IX The Financial Instruments Exchanges (1)

173

174

Chap. IX The Financial Instruments Exchanges (1)processes futures, options, and other transactions from floor trading and theoff-floor market. Orders from a trading participant are mainly enteredthrough the trading partner’s in-house system or through a direct connection
to the TSE’s trading 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. The TSE’s Tdex+ trading
system for derivatives, meanwhile, is based on the LIFFE CONNECT® system of the NYSE Group.
Following the launch of JPX in January 2013, plans were made to amalgamate the derivatives markets of the TSE and OSE on the OSE market in
March 2014, with the trading systems being integrated with J-GATE. Although J-GATE previously used the OSE’s GATEWAY network to connect
with external systems, the network since has been integrated with the TSE’sarrownet.
The clearing and settlement systems for the derivatives market were integrated into the JSCC system in July 2013, and the margin deposit systems related to the derivatives transactions of the OSE and TSE since have been unified. But while the TSE uses the JSCC for its settlement and clearance
operations, the OSE is still using its own settlement and clearance system forthese operations. The JSCC is scheduled to take over all settlement and clearance operations sometime in 2014.
The foreign exchange (FX) system, meanwhile, has its own trading, clearing and settlement, and market data systems. All FX operations are carriedout by the OSE FX system.

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 had to be done on the OTC market in so-called group transactions. In fact, the OTC market remained active even after the country’s stock
exchanges were reopened, resulting in the establishment of an OTC authorization system in June 1949 to provide some control over active trading. Thatsystem 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’s high 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 February 1963. This was the origin of today’s JASDAQ market of
the Tokyo Stock Exchange. The OTC registration system became the new
OTC market in 1983 and served to complement the conventional stock exchanges, particularly as a capital market for growth and start-up companies.
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 meritsof 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,

176

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

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).

Chap. X The Financial Instruments Exchanges (2)177

in 2011 the Tokyo Stock Exchange undertook a review of 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
Listed Company Audit Firm Register. 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.
2. Start-up Market Concepts
Mothers Market Concept
In 1999, the Tokyo Stock Exchange launched its Mothers market under aconcept that differentiated Mothers from the TSE’s First and Second Sections. The TSE established a listing system for Mothers to bring out the special characteristics of, to increase investor confidence in, and to vitalize trading on this new market. Companies wishing to list on Mothers are required todemonstrate high growth potential based on their business models, businessenvironment, or other means. Eligibility for listing and thereby accessing thecapital market is open to a broad range and number of growth companies andis not restricted by business scale or category. Among Mothers’listed companies are those with only several tens of employees and those in such infrastructure fields as information and telecommunications that boast thousandsof 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 or more or submit a report prepared by an independent
specialist affirming the company’s continued high growth potential.
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566 companies

185 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
1,760 companies

Transfer

Transfer

Group ofcompanies thathave special
technologies orbusiness models
with highgrowth potential

Group ofcompanies thatmeet certain
business scale
and performancestandards andhave businessexpansion
potential(At October 2013)

888 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.

178
Chap. X The Financial Instruments Exchanges (2)Chap. X The Financial Instruments Exchanges (2)179

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 information 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 listing requirements for JASDAQ differ somewhat for JASDAQ Standard and JASDAQ Growth. But in general, the formal requirements are thoseof 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 more market capitalization of tradable shares on the initial180

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

Listing Criteria for the Mothers and JASDAQ Markets

October 22, 2013

Quantitative Criteria (Formal Requirements)
Mothers

JASDAQ
Standard

GrowthAmount of net assets(Expected at listing)—¥200 million or moreAmount 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 shareholders(Expected at listing)

Correct amount—

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 firm
- 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

Chap. X The Financial Instruments Exchanges (2)181

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
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.
The Timely Disclosure of Business Information for Start-up Markets
The Tokyo Stock Exchange has established a list of requirements regarding
the timely disclosure of corporate information in its listing regulations. It requires listed companies to provide timely and accurate disclosure of any material corporate information.
Timely disclosure requirements are basically the same whether companies
list on the First and Second Sections, on Mothers, or on JASDAQ. One difference for companies on the Mothers market is the requirement to hold an
investor information meeting at least twice a year. And JASDAQ Growth
section companies are obliged to formulate and submit 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 agrace period in the application of some aspects of its code of conduct.
Delisting Criteria for Start-up Markets
The Tokyo Stock Exchange has delisting criteria built into its listing requirements. 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.

182

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

Criteria for Delisting Stocks (Tokyo Stock Exchange)

October 22, 2013

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.

Chap. X The Financial Instruments Exchanges (2)183After 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 does not suffer companies with collapsed businessmodels to remain on the market. Its delisting criteria are designed to maintainor improve the overall quality of its issuers. Newly established criteria include business performance standards to ensure investor confidence in themarket and stock price standards that eliminate issues with stock prices thathave languished 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 thespecial characteristics of each section.
5. An Outline of the OTC Stock Market
What Is OTC Trading?: In addition to shares traded on stock exchanges,
shares are also traded over the counter. As only those listed issues that meetcertain listing standards may be traded on exchanges, issues that are not eligible 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-exchange transactions in exchange-listed shares.
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. Afterthe war, OTC trading remained active even after the reopening of stock exchanges. In 1962, actively traded OTC issues were moved to the Second Section of the stock exchanges, but stocks continued to be actively traded overthe counter to such an extent, in fact, that an OTC stock market, an organizedmarket where OTC securities that meet the registration requirements of the
JSDA are traded, was launched in February 1963.
As solicitation for investments was restricted in the early years, the OTC

184

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

Form of Trading in OTC Stocks

Securities Company A

Securities Company B

Negotiated transactions by telephone
directly between a buying securities
company and a selling one, anddelivery and settlement of suchtransactions are also made directly
between them.

Securities Company C

Flow of sharecertificates andsettlement funds
Flow of orders

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 upgrading 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, enabling sales solicitations
for such issues meeting certain disclosure standards as green sheet issues.
Another category of traded unregistered or unlisted stocks is the Aozora issues or private equity issues.
6. OTC Securities, Etc.
Aozora Issues: Issuers of unlisted or unregistered stocks are not required bylaw to disclose their corporate information, and, in principle, JSDA rules

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

185

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.
1968 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.
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 stock exchange in December.
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.
2012 Report by Roundtable on the Green Sheet Issue System published.

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.

186

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

The Concept of OTC Securities

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)

OTC-handled securities(Shares and other securities issued by companies in compliance with continuous
disclosure requirements or those disclosing specified corporate information in a
Corporate Information Memorandum)

Green sheet issues(Tradable securities under the
Financial Instruments
and Exchange Law)

Phoenix issues(Tradable securities under the
Financial Instruments
and Exchange Law)

- An OTC securities market is currently defined under the Financial Instruments and Exchange Act as one
operated by an approved financial instruments business association, but, as the JASDAQ market (currently, the OSE JASDAQ market) was converted to an exchange market, there is actually no OTC market at present.
- OTC securities also include OTC-handled securities and green sheet issues, which are subject to selfregulation by the JSDA in addition to statutory rules and regulations.
- As off-floor transactions in exchange-listed shares are also conducted as negotiated transactions on
PTSs, they are regulated by the rules of the JSDA.
- Solicitation of investment in unlisted OTC securities issued by listed companies requires the production
by the issuer of a Securities Information, etc., Report at the point of distribution.

Chap. X The Financial Instruments Exchanges (2)187

OTC-Handled Securities: Securities whose issuers regularly disclose specified corporate information in the form of“Corporate Information Memorandum”are considered to carry less risk than other unregistered issues. And theregulations 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
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 statementwith 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. The Green Sheet System (1)An Outline of the Green Sheet System
Even after the listing standards of exchanges had been eased to allow someof the loss-making companies to go public, it was deemed necessary to improve the market for issuing and trading 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, filing a Corporate Information Memorandum so thatbrokers may market such securities at times, including, but not limited to, thecourse of a primary or secondary offering or private placement, provided thatthe brokers continuously publish quotes and other relevant market information

188

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

The Relationship between the Green Sheet System Issue Systemand the Stock Exchange
Stock exchange markets

Emerging issues(15 issues)

Ordinary issues(21 issues)

Investment trustand SPC issues(0 issue)Phoenix issues(3 issues)

Note: By the end of September 2013, a total of 12 green sheet issues had switched their listings to
exchange markets. Number of issues shown above are as the end of September 2013.

Chart X-5.

Changes in the Green Sheet Market(thousands)(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

13
e 20
Jun 012.2
Dec 12e 20
Jun 011.2
Dec 011e2
Jun 010.2
Dec 010e2
Jun 009.2
Dec 009e2
Jun 008.2
Dec 08e 20
Jun 007.2
Dec 07e 20
Jun 006.2
Dec 06e 20
Jun 005.2
Dec 05e 20
Jun 004.2
Dec 04e 20
Jun 003.2
Dec 03e 20
Jun 002.2
Dec 02e 20
Jun 001.2
Dec 01e 20
Jun 000.2
Dec 000e2
Jun

Table X-6.

Comparison of the Total Market Capitalization(as of the end of September 2013)(billions of yen)

Green Sheet*

125

Mothers (TSE)21,759JASDAQ (TSE)

101,260

Centrex (Nagoya)

193

Q-Board (Fukuoka)

511

Ambitious (Sapporo)

182

TOKYO PRO Market

36＊

The figure for the green sheet market is based on the last trade prices.

Chap. X The Financial Instruments Exchanges (2)189

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
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 (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 listed companies, as well as publishingsuch 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.
8. The Green Sheet System (2)Examination of Issues: As previously described, there are three types ofgreen sheet issue designation. Because the green sheet system was originallydesigned to give venture businesses with growth potential access to financing
opportunities in the capital market, the main category is the emerging issues.

190

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

Recent Business Results and Dividends of Emerging and Ordinary Issues

Levels of profit

Operating profit

Current profit

After-tax profits¥30 m or more

7/12 companies

6/9 companies

5/9 companies¥10 m to less than ¥30 m

1/8

2/7

3/7

¥0 to less than ¥10 m

2/7

1/10

1/9

A deficit of ¥0 to ¥10 m

0/2

1/3

1/4

A deficit of ¥50 m to less than ¥10 m

1/6

1/6

1/6

A deficit of ¥100 m to less than ¥50 m

0/1

0/1

0/1

A deficit of more than ¥100 m

－

－

－

Notes:- Figures in parentheses denote“the number of companies that paid dividends/the number of companies
falling into the category.”- The study covers 36 issues under green sheet designation as of the end of September 2013.

Chart X-6.

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

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

3 companies¥70 m plus 0 companies
2 companies¥60 m plus
1 company¥50 m plus
¥40 m plus

6 companies
2 companies¥30 m plus

4 companies¥20 m plus
1 company¥10 m plus

Less than ¥10 m 0 companies
0

1

2

3

4

5

6

7
companies

Note: 1. The survey covers 27 issues that underwent financing at their point of designation as of the endof September 2013.
2. When any firm makes a public offering of its shares with a total value of larger than ¥100
million, the issuer must file a securities report, and this disqualifies the issuer for the status ofgreen sheet.
3. For small firms that need no large-scale financing, a cheaper financing cost, and speedy
financing are important.

Chap. X The Financial Instruments Exchanges (2)191

Since issuers of securities in this category need to possess certain levels ofperceived growth potential, a member broker sponsoring an issue for green
sheet designation is required to conduct a prescribed review of issuers before
making an application. More specifically, the securities company is required
to verify the commitment of the issuer to legal compliance and its sense ofsocial responsibility (e.g., whether the business of the issuer serves a useful
purpose for society, whether the growth of its business has any social value,
and whether it has been observing the relevant laws and regulations) to see
whether the issuer has adequate internal governance processes and a framework for making timely disclosure (e.g., whether its executives are aware of
the importance of making full and timely disclosure, whether it has a systemof checks and balances built into its management structure, and whether it
has in place a proprietary or outsourced system that is capable of making
such disclosure) and importantly, whether its audit report contains a goingconcern clause and whether it has growth potential (e.g., whether it preparesa business plan based on reasonable grounds, whether it has a profitable business model, and whether its business has perceived growth potential in lightof the size and growth of the market addressed by the issuer and its competitiveness therein) and how much risk is involved in investments by the issuer(e.g., whether its business interruption risk is not assessed to be excessive,
whether its financials and financing are sound, and whether its relationships
with its affiliates are regular and normal).
If an issuer of an emerging issue fails to report 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.
Revocation of Green Sheet Designation: In the past, designation as a green
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, thecommencement of bankruptcy proceedings, rehabilitation or reorganization
proceedings or corporate liquidation, bank suspension, discontinuation ofbusiness 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

192

Chap. X The Financial Instruments Exchanges (2)appropriate in the light of the public interest or investor protection.
9. The Green Sheet Issue System (3)Trading in Green Sheet Issues
Because they are OTC trading, green sheet issues usually take the form ofnegotiated transactions. Japan Securities Agents, Ltd., did launch a proprietary trading system (PTS) in July 2003, but since 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
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 a daily basis, and the JSDA compiles such information for public dissemination. (Please note that members of
the green sheet system, unlike market makers in the United States, do nothave obligations to execute trades according to their quotes.)
Securities companies that have accepted orders from, or have entered intotransactions 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 prohibition of insider trading as provided for in theamendment to the Securities and Exchange Law of April 2005, the JSDA
regulations concerning green sheet issues ban member brokers/dealers fromaccepting market orders; effecting margin or when-issued transactions withcustomers; 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 andChap. X The Financial Instruments Exchanges (2)Chart X-7.

193

The Flow of Solicitation for Investment in Green Sheet Issues

Customers investing in green
sheet issues for the first time
The securities company issues a corporate brochure of the issuer toa customer and collects a statement of confirmation.
Solicitation for investment (Explain using the Corporate
Information Memorandum)
The securities company explicitly identifies the category to which
the issue belongs.
The securities company accepts an order from, and concludes acontract with, the customer.
The securities company reports to the JSDA the information
concerning the quotations and the contract concluded.

Chart X-8.

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

Acceptance of an orderand confirmation note

Japan Securities
Dealers Association(JSDA)

General securities
companies

Customers

including the trade date (T＋3 settlement). As green sheet issues are not eligible for custody with the Japan Securities Depository Center, Inc., sharedelivery 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

194

Chap. X The Financial Instruments Exchanges (2)be conducted during the trading suspension.
10. 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.
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 thegreen sheet system in that no review by handling members is required fordesignation and 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.
After Phoenix issues have been trading on the system for a specified period of time and their issuers have undergone a certain amount of revitalization, those companies that aspire to re-list are expected to move to the green
sheet system and utilize that system in the interests of developing a stable

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

195

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

Phoenix issue system

Eligible securities

Stocks, bonds with new share Stocks and bonds with new sharesubscription rights, preferred subscription rights attached that
notes, and corporate investment have been delisted
trustsDesignation required

Yes

Yes

Obligation for handling mem- Yes
ber to review issue

No
Yes

Criteria for losing designation

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

Negotiated transaction

Delivery and settlement

Direct (in principle, 4 business Directly through JASDEC’s transdays or T + 3)
fer system (in principle T + 3)

Trading hours

0900 to 1530

0900 to 1530

Reporting and disclosure obli- Yes
gations for quotes and orders

Yes

Disclosure materials

Corporate Information Memorandum and securities report(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 Items specified by the JSDA

Items specified by the JSDA

Insider trading rules

AppliedAppliedshareholder base, etc., in preparation for re-listing.
11. Professional Investors Markets̶TOKYO 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 was established under the professional investor market system provided

196

Chap. X The Financial Instruments Exchanges (2)Table X-9. Comparison of TOKYO PRO Market’s and Other Markets’Listing Standards
Other Japanese equity markets

TOKYO PRO Market

Disclosure language

JapaneseJapanese or English

Accounting standards

Japan GAAP

Japan GAAP, IFRS, U.S. GAAP, and otherapproved standards (agreed on by J-Nomad
and auditor and approved by TOKYO AIM)

Listing criteria

Minimum shareholders, capi- No set requirements
talization, sales, profit, etc.
Criteria judged by J-Nomad (similar process
as with LSE’s AIM)

Auditor’s report

Two most recent years

Last fiscal year onlyInternal control reports Required

Not required

Quarterly reports

Required

Not required

Investors

No restrictions

Only professional investors＊ and non-Japan
residents＊What are professional investors?
■Specified investors
 Qualified institutional investors (i.e., financial institutions), listed companies, and private companies with over ¥500 million in capital Government agencies, the Bank of Japan, and regional public authorities■Approved specified investors
 Companies outside the above conditions
 Individuals with over ¥300 million in net assets (including financial assets) and with at least one year of investment experience■Entities not domiciled in Japan

Chart X-9.

Japanese andOverseas
Professional
Investors• Provision of liquidity• Trading infrastructure• Provision of Investor
Information (Analyst
reports, etc.)

Role of J-Adviser

J-Adviser• Assessment of suitability
at time of listing• Ongoing support forlisting and afterward

Japanese andOverseas
Companies(business companies)• Qualification screening (part of SRO activities)

Tokyo Stock Exchange* What is the J-Adviser System?
• Role Listed companies must retain a J-Nomad at all times.
 Assess and confirm the appropriateness of companies wishing to list on TOKYO AIM
 Provide ongoing support after the listing to ensure the company maintains its qualification.
• Eligibility Companies with experience in corporate finance and the necessary staff versed in this area.

• There are currently 7 J-Advisers• SMBC Nikko Securities Inc.
• OKINAWA J-Adviser Co., Ltd.
• Daiwa Securities Capital Markets Co., Ltd.
• Nomura Securities Co., Ltd.
• Phillip Securities Japan, Ltd.
• Mizuho Securities Co., Ltd.
• Mitsubishi UFJ Morgan Stanley Securities Co.,Ltd.
(Japanese kana syllabary order, at December 2013)

Chap. X The Financial Instruments Exchanges (2)197for by the enactment of the December 2008 revision of the Financial Instruments and Exchange Act (FIEA) and was succeeded by the TOKYO PRO
Market.
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. Chart X-9 details
how the TOKYO 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.
At December 31, 2013, the TOKYO PRO Market had seven J-Advisers
and six listed companies.
12. Professional Investors Markets̶TOKYO 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 thedisclosure system and business practices stipulated in the Financial Instruments and Exchange Act are protective of investors in general. Foreign issuers face a particularly high hurdle because of the costs of at least twice-yearly

198

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

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 notfollow the same rules. For example, there is no J-Nomad 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Chap. X The Financial Instruments Exchanges (2)199

Table X-10. 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.”

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 rating 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 forexpeditious 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
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

Chap. XI Prohibited and Regulated Acts of Securities Trading

Table XI-1.

Main Provisions Relating to the Ban on Unfair Trading
Contents

Generalprovisions

201

・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.

202

Chap. XI Prohibited and Regulated Acts of Securities Tradingon 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.
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.
Price manipulation refers to an act of engaging in transactions that could
possibly cause a fluctuation in securities prices for the purpose of misleading(inducing) other persons into believing that, despite intentional price manipulation, the prices are determined by natural supply and demand, and thus inducing them to purchase or sell the securities. (Supreme Court ruling on the
Kyodo Shiryo case, July 20, 1994)
Stabilization transactions are transactions done for the purpose of pegging,
fixing, or stabilizing the prices of specific securities. However, when primaryofferings and secondary distributions are made, there is 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.
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

Chap. XI Prohibited and Regulated Acts of Securities Trading

Table XI-2.

Wash transactions

203

Provisions of the Financial Instruments and Exchange Act Relating toMarket Manipulation
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).

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.
3. Prohibited and Regulated Acts of Corporate Insiders
Regulations concerning the acts of corporate insiders are largely classified

204

Chap. XI Prohibited and Regulated Acts of Securities Trading

into two categories: those prohibiting insider trading per se and those designed for its prevention.
(1) The Prohibition of Insider Trading“Insider trading”refers to acts of effecting the sale, purchase, or other type oftransaction of securities pertaining to any unpublished corporate informationthat may significantly influence the decision making of investors before suchinformation is publicized by an insider of a listed company who has come toknow the information through the performance of his/her duties or due to his/her position. If such transactions were to take place, the investing publicwould 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.
(2) Preventing Insider Trading
Along with the prohibition of insider trading, the officers and principal shareholders of listed companies, etc., are required to officially report any transactions in the shares of the company concerned. They are required to return tothe company any short-term trading profit they have made in the shares of
the company held for a period of six months or less, and they are prohibitedfrom selling the securities, etc., of the company in excess of the share certificates, etc., of the company that they hold.
Checks by securities companies on orders they receive and internal

Chap. XI Prohibited and Regulated Acts of Securities Trading

205

Table XI-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.

206

Chap. XI Prohibited and Regulated Acts of Securities Trading

frameworks of listed companies (to manage and control corporate information and regulate employee trading of company shares) and posting information on J-IRISS play a critical role in preventing insider trading. J-IRSS
stands for Japan-Insider Registration & Identification Support System, asearchable database where securities companies regularly register information on their customers 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 have been set out for financial instruments firms (securities companies) and their employees, officers, and directors from the standpoint of ensuring the protection of investors, the fairness of transactions, andother aspects of trading.
(1) Business Relationship with Customers
Business with customers must be executed in good faith and fairly. Securities
company personnel have a duty to provide customers with appropriate information and the use of false notifications or disclosure, fraudulent means, violence or threats or other unfair methods to gain access to customers’assets isbanned as is the use of excessive solicitation. While these regulations aim toprotect investors, overprotection must also be avoided. To ensure fairness intransactions, 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. Moreover, tomaintain the fairness of the market, securities companies are prohibited fromaccepting orders from customers when aware that the transactions involve 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).
(2) Management of Sensitive Corporate Information
Through their underwriting and M&A-related advisory and other businesses,
securities companies have access to undisclosed information that could influence the stock price, etc., of issuers (sensitive corporate information). To
prevent unfair trading based on such information, securities companies areChap. XI Prohibited and Regulated Acts of Securities Trading

207

Chart XI-1. Prohibited and Regulated Acts of Securities Companies (Duties andProhibited Acts)
Investors (Customers)• Duty to act in good faith• Duty to provide appropriate informationand to explain important items regarding
investment trusts• Prohibited: Use of false notifications anddisclosure, offering conclusive judgments,
violence or threats or unfair methods togain access to customer assets, excessive
solicitation (limited to specifictransactions)• Prohibited: Loss compensation, providing
extraordinary profits, illegal discretionary
account transactions, massive promotional
campaigns for particular securities• Duty to apply suitability principle• Prohibited: Accepting
orders when aware thatthey involve insider
trading or market
manipulation• Prohibited: Solicitation
using sensitive corporate
information

Securities Companies
Sales Division(Responsible for brokerage and offerings businesses)• Prohibited: Trading on own
account before executing acommissioned, etc., tradefrom customer (front running)

Managing sensitive
corporate information…Chinese wall
(an information barrier)Investment Banking
Division (Responsible
for underwriting and
M&A and otheradvisory businesses)

Proprietary Trading Division(Responsible for proprietaryaccount trading)• Prohibited: Sales
utilizing sensitive
corporate
information• Duty toscreening issues
for wholesale
underwriting• Duty tounderwrite
issues based on
appropriate
share volume,
price, and otherconditions

Securities analysis (Analysts)
Division

Others• Duty to manage information processing system• Duty to prevent legal violations by financial
instrument intermediaries, etc.

