Japan Securities

Markets
Bipul Sinha - #1009
Joseph Rodrigues - # 1016
Kamlesh Agarwal - #1018
Manoj - #1024
Raja Periyasamy - #1034
1
Functions of Global Securities
Markets
• CLEARING AND SETTLING PAYMENTS
• TRANSFERRING RESOURCES ACROSS SPACE AND
TIME
• PROVIDING INFORMATION
• ALLOCATION OF RISK
• MANAGERIAL INCENTIVES
• POOLING OF RESOURCES
•
•

2
 Cl
ea
ri
ng
an
d
 Se
tt

li
ng
Pa
 CLEARING AND SETTLING ym
en
PAYMENTS ts
 A financial system provides ways of
clearing and settling payments to facilitate
the exchange of goods, services and assets.


3
 Cl
Functions of the central e
ar
bank. in
g
Issuance of banknotes
a


The Bank of Japan is the sole issuer of banknotes in Japan and

n


banknotes are given the status of legal tender under the Bank of Japan Law.

 d
S
Provision of payment and settlement services
et


 Payment through current accounts tli

 At the end of 2010, 667 institutions, including banks, securities n
companies and bankers’ associations, held current accounts with the central
bank. The Bank of Japan has been operating an online payment system, the g
BOJ-NET Funds Transfer System, since 1988 to process funds transfers between
financial institutions through the central bank accounts. P
 The Bank of Japan may extend loans to financial institutions a
experiencing liquidity constraints, in its role as the lender of last resort, under
Articles 33, 37 and 38 of the Bank of Japan Law. y
   m
 Settlement of JGB transactions
e4
The Bank of Japan has been providing services for registration of JGBs
nt


since 1906, as the sole registrar under the Law Concerning Government
Bonds. In 1980, the Bank of Japan established the JGB Book-entry System, in
which the Bank serves as the depository, to promote the sound development s
of the JGB secondary market. In 1990, the Bank of Japan introduced an online
system, the BOJ-NET JGB Services, to process transfer registrations and book-
 Cl
Functions of the central e
ar
bank… in
g
 Oversight a
 To ensure the safety and efficiency of Japan’s payment and n
settlement systems, the Bank of Japan collects and analyses
relevant information including statistical data, reviews and d
assesses the design and operation of each system, and
encourages improvements in payment and settlement systems. S

et
tli
 Examination and monitoring  n
 The Bank of Japan conducts on-site examinations and off-
site monitoring of the financial institutions that hold current
g
accounts with it. P
 In on-site examinations, it analyses various issues such as a
asset quality and profitability of financial institutions, the
reliability and security of computer systems and the y
management of settlement risks arising from participation in
payment and settlement systems.
m
 In off-site monitoring, it analyses issues associated with
e5
settlement activities, including financial institutions’ nt
management of their daily liquidity and the total value of
securities eligible as collateral for the Bank’s credit extension. s
The role of other private and public sector Ce l
ar
bodies in
 Providers of payment services

g
a
 Banks 
n
Banks, together with bankers’ associations,
d


cooperate in establishing and managing interbank

clearing systems such as BCCSs, the Zengin System S
and the FXYCS. Also, to meet strong public demand for et
cash from depositors, banks provide a nationwide
network of automated teller machines (ATMs). In tli
addition, banks provide direct debit and direct credit n
services, and issue debit cards. g
   P
 New types of banks a
 As use of the internet and mobile phones has y
become widespread and customer needs diversified,
new types of banks have emerged, such as internet- m
only banks and also a bank that specialises in ATM e6
services. nt
 s
The role of other private and public sector Ce l
ar
bodies in

Providers of payment services

 g
a

Japanese Bankers Association  n
 The Japanese Bankers Association consists of banks and regional
bankers’ associations.
d
 One of the roles of the Japanese Bankers Association is to enhance the
S
safety and efficiency of the et
 industry’s payment procedures by establishing market practices and tli
standards.
n
Examples of these market practices and standards are as follows:
g


