RAPID PROGRESS IN
DEMATERIALIZATION
Domestic securities clearing and settlement reform has made progress
toward the final goal: dematerialization of stock certificates. As the organization responsible for the infrastructure of securities clearing and settlement in Japan, the JASDEC Group is tackling several issues that will leadto the improved safety, efficiency and convenience of inherent systems.

6

Rapid Progress in Dematerialization

TARGETS FOR 2009

MEDIUM-TERM THEMESThe JASDEC Group will concentrate on five themes over the next three fiscal years, but the No. 1priority will be dematerialization of stock certificates.

Progress in Dematerialization
Book-Entry Transfer System for Corporate Bonds In preparation for the start of a bookentry transfer system for Corporate Bonds* in January 2006, we are accepting consent notices fromissuers, running a comprehensive connection test of the system, and designing procedures to ensure
a smooth transition from outstanding issued bonds to book-entry transfer bonds.
* Eligible securities for Corporate Bonds are corporate bonds, municipal bonds, rights that should be repre-sented on bond certificates issued by any government or by companies in foreign countries (excluding thosewith the characteristics of bonds with subscription rights), such as Samurai Bonds and Shogun Bonds.

Book-Entry Transfer System for Investment Trusts Working toward the implementationof a book-entry transfer system for investment trusts in January 2007, we are making headway insystem development and exploring suitable approaches to ensure a smooth transition from existing
paper certificates to a dematerialized system. Our perspective on exchange-traded funds (ETFs) is
the same as that on the dematerialization of stock certificates.

Dematerialization of Stock Certificates To achieve dematerialization of stock certificates,
we are exploring practical procedures and conversion techniques, in line with users’ needs.

Book-Entry Transfer System for Dematerialized Commercial Paper To promote
dematerialized commercial paper (CP), we will undertake enterprising promotional activities to raise
recognition and use of the book-entry transfer system for dematerialized CP. We will also make
improvements to the system by joint development with the book-entry transfer system for CorporateBonds.

Promoting STP

We will expand the capacity of the PSMS to encompass contracts and settlement matching forCorporate Bonds and dematerialized CP.

Raising Number of Stock Certificates in Custody

We will undertake aggressive marketing campaigns, using the mass media and word of participants,
to persuade more investors and issuers to grant us custody of stock certificates.

Wider Use of DVP System for NETD

As we continue to survey and discuss the DVP system, we will strive to pinpoint suitable themes
and then realize stated goals to establish and enhance the system and enrich service content.

7

Rapid Progress in Dematerialization

Strengthen Group Capabilities
Medium- to Long-term Plan for Systems Seeking to build safe and efficient systems, wewill formulate and implement medium- to long-term plans for systems geared to the dematerialization of stock certificates and the replacement of our account transfer system.

Reinforce Security Measures We will establish a structure to ensure uninterrupted operationsin the event of an emergency and will redouble efforts to protect confidential information.

Stronger Ties with Overseas Counterparts JASDEC will foster closer ties to counterpart
organizations abroad and create more opportunities for information exchange through to join the Asia
Pacific CSD Group and CSD (International organization for CSDs).

FOR IMPLEMENTATION JANUARY 2006BOOK-ENTRY TRANSFER SYSTEM FOR
CORPORATE BONDS
Main Features of the System

In Japan, the majority of Corporate Bonds transactions is settled by record being made in registration books maintained at registering agencies, which number 160. The fact that an estimated 10
million physical bonds are still in the custody of securities companies and financial institutions
reflects the delay in the implementation of a settlement system for Corporate Bonds in Japan.
In January 2003, the introduction of the Law Concerning Development of Related Laws toImprove Securities Markets Through Reforms of Securities Settlement System facilitated the creationof a new settlement system for Corporate Bonds, etc. The completely paperless environment will
require several changes: Corporate Bonds will be centralized at a single book-entry transfer institution; the custody procedures — from issuance to redemption, including transfers — will be revised,based on the management by balance recorded in a transfer account book. We also intend the implementation of DVP (gross-gross format known as BIS model 1) and STP by linking with PSMS.

Book-Entry Transfer System Based on Balance Management Under the prevailing registration system, registering agencies enter the denomination type and serial number as well as ownershipin respective ledgers. Under the new book-entry system, transfer of ownership is executed by entering the net increase or decrease in the transfer account book, thereby expediting distribution.