----- Management to prevent erroneous orders -----

Markets (Stock Exchanges, etc.)

Issuers(ListedCompanies,
etc.)

208

Chap. XI Prohibited and Regulated Acts of Securities Trading

required to establish appropriate systems. Specifically, securities companies
commonly set up an information barrier or Chinese wall between the investment banking and similar divisions that regularly deal in sensitive corporate
information and the rest of their operating divisions to enable the management of information sharing in-house. In addition, personnel are forbidden touse sensitive corporate information to solicit customers (mainly targeting
sales divisions) and in trading (mainly targeting proprietary trading divisions).
(3) 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.).
(4) 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 and theself-regulation rules of the Japan Securities Dealers Association and stock
exchanges, etc., set out various strongly advised or required management
systems for securities companies.

CHAPTER XII
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210

Chap. XII Financial Instruments Business (Securities Business)

Table XII-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) Sale or purchase of securities, market transactions of derivatives (1) An applicant who had his/her registration rescinded and for whom
five years have not passed since the rescission; an applicant who has
or foreign market derivatives transactions; intermediary, brokerbeen punished by a fine for violating the provision of any applicableage, or agency service for the transactions listed above; intermelaw or regulation and for whom five years have not passed since thediary, brokerage, or agency service for the entrustment of thetransactions listed above; brokerage for the clearing of securiimposition of the fineties, etc.; secondary distribution of securities; or the handling of (2) An applicant with an officer, etc., who is bankrupt or has received
public, primary offering or secondary distribution of securities
certain criminal punishment and for whom five years have not passed
since the completion of the sentenceor the handling of the private placement of securities(2) Over-the-counter transactions of derivatives or intermediary, (3) An applicant without appropriate personnel resources to properly
conduct the financial instruments businessbrokerage, or agency service therefor(4) An applicant with stated capital or net worth of less than ¥50 million(3) Underwriting of securities(4) Sale or purchase of securities or intermediary, brokerage, or (5) An applicant that is not a stock company
agency service therefor, which is conducted through an electron- (6) An applicant whose additional business other than incidental or regisic data processing system and in which a large number of pertered/approved concurrent business is found to be against the publicsons participate simultaneously as a party or parties of the transinterest or to pose difficulty in risk management
action (business of operating a proprietary trading system (PTS (7) An applicant whose major shareholder (with 20% or more of voting
rights) is disqualified for registration
business)(5) Acceptance of deposit of securities, etc., in relation to the trans- (8) An applicant with a capital-to-risk ratio less than 120%
actions, etc., listed above “( safekeeping”) or book-entry transfer (9) An applicant with a trade name that is the same as or similar to thatof stocks or corporate bondsof an already existing financial instruments firm
Minimum Capital Requirement (Article 15, Paragraphs 7 and 11 of theNotes:FIEA Enforcement Order)
1. An authorization from the prime minister is required for conduct(1) Business of conducting wholesale underwritings as a lead manager
ing acts provided in (4) above (Art. 30, Paragraph1).
¥3 billion
2. Acts provided in (5) above are defined as primary business in the (2) All
other underwriters
FIEA rather than as incidental business in the former SEL.
¥500 million(3) Business of operating PTS¥300 million(4) All other Type I financial instrument businesses¥50 million
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(4) Agency service for customers concerning securities
transfer or intermediation thereof(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 derivativetransactions or intermediary, brokerage, or agency service thereof
the request of an investment trust(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 speci(company-type investment trust)
fied assets defined in the Investment Trust Law(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.)
anonymous partnerships, and (iv) loan participation; (v) insurance(1) Conducting a transaction on a commodity exchange(2) Conducting a transaction in a derivative contract on a commodi- agency business; (vi) intermediary service for forming a trust by willor concluding a contract concerning the disposition of deceased estate;
ty price or other benchmark(3) Money-lending business or intermediary service for money (vii) production, sale, and commissioned operation of computer programs; (viii) financial institution agency business; (ix) intermediary,lending(4) Business pertaining to real estate transactions or real estate leases brokerage, or agency service for a transaction of emission rights orderivatives thereof; (x) investment of property, except that entrusted(5) Real estate specified joint enterprise(6) Commodity portfolio management businessunder an investment management contract, in assets other than securi(7) Business of investing property entrusted under an investment ties or rights pertaining to derivative transactions (e.g., management
management contract in assets other than securities or rights of a fund that invests in monetary claims); (xi) management of real estate; (xii) management, under entrustment, of an investment corporapertaining to derivative transactions(8) Among the 23 other businesses designated by a cabinet office tion or a specific-purpose company (TMK); (xiii) guarantee or assumption of debt or intermediary or other service thereof; (xiv)ordinance, the main business include:(i) intermediary, brokerage, or agency service for trading gold; introduction or referral to any other business for a customer; and (xv)concluding agreements or intermediary, brokerage, or agency promotion or advertisement of any other business.
service for concluding agreements for (ii) partnerships (iii)

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. XII Financial Instruments Business (Securities Business)

211

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 Law as part of the Financial System
Reform Law. Specifically, in December 1998 a new registration system replaced the licensing system, and restrictions on the concurrent operation of
nonsecurities business were eased. (Under the same amendment, banking institutions are also allowed to engage in the securities business by registration.)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.
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.

212

Chap. XII Financial Instruments Business (Securities Business)

Chart XII-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)

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)

Financial Bureau(with jurisdiction
over the area inwhich C is located)

Registration of Financial
Instruments Agency Business
Notification of concurrent
Inspection Bureau of
operation
Supervision and inspection the Financial Services
Agency, Securities andExchange SurveillanceCommission
Financial Instruments Agent, an
Inspection
individual or a corporation (excluding banking institutions)

Financial
Instruments Firms
Association

Registration of registered representatives
and supervision

Securities agent,registered representative E
Securities agent,registered representative D

Securities agent,registered representative F

Duty to preserve recordsof transactions

Opening an account, safekeeping,
and trading (conveyed by C); issuance of a transaction report;
and liability of A for damages

Opening an account, safekeeping,
and trading (conveyed by C); issuance of a transaction report;
and liability of B for damages

Securities businesses and conclusion of aninvestment advisory or discretionary investment contract (agency or intermediaryservice only)
Identification of the affiliated financial instruments firms to which transaction orders are forwarded (acceptance of deposits
of customer assets is prohibited)

Customers

Note: More than one agreement commissioning an order is allowed.
Source: Compiled on the basis of the data drawn from materials published by the Financial Services
Agency.

Chap. XII Financial Instruments Business (Securities Business)

213

The provisions of the FIEA are designed to ensure the protection of investors by instituting a number of preventive measures. More specifically, theyrequire 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 August 2013, for example, there were 764 actual financial instruments
agents (528 companies and 236 individuals) acting as a total of 1,041 agents(767 companies and 274 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 235 agents affiliated with Ace Securities and the 200 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.

214

Chap. XII 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 XII-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. ofBusiness
Offices (incl.
head offices)No. of employees
Capital(in ¥ bil)No. ofNo. of Office
Registered
Bound
RepresentaEmployees
tives

2006

130
(13)

177
(21)

307
(33)

2,196
(37)

22,07816,60776,054

2007

128
(13)

188
(17)

316
(30)

2,270
(32)

22,712

17,87981,260

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)

159
(10)

260
(16)

2,109
(17)

16,975

12,34871,916

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 2013 figures, the number of branches and the total amount of capital are as of theend of July and the number of employees is as of the end of June, which does not include 2,778
registered representatives employed by financial instruments intermediary service agents (as ofthe end of June 2013).
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.
Source: Japan Securities Dealers Association, Shoken gyoho (JSDA Monthly Report), Gyomu houkousho(JSDA Operation Report), etc.

Chap. XII Financial Instruments Business (Securities Business)

Table XII-3.

215

Changes in the Number of Domestic Securities Companies through NewEntry Mergers and Discontinuation of BusinessNo. of New Entrants

Through a Merger

Discontinuation

1993–9619－3

1997–2001

80

－36

－22

2002

11

－9

－9

2003

7

－4

－7

2004

7

－5

2005

20

－3

2006

25

－1

－2

2007

22

－2

－10

2008

22

－6

－9

2009

4

－7

－19

2010

9

－6

－13

－2

2011

4

－6

－6

2012

2

－8

－10

2013 (Jan. to Aug.)

3

－7

－6

Notes: 1. The 19 companies that entered the stock market during the years from 1993 through 1996 hadbeen established as securities subsidiaries of banks under the Financial System Reform Law.
2. The term“merger”includes assignment of business to another firm.
3. The number of companies that have discontinued their business is as of the date on which they
have quit their membership of the Japan Securities Dealers Association and one or two years after they had suspended their operations.
4. Figures do not include entries and exits due to reorganization, such as the establishment of local
subsidiaries by foreign securities companies (which have increased rapidly since 2006).
Source: Japan Securities Dealers Association, Shoken gyoho (JSDA Monthly Report).

Table XII-4.

No. of Securities Companies, by Capitalization
End of 2008

End of Sept. 2013¥50 bil or more

The Amount of Capital

14

12¥10 bil or more and less than ¥50 bil

19

17¥3 bil or more and less than ¥10 bil

39

43¥1 bil or more and less than ¥3 bil

47

38¥300 mil or more and less than ¥1 bil

101

81

¥50 mil or more and less than ¥300 mil
Total
Note: Excludes foreign securities companies.

74

53

294

244

216

Chap. XII Financial Instruments Business (Securities Business)companies 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. Meanwhile, a number offirms that were armed with a unique business style and focused on selected
segments of the securities business have entered the market, making it increasingly fluid. Incidentally, during the period from May 1997, after Ogawa
Securities went bankrupt, to the end of August 2013, a total of 216 securities
companies had dropped out of the market either by voluntary dissolution or
through an assignment of business to, or a merger with, another company,
while there were 216 market entrances (see the chart on the next page). In
addition, a number of foreign securities companies have opened branches inJapan. Since 1990, some of them have increased their shares in the equity
and derivatives trading markets, largely thanks to increases in orders received
from their overseas customers. They are playing a major role in new types ofbusiness, such as the securitization of assets, packaging structured bonds, and
M&A—to such an extent, in fact, that the oligopolistic control of the Japanese securities market by the Big Four has been virtually broken.
In 1998 two leading securities companies—Daiwa and Nikko—enteredinto capital and business tie-ups with financial institutions, domestic or foreign, and carried out a far-reaching change in their business organization by
dividing operations into a wholesale division and a retail division (Daiwachanged its corporate structure into a holding company structure in 1998, andNomura and Nikko did likewise in 2001). And many securities companies,
large and small, started to overhaul their traditional Japanese-style employment systems by introducing a new compensation system based on performance. Moreover, large securities companies have shed some of their small
and midsized affiliated securities companies in an effort to increase the overall efficiency of their operations, while leading banks and other business corporations have picked them up with a view to using them as vehicles for entering the securities market (see section 13 of this chapter). At the same time,
many securities companies have tried to claw their way out of the securities
market slump and meet changes occurring in the market environment by reforming their operations. And such efforts have brought about a big change

Chap. XII Financial Instruments Business (Securities Business)217

in the business organization, the personnel administration system, and thecompetitive structure of the securities 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 executedon stock exchanges, most bond orders are executed by matching them against
the positions of securities companies’proprietary accounts (bond dealing).
Along with stock exchanges, securities companies play an important role informing fair prices and maintaining the liquidity of securities through theirbroker/dealer functions.
In addition to underwriting publicly offered new issues of public bonds(government securities, etc.), nonconvertible bonds of 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, theact 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.”
The term“public offering”means the act of soliciting investors for the purchase of new-issue securities and selling them. 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 sales of major shareholders, etc.

218

Chap. XII Financial Instruments Business (Securities Business)

Table XII-5.

Business Volume Handled by TSE Member Companies
Underwriting andDistributions(100 millions of yen)Handling of Public and Distributions(100 millions of yen)

Traded on
margin(%)

Stocks

Bonds

Stocks

Bonds

Beneficiary
certificates ofinvestment trusts
709,796

Cash Stock Transaction Value(trillions of yen)
PropriAgency
etary
2001/3

194

316

11

70,418310,878

17,478

165,966

2002/3

188

271

12

14,701

332,079

18,455

183,771

630,223

2003/3

180

236

14

16,240420,062

23,642

207,617345,3142004/3

262

402

19

29,427445,01742,918234,572

441,715

2005/3

287

503

20

36,652

509,186

51,296248,142

501,677

2006/3

441

886

21

47,813558,784

71,394

340,810

799,629

2007/3

525

982

18

50,427417,929

66,840242,514754,676

2008/3

552

1,036

16

17,614553,961

26,654351,305

702,061

2009/3

381

665

18

19,485509,049

28,005309,318

506,129

2010/3

291

540

21

48,210330,872

67,244

219,282549,085

2011/3

243

595

16

23,373353,167

37,122

222,042

622,565

2012/3

152

537

15

N.A

N.A

N.A

N.A

N.A

2013/3

177

672

17

N.A

N.A

N.A

N.A

N.A

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. Special members are not included. The total number of Tokyo Stock Exchange member companies, including foreign securities companies, as of March 31, 2013, stood at 91.
4. From FY2002 on, the method of computation was changed.
Source: Compiled on the basis of the data drawn from Shoken of the Tokyo Stock Exchange, 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. XII Financial Instruments Business (Securities Business)

Table XII-6.

219

PTS Transactions(millions of yen)

Trading on
Exchange(A)

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

2005/3 368,350,873 21,100,338

389,451,480

124,839

0.6%

0.0%

2006/3 642,298,900 30,507,011

672,805,911

338,675

1.1%

0.1%

2007/3 723,734,608 42,810,934

766,545,542

854,916

2.0%

0.1%

2008/3 762,223,285 49,610,445

811,833,730

2,140,465

4.3%

0.3%

2009/3 521,094,825 36,357,081

557,451,906

2,073,204

5.7%

0.4%

2010/3 395,500,588 24,483,714

419,984,302

3,089,794

12.6%

0.7%

2011/3 397,576,761 24,801,215

422,377,976

4,937,196

19.9%

1.2%

2012/3 335,080,193 32,298,843

367,379,035

15,202,634

47.1%

4.1%

2013/3 382,653,161 36,328,078

418,981,239

21,246,585

58.5%

5.1%

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.

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.
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 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 exchange (FX) transactions are among the products that they use relatively

220

Chap. XII Financial Instruments Business (Securities Business)

Chart XII-2.

OTC FOREX Margin Transactions(trillions of yen)
1,600
1,400
1,200
1,000
800
600
400
200
0
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 12 12 13 13
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

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.

often. Investors use OTC FX transactions to purchase or sell currencies bydepositing a margin with the broker and settle the transaction usually on a net
basis. These OTC transactions got their start in Japan when some commodity
traders became the first to use them following the deregulation of foreign exchange transactions through the 1998 amendment of the Foreign Currency
and Exchange Law. 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
FX transactions more transparent, the Tokyo Financial Futures Exchange(TIFFE, now TFX) listed an FX product in 2005 called Click 365. The OSE
followed suit later, listing FX transactions in 2009. 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Chap. XII Financial Instruments Business (Securities Business)

Table XII-7.

221

OTC CDF Transactions on Securities

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

109,260

136,446

137,424

145,258

145,967

101,196

67

66

80

82

87

63

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

Total

Fiscal 2010
Transaction amount (100 millions of yen)
Number of transactions
Open interest (100 millions of yen)

1,066

109,233

1,265

118,315

2,950,538

25,224

16

84

36

102

111,666

9,070 3,103,147
1

137

50

63,744

Fiscal 2011
Transaction amount (100 millions of yen)
Number of transactions
Open interest (100 millions of yen)

1,458

60,614

1,622

154,570

2,623,063

37,74518

88

71

3,985 2,819,363
1

178
53,354

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

2,900

48,6981,738

18

175,639

1,821,359

32,925394 2,030,317

15

120

111

0

246

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 Japanthe market. This type of OTC trading, where investors can place orders withlow margins and settle the contracts on a net basis, is called contract for difference (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 (see table
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. Management

222

Chap. XII Financial Instruments Business (Securities Business)

Chart XII-3.
3,000

Changes in the Number of M&As Involving Japanese Companies

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
1-7

Note: The 2013 figures include only those from the period from January to July.
Source: Compiled from the data section of marr magazine, Recof.

Table XII-8.

Ranking of Advisors on Published M&As Involving Japanese Companies(January－June 2013)

Rank

Advisors

Amount(in 100 millions of yen)

No. of Deals

1

Mitsubishi UFJ Morgan Stanley

12,47029

2

Nomura10,446

56

3

Sumitomo Mitsui Financial Group

9,850

67

4

Daiwa Securities Group Inc.

7,853

30

5

PLUTUS Consulting

4,293

26

6

GCA SAVVIAN Group

4,261

15

7

Goldman Sachs

4,212

8

8

A.G.S. Consulting

4,192

16

9

YAMADA Consulting Group

4,099

8

10

Partners Consulting

3,992

5

Note: Excluding real estate deals.
Source: Thomson Financial.

Chap. XII Financial Instruments Business (Securities Business)

Table XII-9.

223

Number of Wrap Accounts and Assets Under Management(100 millions of yen)

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

June end 2013

59,596

8,655

0

0

59,596

8,655

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.

of 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 virtually identical 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 2013 amounted to ¥86 trillion ($839 billion) and therepo market has grown to become one of the largest securities markets.
By“consultation to any other business operator with regard to a businessassignment, merger, company split, share exchange or share transfer, or224

Chap. XII Financial Instruments Business (Securities Business)intermediation for these matters”is meant the M&A consulting service thatan investment bank provides to its clients with respect to the spinning off of abusiness 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 March 2013, according toa survey by the Japan Securities Investment Advisers Association, there werea total of 59,596 wrap accounts in the industry, holding approximately ¥865.5
billion. Major brokers, foreign affiliates, and securities subsidiaries of megabanks focus on M&A; structuring of private equity funds; and securitization(defined as business to trade monetary claims and requires notification), collectively known as investment banking services, along with securities underwriting, which is often conducted in association with these services.
In addition, following the deregulation of brokerage commissions (fully
deregulated in October 1999), low-commission online stockbrokers offering
service over the Internet have emerged, and their share of the market has
been increasing rapidly. The number of online brokers stood at 57, with thenumber of accounts rising to 18.16 million at the end of March 2013. The
value of cash stock and margin transactions of these online brokers during
the period between October 2012 and March 2013 amounted to ¥131.19 trillion ($805.7 billion), accounting for 31.7% of the total value of agency transactions, and the online brokers sold ¥607.7 billion worth of investment trust
units according to the JSDA Monthly Report for June 2013. Growth in thebusiness of Internet brokers was particularly notable.
*US dollar conversions from yen are at the exchange rate of ¥102.50 to US$1 prevailingon January 31, 2014.

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 ascollateral for shares or bonds borrowed, interest, and dividends and otherChap. XII Financial Instruments Business (Securities Business)

Table XII-10.

225

Revenue and Expenditure of General Trading Participants of TSE(millions of yen)

No. of trading
participantsCommissions
received

Term ending
Term ending
March 2003 Ratio to net March 2013 Component
operating
ratio
108
91
incomecompanies
companies

Mar. 2013/
Mar. 2003

1,348,538

66.5%

1,642,878

62.4%

121.8%

Brokerage comm.

487,17424.0%

441,654

16.8%

90.7%

Underwriting fees

125,754

6.2%

115,111

4.4%

91.5%
319.2%

Selling concession

138,5786.8%

442,282

16.8%

Other fees and commissions

596,91229.5%

643,72624.4%

107.8%

Trading Profit/loss

555,923

27.4%

826,03631.4%

148.6%

Stocks, etc.

179,789

114,720

63.8%

Bonds

325,709

631,998

194.0%

Others50,405

Financial income

341,662

Margin trading

35,985

Other interest

305,677

Financial expenses

219,580

Margin trading

22,586

Other interest

79,28816.9%

157.3%

436,350

16.6%

50,239386,11110.8%

126.3%

271,930

10.3%

10,386

196,994127.7%
139.6%
123.8%
46.0%

261,544132.8%

Total of net operating revenue

2,026,543

100.0%

2,633,334

100.0%

129.9%

Total of operating revenue

1,893,393

93.4%

2,101,719

79.8%

111.0%

Note: Component ratios represent percentages of the net operating revenue.
Source: Compiled from Earnings Summary of General Trading Participants, TSE.

distributions on securities held in inventory; and 6) other fees and commissions, including those received in connection with incidental or concurrent
businesses, chief of which are 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) financial expenses (interest and fees on brokers’loan and stock certificatesborrowed from securities finance companies in connection with margintransactions, interest and fees on brokers’loans and bonds borrowed in226

Chap. XII Financial Instruments Business (Securities Business)

Chart XII-4.
100%
90%
80%
70%

Expense Structure of General Trading Participants of the TSE

5.6%
13.3%

0.8%
3.2%

13.7%

6.5%

1.2%

13.6%
10.6%

5.4%

4.5%

7.0%

1.1%

17.1%
10.6%

4.0%

1.3%

12.1%
23.2%

60%
50%
40%

12.1%
47.4%

43.9%

43.8%

16.1%

18.8%

18.9%

FY2003/3

FY2008/3

FY2013/3

Five brokers specializing
in online services(FY2013/3)

Tax impact
personnel expensedepreciation charges
othersreal estate-related expense

30%
20%
10%
0%

trading-related expense
administrative expense

14.8%

29.5%

Note: The five brokers specializing in online services refer to SBI, Matsui Securities, Rakuten Securities,
Monex Inc., and Kabu.com Securities.
Source: Compiled from the TSE’s Earnings Summary of General Trading Participants and from investor relations materials (nonconsolidated) from the five online brokers.

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 iscalled“operating profit.”Nonoperating income or loss is added to operating
profit to reach“current (or recurring) profit.”Profit or loss, if any, from thesale of investment securities or real estate holdings and losses due to capital
contribution to affiliates, subsidiaries, etc. (such as nonbank lenders) are further added or deducted as extraordinary profit.
Looking at income trends since 2009, commissions and trading profits
have been on the decline, driven down by a sluggish market caused by thecredit crisis in the United States that spilled over into Europe and the more
recent Great East Japan Earthquake. When viewed over the past decade, brokerage and underwriting fees have decreased, while selling concession andother fees and commissions have increased. 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

Chap. XII Financial Instruments Business (Securities Business)227

have been growing.
Within other fees and commissions, it is believed that an amount equivalent to 60% of selling concession is commission income from the sale of beneficiary certificates of investment trusts. The remainder is accounted for byincomes derived from intra-group fees and information and advice fees, bothof which have been on the rise in recent years. As for expenses, personnel
costs are the largest component, but as a performance-based compensation
system has been introduced at many securities companies in recent years
those costs are increasingly more variable than fixed. As for online brokers,
personnel costs account for less, while administrative costs, real estate expenses, including system-related costs and trade-related expenses, are larger,
which demonstrates a focus on the stock brokerage business.
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 accounting
process with stringent risk management.
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

228

Chap. XII Financial Instruments Business (Securities Business)

Table XII-11.