(1) Market Practices for Real-Time Gross Settlement for money markets;
P


(2) “model contracts” for customer accounts, remittances and letters of

a


credit;
 (3) standard operating procedures for direct debit, domestic funds y
transfers and government funds;
m
 (4) certificate formats for bills, cheques, bonds and other securities;
e7
 (5) formats for magnetic tapes, floppy disks and smartcards
(ZenginkyoIC Cash Card Specification); and nt
 (6) online data exchange protocols (Zenginkyo data transmission
s
protocol).
The role of other private and public sector Ce l
ar
bodies in
 Providers of securities settlement services
g
 Securities companies 
a
 Securities companies provide various kinds of
securities-related services such as dealing, brokerage, n
underwriting and public offering and distribution of d
securities in both primary and secondary markets. S
 At the end of 2010, there were 391 securities et
companies including 80 foreign securities companies in
Japan. tli
   n
 Japan Bond Settlement Network g
 The Japan Bond Settlement Network Co Ltd (JB
P
Net) operates an online network system which links a
participants (investors and dealers), registrars and the y
Bank of Japan for funds transfers, thereby facilitating
the smooth transfer of corporate and other registered m
bonds, including corporate bonds, government- e8
guaranteed bonds and municipal bonds. nt
 s
 Cl
The role of other private and public sector e
ar
bodies in
 Providers of securities settlement services
g
 Japan Securities Depository Centre
a
 The Japan Securities Depository Centre (JASDEC)
was established as the CSD for stocks and started n
operation in 1991, under the Law Concerning Central d
Depository and Book-Entry Delivery for Share S
Certificates and Other Securities.
et
  
tli
 Stock exchanges 
n
 There are five stock exchanges in Japan: the Tokyo g
Stock Exchange, Osaka Securities Exchange, Nagoya
Stock Exchange, Fukuoka Stock Exchange and Sapporo P
Securities Exchange. a
y
• m
 The Tokyo Stock Exchange and the Osaka e9
Securities Exchange predominate in terms of both
volume and value traded. The Tokyo Stock Exchange nt
dominates listed stock and convertible bond trades, s
and the Osaka Securities Exchange lists Nikkei Average
 Cl
ea
Payment media used by non-banks ri
ng

an
d
 This section describes means of payment, instruction instruments and access
channels that are used
Se
for making retail payments in Japan. While bank deposits are the most widely used
tt
li


means of
 payment, cash is also very frequently used, particularly for small-value payments. In
addition, postal ng
 deposits are commonly used for payments. Electronic money is not much in use in Pa
practice, but
ym
prepaid cards, which have a function similar to electronic money, are very common.
en


 
ts


 Cash
  
 Cash is used extensively in Japan compared with other industrial countries. The ratio
of cash in
 circulation to nominal GDP is 14.4%, was the highest among G10 countries.
 There are three reasons for the high preference for cash in Japan:
 (1) obtaining cash is not expensive due to highly developed nationwide ATM
networks;
(2) there is little risk in carrying cash because Japan is a comparatively safe country
10


where crime rates are low; and

 (3) the public continues to have a high level of confidence in cash as a means of
payment because
 anti-counterfeiting measures have been effective.
  
 Cl
ea
Payment media used by non-banks ri
ng
Postal savings

an
Postal deposits are also used for making retail payments. Payment services using


postal accounts
d
include funds transfers, prearranged direct credits, direct debits, debit cards and
Se
tt


ATM services.
 
 li
Prepaid cards
 ng
Prepaid cards are cards that store data regarding the amount paid for the cards

Pa
and the amount spent
ym
so far. They are used for specific services provided by the issuer, and the
en


remaining balance is usually displayed on the card reader during use.

Prepaid cards have spread rapidly in Japan since the 1980s as a means of
 ts
payment for public
telephones and public transportation such as railways, underground railways and


buses.
 


Direct debits


Prearranged direct debits are intrabank funds transfer arrangements used widely


for making a broad

range of recurring payments. They were first introduced in 1955 for the payment
11


of telephone bills.
They have expanded rapidly since the early 1960s and are now used extensively


for the payment of

public utility bills, credit card bills, taxes, school tuition, insurance premiums and

 Cl
ea
Payment media used by non-banks ri
ng
Credit cards

an
Since the issuance of the first card in 1960, credit cards have become


increasingly popular in Japan.

d
The number of credit cards and the value of payments made using credit cards
Se
tt


have almost doubled

over the past 10 years. Major issuers of credit cards include bank affiliates,
 li
consumer credit companies and retailer affiliates.
ng
 
Pa


Bills and cheques

ym


Bills are used for payments in the business sector and can be discounted by
en


banks. Cheques are

widely used by government agencies and firms, but used only rarely for the
 ts
payment of salaries or by
individuals, eg for the payment of credit card bills and public utility bills.


 


ATMs 


Automated teller machines (ATMs) were first introduced by several city banks in


1969, and spread

rapidly as many banks adopted online computer systems in the 1970s. ATMs


were initially installed in

12
bank lobbies, but began to appear at other easily accessible locations in 1973.


