Securities

Market
in Japan
2018

JAPAN SECURITIES RESEARCH INSTITUTE

Copyright © 2018 by Japan Securities Research Institute
All rights reserved. No Part of this Publication may be
reproduced, in any form or by any means,
without the permission in writing of the publisher.

Published by
Japan Securities Research Institute
Taiyo Life Insurance Nihombashi Building
2-11-2, Nihombashi, Chuo-ku,
Tokyo 103-0027, Japan
Telephone (+81) 3-6225-2326
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ISBN 978－4－89032－822－2

The book is a translation of“Illustrated Guide: 2018 Securities Markets in Japan”

(prepared by the Japan Securities Research Institute), which was published in Japanese,
into English. It includes quotations from or references to descriptions of laws and
regulations such as the Financial Instruments and Exchange Act; however, it is the laws and
regulations in Japanese themselves that have legal effect and the translations given herein
are only for your reference. For legal matters, see the laws and regulations
in Japanese described in the official journal.
 PREFACE

The advancement of information technology is having a significant impact

on the world economy in terms of growth and structural changes. Particularly
in financial and securities sectors, it has been pointed out that the introduc-
tion of FinTech and new FinTech-based services and technologies, such as
robo-adviser, crowdfunding, and block chain, will bring about rapid and ma-
terial reforms to how business segment regulations and markets ought to be.
At the present moment, however, it is difficult to accurately forecast what
specific moves will take place going forward.

　Meanwhile, the recent world economy has been relatively favorable with
the term“Goldilocks Economy”being applied, despite facing various risks.
Yet there are times when markets fluctuate significantly due to political and
economical factors, and by no means can we say that the recent economic
conditions allow us to ignore the concern of risks becoming apparent.

　Japan Securities Research Institute has issued an updated edition of The

Securities Market in Japan: An Illustrated Guide every two years since 1973.
The book is intended to explain the structures, functions and current status of
Japan’ s securities markets in a simple, user-friendly manner as much as pos-
sible. Following the previous 2016 edition, this is the English version of the
2018 edition of The Securities Market in Japan. In this updated edition, we
included new sections on FinTech and the corporate governance code. We
also added descriptions on new moves on the market, including the introduc-
tion of the Japanese-version Fair Disclosure Rules, in an effort to provide
timely contents.

　Moreover, at Japan Securities Research Institute, we work to deepen our

understanding of the latest status of securities markets in other countries, in-
cluding developments toward financial and securities systems reforms. As
part of this effort, we also issue other illustrated guides, such as“The Securi-
ties Market in the U.S.,” “The European Securities Markets”and“The Asian
Securities Markets,”every few years. We do this with a view to providing
easy-to-understand explanations of securities markets of leading countries in
Europe, the U.S. and Asia. We hope that the series of these books will also be
of use to those who are interested.

　As with our previous publications, this book was compiled by a group of
specialists, including researchers and research fellows at Japan Securities Re-
search Institute and experts at the Japan Securities Dealers Association
(JSDA), the Japan Exchange Group (JPX), Japan Securities Finance (JSF)
and Japan Investment Advisers Association, who took part in writing the sec-
tions assigned to them respectively. The assignment of writing tasks is as
shown on the next page. Researchers Kazuya Takahashi and Kazutoshi Tashi-
ro at Japan Securities Research Institute were responsible for the overall
compilation.
　As previously mentioned, under circumstances in which it is difficult to
accurately envision the future, we find it extremely important to take another
comprehensive view of and accurately understand the history and current sta-
tus of Japan’ s securities market on the whole. We sincerely hope that this
book will be of wide use to not only persons related to the securities industry
but also many of those who have an interest in this theme.

March 2018
KIICHIROU MASUI
President
Japan Securities Research Institute
 CONTENTS

PREFACE .................................................................................................. i

CHAPTER I The Securities Market and the National Economy

1. What Is a Security? .................................................................... 1
2. Corporate Financing................................................................... 3
3. The Securities Market and Public Finance ................................ 5
4. Financial Assets Held by the Household Sector ........................ 8
5. Investment Behavior of Foreigners
(Inbound Securities Investment) ................................................ 10
6. Advancing FinTech .................................................................... 14

CHAPTER II The History of the Japanese Securities Market

1. The Securities Market in the Prewar Period .............................. 17
2. The Period of Postwar Economic Rehabilitation (1945－54) .... 19
3. The Securities Market during the First Period of Rapid
Economic Growth (1955－64) .................................................... 22
4. The Securities Market during the Second Period of Rapid
Economic Growth (1965－74) .................................................... 25
5. Measures Taken to Cope with the Oil Crisis (1975－84) ........... 28
6. Developments before and after the Economic Bubble
(1985－89) .................................................................................. 30
7. The Reform of the Financial System after the Stock Market
Scandals (1990－95) ................................................................... 33
8. The Debate on, and Enforcement of, the Act on Revision, etc. of
Related Acts for the Financial System Reform (1996－2000) ... 35
9. Developments Since the Big Bang (2001－2008) ...................... 38
10. Developments after the Lehman Shock (2008 onward) ............ 40

CHAPTER III The Stock Primary Market

1. New Issues of Stocks in the Primary Market ............................. 43
2. Forms of Issuing New Shares .................................................... 45
3. Procedures for Issuing New Shares ........................................... 47
4. The Current State of the New Issue Market............................... 49
5. New Share Underwriting ........................................................... 52
6. Private Equity Market ................................................................ 54
iv　Contents

CHAPTER IV The Stock Secondary Market

1. The Structure of the Stock Secondary Market ........................... 57
2. Transaction Size of the Stock Secondary Market ...................... 59
3. The Structure of Share Ownership ............................................. 61
4. Stock Prices and Indicators for Investment (1) .......................... 63
5. Stock Prices and Indicators for Investment (2) .......................... 65
6. Stock Prices and Indicators for Investment (3) .......................... 67
7. Stock Prices and Indicators for Investment (4) .......................... 69
8. The Margin Trading System (1) ................................................. 71
9. The Margin Trading System (2) ................................................. 73
10. Diversification of the Securities Trading System ...................... 76

CHAPTER V New Issues of Bonds in the Primary Market

1. Types of Bonds .......................................................................... 79
2. Issuing Status of Bonds.............................................................. 81
3. Methods of Issuing Public Bonds .............................................. 83
4. Methods of Issuing Corporate Bonds ........................................ 86
5. Credit-Rating Agencies and Rating of Bonds ............................ 89
6. Corporate Bond Management .................................................... 91
7. Corporate Bonds with Subscription Rights/Warrants and
Structured Bonds........................................................................ 93

CHAPTER VI The Secondary Markets for Bonds

1. Trading of Bonds ....................................................................... 96
2. Participants in the Secondary Bond Market............................... 98
3. Over-the-counter Bond Transactions ......................................... 100
4. Reference Statistical Prices (Yields) for OTC Bond
Transactions (1).......................................................................... 100
5. Reference Statistical Prices (Yields) for OTC Bond
Transactions (2).......................................................................... 105
6. Reporting & Announcement System of Corporate Bond
Trading ....................................................................................... 106
7. Book-Entry Transfer System for Bonds..................................... 109
8. Bond Yield and Terms of Issuance............................................. 111
9. Gensaki Market for Bonds (1) ................................................... 114
10. Gensaki Market for Bonds (2) ................................................... 116
11. Bond Lending............................................................................. 119

CHAPTER VII Investment Trusts

1. Overview .................................................................................... 122
2. History of Investment Trusts...................................................... 124
3. Forms of Investment Trusts ....................................................... 126
 Contents 　v
4. Investment Trust Products.......................................................... 128
5. Sale of Investment Trusts ........................................................... 131
6. Investment Management of Investment Trusts .......................... 133
7. Customer Base of Investment Trusts ......................................... 135
8. Disclosure of Investment Trusts................................................. 138
9. Services and Products Based on Investment Trusts ................... 141
10. Foreign Investment Trusts.......................................................... 143

CHAPTER VIII The Derivatives Market

1. Futures Trading .......................................................................... 146
2. Bond Futures Trading ................................................................ 148
3. Stock Index Futures Trading ...................................................... 150
4. Financial Futures Trading .......................................................... 152
5. Options Trading ......................................................................... 154
6. Bond Options Trading ................................................................ 156
7. Stock Index Options Trading ..................................................... 158
8. Securities Options Trading......................................................... 160
9. OTC Derivatives Trading........................................................... 162
10. Credit Derivatives Trading......................................................... 165

CHAPTER IX The Securitized Products Market

1. What Is a Securitized Product? .................................................. 167
2. Basic Mechanism of Issuing Securitized Products .................... 169
3. Description of Major Securitized Products ................................ 170
4. The Size of the Market............................................................... 173
5. Primary Market for Securitized Products .................................. 175
6. Secondary Market for Securitized Products .............................. 177
7. Primary and Secondary Markets for the Beneficiary
Certificates of Real Estate Investment Trusts ............................ 179
8. Listed Infrastructure Funds ........................................................ 182
9. Risks and Credit Enhancement of Securitized Products ............ 184
10. The Enactment of Securitization-Related Laws ........................ 185

CHAPTER X Financial Instruments Exchange, etc. (1)

1. The Function of the Financial Instruments Exchanges .............. 190
2. The Listing System .................................................................... 192
3. The Listing Management System .............................................. 194
4. The Corporate Governance Code............................................... 197
5. The Stock Trading System (1) ................................................... 200
6. The Stock Trading System (2) ................................................... 202
7. The Clearance and Settlement System (1) ................................. 204
8. The Clearance and Settlement System (2) ................................. 205
vi　Contents

9. The Book-Entry Transfer System for Stocks, Etc. .................... 208

10. Trading and Clearing Systems of the Financial Instruments
Exchange (Stock Exchange) (1)................................................. 210
11. Trading and Clearing Systems of the Financial Instruments
Exchange (Stock Exchange) (2)................................................. 212

CHAPTER XI Financial Instruments Exchange, etc. (2)

1. Footsteps of Emerging Markets ................................................. 215
2. Start-up Market Concepts .......................................................... 217
3. Start-up Market Listing Systems ............................................... 219
4. Start-up Market Listing Management Systems.......................... 221
5. An Outline of the OTC Stock Market ........................................ 223
6. OTC Securities, Etc. .................................................................. 225
7. Equity Crowdfunding (1) ........................................................... 227
8. Equity Crowdfunding (2) ........................................................... 229
9. Shareholders Community (1) ..................................................... 231
10. Shareholders Community (2) ..................................................... 233
11. The Green Sheet and Phoenix Issue Systems (1)....................... 236
12. The Green Sheet and Phoenix Issue Systems (2)....................... 238
13. TOKYO PRO Market ................................................................ 240

CHAPTER XII Financial Instruments Business (Securities Business)

1. Overview of Financial Instruments Business Operators
(Securities Companies) (1) ........................................................ 243
2. Overview of Financial Instruments Business Operators
(Securities Companies) (2) ........................................................ 245
3. Overview of Financial Instruments Business Operators
(Securities Companies) (3) ........................................................ 248
4. Securities Businesses (1)—The Principal Businesses (1) .......... 250
5. Securities Businesses (2)—The Principal Businesses (2) .......... 253
6. Securities Businesses (3)—Incidental Business, Concurrent
Business, and Other Businesses ................................................. 255
7. Income and Expenditure of Financial Instruments Business
Operators (Securities Companies) ............................................. 258
8. Financial Condition of Financial Instruments Business
Operators (Securities Companies) ............................................. 260
9. Financial Instruments Firms Associations (1)............................ 263
10. Financial Instruments Firms Associations (2)............................ 267
11. Investor Protection Fund ............................................................ 269
12. Securities Operations of Financial Institutions .......................... 272
13. Competition Structure of the Securities Industry....................... 276
 Contents 　vii
CHAPTER XIII Asset Management Service
1. Management of Individual Financial Assets .............................. 279
2. Pension Fund Management ........................................................ 281
3. Asset Management of Trust Banks ............................................ 283
4. Asset Management of Life Insurance Companies ..................... 285
5. Asset Management of Discretionary Asset Management
Companies.................................................................................. 288
6. Asset Management of Investment Trusts ................................... 290
7. Stewardship Code ...................................................................... 292

CHAPTER XIV Securities Taxation

1. Transitions in Securities Taxation (1) ........................................ 294
2. Transitions in Securities Taxation (2) ........................................ 296
3. Taxation of Interest .................................................................... 298
4. Taxation of Dividends ................................................................ 300
5. Adjustment of Double Taxation Relating to Dividends ............. 303
6. Capital Gains Taxation (1) ......................................................... 305
7. Capital Gains Taxation (2) ......................................................... 307
8. NISA .......................................................................................... 309
9. Taxation of Nonresidents ........................................................... 311
10. Tax Treatment of New Products ................................................ 313
11. Tax Treatment of Pension-Type Products .................................. 315

CHAPTER XV Prohibited and Regulated Acts of Securities Trading

1. Outline........................................................................................ 319
2. Regulation of Market Manipulation........................................... 321
3. Prohibited and Regulated Acts of Corporate Insiders ................ 323
4. Prohibited and Regulated Acts for Financial Instruments
Business Operators (Securities Companies) and Their
Employees, Officers, and Directors ........................................... 325
5. Other Regulated Acts—Information Disclosure to Ensure
Fairness of Transactions............................................................. 327

CHAPTER XVI The Information Disclosure System and Investor

Protection
1. The Information Disclosure System in the Securities Market ... 330
2. The System of Disclosing Corporate Information under the
Financial Instruments and Exchange Act ................................... 332
3. Other Disclosures to Be Made under the Financial Instruments
and Exchange Act ...................................................................... 334
4. Timely Disclosure System of Financial Instruments
Exchange (Stock Exchange) ...................................................... 336
viii　Contents

5. Ensuring the Appropriateness of Information Disclosure .......... 336

6. Recent Moves of Information Disclosure .................................. 339

CHAPTER XVII The Securities Regulatory System

1. Financial Instruments and Exchange Act ................................... 342
2. Other Laws and Regulations Related to the Securities Market... 344
3. Organization of the Securities Regulatory System .................... 347
4. Law Enforcement by the Financial Services Agency ................ 349
5. The Securities and Exchange Surveillance Commission ........... 352
6. Self-Regulatory Organizations................................................... 354
7. International Organization for Securities Regulation ................ 356

APPENDIX Chronology of Events Related to Securities

(1870−2017)...................................................................... 360
 CHAPTER I

The Securities Market and the National Economy

1. What Is a Security?

The financial markets provide a marketplace through which funds are chan-
neled from sectors with idle cash (lenders) to cash-short sectors (borrowers),
and the types of financing arranged on these markets are divided in terms of
intermediaries into indirect and direct financing. Indirect financing means a
form of transaction in which a financial institution acquires a primary securi-
ty (due bills and notes, etc.) from a borrower with a fund raised by issuing an
indirect security (certificates of deposit and insurance policies, etc.). In direct
financing, a borrower raises funds by issuing a primary security (equity and
debt securities, etc.) to lenders through a market intermediary. The market-
place on which direct financing is arranged is the securities market, and it is
divided into a primary market (where securities are issued and distributed)
and a secondary market (where securities are bought and sold).
　Generally, the term“security”refers to instruments that give their legal
holders the rights to money or other property. They are designed to facilitate
the assignment of such rights and have the characteristic of combining rights
and certificates. More specifically, securities are issued in various forms,
such as stocks and bonds issued by business corporations; notes, checks, and
bills of lading; government securities issued by national governments; and
municipal bonds issued by local public bodies. Of these, securities traded in
the securities markets are called“securities under the Financial Instruments
and Exchange Act (FIEA),”as defined in Paragraphs 1 and 2, Article 2 of
that law. Paragraph 1 defines securities whose interests are represented by se-
curities or certificates that are physically issued as listed in the table on the
right. In addition to those provided for in the former Securities and Exchange
Act, new types of securities, such as mortgage securities and securities repre-
senting financial options contracts, have been included. Item (xxi) of the
paragraph provides that securities or certificates designated by government
ordinance include bonds issued by educational institutions, etc.
　Paragraph 2 of Article 2 sets forth the definition of deemed securities.
First, interests represented by securities that are listed in the preceding para-
2　Chap. I The Securities Market and the National Economy

Table I-1. The Definition of Securities under the Provisions of Paragraphs

2-1 and 2-2 of FIEA

Paragraph 2-1 Securities

1. Government securities
2. Municipal bond securities
3. Bonds issued by special public corporations
4. Specified corporate bonds as provided for in the Act on the Liquidation of Assets
5. Corporate bonds
6. Subscription certificates issued by special public corporations
7. Preferred shares as provided for in the Law Concerning Preferred Shares in Cooperative Financial
Institutions
8. Preferred subscription certificates or new preferred subscription rights certificates as provided for
in the Act on the Liquidation of Assets
9. Stock certificates or subscription right/warrant certificates
10. Beneficiary certificates of investment trusts or foreign investment trusts 　
11. Investment certificates or bonds issued by investment corporations, investment equity subscription
rights certificates or investment certificates issued by foreign investment corporations
12. Beneficiary certificates of loan trusts
13. Beneficiary certificates of special-purpose trusts as provided for in the Act on the Liquidation of
Assets
14. Beneficiary certificates of certificate-issuing trusts as provided for in the Trust Law
15. Commercial paper
16. Mortgage securities
17. Foreign securities: foreign certificates that have the attributes of any type of securities as defined in
Items 1 through 9 and Items 12 through 16 hereof
18. Beneficiary certificates of foreign loan claims trusts
19. (Financial) options securities or certificates
20. Foreign depository securities or receipts
21. Securities or certificates designated by government ordinance

Paragraph 2-2 Deemed Securities

(General description of the former clause)
Interests represented by securities that are listed in the preceding paragraph in cases where no physical
certificates are issued
(Latter clause)
1. Beneficiary interests in trusts
2. Beneficiary interests in foreign trusts
3. Partnership interests in general or limited partnership companies (gomei gaisha or goshi gaisha),
as designated by government ordinance, or interests in limited liabilities companies (godo gaisha)
4. Partnership interests in foreign corporations, with the attributes of interests defined in any of the
preceding items
5. Interests in collective investment schemes as comprehensively defined
6. Interests in foreign collective investment schemes
7. Other interests as designated by government ordinance

Source: Based on Toshiro Ueyanagi, Yutaka Ishitoya, and Takeo Sakurai, Shin Kin’
yu Shohin Torihiki-ho
Handobukku, Nippon Hyoronsha, 2006, and Etsuro Kuronuma, Kin’ yu Shohin Torihiki-ho Nyu-
mon, Nihon Keizai Shimbun, 2006, and the Financial Instruments and Exchange Act as listed in
e-Gov’s legal data service.
 　3
Chap. I The Securities Market and the National Economy

graph are deemed to be securities by themselves in cases where no physical

certificates are issued. For example, interests represented by bonds or stocks
held under a book-entry transfer system are deemed to be equivalent to those
securities listed in Paragraph 1. The latter part of the paragraph then goes on
to define deemed securities as interests other than those represented by secu-
rities or certificates. The scope of the definition has been substantially wid-
ened compared with that of the former law, and, specifically, there are com-
prehensive provisions in Item (v) of the paragraph for the FIEA to be
applicable to various types of collective investment vehicles, or funds. In
Item (vii), interests designated by government ordinance, including claims on
loans to educational institutions, are provided for as deemed securities. In ad-
dition to securities, the FIEA applies to derivatives trading in domestic finan-
cial instruments exchanges, over-the-counter markets and foreign markets.

2. Corporate Financing

The term“business corporation”(excluding financial service institutions)

means economic entities whose objective is to make a profit from such activ-
ities as the production and sale of goods or services. Business corporations
invest funds in real assets (such as facilities and products in inventories) to
carry out production and marketing activities on a continuing basis.
　Funds raised by business corporations are divided into internal funds
(those generated in the ordinary course of the production and sale of goods or
services) and external funds (those raised from external sources), according
to the method employed to raise them. Technically, internal reserves and de-
preciation charges are included in internal funds. As corporations are not re-
quired to repay the principal of, or pay interest or dividends on, such funds,
they are considered the most stable means of corporate financing. In actuali-
ty, however, business corporations cannot meet their funding requirements
with internal funds alone, and many of them have to rely on external funds.
External funds are divided into the proceeds resulting from loans and the is-
suance of equity and corporate bond, according to the method employed to
raise them. Loans are obtained primarily from banking institutions. This
method of raising funds with debt securities is termed“indirect financing.”
In addition to those issued at the time of their incorporation, business corpo-
rations issue additional equity shares (an increase of capital) to finance the
expansion of their production capacity or for other purposes. As business cor-
porations are not required to repay the principal thus raised, or pay interest
thereon, the proceeds from the issuance of equity shares constitute the most
stable form of funds among external funds. As is the case with equity shares,
corporate bonds are also an instrument for raising funds from the capital mar-
4　Chap. I The Securities Market and the National Economy

Chart I-1.　Corporate Financing

Internal reserves
Internal funds
Depreciation

Borrowing

Stocks
Straight bonds
External funds Corporate bonds Corporate bonds with equity warrant
Structured bonds
Foreign currency bonds

CP (short-term corporate bonds)

Note: Internal reserves refer to a company’ s after-tax income less any dividends and officers’bonuses.
Depreciation charges are recognized as the economic benefits of tangible fixed assets, such as
buildings and machinery, that are consumed each year and recorded as expenses. In other words,
they are reserves for facility replacement.

kets, and issuers have to redeem them on or by a predetermined date of re-

demption and pay a definite rate of interest on them. Corporate bonds are
largely divided into straight bonds (SB), corporate bonds with subscription
rights/warrants, and structured bonds (see Chapter V regarding corporate
bonds with subscription rights/warrants and structured bonds). The issuance
of equity shares or corporate bonds is recognized as a means of raising funds
by the“direct financing”method.
　A survey of changes that have occurred in the amount of funds raised by
companies from external sources as a percentage of the outstanding balance
of financial debts shows that bank borrowings have tended to decrease since
the 1980s. This tendency was triggered by the fact that following the liberal-
ization and internationalization of the financial markets, businesses have ac-
tively sought to raise funds by selling new shares and corporate bonds on the
market. Since the 2000s, funds raised through the issue of securities have
outpaced those obtained through bank borrowings, and the weight of corpo-
rate financing structure has shifted from indirect to direct financing. Although
at one point the proportion of loan financing rose after the financial crisis of
2008 curtailed the functioning of the capital market, financing through the is-
sue of securities, primarily stocks, has come to account for the majority after
the hike in stock prices at the end of 2012. In addition, the total amount of fi-
nancing has been increasing over the last few years. Considering that the en-
hancement of emerging markets and deregulation and abolition of various
bond regulations have led to establishing the approach of raising funds on the
capital market for not only large companies but also small and midsize com-
 Chap. I The Securities Market and the National Economy 　5
Table I-2.　Percentage of Funds Raised and Invested by the Corporate Sector

(balances at fiscal year-end)

　 1980 1985 1990 1995 2000 2005 2010 2016
Management
　Cash and demand deposits 10.0 7.6 6.6 9.1 13.3 15.5 18.4 14.8
　Time deposits 14.5 14.8 12.8 10.8 7.7 4.1 6.3 6.0
　CDs 0.1 1.2 1.1 2.6 3.3 1.5 1.8 1.5
　Trusts 1.3 1.4 0.7 1.3 0.3 0.3 0.3 0.4
　Investment trusts 0.1 0.6 0.2 0.4 1.0 0.7 1.8 1.2
　Securities 15.7 25.9 30.9 24.2 22.9 36.4 19.4 32.3
　　(equity shares) 13.5 23.5 28.1 22.6 19.6 33.4 16.3 30.3
　　(debt securities) 2.2 2.3 2.8 1.6 3.3 3.0 3.1 2.0
　Inter-business credits 45.5 35.2 30.5 35.3 33.5 24.4 27.1 19.4
　Others 12.7 13.2 17.2 16.3 18.2 17.1 24.9 24.4
Total 312.4 483.5 835.7 783.2 738.9 950.3 792.6 1,146.1
Financing
　Borrowing 42.2 39.5 36.5 40.2 36.2 22.4 31.3 24.4
　Securities 27.1 38.1 43.1 38.6 42.0 58.2 42.5 54.8
　　(equity shares) 23.1 33.9 37.3 32.7 35.2 52.9 35.2 50.0
　　(corporate bonds) 2.2 2.6 2.3 3.8 5.3 4.1 5.8 3.6
　　(foreign currency bonds) 1.8 1.6 2.6 1.5 0.6 0.8 0.8 1.1
　　(CPs) － － 0.8 0.6 0.9 0.4 0.7 0.1
　Inter-business credits 24.3 17.0 14.6 15.4 16.2 12.8 15.4 11.9
　Others 6.4 5.5 5.8 5.8 5.6 6.6 10.8 8.9
Total 477.4 760.6 1,358.7 1,351.7 1,198.0 1,421.8 1,056.7 1,658.8

Notes: 1. In percentages and trillions of yen.