Major Accounts of Securities Companies (253 companies) as of the endof March 2013
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

3,875,783
3,654,794(3,163,678)
46,071,530(34,756,331)(11,315,179)
1,449,273

Trading products(Trading securities, etc.)(Derivatives trading)Collateral-for-contract accountDebt on margin trading(Debt for margin trading)(Money received for securities
lent for margin trading)
2,751,457 Money borrowed to secure
securities(2,462,482) Deposit received(288,912) Guarantee money received

30,118,449(19,448,399)(10,670,031)
1,580,970
1,245,856(690,180)(555,614)

49,886,370 Short-term debt

12,347,067

2,265,740 Total of current liabilities

102,930,108

687,984 Long-term liabilities

4,320,943

111,981,427 Total liabilities

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

165,945
342,499
1,151,521(791,188)

Total of fixed assets

1,660,180 Total capital

Total of assets

In ¥ milCapitalCapital surplus
Retained earnings(Net profit/loss for the term)

113,641,827 Total of liabilities and capital

50,563,857
2,400,855
2,700,797

107,321,475
1,807,895
3,036,141
1,388,829(496,932)
6,320,241
113,641,827

Note: These figures exclude those of companies that have suspended their operations. Totals may not
match sums.
Source: Compiled from materials prepared by the Japan Securities Dealers Association.

company as borrowed securities deposit. On the other hand, the cash for conducting margin trading is borrowed from a securities finance company, and it
is equivalent to the amount that needs to be paid to a customer for the securities sold on margin. Securities companies are required to keep customer assets segregated from their own assets and to hold them in an outside trust (seesection 11); this system is called“segregated customer asset trust.”Ceilingson 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 waslearned from Black Monday of 1987 (the market crash on Wall Street), theindustry and the authorities became painfully aware of the need to control
risk on a total basis, while the International Organization of Securities
Commissions (IOSCO) called for the international harmonization ofChap. XII Financial Instruments Business (Securities Business)

Table XII-12.

229

Capital-to-Risk Ratios of Trading Participant Members of the TSE (97companies as of the end of June 2013)
The minimum ratio
The maximum ratio
The median ratio
The average ratio

206.0%
1733.4%454.8%
525.6%

Distribution
Those in the range of
100%

0 company

200% to 299%

12 companies

300% to 399%

26

400% to 499%

20500% to 599%

10600% to 699%

12

700% to 799%8800% or higher

9

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

Table XII-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

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.)As securities companies handle products whose prices fluctuate in themarket, their revenues are vulnerable to sudden changes in market prices.

230

Chap. XII Financial Instruments Business (Securities Business)

Table XII-14.

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

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 Federationof Securities Dealers Association was established in 1949 as a national
federation. Subsequently, however, there emerged a body of opinion that inChap. XII Financial Instruments Business (Securities Business)

1. Self-regulatory and market management functions

Table XII-15.

231

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 companies.

(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 securitiesConsultation regarding a complaint concerning the business carried out by a member
related disputes through the firm or by financial instruments intermediary service agents and mediation of a dispute
mediation of the JSDA and between a member firm and a customer pertaining to securities transactions (Complaint
the handling of trade-related consultation and dispute mediation have been commissioned to the Financial Instruments Mediation Assistance Center (FINMAC), a non-profit organization)complaints of investors(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

232

Chap. XII Financial Instruments Business (Securities Business)

Table XII-16.

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)order to improve the self-regulatory functions of the securities industry it wasnecessary and proper to consolidate the securities dealers associations into asingle 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
Civil Code to a legal entity under the Securities and Exchange Law, and theMinistry of Finance (the present Financial Services Agency) 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

Chap. XII Financial Instruments Business (Securities Business)

233

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 11) have joined the JSDA as special members since 1994. As of theend of September 2013, the JSDA had 260 regular members (16 of themwere foreign securities companies) and 213 special members (including 132
banks, 14 foreign banks, 39 shinkin banks (credit unions), 11 life insurancecompanies, 5 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.
As a result, the number of registered Type II businesses had risen to 1,276
as of August 2013, exceeding by four times the number of Type I Financial
Instruments Businesses (securities companies, financial futures companies,
etc., hereinafter referred to as“Type I businesses”). The lax registration

234

Chap. XII Financial Instruments Business (Securities Business)

Table XII-17.

Business
Category
Type I

Numbers of Registered Financial Instruments Firms and Related Financial Instruments Firms Associations
Registered Firms(at Aug. 31, 2013)

Related Financial Instruments Firms Associations

283 (Approved) Japan Securities 260 Regular members
Dealers Association(at Sept. 30, 2013)(Recognized) Financial Fu- 154 Regular memberstures Association of Japan(at Sept. 30, 2013)

Type II1,276 (Recognized) Type II Financial 33 Regular members
Instruments Firms Association (at Aug. 2013)

Investment advisory and agency

1.023 (Recognized) Japan Invest- 508 Investment advisory andment Advisers Association
agency members (Oct. 2013)

Investment management315

245 Investment management
members (Oct. 2013)(Recognized) The Investment 85 Investment trust members
Trusts Association, Japan(Sept. 2013)45 REIT members(Sept. 2013)

Total

2,897 (total numberof registrants)
2,087 (actual numberof firms)

Note: Of the 283 Type I businesses, 23 (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 that do not haveto register, most of which are not members of any of the above financial instruments firms associations.
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. Other firms use the provisions as a method to
persuade investors that their business is as good as guaranteed by the Financial Services Agency because
they have submitted a notification. The fact that almost all of these firms are not subject to self-regulatory
rules seems to be a problem.

Chap. XII Financial Instruments Business (Securities Business)

235

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 2,087 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 3,038 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.
11. Investor Protection FundThe purpose of an investor protection fund is to protect the claims that general

236

Chap. XII Financial Instruments Business (Securities Business)

Source of funds

Compensation proceduresThose eligible for compensation

Table XII-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.

customers have on the securities companies they deal with. As we saw in section 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

Chap. XII Financial Instruments Business (Securities Business)

Table XII-19.

237

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
March 2001
in cash and ¥5 bil guaranteed after April
2001

Burden charge on
members

A fixed amount and a fixed rate ofburden charge (computed on the basisof the operating income and the number of registered representatives). The
total of annual burden charge is ¥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 March 31, 2013, there were 253 member firms and the size ofthe fund was approximately ¥55.4 billion.

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 andsubstitute securities deposited with the securities company as collateral for
margin trading, etc., that are impossible to physically identify when they are238

Chap. XII Financial Instruments Business (Securities Business)rehypothecated, 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 andExchange 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) per customer to insure therepayment of his/her assets in the case of bankruptcy of a securities company
and 2) make loans to securities companies to facilitate the prompt return ofcustomer assets.
To enable the fund to provide such services, it is empowered by law to 1)
perform any and all acts that are necessary to preserve customer assets heldby securities companies, 2) become a trust manager of securities companies,
and 3) create 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.

239

Chap. XII Financial Instruments Business (Securities Business)

Table XII-20.

Balance of Investment Trusts, by Seller (as of Sept. 30, 2013)(100 millions of yen)
Direct sales (investment
trust managementcompanies)

Securities companies

Banks (registeredfinancial institutions)

Stock investment trusts

357,42857.3%

261,581

41.9%

5,243

0.8%

624,252

Bond investment trusts

124,241

86.4%

854

0.6%

9

0.0%

143,818

MMFs

14,555

77.8%

4,138

22.1%

21

0.1%

18,713

Total

496,22364.6%

266,573

34.7%

5,273

0.7%

768,069

Total

Note: These figures are based only on beneficiary certificates publicly offered, and those for bond investment trusts do not include MMFs.
Source: Compiled from statistic produced by the Investment Trusts Association, Japan.

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 September
2007, with the 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
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240

Chap. XII Financial Instruments Business (Securities Business)

Table XII-21.

(1) Arm’s-length rule

Firewall between Parent Bank/Banking Subsidiary and Securities Subsidiary/Parent Securities Company (Article 44-3, FIEA)
A financial instruments firm, etc., or officers or employees thereof shall not conduct the sale, purchase, or other transactions of securities or over-the-counter transactions of derivatives with theparent/subsidiary bank of the financial instruments firm, etc., under terms and conditions that are
different from the ordinary terms and conditions and possibly detrimental to the fairness of transactions;(2) Prohibition of tying cred- A financial instruments firm, etc., or officers or employees thereof shall not conclude a contract
it with the sale of a secu- concerning a securities transaction, etc., with a customer knowing that the parent/subsidiary bankrityof the financial instruments firm, etc., has granted credit to the customer on the condition thatsaid contract should be concluded with the financial instruments firm, etc.;(3) Prohibition of acts in the A financial instruments firm, etc., or officers or employees thereof shall not conduct or give adinvestment advisory and vice to conduct any unnecessary transaction for the purpose of securing the interest of the parent/
investment management subsidiary bank of the financial instruments firm, etc.;
businesses with conflictsof interest with customers(4) Prohibition and restric- i ) Arm’s-length rule relating to the sale of assets and other transactions;tion of acts likely to unii)
Prohibitionof conclusion of a financial instruments transaction contract knowing that the pardermine the protection ofent/subsidiary bank of a financial instruments firm, etc., is conducting the transaction in asinvestors, impair the fairsets, etc., at terms and conditions beneficial to itself;
ness of transactions, orcompromise the credibil- iii ) Provisions requiring the disclosure of conflicts of interest in underwriting securities issued by
ity and integrity of the
an obligor to the parent/subsidiary bank;securities markets (Art.
153 and 154 of the Cabi- iv ) Restrictions against underwriting securities issued by the parent/subsidiary bank;
net Office Ordinancev ) Prohibition of selling an underwritten security with financing provided by the parent/subsidConcerning Financial Iniary bank;struments Business, etc.)
v i ) Restrictions against selling an underwritten security to the parent/subsidiary bank;vii) Restriction of exchanging unpublished information concerning an issuer, etc., or customer,etc., between a parent company and its subsidiary without prior written consent;viii) Prohibition of acts in connection with joint visits of representatives from parent and subsidiary legal entities that may mislead customers to identify the two entities as one;ix ) Prohibition of acts in the investment advisory and investment management businesses that
aim to manipulate the price of a security the offering of which is lead managed by the parent/
subsidiary financial instruments firm or parent/subsidiary bank with the purpose of influencing the terms of the offering; orx ) Prohibition of acts in the investment advisory and investment management businesses of subscribing to a security the offering of which is underwritten by the parent/subsidiary financial instruments firm or parent/subsidiary bank when the offering is not fully subscribed.

brokerage business was deregulated in October 1999. With respect to thefirewall, the prohibition of making joint visits (of representatives from bothparent 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 the ban on openingbanking and securities joint branch offices was lifted in September 2002. At
the same time, the interpretation of provisions relating to brokerage withwritten orders was relaxed. In March 2005, banks were allowed to introduce
customers to securities companies as initial public offering (IPO) candidates

Chap. XII Financial Instruments Business (Securities Business)

Table XII-22.

241

Banking and Securities Joint Branch Offices and Financial Instrument
Intermediary Business of the Three Largest Financial Groups
Banking and Securities Joint Branch Offices of Mega Bank-Groups

Banks

Securities companies

Number of joint branch offices

Mizuho Bank, Ltd.

Mizuho Investors Securities Co., Ltd. Planet Booth, 168 (as of July 2013)

The Bank of TokyoMitsubishi UFJ, Ltd.

Mitsubishi UFJ Morgan Stanley
Securities Co., Ltd.

MUFG Plaza, 30 (as of Mar. 2013)

Sumitomo-Mitsui
Banking Corporation

SMBC Friend Securities Co., Ltd.

5 (as of Mar. 2013)

Source: Compiled from the IR information, etc., published by the companies. The collaborative businessof Sumitomo-Mitsui Banking Corporation and SMBC Friend Securities was transferred in 2011
to SMBC Nikko Securities.
Contribution from Intermediary Business to the Retail Operation of Mitsubishi UFJ Morgan Stanley Securities (FY2013/3)
Assets undercustody

Outstanding
account

Sale of investment trusts

Retail JGB

Retail foreign
bonds

Total

25,799(27,492)

276
(278)

2,314
(1,053)

240
(407)

5,413
(4,738)% of total

11.3%(13.0%)

20.2%(19.8%)

14.6%(8.3%)

81.6%(81.1%)

52.6%(53.7%)

Note: Assets under custody and outstanding accounts figures are as of the end of March 2011. Percentages are of total amounts. The top figures in the total line are domestic totals, including financial institutions, while the figures below in parentheses are comparative figures from 2010.
Source: Compiled from the databook provided for the FY2012 investor information meeting of the Mitsubishi UFJ Financial Group.

Table XII-23. Benefits of Collaboration of Mizuho Bank and Mizuho Investors Securities
FY2007/3

FY2008/3

FY2009/3

FY2010/3

FY2011/3

Combined profits(100 millions of yen)

35,35427,50814,393

15,103

16,594

Combined assets undermanagement (100 millions of yen)

28,17928,131

26,29230,26029,949Combined new accounts

11,1598,622

12,495

8,131

6,385

Source: Compiled from Mizuho Investors Securities’FY2010 Business Report. Mizuho Investors Securities was absorbed in a merger with Mizuho Securities in January 2013 (currently, Mizuho Securities).

242

Chap. XII Financial Instruments Business (Securities Business)(business lead service). In June 2009, the joint position regulations prohibiting officers and employees of securities companies and banks from working
on both sides of the firewall were lifted, allowing them to share confidential
information of corporate customers as long as the clients did not opt out of
this arrangement. As a result, megabank groups are developing joint banking
and securities businesses.
13. The Competitive Landscape of the Securities Industry
In the securities industry of Japan, the Big Four securities companies not
only had commanded the largest share in all segments of the market but also
had many small and midsized securities companies as their affiliates (called), and the structure of competition used to be character“keiretsu companies”
ized as the“Big Four oligopoly.”However, the Big Four oligopoly broke
down in the 1990s as (1) Yamaichi Securities went bankrupt in 1997; (2)Daiwa and Nikko split up their companies into two divisions in 1998—thewholesale 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 sale of investment trusts); and (3) Nomura, Nikko (later changed name to
Nikko Cordial), and Daiwa liquidated their holdings of shares in their affiliates. Following an accounting scandal, Nikko Cordial was acquired by Citigroup in 2007 and currently is called 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 theJapanese-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Chap. XII Financial Instruments Business (Securities Business)

243

Chart XII-5. Mega-Bank Securities Subsidiaries and Independent Securities Companies
Mega-bank affiliations (keiretsu)
Mitsubishi UFJ Groupaffiliations
Mitsubishi UFJ Securities

Independents

Mitsubishi UFJ Morgan Stanley, owned 60% by Mitsubishi UFJ Securitie

Nomura Securities

FormerTokyo-Mitsubishi Bank →Daiwa Securities

Merged in
Kokusai, former Nomura→ Acquired shares in 1999 → 2002,
Securities keiretsu
becoming →Mitsubishi
Ryo-ko, former Mitsubishi→ Merged in 1999
Securities
Bank keiretsu
becoming→
Tokyo-Mitsubishi
Dainana, former Tokyo→
Personal Securities
Bank 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, andSecurities keiretsu
Daiichi in 1999.
→
The four securities
Daiichi, former Long-Term→ companies merged
Credit Bank keiretsu
to become Tsubasa
Securities in 2000
Towa, former Sanwa→
Bank keiretsu

Merged inOct. 2005, →becoming
Mitsubishi
UFJ
Securities

BecameMitsubishi
UFJ Stanley
MorganSecurities in
May 2010

Ref: Merged with the Investment Banking
Division of Morgan Stanley Japan
Securities.

→

Daito, former
Fuji Bank keiretsu

Iwai

SBI

Mizuho Bank and Mizuho Investors
Securities plan to merge in the second
half of FY2012

Taito
absorbedin 2001

→

Monex

→

SMBC Nikko Securities, wholly owned by SMBCSMBC acquires business in
2009, and also merged Nikko
Nikko Cordial Securities → Made a subsidiary in 2007 → Citi Securities’ underwriting→by Citigroupand investment banking advisory
operations with its operations
SMBC Friend Securities, wholly owned by SMBC→

Shin’ei Ishino, former
Taiyo-Kobe Bank keiretsu →Meiko, former
Sumitomo keiretsu→

National, former Matsushita→
Electric keiretsu
Izumi, former Sumitomo
Life, keiretsu

MatsuiRakuten→Merged in 2000,
becoming
Sakura Friend
Securities
Merged in 1999,
becoming
Meiko National→
Merged in2003,
becoming
SMBC→ Friend
Securities→→

Acquired
Izumi
Securities
in 2004(Since 2010, absorbed Tamaki, Iida,
Sasebo, Ise, Daihoku securities
companies in mergers)
Plan to merge with Cosmo Securities in
May 2012
and others

Online brokers

Kabu.Com

Sumitomo Mitsui Group

Yamatane, former
Mitsui Bank keiretsu

Kosei

KyokutoMizuho Investors Securities, owned 100% by Mizuho Bank

Kokyo, former DKB
keiretsu

Merged with Toyota Financial Services
Securities in April 2010

Marusan Securities

Ichibashi

Mizuho Securities, owned 94.66% by Mizuho Corporate Bank
Acquires management
Mizuho Securities,
control of Norin Chukin →securities subsidiary
Securities in 2004
Merged in
Shin Nihon, former Industrial
2009,
Bank of Japan (IBJ) keiretsu →becoming →MizuhoMerged in 2000→
Securities
becoming Shinko
Wako, former IBJ keiretsu →Merged in 2000
becoming Mizuho
Investors Securities

Tokai Tokyo
Securities

Mito

Mizuho Keiretsu

Kakumaru, former Daiichi
Kangyo Bank (DKB) keiretsu →Okasan Securities

Toyo Securities→

Merged in2002,
becoming
UFJ
Tsubasa

Terminated business alliance withSMBC FG in 2009, and acquired sharesof the joint venture Daiwa Securities
SMBC from FG (currently Daiwa
Securities Capital Markets)→

SMBC Nikko
Securities(changed namein April 2011)

SMBC
FriendSecurities(sold its
collaborativebanking andsecurities
operations
to SMBC
Nikko
Securities
in 2011)

Softbank acquired Ozawa Securities in
1999; Fides Securities, formerly Nisho
Iwai Securities, in 2005; and SBI
Securities in 2007, folding these into
one company. In 2009, it acquired thebusiness of Nihon Investors Securities.
Rakuten acquired DLJ Direct Securities
in July 2004, establishing its wholly
owned Rakuten Securities
Acquired Saison Securities in 2001 andmerged with Nikko-Beans in 2005, Orix
Securities in May 2010, and Sony Bank
Securities in 2013.
In 2000, e-Wing Securities and Nihon
Online Securities, affiliated with Itochu,
merged, establishing Kabu. Com
Securities. Absorbed Me Net Securities
in 2005. Tokyo-Mitsubishi UFJ Bank
has a 44.3% share and Mitsubishi UFJ
Securities Holdings has 10.5%.

244

Chap. XII Financial Instruments Business (Securities Business)

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 XIII
Asset Management Service

1. Investment of Individual Financial Assets
According to a 2013 first-quarter survey by the Bank of Japan,“Comparisonof the Flow of Funds between Japan, the United States, and Europe,”at theend of March 2013 individuals in Japan had ¥1,571 trillion ($15.3 trillion)
worth of financial assets. Of this amount, 54.0% was invested in cash and deposits and 14.5% in securities investments (stocks and equity contributions,
7.9%; investment trusts, 4.5%; bonds, 2.1%).
Compared with the United States, with 14.0% in cash and deposits and54.9% in securities investments, and Europe, with 35.8% in cash and deposits and 29.2% in securities investments, Japan’s individual financial assets
are heavily skewed toward cash and deposits and thinly invested in securities. In the 2012 survey by Japan FSA’s Central Council for Financial Services Information, 46.7% of respondents said that they focus on“security”astheir reason for selecting financial products, while 24.7% said“liquidity.”
Only 16.9% 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 plan).
The goal of the system is to support asset formation and to expand the supplyof 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 27.6% of individual financial assets.

246

Chap. XIII Asset Management Service

Chart XIII-1.

Composition of Household Assets (at March 31, 2013)

Cash anddeposits

Stocks and Insurance
and pension
Investment equity
Bonds trusts contribution reserves
Others total(54.0%)

Japan(27.6%)(3.1%)(3.9%)(2.1%) (4.5%) (7.9%)(14.0%)

U.S.A(9.3%) (11.9%)(33.7%)(¥1,571 trillion)(28.1%)($57.7 trillion)(3.0%)
EuropeArea(35.8%)

0

10

20(15.2%)

30(6.8%) (7.2%)
40
50

60

(31.7%)

70

80( 19.6 trillion)(3.2%)
90
100

Percentages of the total financial assets
Source: Bank of Japan, “Comparison of the Flow of Funds between Japan, the United States, and Europe.”

Table XIII-1.

Outline of Nippon Individual Savings Account (NISA)

Eligible Investors

Any residents of Japan aged 20 years or more.

Tax-Exempt Income

Dividends, coupons, and capital gains from listed stocks, investments trusts,
etc.

Tax-Exempt Investment Maximum of ¥1 million in new investment annually (Total tax-exempt inAmountvestment amount is ¥5 million)
Tax Exempt Period

Maximum of 5 years*After initial 5-year period, possible to continue program by reinvesting in
the NISA account.

Allowed Investment PeApril 2014 to March 2023 (10 years)
riod
Number of Accounts

One account per person

Investment trust management companies are also asset management companies, handling investment trusts that account for 4.5% 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 aChap. XIII Asset Management Service

247

role in achieving the efficient allocation of capital by supplying growth companies with capital through the market. This function is especially pronounced when the asset management companies use active investment policies. Furthermore, they work to raise stock prices by exercising the voting
rights of their customers in the general meetings of shareholders of the companies they are invested in and contribute to improving corporate governance.
*US dollar conversions from yen are at the exchange rate of ¥102.50 to US$1 prevailingon January 31, 2014.

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.
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 experts. According to the 2011

248

Chap. XIII Asset Management Service

Chart XIII-2.

Structure of Pension System(Figures as of March 31, 2012)

0.13 million
subscribers

Defined-contribution pension(Individual type)
National Pension Funds
0.52 million
subscribers

4.21 million
subscribers

8.01 million
subscribers

4.37 million
subscribers

Definedcontribution
pension plans(Corporate
type)

Defined-benefit
corporate pension

Employee
Pensionfunds

Employees’ Pension(Substitution
portion)34.51 million subscribers, including former
Sankyosai and former Norinkyosai mutual
aid associations(Workplace-oriented
addition)

Mutual Aid
Association
Pension
4.41 million
subscribers

National Pension (Basic pension)
Dependent spouses ofCategory-2 insured
persons9.78 million
Category-3 insured persons

Self employed persons, etc.

Private sector salaried workers

19.04 million

38.92 million

Category-1 insured persons

Category-2 insured persons, etc.

67.75 million

Source: Ministry of Health, Labour and Welfare

Chart XIII-3.

Asset Allocation at the End of FY 2012

Short-term assets
International stocks 1.48%
12.35%
International
bonds
9.79%

Domestic
stocks
14.57%

Marketinvestments
52.59%
FILP
bonds
8.86%

Source: Government Pension Investment Fund (GPIF)

Domestic
bonds
61.81%

Public officers,etc.