ATMs provided cash

withdrawal services only at the initial stage, but began to provide cash deposit


services as well from

 Cl
Interbank payment ea
ri
systems
 

ng
an
 There are four major payment systems for clearing and d
settling interbank payments in Japan – three clearing systems in
the private sector and a funds transfer system operated by the Se
central bank. The three clearing systems are: tt
(1) Bill and cheque clearing systems (BCCSs), which clear bills and li
cheques presented at regional clearing houses. ng
(2) The Zengin Data Telecommunication System (Zengin System),
Pa
which clears retail credit transfers; ym
(3) The Foreign Exchange Yen Clearing System (FXYCS), which

clears mainly yen legs of foreign exchange transactions; and

en
(4) The BOJ-NET Funds Transfer System is the central bank’s funds
ts
transfer system and is used to settle interbank obligations
including net obligations of participants in the private sector
clearing systems.


 In general, BCCSs and Zengin System are used mainly for

smaller-value transfers; and FXYCS and BOJ-NET Funds Transfer
System for larger-value transfers. These four systems are 13
regarded as systemically important payment systems (SIPS),
considering the total amount processed.

 Cl
Interbank payment ea
ri
systems
 
ng
an
d
Se
tt
li
ng
Pa
ym
en
ts

14
 Cl
Interbank payment ea
ri
ng
systems an
d
Bill and cheque clearing systems
Se


 
tt


Bill and cheque clearing systems (BCCSs) provide clearing services

li


mostly for bills and cheques,

 which are exchanged between financial institutions located within the ng
same geographical area. Pa
 

ym
 The first clearing house in Japan was set up in Osaka in 1879; the Tokyo
Clearing House was en
 established in 1887. More than 70% of the total value of bills and ts
cheques exchanged in clearing houses throughout Japan is cleared by the
Tokyo Clearing House.
 


Zengin Data Telecommunication System



 


 The Zengin Data Telecommunication System (Zengin System), an

interbank clearing system for
 domestic funds transfers, started operation in 1973. In 2010, the system 15
handled a daily
 average volume of 7 million transactions, while the daily clearing value
averaged JPY 16 trillion.
 

 Cl
Interbank payment ea
ri
ng
systems an
d
Foreign Exchange Yen Clearing System
Se


 

tt
 The Foreign Exchange Yen Clearing System (FXYCS) was
established in 1980 to facilitate the clearing of yen payments for
li
cross-border financial transactions. Originally, the system operated ng
on a paper basis. To cope with the rapid growth of transaction Pa
volume, the TBA automated the system and consigned operation to
the Bank of Japan in 1989. Clearing has since been conducted ym
through the BOJ-NET. en
 

ts
BOJ-NET Funds Transfer System


 


 The BOJ-NET Funds Transfer System is an online electronic

funds transfer system introduced in 1988. The BOJ-NET comprises
two systems: a system for funds transfers (BOJ-NET Funds Transfer
System) and a system for the settlement of JGBs (BOJ-NET JGB
Services). Although the BOJ-NET Funds Transfer System originally
offered both designated-time settlement mode and RTGS mode for
the settlement of funds, the Bank of Japan abolished designated-time 16
settlement and made RTGS the only available settlement mode at
the beginning of 2001.

 Tr
an
sf
er
ri
ng

Re
s.

ac
ro
 TRANSFERRING ss
Sp
RESOURCES ACROSS SPACE ac
e
AND TIME. &

Ti
me
 A Financial system provides ways to .
transfer economic resources through time, 17
across geographic regions, and among
industries.

 Tr
an
Flow of Funds Accounts sf
er
ri
 The flow of funds accounts (hereafter the FFA) is a statistic that ng
records the financial transactions and the resulting claim/debt held by
each economic entity such as households, enterprises and the Re
government. When any economic entity engages in economic activity, it
initiates various financial transactions in the form of flows of cash,
s.
deposits and other funds. ac
   ro
Examples of flow of funds :
ss


 A household receives a salary payment from a company, if the

company pays through a bank deposit, its deposit will decrease while the
bank deposit of a household increase. In this case, financial assets of the
Sp
company decrease while that of a household increase. ac
   e
When a household purchases a company’s products, cash held by