2. Time and savings deposits include foreign currency deposits.
3. Figures in parentheses are a breakdown of securities, and equity shares include equity subscrip-
tions.
4. Investment of equity shares is based on market prices and that of new shares issued in the years
up to fiscal 1990, inclusive, is based on the capital plus capital reserve and that is based on the
market prices since fiscal 1995.
Source: Compiled from the Flow of Funds Account data published on the web site of the Bank of Japan.

panies, the predominance of raising funds through the issue of securities is

expected to remain stably also going forward.

3. The Securities Market and Public Finance

Public finance is a type of economic activity carried out by the government

(national and local). More specifically, it is a government activity undertaken
to finance administrative services (law enforcement and education, etc.) and
6　Chap. I The Securities Market and the National Economy

Chart I-2.　Changes in the Balance of Outstanding Public Securities and the Degree of
Dependence on Public Securities

(in trillions of yen) (%)

1,000 60
900
Bond dependency ratio 50
800
(the scale on the right)
700 Total balance of
outstanding public 40
600 securities
500 30
400
20
300
200
Balance of construction 10
100 bonds
0 0
End of FY1965 70 75 80 85 90 95 00 05 10 15 17

Notes: 1. Figures prior to fiscal 2013 are actual results. Figures for fiscal 2014 are based on revised budget
and those for fiscal 2016 and fiscal 2017 are estimates.
2. Based on straight government bonds.
Source: Compiled from the data issued by the Ministry of Finance.

public investment with taxes and other revenues. In practice, the government
adjusts its fiscal policies in response to economic trends. When government
expenditures exceed revenues, the deficit is met mainly by issuing public
bonds (government and municipal government bonds).
　A survey of changes that have occurred in the balance of outstanding pub-
lic bonds and the government’ s dependency on debt financing shows that the
government had issued special government bonds (deficit-financing) in fiscal
1965, the first time since the end of World War II, under a supplementary
budget and also that the government has issued a series of construction bonds
on a continuing basis since fiscal 1966. However, both the bond dependency
ratio and the balance of outstanding government debt securities had remained
at a low level until the first half of the 1970s. As tax revenues had leveled off
due to an economic slowdown that began in the second half of the 1970s, the
government had no choice but to issue a large amount of government bonds,
and their outstanding balance had increased sharply to ¥71 trillion at the end
of fiscal 1980. As a result, government bonds came to carry an increasing
weight in the securities market, and the influence of government fiscal poli-
cies on the securities market had taken on a growing importance. With a view
to improving the market’ s financial condition, the government has adopted a
fiscal restructuring policy since fiscal 1981. Helped by economic recovery,
the government succeeded in lowering the dependency on deficit financing
 Chap. I The Securities Market and the National Economy 　7
Table I-3.　Changes in JGB and Short-Term Government Bill Ownership by Investor
Type

(in percentages)
End of
Types of investors FY2005 FY2007 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 Dec.
2016
General government 3.5 3.4 1.6 2.9 1.6 1.6 2.0 1.9 0.2 0.2
Public pension funds 8.1 9.8 9.2 8.3 7.5 7.1 6.7 5.4 4.9 4.6
Fiscal loan funds 8.0 2.5 0.2 0.1 0.1 0.5 0.1 0.3 0.0 0.0
Bank of Japan 12.2 8.5 8.9 9.0 9.7 13.2 20.2 26.5 33.9 39.1
Banks 40.8 43.0 47.4 46.2 45.8 42.4 36.4 31.4 25.6 21.3
Postal savings funds/
17.2 19.5 18.8 16.7 15.8 14.3 12.7 10.3 7.7 6.8
Japan Post Bank
Life, nonlife, and other
15.6 16.6 18.5 18.4 19.2 19.9 19.5 19.2 19.7 19.3
insurance companies
Postal insurance/
7.9 8.6 8.1 7.3 6.5 5.8 5.3 4.6 4.1 4.0
Japan Post Insurance
Pension funds 3.1 3.4 3.4 3.2 3.2 3.4 3.5 3.3 3.2 2.9
Overseas 4.4 7.4 5.6 7.1 8.3 8.5 8.2 9.4 10.2 10.5
Households 3.7 4.5 4.1 3.6 3.0 2.5 2.1 1.6 1.3 1.2
Others 0.8 0.8 1.2 1.4 1.6 1.1 1.4 1.0 0.9 0.9

Notes: 1. Figures for the end of fiscal 2016 are preliminary figures.
2. Banks include securities investment trusts and securities companies.
3. Others are composed of nonfinancial corporations and private nonprofit institu-
tions serving households.
4. Previous to fiscal 2007, figures included short-term discount bills (TB) and fi-
nancing bills (FB), while treasury bills (T-Bill) have been included since fiscal
2008. As of February 2009, TB and FB were integrated into T-Bills.
5. Figures are based on a retroactive revision made on June 29, 2015.
Source: Compiled from Saimu kanri ripoto 2015 (Debt Management Report 2015) pub-
lished by the Ministry of Finance and the Flow of Funds Account data published
on the web site of the Bank of Japan.

and in curbing increases in the balance of outstanding public bonds in the

second half of the 1980s. After the 1990s, however, the dependency on defi-
cit financing rose sharply due to a contraction of tax revenues caused by a
prolonged recession and the implementation of a series of economic stimulus
packages. After exceeding 50% in 2009, the public bond dependency ratio
has been on a moderate decline. Meanwhile, the balance of outstanding pub-
lic securities is expected to continue increasing and reach approximately
¥865 trillion at the end of fiscal 2017.
　Looking at the ownership structure of Japanese government bonds (JGB)
8　Chap. I The Securities Market and the National Economy

as shown in Table I-3, the ownership of private financial institutions, includ-

ing Japan Post Bank and Japan Post Insurance, has been declining since fis-
cal 2012. This change is primarily due to the bold quantitative and qualitative
monetary easing measures introduced by the Bank of Japan in April 2013.
Meanwhile, the Bank of Japan considerably increased its percentage of own-
ership and has become the highest investor, surpassing the banks. Public pen-
sion funds that used to be stable investors premising their investments on
long-term ownership are lowering their percentage of investment in domestic
bonds given that the Government Pension Investment Fund (GPIF) made a
major change to its distribution of investment assets in October 2014. As a
result, the percentage held by public pension funds dropped as low as 4.6%
at the end of 2016. The ownership of overseas investors has been on a gradu-
al increase after a period of growth in demand for JGBs as safe assets in light
of the sovereign debt crisis in Europe that occurred in 2010 and the percent-
age reached 10.5% at the end of 2016. On the contrary, the percentage own-
ership of Japanese households started to fall after fiscal 2008.

4. Financial Assets Held by the Household Sector

The household sector of Japan has consistently run a surplus (over-saving).

Although the ratio of nominal household surpluses to the nominal gross do-
mestic product (GDP) dropped to about 4% in fiscal 2016 after hitting a peak
in the mid-1990s, pro-longed over-saving coupled with a rise in stock prices
has brought about a huge accumulation of households’financial assets, stand-
ing at approximately ¥1,830 trillion as of the end of June 2017.
　A survey of changes that have occurred in the management of financial as-
sets of the household sector found the following three characteristics. First,
while the component ratio of cash and demand deposits has been rising, time
deposits, which used to carry the largest weight within financial assets, has
tended to decrease since the 1980s. This tendency of the component ratio is
mainly due to the low interest rate policy and the quantitative and qualitative
monetary easing measures adopted by the Bank of Japan. Second, the ratios
of insurance and annuities rose almost consistently through to the end of fis-
cal 2000 and have since remained stable. This trend likely reflects that Japan
has already become an aging society. Third, the weight of securities in house-
hold financial assets, particularly for stocks, has been declining considerably
the financial crisis to the rapid slump in stock prices following the sluggish
stock market since the bursting of the Japanese economic bubble in the 1990s
and the Lehman Shock (term used in Japan for the global financial crisis) in
2008. However, the weight of securities recovered on the back of a recovery
of the stock market after the end of 2012 and reached 11.1% at the end of fis-
 Chap. I The Securities Market and the National Economy 　9
Table I-4.　Percentage Composition of Financial Assets of Individuals

(at fiscal year-end)

1980 1985 1990 1995 2000 2005 2010 2016
Cash and demand deposits 9.8 7.7 7.2 8.2 11.6 21.0 23.6 26.2
Time deposits 48.7 44.9 40.2 41.9 42.5 29.7 31.6 25.4
Trusts 4.5 4.0 3.7 3.4 1.5 0.4 0.2 0.2
Insurance funds 13.4 16.3 20.8 25.4 27.2 25.8 28.4 28.7
Investment trusts 1.2 2.3 3.4 2.3 2.4 3.4 3.6 5.4
Securities 16.1 19.7 19.6 13.9 9.7 15.3 8.6 11.1
　(equity shares) 13.2 16.0 16.9 11.5 7.7 13.0 6.2 10.1
　(debt securities) 2.8 3.7 2.6 2.5 2.0 2.3 2.4 1.0
Others 6.3 5.2 5.2 4.9 5.1 4.4 4.1 3.0
Total amount 372.0 626.8 1,017.5 1,256.5 1,388.8 1,516.6 1,480.6 1,808.0

Notes: 1. Composition in percentages and totals in trillions of yen.

2. Time and savings deposits include negotiable and foreign-currency deposits.
3. Figures in parentheses are a breakdown of securities, and equity shares include equity subscrip-
tions.
4. Equity shares are based on market prices.
Source: Compiled from the Flow of Funds Accounts data published on the web site of the Bank of Japan.

Table I-5.　Comparison of Japanese and U.S. Household

Assets Composition (as of March 31, 2017)

Japan United States

Cash and demand deposits 51.5% 13.4%
Bonds 1.4% 5.6%
Investment Trusts 5.4% 11.0%
Securities and equity
10.0% 35.8%
subscriptions
Insurance funds 28.8% 31.2%
Others 2.9% 2.9%

Note: U.S. household assets include non-profit making institutions

providing services to households.
Source: Compiled from the Bank of Japan’ s“Comparison of the
flow of funds between Japan and the United States”(Au-
gust 18, 2017).
10　Chap. I The Securities Market and the National Economy

cal 2016.
　A comparison of household investment in financial assets between Japan
and the United States (including, in the case of the latter, those of nonprofit-
making institutions providing services to households) as of the end of March
2017 still shows a large difference in the preference of investors for types of
assets. While Japanese households invest 80.3% of their funds in cash depos-
its, insurance funds, and pension funds and 16.8% of their funds in securities
(including investment trusts), their American counterparts invest 44.6% of
their funds in the former and 52.4% in the latter. While it is necessary to take
the social security systems, retail loan services, and other differences be-
tween the two countries into account, these figures suggest that while Japa-
nese households prefer assets that guarantee principal, their American coun-
terparts choose investment performance.
　However, the defined contribution pension plan introduced in 2001 and the
Nippon Individual Saving Account (NISA), a small-amount investment tax
exemption scheme, launched in January 2014 have been steadily gaining
popularity. In addition, the individual-type defined-contribution pension plan
(iDeCo) was revised in January 2017 to widen its eligibility, and an install-
ment-type NISA plan will be launched in January 2018. Hence, a stronger di-
rect link has been forged between households and the securities market. Fur-
thermore, a broader range of investment trusts and exchange traded funds
(ETF) among other factors are increasing the options for household invest-
ment in financial assets. Going forward, this sector will call for an improve-
ment in the quality of retail sales operations and greater dissemination and
understanding of financial knowledge among Japanese households.

5. Investment Behavior of Foreigners (Inbound Securities Investment)

Over a period of years after the war, international financial and capital trans-
actions were banned, in principle. However, since the Foreign Exchange and
Foreign Trade Act was amended in December 1980 (the new Foreign Ex-
change and Foreign Trade Act), the system of licensing international finan-
cial and capital transactions was changed to a prior reporting system, making
them free in principle. Furthermore, by virtue of an amendment to the new
Foreign Exchange and Foreign Trade Act in April 1998 (one the main re-
forms under what was locally called“the Japanese version of the Big Bang” ),
the prior reporting system of currency transactions was abolished, completely
liberalizing direct financial transactions with overseas customers.
　A survey of inbound investments in securities made by foreign investors in
recent years shows that they have consistently net bought Japanese stocks ex-
cept for sell-offs in the markets that occurred in 2000 and 2002 after the
 Chap. I The Securities Market and the National Economy 　11
Table I-6.　Investment (on a settlement basis)

(¥100 million)
Calendar Equity Securities Debt Securities (excluding bills)
Net balance
year Bought Sold Net Bought Sold Net
2000 835,593 837,932 －2,339 571,013 470,246 100,767 98,429
2001 779,015 741,061 37,954 522,905 504,878 18,027 55,981
2002 644,372 657,039 －12,667 582,775 618,928 －36,153 －48,819
2003 790,641 692,870 97,771 619,163 641,269 －22,106 75,666
2004 1,161,630 1,056,357 105,273 727,773 683,161 44,612 149,885
2005 1,675,176 1,548,934 126,241 873,775 811,451 62,324 188,565
2006 2,671,452 2,590,472 80,981 1,035,501 970,532 64,969 145,950
2007 3,371,648 3,330,228 41,419 1,123,120 1,023,179 99,941 141,360
2008 2,640,366 2,714,152 －73,786 895,747 933,021 －37,274 －111,060
2009 1,453,977 1,453,694 283 504,203 574,104 －69,900 －69,617
2010 1,736,099 1,717,710 18,389 695,100 688,976 6,125 24,513
2011 1,974,084 1,971,556 2,528 884,363 838,985 45,379 47,906
2012 1,867,789 1,846,517 21,272 811,683 790,007 21,676 42,948
2013 3,942,020 3,783,603 158,416 838,677 873,965 －35,288 123,128
2014 4,115,951 4,089,468 26,483 762,694 676,154 86,540 113,022
2015 5,231,108 5,228,502 2,606 802,426 727,168 75,258 77,865
2016 4,955,097 5,011,755 －56,658 965,053 921,289 43,764 －12,894

Note: Up to 2004, figures were compiled based on“Changes in In-and Out-Bound Securities Investment
(on a settlement basis).”Since 2005 and thereon, figures have been compiled based on“Interna-
tional Transactions in Securities (based on reports from designated major investors).”
Source: Compiled from materials listed on the web site of the Ministry of Finance.

bursting of the dot-com bubble. However, foreign investors reversed direc-

tion in 2008 after the Lehman Shock, becoming net sellers. Furthermore, the
volumes of stocks bought and sold by foreign investors have increased sharp-
ly since 1999, with the result that the difference between the two has fluctu-
ated widely. Particularly since 2012, the trading of Japanese stocks by for-
eign investors has become increasingly active against the backdrop of surging
prices on the stock market. It is apparent that foreign investors also have con-
sistently net bought Japanese debt securities (both bonds and notes). There
has been net selling of debt securities by foreign investors in some years, but
these temporary reversals involved selling to cover arbitrage positions. This
situation happened in 1999 after the abolition of securities transaction taxes,
during the depreciation of the yen in 2002 and 2003 and during the financial
12　Chap. I The Securities Market and the National Economy

Table I-7.　Balance of Inbound Investment and Related Indicators

Year-end Stocks (¥b) Bonds (¥b) TOPIX Interest rate (%) ¥/$ (¥)
2000 63,222 (30.4) 32,981 (15.8) 1,283.67 1.640 114.90
2001 49,563 (24.7) 33,546 (16.7) 1,032.14 1.365 131.47
2002 40,757 (21.4) 27,799 (14.6) 843.29 0.900 119.37
2003 60,085 (28.2) 27,108 (12.7) 1,043.69 1.360 106.97
2004 77,393 (31.2) 33,846 (13.6) 1,149.63 1.435 103.78
2005 132,842 (40.8) 41,428 (12.7) 1,649.76 1.470 117.48
2006 149,277 (43.5) 49,579 (14.5) 1,681.07 1.675 118.92
2007 142,031 (39.4) 60,203 (16.7) 1,475.68 1.500 113.12
2008 68,625 (23.4) 50,650 (17.3) 859.24 1.165 90.28
2009 76,372 (26.6) 42,236 (14.7) 907.59 1.285 92.13
2010 80,537 (26.4) 42,877 (14.0) 898.80 1.110 81.51
2011 65,841 (20.7) 45,730 (14.4) 728.61 0.980 77.57
2012 83,556 (23.2) 49,504 (13.8) 859.80 0.795 86.32
2013 152,323 (32.3) 50,168 (10.6) 1,302.29 0.740 105.37
2014 169,144 (29.2) 64,592 (11.2) 1,407.51 0.320 119.8
2015 186,919 (30.7) 72,623 (11.9) 1,547.30 0.265 120.42
2016 181,530 (28.0) 83,001 (12.8) 1,518.61 0.040 117.11

Notes: 1. Bonds include only long-term debt securities.

2. Figures given in parentheses are component ratios (%) to the total debts to overseas lenders.
3. Interest rate signifies the yield on 10-year government bonds newly issued and distributed on
the secondary market.
4. ¥/$ represents the closing spot rates on the Tokyo market.
Source: Compiled based on the data released by the Ministry of Finance and the Bank of Japan.

turmoil in 2008 and 2009. Net selling was also evident in 2013 due to the
quantitative and qualitative monetary easing measures introduced by the
Bank of Japan among other factors, but the level of trading was high. As was
the case with stocks, the bond transaction level has stepped up since 1999,
with the result that the difference between purchases and sales has fluctuated
substantially. This trend may be explained by active arbitrage trading by for-
eign hedge funds in addition to the expanded market for medium-term gov-
ernment notes (with a maturity of two to five years) and other infrastructural
factors.
　Looking at the trend in stocks (debt), although the balance turned upward
again in 2003 due to a recovery in stock prices, increasing to approximately
¥149 trillion at the end of 2006, by 2010 it had dropped to about ¥81 trillion
because of the Lehman Shock. Subsequently, with the recovery of the stock
 Chap. I The Securities Market and the National Economy 　13
Table I-8.　Percentages of Japanese Stocks and Bonds Held by Investors
of Different Regions

(in percentages)
Year-end United States Europe Asia Others
Equity securities
2006 41.5 50.3 2.0 6.2
2007 44.2 45.1 3.1 7.6
2008 49.8 37.6 3.6 9.0
2009 53.9 36.5 1.7 7.9
2010 46.6 36.0 7.7 9.7
2011 46.0 35.5 8.9 9.6
2012 44.3 37.2 8.4 10.1
2013 45.7 37.9 5.8 10.6
2014 47.4 36.9 5.4 10.3
2015 49.1 36.0 5.7 9.2
2016 49.9 34.9 6.2 9.0
Debt securities (bonds and notes)
2006 12.7 59.7 14.2 13.4
2007 12.5 60.7 13.9 12.9
2008 13.2 53.0 15.4 18.4
2009 16.4 47.5 19.4 16.7
2010 14.9 43.1 21.8 20.2
2011 14.2 42.0 24.1 19.7
2012 14.6 39.8 25.0 20.6
2013 18.0 40.0 20.4 21.6
2014 21.9 33.7 21.6 22.8
2015 22.6 40.0 19.3 18.1
2016 20.2 40.4 22.3 17.1

Note: The figures for Europe include Eastern European nations and Russia.
Source: Compiled on the basis of data from the Bank of Japan.

market, the balance increased to as high as ¥182 trillion at the end of 2016.
The balance of domestic debt securities held by overseas investors, long- and
medium-term bonds and notes combined, also increased steadily to a total of
approximately ¥83 trillion at the end of 2016. Next, in terms of regional
breakdown for stocks, the share of American investors has remained at a high
level while the downward trend in the share of European investors has come
14　Chap. I The Securities Market and the National Economy

to a halt. Meanwhile, for debt securities, unlike in the case of stocks, Europe-
an investors still hold close to 40% of the total despite a downward trend,
while American investors’share is around 20%. On the other hand, there re-
cently has been notable growth in the share of domestic debt securities held
by Asian investors, which accounted for 22% at the end of 2016, following
right behind European investors.

6. Advancing FinTech

Financial technology, referred to as FinTech, produces innovative financial

services that fuse“finance”and information and communication“technolo-
gy.”With the advancement in IT and the penetration of information infra-
structure, FinTech is gaining ground also in Japan. There is a wide range of
FinTech-based financial services, including virtual currencies and new settle-
ment services via smartphones. Financial services that are categorized under
FinTech can be recognized also in relation to securities trading. The feature
common to these services is that a huge volume of data is processed in an op-
timal manner at low cost and in a short timeframe.
　Let’ s look at some primary examples of securities trading services in
which FinTech is applied. Automatic trading of stocks and JGBs using an al-
gorithm is already widely used also in Japan. Recently, algorithm trading
which incorporates projections made by artificial intelligence (AI) has been
spreading as well. AI is used not only for asset management but also in robo-
advisors primarily for individual investors. Several vendors already offer ser-
vices where AI performs customer profiling online as well as presents the in-
vestment policy and the optimal portfolio.
　Meanwhile, crowdfunding is a new financing method that developed par-
ticularly in the U.S. There are several types of crowdfunding, such as re-
wards-based and donation. In equity crowdfunding, small amounts of funds
are collected from a large number of investors online through the offering of
unlisted stocks or handling of private placements. This act of investing in eq-
uity crowdfunding is subject to regulation of the Financial Instruments and
Exchange Act and the related operations are subject to self-regulation of the
Japan Securities Dealers Association. Furthermore, block chain technology is
being adopted on a trial basis in certain types of transactions, for example,
unlisted stock trading and equity transactions with a low trading frequency
on stock exchanges.
　Given such rapid advancement of FinTech, financial and securities authori-
ties are taking new initiatives to adapt to this trend. The Financial Services
Agency (FSA) implemented a coordinated action by establishing the Work-
ing Group on the Financial System of the Financial System Council and
 Chap. I The Securities Market and the National Economy 　15
Chart I-3.　Japan’
s Framework Regarding FinTech

Payment Services Act

Prepaid card (Electronic money, etc.)

Banking Act
[Registration]

Bank
[License] Funds transfer services
(Remittance services, etc.)
[Registration]

Settlement
services Cooperation by the API, etc. Installment Sales Act
Financial management services
Credit card
Settlement services [Registration]

Upgrades in settlement by XML message

Financial efficiency of individual companies

Accounting services

Money Lending Business Act

Loan
services Money lenders [Registration]

P2P
lending
Financial Instruments and Exchange Act

Investment Securities company Investment management business

and [Registration] [Registration]
management
services
Robo advisor Crowdfunding

Payment Services Act

Virtual
➡ Tax reform requests
currency Virtual currency exchange service providers
[Registration]

Source: Materials released by the Financial Services Agency.

16　Chap. I The Securities Market and the National Economy

opening the FinTech Support Desk. The FSA also initiated a process to revise
its organization (Chapter XVII, Section 3). On the legislative side, the Bank-
ing Act and others were revised in 2016, making it easier for the banks to
make investments into financial-related IT firms under the Banking Act, etc.,
as well as introducing regulations on the virtual currency exchange business.
Furthermore, the revised Banking Act enacted in 2017 requires financial in-
stitutions to make an effort to establish a structure that allows access to their
systems through open APIs and put in place a framework for enabling Fin-
Tech businesses to safely access account information and transaction data.
 CHAPTER II

The History of the Japanese Securities Market

1. The Securities Market in the Prewar Period

If we take the point of origin of Japan’ s securities market to be the first issu-
ance of securities, it occurred in 1870 with the issue of a foreign currency de-
nominated government bond bearing 9% interest in London, England. If we
consider the birth of a secondary market based on a legal ordinance, it hap-
pened in 1878 with the establishment of stock exchanges in Tokyo and Osa-
ka. Whichever definition is used, Japan’ s securities market has been in exis-
tence for about 140 years. The stock exchanges started off as markets for
trading in public debt, such as old and new public bonds and Chitsuroku
bonds. Although the stocks of the exchanges and of banks were later listed,
public debt accounted for most of the trading for some time. Around 1886,
there was a period of rapidly emerging mainly railway and textile companies
that ushered in more active trading in stocks.
　The formation of corporations (kabushiki kaisha) in Japan was not related
to the huge capital investments that are required to develop the heavy chemi-
cal industry. Instead, the corporation was introduced to deal with the low lev-
el of capital accumulation in the economy. In conjunction with that action,
schemes were established to facilitate the paying in of capital, such as the
stock installment payment system and stock collateral loans. As a result, the
corporations set up in the Meiji era were mostly small companies primarily
involved in light industry and they really could be considered corporations in
name only in terms of their generally intended function of raising capital.
The turning point for that function in Japan came with the shift in the compo-
sition of industry toward the heavy industry prompted by World War I. Only
then did the country see a sharp increase in large albeit mainly financial com-
bine (zaibatsu)-related companies with paid-in capital exceeding ¥5 million.
　There were practically no shares of major companies listed on stock ex-
changes in the secondary market because the zaibatsu held exclusive owner-
ship of their group companies. And as a result of the lack of investment capi-
tal and inadequate credit provision by banks before World War II, the
secondary market developed mainly around future trading called settlement
18　Chap. II The History of the Japanese Securities Market

Chart II-1.　Changes in Stock Prices (Long-term margin transactions) (1878－1920)

(¥)
900
High
Low
600

300

0
1878 1882 1886 1890 1894 1898 1902 1906 1910 1914 1918

Source: Complied from Tokyo shoken torihikisho no nijyunen shi-kisoku to tokei (A 20-year
History of the Tokyo Stock Exchange-Regulations and Statistics).