Chap. XIII Asset Management Service

249

fiscal year asset management survey by the Pension Fund Association, the allocation of corporate pension funds to asset managers was trust banks,
48.8%; discretionary asset management companies, 28.5%; and life insurance companies, 22.2%. By composition of fund assets, domestic bonds accounted for 27.2%, domestic stock for 17.4%, foreign stock for 16.3%, thegeneral account of life insurance companies for 14.0%, foreign bonds for
12.0%, and others for 8.8%. Asset management experts, of course, are not always the answer. Given the pension fund scandal and other incidents uncovered in 2012, there is a need 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 are administered and managed by the Government Pension Investment
Fund (GPIF). At the end of 2012, the asset composition of the funds managed
by the GPIF were domestic bonds, 61.8%; domestic stock, 14.57%; foreign
stock, 12.35%; and foreign bonds, 9.79%, indicating a heavy weighting on
domestic bonds. Because of this conservative approach, there is ongoing discussion of such methods of improving investment returns as promoting morediversified investment, implementing risk management systems overseen by
a governance structure, and practicing long-term investment policies withstocks.
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 based on their own discretion (designated asset management–type trust) or not become involved in management but only administer
the assets (specified asset management–type trust) or be an intermediary
trustee (general manager) representing the trustees and insurers in acting as
the general manager for dealings with the trustor when the administration
function is commissioned to multiple trust banks and insurance companies.
The two main features of trust bank operations are the high proportion of

250

Chap. XIII Asset Management Service

Chart XIII-4.

Trust Scheme

Trustee

Trust Contract orWill

Monitoring andSupervision
Trust Income

Transfer ofAssetsTrustee

Beneficiary

Administration and
Disposition

Fiduciary Duties andSegregation ofAssets, etc.

Trust Assets
Source: Trust Companies Association of Japan

Chart XIII-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Chap. XIII Asset Management Service

251

pooled 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 theassets 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 accountpolicies pay out benefits that vary based on asset management performance.
Under a general account life insurance policy, the insurer promises to pay acertain amount of benefits, and the policyholder agrees to pay a premium thatis commensurate with the promised benefit. The premium is computed on the252

Chap. XIII Asset Management Service

Table XIII-2.

Asset Composition(%)

Cash andCall loans
depositsMoneytrustsSecurities

Loans

Tangible
assetsOthersTotal
assets

FY2008

1.6%

0.9%

0.8%

73.9%

16.4%

2.2%

4.3%

100.0%

FY2009

1.6%

0.7%

0.7%

76.7%

14.7%

2.1%

3.5%

100.0%FY2010

1.8%

0.6%

0.6%

77.3%

13.7%

2.1%

3.8%

100.0%FY2011

1.1%

0.8%

0.6%

78.8%

12.9%

2.0%

3.8%

100.0%FY2012

1.0%

0.8%

0.6%

80.7%

11.7%

1.9%

3.4%

100.0%

Figures excluding Japan Post Insurance Co., Ltd.
FY2008

1.3%

1.1%

1.1%

71.6%

16.0%

3.2%

5.7%

100.0%

FY2009

1.2%

0.8%

0.9%

75.3%

14.1%

3.1%

4.5%

100.0%FY2010

1.6%

0.6%

0.8%

76.3%

13.1%

3.0%

4.6%

100.0%FY2011

1.0%

0.8%

0.8%

78.4%

12.1%

2.8%

4.1%

100.0%FY2012

1.1%

1.0%

0.7%

80.8%

10.8%

2.5%

3.0%

100.0%

Source: Trust Companies Association of Japan

Table XIII-3.

Composition of Securities under Management(100 millions of yen, %)Regional
bonds

Other
securities

Total% Amount % Amount % Amount % Amount % Amount %Amount

JGBs
Amount

FY2008 1,238,909 53.8

Corporatebonds

StocksForeignsecurities

98,160 4.3 274,568 11.9 156,318 6.8 400,361 17.4 133,768 5.8 2,302,088

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
FY2010 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
FY2011 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
FY2012 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
Figures excluding Japan Post Insurance Co., Ltd.
FY2008542,176 36.9

52,597 3.6 192,431 13.1 156,318 10.6 391,526 26.7 133,768 9.1 1,468,820

FY2009603,711 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

FY2010682,957 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

FY2011

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

FY2012922,966 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

Source: Trust Companies Association of Japan

Chap. XIII Asset Management Service

253

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 2013 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 2012, securities
accounted for 80.7%, while loans accounted for 11.7%. 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 (53.5%), followed by foreign securities(20.1%, of which equities accounted for 1.9% and bonds, etc., 18.2%); Japanese corporate bonds (9.0%); Japanese equities (6.0%); and Japanese regional bonds (5.0%). The recent trend in securities is to increase bond holdings(government, corporate, and regional) and decrease domestic equity holdings.
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.
5. Asset Management of Discretionary Asset Management Companies
Discretionary asset management companies manage the assets of customers

254

Chap. XIII Asset Management Service

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 pension funds, financial companies, and sovereign
wealth funds. Discretionary management companies can be considered thebusiness sector where liberalization and internationalization has progressed
the most, even in the financial industry, which has low barriers to entry for
non-financial or foreign companies. As a category for investment specialists,
the asset management company category includes investment trust management companies and fund managers that sell units in group investment
schemes, such as venture capital funds, as well as discretionary managementcompanies.
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 voting on resolutions at general meetings of shareholders of listedcompanies that are members of the association, 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 a relatively high proportion of active investment
and customized asset management services that closely reflect the wishes ofcustomers. When commissioned to handle the management of assets, theyleave the administration side of the business to trust banks and other financial
institutions. Reacting to the AIJ Investment Advisory Co., Ltd., pension plan
fraud scandal in 2012 and other incidents, trust banks are expanding and reinforcing their monitoring systems by strengthening 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. The trend in recent years has been a reduction in the proportion of Japanese stocks and an increase in the proportion ofdomestic bonds in assets under management. Factors involved include an increase in the percentage of risk-adverse public pension funds in entrusted assets and in the percentage of risk-adverse corporate pension funds. Alongwith the 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

Chap. XIII Asset Management Service

255

Chart XIII-6. Investment of Pension Assets by Investment Advisory Service Companies

Pension fund,etc. customer

Discretionary
investment contract

Investment advisory
company

Tokkin specified money trust

Trust bank(custody and management of assets)

Tripartite agreement

Purchase/saleand delivery of
securities

Investment instructions
Placing orders

Table XIII-4.

Country and Regional Allocation of Assets Under Management

Japan
StocksSecurities companies,
etc.

Bonds

United States

EuropeAsia

OthersReal estate
related Stocks Bonds Stocks Bonds Stocks Bonds Stocks Bonds
securities

2004/3 39.35% 21.30%

7.15%

9.07% 4.19% 5.89%

3.05% 2.38%

2005/3 35.90% 21.36%

6.83%

9.93% 4.41% 6.72%

2.75% 2.73%

2006/3 42.92% 17.48%

6.56%

8.96% 4.23% 5.86%

3.08% 2.92%

2007/3 38.82% 18.22%

6.60%

9.54% 4.65% 6.69%

3.58% 3.64%

2008/3 26.83% 29.84% 0.10%

6.16%

9.59% 4.64% 7.51%

4.07% 3.82%

2009/3 18.78% 36.29% 2.73%

6.42% 10.26% 4.05% 8.28%

2.96% 3.05%

2010/3 19.69% 34.33% 2.77%

7.54% 10.00% 4.70% 7.20%

3.80% 3.50%

2011/3 17.43% 35.84% 3.30%

5.68%

9.06% 3.97% 5.86% 0.75% 0.22% 2.59% 6.82%

2012/3 16.84% 35.23% 3.57%

5.74%

9.84%

2013/3 18.54% 32.11%

6.32% 10.33% 3.70% 6.24% 0.89% 0.67% 2.79% 6.26%

2.91%

3.36% 5.71% 0.81% 0.61% 2.51% 7.10%

Source: Japan Securities Investment Advisers Association.

256

Chap. XIII Asset Management Service

countries and alternative investments that target absolute rather than relative
returns, such as real estate related securities and hedge funds.
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 (about $98 dollars).
The second feature is that investment trusts are managed by professionals.
Building the optimum investment portfolio based on macroeconomic analysis as well as financial trends and stock 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 is published on a daily basis, and Japaneselaws 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 aChap. XIII Asset Management Service

Table XIII-5.

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 XIII-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.

1998

Trends in the Liberalization of Investment Trust Regulations in Japan

Investment trust
management companies

1951
1959
1961
1970
1978
1986
1987
1990
1993
1995

257

Investment

Investment

Main
investment
objectives
Securities
Real estate
Others258

Chap. XIII Asset Management Service

result, 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 theinvestment 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.

CHAPTER XIV
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 (cost reduction) and efficient diversified investment (diversification of risks) that are generated through a joint investment with otherinvestors, also allowing them to take advantage of information analysis andinvestment sophistication gained by having 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 investment trust system is stipulated in the Investment Trust and Investment Corporation Act. Regulations concerning theactions 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 self-regulatory
rules established by The Investment Trusts Association, Japan, an approved
self-regulatory organization under the Financial Instruments and Exchange
Act.
Investment trusts play a major role in making investments for the generalpublic and have the economic benefit of helping companies to raise 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 offered

260

Chap. XIV Investment Trusts

Chart XIV-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 XIV-2. Trend of Total Net Assets of Publicly Offered Investment Trusts and Their
Positions
900,000
800,000
700,000

Total net assets of investment trusts (right-handscale: ¥100 million)
Percentage of domestic stocks held by investment
trusts to market capitalization for domestic stocks

9.0%
8.0%
7.0%

600,000

6.0%

500,000

5.0%

400,000

4.0%

300,000

3.0%

200,000

2.0%

100,000
0

10.0%

1.0%
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 130.0%

Note: Figures for 2013 are those at the end of September (at the end of June for the percentage ofinvestment trusts to household financial assets).
Sources: Total net assets figures obtained from the Investment Trust Association, Japan; percentage
of investment trusts to household financial assets obtained from the Bank of Japan (Flowof Funds Account).

Chap. XIV Investment Trusts

261

investment trusts in Japan. The total net assets reached a peak in 1989 anddeclined after the bubble economy burst. The market rebounded temporarily
in 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 appears to have bottomed out in January 2009. Still, in 2012 Japan accounted for only 2.7% of the global investment trusts net asset total of more than $26.84 trillion (¥2,300 trillion ), a
small portion compared with Japan’s approximate 8% share of the worldgross 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 light of the prewar money trust, it was launched in theform of both the contractual-type stock investment trust and the 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,

262

Chap. XIV Investment Trusts

Table XIV-1.
SystemHistory of the Investment Trust in Japan
Products

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 investment trusts directly (1993)
ness (1993)
Investment trust reform wasdetermined (1994) and impleNikkei 300 Exchange Tradmented (1995)
ed 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)
Trustee responsibility of in- Corporate-type investment
vestment fund management trusts were establishedcompanies was defined (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)

Chap. XIV Investment Trusts

263

deregulating the establishment of new funds by changing from an approvalsystem 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 Investment Trust and Investment Corporation Act,”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. Distribution channels were
further expanded due to the start of marketing investment trusts at post offices in 2005, before the privatization of Japan’s postal system.
In 2006, in relation to the enactment of the Financial Instruments and Exchange Act (implemented at end of September 2007), the Investment Trustand Investment Corporation Act was amended to relegate provisions on therules of conduct for investment trust management companies.
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

Chap. XIV 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 XIV-3.

Investment trust
management companies

264

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 2012.

assets under investment trusts according to a trust agreement. Investors obtain the position of beneficiary by accepting a beneficiary certificate and receive the profits arising from investment management as dividends or by redeeming the certificate.
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

Chap. XIV Investment Trusts

Chart XIV-4.

265

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 2012.

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’srequest 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¥120 trillion ($1.2 trillion) in Japan as of September 2013. They are classified by a variety of methods.
Public Offering of Investment Trusts and Private Placements of Investment Trusts
A public offering of investment trusts is offered to 50 or more unspecified investors, while a private placement is sold to 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 the266

Chap. XIV Investment Trusts

Chart XIV-5.

Overview of Investment Trusts (as of the end of September 2013)
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

Contractualtype investment
trusts76,817(4,694)

Securities
investment trusts
76,807(4,681)

Stockinvestment trusts
62,425(4,513)Unit-type investment trusts
Open-type investment trusts

1,276
(191)
61,149(4,322)

ETFs
OthersBondinvestment trusts
14,382(168)

Public offering
investment trusts
82,185(4,737)

Unit-type investment trusts
Open-type investment trusts
MRFs 9,066 (13)

7,152
(110)
53,997(4,212)25(26)
14,356(142)

MMFs 1,871 (14)Others 3,419 (115)

Total investment trusts
120,231(7,570)Investmentcompanies
5,368
(43)

Privateplacement
investment trusts
38,046(2,833)Contractual-type
investment trusts
37,733(2,822)
Investmentcompanies
313(11)

Investment trusts other than
Money trust benefit funds
10
securities investment trusts(13)
10
Investment trusts managed by trustee
0
(13)
(0)
Securities investment companies
7(2)
Real estate investment companies 5,362(41)
Stock investment trusts
37,043
Securities
investment trusts(2,736)37,733
Bond investment trusts
690(2,822)(86)
Investment trusts other than securities investment trusts
Securities investment companies

64(3)
Real estate investment companies 249(8)

Source: The Investment Trusts Association, Japan.

Investment Trust and Investment Corporation Act, has the margin to freely
design products only with the approval of the investors, because a private
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.
Stock and Bond Investment Trusts
The Japanese tax laws define stock investment trusts as funds that hold even asmall number of stocks, and bond investment trusts are funds that invest notin stocks but only in bonds. Bond investment trusts include funds that invest
mainly in long-term bonds and Money Management Funds (MMF) and Money Reserve Funds (MRF) that invest in short-term money market vehicles.

Chap. XIV Investment Trusts

267

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.
*US dollar conversions from yen are at the exchange rate of ¥102.50 to US$1 prevailingon January 31, 2014.

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 chart
XIV-6. Financial institutions, including banks, accounted for 35% of public
offerings of investment trusts and 42% of public offerings of stock investment
trusts as of the end of September 2013. Banks had about a 70% share in private offerings of investment trusts. In contrast, investment trust management

268

Chap. XIV Investment Trusts

Chart XIV-6.

Breakdown of Total Net Assets of Public Offering Investment Trusts byDistribution Channel(as of the end of September 2013)

Total public offering investment trusts

Public offering stock investment trusts

Direct marketing 0.7%

Direct marketing 0.7%

Banks, etc
34.7%

Banks, etc Securities
47.8%
firms
51.5%

Chart XIV-7.

Securities
firms
64.6%

Trend in Breakdown of Total Net Assets of Public Offering Stock Investment Trusts by Distribution Channel

Securities firms

Banks, etc

2000

Direct marketing
11.0%

85.9%

02
04
06

57.3%

42.1%

08

56.8%

42.7%

10

59.4%

40.0%

0%

Chart XIV-8.

20%

30%

0.6%
0.5%
0.6%
0.7%

34.7%

64.6%

10%

0.8%

33.9%

65.4%

13/9

1.5%

21.5%

76.9%

40%

50%

60%

70%

80%

3.1%

90%

100%

Trend in Breakdown of Total Net Assets of Total Private Placement
Investment Trusts by Distribution Channel

Securities firms
2000

Banks, etc

Direct marketing
14.5%

47.7%

37.8%

02

36.1%

57.1%

6.8%

04

33.6%

60.5%

5.8%

06

26.1%

68.5%

5.5%

08

25.1%

70.2%

4.7%

10
13/9
0%

71.4%

21.1%

73.1%

17.5%

10%

7.5%

20%

30%

40%

50%

9.4%

60%

70%

80%

90%

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

100%Chap. XIV Investment Trusts

269

companies saw weak growth in direct marketing, partially due to the exit oflarge companies related to securities firms (as such companies absorbed thesales).
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 2012, 14.8% of all respondents answeredthat they had acquired investment trusts online.
Distributing companies are subject to the Financial Instruments and Exchange Act, Financial Products Sales Act and the regulations of the Japan Securities Dealers Association, and they are obliged to comply with the rules onsales of the Investment Trusts Association, Japan. For example, they mustcomply with the Suitability Rule, which requires distributing companies not
to engage in inappropriate solicitation activities in light of customers’knowledge, experience, investment purpose, and assets and to assume“accountability”for risk factors, including market and credit risk, and for important
portions in the structure of transactions and to maintain the“duty of sincerity
toward customers”not to conduct“prohibited activities”at the 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 apart 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 to perform theduty 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 cabinet
order under the Law for Investment Trusts and Investment Companies. (Asof September 2011, the specified assets consist of 10 types of assets, including securities, real estate, and rights on derivatives.) Funds investing mainly

270

Chap. XIV Investment Trusts

Chart XIV-9.

Distribution of Assets of Investment Trusts in Japan (as of the end of September 2013, total publicly offered securities investment trusts)
Surplus funds andother 43.2%

Chart XIV-10.

Stocks 23.4%
Bonds 33.4%

Ratio of Foreign Investments to Total Investments in Japan (Total publicly offered securities investment trusts)

80%

Total
Stocks
Bonds

70%
60%
50%
40%
30%
20%
10%
0%

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13/9

Chart XIV-11.

Breakdown of Industry Groups among Domestic Stock Held by Investment Trusts (publicly offered stock investment trusts as of the end of
September 2013)
Electrical equipment 12.8%

Others 38.6%

Pharmaceuticals
4.4%

Machinery 5.9%

Banking
6.1%

Transportation-related
equipment
10.3%
Information andCommunications
8.5%
Retail 7.2%
Chemical 6.2%

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

Chap. XIV Investment Trusts

271

in securities are called securities investment trusts.
Chart XIV-9 shows the distribution of assets under the management ofpublicly offered securities investment funds as of September 2013. Partiallyreflecting a growth in the total net assets of funds that pay dividends frequently, such as monthly distribution funds, bonds hold a large share in assets
under management. Looking at the proportions of domestic and foreign investment, the ratio of foreign investments to total investments had surged up
to the mid-2000s due to the continuing ultralow interest rate in Japan and thehigher popularity of investments in emerging countries. Moreover, blue-chipstocks 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)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.
Additionally, the Investment Trust and Investment Corporation Act imposes a restriction on investment trust management companies prohibiting themfrom giving instructions to acquire stocks of the same issuing company when
the number of stocks held by all investment trusts managed by the given investment trusts management company exceeds 50% of the total number ofoutstanding stocks of that same issuing company. The Investment Trusts Association, Japan, has voluntary rules concerning investment instruments andrestrictions on allocation.
The Investment Trust and Investment Corporation Act stipulates that an 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

272

Chap. XIV Investment Trusts

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 corporations. 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 corporations 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 1% 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 groupof those aged 45 or more comprise the top group, the groups of those aged 35－44 and those less than 35 stood at 52% and 32%, respectively, demonstrating an environment in which the average penetration of investment trusts
among households is above 40%.
In 2012, the amount subscribed to by individuals averaged ¥4.41 million
for unit-type publicly offered stock investment trusts for which statistics areavailable, while in terms of the numbers of subscribers, the category of ¥1
million－¥3 million accounted for one third of the total subscribers.
Many investors previously answered that they had no specific investment
purpose as their reason for buying investment trusts (Japanese traditionallysave money for unexpected purposes, i.e.,“for a rainy day”). Recently, more
and more individuals are buying investment trusts for“their retirement”andfor“diversifying the risk on assets.”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

Chap. XIV Investment Trusts

Chart XIV-12.

273

Breakdown of Holders of Investment Trusts (as of the end of 2012)
Japan

Deposit-receiving
institutions
Nonfinancial
2.9% Others 1.7%
corporations
8.9%
Households
62.9%
Insurancecompanies andpension funds
23.6%

Deposit-receiving
institutions
5.2%

U.S.
Others 17.9%

Nonfinancial
corporations
2.4%

Households
53.7%

Private pension plans
20.8%

Sources: The Bank of Japan, The Flow of Funds Accounts of the FRB.

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.
According to a survey of individuals conducted in 2012 by the Investment
Trusts Association, Japan, the average investment trust holder earns an annual after-tax income of ¥4.41 million ($43,024) and holds total savings of¥11.98 million, including investment trusts of 1.6 types of funds amounting
to ¥4.47 million.
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 Investment Trust and Investment Corporation Act).
Following the deregulation of the establishment of funds, in which the filingsystem replaced the approval system, as a result of the enforcement of the Financial System Reform Law in 1998, the Securities and Exchange Law (nowthe Financial Instruments and Exchange Act) was applied to investment trusts
the same as to stocks, etc. Therefore, publicly offered investment trusts arenow subject to both the Investment Trust and Investment Corporation Act
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. The

274

Chap. XIV Investment Trusts

mainstream open-end investment trusts are continuously (daily) offered after
the establishment of funds by initial subscription. This means that there is alarge difference between open-end investment trusts and stocks, in that thelatter are offered only at IPO and capital increases; otherwise, investors purchase issued stocks in secondary markets. Given these characteristics in a
subscription form of investment trust, the prospectuses were split into twovolumes to provide investors with“easy for investors to understand”information in 2004: a“prospectus for all investors (simplified significantly in2010),”which distributing companies are required to deliver to all investors
entering into contracts in advance, and a“prospectus on request,”which distributing companies delivered to investors upon their request.
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.
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.) It is requiredthat financial statements, etc., gain an audit certification from a certified public accountant or an audit firm that has no particular connection with the investment trust management company.
As for periodic disclosure, the Investment Trust and Investment Corporation Act requires investment trust management companies to deliver“financial reports”to individual investors.
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 the account, 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

Chap. XIV Investment Trusts

Chart XIV-13.

275

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 XIV-14.

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.

276

Chap. XIV Investment Trusts

stocks, and proceeds from the sale of securities, in MRFs and also offers suchservices 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 (Cash Management Account) funds developed in1977 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 of liquidity 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 (nocommission 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.

Chap. XIV Investment Trusts277

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 asJapanese 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“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, andreal estate and alternative funds grew also, after 2004 when stock prices recovered globally though broadly defined bond funds, including MMFs, continued to be mainstream. Looking at foreign investment trusts by country of278

Chap. XIV Investment Trusts

Table XIV-2.

End of year
1993
94
95
96
97
98
99
2000
01
02
03
04
05
06
07
08
09
10
11
12
13/9

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)

7,090
5,412
5,365
5,795
15,23629,35235,09936,084
41,42647,14754,42762,411
79,67087,10482,42751,47359,30658,80052,35857,83959,625507,375
434,083
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
640,638
768,068

Total (C)(A＋B)
514,465
439,495
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
698,477
827,693(A) / (C)
1.4%
1.2%
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%
7.2%

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.

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 2013, Luxembourg, Cayman, and other investment trusts accounted for 44.9%, 40.5%, and 14.6% interms of total net assets, respectively.

