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Japan FSA Sets Out Reform Plan to Enhance Investments and Entice Foreign Capital

By Jim Hamilton

The Japanese Financial Services Authority is set to aggressively implement an action plan for financial market growth that will include a review of accounting rules and internal control standards for small and medium-sized companies and the expansion of English language disclosure by foreign companies listing on Japanese exchanges. The plan will also reform the tax treatment of cross-border transactions and OTC derivatives.

The scope of English language disclosure documents is currently limited to continuous disclosure documents. In order to encourage foreign companies to raise capital in Japan and expand opportunities for Japanese investors to invest in foreign companies, the FSA is considering expanding the scope of English language disclosure to include certain issuance disclosure documents. Based on the results of its Disclosure System Working Group, the FSA will submit a legislative proposal.

The FSA will review accounting standards and tailor them to the actual circumstances of small and medium-sized enterprises. Similarly, in order to encourage internal control reporting systems tailored to the actual situations of companies, including SMEs, and to facilitate internal controls using companies? innovative ideas, the FSA will review related Ordinances and Standards and best practices for internal controls reporting, and create a casebook of effective internal control reporting practices for SMEs.

In an effort to energize the market for corporate bonds, the FSA will actively support initiatives by market participants to stimulate the corporate bond market, focused on a review of underwriting examinations by securities companies, corporate bond management and the development of an infrastructure for disseminating corporate bond price information.

Block trading is used in cases where large lot shareholders sell shareholdings without affecting market prices. Acts of intermediation by securities companies to sell more than 5% of total share are taken in the process of block trading. The acts correspond in form to ?activities for collection of shares?, which are subject to insider trading regulations.

The FSA proposes to make ?activities for collection of shares? inapplicable to acts of intermediation by securities companies related to block trading since these acts are not aimed at control of the corporation.

In order to promote participation by foreign investors in Japan?s securities markets, the tax system on cross-border transactions will be reformed to aid securities lending, enable Islamic finance, and change of international tax principles from the entire income principle to the attributable income principle. The FSA also seeks to extend the reduced tax rate of 10 percent for dividends and capital gains on securities transactions past its 2011 expiration date.

Active market participation by individual investors is related to the ease of investing in diverse products. However, under the current tax system, there is limited scope for offsetting profit and loss between financial products. For example, capital losses on shares cannot be offset against interest income on deposits and bonds, and there is a limited three year loss-carry forward period. This situation makes it difficult for investors to invest in diverse financial products. Therefore the FSA seeks tax reforms expanding the profit/loss offset scope and the loss-carry forward period for financial products.

Although OTC derivative transactions and market derivative transactions are financial transactions with the same economic substance, currently market derivative transactions are subject to separate self-assessment taxation while OTC derivative transactions are subject to aggregate taxation. Since the current tax system creates distortions in choices of financial products by individuals, the FSA proposes tax reforms to implement a change to separate self-assessment taxation for OTC derivative transactions.

Current regulations on the investment management business impose strict registration requirements, resulting in investment managers moving overseas. Considering this, the FSA will work to relax regulations on investment management businesses to encourage the launch of investment management funds which meet various asset management needs and curb the trend of asset managers moving overseas. Specifically, in the case of investment managers with limited types of clients, the FSA will grant exceptions which partially ease registration requirements and which are an obstacle to the launch of small funds. The FSA will submit a legislation proposal.

Full post as published by Jim Hamilton's World of Securities Regulation on January 04, 2011 (boomark / email).