Chart II-2.　Stock Price Movement (Major Stock Price Index) (1921－1944)

(¥)
250

200

150

100

50

0
1/1921 1/1925 1/1929 1/1933 1/1937 1/1941

Source: Complied from Tokyo shoken torihikisho tokei nenpo (Tokyo Stock Exchange Annual
Statistics Reports) and nisho tokei geppo (Japan Securities Exchange Monthly Statistics
Reports).

dealings and margin transactions. Even the main trading issues of exchanges’
stocks were subject to speculative investment. For that reason, the prewar
stock market can be characterized as being speculative. Another characteris-
tic that can be pointed out in retrospect is the imposition of wartime regula-
tions. Following the Showa depression, the government sought to achieve
economic recovery by devaluing the currency to promote exports and by cre-
ating inflation through expansive government spending, principally on the
military. After the outbreak of the Sino-Japanese War, the government imple-
mented a wartime regime and imposed regulations on the securities market.
The government restricted the issuance of securities for nonessential indus-
 Chap. II The History of the Japanese Securities Market　19
Table II-1.　Issues Listed on the Tokyo Stock Exchange

(as of end of 1878)

Bonds: New and old public bonds, Chitsuroku public bonds, Kinroku public, bonds, Ki-
gyo public bonds
Stocks: Tokyo Stock Exchange, Daiichi National Bank, Tokyo Kabutocho Rice Mer-
chant Association, and Tokyo Kakigara-cho Rice Merchant Association

Source: Complied from Tokyo shoken torihikisho no gojyunen shi (A 50-year History of the Tokyo Stock
Exchange).

Table II-2.　Number of Issues Listed on the Japan Securities Exchange, by Industry

(as of May 31, 1945)

Subscription certificates, 2; banks, trust companies, and insurance companies, 64; in-
vestment companies, colonization companies, and securities companies, 28; stock ex-
changes, 2; railroad and electric railroad companies, 62; transportation and communica-
tion companies, 28; gas and electric utilities, 43; mining companies, 86; shipbuilding
and machinery companies, 232; steel companies, metal companies, and smelting com-
panies, 81; textile industrial companies, 58; sugar manufacturing and milling compa-
nies, 18; food processing companies and fisheries companies, 29; chemical companies,
65; ceramics companies, 25; paper and pulp, printing, and tanning companies, 26; other
industrial companies, 31, rubber and tobacco companies, 23; land, building, and ware-
housing companies, 17; commercial companies, 46

Source: Japan Securities Exchange.

tries, instituted planned corporate bond issuance, put controls on stock prices,
and introduced a licensing system for securities companies. Japan’ s 11 stock
exchanges, furthermore, were merged into the Japan Securities Exchange in
1943.

2. The Period of Postwar Economic Rehabilitation (1945−54)

After the war, Japan was placed under the control of the general headquarters
(GHQ) of the supreme commander for the Allied powers. There was immedi-
ate movement within Japan’ s securities industry to reopen the market. At one
point, in fact, the Ministry of Finance decided to restart the stock exchanges
on October 1, 1945. However, the GHQ did not approve of this, and the mar-
ket was not reopened. The securities industry continued to enthusiastically
lobby for a restart of market operations, but the GHQ rejected the idea as
20　Chap. II The History of the Japanese Securities Market

Chart II-3.　Stock Price Movements

(¥)
480

380

280
High
180 Low

80
1949 50 51 52 53 54

Source: Compiled from Nomura Securities’ Shoken tokei yoran (Manual of Securities
Statistics).

Table II-3.　Number of Members and Listings of Each Exchange at Establishment

No. of members
Establishment (at the time the fund Listings
was established)
116 official members,
Tokyo Stock Exchange May 16, 1949 681
12 specialists
76 official members,
Osaka Securities Exchange May 16, 1949 523
11 specialists
50 official members,
Nagoya Stock Exchange May 16, 1949 268
8 specialists
Kyoto Stock Exchange July 4, 1949 41 members 217
Kobe Stock Exchange July 4, 1949 34 members 189
Hiroshima Stock Exchange July 4, 1949 28 members 119
Fukuoka Stock Exchange July 4, 1949 29 members 181
Niigata Stock Exchange July 4, 1949 24 members 176
Sapporo Securities Exchange April 1, 1950 17 members 103

Source: Complied from shoken torihiki iinkai hokokusho (a Securities and Exchange Commission Re-
port).

premature and instead gave priority to economic reforms (land reform, dis-
mantling of the zaibatsu, and labor reform) and political and social reforms.
Consequently, it took nearly four years to reopen the stock exchanges, during
which time the Japan Securities Exchange remained closed. This has been
the only blank period in the operation of exchanges in the history of the secu-
rities market in Japan.
 Chap. II The History of the Japanese Securities Market 　21
Table II-4.　Member Securities Companies at the Establishment of Tokyo Stock Exchange
(April 1, 1949)

Nikko Securities, Tamazuka Securities, Yamaichi Securities, Yachiyo Securities, Taguchi Securities,
Maruhiro Securities, Nitto Securities, Yamazaki Securities, Kaneju Securities, Irimaru Securities,
Yamayoshi Securities, Aizawa Securities, Kokusai Heiwa Securities, Marusui Securities,
Toyama Securities, Meiwa Securities, Sekitani Securities, Daiwa Securities, Sekito Securities,
Shinko Securities, Nomura Securities, Matsuya Securities, Tokuda Securities, Sanko Securities,
Yamaka Securities, Kanaman Securities, Bokutoku Securities, Naruse Securities, Daifuku Securities,
Rokushika Securities, Daito Securities, Oda Securities, Tokyo Daiichi Securities, Ninomiya Securities,
Yamakanou Securities, Osawa Securities, Obuse Securities, Marusan Securities, Tabayashi Securities,
Kakumaru Securities, Koyanagi Securities, Tsukuba Securities, Chiyoda Securities,
Nippon Kangyo Securities, Tachibana Securities, Marusugi Securities, Mie Securities,
Haratada Securities, Maruya Securities, Fukuyama Securities, Irinaka Securities, Ikko Securities,
Rokko Securities, Nippon Sangyo Securities, Toyo Securities, Totan Securities, Toko Securities,
Tokyo Showa Securities, Tokyo Shinei Securities, Tokyo Jiyu Securities, Chugai Securities,
Marukuni Securities, Ikanagashira Securities, Kaga Securities, Kadoman Securities,
Yoshikawa Securities, Yoshimura Securities, Taihei Securities, Taiyo Securities, Tanaka Securities,
Takai Securities, Taishichi Securities, Taisei Securities, Naigai Securities, Nakahara Securities,
Nakajima Securities, Hachisu Securities, Ueno Securities, Ono Securities, Osaka Shoji, Oda Securities,
Yamani Securities, Yamawa Securities, Fukuri Securities, Yamamaru Securities, Yamafumi Securities,
Yamasachi Securities, Yamasan Securities, Marutoyo Securities, Maruwa Securities,
Marusan Securities, Maruju Securities, Matsui Securities, Fuso Securities, Koiei Securities,
Ebisu Securities, Ando Securities, Yamata Securities, Sanshin Securities, Sansei Securities,
Sakai Securities, Kyowa Securities, Kyodo Securities, Misawaya Securities, Miki Securities,
Shimizu Securities, Shinei Securities, Jujiya Securities, Juzen Securities, Joichi Securities,
Jonan Securities, Hinode Securities, Hiyama Securities, Hirahara Securities, Central Securities,
Marugo Securities
Specialists: Daiichi to Daijuni Jitsuei Securities

Source: Compiled from Tokyo shoken torihikisho no jyunen shi (A 10-year History of the Tokyo Stock
Exchange).

　Despite trading being halted on the floors of the stock exchanges and offi-
cial secondary market, the demand for securities trading persisted even in the
confusion of postwar Japan. Securities trading naturally emerged at the offic-
es of securities companies in the form of over-the-counter (OTC) trading.
When it became clear, moreover, that the stock exchanges were not going to
restart anytime soon,“group transactions,”which involved institutionalized
OTC trading at fixed places and times in parallel with the OTC trading at in-
dividual securities companies, also got under way. By the end of 1945, group
transactions, which first emerged in Tokyo and Osaka, had spread to ex-
changes in Nagoya, Niigata, Kyoto, Kobe, Hiroshima, and Fukuoka, among
others.
　It would, of course, have been difficult to reopen the stock exchanges
merely by continuing the prewar exchange organization and securities legis-
lation. To democratize the securities industry, the Japanese government com-
menced the formulation of a new legal framework. In 1947, it promulgated
22　Chap. II The History of the Japanese Securities Market

the Securities and Exchange Law, which drew on the Securities and Ex-
change Act of the United States. Initially, only those articles of the law deal-
ing with the Securities and Exchange Commission, which was patterned after
the U.S. Securities and Exchange Commission (SEC), were enforced. Then a
full-scale revision of the law was promulgated in 1948. This amended law
formed the legal framework for the new postwar securities market, replacing
the licensing system for securities companies with a system of registration
with the regulatory authority and putting in place such regulations as the sep-
aration of banking and securities businesses.
　Stock exchanges were established in Tokyo, Osaka, Nagoya, and other cit-
ies from May 1949. The GHQ, however, instructed Japan’ s Securities and
Exchange Commission to ensure the strict observance of its Three Principles
of Market Operation: (1) recognize transactions in order of occurrence, (2)
concentrate trading on exchanges, and (3) prohibit futures trading. All ex-
changes pledged to strictly follow these principles, enabling the long-awaited
reopening of stock exchanges (participants in group transactions and the is-
sues they had traded moved en masse to these stock exchanges and restarted
trading on a cash transaction basis only). Because, however, it was difficult
to match buys and sells based only on actual demand, a movement got under
way in the industry to push for the revival of prewar margin transactions for
the purpose of introducing temporary demand. Since the management of the
exchanges and the GHQ were against this proposal, a margin trading system
modeled on the U.S. margin trading system was introduced in 1951.

3. The Securities Market during the First Period of Rapid Economic

Growth (1955−64)

As made clear in the title of an economic white paper issued in 1956, The
Post-War Period Is Over, in the first half of the 1950s Japan had finished with
its postwar recovery and was heading into its first period of rapid economic
growth. Japan’ s Jinmu and Iwato booms in the mid-1950s and from 1958 to
1961, respectively, were representative of the change. Against a backdrop of
favorable growth in corporate performances, stock prices rose almost univer-
sally during the period from the latter half of 1955 to July 1961. An invest-
ment trust boom at the time also contributed to the rising securities market.
　Japan had introduced a postwar securities investment trust system in 1951,
but the market for these investment trusts struggled until 1955. From 1956
on, however, stock prices surged, and the outstanding principal of investment
trusts expanded sharply. Investment trusts became such a force in the securi-
ties market that they were referred to as“the whale in the pond.”Another
factor in the bull market was the system of“investable custody.”Under that
 Chap. II The History of the Japanese Securities Market 　23
Chart II-4.　Stock Price Movements (TSE’
s Modified Stock Price Average) (1955－1964)

(¥)
1,840

1,540

1,240

940
High
640 Low

340
1955 56 57 58 59 60 61 62 63 64

Source: Compiled from Nomura Securities’ Shoken tokei yoran (Manual of Securities
Statistics).

Table II-5.　Changes in Assets of Stock Investment Trusts and Bond Investment Trusts
(Principal basis)

(millions of yen)
Stock Investment Trusts Bond Investment Trusts
Net asset Net asset
Cancella- Redemp- Cancella- Redemp-
Sales Year-end change Sales Year-end change
tion tion tion tion
(A) Principal (D=A– (A) Principal (D=A–
(B) (C) (B) (C)
(B+C)) (B+C))
1955 26,381 31,792 13,640 59,519 －19,051
1956 51,431 27,163 16,039 67,748 8,229
1957 92,544 16,178 7,199 136,915 69,166
1958 106,412 25,741 7,890 209,695 72,780
1959 182,480 58,876 3,219 330,081 120,385
1960 362,066 87,945 － 604,202 274,120
1961 588,205 155,751 9,810 1,026,845 422,643 244,490 88,470 － 156,020 156,020
1962 347,116 229,174 14,161 1,130,627 103,781 83,819 107,160 － 132,679 －23,341
1963 331,873 274,226 17,884 1,170,388 39,761 109,857 71,021 － 171,515 38,836
1964 330,158 293,573 45,415 1,161,558 －8,829 122,332 84,811 － 209,036 37,521
1965 196,829 349,502 42,556 966,328 －195,229 120,665 110,132 － 219,569 10,533

Source: Compiled from Shokenshintaku sanjyunen shi (30-year History of Securities Investment Trusts).
24　Chap. II The History of the Japanese Securities Market

Table II-6.　Categories of Investible Custody Securities and Investment Uses

(millions of yen)
Category Investment Area
Total Assets Special debt
Under Corporate Deposited
Of above, Others
Management bonds collateral
bank
debentures
Sept. 1958 62,701 61,984 61,384 568 53,812 5,283
Sept. 1959 108,347 107,602 105,381 673 88,793 19,420
Sept. 1960 146,076 144,875 141,666 969 116,061 30,015
Sept. 1961 139,833 138,552 134,794 1,239 116,988 22,845
Sept. 1962 154,284 152,127 143,946 2,005 129,030 25,254
Sept. 1963 209,197 205,337 196,967 3,386 156,319 52,877
Sept. 1964 249,079 244,685 235,557 3,714 195,891 53,189

Source: The Securities Bureau of the Ministry of Finance, Nenpo (Annual Report).

system, securities companies borrowed bank debentures (primarily discount

bank debentures) that they had sold in the market on a commission basis
from unspecified multiple customers for a predetermined fee through a cus-
tody system. The securities companies then raised capital from small and
medium-sized financial institutions or in the call money market by using the
bank debentures as collateral and invested it in stocks or bonds through their
own proprietary trading accounts. In this manner, against the backdrop of an
expanding economy and bullish securities market, OTC trading value rose
sharply, and the number of companies approved to sell their securities OTC
grew rapidly, concentrated mainly on start-up and growth companies. To deal
with the rapid expansion in the OTC market, the Tokyo, Osaka, and Nagoya
stock exchanges each established Second Sections.
　Japan, though, was striving to balance its current account, and when the
balance of payments fell into the red it tightened the money supply. When the
interest rate was raised in July 1961 to improve the balance of international
payments, Japanese companies began liquidating their stockholdings. In
combination with corporations’focus on increasing capital, this trend caused
a worsening in the demand-supply balance for stocks. The resultant drop in
stock prices forced an end to the investment trust boom, as the mechanism
that had been driving up stock prices reversed and caused further declines in
stock prices. The increase in the official discount rate also produced a rise in
the number of redemptions of bond investment trusts, especially by compa-
nies. This action placed a great financial burden on the securities companies,
 　25
Chap. II The History of the Japanese Securities Market

which were forced to buy bonds that were being removed from the pool of
investment trust assets. These factors became a cause of panic in the securi-
ties market.
　For that reason, the market took such steps as urging business corporations
to rearrange their financing plans (cutting back or postponing their planned
increase of capital) and persuading commercial banks to make loans secured
by bonds to four bond investment trusts. Despite these efforts, stock prices
kept declining, partially because of the market reaction to the assassination of
U.S. President Kennedy. To deal with the issues, the industry formed stock
purchasing organizations. In January 1964, banks and securities companies
contributed capital to create the Japan Joint Securities Co., Ltd., while in Jan-
uary 1965 a group of securities companies jointly established the Japan Secu-
rities Holding Association. Both of these organizations carried out share pur-
chasing operations in the market and assumed ownership of shares held by
investment trusts with the aim of improving the demand and supply balance
in the stock market. In the latter part of May 1965, however, the news that
Yamaichi Securities Co., Ltd., was on the verge of bankruptcy hit the market,
plunging it into a state of panic.

4. The Securities Market during the Second Period of Rapid Economic

Growth (1965−74)

The curtain opened on the 10-year period from 1965 onward with a securities
panic. At the end of the first half of fiscal 1964 (September 30, 1964), the cu-
mulative earnings of securities companies in Japan amounted to a loss of
¥26.4 billion. And Yamaichi Securities’performance had deteriorated partic-
ularly badly; by March 31, 1965, the company had racked up a loss of ¥28.2
billion, compared with total capital of only ¥8 billion. On May 21, 1965, it
finally was revealed that Yamaichi Securities was on the brink of failure. To
avoid a loss of confidence in the market, a move was made to bail the com-
pany out. In the late night on May 28, the government invoked Article 25 of
the Bank of Japan Act and announced that Yamaichi Securities would receive
a special loan from the Bank of Japan without any required collateral and for
an unlimited amount (in actual fact some collateral was secured). Stock pric-
es continued to fall for some time following the announcement but staged a
rally when the government made clear that it intended to issue deficit-cover-
ing bonds for the first time since the war. Meanwhile, the panic in the securi-
ties market also served as the basis for a reorganization of the securities in-
dustry. The government amended the Securities and Exchange Act,
introducing a licensing system for securities companies. This forced many
securities companies to combine their operations, or merge, to prepare for the
26　Chap. II The History of the Japanese Securities Market

Chart II-5.　Stock Price Movement (TSE’

s Modified Average, Nikkei Dow, TOPIX)
(1965－1974)

(¥) High
5,400 Low
4,850
4,300
3,750
3,200 TSE’s Modified Stock Price Average, Nikkei Dow average
2,650
2,100
1,550
1,000
450
400
350
300
250
TOPIX
200
150
100
1965 66 67 68 69 70 71 72 73 74

Source: Compiled from data the Shoken tokei yoran (Manual of Securities Statistics), the Nihon
Keizai Shimbun, and the Tosho tokei nenpo (TSE Annual Report).

new system. In combination with the securities companies that had their reg-
istration revoked around the time of the securities panic and those that dis-
solved their operations, the number of securities companies at the time of the
conversion to the new licensing system declined to 277 companies, compared
with 593 companies at the end of 1963.
　During the decade from 1965 to 1974, progress was made in international-
izing Japan’ s securities market. In 1964, Japan become an Article 8 country
member of the International Monetary Fund (IMF), joined the Organization
for Economic Cooperation and Development (OECD), and publicly promised
to liberalize capital transactions. Consequently the government implemented
measures to liberalize the capital market in five stages beginning in July
1967. This process steadily eased the restrictions on ownership of Japanese
stock by foreigners, and they were finally fully lifted with the exception of
certain stock categories. The liberalization of capital transactions was not
limited to foreign investors; foreign issuers and intermediates were also able
to operate in Japan’ s securities market. In 1970, the Asian Development Bank
started issuing yen-denominated foreign bonds in Japan. Foreign corpora-
tions followed suit and began to offer their shares in 1972. The Tokyo Stock
Exchange established a Foreign Section for them in 1973. Around the same
time, foreign securities companies commenced setting up operations in Ja-
pan. Merrill Lynch opened a Tokyo branch in 1972, becoming the first for-
 　27
Chap. II The History of the Japanese Securities Market

Table II-7.　Changes in Number of Securities Companies

Changes in the number of Companies at Number of Per-Company
companies financial Business Total Capital Capital
year-end Offices (in ¥ mil.) (¥ mil.)
Increase Decrease
FY1948 959 11 948
1949 292 113 1,127 1,889 3,014 2.7
1950 18 209 936 1,601 3,454 3.7
1951 11 109 838 1,642 3,767 4.5
1952 71 73 836 1,794 6,683 8.0
1953 52 52 836 2,105 10,115 12.1
1954 11 83 764 1,997 10,713 14.0
1955 2 66 700 1,901 10,826 15.5
1956 7 55 652 1,848 12,022 18.4
1957 7 77 582 1,904 18,062 31.0
1958 7 32 557 1,984 19,569 35.1
1959 15 26 546 2,233 29,221 53.5
1960 36 30 552 2,565 39,094 70.8
1961 48 10 590 2,841 74,991 127.1
1962 23 12 601 2,934 78,114 130.0
1963 8 16 593 2,893 100,573 169.6
1964 0 82 511 2,424 126,118 246.8
1965 0 86 425 2,109 125,599 295.5
1966 2 30 397 2,009 118,632 298.8
1967 0 113 284 1,869 119,955 422.4
1968 0 7 277 1,572 119,904 432.9
Note: Figures for“Number of Business Offices”and“Capital”for the years preceding 1959 are as of the
end of the calendar year concerned.
Source: The Securities Bureau of the Ministry of Finance, Nenpo (Annnual Report).

Table II-8.　Changes in Stock Ownership Among Investor Categories

By Owner FY 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975
National and local government 0.3% 0.2% 0.3% 0.3% 0.3% 0.3% 0.2% 0.2% 0.2% 0.2% 0.2%
organizations
Financial institu- 26.8% 29.8% 30.6% 32.0% 31.9% 32.3% 33.9% 35.1% 35.1% 35.5% 36.0%
tions
Securities compa- 5.4% 5.4% 4.4% 2.1% 1.4% 1.2% 1.5% 1.8% 1.5% 1.3% 1.4%
nies
Corporations
Business corpora- 21.0% 18.6% 20.5% 21.4% 22.0% 23.1% 23.6% 26.6% 27.5% 27.1% 26.3%
tion, etc.
Foreign corpora- 1.9% 1.7% 1.7% 2.1% 3.1% 3.0% 3.4% 3.4% 2.8% 2.4% 2.5%
tions
Corporate investor total 55.1% 55.5% 57.2% 57.6% 58.4% 59.6% 62.4% 66.9% 66.9% 66.3% 66.2%
Individuals and 44.4% 44.1% 42.3% 41.9% 41.1% 39.9% 37.2% 32.7% 32.7% 33.4% 33.5%
Individual others
Foreign investors 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.1% 0.1% 0.1% 0.1%
Individual investor total 44.6% 44.3% 42.5% 42.1% 41.3% 40.1% 37.4% 32.8% 32.8% 33.5% 33.6%
Note: Investment trust portion is included in financial institutions.
Source: Compiled from Kabushiki bunpu jokyo chosa (Survey of Stock Distribution Status).
28　Chap. II The History of the Japanese Securities Market

eign securities company to receive a securities business license in Japan.

　The liberalization of capital transactions also meant that it was now possi-
ble for foreign companies to acquire Japanese companies. Japanese compa-
nies countered this new possibility by focusing on building stable shareholder
bases. If companies held shares in each other, this reduced the number of
shares available in the market, making it easier to defend against takeover at-
tempts. Share crossholdings were viewed from the perspective of takeover
prevention. Later, after Japanese companies switched the form of their capital
increases from making rights issues to existing shareholders at par value to
making public offerings of stock at market prices, issuers also pursued share
crossholdings from the point of view of the desirability of high share prices
when floating shares at market value. As a result, there was a change in the
shareholding composition of the market, with the proportion of corporate
shareholdings increasing and the proportion of individual investor sharehold-
ings declining.