the household will transfer to a company in exchange for its product. The &
decline in the financial assets of the household is therefore matched by a
corresponding increase in those of the company.
Ti
   me
 A company makes an investment in plant and equipment. When the .
amount of the investment exceeds the company's earned fund flow, the
company will raise funds by making loans from a financial institution, or
by issuing bonds or shares for the investment (excess investment = 18
financial deficit). On the other hand, if the amount of investment is within
the earned funds flow, the surplus is invested as financial assets or used
to repay its liabilities (excess net savings = financial surplus).
 Tr
Matrix for FFA
an
sf
er
ri
ng
Re
s.
ac
ro
ss
Sp
ac
e
&
Ti
me
.
19
 Tr
an
Contents of the Matrix sf
er
ri
 In the matrix used for the FFA, the columns into ng
which economic entities are classified are known as Re
"sectors". They are broadly divided into six sectors, s.
such as "financial corporations", "nonfinancial
corporations", "general government", "households", ac
"private nonprofit institutions serving households", and ro
"overseas". ss
   Sp
 These sectors are further broken down to sub- ac
sectors. For example, under “financial institutions”, e
there are “depository corporations”, “insurance and
pension funds”, and “other financial intermediaries” &
etc, while, “nonfinancial corporations” are divided into Ti
public or private nonfinancial corporations. me
   .
 The items in the horizontal lines into which
financial instruments (transactions, or assets and 20
liabilities) are classified are known as "transaction
items". They consist of totaled items such as "currency
and deposits", "loans", "securities other than shares",
 Tr
an
Classification of economic entities in the FFA sf
 Financial institutions er
ri
 "Financial institutions" are institutions whose primary activities cover:
 financial intermediation activities that correspond to the intermediation of funds and involve
the holding of financial assets and liabilities; or financial auxiliary activities (non-intermediary type
financial activities) comprising the provision of services that are closely linked with financial ng
 
intermediation but do not involve the holding of financial assets and liabilities.
Re
s.


 This sector includes the "central bank", "depository corporations", "insurance corporations

 

and pension funds", "other financial intermediaries", and "financial auxiliaries".
ac
 Central bank ro
ss
 "Central bank" is a financial institution that issues currency, controls interest rates and the
volume of money and credit. It refers to the Bank of Japan.
 


Depository corporations
Sp
ac


 "Depository corporations" are financial institutions that engage in financial intermediation

e
through accepting deposits and deposit-like instruments from general investors. The sector includes
"banks", "postal savings"(until the third quarter of 2007) and "collectively managed trusts".
 


Insurance and pension funds

&
Ti


 "Insurance and pension funds" are defined as institutions that engage in financial

me
intermediation through managing funds received from the policy holders of insurance and
beneficiaries of private pension funds. This sector includes insurance and pension funds.
 


 Financial auxiliaries
.
 Institutions that guarantee financial instruments.
 Stock exchanges, financial exchanges: 21
 Banks’ Shareholdings Purchase Corporation
 Foreign exchange brokers, foreign exchange margin trading firms
 Tr
Classification of economic entities in the FFA an
sf
 Nonfinancial corporations
"Nonfinancial corporations" are institutions that engage in ordinary
er
ri


production of goods and services. This sector includes private nonfinancial

 

corporations and public nonfinancial corporations.
ng
 General government Re
 "General government" refers to institutions that provide government
services based on tax revenues. "Government services" include the provision
s.
of public goods and services and income redistribution. ac
 

ro
Households
ss


 "Households" consists of small groups that engage in consumption and

production activities and includes employers, employees, and sole
proprietorships and recipients of property income and transfer income.
Sp
 
 ac
 Private nonprofit institutions serving households e
"Private nonprofit institutions serving households" are institutions that


provide services to households without seeking profits. They include the &
following institutions. Ti
 
me


 Overseas
 The "overseas" sector covers nonresidents, including international .
organizations, foreign governments, and foreign corporations. With the
exception of overseas SPCs that issue samurai bonds.
22
 Tr
Balance of Payments an
sf
 What Does Balance Of Payments - BOP er
Mean? ri
 ng
A record of all transactions made between one Re
s.
particular country and all other countries during
ac
a specified period of time. BOP compares the ro
dollar difference of the amount of exports and ss
imports, including all financial exports and Sp
imports. A negative balance of payments means ac
that more money is flowing out of the country e
than coming in, and vice versa. &
 Ti
me
.
23
Tr
an
sf
er
ri
ng
Re
s.
ac
ro
ss
Sp
ac
e
&
Ti
me
.
24
 Tr
Recent Trends of Japan's Balance of an
Payments sf
• Japan's current account surplus decreased in 2009 for er
the second consecutive year to 13.3 trillion yen, ri
down from 16.4 trillion yen in 2008, mainly due to a
decrease in the income surplus. ng
• The capital and financial account deficit (net outflow) Re
decreased to 12.7 trillion yen in 2009, down from s.
18.4 trillion yen in 2008. ac
• Reserve assets continued to increase, rising by 2.5 ro
trillion yen in 2009 compared to an increase of 3.2 ss
trillion yen in 2008.
• Balance of payments data for the whole of 2009 and Sp
the fourth quarter of 2009 in this report are ac
preliminary unless otherwise stated.  e
• In balance of payments statistics, the following &
relationship holds true at all times: Current account Ti
+ capital and financial account + changes in reserve
assets + errors and omissions = 0. me
• Japan's balance of payments for 2009 shows that the .
current account surplus earned is mirrored by
reverse flows abroad in the form of a capital and 25
financial account deficit (outflows) and an increase
in reserve assets.