JASDEC

Trade
Party

1
Trade Report Data

Pre-Settlement
Matching System

4
Noice ofAffirmation

Affirmation/
Disaffirmation

55

SSI

Notice ofSettlement Matching
Status78
Transfer Application(linked with 6)

Settlement
Party

6

Settlement
Matching

2
Trade Report Data

TradeMatching

TradeParty

3
Affirmation of Trade5
Automatic
Generation of Settlement
Instruction Data57
Notice ofSettlement Matching
StatusSettlement
Matching

Settlement
PartyTransfer Systemfor Corporate bonds
910
Notice of Recording

Record inTransfer Ledger

16
Securities Transfer
NoticeSecurityTransfer

10
Notice of Recording

Securities
Settlement

15

FundSettlement
Company

16
Securities Transfer
Notice14
Settlement
Completion

11
Fund
Settlement Data

12
Notice of Receipt

12
Payment Request
13
Payment Instruction
14
Notice of Payment
Completion

14
Notice of Receipt
Completion

Fund
Transfer
Bank of Japan

LinkedFund
Settlement
Company

Fund
Settlement

Multi-Layer Holding Structure of Participation We are planning to diversify the forms ofparticipation in the book-entry system to include participation through international connections. The
multi-layer holding structure will be composed of book-entry transfer institutions, account management institutions and investors. Account management institutions are positioned in the multi-layer
holding structure in order to facilitate flexibility of business development and to promote affiliation
among international institutions.

Eligible Securities A variety of bonds are eligible (not including JGBs), regardless of whether
the securities are public or private offerings. In addition, the system is flexibly designedand will accommodate floating-rate notes and foreign-currency-denominated bonds.*Corporate bonds
Municipal bonds● Specified Corporate Bonds prescribed in the Law Concerning Liquidization of Assets● Rights that should be represented by bond certificates issued by companies under special law● Rights that should be represented by bond certificates issued by any government or by companies
in foreign countries (excluding those with the characteristics of bonds with subscriptionrights), such as Samurai Bonds and Shogun Bonds●●*Notes:
1. Corporate bonds with subscription rights will become dematerialized when stocks aredematerialized.
2. Corporate bonds issued in overseas markets, such as Euro-yen
Bonds are excluded fromeligibility.

9Rapid Progress in Dematerialization

Smooth Transition of Outstanding Issued Bonds After the date determined by Cabinet
Order (some time before January 5, 2008), the Law on Recording of Bonds, etc. will be abolished.
Bonds will be issued either as book-entry transfer bonds, based on the new law, or physical bonds,
based on the principles of the Commercial Code. Outstanding recorded bonds and physical bonds
can be converted to book-entry transfer bonds by the consent of both issuer and investors.
From January 6, 2008, preferential tax treatment on interest income for such entities as taxexempt corporations will be applied only to book-entry transfer bonds. Recorded bonds and physical bonds will no longer be eligible for preferential tax treatment. JASDEC will continue its efforts topromote book-entry transfer bonds.

FOR IMPLEMENTATION JANUARY 2007

BOOK-ENTRY TRANSFER SYSTEM FOR
INVESTMENT TRUSTS
Investment Trust Market in Japan

Investment trusts were traditionally securities-style savings products for individual investors. But
recently, investment trusts have attracted the attention of corporations seeking new approaches tofund management as well as products suitable for the Japanese version of the 401K retirement plansestablished in the United States. According to the Investment Trusts Association of Japan, net
investment trust assets reached ¥59.3 trillion, as of March 31, 2005, substantiating the rising importance and growing prevalence of these financial products in Japan.

System Summary JASDEC aims to implement a book-entry transfer system for investment
trusts, like those for CP and Corporate Bonds, in January 2007. With this system, subscription,transfer and redemption of beneficiary rights following the establishment, transfer and cancellationof investment trusts will be recorded in the transfer account book.
Book entry will ensure safety and efficiency in the settlement of investment trusts and support
further growth of the investment trust market in Japan. In addition, dematerialization will eliminate
paper-based beneficiary certificates, which are required under the current system, and thereby
streamline administrative processes.

Rapid Progress in Dematerialization

Advantages of the System The implementation of the book-entry transfer system for investment trusts should generate the following advantages.
●Lower administrative costs pertaining to the issue and certification of material beneficiary certificates.

●No more stamp duties charged when beneficiary certificates are issued.

●

Reduced costs related to conveying and safekeeping certificates.

●

A drop in various administrative and custodial costs that comes with the material existence of beneficiary certificates, including administrative costs for entering and maintaining beneficiary certificate ledgers as well as costs incurred to reconcile balances, enter denominations and voidcertifications at redemption.

●No risk of certificates being lost, stolen or counterfeited.

●Standardized, safer, more efficient settlement systems — such as STP, DVP settlement and smooth
cash transactions — for subscription, partial redemption at maturity and transfer.

Eligible Certificates This book-entry transfer system for investment trusts will extend tobeneficiary rights recognized under the Investment Trust and Investment Corporation Act but
will not initially cover those foreign investment trusts established overseas or mother funds.*

Moving toward Implementation To facilitate the January 2007 implementation ofthe book-entry transfer system for investment trusts, JASDEC issued the Outline of BookEntry Transfer System for Investment Trusts in September 2004, which describes the basicframework of the system, and the System Operation Outline for Investment Trusts inJanuary 2005, which summarizes the processes involved. We will continue to explore thedetails of practical application and system development.