5. Measures Taken to Cope with the Oil Crisis (1975−84)

At the end of the previous 10-year period, there had been a succession of ma-
jor events that shook the Japanese economy, including the Nixon Shock
(1971), the introduction of a floating exchange rate system (1973), and the
first oil shock (1973.) A second oil shock occurred later, in 1979. With Japa-
nese companies practicing energy conservation management in the face of
back-to-back oil crises, the government seemed intent on getting through the
crises using a fiscal expansion strategy. Underpinning that strategy was the
massive issuance of deficit-covering Japanese government bonds (JGBs).
　As previously mentioned, government bond issuance after the war got
started in fiscal 1965. The main feature of those bonds was that they were is-
sued at low interest rates without regard to market conditions and were forci-
bly allocated among financial institutions belonging to the underwriting syn-
dicate according to their capital strength. Maintaining this artificially fixed,
low interest rate market meant that financial institutions could not be permit-
ted to sell the JGBs in the market freely. Since at the time the government
was trying to keep JGB issuance within the scope of the growth in the money
supply, the Bank of Japan was purchasing almost all JGBs that had been held
by the financial institutions for more than one year (liquidity policy). The
reason, in fact, that JGB issuance after the oil shocks was called massive was
that JGB issuance from fiscal 1975 on exceeded growth in the money supply.
　With the massive issuance of JGBs, the liquidity policy reached its limits,
making it impossible to avoid issuing JGBs in the public market. According-
ly, the government approved, with some restrictions, JGB sales on the bond
 Chap. II The History of the Japanese Securities Market 　29
Chart II-6.　Stock Price Movement (Nikkei Dow and TOPIX) (1975－1984)

(¥)
11,600
10,000
8,400 Nikkei Dow average High
6,800 Low
5,200
3,600
950
850
750
650
550 TOPIX
450
350
250
1975 76 77 78 79 80 81 82 83 84

Source: Compiled from data from the Nihon Keizai Shimbun, the Tosho tokei nenpo (TSE Annual
Report), and the Shoken tokei yoran (Manual of Securities Statistics).

Chart II-7.　Change in JGB Issuance and Outstanding Balance

100 billion of yen 100 billion of yen

1‚600 10‚000
1‚400
8‚000
1‚200
1‚000 6‚000
800
600 4‚000
400
2‚000
200
0 0
1965 69 73 77 81 85 89 93 97 01 05 09 13
Article 4 bonds (left axis) Special deficit-financing bonds (left axis)
Others (left axis) Ordinary JGB balance (right axis)

Notes: 1. JGB issuance amounts are calculated on a proceeds basis.

2. Special deficit-financing bonds include temporary-bridging, tax-reduction offset, and
disaster-recovery special public bonds.
3. Others represents the total of pension plan funding special deficit-financing bonds,
reconstruction bonds, FILP bonds, and refunding bonds.
Source: The web site of Japan’s Ministry of Finance.
30　Chap. II The History of the Japanese Securities Market

market in 1977. Following this change, the restrictions on sales were liberal-
ized in stages, resulting in the deregulation of the JGB secondary market.
The interest rate yields for JGB subscribers, on the other hand, were the base
rates given by the regulated interest rate structure in Japan. To deregulate
these rates would force the government to change its artificially regulated in-
terest rate policy. For that reason, there was a great deal of resistance to the
deregulation of the JGB primary market within the government, and deregu-
lation proceeded at a snail’ s pace. When, however, the designated underwrit-
ing syndicate refused to underwrite the planned issuance of JGBs in June
1981, the issuance conditions for JGBs were deregulated, setting the stage
for the deregulation of the different types of long-term interest rates.
　Internationalization proceeded at this time. During the period from 1975 to
1984, Japan’ s trade surplus with the United States ballooned, causing trade
and economic friction between the two countries. Perceiving the reason for
the problem to be the closed nature of Japan’ s financial, capital, and service
markets, the United States demanded the overall reform of Japan’ s economic
structure. As part of that process, the two countries formed the Japan-U.S.
Yen/Dollar Committee. The United States argued that deregulated financial
and capital markets driven by a market mechanism would enable the opti-
mum allocation of capital in Japan. It therefore pushed strongly for the re-
moval of various restrictions placed on those markets by the Japanese gov-
ernment that it considered obstructive to open markets. In this manner, inter-
nationalization formed the basis for financial deregulation in Japan.

6. Developments before and after the Economic Bubble (1985−89)

In a Japan-U.S. Yen/Dollar Committee Report released in 1984, the United

States brought pressure on Japan to liberalize its financial and capital markets
and to internationalize the yen. The Japanese government responded by liber-
alizing the domestic financial market through such actions as deregulating
interest rates on bank deposits. It also moved to improve foreign financial in-
stitutions’access to the Japanese market through such measures as opening
up membership on the Tokyo Stock Exchange (TSE). As a first step toward
internationalizing the yen, the government liberalized the Euroyen market.
The TSE, meanwhile, heeded the request of the government to open its mem-
bership by revising the fixed number of membership seats in its Articles of
Incorporation in 1985 and accepting its first round of new members. A total
of three rounds were eventually conducted, resulting in seats on the TSE for
25 foreign securities companies.
　The deregulation of interest rates began in 1985 with the deregulation of
interest rates on large deposits. After that, the deregulation of interest rates on
 Chap. II The History of the Japanese Securities Market 　31
Chart II-8.　Stock Price Movement (Nikkei Dow and TOPIX) (1985－1989)

(¥)
39,000
32,000 Nikkei Dow average
High
25,000
Low
18,000
11,000
2,900
TOPIX
2,400
1,900
1,400
900
1985 86 87 88 89

Source: Compiled from data from the Nihon Keizai Shimbun and the Shoken tokei yoran (Manual
of Securities Statistics).

Chart II-9.　Yen to US$ Exchange Rate and Japan’

s Official Discount Rate

(¥) %
300 5.50
Yen exchange rate
5.00
Official discount rate
250 4.50
3.00
200
3.50

150 3.00
2.50
100 2.00
1985 86 87 88 89

Source: Web site of the Bank of Japan.

deposits progressed rapidly. As a result, the Bank of Japan’ s open interest rate
for fund raising jumped to 53% in 1989, from 7.5% at the end of 1984, great-
ly increasing fund procurement costs for banks. Major corporations concur-
rently shifted their financing from bank loans to security issuance, resulting
in a decline in the balance of loans being extended by major banks to their
core customer base (heavy industry). To cope with the loss of business, the
leading Japanese banks expanded the scope of their loan operations to in-
clude real estate, construction, and other industries and launched internation-
al operations. They also began planning to enter the securities business, cre-
ating friction between the banking and securities industries.
32　Chap. II The History of the Japanese Securities Market

Table II-9.　Stock Trading Composition by Investor Category

(100 million shares)

Life and
Total
Non-Life Investment Corpora-
Brokerage Individuals Foreigners Banks Others
Insurance Trusts tions
Trading
Companies
1983 1,250.7 59.5% 15.9% 1.3% 3.5% 4.4% 9.3% 6.1%
1984 1,344.5 54.6% 17.3% 1.2% 5.3% 4.4% 11.5% 5.7%
1985 1,615.6 49.5% 15.4% 1.2% 10.6% 5.0% 11.6% 6.6%
1986 2,772.0 41.7% 13.8% 1.1% 16.1% 5.4% 15.4% 6.5%
1987 3,683.4 36.8% 12.4% 1.0% 21.5% 5.6% 17.0% 5.8%
1988 3,979.2 34.8% 9.1% 1.2% 24.7% 6.8% 17.7% 5.7%
1989 3,395.1 32.3% 10.8% 1.2% 25.4% 10.0% 14.6% 5.7%

Note: Total brokerage trading equals the buying and selling of all securities companies on the first and
second sections of the TSE, Osaka, and Nagoya exchanges.
Source: Compiled from the Tosei yoran (Tokyo Stock Exchange handbook).

　In 1985, the Plaza Accord was signed, after which the yen appreciated
sharply against the U.S. dollar. The rate movement raised concerns about a
strong yen-related economic recession in highly export-dependent Japan. The
Bank of Japan’ s reaction was to implement successive reductions in the offi-
cial discount rate from January 1986 onward, and the economy responded by
entering a recovery phase. Amid this low interest rate climate, Black Monday
rocked the U.S. market on October 19, 1987, causing nations around the
world to initiate monetary easing to avert recessions. Japan, meanwhile, was
still in an economic recovery phase, and its official discount rate remained at
a low level. Consequently, the price of land and stocks continued to rise.
Against this backdrop of asset inflation, corporations began taking advantage
of their ability to raise capital through bank loans and securities, using finan-
cial engineering, or zaitech, to boost their financial income. Financial institu-
tions, hurt by the decline in loan balances, also aggressively invested capital
in securities. Heated investment in securities pushed the Nikkei Dow index
up from ¥12,716.52 (September 30, 1985) before the Plaza Accord to a re-
cord high of ¥38,915.87 at the end of 1989.
　New trading methods were also introduced during this period, commenc-
ing with bond futures trading in 1985. Stock index futures trading was intro-
duced in 1987, and stock index options in 1989. Japan’ s securities market
thus gained a full complement of cash, future, and options trading.
 　33
Chap. II The History of the Japanese Securities Market

Chart II-10.　Stock Price Movement (Nikkei Dow and TOPIX) (1990－1995)

(¥)
39,000
34,000
High
29,000 Low
24,000 Nikkei Dow average
19,000
14,000
3,000
2,500
2,000 TOPIX
1,500
1,000
1990 91 92 93 94 95

Source: Compiled from data from the Nihon Keizai Shimbun and the Shoken tokei yoran (Manual
of Securities Statistics).

7. The Reform of the Financial System after the Stock Market Scandals
(1990−95)

The debate on financial system reform began in Japan in the mid-1980s. It

arose in response to the global trend toward financial deregulation and to the
change in the financing methods of Japanese corporations. The Financial
System Research Council took the lead in the debate and considered revi-
sions in the specialized financial institution systems that separated long-term
interest rates from short-term interest rates, commercial banks from trust
banks, and the banking industry from the securities industry. These systems
were the pillars of the postwar financial system in Japan. The Financial Sys-
tem Research Council, however, was positive about banks being allowed to
enter the securities business and decided that the best approach would be to
allow mutual entry into the banking, trust and securities businesses based on
wholly owned subsidiaries. It requested the Securities and Exchange Council
to revise the system separating the banking and securities industries. But the
Securities and Exchange Council was wary of allowing banks into the securi-
ties business, recognizing that the securities industry overall was far less en-
thusiastic about this idea than the banking industry. The Securities and Ex-
change Council nevertheless decided to approve mutual entry through
subsidiaries on the condition that firewalls were established between subsid-
34　Chap. II The History of the Japanese Securities Market

Table II-10.　Establishment of Securities Subsidiaries of Banking Institutions

Month/Year Companies Starting New Securities Business

Jul. 1993 IBJ Securities (currently Mizuho Securities), LTCB Securities (currently UBS Securities),
and Nochu Securities (currently Mizuho Securities)
Nov. 1993 Sumitomo Trust Securities (liquidated in 2000) and Mitsubishi Trust Securities (currently
Mitsubishi UFJ Morgan Stanley Securities)
Jul. 1994 Asahi Securities (dissolved in 1999)
Aug. 1994 Yasuda Trust Securities (currently Mizuho Securities)
Nov. 1994 Sakura Securities (currently Daiwa Securities), Sanwa Securities (currently Mitsubishi
UFJ Morgan Stanley Securities), Daiichi-Kangyo Securities (currently Mizuho Securi-
ties), Fuji Securities (currently Mizuho Securities), Mitsubishi Diamond Securities (cur-
rently Mitsubishi UFJ Morgan Stanley Securities), and Sumitomo Capital Securities (cur-
rently Daiwa Securities)
Mar. 1995 Tokai International Securities (currently Mitsubishi UFJ Morgan Stanley Securities)
Apr. 1995 Hokkaido Takushoku Securities (dissolved in 1998)
May 1995 Mitsui Trust Securities (terminated business in 1999)
Oct. 1995 Toyo Trust Securities (liquidated in 1999)
Nov. 1996 Shinkin Securities and Yokohama City Securities (both liquidated in 1999)
Aug. 1997 Tokyo Forex Securities (currently ICAP Totan Securities), and Nittan Brokers Securities
(currently Central Totan Securities)
Nov. 1997 Ueda Tanshi Securities (dissolved in 2001)
Oct. 1998 Hitachi Credit Securities (currently DBJ Securities)

Source: Complied from data from the Nihon Keizai Shimbun, the Securities Bureau of the Ministry of
Finance, Nenpo (Annual Report).“The First Year of the Financial Supervisory Agency”, and
“The First Year of the Financial Services Agency.”

iaries and parent companies. And for the time being bank subsidiaries, in-
cluding indirectly owned subsidiaries, were prohibited from operating in the
stock brokerage market. The Institutional Reform Law was enforced in June
1992 based on those conditions, and mutual entry into these financial sectors
became a reality.
　Around the time that the debate on financial system reform was dying
down, the uncovering of major financial and securities scandals shook the
banking and securities industries. For the securities industry it was the dis-
covery through a tax audit that during the financial bubble major securities
companies had been compensating their largest corporate clients for losses
incurred (in August 1991, total compensation by the four major securities
companies and 17 second-tier and medium-sized companies had reached ap-
proximately ¥172 billion). Dealings with members of known crime syndi-
cates and market manipulation charges also surfaced, escalating the problems
into a social issue. Most of the loss compensation was done through eigyo
 　35
Chap. II The History of the Japanese Securities Market

tokkin accounts (discretionary accounts managed by the securities company

for tokkin, a form of corporate investment fund). The commonly used meth-
ods involved arranging to have the client earn a profit on transactions dis-
guised as bond transactions or shifting losses between corporate clients with
differing fiscal year-ends to avoid reporting the loss by temporarily transfer-
ring securities with losses at book value between their accounts in a process
called tobashi.
　Since under the existing law loss compensation for trades after the fact
was not illegal, the Securities and Exchange Act was immediately amended
to ban securities trading under a discretionary account and loss compensation
before or after the fact. Criticism mounted that“excessive profits due to the
regulator’s protection of market participants, problematic administration, and
fixed rate commissions had made loss compensation possible,”and it was
said that“what the solution requires is not the banning of loss compensation
or the punishment of securities companies, but the implementation of finan-
cial system reform itself.”In September 1991, the Provisional Council for
the Promotion of Administrative Reform recommended the liberalization of
brokerage commissions, the promotion of new market entries, and the sepa-
ration of the market surveillance organization from the Ministry of Finance.
In July 1992, the authorities established the Securities and Exchange Surveil-
lance Commission. The rest of the Provisional Council’ s recommendations
were included in the financial Big Bang reforms that came later, contributing
to the formation of a new framework for Japan’ s financial and capital mar-
kets.

8. The Debate on, and Enforcement of, the Act on Revision, etc. of
Related Acts for the Financial System Reform (1996−2000)

The bursting of the economic bubble left deep scars on the economy. The
trauma from the collapse of stock prices emerged in the form of securities
scandals, while that from the collapse of land and real estate prices emerged
as the nonperforming loan problem in the financial industry. The nonper-
forming loan problem in particular lingered without the implementation of
any fundamental solution - the banking industry struggled for close to 10
years to get out from under its bad debt. During this long process, foreign
companies and investors and financial transactions flowed out of the Japa-
nese market, making the hollowing out of the financial market real. Japan’ s
way of addressing the issue was the financial Big Bang initiative proposed by
then prime minister Ryutaro Hashimoto in 1996. The goals of the initiative
were to wrap up the cleanup of nonperforming loans by 2001 and rebuild the
Japanese financial market into an international market comparable to the
36　Chap. II The History of the Japanese Securities Market

Chart II-11.　Stock Price Movement (Nikkei Dow and TOPIX) (1996－2000)

(¥)
22,500 High
Low
20,500
18,500 Nikkei Dow average
16,500
14,500
12,500
1,700
1,500
TOPIX
1,300
1,100
900
1996 97 98 99 2000

Source: Compiled from data from the Nihon Keizai Shimbun and the Shoken tokei yoran (Manual
of Securities Statistics).

New York and London markets based on the principles of“free, fair, and
global.”
　Discussions on financial reform took place in the Securities and Exchange
Council, the Financial System Research Council, the Insurance Council, the
Council on Foreign Exchange and Other Transactions, and the Business Ac-
counting Council. Those discussions resulted in recommendations to change
Japan’ s established bank intermediation-based capital allocation system (in-
direct financing) to a market-based capital allocation system (direct financ-
ing). Passed in October 1998, the Act on Revision, etc. of Related Acts for
the Financial System Reform, paved the way for services based on vigorous
intermediation, set up a market system with special characteristics, and estab-
lished a framework for trading that users could trust. Among its many revi-
sions, the deregulation of stock brokerage commissions and the shift to for
securities business provided incentive for securities companies to reform
their business models. Its elimination of the obligation to trade stocks only
on exchanges, on the other hand, promoted competition between markets.
　Almost at the same time as the financial Big Bang initiative was being
proposed, major financial institutions experienced business and financial cri-
ses that led to bankruptcies. Among troubled banks were Hokkaido Takush-
oku Bank, Ltd., the Long-Term Credit Bank of Japan, Ltd., and the Nippon
Credit Bank, Ltd. The list of securities companies included second-tier Sanyo
Securities Co., Ltd., and one of the four major securities companies, Ya-
 Chap. II The History of the Japanese Securities Market 　37
Table II-11.　Schedule for Reforming the Securities Market During the Big Bang

FY1997 FY1998 FY1999 FY2000 FY2001

I. Investment Vehicles (Attractive investment instruments)
1. Diversity of the types of bonds
2. Diversity of derivatives products
3. Developing Investment Trust Products
(1) Introduction of Cash Management Account (wrap account)
(2) OTC sales of investment trusts products by banks
(3) Private placement of investment trusts
(4) Investment company type funds
4. Review of the definition of securities
5. Enhancement of corporate vitality and efficient use of capital
II. Markets (An efficient and trust framework for transactions)
1. Improvement of transaction system on stock exchanges
2. Improvement of OTC (JASDAQ) market system
3. Deregulation of sales solicitations by securities firms for unlisted, unregistered stock
4. Improvement of share lending market
5. Improvement of clearing and settlement system
6. Strengthening inspection, surveillance and enforcement systems
7. Strengthening disclosure
III. Financial Intermediaries (Diverse investment services to meet client needs)
1. Deregulating brokerage commissions
2. Diverse activity by intermediaries
3. Use of holding company structure
4. Strengthening asset management
5. Enhancing monitoring system for soundness of securities companies
6. Entry regulations for securities companies
(1) Licensing system reform
(2) Enhancing mutual entry into banking, securities and trust businesses
7. Investor protection related to exits of intermediaries from the market
(1) Strict separation of client assets from securities companies’own assets
(2) Enhancing the securities Deposit Compensation Fund scheme
Review of the taxation related to securities
Shift to the new administrative regime

Source: Drawn from the Securities and Exchange Council’ s report“Comprehensive Reform of the Secu-
rities Market—For a Rich and Diverse 21st Century”

maichi Securities Co., Ltd. These companies previously would have been
rescued by being absorbed by or merged with other major financial institu-
tions. But there were no financial institutions with the financial strength to do
so. The myth that banks could not fail was shattered, and the convoy system
of financial regulation came to an end. Forced into action by the crisis, the
major financial institutions reorganized beyond traditional corporate lines,
condensing into four major financial groups. The new groups also, further-
more, began reorganizing their affiliated securities companies to restrict sec-
ond-tier and small to medium-sized securities companies. Amid such major
changes as the shift to a registration system and the deregulation of broker-
age commissions, an information technology (IT) revolution occurred. This
resulted in a rush into the market of securities companies with online broker-
age businesses and other new business models, producing a change in key
market players.
38　Chap. II The History of the Japanese Securities Market

Chart II-12.　Stock Price Movement (Nikkei Dow and TOPIX) (2001－2008)

(¥)
19,000 High
17,000 Low
15,000
13,000 Nikkei Dow average
11,000
9,000
7,000
1,900
1,700
1,500
1,300 TOPIX
1,100
900
700
2001 02 03 04 05 06 07 08

Source: Compiled from data the Nihon Keizai Shimbun, the Tosho tokei geppo (TSE Monthly Report),
Shoken tokei nenpo (Securities Statistics Annual Report), and the web site of the Tokyo Stock
Exchange.

9. Developments Since the Big Bang (2001−2008)

Entering the 2000s, the nonperforming loan problem reached a turning point.
Prime Minister Junichiro Koizumi championed structural reform and over-
saw the final clearing of this bad debt from the banking sector based on a Fi-
nancial Revitalization Program in October 2002 that prioritized eliminating
nonperforming loans. Because this approach threatened dangerously low lev-
els of capital reserves at banks, a rise in bankruptcies in the corporate sector,
and an increase in unemployment, the government took steps to control its
adverse effects. It injected capital into banks to maintain the stability of the
financial system and established restructuring mechanisms for corporations.
These mechanisms included the enactment of the Civil Rehabilitation Act
and of the function of the Resolution and Collection Corporation (RCC) and
the setting up of the Industrial Revitalization Corporation of Japan (IRCJ).
　Under the slogan of“From Savings to Investment,”Japan’ s government
also implemented policies and programs to shift to a market-based financial
system with a strongly rooted securities market at its core in which a diverse
range of investors would participate. The policies and programs included the
Basic Policies for Economic and Fiscal Management and Reform (June
2001), the Program for Structural Reform of Securities Markets (August
 Chap. II The History of the Japanese Securities Market 　39
Chart II-13.　Changes in the Composition of Household Assets

%
100
90
80
70
60
50
40
30
20
10
0
01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

16

17
20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20
Cash and deposits Bonds Investment trusts Stocks and equity contribution
Insurance and pension reserves Other

Source: Web site of the Bank of Japan.

Chart II-14.　Trading Amounts on TSE and Brokerage Income

(10 billions of yen) (10 billions of yen)
80,000 300
250
60,000
200
40,000 150
100
20,000
50
0 0
FY1974 FY1979 FY1984 FY1989 FY1994 FY1999 FY2004 FY2009 FY2014

Trading amounts on TSE (left) Commission income (right)

Source: Produced based on data from the Tosho tokei geppo (TSE Monthly Report), the Tosho yoran
(TSE Fact Book), the Shoken and the website of the Tokyo Stock Exchange.

2001), and the Program for Promoting Securities Markets Reform (August
2002). These policies and programs put an emphasis on the expansion and
improvement of sales channels (lifted a ban on banking and securities joint
branch offices and introduced a securities intermediary system); the diversifi-
cation of financial instruments and services (lifted a ban on wrap accounts,
etc.); and the fairness and transparency of the financial business (thorough
disclosure and the greater supervisory oversight of audit corporations, etc.).
40　Chap. II The History of the Japanese Securities Market

The authorities aimed at establishing a market that participants would have

confidence in and that would attract a wide range of investors. Thanks to
their reforms, the allocation of household financial assets into risk-class as-
sets, such as equities, bonds, investment trusts, and other securities, trended
upward until 2006. The reforms also, however, resulted in an increase in the
number and volume of complex financial instruments and transactions that
demanded a comprehensive set of regulations to ensure the thorough obser-
vance of investor protection rules and the coverage of an expanding and in-
creasingly diversified range of investment instruments. In response, the gov-
ernment revised the Securities and Exchange Act, reintroducing it as the
Financial Instruments and Exchange Act.
　In the aftermath of the financial Big Bang, the retail securities business re-
form and the inter-market competition between exchanges got under way in
earnest. In the retail securities business, ever since the liberalization of bro-
kerage commissions, the level of commission income became sluggish.
Therefore, leading securities companies that used to focus on the brokering
business shifted their direction to adopting a marketing approach of paying
greater attention to asset management in an effort to break away from being
dependent on the market condition. Meanwhile, the inter-market competition
was focused on attracting new listings and more transaction volume. The ex-
changes started targeting new listings around 2000, launching start-up com-
pany markets, and start-up companies and growth companies successively
listed their shares on exchanges. In the battle for greater transaction volume,
Tokyo Stock Exchange (TSE) quickly took the lead. The TSE introduced
electronic stock trading and off-floor trading, strengthening its dominant po-
sition. The concentration of stock trading on the TSE, however, produced a
notable decline in support for other regional stock exchanges, leading to suc-
cessive reorganizations that began around 2000.

10. Developments after the Lehman Shock (2008 onward)

The Lehman Shock began with a liquidity crisis among European and U.S.
financial institutions that resulted from a collapse in U.S. housing prices and
from subprime loan defaults beginning about summer 2007. This market cri-
sis escalated into a global financial crisis and a simultaneous recession in the
global economy after Lehman Brothers Holdings filed for Chapter 11 bank-
ruptcy protection on September 15, 2008. Then in 2009, the Greek sovereign
debt problem arose. This quickly spread also through the countries which had
large current account and fiscal deficits. Then financial institutions in the
United Kingdom, Germany, and France became enveloped in the crisis be-
cause they held large amounts of the sovereign debt of these countries, and
 Chap. II The History of the Japanese Securities Market 　41
Chart II-15.　Stock Price Movement (Nikkei Dow and TOPIX) (2010 onward)

(¥)
25‚000
20‚000 Nikkei Dow average
15‚000
High
10‚000
Low
5‚000
1‚800
1‚600
1‚400
1‚200
TOPIX
1‚000
800
600
2009 10 11 12 13 14 15 16 17

Source: Compiled from data the Nihon Keizai Shimbun and the web site of the Tokyo Stock Exchange.