 Tr
Recent Trends of Japan's Balance of an
Payments sf
er
ri
ng
Re
s.
ac
ro
ss
Sp
ac
e
&
Ti
me
.
26
 Pr
ov
id
in
g
In

fo
rm

at
io
 PROVIDING n
INFORMATION


 A financial system provides price

information that helps coordinating
decentralized decision-making in various
sectors of the economy. 27

 Pr
Sources of information : ov
id
 in
 g
In
• Regulatory bodies fo
• Credit Rating Agencies. rm
• Interest rates and asset prices at
• Implied Volatility io
n


28
 Pr
Regulatory bodies in Japan’s financial ov
industry. id
 Financial Services Agency (FSA) in
 Responsible for economic policy planning and g
supervision and inspection of financial institutions. The In
FSA, previously named Financial Supervisory Agency fo
was established on July 1, 2000 as a result of the rm
integration of the Financial Supervisory Agency and the
Financial System Planning Bureau of MOF. at
 
io
 
n
Securities and Exchange Surveillance Commission

(SESC)
 Supervises exchange activities. The exchanges are
governed by the Securities and Exchange Law,
although there is a strong reliance on self-regulation.
Functions include compliance inspections on securities
houses, stock exchanges or financial futures brokers to
observe codes of conduct for fair trading; daily market
29
surveillance; and the investigation of securities crimes
including insider trading, market manipulation and
falsified financial statements.
 Pr
Regulatory bodies in Japan’s financial ov
industry. id
Securities and Exchange Surveillance
 in
Commission (SESC) g
 In
fo
rm
at
io
n

30
 Pr
Regulatory bodies in Japan’s financial ov
industry. id
Information received from general public.
 in
 g
In
fo
rm
at
io
n

31
 Pr
Regulatory bodies in Japan’s financial ov
industry. id
Bank of Japan (BOJ) in
 Pursues price stability to maintain an g
economic environment in which there is neither In
inflation nor deflation. Other operations include fo
rm
the issuance of banknotes; the conduct of
at
monetary policy; providing settlement services io
and ensuring the stability of the financial system. n
 

Ministry of Finance (MOF)

 The central government arm responsible for

the provision of the budget bill, the issuance of
financial policies, the management of tax income
and the management of governed property.

32
 Pr
Japan Credit Rating Agency ov
id
Informational Services in
 
g
JCR Ratings
In
 
fo
"JCR Ratings "(monthly in English) lists all JCR ratings
rm
and carries a summary on rating rationale with the at
issuer's background information and financial analysis
with JCR's review on current specific issues. "JCR io
Ratings" is a vital source of information for investors. n
 
JCR Kakuzuke

 

"JCR Kakuzuke "(monthly in Japanese) lists all JCR ratings

and contains the rating information with a key financial

statistics of an issuer and contains some analyses on
interesting topics.

33
 Pr
Providing Information ov
id
 Interest rates and asset prices in
 
g
 Interest rates and security prices, for example, are In
information that house-holds or their agents use in fo
making their consumption-saving decisions and in
choosing the porfolio allocations of their wealth. These rm
same prices provide important signals to managers of at
firms in their selection of investment projects and io
financings. n
 

Implied Volatility

 

 As the diversity of financial markets has increased

during the past two decades, so too have the
opportunities to extract useful information from the
prices of financial instruments. Information about the
future volatility of changes in security, currency and
commodity prices can be extracted from option-like
securities. Volatility is a critical input for virtually all 34
decisions relating to risk management and strategic
financial planning.

A L LO C A T IO N O F R IS K

A fin a n cia l sy ste m p ro vid e s w ay s to m a n g e

u n ce rta in ity a n d co n tro lrisk

35
Types of Risks
Allocation

36
Interest Rate Fluctuations

37
Exchange Rate
Fluctuations:

38
Ways of managing Risk
Allocation

39
Diversification
• Cash Asset Class (Cash and Cash Equivalents) Allocation
Ø Cash (in form of currency) and other cash equivalents
like certificates of deposit (COD), money markets,
commercial paper and treasuries
• Fixed Income Asset Class (Bonds)
• Stocks Asset Class
Ø Large-cap, mid-cap and small-cap stocks

• Real Estate Asset Class

• Commodities Asset Class
Ø Commodities are raw materials like petrol, gas,
agricultural products (wheat, corn, cattle), and 40
metals like iron, copper and aluminum
• Precious Metals Asset Class (Gold and Silver)
Stock as an asset class in Japan

• Japan loses out on stock as asset class Allocation

41
Bonds as an asset class
• One of the major asset class for pension plan sponsors
• Allocation weight is more than 30%
Allocation
•
• Japanese Bond Market has become ticking bomb.
 This fiscal year’s budget called for the issuance of 44
trillion yen in government bonds despite projected tax revenues
of only 37 trillion yen.