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 (5% or larger shareholdings). 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.
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 andbondholders 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 the280

Chap. XV The Information Disclosure System

Chart XV-1.
Statutory disclosure

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

Chap. XV The Information Disclosure System281

investors to make informed and reasonable investment decisions.
2. The System of Disclosing Corporate Information under the Financial
Instruments and Exchange Act(1) Issuance Disclosure
When a company publicly offers, or makes a secondary distribution of, a security whose aggregate value is ¥100 million ($0.98 million) or more, the issuer of such security must, in principle, file a securities registration statementwith the prime minister. On the primary market, information is disclosed
through the securities registration statement. Concretely, the statement shalldescribe (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 on other material matters concerning its business. In addition, when a securities company solicits customers for the purchase of a newly issued security, it is required to provide investors with a prospectus that furnishes themwith information concerning the issue that is deemed necessary for them toassess its value and to make an informed investment decision.
*US dollar conversions from yen are at the exchange rate of ¥102.50 to US$1 prevailingon January 31, 2014.

(2) 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
does not reflect such withheld information. This is why the law requires theissuers of securities to disclose all pertinent information, good or bad, in their282

Chap. XV The Information Disclosure System

Table XV-2.

Disclosure of information concerning the issuance of new shares

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 ($1.2 million at the rate of ¥83.15 to the dollar) or more andsuch company plans to solicit 50 or more investors for the purchaseof its new shares or plans to sell to or solicit 50 or more investors forthe 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 ($6.01 million),the contents of the registration statement of securities required to be
Registration statement filed by such company are simplified.
of securities* Incorporating system: A company that has been filing securities reports 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 ($1.2 million) or more, such issuer
may file a shelf-registration 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($1.1 million) or more, such issuer is required to file supplementarystatement
documents relating thereto.

Securities report
Periodic disclosure

Disclosure of corporate affairs

Division

Statutory Disclosure Documents Required to be Filed

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 order
as being similar in terms of distribution conditions must file quarterly
reportsecurities 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
own sharesor at a board of directors’meeting to acquire its own shares must filea report.

Chap. XV The Information Disclosure System283

securities 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(1) 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.”If any person other than the issuer of a listed stock who is required to file a securities report proposes thepurchase of such shares outside the market of a stock exchange, he must, except in cases that fall within the purview of certain requirements, such as thepurchase will result in the ownership of more than 5% of the securities, etc.,
purchase such shares through a tender offer. The tender offerer is obligated toserve 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.
(2) 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 information 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 of

284

Chap. XV The Information Disclosure System

Table XV-3.

Transitions in Tender Offer Bid (TOB) System
Major Developments

1971• Public tender offer system introduced

1990• Principles set down for forcing tender offers• Percentage share offer that triggers obligation to make tender offer decreased from 10% to
5%• Prior notification system abolished• Duration of offer extended• Shareholders’withdrawal rights expanded

2001• Along with the deregulation, in principle, of purchasing treasury shares, system for making
tender offers for a company’s own shares introduced

2003• Scope of acquisitions exempt from the TOB system enlarged

2004• TOBs restricted to companies with equity securities• Electronic notification system introduced

2005• ToSTNeT transactions made independent of market transactions

2006• Disclosure for TOBs upgraded (purpose of acquisition, basis of price calculation, disclosurefor MBOs)• Regulations implemented concerning the combined acquisition of shares on and offmarket• 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

purchasing 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 alarge volume of shares can have large effects on the formation of stock prices
at the market.
4. Timely Disclosure System of Financial Instruments Exchanges (TheChap. XV The Information Disclosure System

Table XV-4.

285

The Tender Offer Process

1. Commencement of a Tender Offer- Make a notice of commencement of a tender offer. (A public notice of a tender offer furnishing
information concerning the objective of the tender offer, the purchase price, the number ofshares to be purchased, and the period of the tender offer is published in a national daily newspaper.)- A registration statement of tender offer is filed with the prime minister on the day the public notice is published, and copies of it are forwarded to the target company, the stock exchange on
which the shares are listed, and the person who has filed the registration statement of tender offer with respect to the target company.
2. The Period of a Tender Offer (for 20 business days or more and 60 business days or less, in principle)- Issue a circular of tender offer to shareholders who plan to sell their holdings of the share certificates of the target company.
- The purchase price shall be uniform and universal and a tender offerer in principle may not
make certain changes in the terms of purchase, including lowering of the purchase price andshortening of the purchase period.
- A tender offerer in principle may not withdraw the offer or cancel contracts pertaining to a tender offer and shall offer to acquire the entire issue of shares, etc., subject to the tender offer inthe event that the holding of the tender offerer after the completion of the tender offer should
exceed two-thirds of the said shares, etc.
- Any shareholder who has offered to sell his holdings under the tender offer may terminate thecontract any time he chooses during the tender offer period.
- A subject company, or the issuer of the shares subject to a tender offer, shall submit a subject
company’s position statement to the prime minister and send copies of the statement to the tender offerer and relevant securities exchange(s).
- The tender offerer is prohibited, in principle, from purchasing the shares of the target company
through any manner other than the tender offer.
3. End of the Tender Offer- The tender offerer serves a public notice or announces the number of shares bought through thetender offer and files a report on the tender offer with the prime minister.
- The tender offerer forwards to shareholders who have offered to sell their holdings a notice indicating the number of shares the tender offerer has bought from such shareholders.
- The tender offerer pays for the shares it has bought without delay.

Stock Exchanges)
As described in the head 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

286

Chap. XV The Information Disclosure System

Table XV-5.

The Flow of a 5% Shareholding Report

1. The Duty to File a Large Shareholding Report- A holder or joint holders of shares, etc., whose holding ratio of the shares, etc., issued has exceeded 5% shall submit to the prime minister a large shareholding report, which shall include
the name(s), address(es), and business(es) of the holder or joint holders, an item concerning theholding ratio of shares, etc., the purpose of holding, an item concerning the fund for acquisition,and other items within five days from the date of such occurrence and send copies of the reportto the issuer and relevant securities exchange(s).
- A large shareholding report pertaining to shares, etc., held by a institutional investor, excluding
the cases where the holding ratio of shares, etc., exceeds 10%, shall, notwithstanding the provision above, be submitted to the prime minister within five days from the (bimonthly or more
frequent) reference date when the holding ratio of shares, etc., has exceeded 5% for the firsttime (special provisions for reporting large shareholdings).
2. The Duty to File Other Reports- Any large shareholder whose percentage of holdings has increased or decreased by 1% or moreof the outstanding shares of a listed company after he had filed a large shareholdings reportmust file with the prime minister a report on the change in his shareholdings within five business days, in principle, from the day on which such change has occurred and forward a copy of
the report to the stock exchange on which such stock is listed and to the issuing company ofsuch shares.
- When any large shareholder who had filed a large shareholdings report finds any inadequacy inthe contents of such report, such large shareholder must file an amended report with the prime
minister.
3. Public Inspection of Reports- The prime minister and the stock exchange on which such stock is listed must make these reports available for public inspection for five years.

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.
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. This applies to a case where
corporate information is leaked to outsiders before it is made public and its
securities are traded on the basis of unconfirmed information. When listedcompanies do not disclose information according to such regulations, thestock exchange concerned may (1) designate the securities issued by the listedcompany as disclosure-delinquent issues and publicize such fact to alert theinvestors to the issuer’s failure to disclose material information; (2) requirethem to file a report describing these facts and measures (revised reports),
which is made available for public inspection, if necessary, to improve theChap. XV The Information Disclosure System

287

Table XV-6. 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. 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 halt issue of shares or new share subscription rights
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

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.

288

Chap. XV The Information Disclosure Systemsituation; and (3) take measures to impose monetary penalties or designate
the securities as closely monitored issues because of a serious violation of thelisting agreements if there is no sign of improvement of the situation eventhrough the above measures.
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.
5. Electronic Disclosure
Previously, the statutory and timely disclosure of corporate information had
been made in the form of documents and had been made available for public
inspection at the regional financial bureaus and stock exchanges. At present,
both statutory and timely disclosures are generally made electronically available through the Internet. This digitization allows investors to view disclosed
information more fairly and immediately and helps the issuers to reduce theadministration costs of disclosure. The introduction of the XBRL (Extensible
Business Reporting Language), a next-generation standard language, is being
promoted for electronic disclosure systems in foreign countries to help bringabout more-efficient preparation, distribution, and reuse of electronic financial information and increase the convenience for investors. In Japan, preparation for the introduction of the XBRL for statutory disclosure and timely
disclosure has been going on since 2008.
(1) Electronic Disclosure for Investors’Network (EDINET)EDINET is a system that enables electronic filing and public inspection of
documents disclosed under the Financial Instruments and Exchange Act. The
disclosure documents had previously been disclosed through the printed media. More specifically, persons who are required to file securities reports now
file disclosure documents furnishing their corporate information with thecompetent regional financial bureaus online through the Internet, and the financial bureaus, in turn, offer such information for public inspection on thescreens of computer monitors installed at their inspection rooms. In addition,
investors can also inspect such documents through the Internet.
(2) Timely Disclosure Network (TDnet)
TDnet is a system designed to enable comprehensive electronic processing ofChap. XV The Information Disclosure System

Chart XV-2.

Conceptual Chart of the EDINET System
EDINET system

Submitter
Registration statement
Preparation of documents

289

Internet

Document files
Format check

Person filing a
registration statement

Notification andacceptance subsystem

Custody of
documents

Document files

Database of
filed documents

Submission
Inspection room Inspection roomat the financial
bureauDatabase management
subsystem

Inspection
subsystem

Stock exchanges Inspection roomand securities
dealers association

Information disclosure
subsystem

Investors

Database ofInformation disclosure

Internet

Source: Financial Services Agency, Guide to the EDINET.

News media

Flow of Information Disclosure via TDnet

Online registration system
TDnet

Registration

Exclusiveline

Issuance ofcertificates

Listedcompanies
Registration●Vendors’

terminal

After publicannouncement

General-purpose
computers

Internet circuit

Exclusive line

Source: Tokyo Stock Exchange, Handbook of the TSE 2007.

Internet
Real time

Internet
Real time

General investors

General-purpose
computers●Newspapers●TV

Timely disclosure inspection service

Listedcompanies

TDnet databese service

Chart XV-3.

290

Chap. XV The Information Disclosure Systema series of disclosure procedures for listed companies. They include (1) providing corporate disclosure information to the stock exchange, (2) furnishing
the stock exchange with disclosure information in advance of public disclosure, (3) disclosing such information to the news media, (4) allowing public
inspection, and (5) building a disclosure information database. At present,
TDnet is used to communicate timely disclosures of companies listed on other stock exchanges in Japan. Information disclosed through TDnet is available for the day on which it is disclosed and for 30 days thereafter under thetimely disclosed information service, which is jointly operated by the stock
exchanges throughout the country via the web sites of these stock exchanges.
6. Recent Moves of Information Disclosure(1) Legislation of Quarterly Disclosure
Twice-a-year (annual and semiannual) disclosure of business results has beencommon practice in Japan. However, as the business results of a growing
number of companies have changed rapidly in recent years, many investors
felt the need to have access to such results more frequently than before. To
meet such need, listed companies were, under the regulations of the stock exchanges, obligated to disclose financial results quarterly; this was subsequently enforced as a quarterly reporting system by law as a result of the implementation of the Financial Instruments and Exchange Act.
(2) Enhancement of Corporate Governance and Internal Control
Following a rash of false statements in securities reports and window-dressing settlements of large companies in recent years, stock exchanges have required listed companies to file a written confirmation statement regarding
compliance with exchange disclosure regulations and a report of corporate
governance to ensure the credibility of the information disclosure system.
The Financial Instruments and Exchange Act also requires listed companies
to file a written confirmation on the appropriateness of internal control reports and securities reports, which value the system necessary for ensuring
the appropriateness of documents pertaining to financial calculations andother information on the listed company and business group to which it belongs.
(3) Movement toward Introduction of International Financial Reporting Standards (IFRS)In 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

Chap. XV The Information Disclosure System

Table XV-7.

291

Outline of the Written Confirmation Statements and Reports

Submitted Documents Written confirmation of Outline of timely disclo- Written confirmation atcompliance with stock sure (included in corpo- tached to securities reexchanges’regulations
rate governance reports) ports
PurposeTo maintain and enhance the confidence of investors in the security market

Content

The representative attests
that they will comply
with the regulations, etc.,of the stock exchange
and will observe themeasures stipulated by
the stock exchange basedon its regulations, etc.

Date of submission

When the representative When any details have At the time a securities
has changed
changedreport, etc., is filed

Method of publication

Report on the status ofestablishment of disclosure policies, organization, and procedures, andon the status of the establishment of a monitoring system for thetimely disclosure system.

The representative attests
that the content of thecompany’s securities reports, etc., is in accordance with the Financial
Instruments and Exchange Act.

Public inspection (web Public inspection (EDIsites of the stock ex- NET)changes)

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, it is expectedthat the number of companies adopting IFRS will increase.

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, startingwith income tax for 2015, the rate for taxable income in excess of ¥40 million was set at 45%.
In the fiscal 1999 tax reform, the basic corporate income tax rate was reduced to 30% from the existing 34.5%. The basic corporation tax rate wasfurther cut to 25.5% in the fiscal 2011 tax reform. As a result, the effective
corporate tax rate as of January 2013 was 35.64%.

Chap. XVI Securities Taxation

Table XVI-1.
Year

293

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).

Looking at major trends in Japan’s securities taxation system during thelate 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

294

Chap. XVI Securities Taxation

been issues of concern. Further measures followed with the introduction of
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
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
Set up of a tax-free system for small amount investment (to be introduced whenrules on tax rates implemented)
2011 Preferential tax rate on dividends and capital gains of listed stocks, etc. extended fortwo more years
Introduction of tax-free system for small amount investment postponed for two
years (starting 2014)2013 Tax system for public bonds, etc., changed and scope of profit and loss netting expanded (starting 2016)

Income tax brackets

6 brackets (5%－40%)

Chap. XVI Securities Taxation

Table XVI-3.

295

Outline of Taxes on Dividends and Capital Gains and Losses from Listed
Stocks, etc.
To 2008/12

Tax rate10%

2009/1 to 2013/12
Base: 20%

From 2014/1
20%

Preferential rates:
Capital gains: 10%
Dividends, etc.: 10%
Withholding tax rate

10% (no declaration 10% (no declaration 20% (no declarationnecessary)necessary)necessary)

Netting of annual profits and losses—

Netting of annual capital gains and losses
and dividends
From 2009/1: Possible on tax return
From 2010/1: Possible with withholding
tax account as well
From 2016/1: Possible with interest andcapital gains and losses on public bonds,
etc.

Note: Special income tax for reconstruction levied from 2013 to 2037.
Source: Illustrated Taxation System of Japan, 2013 edition, page 105, compiled by Hirotaka Unami.

Table XVI-4.
Eligible for Tax
Exemption

Outline of Nippon Individual Savings Account (NISA)

Small amounts of dividends and capital gains on listed stock in tax-free account.

Tax-Exempt
Annual (1) new investments and (2) existing investments in listed stocks, etc., up
Investment Amounts to a maximum of ¥1 million in market value (unused portion cannot be carriedover to next year).
Total Tax-Exempt
Investment AmountMaximum of ¥5 million (¥1 million×5 years)

Tax Exempt Period

10 years from 2014 to 2023

Holding Period

Maximum of 5 years, investments can be sold at any time (however, sold portion
cannot be replace with new investment)

Source: Complied from Ministry of Finance materials.

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
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296

Chap. XVI Securities Taxation

special two-year measure extending the preferential tax rate on capital gainsof ¥5 million 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, and the tax reform for fiscal 2011 extended it another two years. To help fund the restoration of the area strickenby the Great East Japan Earthquake, a special income tax for reconstruction
is being levied from 2013 to 2037.
Looking at the trend in the scope of allowing netting of losses against
gains, the fiscal 2003 tax reform made it possible for investors to offset losses on redemptions (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, etc.,from listed stocks starting in 2016.
The tax exemption on dividends and capital gains on small investments inlisted stocks, etc., in tax-free accounts, in other words NISA, was introduced
in January 2014.
3. Taxation on Interest
Interest on deposits, savings, and bonds and on profits distributed by jointly
invested trust accounts and bond investment trusts are treated as interest income, and a tax is withheld at a uniform rate of 20% (20.315% including thespecial income tax for reconstruction) separately from other incomes. In addition to these incomes, compensation money for benefits of periodical deposit, interest on mortgage securities, profits from a gold investment account,exchange gains made from a foreign currency investment account, and gains
made from single-premium endowment insurance will be subject to a separate withholding tax, as is the case with interest income. However, interest on
IBRD (International Bank for Reconstruction and Development) bonds; IDB(Inter-American Development Bank) bonds; and ADB (Asian Development
Bank) bonds are subject to the comprehensive taxation due to exemption
from duty of withholding at source.
For specified discount bonds or debentures, an 18% separate withholdingChap. XVI Securities Taxation

Table XVI-5.
Division

297

Interest Taxation System

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 (18.378% including the special income tax for reconstruction) is imposedon 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 thespecial income tax for reconstruction). The redemption gains on discountbonds or debentures that do not qualify as specified discount bonds or debentures are deemed to be miscellaneous income and are thus subject to comprehensive taxation. The redemption gains on coupon bonds are also subject tocomprehensive taxation.
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 for298

Chap. XVI Securities Taxation

Table XVI-6.

The Status of Taxation on Interest Income, Etc. (2011)(millions of yen)

Division

Amount paid

Taxable amount

Withholding tax

Public bonds

10,547,310

459,836

Corporate bonds

3,019,296

515,958

77,394

Deposits (Banks)

1,004,696

866,785

130,018

Deposits (Others)

878,483

588,863

88,329

Jointly invested trusts

25,81913,403

2,011

Bond investment trusts

123,418

111,374

16,706

2,899

2,899

522

Others

520,511467,429

83,971

Total

16,122,429

3,026,546

467,925

Redemption gains from discount bonds

68,975

Notes: 1. Taxable amount includes not only that paid to individuals but also that to corporations.
2. Amount paid and withholding tax on the redemption gains from discount bonds include not justthose paid to individuals but also to corporations.
3. As fractions were rounded to the nearest whole number, the figures may not add up to the actual
total amounts.
Source: Compiled on the basis of the data drawn from the web site of the National Tax Agency of Japan(http://www.nta.go.jp).

handicapped 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 for tax-exempt principal, making earnings on a
total of ¥7 million or less of principal tax free when both types of systems areused. The government abolished a previously available tax-exempt system
for interest income on postal savings for handicapped persons, etc., after theprivatization of postal services. Now qualified handicapped persons include
persons with a physical disability certificate, wives of insured persons receiving survivors’basic pension benefits, and recipients of widow’s pension benefits.
The tax-exempt 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 to buy houses andstabilize their retirement life, and interest, etc., 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 anontaxable upper limit of ¥3,850,000.

Chap. XVI Securities Taxation

299

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.
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
Table XVI-7.

An Outline of Dividend Income Taxation

Division

From 2009 to 2013

From 2014

Distributions from publicly offered investment Election of non-declaration or comprehensive taxation
trusts, etc.
methods
Non-declaration (20% withholding tax—15% income
Dividends on listed
tax and 5% inhabitants’tax)
stocks, etc. (other than toPreferential tax rate (to 2013)
those paid to large(10% withholding tax—7% income tax and 3% inhabshareholders)*
itants’tax)Or
Comprehensive taxation
Dividend tax credit (5% to 40% income tax and 10%
inhabitants’tax)
Note: 20% separate taxation method can be selected
Dividends on profto net capital losses on stocks against other annual seit, distributions ofcurities income. (15% income tax and 5% inhabitants’retained earnings,
tax)
and others
Preferential tax rate (to 2013)(10%—7% income tax and 3% inhabitants’tax)
Other than the above

Comprehensive taxation (Dividend tax credits) (5% to
40% income tax and 10% inhabitants’tax)
Dividend paid at one(20% withholding tax—20% income tax only)
time less or equal to:
Non-declaration method￥100,000 ×(20% withholding tax—20% income tax only)
Dividend computational period
12

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. Special income tax for reconstruction levied from 2013 to 2037.
Source: Based on the web site of the Ministry of Finance.

300

Chap. XVI Securities Taxation

Table XVI-8.

Taxation of Dividend Income (withheld at source) (2011)(millions of yen)
Total tax paid

Division

Generaltaxation

Special tax
rate applied

Tax withheld
at source

Dividends on profit or interest income, distribution of retained earnings, and dividends,
etc.,/ on interest on fund corporations

12,606,043

6,951,261

2,894,980

1,575,213

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

654,662

1,204

399,419

31,129Remittance to optional withholding tax account912,966－

912,966

63,717

14,173,671

6,952,466

4,207,364

1,670,059

Total

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 off to whole numbers, 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.

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 unlisted stocks and those received by large
individual shareholders are subject not to the preferential 10% dividend tax
but to comprehensive taxation after paying a 20% withholding tax (20.42%
from 2014 to 2037). In this case, shareholders have the right to select theChap. XVI Securities Taxation

301

non-declaration of dividends paid at one time less or equal to the amount divided by ¥100,000 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 9 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).
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, 5% of such part of their dividend income thatpushes their taxable income over and above ¥10 million (and 2.8% for inhabitants’tax) is deductible. For instance, when individual shareholders have a
total taxable income of ¥13 million (¥9 million in general income and ¥4
million in dividend income), they are entitled to a tax deduction of ¥250,000(¥100,000 (＝(¥10 m－¥9 m)×0.1)＋¥150,000 (＝(¥13 m－¥10 m)×0.05).
The entire amount of dividends received on the shares of wholly owned subsidiaries, etc. is not counted as taxable income. For dividends received on the302

Chap. XVI Securities Taxation

shares of an affiliate (a more than 25%-owned company), dividends less interest paid is not counted as taxable income, and 50% of dividends received
from other sources less interest on debts is not counted as taxable income.
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 as with interest paid) and the comprehensive business income tax method (CBIT). As interest and dividends are not deductible
from taxable income on the corporate level, they are subject to corporate tax,
but such interest and dividends received by individuals are not subject to income tax.
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
Table XVI-9.

Outline of the Capital Gains Taxation System for Stocks, Etc.

Division

Outline(1) Listed stock, etc.
A 20% separate income tax (of which 5% is local
Stocks listed on a stock exchange, domestic or for- inhabitants’tax) is levied on self-assessed capital
eign; subscription certificates of the Bank of Japan; gains.(The rate is lowered until the end of 2013.)
bonds with equity warrants; OTC-registered bonds (In addition, investors who use a special brokerageof the convertible bond type with equity warrants; account are exempted from the duty to file a returnlisted preferred subscription certificates of the or can take advantage of a simplified procedure for
Shinkin Central Bank and Chukin Bank (the Japan filing an income tax return.)
Finance Corporation for Small Business [JFS];
shares of exchange-traded funds (ETF); beneficiary certificates of real estate investment trusts (REITs or listed investment certificates of listed realestate investment trusts); investment securities,
such as unlisted shares of a listed company; andpublicly offered stock investment trusts, etc.
(2) Other stocks, etc

A 20% separate income tax (of which 5% is local
inhabitants’tax) is levied on self-assessed capitalgains.

Note: Special income tax for reconstruction levied from 2013 to 2037.

Chap. XVI Securities Taxation

303

Chart XVI-1. Illustration of the Special Brokerage Account
Listed stocks, etc.

Special brokerage accountInvestors

Selection

Dividends
Stock
issuers,etc.

Simplified tax
return account
Capital gains

Withholding tax
account

Securities
firms,
etc.

Capital gains

Calculation

Dividend income

Annualstatementof trading
Produced by the
securities firms, etc.
Annualstatementof trading

Final income
tax return• Calculation of capital gains on stocks• Tax deduction on capital gains on
stocksSelectionNodeclaration

Source: Based on the web site of the Ministry of Finance.

