Japan Pushes Financial Sector Reform (Again)

♠ Posted by Emmanuel in at 12/26/2007 01:06:00 AM
Relatively moribund financial markets in Japan have led the government to shake things up yet again to get more activity going. Time and again Japan has experimented with financial reforms to enliven this sector. However, many of these efforts have been piecemeal and have not really resulted in the intended improvements. With the likes of Sydney, Hong Kong, and Singapore becoming relatively more competitive than Tokyo in the Pacific Rim by offering lower taxes and regulation, Japan has little choice but to make more "market-friendly" reforms should it wish to remain a financial center worth its salt. Dare we say that it is becoming more (gasp) neoliberal? As with most reforms, it is good to ask whether they are culturally appropriate. Though it is not talked about all that much, the success of many reform programs is contingent on the goodness of fit of such efforts with prevailing socioeconomic institutions. From the Financial Times:

The Japanese government has agreed to a sweeping reform package designed to revitalise the country's financial markets, including eliminating the firewalls that keep a strict division between banks and securities companies.

The measures unveiled by the Financial Services Agency on Friday constitute the most comprehensive programme of financial sector reforms since Japan's Big Bang financial deregulation in 1996. The latest effort to boost the country's financial competitiveness comes amid concern that Tokyo, capital of the world's second-largest economy, is losing out to other regional financial centres due to problems ranging from outdated rules to high taxes.

A survey conducted this year by the Corporation of London ranked Tokyo 10th in the world in its competitiveness as a financial centre, below not only regional rivals Hong Kong and Singapore but also Frankfurt and Sydney. The FSA plan, which incorporates about 60 specific deregulation measures, has been welcomed by industry groups. "There is a lot that is good in there," said a representative for a foreign bank. "It's not the end of the story. They need to keep doing more to globalise Tokyo as a financial centre."

The FSA wants to promote the participation of foreign financial institutions, hedge funds and others in Japan's markets and encourage the shifting of household savings into investments [presumably away from the post office--the largest player in the industry]. Under the latest programme, the firewalls that separate banking and securities companies will be lowered to allow financial conglomerates that conduct banking, securities and other financial services businesses to operate more closely and share customer information. This step is particularly welcomed by foreign banks, which have complained the strict separation of banking and broking in Japan has added to costs, hampered operational efficiency and even jeopardised internal risk management.

Another key measure is the decision by the finance ministry to exempt offshore funds from permanent establishment taxation. Under existing rules, offshore funds that conduct business with an agent in Japan are potentially liable for Japanese taxes. The new measure would make it clear that offshore funds will not be subject to such taxation. Other measures include deregulation to allow a broader range of products to be traded on markets and to allow the establishment of markets for professional investors with less stringent rules than those that apply in other markets.