Chart II-16.　Changes in the Central Bank Assets (at the end of March)
(100 billions of yen)
6‚000
5‚000
4‚000
3‚000
2‚000
1‚000
0
01

02

03

04

05

06

07

08

09

10

12

13

14

15

16

17
11
20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

Long-term government bonds CP, etc. Bonds ETF REIT Loan Other

Source: Compiled from the data published on the web site of the Bank of Japan.

Chart II-17.　Transactions on Proprietary Trading Systems

% PTS transaction values for off-exchange types of transactions (left) %

80 PTS transaction values for all types of transactions (right) 6.0
60 4.0
40
20 2.0
0 0.0
lf
ha
01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

16

t
20
20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

s
fir
17
20
Source: Produced based on information on the website of the Japan Securities Dealers Association.
42　Chap. II The History of the Japanese Securities Market

thus it became a European sovereign debt crisis. Under these circumstances,

each of these countries avoided a serious crisis by carrying out fiscal injec-
tions in large amounts and monetary easing. Japanese financial institutions
suffered far fewer losses from the subprime loan problem, European sover-
eign debt crisis, and other financial shocks than those of other nations, but
the financial crisis originating in the United States and Europe had its impact
on the Japanese economy. In fall 2008, the Japanese stock market experi-
enced successive sharp declines. Of the leading 10 day-to-day declines re-
corded in the TOPIX to July 31, 2015, the top 4 are from this period.
　The Abe administration and the central bank led by Governor Kuroda are
aiming to have the country break away from prolonged deflation. On the one
hand, corporate governance reforms were implemented to heighten the earn-
ing capabilities of corporations, and the Corporate Governance Code and the
Japanese-version Stewardship Code were introduced. On the other hand,
drastic monetary easing measures were carried out. The Bank of Japan un-
veiled its quantitative and qualitative monetary easing policy aimed at meet-
ing a 2% inflation target within two years and increased purchases of not
only JGBs but also ETFs and REITs. As a result, the assets of the Bank of Ja-
pan increased drastically from ¥164 trillion at the end of March 2013 to ¥490
trillion at the end of March 2017. However, consumer prices did not reach
the year-on-year inflation target, and the central bank adopted a negative in-
terest rate policy effective February 2016. As such, monetary easing mea-
sures continue to be implemented on a large scale in Japan. Meanwhile, the
U.S. and Europe, the forerunners in adopting monetary easing, are shifting to
reducing the balance sheets of their central banks and Japan will likely be ex-
pected to specify its exit strategy.
　In recent years, there has been another change in the Japanese securities
market. The Tokyo Stock Exchange updated its trading system, prompting
the start of inter-market competition to secure liquidity. High-frequency trad-
ing (HFT) was introduced in earnest and the use of proprietary trading sys-
tems (PTS) also increased. Inter-market competition, however, has driven up
system costs of stock exchanges and called for restructuring of exchanges be-
yond country borders worldwide. Under these circumstances, Japan’s secu-
rities market took a major step toward increasing its international competi-
tiveness and enhancing convenience with the January 2013 merger of the
Tokyo Stock Exchange and the Osaka Securities Exchange, giving birth to
the Japan Exchange Group.
 CHAPTER III

The Stock Primary Market

1. New Issues of Stocks in the Primary Market

For the purpose of the Companies Act, companies are classified into corpora-
tions (kabushiki kaisha); general partnerships (gomei-gaisha); limited part-
nerships (goshi-gaisha); and limited liability companies (godo-gaisha). Of
these, corporations have a number of advantages against the others in that (1)
ownership interest in a company is divided into shares of stock; (2) investors
may recoup contributed capital simply by selling their shareholdings; and (3)
investors shall be held liable only to the extent of capital contributed by them
(limited liability). These advantages help a corporation to raise a large
amount of capital from various investors.
　The shares issued by a corporation are capital securities, or narrowly de-
fined securities, in that they represent certain claims and rights of their inves-
tors. Shareholders contribute capital in exchange for their shareholdings,
which give them privileges to (1) participate in the management of the corpo-
ration (by attending general shareholder meetings and exercising voting
rights that are proportionate to their shareholdings); (2) claim distribution of
profits; (3) claim residual corporate assets (shareholders have proportionate
rights to claim residual corporate assets upon liquidation); and (4) file deriva-
tive suits. Issued shares, unlike bonds, are not redeemable except when
shares are repurchased by the corporation or upon liquidation. Because con-
tributed equity may not usually be repaid by the corporation, shareholders
wishing to monetize their holdings can only do so by selling them in the mar-
ket. For the benefit of increased liquidity, stock is divided into a standard unit
of shares and often represented by share certificates. On the other hand, with
corporate bonds, another class of capital securities, the repayment value is
backed by the issuer.
　The legal framework for stocks has undergone substantial changes by a se-
ries of amendments to the Commercial Code introduced since 2001. Pursuant
to the amendments that took effect on October 1, 2001, par value stock was
abolished and all stocks are now issued with no par value. Accordingly, the
par value-based tan’ i-kabu round-lot system was replaced by the new, discre-
44　Chap. III The Stock Primary Market

Table III-1.　Principal Rights of Shareholders

Rights for personal interest Rights for common interest

(rights on benefits of owing property) (rights on participating in management)
・Right to claim dividend of surplus ・Right to exercise votes at general shareholder
・Right to subscribe for new shares meetings
・Right to demand distribution of residual assets ・Right to bring representative suit
・Right to request registration of name transfer ・Right to convoke a general shareholder meeting
・Right to request purchase of shares ・Right to demand suspension of illegal action by a
director
・Right to make a shareholder proposal
・Right to request dissolution
・Right to demand dismissal of a corporate officer
・Right to request inspection, etc.

Table III-2.　Recent Amendments to the Commercial Code Relating to Equity Financing

and Main Contents of the Companies Act

The amendments made in 2001 (enforced on October 1, 2001):

　A revision of the system of acquiring and holding one’ s own shares (the ban on holding treasury
shares was lifted); the abolition of the system of issuing shares with face value (under this system, all
shares are issued without par value); the abolition of the requirement of net asset value (a minimum of
¥50,000 or $487.8 at the rate of ¥102.50 to the dollar); the abolition of the tan’
i-kabu system in favor of
tangen-kabu system; and the relaxation of the legal reserve system, etc.

The amendments made in 2001 (enforced on April 1, 2002):

　The institution of the equity warrant system and the abolition of regulation of the stock option sys-
tem, the electronification of corporate documents, and a revision of regulation of the classified stock
(the lifting on the ban of tracking stock＊), etc.

The amendments made in 2002 (enforced in April 2003):

　A revision of regulation of the classified stocks, the institution of the system relating to lapses of
stock certificates, and the rationalization of the procedure for reducing capital, etc.

The amendments made in 2003 (enforced on September 25, 2003):

　The acquisition of one’ s own shares by a resolution of the board of directors under the provisions of
the articles of incorporation and a revision of the method of computing a limit on interim dividends,
etc.

The amendments made in 2004 (enforced on October 1, 2005):

　The adoption of a system of not issuing stock certificates, the introduction of a system of issuing no-
tices by electronic means, etc.

Amendments in conjunction with the enactment of the Companies Act in 2005 (enforced on May 1,
2006):
　A revision of regulations to make the share transfer system more flexible, the rationalization of the
system of retiring shares, a revision of regulations relating to issuing of share certificates, and the aboli-
tion of fractional shares, etc.

The amendments made in 2014 (enforced on May 1, 2015):

　Revision of new share issuance procedure involving transfer of controlling shareholders Introduction
of a cash-out method that allows a special controlling shareholder to request other shareholders to sell
their shares, etc.

Note: The ban on tracking stock (under this system, dividends are paid not out of the earnings of a com-
pany as a whole but out of the earnings of a specific division or a subsidiary of such company) was
lifted.
 　45
Chap. III The Stock Primary Market

tionary tangen-kabu system. Under the amendments enforced on April 1,

2002, (1) new subscription rights/warrants were introduced, (2) the regula-
tion of stock options was relaxed, and (3) the regulation regarding multiple
classified stocks was relaxed.
　The Commercial Code as amended in 2004 and the Law Revising the Act
on Book Entry of Corporate Bonds and Shares etc., for Streamlining Settle-
ment of Transactions in Stocks, etc., that was promulgated in the same year
introduced a system allowing electronic bookkeeping for shares, paving the
way for the dematerialization of share certificates of public companies on
January 5, 2009. The Companies Act that came into effect on May 1, 2006
allowed transfer restrictions on any and/or all classes of stock and issuance of
classified stocks subject to wholly call. Furthermore, in the revised Compa-
nies Act enforced on May 1, 2015, the authorities introduced a“cash out”
system where controlling shareholders of a company may force minority
shareholders to sell their shares to them.

2. Forms of Issuing New Shares

Shares are first issued when a corporation is established. Establishment of a

corporation can be roughly divided into incorporators-only establishment and
by-subscription establishment. When a corporation is established only with
the funds contributed to its capital stock by its promoters, this method of es-
tablishing a corporation has the advantage of its shares being fully subscribed
to, but it has a drawback in that the number of shares it can issue is limited to
the funds its promoters can raise. On the other hand, establishing a corpora-
tion with the capital raised by publicly offering its shares to an unspecified
large number of investors is called“establishment through a public offering
of shares.”While a large amount of capital can be raised through this meth-
od, one major drawback is that it takes time to successfully complete the
public offering, and when its shares are not fully subscribed to by investors
during the public offering period, the corporation cannot be established. Un-
der the old provisions of the Commercial Code, the par value of shares issued
by a corporation at the time it was established had to be ¥50,000 or more, but
this restriction was abolished—and the requirement of par value has been lib-
eralized—by virtue of the 2001 amendment to the Commercial Code.
　Even after a corporation is established, it is a general practice for the cor-
poration to issue new shares after in order to raise funds, to transfer the con-
trol of its management to a third party, or to enhance the liquidity of its
shares. Usually, the method of issuing new shares is divided into paid-in cap-
ital increase and stock splits (and gratis issues).
　Issuing new shares against the payment for them by shareholders is called
46　Chap. III The Stock Primary Market

Table III-3.　Forms of Issuing New Shares

Payment required
　　Capital increase through a public offering
　　Capital increase through a third-party allocation of new shares
　　Capital increase through a rights offering
　　The exercise of subscription rights/warrants
Payment not required
　　Stock split
　　Merger
　　Swap of shares
　　Stock transfers

Table III-4.　Funds Raised by Equity Financing

(billions of yen)
Exercise of
Third party Preferred stock
Rights offering Public offering subscription Total
Year allotment and others
rights/warrants
No. Amount No. Amount No. Amount No. Amount No. Amount No. Amount
1998 0 0 8 2,782 32 6,880 28 864 5 4,710 73 15,236
1999 0 0 28 3,497 75 23,473 62 2,529 25 69,894 190 99,393
2000 2 82 24 4,941 46 9,228 87 1,056 4 1,073 163 16,298
2001 3 320 18 12,015 57 4,772 85 374 5 2,161 168 19,322
2002 0 0 19 1,533 62 4,844 78 2,763 36 9,968 195 19,107
2003 2 15 35 5,672 84 2,232 121 366 74 25,322 316 33,592
2004 1 27 78 7,502 129 5,726 228 995 50 13,626 486 27,849
2005 2 37 74 6,508 150 7,781 336 1,669 45 11,678 607 27,635
2006 0 0 69 14,477 145 4,165 371 1,513 26 5,597 611 25,751
2007 1 81 60 4,570 117 6,621 347 1,650 12 7,955 537 20,796
2008 1 1 27 3,417 93 3,958 240 209 9 5,937 370 13,521
2009 0 0 52 49,668 115 7,146 169 188 28 4,740 364 61,743
2010 1 7 50 33,089 88 5,356 159 246 10 736 308 39,427
2011 0 0 45 9,678 66 3,952 171 261 7 693 289 14,584
2012 1 4 53 4,518 71 1,593 174 218 17 12,755 316 19,084
2013 1 10 114 11,137 151 3,719 350 1,904 3 1,200 619 17,970
2014 0 0 129 13,780 190 3,928 412 1,087 14 2,242 745 21,037
2015 1 1 131 9,620 187 1,636 437 815 6 7,513 762 19,585
2016 1 2 95 2,577 151 6,230 483 901 7 1,480 737 11,190
2017 2 1 116 4,242 238 8,816 526 1,926 7 613 889 15,598

Source: Website of the Tokyo Stock Exchange.

 　47
Chap. III The Stock Primary Market

paid-in capital increase, and a corporation can raise its equity capital by this
method. Paid-in capital increase is also divided on the basis of investors to
whom shares are issued into public offering, rights offering, and allotment of
new shares to a third party.
　By definition, a stock split, the act of splitting one share into two or more
shares, does not by itself increase the assets or the capital of a corporation.
However, new shares issued through a stock split play an important role. The
stock split increases the number of the corporation’ s shares outstanding on
the market, and the fall in the per share price caused thereby enhances the li-
quidity of shares, making it easier for the corporation to raise funds through
equity financing in the future. Until 2001, there was a rule banning any stock
split that reduces the value of net assets per share to less than ¥50,000, but
this rule was abolished by virtue of the 2001 amendment to the Commercial
Code. This step was taken because of widespread complaints among venture
businesses—those that have high growth potential and whose shares are trad-
ed at high prices despite limited net assets—that on account of the restric-
tions against a stock split, they could not improve the liquidity of their shares.
However, it was desirable to prevent share certificates from being in short
supply during the period from the record date of stock split (day on which the
shareholders to whom new shares are allocated are determined) to the effec-
tive date (day on which the right to new shares for shareholders goes into ef-
fect), which can disrupt the demand-supply balance and cause stock prices to
fluctuate violently. Hence, it was decided that the effective date would fall on
the day following the record date from January 2006.
　Other cases in which a corporation is authorized to issue new shares in-
clude the exercise of new share subscription rights/warrants, a new type of
warrant introduced by the April 2002 amendment to the Commercial Code;
equity swaps with one’ s subsidiaries under the equity swap system; and allo-
cation of shares to shareholders of one’ s subsidiaries under the stock transfer
system.

3. Procedures for Issuing New Shares

New share issuance may be done in exchange for capital paid in by investors
in the form of a public offering, third-party allotment, or rights offering.
　In a rights offering, shareholders on record as of a specified record date are
given subscription rights in proportion to their stockholdings. In the case of
public companies, grant of subscription rights or allotment of new shares to
non-shareholders are only subject to board approval. On the other hand, a
third-party allotment by a private company, under the Companies Act, in
principle, requires a special resolution at the general shareholders meeting,
48　Chap. III The Stock Primary Market

Chart III-1. Equity Financing in 1989 by TSE-Listed Companies, by Type of Financing

(Total capital procured: ¥8,529.39 billion)

Rights offerings
¥689.54 billion
(8%)
Corporate bonds with subscription
rights/warrants (cash paid-in)
¥2,104.76 billion
(25%)

Third-party allotments
¥89.14 billion Public offerings
(1%) ¥5,645.95 billion
(66%)

Source: Tokyo Stock Exchange, Monthly Statistics Reports.

Chart III-2.　Equity Financing in 2017 by TSE-Listed Companies, by Type of Financing

(Total capital procured: ¥1,559.84 billion)

Exercise of new shave

subscription rights
¥192.6 billion
(12%)
Preferred stock, etc.
¥61.34 billion
(4%)

Third-party allotments Allotments to

¥881.58 billion shareholders
(57%) ¥0.11 billion
(0.01%)
Public offerings
¥424.22 billion
(27%)

Source: Web page of the Tokyo Stock Exchange.

 　49
Chap. III The Stock Primary Market

but it may be conducted by ordinary resolution when provided for in the Ar-
ticles of Incorporation. A rights offering to existing shareholders is a means
of capital raising that is neutral to the control of corporations, in that it does
not affect proportionate ownership of the shareholders. An offering of rights
at par used to be the dominant measure of equity financing, but such offering
is no longer common, partly due to the elimination of par value of stocks un-
der amendments to the Commercial Code in 2001.
　Public offerings grant subscription rights to the general public. A public
offering raises more capital for an issuer than an offering of rights at par,
which was once prevalent along with par value stock, by the excess of the is-
sue price over par. From the viewpoint of investors, however, it deprives in-
vestors of the opportunity to earn the premium, thereby losing their incentive
to subscribe. Although public offerings declined in the 1990s, they are still a
primary means of raising equity capital today.
　A third-party allotment raises capital by granting subscription rights to cer-
tain third parties, including banks or business corporations with special rela-
tionships with the issuer and/or its director(s). This method is often used to
bail out troubled companies, strengthen relationships with corporate partners,
and form a business and capital alliance rather than simply to raise capital.
Of the amount raised in 2017, nearly 70% accounted for the support for indi-
vidual companies. Additionally, the method has recently been noted as a
measure for fending off hostile takeovers. Third-party allotments cause dilu-
tion of ownership of existing shareholders. They may be approved by board
resolution except when terms of rights harm the interests of existing share-
holders because they are unequivocally advantageous to the grantee(s) in
which case a special resolution at the general shareholders meeting will be
required (advantageous issuance). An issuer pursuing a capital increase by
third party capital allocation has an obligation to explain the rationality and
necessity of the capital increase in its securities registration statement.
　Under the revised Companies Act that went into effect in 2015, when new
share issuance by a public company involves any transfer of controlling
shareholders (accounting for one-half or more of voting rights), the name and
other information of the underwriter must be notified to existing sharehold-
ers. Furthermore, if there is opposition by 10% or more of voting rights, the
share issuance is subject to a resolution not only by the board of directors but
also by the general shareholders meeting. Thus the involvement of sharehold-
ers in share issuance was strengthened.

4. The Current State of the New Issue Market

New shares are usually issued (1) in exchange for capital contribution (equity
 Table III-5.　The State of Issuing New Shares by Listed Companies
(in thousands of shares)
Preferred stock,
Paid-in conversion of a
Rights Public Third party corporate bond with Exercise of
Year capital subscription rights/ subscription Stock split Others Total
50　Chap. III

increase offering offering allotment warrants of the rights/warrants

convertible bond
type into shares, etc.
1978 4,906,531 2,387,691 1,071,412 444,375 1,003,023 － 2,677,987 △154,435 7,430,084
1979 4,696,470 1,470,800 1,151,803 236,944 1,836,923 － 2,323,957 171,436 7,191,866
1980 5,900,618 1,761,008 1,619,438 311,354 2,208,818 － 3,270,677 34,846 9,206,243
1981 10,621,006 5,624,372 2,360,917 99,890 2,535,827 － 3,542,488 64,632 14,228,128
1982 4,919,006 1,932,416 1,760,389 111,822 1,102,860 11,519 4,265,996 318,347 9,503,352
1983 4,231,828 1,005,145 513,645 589,154 2,006,283 117,601 4,208,030 24,857 8,464,718
1984 5,312,713 1,170,322 778,686 319,665 2,835,670 208,370 4,033,612 169,830 9,516,159
1985 5,580,645 909,635 590,696 118,126 3,514,706 447,179 4,390,653 93,169 10,064,468
1986 4,503,842 371,191 346,883 78,308 2,831,297 876,161 3,939,802 621,924 9,065,569
1987 8,600,184 547,900 718,327 314,650 4,753,694 2,265,611 3,300,518 510,942 12,411,644
The Stock Primary Market

1988 9,052,096 849,464 1,286,177 169,633 4,623,233 2,123,587 4,004,200 96,212 13,152,509
1989 12,467,106 803,396 3,558,558 94,151 5,522,653 2,488,346 5,906,047 44,848 18,418,003
1990 4,733,374 758,546 1,284,250 252,593 1,859,145 578,839 8,283,600 1,632,879 14,649,854
1991 1,604,596 420,553 39,850 182,776 600,930 360,485 3,451,047 1,581,058 6,636,703
1992 766,227 244,895 2,180 190,340 139,205 189,605 1,584,403 414,121 2,764,752
1993 1,605,059 87,091 4,150 479,440 347,764 686,612 901,948 1,147,000 3,654,008
1994 1,530,474 24,152 33,360 543,846 445,479 483,635 2,330,679 1,190,447 5,051,602
1995 1,433,831 249,876 10,400 490,557 343,684 339,311 1,015,654 359,334 2,808,819
1996 2,546,611 455,200 200,883 583,427 506,753 800,348 847,835 1,873,163 5,267,610
1997 3,093,475 204,686 93,250 1,493,319 1,034,959 267,261 551,076 251,712 3,896,265
1998 3,641,490 7,707 97,337 2,380,126 1,079,024 77,295 168,263 22,696 3,832,450
1999 9,627,895 － 54,599 8,402,531 976,593 194,170 742,946 61,952 10,432,793
2000 3,709,565 87,140 84,200 2,621,987 835,744 80,492 1,599,465 1,158,762 6,467,792
2001 4,526,944 143,051 49,760 3,328,896 935,912 69,324 624,199 3,330,016 8,481,160
2002 4,260,986 － 238,268 2,719,749 546,153 756,815 692,917 1,412,881 6,366,784
2003 4,541,171 20,352 431,517 2,995,729 679,841 413,729 333,448 5,931,549 10,806,168
2004 5,659,174 18,193 516,166 1,586,466 2,404,691 1,133,656 2,975,260 24,497 8,658,931
2005 11,393,111 53,120 616,574 2,957,298 6,241,871 1,524,246 3,051,215 △13,967,015 477,311
2006 7,459,697 － 1,638,972 850,680 4,450,694 519,349 6,713,875 △1,201,938 12,971,634
2007 5,341,133 80,862 409,532 1,521,236 2,928,468 401,032 11,749,106 △3,504,021 13,586,219
2008 3,542,021 6,998 687,868 1,549,130 1,119,159 178,863 120,552 △542,754 3,119,819
2009 22,418,250 － 12,049,714 3,192,219 6,846,482 329,833 16,193,816 238,890 38,850,955
2010 10,464,418 68 7,548,008 1,935,650 835,992 144,697 877,229 △860,938 10,480,708
2011 6,391,284 － 2,947,644 2,283,962 839,211 320,465 1,842,238 625,267 8,858,789
2012 4,309,521 34,504 2,371,349 663,776 1,024,399 215,492 3,759,441 576,904 8,645,867
2013 5,226,016 613 1,244,084 2,058,111 1,400,302 522,905 27,099,251 △8,996,091 23,329,176
2014 4,624,642 － 1,422,172 627,019 1,933,058 642,391 8,841,942 △6,101,224 7,365,361
2015 3,717,412 1,560 679,898 767,728 1,797,390 470,834 7,060,155 △12,958,857 △2,181,288
2016 5,403,536 3,699 140,825 4,152,569 798,326 308,115 2,232,113 △29,020,941 △21,385,291
2017 4,747,915 1,312 320,095 2,934,439 606,853 885,214 4,836,899 △71,033,038 △61,448,223
Source: Tokyo Stock Exchange, Shoken tokei nenpo (Annual Report of Securities Statistics) and Tosho tokei geppo (Monthly Report of Securities Statistics).
 　51
Chap. III The Stock Primary Market

financing in the forms of public offerings, third-party allotments, rights offer-

ings, exercise of subscription rights, etc.); (2) in conjunction with stock splits
(and gratis issues); and (3) for the purpose of corporate acquisitions. (Share
counts are reduced when treasury stock is cancelled.) In 2017, the leading
source of new shares issued by listed companies was by stock splits and gra-
tis issues (increase of 4.84 billion shares), followed by equity financing (4.75
billion shares). The amendments to the Commercial Code in 1991 defined
stock splits as a notion that encompasses stock dividends, gratis issues, and
reclassification of paid-in capital in excess of par into capital stock all of
which were cases that did not involve payments by investors at the time of
issuance of new shares.
　Today, in Japan, equity financing is the leading source of new shares. List-
ed companies on the Tokyo Stock Exchange (TSE) raised approximately ¥1.5
trillion in equity in 2017. By contrast, equity financing, except for initial
public offerings, is less used in the United States and the United Kingdom
because it tends to cause earnings dilution and consequently pushes down the
stock price. It should be noted, however, that over the past years, equity fi-
nancing in Japan has undergone many changes. During the period of rapid
economic growth, corporations mostly used the method of rights offering at
par to raise equity capital, because investors did not have enough accumula-
tion of financial assets, while issuing companies suffered a chronic shortage
of funds. (Stock par value was abolished in 2001.) In those days, corpora-
tions mostly relied on bank borrowings for their funding requirements, and
the stock market was a marginal marketplace for raising capital. However, as
the economy slowed down after the oil shocks, the funding needs of busi-
nesses were reduced, and due in part to the necessity of securing a strong
stockholder base, public offerings at market price became the prevalent
means of raising equity among business corporations. Meanwhile, the weight
of rights offerings also shifted from rights offering based on par value to that
based on a median of par and market values. In the second half of the 1980s,
with progress in deregulation concerning debt financing, issuing of convert-
ible corporate bonds and corporate bonds with subscription rights/warrants
increased, and so did their conversion and exercise. Particularly, as banks
came under pressure to meet Tier 1 capital requirements imposed by the Ba-
sel regulatory standards, they scrambled to shore up their capital base, and
such issuing accounted for about half of equity financing at the time.
　In the 1990s, there was a marked decline in capital increases by public of-
ferings because of stagnant stock prices. At the time, new rules to ensure
sound issuing of public stock offerings at market price were instituted.
Among them, the Japan Securities Dealers Association (JSDA) adopted a
profit distribution rule in March 1992 that required issuing companies to
raise their dividend payout ratio to 30% or more and the Ministry of Finance,
52　Chap. III The Stock Primary Market

which was then responsible for securities regulation, issued guidelines re-
quiring issuing companies to meet or exceed the threshold of 10% in their re-
turn on equity (ROE) in December 1993. These rules were abolished in April
1996, and the stock primary market was fully liberalized. Increasing capital
through public offerings remained stagnant thereafter. However, following
the global financial crisis that kicked off in 2008, equity financing picked up
as companies sought to shore up their weakened financial bases by public
stock offerings which became active in 2009. Also given the surge in stock
prices in 2013, stock splits reached 27.0 billion shares, the highest in history.
On the other hand, the overall number of issued shares has been declining in
recent years, due mainly to the retirement of treasury shares.