Chart XVI-2.

Withholding Taxes on Capital Gains on the Sale of Listed Stock, Etc.,
Managed in Special Brokerage Accounts(millions of yen)
300,000
250,000

254,672
223,942200,000

210,356

150,000
100,000
50,000
0

2005

2006

2007

49,65250,44946,81738,895

2008

2009

2010

2011

Source: Based on the website of the National Tax Agency of Japan.

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. Up to the end of 2013, the capital gains from thesale of listed stocks, etc., are subject to a 10% preferential tax rate (10.147%
in 2013), rising to 20.315% from 2014 to 2037, with the normal 20% income
tax rate taking effect after that. Previous to 2003, capital losses from the saleof stocks, etc., were deductible only from capital gains from the sale of other304

Chap. XVI Securities Taxation

stocks, etc., if any, made during the same year, and it was not permissible tocarry forward any unused losses. However, from 2003 on, investors havebeen able to carry forward capital losses from the sales of listed stocks, etc.,
for three years starting with the year following their occurrence. Also, since2009, investors have been able to deduct capital losses on listed stocks, etc.,from dividends, etc., received from listed stocks, etc. Moreover, from 2016,
the tax system for public bonds, etc., will change, with investors being allowed to offset income against losses for interest and capital gains or losses
from public bonds and income, etc., from listed stocks.
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 returnby 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.
7. Capital Gains Taxation (2)Although the tax system for capital gains on public bonds, etc., will change
in 2016, in principle, capital gains from the sale of bonds are tax deductible.

Chap. XVI Securities Taxation

305

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 ofChart 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
¥1 million

Stock capital gain
¥1 million

Stock capital gain
¥1 million

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, 2013 edition, page 107, compiled by Hirotaka Unami.

306

Chap. XVI Securities Taxation

one year or more (deferred payment bonds) are also are subject to comprehensive taxation.
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 invest 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 of the amount invested in 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 capitalgains in the same year; (3) when investors suffer losses from the sale of thespecified stocks up to a day before listing date, or when they suffer losses
from the dissolution and liquidation of issuers, these losses are deductible
from gains on the sale of stocks in the same year. Unused deductible losses
may be carried forward for three years starting with the next year.
8. 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 some

Chap. XVI Securities Taxation

Table XVI-10.

307

Outline of Matters Related to Taxation of Nonresidents, Etc.

Non resident category Nonresidents with a permanent establishment in Japan

Type of income

Nonresidents, etc.,with a fixed officeor other designatedplace of business

Nonresidents, etc., engaged inNonresidents
construction, installation, or without a permanentassembly work for more thanestablishment in
one year or as an agent or otherJapan
representative meeting certain
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)

Withholdingtax

Tax deductible

None

Comprehensive
taxation (Note 2)

None(Note 1)None
20.42%Tax deductible
Separate withholding tax followed by comprehensive taxation

Compensation for personal
services
Rental income, etc., from realestateInterest, etc.
Dividends, etc.
Separate withholding tax followed by
Separate withholding tax
comprehensive taxation(notes 3, 4, 5)
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%15%
20.42%(Notes 4, 5)
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. However, income from the sale oflisted stocks, etc. is eligible for a preferential tax rate of 7.147% up to December 31, 2013.
2. 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.
3. 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.
4. Dividends, etc., on listed stocks, etc. are eligible for the preferential tax rate of 7.147% up to
December 31, 2013. The 15.135% tax rate will apply from 2014 to 2037.
5. Nonresidents with a permanent establishment in Japan use the comprehensive or none-declaration tax system for dividends, etc. (excluded those subject to the separate withholding tax system).
Source: Complied from“Withholding Tax Basics,”FY2013 edition, National Tax Agency of Japan.

308

Chap. XVI Securities Taxation

income) 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.
(1) Nonresidents with a PE in Japan: On interest on deposits and savingsand dividends, etc., and profits distributed by bond investment trusts, a
15.315% separate withholding tax is imposed. Dividends, etc., on listed
stocks, etc., of domestic corporations are taxed differently based on the way
PE was determined. In the case of a PE based on (i) above or a PE based on(ii) above where the income can be attributable to the domestic business, thedividends, etc., are subject to comprehensive taxation after withholding at thesource of 7.147% in 2013, and 15.135% from 2014 to 2037. However, likean individual with permanent residence, the party may elect to use either the
non-declaration or separate taxation system. In the case of a PE based on (ii)above where the income cannot be attributable to the domestic business theseparate withholding tax method applies.
(2) Nonresidents without a PE in Japan: On interests on deposits and savings and dividends, etc., distributed by bond investment trusts, a 15.315%
separate withholding tax is imposed just as 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 theseparate withholding tax. The above tax rates include the special income tax
for reconstruction.
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.
9. Taxation of New Products(1) New Types of Investment Trusts
Profits received from a privately placed stock investment trust of the contractual type are, in principle, subject to a withholding tax and then are taxed

Chap. XVI Securities Taxation

Table XVI-11.

Contractual typeClassification

New Taxation Framework for Investment Trusts

Profit distribution

Cancellation (redemption) gains1

Capital gains

Privately placed stock Taxable as dividend
investment trusts
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

Privately placed as- 20% separate withholding tax
set-management trust
Publicly Open-end
offered type

Corporate type309

Tax deductible

Taxed as dividend
income (10%2 of thedividend is withheld)

Taxed as dividend income (with- 10%2 of the capital
holding at source of 10%). 2 A gains is taxed sepaportion deemed as capital gains rately on the basis
or losses from the sale is subject of self-assessment
to separate taxation, based on
self-assessment.

Closed-end Taxed as a dividend
type
income (20%3 of thedividends is withPrivately placed
held)

Taxed as dividend income (with- 20%3 of the capital
holding at source of 20%).3 A gains is taxed sepaportion deemed as capital gains rately on the basis
or losses from the sale is subject of self-assessment
to the separate taxation, basedon self-assessment.

Notes: 1. Since contract cancellations are not possible with closed-end trusts, this applies only to liquidations or redemptions.
2. 20% in and after January 2014
3. A 10% rate applies to closed-end investment trusts that are listed up to December 2013.
4．Special income tax for reconstruction levied from 2013 to 2037.
Source: Primer on Taxation, 2013 edition, page 179, Daiwa Institute of Research Ltd.

Table XVI-12.

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.

comprehensively together with other incomes of the recipients of such profits. The tax credit for dividends is also applied, and when the recipient meets
certain requirements, he is exempted from the requirement of filing an income tax return. Capital gains made by selling beneficiary certificates ofsuch investment trusts are subject to a withholding tax. Profits received from

310

Chap. XVI Securities Taxation

an investment trust managing privately placed bonds and redemption gains
are subject to a withholding tax, and capital gains are tax exempt. 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% from 2014 is imposed before comprehensive taxation or 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 of 20.315% from 2014 based on self-assessment. On the other hand, dividends received from closed-end or privately
placed investment trusts are subject to a withholding tax in principle and thento comprehensive taxation. In general, a taxation system is selected that does
not require the declaration of such income when certain requirements are satisfied. Provided that a credit for dividends is not applied when the comprehensive taxation is selected on dividends. Capital gains from the sale ofclosed-end or privately placed investment trusts are subject to the separate
taxation of 20.315% from 2014, based on the self-assessment. For REITs(real estate investment trusts), dividends and capital gains from the sale oflisted REITs are subject to the same taxation as listed stocks. However, acredit 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.

Chap. XVI Securities Taxation

311

10. 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 contributions, with the understanding that pension benefits may vary depending on
the results of such investment. It is divided into the individual type and thecorporate type, in which the company makes contributions on behalf of its
employees. In order to encourage the spread of pension products based onsuch a system and to enhance the efficiency of the management of suchplans, it is essential to give a certain tax incentive. And in devising such ataxation system, due care must be exercised to strike a suitable balance
Chart XVI-4.

¥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:¥51,000 permonth(¥612,000 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:¥25,500 per month(¥306,000 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

Source: The web site of the Ministry of Health, Labor and Welfare (http://www.mhlw.go.jp).

Civil
servants

312

Chap. XVI Securities Taxation

Table XVI-13.
Division

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

Premiums paid by employer

Premiums paid by em- Premiums to small-scale company mutual aid association are deducted asployeea loss (Note)
Management stage:

Special corporate income tax is applied (frozen until end of fiscal 2013)

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.

between the taxation system for such pension plans and that for other pension
plans and to ensure the portability of benefits (the possibility of transferring
pension assets when changing jobs). The government has taken the following
tax measures applicable to defined contribution pension plans.
(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 planof 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, 2014.
(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Chap. XVI Securities Taxation

313

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 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 monthin which he or she is disabled, and the benefits are exempted from income
tax and inhabitants’tax. (iii) Death benefits: Death benefits paid in a lumpsum to the survivors when the subscriber died are deemed as an inheritedproperty, and up to ¥5 million for each 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. Applicable Laws (1)—The History of the Securities and Exchange
Law
In 1948, the Japanese government enacted the Securities and Exchange Law
under the guidance of the General Headquarters (GHQ) of the Allied Powers.
Because the law was basically a U.S. law introduced in Japan“as is”and enacted in haste, revisions soon became necessary. For example, to better suit
Japan’s markets, the government sought to replace the disclosure and fraud
prevention approach typical of U.S. regulations with stronger surveillance
functions by the securities industry and stock exchanges. In 1952, it abolished the Securities and Exchange Commission set up along the lines of the
U.S. SEC, the executive agency of the law in the United States, and followed
up in 1953 with liberalization of regulations. Over the years, the law has been
regularly revised to cope with issues as they arose. In 1965, in response to
problems of improper conduct toward customers in the securities industry,
the authorities changed the authorization system from a registration system
to a licensing system while also imposing a strict code of conduct for directors, officers, and employees of securities companies. In 1971, in reaction toclear cases of misleading accounting practices by listed companies, the authorities reinforced the disclosure system by expanding the scope of companies required to submit securities reports and by introducing semiannual andextraordinary reporting systems. At the same time, they strengthened the civil
liability of companies regarding fraudulent disclosure. Insider trading regulations were introduced in 1988 in response to an incident where a bank tried
to sell its shares in a company that had incurred huge losses before the fact
became public. In 1990, in addition to revising the public tender offer system
for shares, the authorities introduced a disclosure system for large shareholdings. In 1991, when securities scandals triggered by the bursting of the economic bubble revealed that securities companies had been providing loss
compensation to their best corporate clients for large losses incurred in theirtrading accounts, the authorities introduced punitive regulations to prevent
loss compensation or insuring the losses of clients. The following year, theChap. XVII The Securities Regulatory System

Table XVII-1.
Year

315

Major Amendments to the Securities and Exchange Law
Purpose of revisions

1952

Abolish Japan’s Securities and Exchange Commission.

1953

Simplify disclosure system, strengthen surveillance of securities firms and exchanges,
and enable margin transactions.

1965

Switch over to license system for securities firms and strengthen regulations by introducing code of conduct for directors, officers, and employees of securities firms; administrative rules for securities firms; registration system for securities representatives;and inspection correction ordinance orders by the Minister of Finance.

1971

Expand scope of obligation to submit securities reports, introduce semiannual and extraordinary reporting system, increase civil liability for falsifying securities and business information reports, and introduce tender offer system.

1981

Lift restrictions on public bond trading by banks.

1985

Lift restrictions on futures trading by financial institutions.

1988

Introduce insider trading regulations, expand and improve periodic disclosure, andsimplify procedures for issuance disclosure.

1990

Introduce a disclosure system for large shareholdings (5% rule) and undertake fullscale revision of tender offer system to conform to international standards.

1991

Prohibit loss compensation or insurance and discretionary trading accounts.

1992

Establish the Securities and Exchange Surveillance Commission, establish andstrengthen inspection and audit system by reinforcing function of SROs, enable banks
to participate in securities business through subsidiaries, and legally define, etc., securities, and provide legal framework for private offerings.

1997

Establish and strengthen punitive measures for disclosure violations, unfair trading
practices and legal violations discovered by inspections, and audits by surveillance authorities and implement necessary revision in line with the introduction of a stock option system, etc.

1998

Establish OTC derivatives trading, set up system for company-type investment trustsby securities investment corporations, expand scope of securities definition, expand
scope of disclosure system, shift to disclosure on a consolidated basis, remove obligation for listed securities to trade on exchanges, introduce PTS’s, deregulate brokeragecommissions, strengthen unfair trading practices regulations, switch to registration system for securities firms, abolish diversification restriction on securities firms, diversify
securities intermediary services, convert to violations surveillance approach for regulations to ensure the financial soundness of securities firms, introduce system to ensure
thorough compliance by securities firms regarding segregated management of customer assets, and launch Investor Protection Fund system.

2000

Achieve incorporation of exchanges as joint stock companies and promote electronification of prospectuses and reports, etc.

2003

Introduce securities intermediary system, expand scope of private offering to promote
investment in venture companies, strengthen disclosure by listed companies with reference to the U.S. Sarbanes-Oxley Act, and achieve establishment of securities exchange
holding companies.

2004

Introduce best execution for customer orders, upgrade PTS’s, introduce rules for green
sheet issues, improve the prospectus system, lift restrictions on securities intermediaryservices by banks, liberalize tender offer system, introduce monetary penalty system,
revise civil-liability system, strengthen inspection authority of Securities and Exchange
Surveillance Commission.

2005

Introduce disclosure obligation for parent companies, expand scope of application ofmonetary penalty system, expand scope of application of tender offer system, and introduce English-language disclosure in line with globalization of securities trading.

316

Chap. XVII The Securities Regulatory Systemauthorities also took steps to deal with various issues that had been raised regarding the securities industry and the regulatory system through such actions as establishing the Securities and Exchange Surveillance Commission
and clarifying the role of self-regulatory organizations (SROs). Despite these
efforts, securities scandals continued to occur, resulting in the authorities further strengthening punitive measures in 1997. Then major reforms (Japan’sfinancial“Big Bang”) aimed at revitalizing financial markets got under way
in 1998. In one phase of those reforms, the structure of the securities market
was revised in 2003, followed by further revisions in 2004 aimed at shifting
Japan’
s financial system to one built around the market function. In 2005, inlight of the occurrence of major securities incidents involving Livedoor, Seibu Railways, and others, the authorities revised the disclosure regulation andthe tender offer regulation.
2. Applicable Laws (2)̶Shifting to the Financial Instruments andExchange Act
In 2006, the Securities and Exchange Law underwent major revisions andwas renamed the Financial Instruments and Exchange Act (FIEA). The purpose of the new law was to introduce cross-sectional regulations and flexibility into the financial system. One prime example of the move to cross-sectional application was the introduction of measures to ensure the same typesof rules applied to all financial instruments with similar economic functions
and investment risks. The government achieved this goal by expanding theFIEA’s scope of application and by revising various related laws and regulations. More specifically, it extended the scope of application 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, it revised various related laws 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(see section 3.). Another example of the move to cross-sectional application
was the revision of traditionally vertically compartmentalized regulations tostandardize the registration of sales and solicitation, investment advisory, asset management, and asset administration, etc., businesses under the umbrellaof 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

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

Bill to partially revise the Securities and Exchange Law, etc.
(Establishing cross-sectional legislative framework to protect investors)●

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.

Chart XVII-1. Transition from Securities and Exchange Law to Financial Instruments and Exchange Act

Chap. XVII The Securities Regulatory System

317

318

Chap. XVII The Securities Regulatory 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
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.
Since then, the government has seeming implemented reforms to the FIEA
on an annual basis. In 2013, there was a major reform of the insider trading
regulations. The backdrop to those reforms was the emergence of problems
related to the regulatory coverage and sanctions in cases of so-called capitalincreases through public offerings insider trading. To deal with the issue, regulations were introduced for communicating sensitive information and recommending transactions and monetary penalties for violations by asset management companies were increased. Based on practical experience with theregulations in recent years, reforms have been made related to what actions
fall within their scope and which do not.
3. Applicable Laws (3)̶Securities Market Related Laws andRegulations
The original concept behind the FIEA was to apply the same types of rules tosimilar financial instruments based on legislation covering investment services. However, the law never quite attained this goal because jurisdiction was
split up among administrative authorities, and many financial instruments
had distinctly different features. Nevertheless, from the point of view of investor protection, other laws were revised so that as much as possible theyshared common rules 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, insurance, and investment trust laws implemented provisions equivalent to the FIEA’s code of conduct, perhaps the most importantarea for customer protection. Specifically, these laws have advertising, regulations; disclosure obligations; behavior prohibitions; and loss compensationprohibitions, etc. (Art. 13-4, Banking Act; Art. 300-2, Insurance Business
Act; Art. 24-2, Trust Business Act). The Commodity Exchange Act (currently
the Commodity Futures Trading Act) was also reformed to include similar
regulations for its financial instruments; the revisions implemented advertisingChap. XVII The Securities Regulatory System

Table XVII-2.

319

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.

320

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.

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 (Art. 213-2, Art. 218 (1) (2); Art. 2143; and Art. 358-2).
The FIEA incorporates part of the Investment Trust and Investment Corporation Act (Investment Trust Act), which forms one of the two pillars of investment trust regulations. In other words, most of the business and code of
conduct regulations regarding the investment trust intermediary business andasset management business of investment corporations have been included in
the FIEA, leaving the Investment Trust Act focusing solely on investment
trust regulations.
The Financial Instruments Sales Law governing sales, etc., of financial instruments was formulated in 2000 to provide cross-sectional rules regarding
the sale and solicitation of sales for deposits, investment trusts, insurance, securities, and other financial instruments. Due to its relative lack of use in litigation, however, the law was revised in 2006 at the same time the FIEA cameinto force to make it easier for customers to press civil liability suits. Specifically, the law expanded the scope of the obligation to explain products tocustomers, including requirements to explain not just the risk of loss of principal due to market or credit risk, but also the possibility of losses in excess

Chap. XVII The Securities Regulatory System321

of principal and the essential features of the transaction scheme (Art. 3, Par.
1, Items 2, 4, 6). The law also added a suitability rule (Art. 3, Par. 2) and aprohibition on making investment decisions on behalf of clients (discretionary services) and civil liability for any such services provided (Art. 4 and 5).
These revisions enable the courts to make a decision on whether, based on
the suitability rule, the seller fulfilled the obligation to explain the financial
product, establishing responsibility to compensate the customer for damages,
which are presumed to be any loss of principal (Art. 6).
4. Enforcement (1)̶Transitions in the Regulatory Framework
After the 1952 abolishment of the U.S.-modeled Securities and Exchange
Commission (see section 1.), the Ministry of Finance took over the regulation of securities. Rather then using the legal provisions set out in the former
Securities and Exchange Law, the ministry depended more on unwritten rules
called administrative guidance as a regulatory method. After administrative
guidance was recognized to have contributed to a security scandal in 1991,
however, the method came under severe criticism. In response, the ministrybolstered its market surveillance by establishing the Securities and Exchange
Surveillance Commission (SESC) and transferring surveillance to this body.
Further change came in 1997 when the government set up the Financial Supervisory Agency, later to become the Financial Services Agency (FSA) towhich the Ministry of Finance transferred the financial system planning andlaw drafting functions in 2000. The SESC became part of the FSA at thattime. Through this process, the major portion of securities regulation in Japan
congealed into a system administered by the FSA and the SESC and policy
shifted from preventative administration to regulatory violation surveillance.
During the period when the government was formulating the Financial Instruments and Exchange Act, the enforcement of its regulations became anissue and was discussed in various venues (Achieving Rule Enforcement, Financial System Council, March 30, 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 Law aimed to reduce the degree of dependence on criminal litigation
and achieve a framework in keeping with the trend toward enforcement
through surveillance. Two of the main points in the plan were upgrading themonetary penalty system and establishing a financial alternate dispute resolution (ADR) system. A monetary penalty system had already been introduced
in 2004 as a measure to curtail violations by imposing a financial burden on

322

Chap. XVII The Securities Regulatory System

Chart XVII-3.

Conceptual Flowchart of Securities Trading Surveillance
CourtsAppointment of chairman
and commissioners

Orders prohibiting or
suspending violations(Note 3)(Note 1)
Recommendation

Prime Minister

Reporting of measures taken based on

Results 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

PeopleSecurities 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.

perpetrators, but in 2008 the authorities reinforced the system by revising thescope of application and increasing its severity by revising the fine calculation method (see next section).
The financial ADR system had been under discussion as a necessary measure to promote since the formulation period of the Financial Instruments andExchange Act. Making this a reality, the 2009 amendments of 16 laws, including the FIEA, established a new ADR system (with financial services

Chap. XVII The Securities Regulatory System

323

ADR at its core). Presently, the Financial Instruments Mediation AssistanceCenter; the Life Insurance Association of Japan; and the Japanese Bankers
Association have been designated as ADRs under the system. In this manner,the enforcement framework was established and strengthened by including
private citizens and regulatory authorities in the process.
5. Enforcement (2)̶ Financial Services Agency
The executive authority for the Financial Instruments and Exchange Act lies
with the prime minister of Japan, the top minister of the cabinet, who, in turn,oversees the Financial Services Agency (FSA). In actual practice, with some
exceptions, the prime minister delegates this authority to the commissionerof the FSA as stipulated in Article 194-7 (1) of the FIEA. For example, thecommissioner may issue an Order to Improve Business Operations to Financial Instrument Firms and Registered Financial Institutions (Art. 51, Art. 512) or an order to suspend operations or rescind their registration or approval(Art. 52, Art. 52-2). The commissioner is also required to issue an Administrative Monetary Penalty Payment Order if certain conditions are met. Specifically, the order is triggered in the following cases: non-submission or
misrepresentation of Securities Registration Statement and other reports (Art.
172, Art. 172-2, Art. 172-3, Art. 172-4); non-submission or misrepresentationof the public announcement of the start of an offering or the Tender Offer
Notification (Art. 172-5, Art. 172-6); non-submission or misrepresentation of
Large Shareholder Reports and other reports (Art. 172-7. 172-8); non-submission or misrepresentation of information on specified securities for professional markets and falsifying issuer information (Art. 172-9, Art. 172-10,
Art. 172-11); and unfair trading practices, such as circulating rumors, fraud,market manipulation, and insider trading (Art. 173, Art. 174, Art. 174-2, Art.
174-3, Art. 175).
When one of these conditions is met, an Administrative Monetary Penalty
Payment Order is decided through a trial procedure—in principle with a panel of three examiners and in public (Art. 180, Art. 182)—with the respondent
being allowed to make a statement and submit documentary and material evidence regarding the allegations (Art. 184, Art. 185-3). The examiners may
hold hearings, request appraisals by experts, and visit and inspect the work
site, etc. (Art. 185, Art. 185-2, Art. 185-4, Art. 185-5). The final order is decided based on a draft produced by these examiners (Art. 185-6, Art. 185-7).
Based on this process, it is possible for the FSA to enforce its regulations
even in cases where it cannot move aggressively even if they warrant criminal penalties because there is not enough cause or proof to take legal action(see Table XVII-3 for FY2013 Administrative Monetary Penalty Payment

324

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

Orders).
The inspection authority for issuing disciplinary action by order or measures by the FSA is delegated by the commissioner to the commission (Art.
194-7 (2)-(4)). The commission members carry out their investigation within
the permissible scope and when considered necessary, the law provides thatthe commission may report the matter to the prime minister or the FSA commissioner for administrative disciplinary action (Law for Establishing the Financial Services Agency, Art. 20). In fiscal 2012, the FSA implemented administrative disciplinary actions, etc., based on such reports in 15 cases withType I financial instrument firms, 9 cases with Type II financial instrument
firms, 12 cases with investment advisors and agents, and 6 case with asset
management companies.
6. Enforcement (3)̶Securities and Exchange Surveillance Commission
The Securities and Exchange Surveillance Commission comprises a chairman and two other committee members appointed by the prime minister with

Chap. XVII The Securities Regulatory System

Table XVII-3.