*Note:
Exchange-traded funds (ETFs)
are different from other investment trusts. JASDEC’s basic
stance on ETFs, in the event
settlement is carried out bythe same procedures applied tostocks, is to use the same system
platform used for stocks, and topursue further improvements
consistent with those applied tothe book-entry transfer systemfor stocks.

FOR IMPLEMENTATION JUNE 2009

DEMATERIALIZATION OF STOCKCERTIFICATES
Dematerialization of Stock Certificates in JapanT he June 2004 promulgation of the Stock Settlement Rationalization Law — a law for partial
amendment of the Law concerning Book-entry Transfer of Corporate Bonds and other securities forthe purpose of streamlining the settlement for trades of stocks and other securities — enabled publicly held companies to eliminate stock certificates by stating in their articles of incorporation thatthey do not issue stock certificates. All listed companies will become non–stock-issuing companies,
effective on a day within five years from the date (June 9, 2004) on which the Stock Settlement
Rationalization Law was announced and as determined by government ordinance.

11

Rapid Progress in Dematerialization

Basic Format of New System
The basic structure is as follows:
Under the new book-entry transfer system, the attribution of ownership on stocks (shares in custody) will be made by entry into the transfer account book. The transfer of shares in custody will
be executed by account transfer.
● Twice a year, in principle, the central securities depository — namely, JASDEC — will inform issuersof shares in custody about shareholders (general shareholders’ notification), based on entries in thetransfer account book. This service is similar to the one for beneficial shareholder notification
under the current system in Japan, but it differs in that issuers can, if the cause is justified, request
the central securities depository to issue a general shareholders’ notification whenever necessary.
● Issuers draw up beneficial shareholder lists based on general shareholders’ notification data. Under
the prevailing securities custody and book-entry transfer system, stock certificates in the custody ofthe central securities depository are listed in the shareholders’ register in the name of the central
securities depository while actual shareholders are named in the beneficial shareholders’ register.
But under the new system, ownership information will be consolidated, with the names of actual
shareholders recorded in the shareholders’ registry .
●When issuers undertake stock-issuing activities, such as stock splits, bonus issues and mergers, therecord of shareholders’ accounts is automatically revised through procedures executed by theissuer and the central securities depository as well as the account management institution.
● When minority shareholders and single-unit shareholders wish to exercise rights on shares in custody, they must submit to their respective account management institution an application notifying
the issuer of the data in the account transfer book. The central securities depository will theninform the issuer (specific shareholder notification) and within a specified period thereafter willprompt the issuer to exercise its rights.
● With justifiable cause, an issuer can request the central securities depository or an account management institution to provide information pertaining to items recorded in the account transfer book.
●Future Tasks The Financial Services Agency began meetings in August 2004 to discuss governmental and ministerial ordinances related to dematerialization of stock certificates. To facilitate theestablishment of practices and systems for this purpose, JASDEC will address the following tasks.
● Standardize information among the central securities depository, account management institutions,issuers and transfer agents.
● Establish a data center where the collection of actual shareholders’ names can be consolidated inone place.

Rapid Progress in Dematerialization

Prompt shareholder responses by issuers, transfer agents and account management institutions andthe central securities depository.
● Eliminate beneficial shareholder form and seal impression form.
● Create a more realistic and understandable fee structure for services provided.
●IMPLEMENTED MARCH 2003

BOOK-ENTRY TRANSFER SYSTEM FOR
DEMATERIALIZED CP
Main Features of the System
Dematerialized Format CP in the conventional paper form, or paper-based CP, is prepared incertificates, and these certificates must be delivered or presented to the assigned holder at settlement.
In comparison, JASDEC’s system totally dematerializes CP and records systematically the issuance,transfer and deletion in the transfer account book. Initially, the system handled only dematerialized
CP issued by domestic companies, but from April 2004, the system has accepted dematerialized
Samurai CP as well.

DVP Settlement JASDEC’s book-entry transfer system for CP uses DVP (gross-gross format known
as BIS model 1) settlement, linked to the Bank of Japan system. This system shortens the settlement
period, removes the risks inherent in transporting certificates and eliminates the cost of custody —which were all drawbacks of the paper-based form — and makes settlement safer and more efficient.
Because requests for CP transfers are executed electronically, the settlement period could beshortened to T+0, essentially the same day a trade is initiated.
Furthermore, paper-based CP is subject to restrictions regarding circulation, since the stamp
duty charged on each certificate encourages Issuers to cut the burden of cost by issuing largedenomination certificates. Dematerialized CP is not hampered by such restrictions, allowing
issuance and circulation in smaller denominations, and thus providing greater investment flexibility.
Coinciding with the development of the book-entry transfer system for Corporate Bonds,
JASDEC will work on enabling direct connection to users’ mainframe computers, linking functionality with the PSMS and introducing a security queue function to ensure sufficient capacity to handle
the growing CP market.
Note: Transaction results for fiscal 2004 are detailed on page18

13