5. New Share Underwriting

The method of issuing shares may be divided into direct offering and indirect
offering, and public offering and private placement. When the issuing com-
pany itself performs the administrative procedures necessary for issuing
shares and sells them to investors, this is called“direct offering (or self-offer-
ing).”Although this method helps the issuing company save the fees payable
to an intermediary, it is not an easy task to perform the technically complicat-
ed procedures and sell the securities to an unspecified large number of inves-
tors. When the issuing company commissions a specialist intermediary to
handle the public offering of its shares, this is called“indirect offering.”The
intermediary provides the issuing company with expert advice, handles the
distribution of shares and performs the necessary administrative procedures
on behalf of the issuing company, and takes over the shares remaining unsold
after the public offering period. At present, almost all shares are offered
through the indirect offering method. A“public offering”is the public solici-
tation of an unspecified large number of investors for the purchase of new
shares, and“private placement”is the private solicitation of a specified small
number of investors to purchase them. In public offerings of new shares, in-
direct offering through underwriting securities companies is the general rule.
　In the case of an indirect offering, the issuing company concludes an un-
derwriting agreement with a securities company. Underwriting agreements
are divided into standby underwriting (the underwriting securities company
commits itself to buying up the shares remaining unsold) and firm commit-
ment underwriting (it agrees to buy up the entire issue from the start). Today,
the latter has become the general practice.
　When the total amount of shares offered is too large, a securities company
alone cannot accept the underwriting risk involved. Therefore, a number of
securities companies often get together to form an underwriting syndicate. Of
 Chap. III The Stock Primary Market 　53
Table III-6.　Number of Lead Managing Underwriters in Shares of Securities Companies
(IPOs)

(Existing stock exchanges and start-up markets in 2017)

Existing Markets Mothers JASDAQ
Securities companies
No. of co. % of total No. of co. % of total No. of co. % of total
Daiwa 4 26.7 10 18.5 1 7.1
Nomura 3 20.0 10 18.5 4 28.6
Mizuho 3 20.0 8 14.8 7 50.0
SMBC Nikko Securities 2 13.3 10 18.5 － －
Tokai Tokyo 2 13.3 3 5.6 － －
Mitsubishi UFJ Morgan Stanley 1 6.7 － － － －
SBI － － 12 22.2 1 7.1
Others － － 1 1.9 1 7.1
Total 21 100.0 54 100.0 11 100.0

Source: PRONEXSUS, Kabushiki Kokai Hakusho (White Paper on Public Listings).

Table III-7.　Flow from additional secondary distribution by over-allotment in initial

public offering to syndicate cover transaction

Board of directors’ Determine BB Set open price Listing date SC transaction

meeting on issuance provisional (Report Set OA offering (Trading or GS exercise
of new shares and terms demand) volume start date)
secondary distribution
Set OA offering limit

BB ＝Book Building
OA ＝Over-Allotment
SC transaction＝ Syndicate Cover (short cover) transaction
GS exercise ＝Exercise of Green Shoe option

Note: SC transactions and exercise of GS must be executed within 30 days from the day following the
date on which the period during which investors submit their applications to securities compa-
nies is completed (normally, 2 or 3 business days prior to the listing date).
54　Chap. III The Stock Primary Market

these securities companies, the firm that plays the leadership role in organiz-
ing the syndicate members and in negotiating the terms and conditions of the
underwriting agreement with the issuing company is called the“lead manag-
ing underwriter.”And the group of securities companies that assumes no un-
derwriting risk and only sells the securities is called the“selling group.”
　In a public offering or secondary distribution, it is necessary to have a
strategy for balancing supply and demand. Using an over-allotment option
allows the securities firm that is the lead managing underwriter of an offering
to borrow shares from existing shareholders and sell them if demand is great-
er than the original scheduled number of shares. In Japan, lead managing un-
derwriters of offerings have been able to use the over-allotment option based
on the underlying underwriting agreement since January 31, 2002. This op-
tion allows the sales of additional shares up to 15% of the scheduled number
of shares in the public offering or secondary distribution. The short position
arising when the lead managing underwriter the over-allotment option is
cleared differently depending on whether the price in the secondary market
has risen or fallen compared with the price after the listing. When the price
of the shares has fallen, the lead managing underwriter purchases the excess
shares in the secondary market (syndicate cover). When the price of the
shares has risen, the lead managing underwriter exercises a green shoe option
(right to acquire additional shares from the issuing company or from inves-
tors who have lent shares).

6. Private Equity Market

Public offerings and other equity financing that raise capital from the general
public are mostly conducted by public companies that have their shares trad-
ed on an exchange or other public market. However, that does not mean that
equity financing by private companies faces special legal restriction. In fact,
equity financing regulations for private companies can be said to be less strict
than those for public companies. For example, the written notice of securities
does not require information concerning the operating performance or finan-
cial conditions of the issuer because, unlike the securities registration state-
ment, it is not intended to disclose information to investors. Under the Finan-
cial Instruments and Exchange Act and Cabinet Office Order, etc. currently
in force, furthermore, in cases where the proceeds from a proposed offering
or secondary distribution of shares (securities) are less than ¥100 million, the
private company is exempt from filing a securities registration statement, and
a written notice of securities is filed in its place, regardless of whether the so-
licitation is extended to 50 persons or more or not. Furthermore, if the pro-
ceeds from an offering do not exceed ¥10 million or fewer than 50 persons
 Chap. III The Stock Primary Market 　55
Table III-8. Criteria for Requirement to Submit Securities Registration Statement or
Written Notice of Securities Under the Financial Instruments and Exchange
Act, and Cabinet Office Order, etc.

No. of Investors*
Less than 50 50 or more
Issue 100 million yen or more Not necessary Securities
Amount Registration
Statement
10 million yen or greater but less than 100 Not necessary Written
million yen Notice of
Securities
10 million yen or less Not necessary

*Notes: 1. Under the current FIEA and Cabinet Office Order, etc. even when the number of investors so-
licited is less than 50, if the issuer has made an offering of the same type of security within six
months previously and the combined number of investors solicited is 50 or more, the determi-
nation of whether a securities registration statement or written notice of securities is required
must be made based on the total issuance amounts of the offerings.
2. In accordance with the revision of administrative orders effective April 1, 2003, issuance regu-
lations have been liberalized as follows.
(1) Under specified condition of the number of Qualified Institutional Investors being 250 or
less, etc., the number of professional investors (Qualified Institutional Investors) may be
deducted from the count of 50 or more of the number of investors being solicited.
(2) In determining the issuance amount for a professional investor private equity offering in a
solicitation for purchase of securities where only Qualified Institutional Investors are
counterparties and there is little possibility of sales to anyone other than qualified institu-
tional investors, equities, etc. and equity related products are to be included. In this case,
regardless of the number of investors, the written notice of securities is required only for
issues of 100 million yen or more (for solicitations of investor groups of less than 50,
please see note 1 above).

are solicited, the issuer is not, in principle, required to file a written notice of
securities.
　However, when viewed from the standpoint of general investors, private
equity investments, given the limitations on information available to them,
involve higher risks. While stock prices of public companies are properly
formed through market transactions, reasonable values of private stocks are
not easy to determine since there are various methods to estimate private
stock prices, including the net asset method of estimating based on the com-
pany’ s net assets, the income method based on cash flows, and the dividend
discount method based on future dividend projections. Moreover, the prob-
lem with private equity investments is that the funds invested in them are not
easily recoverable due to lack of liquidity. Since it was difficult to recover
funds until the company went public, investment in private equity was limit-
ed to a small number of investors, such as venture capital funds, which have
56　Chap. III The Stock Primary Market

Table III-9.　Examples of methods of calculating stock values of private companies

1. Net assets approach

(1) Book value method
Price per share＝Book value of net assets/Total number of issued shares
(2) Adjusted book value method
Price per share＝Book value of net assets reflecting unrealized gain and losses/Total number of
issued shares
(3) Market value method
Price per share＝Market value of net assets/Total number of issued shares
2. Income approach
(1) Income capitalization method (direct return method)
Price per share＝(Projected future net profit after tax/Capitalization ratio)/Total number of issued
shares
(2) DCF method
Price per share＝Total amount of discounted present value of projected future profit/Total num-
ber of issued shares
3. Dividend discount approach
(1) Dividend discount method
Price per share＝(Projected future annual dividends/Capitalization ratio)/Total number of issued
shares
(2) Gordon Growth Model method
Price per share＝(Projected future annual dividends/(Capitalization ratio-Investment return ratio
×Retained ratio)

the economic wherewithal to tolerate the high risks and long investment peri-
ods associated with such investments.
　In recognition of the necessity of stimulating business startups and nurtur-
ing venture-type companies, the JSDA relaxed some of its rules in June 1997,
and launched a public quotation system (Green Sheet system) for private eq-
uity or unlisted shares. Securities companies became able to solicit invest-
ment in private equities for issues of OTC securities that met a certain stan-
dard of information disclosure and for which the securities companies
provide publicly announced buy and sell quotes. The system also contributed
to adding liquidity to unlisted shares and paving the way for companies to
adopt a new means of financing before going public. In May 2015, a new
shareholder community system was introduced with the purpose of dissolv-
ing the green sheet system to form a better framework by March 31, 2018
(see Chapter XI).
 CHAPTER IV

The Stock Secondary Market

1. The Structure of the Stock Secondary Market

The stock secondary market on which shares are traded consists of a trading
market opened on a stock exchange, a proprietary trading system (the so-
called PTS) operated by private companies authorized under the 1998
amendment to the Securities and Exchange Act, and the off-exchange trading
of listed stocks that was made by virtue of the same amendment, which abol-
ished the duty to centralize securities trading on stock exchanges.
　The exchange market is provided by stock exchanges, and there are four
stock exchanges in Japan: the Japan Exchange Group formed from the com-
bination of the Tokyo Stock Exchange and the Osaka Exchange, and the Na-
goya, Sapporo and Fukuoka exchanges. Stock exchanges used to be member-
ship organizations consisting of securities companies. However, under the
2000 amendment to the Securities and Exchange Act, they were authorized to
change their status as corporations, and the Japan Exchange and the Nagoya
Stock Exchange have become corporations.
　Shares of listed stocks (1) that meet certain listing requirements are traded
(2) during fixed trading hours (3) by auction, and (4) the stock exchanges as
self-regulatory organizations manage and supervise the trading process and
the business conduct of securities companies with a view to ensuring the fair-
ness of trading.
　In addition, there is the green sheet market where shares of companies that
are not listed on a stock exchange or not registered with the over-the-counter
(OTC) market are traded over the counters of securities companies and re-
ported to the Japan Securities Dealers Association (JSDA). However, the vol-
ume of trading on the Green Sheet market is small and the market will be
abolished effective March 31, 2018. Instead, a“shareholders community sys-
tem”was established in May 2015 as a framework to trade unlisted stocks.
The system for off-floor trading of shares listed on the Tokyo Stock Ex-
change (ToSTNeT) has a three-part structure to accommodate the diverse
needs of investors: ToSTNeT-1 which processes large-lot and basket trades
of listed stocks through negotiated or cross transactions; ToSTNeT-2 which
58　Chap. IV The Stock Secondary Market

Chart IV-1.　Inter-market Competition in Japan

Japan Exchange Group

(as of October 26, 2017)
First Section OTC trading by OTC trading by
2,034 companies securities companies securities companies

ToSTNeT
JASDAQ Shareholders Community Green Sheet issues, etc.
748 companies (as of October 20, 2017) (as of September 29, 2017)
Second Section Mothers 16 companies 11 companies
525companies 246 companies

Tokyo Pro Market

22 companies OTC trading by

Co or tr
securities companies
f
m ad
pe in
Listed issues, etc.

tit g
io
n Privately
conducted trading by
(13 companies)
Centrex

securities companies
Nagoya Stock Exchange through electronic
(as of October 10, 2017) commerce [PTS]
278 companies
Issues listed on the 1st Sect.
Issues listed on the 2nd Sect.
N-NET

Fukuoka Stock Exchange

panies)
(14 com-
Q-Board

(as of September 29, 2017)

Trading in Japanese
97 companies stocks on overseas
markets

Sapporo Stock Exchange

panies)
(8 com-
Ambitious

(as of June 21, 2017)

50 companies

concludes trades at specific prices such as the closing price several times a
day; and ToSTNet-3 which handles purchases of treasury stocks. In addition,
certain securities companies have opened a proprietary trading system (PTS)
on their own mainly for the purpose of matching orders received after busi-
ness hours.
　A few years before, there were repeated cases of breakdowns of trading
computer systems at securities companies and stock exchanges, erroneous
 　59
Chap. IV The Stock Secondary Market

placement of orders, and other irregularities such as buy or sell orders with
no intention of execution. As a result, in January 2010, the Tokyo Stock Ex-
change introduced its new world-class, high-speed trading system“arrow-
head”to increase the credibility of the market.

2. Transaction Size of the Stock Secondary Market

As of December 31, 2016, the number of companies listed on the nation’ s

stock exchanges (including multiple listings) stood at 3,654, of which 3,533
were on the Tokyo Stock Exchange (TSE). The number of shares listed on
the TSE came to 407.2 billion, with a total market capitalization of ¥579.6
trillion. And the value of listed shares traded on all of Japan’
s stock exchang-
es was ¥691.3 trillion.
　The level of concentration of stock trading on the Tokyo Stock Exchange
is extremely high. The TSE accounts for the majority of the nation’ s listed
stocks, and the number of issues listed only on regional stock exchanges
stood at 116. In terms of value only, the Tokyo Stock Exchange accounts for
almost all of the nation’ s stock trading. The heavy concentration of stock
trading on the TSE may be explained by the fact that the stock markets have
taken on a hierarchical structure, with the First Section of the TSE at the top,
and that business corporations that are bent on enhancing their social status
have sought to list their stocks on the First Section of the TSE. Therefore,
blue-chip corporations have tended to converge on the First Section of the
TSE. And as shares are actively traded in large volumes and on a highly liq-
uid market, the externality of the order flow—trading flows to where shares
are actively traded—was at work accelerating the concentration of orders.
　The number of stocks listed on the JASDAQ market (formerly the over-
the-counter market), which became a regular stock exchange in December
2004, stood at 748 at September 30, 2017, with a total market capitalization
of ¥10.3 trillion, and the total trading volume during 2016 came to ¥29.7 tril-
lion, with the value of shares traded on this market totaling ¥12.1 trillion.
These figures far exceeded the Second Section of the TSE, with which the
JASDAQ market has been competing for business for many years, with the
exception of total market capitalization: the number of shares listed (748 vs.
523); total market capitalization (¥10.3 trillion vs. ¥10.6 trillion); total trad-
ing volume (¥29.7 trillion vs. ¥25.6 trillion); and total value of shares traded
(¥12.1 trillion vs. ¥6.1 trillion).
　Other emerging stock markets include the Mothers market opened on the
TSE in November 1999, the NASDAQ Japan market established on the Osa-
ka Securities Exchange in June 2000, the Centrex market of the Nagoya
Stock Exchange, the Ambitious market of the Sapporo Stock Exchange, and
60　Chap. IV The Stock Secondary Market

Table IV-1.　Trading Volumes of Major Stock Exchanges

Year 2008 2009 2010 2011 2012 2013 2014 2015 2016
First Section of
Trading volume (in thousands of shares)

541,576,224 552,098,670 511,695,772 524,646,368 519,754,423 841,857,965 612,851,073 620,005,885 593,610,396

TSE
Second Section
11,775,067 10,202,351 7,315,086 9,850,350 7,703,508 22,225,351 36,199,273 36,580,825 25,604,041
of TSE
First Section of
5,734,251 6,369,508 4,884,700 6,505,596 5,260,315 － － － －
OSE
Second Section
3,879,093 4,428,690 2,763,250 5,827,921 2,702,625 － － － －
of OSE
JASDAQ 11,288,330 13,461,273 7,780,105 11,627,350 11,347,773 13,237,308 37,019,052 37,077,973 29,715,104

Note: The Tokyo Stock Exchange and the Osaka Securities Exchange were integrated in January 2013
and became the Japan Exchange Group as a result of which the first and the second sections of
these markets were also combined.
Source: Japan Securities Dealers Association; Japan Exchange Group.

Table IV-2.　Trading Volume by Stock Exchanges

and Percentage Composition (2016)

Trading Amount
Stock Exchanges %
(millions of yen)
Tokyo 691,102,578 99.978
Nagoya 82,877 0.012
Fukuoka 17,209 0.002
Sapporo 51,288 0.007
Total 691,253,953 100

Source: Japan Exchange Group.

the Q-Board market of the Fukuoka Stock Exchange. Competition among the
stock exchange for winning over candidates for stock listings has since be-
come increasingly fierce. Further, in August 2007, the JASDAQ Securities
Exchange joined the race with the launch of NEO, its version of a new mar-
ket for venture businesses.
　Subsequently, as NASDAQ of the United States withdrew from the mar-
ket, NASDAQ Japan changed its name to Hercules in December 2002. And
in October 2010, the Hercules, JASDAQ, and NEO markets merged to be-
come a new JASDAQ market.
　In July 2013, the cash markets of the Tokyo Stock Exchange and the Osa-
ka Securities Exchange were integrated to form the Japan Exchange Group
(JPX). As a result, Japan Exchange is now affiliated with JASDAQ, the
 　61
Chap. IV The Stock Secondary Market

Mothers market and the Tokyo PRO Market.

3. The Structure of Share Ownership

Following the liquidation of the financial combine zaibatsu (great industrial

or financial conglomerates or holding companies) after the war, shares held
by them were released to the stock market for distribution among individual
investors. And the ratio of shares held by individual shareholders rose to
69.1% in 1949. However, as obviously not many of these individual investors
could afford to hold these shares for the long haul, they liquidated their hold-
ings soon after they had acquired them. As a result, the ratio of individual in-
vestors’shareholdings declined rapidly thereafter. Partly due to the fact that
some investors had cornered these shares, groups of companies that had be-
longed to the former financial combine (zaibatsu) started cross-holding
shares of one another to strengthen their group solidarity.
　In the 1960s, capital transactions were liberalized following the post-war
restoration efforts. However, in fear of a hostile takeover by foreign firms
taking advantage of liberalized capital transactions, Japanese firms sought to
build a strong shareholder base, and the ratio of the shareholdings of business
corporations and financial institutions increased. Subsequently, the system of
issuing shares at par value changed to one of issuing at market price, making
it necessary for business corporations to maintain their share prices at a high
level if only to enable them to advantageously raise funds for a capital in-
crease. Consequently, the ratio of the shareholdings of business corporations
continued to increase in the years up to 1975. Meanwhile, encouraged by the
long-lasting bull market, financial institutions also continued to build their
equity portfolios and increased the ratio of their stock holdings until the
speculative bubble in the end of the 1980s.
　Such corporate domination of the shareholdings structure brought about a
material impact on the formation of stock prices. While individuals and insti-
tutional investors bought stocks as an investment to earn yields (profit-earn-
ing securities), business corporations or financial institutions bought shares
on their proprietary accounts, in many cases, for the purpose of holding
shares to strengthen corporate affiliations or business tie-ups as a means of
gaining control of the management. Therefore, these corporations were more
determined to hold such shares for the long haul (management-stake securi-
ties) without consideration to yields on investment, and yields on such shares
tended to decline. As a result, prices of such shares rose to a level that was
beyond the reach of individual investors who invested in shares on the basis
of the yield they produced, and the ratio of stock holdings by individual in-
vestors dropped further. In addition, as individual investors had no choice but
62　Chap. IV The Stock Secondary Market

Chart IV-2.　Changes in the Ratio of Shares Held by Different Categories of Investors

% %
45 45
Business corporations, etc.
40 40
Trust banks, life and non-life insurance
companies, and other financial institutions
35 Individuals and others
(including institutional investors) 35

30 30

25 25

20 20

15 15
Commercial and
Foreign investors regional banks
10 10

5 5

0 0
1970 75 80 85 90 95 2000 05 10 15
year
Note: Results from FY2004 to FY2009 include the portion of companies listed on JASDAQ.
Source: Share Distribution Survey.

Chart IV-3.　Ratios of Cross-Shareholdings

Note: Research by Nomura Securities Co., Ltd.

Source: Nihon Keizai Shimbun; July 16, 2017
 　63
Chap. IV The Stock Secondary Market

to aim at making capital gains even under such circumstances, the rate of
turnover of their investments needed to be quickened. This was why individ-
ual investors took to highly speculative investment, bringing about a special
structure of the stock market in this country.
　However, as unrealized capital gains on stock investment shrank sharply
due to falls in stock prices after the burst of the speculative bubble, holding
shares was no longer an attractive investment even for corporate investors.
Furthermore, stock prices dropped below their acquisition cost from the au-
tumn of 2001, and as the system of valuing banks’shareholders at their mar-
ket prices was introduced applicable to the term that ended in September
2001, banks had to deduct 60% of the unrealized losses from their earned
surplus. In the 2000s, cross-shareholdings among nonfinancial companies
started to rise again as defense measures against corporate takeovers and oth-
er uninvited contests for corporate control. However, with a growing interest
in corporate governance, chiefly megabanks have been selling off shares in
their holdings.

4. Stock Prices and Indicators for Investment (1)

Theoretical prices of assets such as land and stocks represent rents or divi-
dends, as the case may be, capitalized by a certain rate of return of capital
(interest rate plus risk premium). However, as only a small part of such assets
is actually bought or sold, the total asset value is calculated by multiplying
the total of such assets using the prices formed through such transactions. For
instance, the total market capitalization on the First Section of the TSE as of
October 30, 2017 was approximately ¥652.5 trillion, but the value of shares
actually traded on that day was about ¥4.0 trillion. This indicates that the to-
tal market capitalization of the TSE is computed on the basis of share prices
formed through the trading of approximately ¥4 trillion worth of shares. (Ac-
tually, it represents a sum total of the market valuation of all listed stocks,
and the above explanation is intended to simplify the picture.)
　At this stage, whether the given price of a stock is high or low is judged by
comparing its dividend yield with the market interest rate then prevailing. In
other words, an investment opportunity to generate better-than-average earn-
ings, working through competition among investors who seek such invest-
ment opportunities, equalizes the dividend yield on a given stock to the mar-
ket rate then prevailing. However, if an oligopoly strengthens in a given
industry group and the earnings gap among companies belonging to the same
industry group widens, those with higher growth potential tend to reinvest a
larger portion of their profit as retained earnings. (Typical of this tendency
are the former IBM and Microsoft, which had no dividends until the end of
64　Chap. IV The Stock Secondary Market

Table IV-3.　Stock Splits and Changes in Divisor

Before stock split After stock split

Issue
No. of shares Stock price No. of shares Stock price
A 10 $20 20 $10
B 10 10 10 10
C 10 6 10 6
Total 30 36 40 26
Dow divisor 3 2.1667
Dow scaled
12 12
average

Source: J. H. Lorie and M. T. Hamilton, The Stock Market, 1973; Japanese

translation Shoken kenkyu, Vol. 51, 1977, pp. 73

Chart IV-4.　Stock Price and Capital Increase of Toray Industries

(yen)

350 ¥327 ¥334

¥314
300 ¥275
250 ○
a 1:0.8 ○
a 1:0.54
○
a 1:1 ○
b 0.06 ¥219
○
b 0.2
200 ○
a 1:0.5 ¥179
○
b 0.5
150 ¥168 ¥161 ○
a 2:1
¥155
¥133
100 ¥112
50

0
1953 ’54 ’55 ’56 ’57 ’58 ’59 ’60 ’61 ’62 ’63

Notes: ○
a Rights offering.
○
b Free distribution of shares.