325

FY2013 Administrative Monetary Penalty Payment Orders (At November 28, 2013)

Misrepresentation of facts in securities reports, etc.
Chronicle Corp. (5/10, ¥64.43 million)/G. Taste Co., Ltd. (5/23, ¥101.45 million)/Oki Electric Industry
Co., Ltd. (6/5, ¥16.8 million)/Japan Care Service Corp. (7/8, ¥21 million)/Meiji-Machine Co., Ltd. (8/5,¥82.71 million)/OBIC Co., Ltd. (8/5, ¥8.85 million)/KYCOM-Holdings Co., Ltd. (11/27, ¥27 million)
Insider trading
Person receiving insider information from an employee from a company negotiating a contract with
Micron Technology, Inc. (4/16, ¥0.12 million)/Person receiving insider information from employee ofcompany making a tender offer for SXL Co., Ltd. (5/23, ¥0.79 million)/insider trading by director ofsubsidiary of Ishiihyoki Co., Ltd. (6/5, ¥3.12 million)/Person receiving insider information from director of Kenko.com, Inc. (6/21, ¥0.21 million)/Person receiving insider information from an employee
from a company negotiating a contract with Tokyo Electric Power Company, Inc. (TEPCO) (6/27,¥0.06 million)/Person receiving insider information from an employee from a company negotiating acontract with TEPCO (6/27, 14.68 million)/Insider trading by employee of Cosel Co., Ltd. (7/8, ¥1.92
million)/Person receiving insider information from employee of AnGes MG, Inc. (8/23, ¥1.02 million)/
Person receiving insider information from employee of company making a tender offer for So-net Corporation (9/27, ¥2.89 million)/Insider trading by employee of Toda Corporation (10/17, ¥0.52 million)/
Person receiving insider information from a person negotiating a contract with company making a tender offer for OST Japan Group, Inc. (11/27, ¥1.45 million)/Person receiving insider information from
employee of company negotiating contract with subsidiary of Noritsu Koki Co., Ltd. (11/27, ¥0.47 million)
Market manipulation
Manipulation regarding stock of Kagetsu Kanko Co., Ltd., and one other stock (4/1, ¥1.07 million)/The
Gifu Bank, Ltd. (4/6, ¥1.53 million)/Mammy Mart Co., Ltd. and one other stock (6/21, ¥0.12
million)/21Lady Co., Ltd. (7/18, ¥3.6 million)/CK SAN-ETSU Co., Ltd. (10/17, ¥5.96 million)/EPG
Co., Ltd. (11/8, ¥7 million)/STEP Co., Ltd. (11/8, ¥5.91 million)
Note: Figures in parentheses are the date of the order and the amount of the fine.
Source: The FSA’s web site.

the approval of the upper and lower houses of parliament (Law for Establishing the Financial Services Agency, Art. 10 to 12). The commission has theauthority 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). The commission also has the authority to demand the
production or submission for inspection of reports and materials from thesubmitters of Securities Registration Statements or Large Shareholdings Reports and tender offers (FIEA Art. 26, Art. 27-22, Art. 27-330, etc.) Based on
this process, the commission mainly carries out the following tasks: market
analysis screening (daily market surveillance) involving a review of the securities trading activity of financial instruments firms; securities inspections involving wide-ranging and detailed branch inspections of financial instruments

326

Chap. XVII The Securities Regulatory System

Table XVII-4.

SESC Recommendations by Business Year (At November 30, 2013)

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total
Total

1

1

3

5

7

6

7

5

7

10 10 11 11 13 10 13 17

8

15

7

2

170

Falsifying Securities －Reports, etc.

1

－ － －

1

1

3

1

3

3

2

2

4

1

2

4

4

2

4

－ －

38

－ －

2

1

－

2 －

1

1 －

2

2

3

1

4

1

－

22

1

1

1

1

－

2

2

1

3

4 －

3

1

1

－

1

23

1

2

3

5

6

6

5

9

2

7

4

Spreading rumors and－ －other interventions
Market manipulation or1
price fixing

1

1

－

1

－ － － － －Insider trading

－ －

2

－

3

1

4

6

2

1

76

others

－ － －

1

1

5

－ － － － － － － － － － － － － －

4

－

11

7

Source: Materials produced by the Securities and Exchange Surveillance Commission

firms and registered financial institutions; disclosure inspections to ensure
the appropriateness of disclosure by submitters of Securities Registration
Statements and reports; and 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. In the case of a criminal act investigation, such as themisrepresentation of material facts in a Securities Registration Statement orreport or market manipulation, officials of the commission are authorized toarbitrarily investigate by questioning, inspecting, and keeping documents incustody (FIEA Art. 210). In such criminal investigations, the officials also
have search and seizure authority within the scope of the warrant issued by ajudge (FIEA Art. 211).
After the commission has made its recommendations based on its securities
investigations, the FSA commissioner issues orders to improve business operations, rescinds registration, or suspends operations. When the commission
recommends action as a result of its monetary penalty investigations, thecommissioner issues an Administrative Monetary Penalty Payment Orderwhen he/she is convinced that regulations have been violated. Furthermore,when the commission is convinced that irregularities have been committed
following a criminal investigation, it must report the case to the Public Prosecutors Office (FIEA Art. 226 (1)) (see Table XVII-4 for SESC reporting status).
From the perspective of strengthening enforcement, one area that is receiving attention recently is business injunctions or suspension orders issued by
the courts (FIEA Art. 192 (1)). In the 2008 revision of the FIEA, the Securities and Exchange Surveillance Commission was given the authority to petition for these legal actions. It first used this power to deal with a business operator not registered as a financial instruments business operator in 2010

Chap. XVII The Securities Regulatory System

327(Nov. 17, Daikei Co., Ltd.). It has continued to do so (for example, Benefit
Arrow Co., Ltd., in June 2011).
7. Enforcement (4)̶Self-Regulatory Organizations
A self-regulatory organization (SRO) is a private organization that in the
public interest as well as its own establishes rules for its members and punishes violations of those rules. There are various SROs in Japan’s securities
markets, but here we will cover the Japan Securities Dealers Association(JSDA) and the Tokyo Stock Exchange (TSE).
The JSDA is an authorized financial instruments firms association approved by the prime minister pursuant to Article 67-2 of the FIEA. Its members comprise financial instruments firms and registered financial institutions. The purpose of the association as defined in Article 67, Paragraph 1 of
the FIEA is to ensure fair and smooth trading of securities and other transactions and to contribute to the sound development of the financial instruments
business and to the protection of investors. To fulfill that purpose, the JSDA
has formulated many rules and regulations for its members, including selfregulatory, unified conduct, dispute resolution, and other rules. The JSDA isalso empowered to take disciplinary action when its members violate theseassociation rules and regulations, its articles of association, laws and regulations, and disciplinary action taken by administrative authorities. Its scope of
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).
The TSE is a corporation licensed by the prime minister of Japan as a financial instruments exchange able to operate a financial instruments market(FIEA Art. 2 (16), Art. 80 (1)). With the authorization of the prime minister,
the self-regulation-related services of the TSE have been commissioned toTokyo Stock Exchange Regulation, a separate SRO body pursuant to Article
85 of the FIEA. Those services include the listing and delisting of financial
instruments, inspections of compliance of members with laws and regulations, etc., and other measures specified by cabinet office ordinance for the
purpose of ensuring fair trading practices (FIEA Art. 84 (2)). Tokyo Stock
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, etc., listed on the exchange; a market surveillance and compliancedepartment that investigates and seeks to prevent unfair trading practices;
and a participants examination and inspection department that monitors compliance and implements disciplinary action, etc. Under rule 34 of the TSE’s

328

Chap. XVII The Securities Regulatory System

Table XVII-5.

SRO Disciplinary Action (TSE and the JSDA) from FY2005 to FY2013

Cases disciplined by both the TSE and the JSDA
Company
Sanei Securities
Corporation
Toyo Securities Co., Ltd.

Reason for disciplinary action
TSE
JSDA
Buying, etc. listed securities for the purposes for manipulating the ¥5 million penalty (Oct. 7, Reprimand (Oct. 7, 2010)
price of said listed securities, etc.
2010)
Insufficient trading management system to prevent accepting or- ¥20 million penalty (April 16, Reprimand (Sept. 10, 2010)ders related to falsifying price formation.
2010)
SBI Securities Co., Ltd.
Insufficient management of electronic information processing Warning (May 14, 2010)
Reprimand (June 15, 2010)
system related to financial products trading.
¥20 million penalty (Mar. 16,
Cosmo Securities Co., Ltd. Serious lack of business and marketing management structure re- Warning (Mar. 16, 2010)sulting in organizational and multiple violations and other inap2010)
propriate behavior and the overlooking of said behavior.
BNP Paribas, Tokyo
Placing orders for the purpose of stabilizing the price of a specific ¥50 million penalty (Feb. 16, ¥30 million penalty (Feb. 16,
Branchlisted financial product.
2010)
2010)
Failure to implement necessary and appropriate measures to pre- ¥5 million penalty (Oct. 20, ¥20 million penalty (Oct. 20,
Kabu.com Securities
vent unfair trading practices related to sensitive corporate infor- 2009)
2009)
mation.
Mitsubishi UFJ Securities Insufficient internal control system for management of individual Warning (Aug. 11, 2009)
Reprimand (Aug. 11, 2009)
customer information.
Rakuten Securities
Insufficient management of electronic information processing ¥3 million penalty (June 12, ¥10 million penalty (June 12,
system for financial instruments business, etc.
2009)
2009)
Monex Securities
Insufficient management of electronic information processing ¥3 million penalty (June 12, ¥10 million penalty (June 12,
system for financial instruments business, etc.
2009)
2009)
SBI E Trade Securities
Failure to implement necessary and appropriate measures in the Warning (June 27, 2008)
Reprimand (June 27, 2008)
management of trading, etc., of customer securities to prevent unfair trading practices related to sensitive corporate information.
Maruhachi Securities
Brokerage and execution of a series of purchases of a listed secu- Three-day suspension of trad- ¥200 million penalty (May 28,
2008)
rity in order to maintain its price.
ing (May 28, 2008)
Deutsche Securities
Proprietary trading based on sensitive corporate-related informa- ¥3 million penalty (May 28, ¥5 million penalty (May 24,
tion.
2008)
2008)
Maruhachi Securities
Concluding contracts for discretionary account trading.
¥30 million penalty (Dec. 26, ¥50 million penalty (Dec. 26,
2007)
2007)
Mizuho Securities
Attempt to receive, etc., undisclosed information from parent Warning (Dec. 18, 2007)¥2 million penalty (Dec. 18,
company.
2007)
Toyo Securities
Taking order from customer without delivering written document Warning (Oct. 12, 2007)
Reprimand (Oct. 12, 2007)
containing best-execution policy.
Dojima Kanto Securities Insufficient trading management system to prevent unfair trading Warning (Oct. 12, 2007)
Reprimand (Oct. 12, 2007)
practices by customers.
Insufficient management of electronic information processing Warning (Aug. 10, 2007)
Reprimand (Aug. 10, 2007)
Rakuten Securities
system related to securities business.
Eiwa Securities
Falsifying price formation.
¥12 million penalty (Aug. 10, ¥10 million penalty (Aug. 10,
2007)
2007)
H.S. Securities
Carrying out underwriting of issue at notably inappropriate price. Warning (June 1, 2007)¥30 million penalty (June 19,
2007)
Mitsubishi UFJ Securities Trading for proprietary account using sensitive corporate-related Warning (Mar. 9, 2007)
Reprimand (Mar. 9, 2007)
information.
Daiwa Securities
Accepting orders knowing that transactions could be considered Warning (Jan. 19, 2007)¥5 million penalty (Jan. 19,
insider trading.
2007)
Reprimand (Dec. 1, 2006)
Japan Asia Securities
Concluding contracts for discretionary account trading.
Warning (Dec. 1, 2006)
Maruhachi Securities
Concluding contracts for discretionary account trading.
¥10 million penalty (Dec. 1, ¥30 million penalty (Dec. 1,
2006)
2006)
Calyon Capital
Short selling in violation of government ordinance.
¥10 million penalty (Oct. 20, ¥5 million penalty (Sep. 13,
Markets Asia
2006)
2006)
¥5 million penalty (June 30,
H.S. Securities
Insufficient trading management system to prevent accepting or- Warning (June 30, 2006)
2006)
ders related to falsifying price formation.
JPMorgan
Falsifying price formation, etc.
¥25 million penalty (Mar. 29, ¥20 million penalty (Mar. 29,
2006)
2006)
Mizuho Securities
Insufficient management of electronic information processing ¥10 million penalty (Mar. 22, Reprimand (May 19, 2006)
system related to securities business.
2006)
Nihon Kyoei Securities
Insufficient trading management system to prevent accepting or- Warning (Mar. 10, 2006)¥2 million penalty (Mar. 10,
ders related to falsifying price formation.
2006)
Rakuten Securities
Insufficient management of electronic information processing Warning (Mar. 10, 2006)
Reprimand (Dec. 16, 2005)
system related to securities business.
¥10 million penalty (July 22, ¥30 million penalty (July 22,
Maruhachi Securities
Concluding contracts for discretionary account trading.
2005)
2005)
Sanko Securities
Attempting to manipulate market prices for financial products, ¥12 million penalty (Feb. 21, ¥10 million penalty (Feb. 21,
etc., by using marketing drives for such products.
2013)
2013)
Nomura Securities
Not having necessary and proper systems in place to manage sen- ¥200 million penalty (Oct. 31, ¥300 million penalty (Oct. 31,
2013)
sitive corporate client information and using said sensitive infor- 2013)
mation for solicitation.
Takagi Securities
Not having necessary and proper systems in place to manage sen- ¥5 million penalty (Sept. 12, Reprimand (Sept. 21, 2012)
sitive corporate client information.
2012)
Livestar Securities
Inadequate management of electronic data processing system for ¥3 million penalty (Aug. 29, Reprimand (Feb. 21, 2013)2012)
financial instruments firms, etc.
SMBC Nikko Securities Not having necessary and proper systems in place to manage sen- ¥80 million penalty (Aug. 7, ¥200 million penalty (June 19,
sitive corporate client information and inappropriate solicitation. 2012)2012)

Chap. XVII The Securities Regulatory System

329

Trading Participant Regulations, violations of laws or rules and regulations
by participants are punishable by revocation of trading qualifications, suspension or restriction of trading, and monetary penalties or official warnings,
etc.
In this manner, the JSDA and the TSE can regulate their members throughdisciplinary actions. Because these SROs share much the same membership,
there are cases where both SROs punish the same violation as well as ones
where only one body disciplines a dual member. The TSE is typically the one
to discipline cases where insufficient internal control systems in a company
have resulted in mistaken orders that have had a significant impact on themarket, while the JSDA is typically the one to discipline such cases as problems with internal control system, etc., which do not have a significant impact on the market but are nonetheless regulatory violations.
8. Enforcement (5)̶International Securities Regulations
Built around the membership of the Inter-American Association of Securities
Commissions, which was established in 1974, the International Organizationof Securities Commissions (IOSCO) was formed in 1983, with Japan’s regulatory authority becoming a member in 1988. A global organization, IOSCO
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.

330

Chap. XVII The Securities Regulatory System

Table XVII-7.

Major Areas Addressed by IOSCO Public Documents(1) Regulator

Online securities trading (83) (120) (159)(2) Self-regulation

Self-regulation in general (53) (200) (225); Converting exchanges to corporations (119) (200) (225); Effective self-regulation (110)(3) Enforcement of securi- Financial services outsourcing (184); Market manipulation (103); Crossties regulation
border regulations (Online trading) (83) (120) (159); Money laundering(26) (103) (205)(4) Cooperation in regula- International cooperation (76) (83) (86) (111) (126) (159); Online tradingtion(83); Derivative trading (111); Scope of cooperation (Information sharing)(17) (86) (248); Protecting the interests and assets of victims of fraud (55);
Regulations for unregulated regions (41); Cooperation on financial conglomerates (88) (101) (102)(5) Issuers

Disclosure (1) (15) (16) (24) (32) (38) (39) (61) (62) (71) (81) (118) (120)(132) (141) (145) (159) (182) (242); Accounting (182); Insider trading(145); Global offerings (1) (16) (38) (61) (71); Online trading (83) (120)(159); Internal supervisors (229); Inspections (133) (134) (199) (229)(231); Financial services outsourcing (184)(6) Collective investment Regulations for and inspections of investment (managers) (40) (69); Conflicts of interest for investment managers (108); Risk assessment (136)schemes(137) (156); Commissions (157) (178) (225); Anti-market timing (207);
Disclosure (59) (131) (144) (158) (169); Money laundering (205); Hedge
funds (142) (226) (253); Index funds (163); CIS integration (179); Commissioning authority and functions (113); Structures (60) (107); Investor
education (117) (140); Customer protection (57); CIS assessment values(91) (92) (93) (253); International cooperation (52) (54)(7) Market intermediaries

Regulations in general (8) (79); Disclosure (97) (116); Capital-related regulations (14) (77) (78) (79) (89) (97) (105) (116) (122) (201); licensing andregistration systems (178); Risk management (35) (78) (105) (122) (128);
Online trading (83) (159); Identification of customers (167); Money laundering (146); Conflicts of interest for analysts (152); International cooperation (49)(8) Secondary market

Regulations in general (90) (42); Converting exchanges into corporations(200) (225); Derivative trading (6) (22) (85) (111) (143); Defaults and market turmoil (22) (29) (49) (138); Online trading (83) (120) (120) (159);
Market transparency (27) (124) (147) (161) (168); Unfair trading practices(85) (103) (143) (145) (208); Securities clearing and settlement (74) (123);
Margin requirements (22) (50); Short selling (96)Notes: 1. Public documents categories are based on IOSCO’s Objectives and Principles of Securities
Regulation.
2. The numbers in parentheses are the IOSCO numbering system for public documents.
Source: The IOSCO web site.

Chap. XVII The Securities Regulatory System331

had 205 member organizations as of November 2013, representing the regulators of 90% of the world’s securities markets. To date, the organization has
published a wide range of principles, policies, standards, guidance, codes,
recommendations, and practices regarding securities trading that have been
implemented in many countries. Of all of the documents published by IOSCO, perhaps the most comprehensive coverage of the significant and basic
concepts of the organization is given by Objectives and Principles of Regulation, which IOSCO formulated in September 1998 and revised in June 2010.
The document sets out 30 principles of securities regulation based on thethree objectives of securities regulations; 1) the protection of investors; 2)
ensuring that markets are fair, efficient, and transparent; and 3) the reductionof system risk. For practical implementation, the principles have beengrouped into the eight categories of 1) the regulator, 2) self-regulation, 3) enforcement of securities regulation, 4) cooperation in regulation, 5) issuers, 6)collective investment schemes, 7) market intermediaries, and 8) the secondary market (In the June 2010 revision IOSCO added the category of auditors,
credit rating agencies, and other information providers and increased thenumber of principles slightly to 38). This document indicates the form of securities regulations that IOSCO is aiming for, and most of the other papers
issued by the organization focus on one of the principles set out in this document. In actual fact, there are many cases where the principles stated in thisdocument are used verbatim in other papers.
IOSCO’
s documents have a strong influence on Japan’s securities regulators, which have taken steps to implement its policies through laws and selfregulatory systems. The Financial Services Agency closely follows IOSCO
trends and publishes them on its web page. One example of these IOSCO
principles being set in Japanese legislation is the International Conduct ofBusiness Principles. Formulated in 1990, these principles deal with the market intermediaries category. Of the seven principles regarding conduct in the
securities business covered by this paper, the first principle, honesty and fairness, and the fourth principle, information about customers, were put into theformer Securities and Exchange Law through an amendment in 1992 in theform of an obligation to be sincere and fair in securities trading and the requirement to apply a suitability principle in sales and solicitation of sales of
securities. With IOSCO’s importance in international markets continuing togrow, it is likely that Japan will align its securities regulatory framework withemerging trends through ongoing revisions.

APPENDIX
Chronology of Events Related to Securities(1870−2013)

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 firstsecurities 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.

Mar. 9, 1899

The Commercial Code is promulgated (the basic law of
today’s Joint Stock Companies Act).
Mar. 15, 1920 Stock prices crash, touching off a reactionary depression.
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 publishingit.

July 17, 1937 Fujimoto Bill Broker Securities forms a securities investment partnership–the first investment trust.
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 branchexchanges of the Japan Securities Exchange.
Sept. 26, 1945 The GHQ releases a memorandum (dated Sept. 25) banning
the resumption of business by the securities exchange.

APPENDIX Chronology of Events Related to Securities

Dec. 1945

333

Investors start group trading in stocks in Tokyo and Osaka.

Mar. 28, 1947 The Securities and Exchange Law (of 1947) 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.
Jan. 31, 1949

The GHQ announces a policy authorizing the resumption of
securities trading.

Feb. 12, 1949 Securities companies hold inauguration meetings of stock
exchanges in Tokyo (Feb. 12), Osaka (Feb. 15), and Nagoya(Mar. 7).
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 1, 1951

The Securities Investment Trust Law is promulgated andenforced, and stock investment trusts start operating on
June 15.

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.
Apr. 2, 1956

The stock exchanges in Tokyo and Osaka open a bondtrading market.

Oct. 2, 1961

The stock exchanges of Tokyo, Osaka, and Nagoya open
Second Sections.

July 18, 1963 President Kennedy of the United States proposes thecreation of an interest equalization tax, and stock prices on
the Tokyo Stock Exchange crash on July 19.
May 21, 1965 Talks about the rehabilitation of the near-bankrupt Yamaichi
Securities are reported, plunging the market into a semicrash.
Oct. 1, 1965
Mar. 3, 1971

The amended Securities and Exchange Law is enforced;
among other things, it requires securities companies toobtain a license from the government.
The Law Concerning Foreign Securities Firms ispromulgated.

334

APPENDIX Chronology of Events Related to Securities

Feb. 13, 1973 The government shifts the exchange rate system to afloating exchange rate system.
1975

The Ministry of Finance starts issuing a massive amount ofgovernment securities, and the turnover of bonds on the
OTC market increases sharply.

Dec. 1, 1980

A new Foreign Exchange Law is enforced, and in- and outbound securities investment is liberalized, in principle.