• Standard & Poor’s changed its rating of Japanese government

bonds from AA (stable) to AA (negative).
• Japan has 834.4 trillion yen ($6.82 trillion) in public debt, the
equivalent of the economic output of Asia-Pacific's next
largest 13 economies combined.

• Japan Post Bank Co., holds more than 150 trillion yen (US$1.74
trillion) in government bonds.
• public pension program holds 80 trillion yen. 42
• Japan Post Insurance Co. 70 trillion yen, Bank of Japan 60 trillion
yen, Life and non life insurance companies 60 trillion yen.
Performance of Bonds:

Allocation

43
Yen as another asset class
Allocation
• Forex another asset class: bets on direction of
yen
•
• The concept of foreign exchange as an asset
class exists to give portfolio managers a
new way to create alpha (uncorrelated skill-
based returns) from conventional asset
classes.

44
Hedging
• Exchange Traded Allocation
Ø Osaka Securities Exchange handles almost 100% of
trading in options market and 59% of stock futures.
Ø Variety of derivative instruments include s:
 INDEX- Futures, Options, Options on Futures
 STOCK- Options
 CURRENCY- Futures
 INTEREST RATE- Futures, Options in Future
 BONDS- Futures , Options in future
 COMMODITIES- Futures


• OTC
Ø OTC derivatives market daily turnover US$100.9billion
Ø IR swaps continued to increase by 67% as compared to 45
year 2007.
Ø Yen linked IR derivative txn rose by 6.5%
Insurance
• 90 percent households have life insurance policies
Allocation
• Japanese market is a gigantic, yet it comprises only 29
companies( 2000 companies in US) resulting in fewer
choices for customers.
• Major Risks Facing Japanese Life Insurance Companies
Business risks
Financial risks
Weak Japanese economy
Strong earnings pressures
Lack of policyholder confidence, flight to quality
Low interest rates, exposure to domestic, overseas
investment market fluctuations
Deregulation, mounting competition
Poor asset quality
Inadequate policyholders’ safety net 46
Weakened capitalization
Intermediaries facilitating risk
management
• Credit Ratings by JCR, Mikuni & Co., Ltd.,
Allocation
Rating and Investment Information, Inc. (R&I) help in
accessing credit ratings of different securities
• Insurance companies like Allianz, Nipponkoa
Insurence ,Sompo japan Interglobal , Japan
earthquake reinsurence
• Derivative Exchanges :Osaka security exchange,
Tokyo Commodity Exchange , Osaka Textile Exchange ,
Tokyo Stock Exchange , Tokyo International Financial
Futures Exchange etc
• Investment funds DFA Japanese Small Company , Nomura
Partners The Japan S Fidelity Japan, JPMorgan Intrepid Japan
Select, Commonwealth Japan
 Deposit taking institutions like Japan Finance 47
corporation, Japan Bank of International
Corporation,Okinwa Development Finance corporation
Managerial Incentives
A financial system provides ways to deal with
incentive problems when one party to a financial
transaction has information that the other party
does not , or when one party is an agent for another .

48
Traditional’ Japanese
corporate governance
Managerial I
• According to the Ministry of Finance (MOF), Japanese
corporate governance has been seen as


 1) a board that consists mainly of internally promoted

senior managers;
2) incomplete separation of the board and executives;

3) a large number of the board members; and

4) relatively low and non-performance-linked

compensation for directors



49
Difference b/w U.S and
Japan Managerial I
• The U.S. model of corporate governance is
characterized by diffused stock ownership, a low
level of ownership concentration and a general
understanding that managers are supposed to
maximize shareholder value
•
• The instruments that U.S. companies often use to
align managers' interests with those of shareholders
are high-powered incentives such as stock-based
compensation plans
•
• Enron and WorldCom showed that these could also
provide incentives for the managers to "manage"
the companies' earnings by manipulating 50
accounting numbers and stock prices
•
 Japan
Managerial I
• The Japanese model typically features block
shareholding and an understanding that managers
are not just supposed to maximize shareholder
value but broaden stakeholder value, with particular
emphasis on the well-being of employees.


• In this model, the incentives of managers are

supposed to be more closely aligned with the
interests of employees, which sometimes raises
concern that managers with low-powered incentives
tend to become risk-averse and may not pursue the
most profitable projects
•
51
 J-SOX
Managerial I
• J-SOX is the informal name for a new legislative
framework of internal controls over financial
reporting (ICFR) that falls within the scope of
the Japanese Financial Instruments and
Exchange Law.(in effective from 2006)
• The new framework is called J-SOX because it
was modeled after the U.S. Sarbanes-Oxley Act,
which was enacted in 2002 in the wake of huge
accounting frauds at energy trader Enron Corp.
and telecommunications company WorldCom,
Inc.