Previous day’s total stock price±total ex rights portion

New divisor＝Previous day’
s divisor×
Previous day’ s stock price total

s divisor� �
Total ex rights portion
＝Previous day’ � 1± Previous day’s stock price total �
 　65
Chap. IV The Stock Secondary Market

2002.) Under such circumstances, dividend yields cannot be computed to

start with, and the level of stock prices becomes irrelevant as an indicator for
investment.
　As highly profitable corporations increase their capital by reinvesting their
earnings instead of issuing new shares, their per share profit increases and
the price of their stock also rises proportionately thereto. If their stock price
rises too high, small investors cannot buy their shares, with the result that the
marketability and liquidity of their shares suffer. Therefore, such corpora-
tions seek to recover the marketability of their shares by lowering their stock
prices by means of stock split-ups or stock dividends—forms of issuing new
shares that do not require payment for the new shares.
　If this kind of capital management policy is adopted, such practice is
bound to affect the stock price indexes. Assuming that other conditions re-
main unchanged, a two-for-one stock split would halve the price of such
shares. However, since the number of shares a shareholder of such a corpora-
tion holds would double as a result of the two-for-one split while the stock
price is halved, the total market value of the shares held by such a sharehold-
er would not change at all. The Dow scaled average represents the average of
original stock prices as seen from the standpoint of shareholders prior to the
stock split. The Dow Jones Industrial Average is computed by changing the
divisor each time a stock price declines due to a stock split or an issuance of
new shares that does not accompany payment.

5. Stock Prices and Indicators for Investment (2)

In Japan, the Nihon Keizai Shimbun (the Nikkei Daily) has devised several
Dow indexes (the Nikkei average), typical of which is the Nikkei 225. This is
a price-weighted equity index, which consists of 225 leading issues listed on
the TSE representing various industry groups. Whenever a stock split or divi-
dend is reported or whenever any of the 225 issues is replaced by another,
DOW indexes (the Nikkei average) are computed using a revised divisor. The
Nikkei 225 started with a divisor of 225. Subsequently, however, the divisor
has continued to decrease and dropped to 26.950 on October 30, 2017, with
the result that its multiple has risen to 8.35. This means that when the simple
average of the stock prices of the 225 issues rises or falls ¥20, the Nikkei av-
erage will increase or decrease ¥167. The Dow scaled average is designed to
restore the continuity of stock prices on the basis of the total market value of
original shares held by an existing investor when a stock split or an issuance
of new shares that does not accompany payment is conducted. However, it
actually reflects the rise or fall in the simple average of stock prices at a scale
several times larger than what occurred.
66　Chap. IV The Stock Secondary Market

Chart IV-5.　Transitions in Stock Prices

Nikkei average (left) TOPIX (right)
(Points) JPX Nikkei 400 (left) (Points)
25,000 2,500

20,000 2,000

15,000 1,500

10,000 1,000

5,000 500
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
(Year)

Note: The record date of JPX Nikkei 400 is August 30, 2013 (base value of 10,000 points).
Data: Bloomberg
Source: Japan Securities Dealers Association.

Chart IV-6.　Amounts of Trades on the TSE

Total trading amounts on TSE (right)
Daily average trading values on TSE (left)
(billions of yen) (trillions of yen)
4,000 800

3,500 700

3,000 600

2,500 500

2,000 400

1,500 300

1,000 200

500 100

0 0
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
(Year)

Notes: 1. Total of domestic stocks.

2. In July 2013, the cash equity market of the former Osaka Securities Exchange was integrated
into the Tokyo Stock Exchange.
Source data: Japan Exchange Group.
Source: Japan Securities Dealers Association.
 　67
Chap. IV The Stock Secondary Market

　Acknowledging that the Nikkei average no longer reflects fairly the

changed market reality brought about by the information technology (IT)
boom, in April 2001 the Nihon Keizai Shimbun (Nikkei) replaced as many as
34 issues out of the 225 issues at a stroke. However, as the stock prices of IT-
related issues fell sharply in June of the same year, the new Nikkei average
dropped more sharply than the old Nikkei average would have. Furthermore,
as the Nikkei average is an unweighted average computed on the basis of
simple average stock price per share, it is strongly affected by a rise or fall in
the prices of scarce stocks or high-priced stocks. This is why market watch-
ers pointed out the possibility of a manipulation of the stock index when
trading in the Nikkei stock index futures trading increased sharply in the first
half of the 1990s.
　Market capitalization-weighted indexes that are designed to remedy these
shortcomings of the Dow average are the New York Stock Exchange Com-
posite Index, Standard & Poor’ s (S&P) 500 index, and the TOPIX (Tokyo
Stock Price Index). TOPIX represents the total market capitalization of all is-
sues listed on the First Section of the TSE computed based on the assumption
that market capitalization as of the base date (January 4, 1968) is 100.
　TOPIX has the following characteristics: (1) it covers all issues listed on
the First Section of the TSE and therefore has become an index that reflects
changes occurring in the country’ s industrial structures and stock price
trends, and it is an index which can avert the discontinuity that might occur
when its component issues are replaced by others; (2) it allows one to easily
determine changes in market size from the perspective of market capitaliza-
tion; and (3) it is weighted by the number of shares of listed issues and there-
fore is relatively immune to a rise or fall in the prices of scarce stocks or
high-priced stocks. Since January 6, 2014, the Japan Exchange Group has
been announcing the JPX-NIKKEI 400 Index, which is composed of compa-
nies that meet requirements of global investment standards, such as efficient
use of capital and investor-focused management perspectives.

6. Stock Prices and Indicators for Investment (3)

As room for the discretionary implementation of capital management policy

grew and diversified, the weight carried by capital gains in determining an
investment policy increased and the importance of dividends or return on in-
vestment as an indicator for investment decreased. Consequently, the com-
prehensive yield that adds dividends to capital gains has come to be adopted
as an index. In addition, a growing number of investors have come to value
the price earnings ratio (PER), which is the quotient of the per share stock
price divided by profit, i.e., a reciprocal of return on investment.
68　Chap. IV The Stock Secondary Market

Chart IV-7.　Dividend Yields of TSE First Section Companies

%
3.00

2.50

2.00

1.50

1.00

0.50

0.00
2007/9
2008/3
2008/9
2009/3
2009/9
2010/3
2010/9
2011/3
2011/9
2012/3
2012/9
2013/3
2013/9
2014/3
2014/9
2015/3
2015/9
2016/3
2016/9
2017/3
2017/9
Source: Japan Exchange Group.

Chart IV-8.　Transition in Average PER (simple average) of Stocks on the TSE First
Section

(times)
100

80

60

40

20

0
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
(Year-end)

Note: End of 2002 and 2009 are blank, since the total net profit after tax per share was a negative figure.
Source data: Japan Exchange Group.
Source: Japan Securities Dealers Association.
 　69
Chap. IV The Stock Secondary Market

　The reason behind the growing popularity of PER as an index for invest-
ment was the concept of“growth stocks.”In other words, as these corpora-
tions with high growth potential continued to follow financial policies that
valued retained earnings and reinvestment of profit, dividend yield (a tradi-
tional index for investment) decreased, making it difficult for brokerage
firms to put out buy recommendations on such shares. A phenomenon repre-
sentative of this was what was known as the yield revolution—in which divi-
dend yield fell below bond yield—that occurred in the United States in 1958.
In Japan, also, a similar situation occurred in the 1960s.
　In such a situation, there was a need to link the growth potential of a cor-
poration to the level of its stock price one way or another in order for broker-
age firms to put out buy recommendations on such shares, and the answer
was the PER. In other words, the PER shows multiples of earnings at which
the underlying shares are bought and sold. Therefore, when the shares of a
corporation have a high PER, it means that the market believes that the cor-
poration has high growth potential. Actually, securities companies compare
the PER of an issue with the industry average or with other issues in the same
industry group to measure whether the issue is overvalued or undervalued.
What is more, the PER is used not only as a stock price index of individual
issues but also as a measure to compare the stock price level of a country
with the levels of other countries. Today, it has thus become one of the typi-
cal stock price indexes.
　However, while stock yield can be compared with an objective index, such
as market interest rate, the PER has a drawback in that it can be compared
with other indicators only relatively. For instance, as is often pointed out, the
PER of the S&P 500, one of the major stock indexes of the United States, has
moved between 15 and 30 since the war, but the Nikkei 225 of Japan has ris-
en as high as 80 or more in the past. (On October 30, 2017, the unconsolidat-
ed PER of the TSE First Section stood at 18.0.) It has been analyzed that the
difference between the levels of the PERs of the two countries was attribut-
able to the difference in the business accounting system (notably, the method
of depreciation) and the cross-shareholding system of Japan. It is possible
that these factors affected the PER level of Japan. More importantly, howev-
er, was the fact that there was no valid PER level to start with.

7. Stock Prices and Indicators for Investment (4)

While the PER shows the relationship between per share earnings and stock
prices, earnings vary depending on the method used to calculate them. Par-
ticularly, depreciation expenses associated with capital investments are de-
ducted from taxable income (which, therefore, cuts into earnings), but such
70　Chap. IV The Stock Secondary Market

Chart IV-9.　PBRs of TSE First Section Companies

(times)
1.4

1.2

1.0

0.8

0.6

0.4

0.2

0.0
2007/9
2008/3
2008/9
2009/3
2009/9
2010/3
2010/9
2011/3
2011/9
2012/3
2012/9
2013/3
2013/9
2014/3
2014/9
2015/3
2015/9
2016/3
2016/9
2017/3
2017/9
Source: Japan Exchange Group.

Stock price
PER＝
Per share after-tax income
Stock price
PBR＝
Per share net asset value
Stock price
PCFR＝
After-tax income + depreciation charges－(dividend + officers’bonus)

investments contribute significantly to future earnings. Therefore, a stock

price index based on earnings could sometimes mislead investors when they
make an investment decision.
　The price cash flow ratio (PCFR) is an index designed to reflect the growth
potential of a corporation based on its share price. The PCFR is computed by
dividing the stock price by the sum of the after-tax income and depreciation
expenses for the term, minus any dividends and executive officers’bonuses.
Since depreciation expenses are retained and reinvested at a later date, they
are an important factor to take into account when assessing the growth poten-
tial of a corporation, as they indicate its real earnings and cash flow.
　The PCFR is generally used in comparing the stock price of a corporation
with the stock prices of other corporations in the same industry group and
particularly in evaluating the stock prices of high-tech corporations whose
future competitiveness is largely determined by the scale and components of
their capital investment.
　Another frequently used index for investment is the price book value ratio
(PBR), which shows the relationship between the net asset value owned by a
 　71
Chap. IV The Stock Secondary Market

corporation and its stock price. The PBR of a corporation is computed by di-
viding its stock price by the value of net assets per share. The net assets of a
corporation represent the sum of the capital and earned surplus, etc., which is
called equity capital, and they are computed by deducting liabilities (debt,
etc.) from the total assets listed on the debit side of the balance sheet. In other
words, it is the net assets that would remain after repaying all the debts of a
corporation out of the proceeds of its assets when the corporation is dissolved
at a certain point in time. Hence, the PBR is an index that compares the stock
price of a corporation prevailing at a given time with its liquidation net asset
value per share. If the PBR of any corporation falls below one (or below its
liquidation net asset value per share), the stock price of such a corporation is
often considered undervalued.
　It is to be noted, however, that the use of the PBR as an index for invest-
ment is based on the assumption that it reflects the actual book value of the
issue. If the actual asset value of the land and shareholdings of a corporation
falls below the book value of the land and shareholdings on account of an
unrealized loss, the stock price of such issue, even when its PBR is below
one, cannot be considered undervalued. If such a situation arises, and the
stock market functions efficiently to a certain degree, corporations will likely
seek actively to merge with or acquire (M&A) another corporation. In fact, a
string of corporate mergers and acquisitions did take place on the U.S. stock
markets when Tobin’ s q (a modified version of the PBR) fell below one. The
PBR of the First Section of the TSE stood at 1.41 on October 30, 2017.

8. The Margin Trading System (1)

Shinyo torihiki (margin trading) is a system crafted on the model of the mar-
gin trading conducted in the United States and was introduced into Japan in
June 1951 with a view to stimulating speculative demand for securities trad-
ing. Margin trading is a transaction in which an investor can buy a certain
number of shares of a stock or sell shares which it does not own, with funds
or shares borrowed from a Financial Instruments Business Operator (securi-
ties company) by depositing a margin with the Financial Instruments Busi-
ness Operator. On the other hand, the Financial Instruments Business Opera-
tor that receives such an order must settle the transaction on the fourth
business day from the date of such transaction. As there was no adequate
stock lending market or securities financing market in Japan in the early
days, a securities finance company was created to help Financial Instruments
Business Operators reduce their burden of having to provide cash or stock
certificates for the settlement of such margin trading. This is called the Loans
for Margin Transactions.
72　Chap. IV The Stock Secondary Market

Chart IV-10.　Outline of Margin Trading and Loans for Margin Transactions

institution,
Financial
etc.
Bank of
Japan
(Purchase

procurement
consignment) Application for loan
Financial instruments

Funds
purchasing customer

Call money
Loan application
business operator
Margin transaction

Loan

Securities finance
Financial instruments
Loan

Clearing Corporation

Call broker
Japan Securities

company
exchange
Market

Execution of buy order

Call money procurement

Execution of sell order

Call money
Financial instruments
business operator
Margin transaction

Lending stock
procurement
selling customer

Stocks
Lending stock

System participant
deposit receipt
business operator, etc.
Financial instruments

(bank, etc.)
Application for Application for borrowing stock
borrowing stock
(Sale consignment)

◦Standardized margin trading (between a customer and a Financial Instruments Business Operator)
　Collateral: Shares bought (or the proceeds from the sale of shares sold)
　Margin: 30% or more of the market price of the shares bought (or sold) on margin. (When a substitute
security is deposited, such security will have a collateral value of up to 80% or less of its
market price.) However, the minimum amount of the margin in all cases is ¥300,000.
◦Loans for margin transactions (between a Financial Instruments Business Operator and a securities fi-
nance company)
　Collateral: Shares bought (or the proceeds from the sale of shares sold)
　Guarantee deposit: 30% or more of loan balance (or the lending stock balance) (When a substitute
security is deposited, such security will have a collateral value of up to 80% of its
market price.)
◦Call money share collateral deposit receipt system (participating in the system are securities finance
companies, call money dealers, companies affiliated with the deposit receipt system, financial instru-
ments exchanges, and the Bank of Japan).
　　Under this system, stock certificates pledged as collateral for a loan for margin transaction received
by a securities finance company (only such issues recognized as appropriate by the Bank of Japan) are
transferred to the account of a financial instruments exchange opened with the Japan Securities
Depository Center and the securities finance company takes in call money by pledging as collateral the
deposit receipt issued by the financial instruments exchange based on the aforesaid stock certificates.
This deposit receipt also serves as collateral security when a call money dealer borrows funds from the
Bank of Japan. In other words, a system is in place to have the funds necessary for the loan transaction
to be provided by the Bank of Japan to a securities finance company through a call money dealer with
stock certificates as substantial collateral security.

Note: The margin rate and the ratio of collateral value above may change based on margin trading regula-
tions.
 　73
Chap. IV The Stock Secondary Market

　The loan for margin transaction is where a securities finance company

lends a Financial Instruments Business Operator, who is a participant of a fi-
nancial instruments exchange, funds or stock certificates that are associated
with margin trading issues and that are needed to settle a margin transaction,
through the settlement organization of the financial instruments exchange.
The securities finance company can save costs and expenses by internally
offsetting applications for a loan of shares of a certain stock against those for
lending shares of the same stock—more specifically, by lending the money it
collects from a margin selling investor (or stock certificates it collects as col-
lateral from a margin buying investor). When a shortage of funds develops
after offsetting, the securities finance company meets the shortage by bor-
rowing the amount of such shortage from a bank, the call market, or the Bank
of Japan. When a shortage of stock certificates develops after offsetting, the
securities finance company may borrow them by inviting bids from Financial
Instruments Business Operators and institutional investors (see the chart on
the next page). Issues for margin trading purposes are selected from among
listed stocks based on standards set by the financial instruments exchange.
Stocks that can be margin traded or lent for margin trading purposes can be
categorized into trading issues, which can be used for both trading and loans,
and loanable issues, which are used only for loans. Loanable issues are se-
lected from the perspective of ensuring liquidity to handle speculative de-
mand based on the number of tradable shares or the number of shareholders.
Moreover, there are added restrictions on the amounts of stocks that can be
borrowed.
　The securities finance companies are special financial institutions on the
securities market established in February 1950. They began operating loan
transactions in line with the introduction of the margin trading system in June
1951. Since the role of securities finance companies on the securities market
increased thereon as margin trading expanded, to strengthen their function,
the government introduced a licensing system in April 1956, requiring secu-
rities finance companies to be authorized by the Minister of Finance (cur-
rently, the Prime Minister). Since then, there has been significant consolida-
tion among securities finance companies that had been established on
regional stock exchanges. As of September 30, 2017, Japan Securities Fi-
nance (JSF) alone handles loans for margin transactions as designated by
each of the stock exchanges in Tokyo, Nagoya, Sapporo and Osaka.

9. The Margin Trading System (2)

Based on the amendments to the Securities and Exchange Act in 1998, the
restrictions on Financial Instruments Business Operators borrowing stock
74　Chap. IV The Stock Secondary Market

Table IV-4.　Comparison of Standardized and Negotiable Margin Trading

Standardized margin trading Negotiable margin trading

Margin deposit 30% or more of trade contract value 30% or more of trade contract value
Loan rate (negative interest) Rate set by the financial instruments Determined between the investor
exchange and the Financial Instruments Busi-
ness Operator
Repayment due date Up to six months Determined between the investor
and the Financial Instruments Busi-
ness Operator
Eligible issues Issues selected by the financial in- In principle, all listed stocks
struments exchange
Rights processing Method set by the financial instru- Determined between the investor
ments exchange and the Financial Instruments Busi-
ness Operator
Financing (loan transaction) Available Not available

Source: Complied using data from the website of the Japan Exchange Group, etc.

without going through securities finance companies and on borrowing and

lending stock between themselves (the so-called stock lending market) were
lifted. At the same time, the regulator approved negotiable margin trading, al-
lowing Financial Instruments Business Operators to freely determine prices,
interest rates, and contract terms between themselves and their customers. At
this juncture, those margin tradings backing loans for margin transactions for
which the financial instruments exchanges determine prices, interest rates,
and contract terms on their markets came to be called standardized margin
transactions (see Table IV-4). Negotiable margin trading became increasingly
popular after they started to be used in Internet trading in Japan in 2003, and
such transactions have come to account for about 20% of all margin purchase
balances in recent years.
　Looking at the proportion of loan balances in margin stock buying balanc-
es, the dependency of Financial Instruments Business Operators on loans for
margin transactions almost uniformly declined up to 1988 because of their
growing ability to finance themselves primarily out of their internal reserves.
However, the market’ s dependency on loans for margin transactions began to
rise again in the 1990s, due to factors including the deterioration in the finan-
cial positions of Financial Instruments Business Operators following the
burst of the economic bubble, the emergence of Internet trading, and a recov-
ery in stock market prices starting in 1999. In 2005, the dependency of Fi-
nancial Instruments Business Operators on loans for margin transactions
neared the 50% mark. Since then, the dependency on loans for margin trans-
 Chap. IV The Stock Secondary Market 　75
Chart IV-11.　Margin Buying Balances (standardized and negotiable trading) and Loan/
Selling Balances

(trillions of yen) (%)

100 60
90
80 50
70 40
60
50 30
40
30 20
20 10
10
0 0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
(year)
Standardized margin Negotiable margin Stock lending loan Loan balance/selling balance
buying balance buying balance balance (total of standardized and negotiable
system balances, units on right axis)

Note: Previous to 2012, figures included the margin balances of companies listed on the Osaka Securities
Exchange.
Source: Complied using data from the website of the Japan Exchange Group, etc.

Chart IV-12.　Margin Selling Balances (standardized and negotiable trading) and Loan/
Stock Lending Balances

(trillions of yen) (%)

16 90
14 80
12 70
10 60
50
8
40
6 30
4 20
2 10
0 0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
(year)
Standardized margin Negotiable margin Stock lending loan Stock lending balance/selling balance
buying balance buying balance balance (total of standardized and negotiable
system balances, units on right axis)

Note: Previous to 2012, figures included the margin balances of companies listed on the Osaka Securities
Exchange.
Source: Complied using data from the website of the Japan Exchange Group, etc.
76　Chap. IV The Stock Secondary Market

actions has taken a downward path because of the greater diversification of

financing sources for Financial Instruments Business Operators. On the other
hand, looking at the balance of shares used in lending transactions, the tradi-
tionally small amount of margin sales began to rise in the latter half of the
1990s as institutionalization of stock markets became active and cases of Fi-
nancial Instruments Business Operators borrowing shares from securities fi-
nance companies on their own proprietary accounts to settle buy orders in-
creased. By 2000, the dependency of Financial Instruments Business
Operators on loans for margin transactions had risen to 70%. Since then, this
dependency has continued to fall because of the expanding number of sourc-
es of stock lending following the lifting of restrictions on the stock lending
market.
　The margin trading system and margin deposit operations of securities fi-
nance companies have changed and diversified along with the development
of the securities market in Japan. The margin trading system was revised fre-
quently to expand the number of available issues as a measure to invigorate
the market, with the Second Section issues being added in December 1991
and the OTC introducing a margin trading system in October 1997. Margin
deposit operations have changed as well. A financing system using loanable
issues for margin transactions for non-loanable issues was introduced in Oc-
tober 1995, and loans for margin transactions became available for the JAS-
DAQ market in April 2004. Furthermore, a commercial financing system be-
came available for Financial Instruments Business Operators that needed
cash to settle their margin buying trades in negotiable margin transactions.
　In addition to their licensed-based loans for margin transactions business,
securities finance companies also (1) offer collateral loans for bonds and gen-
eral collateral loans to Financial Instruments Business Operators or their cli-
ents, (2) run a commercial stock lending business other than the loans for
margin transactions for financial instruments companies, and (3) act as inter-
mediates in bond lending transactions.

10. Diversification of the Securities Trading System

The basic function of the stock market is to efficiently allocate funds by find-
ing a price at which all demands are matched with the supply available. At a
stage when information technology (IT) was not fully developed, there was a
need to concentrate securities trading in one place in order to achieve that
purpose. In fact, a number of stock exchanges had been established in differ-
ent regions to the extent that transactions in each region could be concentrat-
ed at the respective exchange, and listed securities were required to be traded
on these stock exchanges. In an environment where dissemination of infor-
 Chap. IV The Stock Secondary Market 　77
Chart IV-13.　Trading Amounts of Exchange Transactions and OTC Transactions

(trillions of yen) (%)

900 12

800
10
700

600 8

500
6
400

300 4

200
2
100

0 0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
(year)
Exchange transaction OTC transaction Percentage of OTC transactions to total transactions
(right axis)

Source: Japan Securities Dealers Association.