Apr. 20, 1984 The Law Concerning the Custody and Transfer of Stock
Certificates is promulgated.
Dec. 24, 1985 Merrill Lynch and five other foreign securities firms areadmitted to the Tokyo Stock Exchange for the first time.
Nov. 25, 1986 The Law Concerning the Regulation of Investment
Advisers Relating to Securities is enforced.
Oct. 20, 1987 Following Black Monday on the New York market, stock
prices on the Tokyo Stock Exchange register a record oneday drop (down 14.9%), and Black Monday spreads acrossthe world.
Sept. 3, 1988

The Tokyo Stock Exchange (TOPIX) and the Osaka
Securities Exchange (the Nikkei 225) start trading in stockindex 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.
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.
Apr. 1, 1994 The brokerage commission securities companies charge on
block trading is liberalized.
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 isabolished.

APPENDIX Chronology of Events Related to Securities

335

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”).
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.
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 thebrokerage 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.
Aug. 6, 1998

The Financial Council is launched.

Oct. 16, 1998 Eight laws related to financial reconstruction are
promulgated.
Dec. 1, 1998

The Financial System Reform Law is enforced.

Dec. 15, 1998 The Financial Reconstruction Commission is launched.
Apr. 1, 1999

Securities companies start managing their customers’assets
separately from their own.

Oct. 1, 1999

The brokerage commission on stock transactions isliberalized.

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.

336

APPENDIX Chronology of Events Related to Securities

May 31, 2000 The Securities and Exchange Law as amended in 2000 is
promulgated, and the portion of the Securities andExchange 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.
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 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.

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.
Jan. 2002

The Stock Acquisition Corp. (which buys shares held bybanking institutions) is established.

Apr. 1, 2002

The special measure for the protection of the entire depositof investors expires, and the blanket government guaranteeof deposits is partially lifted.

June 6, 2002

The Securities Settlement System Reform Law is enacted.

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.

APPENDIX Chronology of Events Related to Securities

Jan. 16, 2006

337

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.

July 21, 2009 The Osaka Securities Exchange sets up FX markets andbegins trading.
Aug. 30, 2009 The Democratic Party of Japan wins the national elections
and Japan’s ruling party changes.
Jan. 19, 2010 Japan Airlines Co., Ltd., files with the Tokyo District Court
for protection under the Corporate Reorganization Law
becoming the largest business failure in Japan’s post-war
history.
Feb. 4, 2010

European markets plunge due to the sovereign debt crisis in
Greece.

Sept. 10, 2010 The Incubator Bank of Japan, Limited declares its
bankruptcy to the FSA, which announces the first evertriggering of the government’s deposit insurance cap
system.
Mar. 11, 2011 Great East Japan Earthquake occurs, followed by ahydrogen explosion at Tokyo Electric Power Company’s
Fukushima nuclear power facility on March 13.
June 2011

U.S. Fitch Ratings downgrades Greece’s long-term
government debt to“CCC.”

July 13, 2011

Standard & Poor’s downgrades U.S. long-term government
debt from“AAA”to“AA.”June 4, 2012

Fears about the direction of the U.S. and global economies,
drove down TSE’s Nikkei average to a low for the year, at
8,295.63. The TOPIX index also fell to its lowest point in
28-and-a-half years, setting a new post-economic bubble
low.

338

APPENDIX Chronology of Events Related to Securities

Dec. 16, 2012 The Liberal Democratic Party won the national lower houseelections by a landside, returning to power.
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.

Aug. 9, 2013

The Ministry of Finance announced that the national debt
had risen to ¥1,008.6 trillion as of June 30, 2013.

INDEX

1992 Financial System Reform Law
239
1998 amendment of the Foreign Currency and Exchange Law 220
ABS 138, 139, 140, 142, 150, 152
account management institutions 101,
103, 168, 170
active management 251
administrative disciplinary action 205,
287, 324
administrative guidance 321
ALM 253
Angels taxation system 305, 306
Aozora issues 184, 185
arrangers 137
asset formation for home-building savings 298
Asset Liquidation Law 134, 136, 138,
139, 140, 151, 152, 153
asset management 209, 247, 249, 251,
253, 256, 257, 258, 264, 300, 316, 319
Asset management companies 34, 245,
246, 247, 249, 254, 324
Asset Management Service 245
asset securitization 140, 150, 209
asset-backed commercial paper (ABCP)
140
asset-backed securities 134, 138, 142,
146, 151
asset-formation pension savings 298
assignment of business 216
assume obligations 166
assumed basic rate 253
Authorized Financial Instruments Firms
Association 213, 230, 327
balance of outstanding public securities
5, 6
ban, in principle, on concurrently operating nonsecurities business 209

bank debentures 21, 75, 77, 79, 84, 85,140Banking and Securities Joint Branch Offices 36, 240, 241
bankruptcy remoteness 136
Basel regulatory standards 48
Big Four 216, 242
Big Four oligopoly 242
bond linked to the Nikkei average 90,
91
bond management company 89
bond manager 82, 89
bond options transactions 131
bond repurchase agreements (repo) 223
bond trustee system 82, 87, 89
bondholders’meeting 89
book-entry transfer services 217
book-entry transfer system for stocks,
etc. 168, 170borrowed securities deposit 228
borrowings against the collateral of securities 227
Breakdown of Holders of Investment
Trusts 273
brokerage commission 224
brokerage—agency trading 217
business lead service 242
buy in 168
capital adequacy ratio 140, 229
capital contribution 46, 226
capital increases 25, 46, 48, 274
capital increases through public offerings
insider trading 318
capital securities 40
capital-to-risk ratio 213, 230, 237
cash for conducting margin trading 228
CDF Transactions 221
central custody and transfer agent 101,308
CFD transaction 221

340

Index

Chinese wall 208
circuit breaker mechanism 127
claim distribution of profits 40
claim residual corporate assets 40
Class 1 rider 253
Class 2 rider 253
Class I registered representatives 233
Class II registered representatives 233
closed-end type 264, 265
collateralized bond obligations (CBO)
140
collateralized debt obligations (CDO)
140
collateralized loan obligations (CLO)
140
collective investment schemes 211,
223, 224 233, 316, 331
commercial mortgage-backed securities(CMBS) 138
commission income from the sale of beneficiary certificates of investment
trusts 227
communicating sensitive information andrecommending transactions 318
Companies Act 14, 40, 42, 44, 46, 89,
187, 279
competitive bidding 81, 105
comprehensive business income tax
method (CBIT) 302
Comprehensive securities accounts 274
Concurrent Business 221
confidential information 242
consolidated accounts 253
construction bonds 5
Contractual Type (Investment Trust)263
conventional auction 81
conversion factor 115
corporate acquisitions 46
Corporate Bonds with Subscription
Rights/Warrants and Structured Bonds
90
Corporate Information Memorandum
187, 191, 192, 193, 195
corporate pension 247, 249, 254, 311,
312
corporate straight bonds 79, 99, 144
Corporate Type (Investment Corporation)264
credit default swaps 133, 167

credit derivatives 131, 133
Credit derivatives trading 131, 133
Credit rating 38, 82, 85, 86, 148, 149
credit rating agency 85, 87, 149
credit-enhancing 136, 148, 149
credit-linked notes 133
criminal act investigation 326
Customer Base of Investment Trusts
272
customers’separate fund 238
dealing in bonds 238
dealing—proprietary trading 217
debt issuance programs 199
debt securities issued by government
agencies 79
deemed securities 3
Defined Contribution Pension Plans
276, 312
defined-benefit corporate pension 248
defined-contribution pension 247
dematerialization of securities 101
dematerialization of share certificates42
deregulation of brokerage commissions
224
derivative transactions 3, 167, 211
derivatives 90, 129, 131, 133, 167,
174, 211, 216, 217, 219, 227, 239,
259, 269
direct marketing 267, 269
direct offering 48
disclosure inspections 326
disclosure of information 159, 204
Disclosure of Investment Trusts 273
Disclosure of Large Shareholdings 283
Disclosure Relating to a Tender Offer
283
Discretionary Asset Management Companies 249, 251, 253, 254
discretionary management contract 254
discretionary tangen-kabu system 42
dividend tax credit system 301
Dutch auction 81
duty to deliver documents before concluding contracts 269
DVP settlement 168
early remedial measure 230, 237
earnings summaries of financial resultsIndex288
EDINET 281, 288
eigyo tokkin accounts 32
employee pension 247
employee pension funds 247, 249
Entrustment 203, 211, 249
Erroneous Orders 53, 208
exchangeable bond 90
Exchange-Traded Funds (ETF) 267
external credit-enhancing 149
external funds 3, 4
fail 34, 148, 168
file derivative suits 40
FILP agency bonds 79, 82, 87
financial“Big Bang” 316
financial ADR system 322
financial Big Bang 32, 33, 34, 37
financial expenses 225, 226
financial futures 219
Financial Futures Trading Act 219, 220
financial futures trading business 211
Financial Futures Trading Law 211
financial income 29, 224
financial indexes 219
Financial Instrument Intermediary Business 241
Financial Instruments and Exchange Act
1, 37, 50, 77, 151, 153, 154, 187, 189,
192, 194, 197, 200, 202, 209, 220,
233, 259, 263, 265, 269, 271, 273,
274, 279, 288, 290, 316, 321, 322
Financial Instruments Intermediary Service 211, 213
Financial Instruments Sales Law 320
financial products 10, 37, 98, 122, 151,
209, 211, 219, 245, 320
Financial Products Sales Act 269
financial reports 274, 277
Financial System Reform Law 33, 153,
211, 261
firewall 239, 240, 242
fiscal agent 82, 89
Fiscal Investment and Loan Program(FILP) bonds 77
foreign affiliates 224
foreign exchange (FX) transactions 219
Foreign Exchange and Foreign Trade
Control Law 12
Foreign Investment Trusts 277

341

foreign securities companies 25, 28,
216, 233
FOREX Margin Transactions 220
Forms of Investment Trusts 263
Futures Trading 113, 119, 121, 125
general account 249, 251
General and Administration Division233
general investors 50, 160, 234, 318
general manager 249
government bonds 55, 75, 77, 79, 105,
108, 117, 123
government debt securities 5, 6, 75
Government Pension Investment Fund
249
government’s dependency on debt financing 5
government-guaranteed bonds 79, 82,
105, 146
GPIF 249
green sheet issue 189, 191, 194
green sheet issues 52, 184, 185, 186,
191, 192, 193
green sheet system 184, 185, 189, 192
Green Sheet System Issue System 188
greenshoe option 50
group transactions 19, 175
Guidelines for Defending Corporate
Value 14haircut 108
high-yield bonds 85
History of Investment Trusts 261
hollowing out of the financial market
33
hostile M&A 14
hostile M&A defense measures 14
hostile takeover bid (TOB) 14
household investment in financial assets
8
imputation system 302
inbound investment 12
Incidental businesses 210
Incidental Business 221
incorporators only establishment 42
increase its authorized total 44
independent management 251
Independent Securities Companies 243
indirect offering 48, 49

342

Index

inducement of insider trading 204
information and advice fees 227
Information Processing Systems 208
Insider trading 189, 192, 193, 197, 200,
204, 206, 318, 323
integrated securities companies 214,
216, 242
inter-market competition 37, 39, 74
internal credit-enhancing 149
internal funds 3International Financial Reporting Standards (IFRS) 290
International Organization of Securities
Commissions (IOSCO) 228, 329
Internet brokers 224
into paid-in capital increase 43
intra-group fees 227
investable custody 21
Investment Advisor Law 211
Investment Advisory and Agency Business 209, 318
investment advisory business 211
investment banking services 224
investment banking—underwriting 217
investment certificates 2, 52, 210, 264,302
investment corporation 138, 146, 148,264
investment management business 209,
211, 223, 234, 276
Investment Management of Investment
Trusts 269
investment management service providers 224
Investment Trust and Investment Corporation Act 259, 263, 266, 271, 273,
274, 320
investment trust management companies
146, 225, 254, 256, 257, 258, 259,
261, 262, 263, 267, 271, 273, 274, 277
investment trust management company
147, 263, 271, 274
Investment Trusts 146, 256, 259, 262,
263, 265, 267, 269, 272, 273, 274,
277, 308
investment-grade bond 85
investor protection 37, 98, 144, 157,
159, 175, 192, 235, 209, 318
investor protection fund 213, 235, 237,
238, 315

investors meeting 264
Issuance Disclosure 273, 281
issue market 1
issued by separate and individual bidding
by competing underwriters 82
issuer filing information 198
Japan Federation of Securities Dealers
Association 230
Japan Investor Protection Fund 237
Japan Joint Securities Co., Ltd. 22
Japan Securities Clearing Corporation
165
Japan Securities Dealers Association
48, 144, 208, 213, 230, 235, 269, 272,
277, 327
Japan Securities Dealers Association(JSDA) 213, 230, 327
Japan Securities Exchange 17, 18
Japan Securities Holding Association
22
Japanese government bonds (JGBs) 6,
25
Japanese version of the 401 (k) plan
311
Japan-U.S. Yen/Dollar Committee Report
27
JGBs 7, 8, 25, 27, 75, 81, 92, 94, 96,
98, 99, 101, 105, 107, 108
J-IRISS 206
joint banking and securities businesses
242
joint position regulations 242
joint stock companies 14, 15, 40, 42,
53, 151, 154
jointly offered local government bonds
75
junk bonds 85
Law Concerning Special Exception to
the Bankruptcy Proceedings of Financial Institutions 237
lead manager 50, 82, 84, 210, 240, 242
lead manager restrictions 240
lending and borrowing of securities
227
leverage 220
liability 40, 89, 203, 238, 251, 253,
301, 314, 320, 321
licensing system 17, 19, 23, 209, 211,

Index236, 314
Life insurance 251
Life Insurance Companies 251
listed an FX product 220
Livedoor 316
loan to facilitate margin trading 227
loans against the collateral of securities
227
long-term bonds 38, 75, 266
loss compensation 32, 213, 314, 318,
320
M&A 13, 14, 67, 206, 209, 216, 224,
225, 242, 244
M&As 14, 222
Major brokers 224
making do with a fiscal agent 89
managing underwriter 176, 179, 217
margin call 108
margin trading 19, 67, 69, 113, 129,
223, 227, 228, 233, 237
margin trading registered representatives
233
margin trading system 19
margin transactions 16, 19, 70, 72, 113,
185, 224, 225, 226
market administration 230
market analysis screening 325
market entrances 32, 216
Market manipulation 202
Maruyu for handicapped persons, etc.
298
Maruyu savings for handicapped persons,etc. 298
massive issuance 25, 27, 107
measures to prevent customers from mistaking investment trusts for deposits
269
medium-term notes 75, 199
Mega-Bank Securities Subsidiaries 243
mega-banks 224
merger 13, 14, 39, 89, 90, 216, 223,
244
mezzanine securities 136
Minimum Capital Requirement 210
MMF 266
Monetary Penalty 323
monetary penalty investigations 326
monthly distribution funds 277
MRF 266

343

municipal bonds 1, 75, 77, 79, 81, 82
municipal bonds targeted at local residents 82
municipal bonds targeting local residents
75, 79municipal bonds through public offerings
82
municipal debt securities 5, 75
mutual aid association pensions 247
nationally placed municipal 75
Negotiated transaction 195
negotiated transactions 113, 183, 184,
185, 192
netting 166, 168, 227, 296
new Banking Law 238
New share issuance 44
new share subscription rights 44, 170
Nikkei 225 mini-futures 117, 119, 219
NISA 10, 245, 296
no par value 40
noncompetitive bidding 81
notification statement 50
obligation to explain products 320
online brokerage 35, 209
online brokers 220, 224, 226, 227
open-end type 264, 265
opening banking and securities joint
branch offices 240
Open-Type 267
Order to Improve Business Operations
323
order to suspend operations 323
originator 136, 148
OTC Bond Market 96
OTC securities 51, 131, 183, 184, 185,
186, 187, 194, 233
OTC trading 19, 21, 96, 98, 167, 183,
192, 194, 221
OTC-handled securities 186, 187
Other businesses requiring registration
210
other fees and commissions 225, 226,
227
over-allotment option 50
over-the-counter 3, 19, 53, 96, 144,
159, 183, 187
over-the-counter derivative trading 218

344

Index

par value stock 40, 44
participate in the management of thecompany 40
passive investment 251
Pension Fund 247, 249
Pension Fund Association 249
pension plan system 247
Periodic Disclosure 274, 281
permanent establishment (PE) 306
Phoenix Issue 194, 195
Phoenix issue system 185, 194
Phoenix issues 186, 189, 194
pooled asset management 251
pre-marketing 82
principal transactions 98
private companies 50, 53, 74, 75
private equity 50, 51, 184, 209, 224,
244
private placement 48, 49, 142, 187,
211, 217, 239, 265, 266, 277
Private Placements of Investment Trusts
265
privately placed bonds issued by certain
special public financial institutions
77
product classification 267
professional investors 195, 197, 265,
318
prohibited and regulated acts 200, 213
Prohibited and Regulated Acts of Securities Companies 207
prohibition on making investment decisions on behalf of clients 321
prospectus 267, 269, 273, 274, 277,
281
prospectus for all investors 274
prospectus on request 274
provisions on the rules of conduct for investment trust management companies
263
PTS business 210
PTS operations 192
PTS services 218
public bond offering 85
Public finance 5
public offering 42, 43, 48, 49, 82,
85.179 217, 240, 265, 266
public offering and private placement—
distribution of securities 217
Public Offering of Investment Trusts

265
Public offerings 44, 50
public offerings and secondary distributions 224
public offerings of stock at market prices
25
public quotation system (Green Sheet)51
public stock offerings at market price48
Publication of Reference Prices for OTC
Bond Trading 98
publicly offered investment trusts 259,
273, 299
purchasing the excess shares in the secondary market 50, 235
Quarterly Disclosure 290
quarterly reports 281
real estate investment trust 263
real estate investment trusts (REIT)
138
real estate investment trusts (REITs)
146
reason for buying investment trusts 272
recognized Financial Instruments Firms
Association 235
registered financial institutions 213,
239, 256, 258, 325, 326, 327
registered representative qualifications
233
registered representatives working oncommission 216
registration requirements 183, 210,
213, 223, 233
registration requirements for Type II
businesses 233
registration statement 50, 187, 281
registration system 33, 35, 175, 209,
211, 220, 236, 239, 314
registration system of securities companies 239
repricing 110
residential mortgage-backed securities(RMBS) 138
restricted the scope of business 239
restrictions on the concurrent operationof nonsecurities business 211
revised report 284

Indexrights issues to existing shareholders at
par value 25
rights offering at par 46
RMBS issued by the Japan Housing Finance Agency 142, 146
RMBSs 138
safekeeping 217, 256
saiken repo 110
Sale of Investment Trusts 267
sales commission for investment trusts
269
secondary distribution 202, 211, 217,
281
Securities and Exchange Law 1, 19, 23,
32, 37, 52, 53, 151, 153, 154, 184,
189, 192, 204, 209, 211, 218, 219,
232, 236, 237, 238, 263, 273, 314,
316, 321, 331
Securities Business of Banking Institutions 238
securities company scandals 232
securities held for trading purposes 227
Securities Information Center 233
securities inspections 325
securities intermediary service 211
Securities Investment Trust Law 261,
273, 277
Securities Investors Protection Fund
237
securities lending and borrowing 223
securities panic 22, 23
securities registration statements 46,
197, 273
securities report 187, 281, 283
securities reports 197, 274, 283, 288,
290, 314
securities scandals 31, 32, 314, 316
securities settlement system 99, 101
securities slump 216
Securities Strategy Division 233
security 1, 8, 15, 29, 85, 96, 134, 136,
166, 168, 172, 185, 189, 192, 202,
217, 227, 237, 245, 276, 279, 281,
303, 321
segregated custody 237
segregated customer asset trust 228
Seibu Railways 316
self-regulation 156, 208, 230, 235, 327,
331

345

Self-Regulation Division 233
selling and administrative expenses
225
selling group 50
selling public bonds over the counter
238
senior securities 136
senior subordinated structure 134, 149
Sensitive Corporate Information 206
separate designed investment accounts
253
settlement guarantee 166, 167
Shares issuance 42
short-term bills 75
Shoup Report 292
small and midsized securities companies
214, 242
special account 251, 253, 294
special bonds 77
special brokerage account system 304
special financial contract 85
special government bonds 5
special income tax for reconstruction
296, 297, 302, 308
Special Member Class I registered representatives 233
Special Member Class II registered representatives 233
Special Member Class IV registered representatives 233
special members 233
special-purpose company (SPC) 136
special-purpose vehicle 134
Specific-purpose trust 138
specified assets 151, 269
specified securities information 197,
198
spread pricing 84
SPV 134, 136, 137
standards on the selection of foreign investment trusts 277
statutory disclosure 279, 281, 282, 288
Stock and Bond Investment Trusts 266
stock collateral loans 15
stock installment payment system 15
stock lending 68, 69, 70, 72, 223
Stock Options 42, 123, 127, 219, 293,
309, 310
stock splits 43, 46
stock splits (and gratis issues) 43, 46

346

Index

STRIPS 75, 305
structured bonds 4, 90, 91, 216, 218
subordinated securities 136, 149
subscription establishment 42
Substitution 110
sub-underwriting 217
Suitability Principle 206, 331
Suitability Rule 269
suitability rule 269, 321
superlong-term bonds 75
swap intermediaries 219
syndicate cover 50
syndicate members 49
syndicates 32, 81
system of authorizing certain securities
businesses 239
system-related costs 227
takeover defense measures 14
tan’
i-kabu round-lot system 42
TDnet 189, 288, 289, 290
The Investment Trusts Association, Japan
235, 259, 267, 269, 271, 273, 274, 276
The Japan Securities Investment Advisers Association 224, 254
third-party allotment 44
Three Principles of Market Operation
19
timely disclosure 159, 181, 189, 191,
197, 274, 279, 284, 287, 288
TMK bonds 144
to-be-handled securities 185
tokutei mokuteki kaisha 136
Tokyo Financial Futures Exchange 220
TOKYO PRO-BOND Market 197,
198, 199
Tokyo Stock Exchange 17, 25, 28, 37,
39, 46, 53, 55, 56, 96, 115, 117, 123,
125, 126, 127, 129, 146, 147, 148,
154, 155, 156, 158, 159, 160, 161,
163, 164, 165, 175, 177, 178, 181,
182, 195, 197, 198, 199, 285, 327
Total Net Assets of Foreign Investment

Trusts 277, 278
total return swaps 133
tradable securities 189
trade association of securities dealers
230
trading account 227
trading in bonds with options 123
trading income 224
trading market 1, 53, 55, 146
tranche 136
transfer instructions 166
triangular merger 14
Trust Banks 30, 94, 238, 239, 245, 249,
254, 256
two types of internationalization 27
Type I 209, 210, 223, 229, 233, 318,
324
Type II 209, 233, 235, 318, 324
Type II Financial Instrument Businesses
233
Type II Financial Instruments Firms Association 235
underwriting 217, 219, 224, 242, 244
underwriting syndicate 25, 27, 49, 82
underwriting syndicates 82
Unfair Trading 200, 201, 206, 323,
326, 327
Unit-Type 261, 267, 272
Variable Annuities 266, 276
voluntary dissolution 216
voting rights 40, 170, 247, 271
wholesale underwriting 217
with investment instructions from trustors 263
without investment instructions fromtrustors 263, 264
wrap account 224, 276
Wrap Accounts 36, 223, 224, 276
yen-denominated foreign bonds 25, 77,
79

2014

Securities Market in Japan 2014

Securities
Marketin Japan

Securities
Marketin Japan
2014

JAPAN SECURITIES RESEARCH INSTITUTE