Things you must do…
By: Norbert Gehrke
Tags: Japan, Regulation, Innovation, Finance, Banking

If you run a regulated business, nothing gets your attention like your supervising agency saying “You must do…”. For sure, there are always lots of “should do” and “need to do” that leave just enough room for interpretation, but the strong form is pretty direct, and in the otherwise so subtle Japanese language feels a bit like the equivalent of shouting at your counterpart. So we were all ears when we went through the Japan Financial Services Agency (JFSA) priorities for the period from July 2020 to June 2021 with a fine comb. Just as a reminder, three pillars constitute the short-term plan.

JFSA priorities for July 2020 to June 2021

Fight against COVID-19 and develop a better post-COVID society

First, JFSA will continue to work on policy responses to COVID-19 related issues. We will make every effort so that financial institutions will be able to perform their financial intermediary function to firmly support businesses and households. At the same time, we will take measures so as to prepare for a strong post-COVID economic recovery and the construction of a better society.

Make the Japanese financial and capital market more sophisticated and attractive

Second, JFSA will take measures to improve the function of the Japanese financial and capital markets and enhance its role in Asia and the rest of the world. The Japanese market has the potential to contribute to international risk diversification as geopolitical risks increase. We will think through to develop the Japanese market in a way that it will benefit both the Japanese and global economy.

Reform JFSA

Third, JFSA will continue to reform itself so that it can serve as an agency to develop the financial industry and literacy. We will further evolve and establish work style reforms triggered by responses to COVID-19 related issues. We will create an organizational culture in which employees discuss in a free and easy way with each other and take the initiative. We intend to enhance our capability to grasp the reality and conceptualize our policies.

Must do it (sorry, Nike)

Financial institutions’ liquidity assistance for business operators

Given the enormous economic impacts of COVID-19 crisis in and outside Japan, financial institutions must continuously keep track of performances of business operators in detail and provide them with adequate liquidity assistance.

Translation: You are in the lending business, so lend. You are sitting on a surplus of deposits anyway. And by the way, do not wait for your clients to knock at your door — go out, assess and come to your conclusions who among your clientele might need help.

Revise regulations on the scope of business for banks to allow them to conduct business essential to support the recovery of their clients and their local economy

Impacts of the COVID-19 crisis and other factors are causing socio-economic changes, which are coupled with structural changes including the aging society with fewer children and declining population. Against this backdrop, financial institutions must proactively support business operators and individuals in responding to these changes and, at the same time, review their own services.

Translation: Everything we said above, plus you might want to consider digital services, too!

Dialogues with financial institutions concerning sustainable business models

[…] the environment surrounding the financial industry is changing drastically. […] Financial institutions must develop sustainable business models considering these changes.

Translation: We have done the analysis in 2018, and concluded that the economic activity in 23 prefectures cannot even support a single regional bank. We are now going to use the additional stress from the pandemic as a catalyst to ensure you have a viable business, otherwise we will fold/merge you.

Regional financial institutions

Moreover, when we identify a regional financial institution with an issue in their profitability that must be sustainable or financial soundness that must continue, we will have an in-depth dialogue with it based on an early warning system etc., and request it to take effective measures for developing a sustainable business model.

Translation: Same as above, except for us mentioning explicitly the special waiver on Anti-Trust Law in the next paragraph in case you did not get the hint.

Japan Post

Japan Post Group needs to unleash its originality and ingenuity as a private-sector company and provide customer-oriented services based on the postal network. To this end, it must establish a sustainable group-wide business model.

Translation: In case there was any doubt — mis-selling insurance products to seniors is not a sustainable business model. Instead of the senior management team sitting out the next few years until retirement, actually take advantage of the entrepreneurial freedom you supposedly gained when you became a publicly listed company.

Develop an economic system that adequately diversifies and regulates risks associated with new businesses

[…] the financial industry must change significantly. It would be insufficient if it superficially addresses, for example, digitalization without fundamentally questioning its conventional business approaches. Facing a major turning point, the industry must face up to customers’ real needs and consider and achieve added-value creation to meet them.

Translation: The status quo is not an option. And to use Anne Boden’s (Founder & Chief Executive Officer of Starling, one of the UK’s premier challenger banks) words: “Get on with it”.

Additionally, it is important to improve the capital market environment. For companies to realize sustainable growth, they must share their mission and vision of change with their stakeholders, including shareholders, customers, employees, and communities, and implement them.

Translation: Shareholder capitalism is dead. Long live stakeholder capitalism!

Digitalization in finance

All the relevant businesses, including financial institutions, must not be complacent about replacing their conventional operations with digitalized ones. Rather, they must think creatively to generate added value for meeting customer needs and helping solve social issues with new approaches leveraging digital technologies.

Translation: Get on with it.

Sustainable finance

[…] given the significant changes that could occur in the socio-economic structure in the post-COVID world, businesses, investors, financial institutions, etc. must address these changes from a medium to long-term perspective.

Translation: Mizuno-san at the Government Pension Investment Fund (GPIF) has demonstrated it to you — we have a cross-generational obligation. When we say “long-term”, we really, really mean long-term.

Develop an environment that supports our [JFSA] staff’s proactive initiatives

The environment surrounding the financial market is changing and citizens’ needs are diversifying. Against this backdrop, in order to steadily implement measures for the COVID-19 crisis and enable Japan to win global growth competition in the post-COVID world, we must improve the quality of financial administration.

Translation: We are not the best at what we are doing, as we are run any other traditional Japanese company. We are going to change this, because effectively we can pick from the best graduates and outside talent, so we are going to pick differently in the future.

Integrated operations with the Local Financial Bureaus’ departments in charge of financial administration

As the COVID-19 is significantly affecting regional economies, we must work together even harder to get the financial system to support economic activities and have regional financial organizations unleash their financial intermediary functions, support business operators, and contribute to the growth of regional economies.

Translation: We have not given up on the regional economies just yet, although we have already invested significant resources. At this point, incremental change will not turn the ship around. Something more substantial is needed.