52
 J-SOX
Managerial I
• The Section 1 guidance, which covers the
basic framework for internal control,
stipulates establishing a control framework
that includes the common COSO elements
of:
1. Control Environment
2. Risk Assessment
3. Control Activities
4. Information and
5. Communication Monitoring
• 53
 J-SOX
Managerial
• The Section 2 guidance covers management I
assessment and reporting of ICFR and includes
the following six areas:


1.Definition of Financial Reporting

2.Scoping of Management Assessment
3.Structure for Internal Control Assessment Method
and Use of Specialists
4.Evaluation of Company Level Controls
5.Process Level Controls – Assessment of Operating
Effectiveness
54
6.Recording and Retention of Assessment
Procedures
7.
 J-Sox
Managerial I
• The Section 3 guidance covers the audit
of ICFR and includes the following four
areas:
•
1.The meaning of auditor's "Indirect
Reporting"
2.Sample size for testing operating
effectiveness
3.Use of the work of internal audit and/or
others
55
4.Reporting on material weaknesses and
other reportable conditions
 Committee system
Managerial
• The Committee System or the committee-based I
corporate governance structure is a newly
introduced corporate structure that came about
through the revision of the 2003 Commercial
Code.
•
• Under the Committee System, directors are
primarily responsible for monitoring
management. Executive officers, who are
chosen by the directors, conduct business
operations within the scope of authority that is
delegated by the directors.


56
• There are three committees in the system:
 the Nomination Committee, the Audit
Committee and the Compensation Committee.
Committee system
Managerial I

57
 Free Trade Agreement entered into by Japan
• ASEAN Japan Comprehensive Economic Partnership
Agreement Pooling of R
• Japan Brunei Economic Partnership Agreement
• Japan Indonesia Economic Partnership Agreement
• Japan Malaysia Economic Partnership Agreement
• Japan Philippines Economic Partnership Agreement
• Japan Singapore Economic Partnership Agreement
• Japan Thailand Economic Partnership Agreement
• Japan Vietnam Economic Partnership Agreement
• Japan Australia Economic Partnership Agreement
• Japan Chile Economic Partnership Agreement
• Japan India Economic Partnership Agreement
• Japan Mexico Economic Partnership Agreement
• Japan Republic of Korea Economic Partnership
Agreement
 Under Negotiation

Pooling
• Japan Peru Economic Partnership Agreement of R
• Japan Mongolia Economic Partnership Agreement
•

59
 • Beginning of 1990s marked the end of Japan's
high growth period.


• The Nikkei index fell from its peak of ¥38,917 in

Pooling
December 1989 to ¥14,309 in August 1992.  
of R


• Land prices in metropolitan commercial areas

declined to one-fifth to one-quarter of their
peak level (Kuroda 2003).


• International competitiveness of Japanese

financial markets and institutions worsened 


• Banks faced a massive overhang of bad loans for

which securities and property that had become
60
almost worthless served as collateral.
•
 "Japanese Big Bang”

Aimed at

Pooling of R
• To increase investors' opportunities
• To improve the quality of financial services and
promote competition
• To make markets more "user friendly"
• To make trading fairer and more transparent.


Emphasis will be laid on a phenomenon called



"institutional complementarity"


61
 • Banks are engaged in bond underwriting, sell capital
market products to households and securitize loans
in bundling them into packages to be sold in the
market.


Pooling of R
• Financial intermediation stress the role of transaction
costs and asymmetric information. 


• The range of financial innovations is widening

including new kinds of derivatives, securitised loans
and the creation of synthetic assets through
dynamic trading strategies.


• Explosion of trading in interest rate swaps and their

growing use as benchmarks in international fixed-
income markets


• Bureaucratic quality is high and corruption low.

  62
• The quality of accounting standards is well above the
average of Asian countries and there are few
restrictions on the press so that the overall quality
Pooling of R

63
Po
ol
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Re
so
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64
 • Both Financial institutions and non financial
institutions have access.
 Po
• Most important source of Short term funds ol
accounts to around 40%.  in
• Maturities in this market range from half a day to g
several days of

Re
• A typical money market transaction goes as so
follows: 
The lender bank transfers a deposit to a money
ur
ce


market broker receiving a promissory note in

return. The borrower bank, in turn, gives a s
promissory note to the broker receiving in 65
reaction the lender's deposit. Settlement takes
place on the banks' accounts kept with the Bank
of Japan with the latter functioning as a clearing
Types of Money Market Transaction


• Cash-collateralized bond lending

• Gensaki market
• Private non-banking organisations with a licence

Pooling of R
• Repo operations may reduce credit risk and cost
of funds.
 

