The volume of international financial transactions has increased exponentially in recent years, a trend which shows no signs of abating. Meanwhile, as both financial product design and communications technology grows ever more complex, the dizzying pace of change threatens to overwhelm financial and capital markets unable to compete in this new global environment. Japanese financial institutions have long been sheltered from global competition by a complex web of protective regulation. Originally set up to aid to Japan's domestic enterprises, over-regulation is now seen by many observers both domestic and overseas as a primary impediment to the overall competitiveness of a Japanese economy now bobbing in the tides of the rapidly emerging global marketplace.

The deregulation progress is already underway with the amendments to the Foreign Exchange and Foreign Trade Control Law that allow Japanese investors and financial institutions to more freely select markets to conduct their transactions. These amendments alone represent a significant step, freeing up an estimated Y1,200,000,000,000,000 (Y1,200 trillion) in individually held assets for investment in a far wider array of financial options than was previously available. Nevertheless, critics fear that piecemeal deregulation undertaken without simultaneous implementation of effective measures to revitalize Japan's markets could harm Japan's financial institutions even as it benefits individual consumers, eventually resulting in a Japanese version of Ross Perot's "giant sucking sound", as transactions and money flow out of Japan and into offshore markets.

Proponents, on the other hand, maintain that the present legal reforms will make the Japanese market more attractive to foreign investors. Even if large amounts of capital initially flee Japan for offshore markets, say these observers, legal reform will stimulate the restructuring of Japanese capital markets, allowing them to become more competitive by international standards. The end result of this process could be a net capital inflow over the long term.

The Hashimoto administration has responded to the prospect of capital flight by taking steps to revitalize Japan's financial and capital markets so that Japan's financial institutions can share the benefits of deregulation along with consumers. Five advisory boards have been established to facilitate the reform of Japan's financial system based on the following five fundamental principles: (1) a free, competitive and internationalized financial market: liberalization of operations, products, prices and business organizations should be vigorously pursued so that market mechanism will work in the Japanese market and resources will be properly allocated; (2) transparent regulation: transactional rules and disclosure rules, including penalties, should be fair and clear; (3) The method of financial administration should be disclosed and in compliance with the rules: financial administrators should play a strictly passive role in support of market mechanisms, and should make administrative decisions based upon rule-based and transparent criteria rather than arbitrarily; (4) self-discipline by participants in financial and capital markets: participants in financial and capital markets such as financial institutions, investors and those who procure funds should act with self-discipline and responsibility; (5) the financial system should be stabilized.

The above five advisory boards have submitted reports to the Hashimoto administration, and continue to discuss unresolved issues and proceed with the reformation of the financial system. However, only a part of the reforms have been accomplished and only a few statutes, rules and regulations have been promulgated.

We have prepared and plan to prepare various articles for the database describing the current status of legislation, reformation and issues, and the expected goals of each stage of the reform process. The articles, which have or have not been put on-line, are categorized as 10 major sections as follows: (A) the amendment of the Foreign Exchange and Foreign Trade Control Law; (B) general reformation of financial systems; (C) mutual entrance into financial markets; (D) securities markets, business and transaction; (E) insurance; (F) asset-backed securities; (G) derivatives; (H) accounting and taxation; and (I) electronic money and electronic payment systems.

Because of the generality of this article, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

(c) Komatsu, Koma & Nishikawa 1997

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