• Two markets that are part of the Japanese foreign

exchange market are the dollar call market and
the Tokyo Offshore Market.
 

• The offshore market is not open to Japanese

residents. Trading volume is low.
 

• Less attractive because of taxes and the

nonexistence of securities trading. 66
 

•
Treasury Bills
• They were underwritten close to one hundred per cent
by the Bank of Japan.

Pooling of R


• Held by the Bank and by official institutions such as

• The Trust Fund Bureau
• The National Debt Consolidation Fund
• The Postal Live Insurance and Postal Savings
schemes
• Before privatisation, the Japanese National Railways.
•
• Foreign Exchange Fund Special Account (FEFSA) which
was initially established to manage the foreign funds
of the Japanese government.


• On the asset side, the largest item beside

international reserves was yen assets deposited
with the Trust Fund Bureau, the predecessor of the
Fiscal Loan Fund Special Account, making the 67
account an important channel for the finance of
public spending programmes and a major source of
funds for the Japanese Fiscal Investment and Loan
Program (FILP)
Po
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of
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s
68
Equities Markets
• Japan's financial system has long suffered from a
strict functional separation among financial

 
institutions weakening stock trading. Pooling of R
• The first securities subsidiaries established by two
long-term credit banks, two trust banks and the
Norinchukin Bank started operating in July 1993.
The Bank of Tokyo followed in October the same
year. Each institution needed the approval of the
Ministry of Finance (MOF)


• The Big Bang, and the Financial Reform Law passed in

June 1998, brought additional changes. Concerns
about securities derivatives, asset-backed securities
and special-purpose companies were addressed.
 
69

• They had been among the first establishing so-called

structured derivative product companies (DPCs)
Po
ol
in
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of
Re
so
ur
ce
s
70
Po
ol
in
g
of
Re
so
ur
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s
71
 • Abolition of restrictions on off-exchange market
trading for exchange-listed stocks in1998
allowed the establishment of electronic
communication networks (ECNs) and Pooling
private of R
trading systems (PTS).


• The Japanese government was reported to have

pumped more than ¥12 trillion into the market
through the purchase of equities using pension
funds and postal savings
•

72
Bond Markets
• The high volume of government borrowing in the
market is greatly crowding out private business

Po
• Different kinds of corporate bonds in Japan 
• Straight bonds offer the holder a stream of interest
ol
payments in
• Convertible bonds, that exist since 1966 g
• Warrant bonds with a warrant. i.e. an option to
purchase shares of the firm's stock, attached of
• Detachable warrants, first authorized in Japan in Re
1989, may be traded independently of the bonds
with which they are issued. so
• Samurai bonds yen-denominated bonds issued in ur
Japan by non-residents
• Shogun bonds are foreign-currency denominated
ce
bonds issued by non-residents in Japan s
• Daimyo bonds, non-resident eurobonds issued in 73
Japan and sold to investors in the euromarkets.

Po
ol
in
g
of
Re
so
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s
74
Derivatives
• Trading volumes in derivatives markets are much Po
higher than in any other financial market
segment traditionally but are weaker than other
ol
segments in Japan in
 g
• Derivatives are traded over the counter (OTC) of
and on organised exchanges  Re

so
• Bond futures and stock price index futures / ur
interest rate and currency futures both
categories are listed and traded on different
ce
exchanges. s
75


• Tokyo International Financial Futures Exchange

(TIFFE)
Po
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of
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s
76
Po
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of
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s
77
Mutual Funds
• Total Assets under Management approx 130 Po
trillion Yen with around 120 plus players
• Some Major Players are
ol
• Nomura Asset Management Company Ltd. in
• Daiwa Asset Management Company Ltd. g
• UBS, HSBC, Deutsche, etc of
• Well developed Mutual Fund industry Re
• Usually people invest for a short duration instead
of longer term so
• Have most types of Funds ur
• Open Ended ce
• Close Ended s
• Life Cycle, Balanced, Money Market, Sector 78
Specific etc
•
Po
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of
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s
79
Po
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of
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80
Po
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of
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s
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Po
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82
 • Deposits rates have fallen significantly during the
last couple of years, drawing people to capital
markets for better returns.


• Normal trends suggest that Males are major Po

contributors to the financial markets as ol
compared to females. in

g
• People normally prefer to invest in Mutual Funds
than accessing the asset classes directly.
of
Re
so


• Investment in capital markets rises with increase

in age of the investors and usually they access ur
through Mutual Funds route. ce

s
• Few important things taken into consideration 83
while investing in Mutual Funds
• Expected returns, Past performance, Frequency
Po
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of
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

 THANK YOU!!


85