Chart IV-14.　Breakdowns of OTC transactions

(trillions of yen) (%)

100 70
90
60
80
70 50

60
40
50
30
40
30 20
20
10
10
0 0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
(year)
Amounts of PTS trades Amounts of trades other than PTS
Percentage of PTS against OTC transactions (right axis)
Source: Japan Securities Dealers Association.
78　Chap. IV The Stock Secondary Market

mation, communication of orders, and processing of transactions incur costs

and cannot be conducted in a timely manner, no arbitrage transaction—a
practice that plays the role of eliminating a price difference—could suffi-
ciently take place even if an opportunity arose to make a profit by taking ad-
vantage of a difference in the price of one and the same stock between stock
exchanges. Under such circumstances, it became necessary to concentrate se-
curities trading on the stock exchange to avert the occurrence of what is
known as the“fragmentation of the market.”
　However, the securities markets have shifted to computerized trading sys-
tems thanks to the development of information technology, and stock ex-
changes where orders are processed manually on the trading floor have be-
come a rarity in the world. That is, elements of securities trading, i.e.
integration of trading information, transmission and execution of orders, de-
livery of securities, settlement, and custody, are integrated by the computer
networks and processed in real time, realizing an environment in which bal-
anced prices can be found even through a dispersed computer network in-
stalled at markets in multiple locations. The idea of market operation based
on such an infrastructure of securities trading is called inter-market competi-
tion. Meanwhile, given the growing number of institutional investors in the
securities market, the need for a guarantee of anonymity and for a trading
system designed to minimize the market impact cost has increased, and spe-
cial forms of trading, such as large-lot transactions and basket transactions,
have also increased. As complex trading rules can be instituted without diffi-
culty in a computerized trading system, a trading system capable of meeting
such needs can be provided at a low cost.
　These technological innovations make it difficult to distinguish the trading
systems provided by private companies from those provided by the tradition-
al securities exchanges. In the United States, the Securities and Exchange
Commission (SEC) has acknowledged the similarity of functions performed
by the two types of trading systems and has adopted the Alternative Trading
System (ATS) and has authorized the Electronic Communication Network
(ECN), a type of ATS, as a securities exchange. Also in Japan, the regulators
have authorized negotiated trading in listed securities following the lifting of
the ban against off-exchange securities trading and have added a Proprietary
Trading System (PTS) to the types of securities business that can be handled
by securities companies.
 CHAPTER V

New Issues of Bonds in the Primary Market

1. Types of Bonds

The term“bonds”generally refers to debt securities issued by governments

and other public entities as well as by private companies. The issuance of
bonds is a means of direct financing, through which the issuer raises funds,
but, unlike equity financing, the issuer has an obligation to repay the princi-
pal at maturity. Bonds are classified by type of issuer into government debt
securities, municipal debt securities, government agency bonds, bank deben-
tures, corporate bonds (industrial bonds), and foreign bonds.
　Government debt securities are those issued by the national government,
and they are classified as short-term bills (maturing in one year or less), me-
dium-term notes (maturing in two to five years), long-term bonds (maturing
in six to ten years), or superlong-term bonds (maturing in ten years or more)
to distinguish an issue’ s term to maturity. In fiscal 2002 (ended on March 31,
2003), the government introduced the STRIPS and (variable-rate) retail ten-
year Japanese government bond (JGB) programs. Under the former program,
the principal and individual interest payment components of JGBs designated
by the Ministry of Finance as STRIPS bonds may be traded as separate zero-
coupon government bonds (all fixed-rate JGBs issued on and after January
27, 2003 are eligible for the program). Subsequently, the government started
issuing ten-year CPI (consumer price index)-linked bonds, five-year bonds
for retail investors, forty-year fixed-rate bonds, and three-year bonds for re-
tail investors in fiscal 2003, 2005, 2007, and 2010 respectively. Municipal
debt securities can be roughly divided by type of funds into“public sector
funds”and“private sector funds.”The former are raised through fiscal loan
funds and Japan Finance Organization for Municipalities, while the latter are
raised in the public market or underwritten by banks and other financial insti-
tutions. Among these funds, the funds raised in public markets are divided
into nationally placed municipal bonds, jointly offered local government
bonds, and municipal bonds targeting local residents (mini-local bonds).
While the municipal bonds underwritten by banks and other financial institu-
tions are called bank, etc. underwritten bonds, they come in two types, funds
 Chart V-1.　Types of Bonds
Government bonds for individual investors
Consumer price index government bonds
80　Chap. V

Variable-rate government bonds

Government debt Superlong-term government bonds Government
securities Long-term government bonds
Medium-term government securities
(or notes)
Short-term government bonds
Public bonds

Municipal debt Local public bodies

securities
Government-guaranteed debts
Independent Administrative Institutions (Urban Renaissance Agency,
Government Bonds issued by Treasury investment and etc.), Koko (Financial Corporation for Municipal Enterprises, etc.)
agency bonds loan agencies Special corporations (Kansai International Airport)
Privately placed agency bonds
Nippon Telegraph and Telephone Corporation (NTT)/ Nippon Hoso

Bonds
Others
New Issues of Bonds in the Primary Market

Kyokai (NHK: Japan Broadcasting Corporation)

Straight bonds
Power (or utilities) bonds Electric power companies, etc.
General industrial bonds Business corporations at large

Corporate bonds Corporate bonds with equity warrant

with equity warrant Corporate bonds with equity warrant Business corporations at large
of the convertible bond type
Yen-denominated
foreign bonds and International organizations and foreign governments, etc.
foreign currency
Private debt securities

denominated for-
eign bonds
Kinko bonds Central Cooperative Bank for Agriculture and Forestry
Bank debentures (Norin Chukin Bank)/ Shinkin Central Bank

Note: Local government bonds represent debt issued under local government laws and fiscal policies. However, only those publicly placed or underwritten by
banks or other financial institutions based on the issue of debt securities are included in public bonds.
 　81
Chap. V New Issues of Bonds in the Primary Market

borrowed on deeds from banks and other financial institutions or debt securi-
ties issued in the market. Government agency bonds are debt securities is-
sued by various government-affiliated entities, such as independent adminis-
trative agencies. Agency issues with a government guarantee are categorized
as government-guaranteed bonds. On the other hand, non-guaranteed govern-
ment agency bonds can be further divided into Fiscal Investment and Loan
Program (FILP) agency bonds that are publicly placed bonds and privately
placed bonds issued by certain special financial institutions. The three cate-
gories of debt securities mentioned above are sometimes collectively called
“public bonds.”Bank debentures are debt securities issued by certain bank-
ing institutions under special laws. They are principally issued in the form
and maturities of five-year interest-bearing and one-year discount debentures.
In addition, as bank debentures and government agency bonds fall within the
category of“debentures issued by a juridical person under a special Act”
stipulated in Article 2, Paragraph 1, Item (iii) of the Financial Instruments
and Exchange Act, they are sometimes called“special debts (tokushusai).”
Corporate bonds are those issued by private-sector companies and are also
known as industrial bonds. In addition to nonfinancial enterprises, banks and
consumer finance companies may also issue corporate bonds. Foreign bonds
are defined as debt securities issued in Japan by non-Japanese governments
or corporations. Those denominated in yen, in particular, are separately clas-
sified as yen-denominated foreign bonds.

2. Issuing Status of Bonds

The total value of public and corporate bonds issued in fiscal 2016 decreased
approximately 1.5% from the previous year to ¥197.2 trillion. The break-
down of issuance is described below. Of this amount, ¥168.0 trillion, or
roughly 85% of the total value, was accounted for by government bonds, un-
derscoring their dominant presence in the public and corporate bond market
in Japan. Up until fiscal 2008, JGB issuance had been on a decline along
with the upswing in the central government’ s financial position, but given the
deterioration in the government’ s finances caused by the slump in the econo-
my following the Lehman Shock in September 2008, it has been on the up-
swing since fiscal 2009. JGB issuance can be broken down into superlong-
term government bonds (¥33.0 trillion); long-term government bonds (¥35.2
trillion); medium-term government notes (¥60.5 trillion); treasury bills (¥25.0
trillion), and bonds for retail investors (¥4.6 trillion).
　In fiscal 2016, ¥6.2 trillion worth of municipal bonds were publicly of-
fered. The volume of issuance continues to be at a high level although it has
been on a slight decline since fiscal 2013. The continuing high level is basi-
82　Chap. V New Issues of Bonds in the Primary Market

Table V-1.　The Value of Bonds Issued

(¥100 million)
Total of public Government Government Superlong-term Long-term Inflation-indexed
bonds publicly securities sold on
offered bonds the market government bonds government bonds government bonds
FY
No. of Issue No. of Issue No. of Issue No. of Issue No. of Issue No. of Issue
issues Amount issues Amount issues Amount issues Amount issues Amount issues Amount
2015 764 1,880,765 78 1,736,700 78 1,632,759 9 347,870 4 355,190 1 21,394
2016 701 1,822,141 78 1,680,014 78 1,600,274 9 330,399 4 351,724 1 17,272

Medium term Medium term Individual investor Short-term discount Bonds subscribed to
government bonds government bonds
(5 year) (4, 2 year) government bonds government bonds by the Bank of Japan
FY
No. of Issue No. of Issue No. of Issue No. of Issue No. of Issue
issues Amount issues Amount issues Amount issues Amount issues Amount
2015 4 321,281 12 307,657 36 21,367 12 258,000 － 103,941
2016 4 308,782 12 296,542 36 45,556 12 250,000 － 79,740

Municipal bondsGovernment- FILP agency

guaranteed bonds bonds
FY
No. of Issue No. of Issue No. of Issue
issues Amount issues Amount issues Amount
2015 406 67,716 68 31,456 212 44,893
2016 360 62,493 79 31,069 184 48,565

Total of private Corporate bonds with

bonds publicly Straight bonds Asset backed
convertible-bond-
offered corporate bonds
type subscription
FY rights/warrants
No. of Issue No. of Issue No. of Issue No. of Issue
issues Amount issues Amount issues Amount issues Amount
2015 353 71,572 348 69,412 1 500 4 1,660
2016 553 115,679 546 114,129 2 1,000 5 550

Discount bank
Bank debentures Interest-bearing
debentures bank debentures
FY
No. of Issue No. of Issue No. of Issue
issues Amount issues Amount issues Amount
2015 91 23,647 0 0 91 23,647
2016 76 17,380 0 0 76 17,380

Nonresident bonds Yen-denominated

(yen denominated) foreign bonds
FY
No. of Issue No. of Issue
issues Amount issues Amount
2015 72 18,159 72 18,159
2016 47 16,220 47 16,220
Total of bonds
FY No. of Issue
issues Amount
2015 1,280 1,994,143
2016 1,377 1,971,419
Notes: 1. Amounts are in hundreds of million yen and decimal points have been rounded off.
2. The total of bonds is the aggregate of public bonds publicly offered, private bonds publicly offered, bank debentures,
and nonresident bonds.
3. Public bonds publicly offered include government securities, municipal bonds, government-guaranteed bonds, and
FILP agency bonds.
4. Private bonds publicly offered include straight bonds, asset backed corporate bonds, and corporate bonds with convert-
ible-bond-type subscription rights/warrants.
Source: Japan Securities Dealers Association.
 　83
Chap. V New Issues of Bonds in the Primary Market

cally due to the deterioration in the fiscal position of local governments, re-
sulting in the introduction of publicly offered municipal bonds targeting local
residents in fiscal 2001 and publicly offered joint local government bonds in
fiscal 2003.
　Among government agency bonds, government-guaranteed bonds amount-
ed to ¥3.1 trillion and FILP agency bonds and others came to ¥4.9 trillion.
Following the reform of the fiscal investment and loan program, the Govern-
ment Housing Loan Corporation issued ¥50 billion worth of the first FILP
agency bonds in fiscal 2000. Since then, the combined value of FILP agency
bonds issued has grown considerably.
　The amount of bank debentures issued stood at ¥1.7 trillion, continuing to
decline from the ¥43 trillion recorded in fiscal 1995. These were all interest-
bearing bank debentures and the issuance of discount bank debentures has
decreased sharply from the ¥30 trillion issued in fiscal 1995. No discount de-
bentures have been issued since fiscal 2013. Behind this drop was the steady
decline in operations of long-term credit banks as suppliers of long-term cap-
ital to industry. Bank of Tokyo-Mitsubishi (now the Bank of Mitsubishi-To-
kyo UFJ) ceased issuing bank debentures in March 2002, followed by similar
decisions by Mizuho Corporate Bank in March 2007 and Aozora Bank in
September 2011.
　The total issue value of corporate straight bonds has followed an upward
trend in issuance, reaching ¥10 trillion. The desire of companies to obtain a
safe source of funding in the aftermath of the Lehman Shock had prompted
an increase in the issuance of straight bonds. Although issuance declined
somewhat thereafter, it started to grow in fiscal 2016 and increased to ¥11.4
trillion.
　After recovering from the default on Argentine government debt in 2002,
the issuance of yen-denominated foreign bonds increased for several years.
Issuance of these bonds tends to fluctuate under the influence of such exter-
nal factors as foreign exchange rates, and the amount issued in fiscal 2016
was ¥1.6 trillion.

3. Methods of Issuing Public Bonds

Government securities are issued in the public market or directly to individu-

al investors or underwritten by the public sector. This section deals with the
former two methods of issuance. When issued in the market, JGBs are pri-
marily sold through public auctions based on competitive bidding on price (or
on yield), as underwriting by syndicates was discontinued in fiscal 2006. In
accordance with the terms of offering set forth by the Ministry of Finance,
auction participants submit their bid prices and amounts, and they are then
84　Chap. V New Issues of Bonds in the Primary Market

Table V-2.　Categories of Government Securities

Maturity Short-term government bonds Medium-term government bonds Long-term government bonds
6-month, 1-year 2-year, 5-year 10-year
Type of issue Discount government bonds Interest-bearing government bonds
Minimum denomi- ¥10,000,000 ¥50,000
nation
Issuance method Public auction BOJ switch Public auction OTC sales (based on subscriptions to offering)
Auction method Price-competitive bidding Price-competitive bidding Conventional style
Conventional style
Noncompetitive Non-price Competitive Auctions I Noncompetitive Bidding
Bidding, etc. Non-price Competitive Auctions I
Non-price Competitive Auctions II
Transfer restriction Yes (Note 2) No
Issuance frequency 1-year discount bonds: monthly Monthly
(FY2014 Plan)

Maturity Superlong-term government bonds Individual investor Inflation-indexed Floating inter-

government bonds government bonds est rate govern-
ment bonds
20-Year 30-Year 40-Year 3 - y e a r, 5 - y e a r 10-year 15-year
fixed rate; 10-year (Note 1)
floating rate
Type of issue Interest-bearing government bonds
Minimum denomi- ¥50,000 ¥10,000 ¥100,000
nation
Issuance method Public auction OTC sales (based Public auction －
on subscriptions to
offering)
Auction method Price-competitive bidding Yield-competi- － Price-competitive －
Conventional style tive bidding bidding
Dutch auction Dutch auction
Noncompetitive Non-price Competitive Auctions I Non-price － Non-price －
Bidding, etc. Non-price Competitive Auctions II Competitive Competitive
Auctions II Auctions II
Transfer restriction No Yes (Note 2) (Note 3) No
Issuance frequency Monthly (Note 4) Quarterly Monthly Quarterly Not scheduled
(FY2014 Plan) (Note 4)

Notes: 1. There have been no additional issues of 15-year floating rate JGBs since they were first issued in May 2008.
2. Short-term discount bonds are transferable only to corporations (including certain trustees); JGBs for individual inves-
tors are transferable only to individuals (including certain trustees).
3. Although inflation-linked bonds are not transferable to individuals, the transfer restriction has been lifted for inflation-
linked bonds maturing in January 2016 and thereon effective January 2015, allowing holding of such bonds by individ-
uals. The restriction on transfer to individuals applies to inflation-linked bonds maturing on or before December 31,
2015 even in and after January 2015.
4. The fiscal 2014 issuances of 20-year and 30-year bonds were, in principle, reopenings; bonds issued in March, April,
and May were reopenings of the March issuance; those in June, July, and August were reopenings of the June issuance;
those in September, October, and November reopenings of the September issuance; and the issuances in January and
February 2015 were reopenings of the December 2014 issuance. The March 2015 issuance was partially the same issue
as the fiscal 2015 issuance. For 40-year bonds issuance, the May, August, November 2014 and February 2015 issuanc-
es were in principal all reopenings of the May 2014 issuance.
Source: Based on the Ministry of Finance, Debt Management Report 2016, p. 44.
 Chap. V New Issues of Bonds in the Primary Market 　85
Chart V-2.　Organization of Underwriting Publicly Offered Municipal Bonds at a Glance

Issuer

Public offering agreement Underwriting and distribution agreement

(back-office work related (underwriting of publicly offered
to the issuance of bonds) municipal bonds)

Trustee Municipal bond underwriting syndicate Underwriting

Securities companies agreement
Subscription certificates and payment
City banks
Long-term credit banks
Regional banks
Trust companies
Second-tier regional banks Distribution handling
Shinkin banks agents (memorandum
on handling
distribution)

Purchase and payment Handling of distribution

Investors (institutional and individual investors)

Source: Daiwa Securities SMBC, Saiken-no joshiki (What Bonds are All About), 2009.

aggregated to determine the issue price and amount. Depending on the type
of securities to be auctioned, the issue price is set either in a conventional
auction, where bonds are issued to successful bidders at their respective bid
prices, or in a Dutch auction, where the issue price (yield) is set at the lowest
price (highest yield) among accepted bids. Other than competitive bidding,
two-, five-, and ten-year fixed rate JGBs are also offered through a noncom-
petitive bidding process that facilitates small- and medium-sized bidders and
through Non-price Competitive Auctions I and II reserved for special partici-
pants (21 companies are designated as of July 15, 2016). Private financial in-
stitutions handle subscriptions for individuals in offering JGBs for individu-
als and in offering two-, five-, and ten-year fixed rate JGBs under the new
over-the-counter sales approach.
　To issue municipal bonds, a local public body must prepare a budget plan
that defines the use of proceeds from the proposed bond issue and obtains the
approval of the local assembly. The actual issuance is also subject to consul-
tation with the Minister of Internal Affairs and Communications (MlC) or the
governor of the prefecture concerned (local bond consultation system). Even
when the issuer is authorized to issue a municipal bond, the proceeds of such
bonds can be used only for authorized projects - to finance a publicly run
corporation, for equity contributions and loans, and to roll over maturing
86　Chap. V New Issues of Bonds in the Primary Market

debts, etc. As of April 1, 2017, 35 prefectures and 20 cities “( designated cit-

ies”) that have been designated by an ordinance of the Ministry of Internal
Affairs and Communications have issued municipal bonds through public of-
ferings. In most cases, the issuer negotiates the terms of issue with an under-
writing syndicate that handles its public offering, under which the underwrit-
ing syndicate buys up whatever bonds remain unsold after the public
offering. Municipal bonds publicly offered on the joint primary market (mu-
nicipal bonds jointly issued by 35 local public bodies) in and after fiscal 2003
are also handled by underwriting syndicates, but the municipal bonds target-
ed at local residents introduced in March 2002 generally commission local
financial institutions to handle the underwriting and subscription administra-
tion.
　The issuance of government-guaranteed bonds is planned as part of the
Fiscal Investment and Loan Program, and annual ceilings on the issue
amount must be approved by the Diet. They are issued by way of either an
underwriting syndicate or issued by separate and individual bidding by com-
peting underwriters. In the former method, the terms of issue are determined
based on the results of recent JGB monthly competitive bidding. In the latter,
the terms are bid for competitively along with the lead managing underwriter
for the offering. FILP agency bonds are also issued as interest-bearing bonds,
and in issuing them, the issuing agency usually selects a lead managing un-
derwriter which, in turn, forms an underwriting syndicate.

4. Methods of Issuing Corporate Bonds

The issuance of straight bonds had in the past been subject to strict regula-
tions, and the corporate bond trustee system was the core of those regula-
tions. Against the backdrop of the main bank system in Japan at the time, the
banks had an extremely strong influence on individual corporate straight
bond issues under the corporate bond trustee system. Even in the overall cor-
porate bond primary market, banks had a greater voice than securities com-
panies. However, as the role played by the corporate bond trustee system de-
clined in the 1980s, the Commercial Code was amended in 1993 to
drastically change the system, and regulations on the issuance of corporate
bonds have been substantially eased.
　The issuing corporation appoints managing underwriters and other under-
writers that together constitute an underwriting syndicate, a bond manager or
a fiscal agent, and providers of other relevant services and obtains a prelimi-
nary credit rating. When preparations are completed, the underwriting syndi-
cate, under the leadership of managing underwriter, conducts pre-marketing
in order to build a book for the bonds. Along with this process, the issue
 Chap. V New Issues of Bonds in the Primary Market 　87
Table V-3.　Corporate Bonds Offering Amounts by Ratings

(millions of yen, %)
FY 2011 FY 2012 FY 2013
No. of Issue Proportion No. of Issue Proportion No. of Issue Proportion
issues Amount of issuance issues Amount of issuance issues Amount of issuance
AAA 23 480,000 6.0 2 70,000 0.9 2 60,000 0.8
AA＋ 24 620,000 7.7 41 965,000 12.0 53 1,170,000 14.8
AA 41 888,000 11.1 76 1,648,000 20.6 60 1,240,000 15.7
AA－ 66 2,140,400 26.7 79 2,171,400 27.1 71 1,527,000 19.4
A＋ 59 1,546,000 19.3 46 896,000 11.2 66 1,089,000 13.8
A 73 1,219,000 15.2 80 1,569,000 19.6 77 1,611,000 20.4
A－ 44 665,000 8.3 37 338,000 4.2 54 767,000 9.7
BBB＋ 28 321,000 4.0 23 278,100 3.5 24 265,000 3.4
BBB 17 147,600 1.8 10 78,400 1.0 13 153,600 1.9
BBB－ 0 0 0.0 0 0 0.0 1 1,400 0.0
Total 375 8,027,000 100 394 8,013,900 100.0 421 7,884,000 100.0

FY 2014 FY2015 FY2016

No. of Issue Proportion No. of Issue Proportion No. of Issue Proportion
issues Amount of issuance issues Amount of issuance issues Amount of issuance
AAA 3 45,000 0.5 18 577,000 8.0 25 850,800 7.5
AA＋ 34 845,000 9.9 19 326,000 5.0 32 495,000 4.4
AA 50 900,000 10.5 37 870,000 13.0 64 1,168,000 10.3
AA－ 69 1,450,000 16.9 46 688,000 10.0 86 1,535,000 13.6
A＋ 81 1,487,000 17.3 70 1,573,000 23.0 87 2,266,000 20.1
A 67 1,349,600 15.7 58 1,133,000 17.0 82 1,722,000 15.2
A－ 63 1,352,000 15.8 52 1,508,000 22.0 85 2,457,000 21.7
BBB＋ 25 1,071,000 12.5 21 165,000 2.0 27 236,000 2.1
BBB 6 73,000 0.9 2 20,000 0.0 12 571,500 5.1
BBB－ 0 0 0.0 0 0 0.0 0 0 0.0
Total 398 8,572,600 100.0 323 6,860,000 100.0 500 11,301,300 100.0

Note: Compiled based on the date of terms of issue. Transportation and broadcast bonds are included.
The highest credit ranking from an agency is used.
Source: I-N INFORMATION SYSTEMS, LTD.
88　Chap. V New Issues of Bonds in the Primary Market

Chart V-3.　Mechanism of Underwriting Corporate Bonds

Bond management company/

Issuer
Agreement commissioning the manage- financial agent*
ment of bond/Financial agent agreement*
Underwriting
Underwriting agreement (purchase agreement/underwriting and public
offering agreement)

Underwriter Memorandum among

the underwriters
Underwriting syndicate Underwriting agreement

Distribution

Investors

Note: *The issuer signs this agreement with a trustee company in the case of a mortgage bond.
Source: Daiwa Securities SMBC, Saiken no joshiki (What Bonds Are All About), 2009.

terms of the bonds are finalized and the offering begins. The book-building
method is one under which the lead managing underwriter asks syndicate
member companies to survey investors’interest in the bonds and then decides
on the issuing terms on the basis of the findings of that survey. Recently,
many issuers have employed“spread pricing,”a method under which the in-
terest of investors is measured in terms of a spread over the yield of a JGB or
an interest rate swap with the same term, to determine the issuing rate.
　During recent years, annual corporate straight bond issuance has remained
around the ¥8 trillion mark and featured mainly issues with high ratings and
a notably small proportion of issues with a low rating. The reason behind this
trend is that major institutional investors have limited their investment in cor-
porate bonds to issues with ratings of A or higher. Conversely, most of the is-
suers of BBB rated bonds are infrastructure-related companies, such as rail-
ways and telecommunications, some of which target the retail investor
market. Furthermore, in contrast to the United States, there are hardly any
BB rated or lower corporate bonds with high yields in the primary market. In
2009, to stimulate the overall corporate bond market, the Japan Securities
Dealers Association (JSDA) formed the Study Group to Vitalize the Corpo-
rate Bond Market, in which a wide range of measures are being discussed
regularly by representatives of securities companies, financial institutions,
institutional investors, and related bodies.
　Among bank debentures, discount bank debentures used to be issued pri-
marily by Mizuho Bank, Aozora Bank and Shinsei Bank in the past, but issu-
 　89
Chap. V New Issues of Bonds in the Primary Market

ance has been suspended in recent years. Among other categories, interest-
bearing bank debentures are issued in two ways: issuing debentures through
a public bond offering on a fixed day and selling them during a certain sell-
ing period. In recent years, issuance of these debentures has been on the de-
cline because of the increased diversification of funding sources.

5. Credit-Rating Agencies and Rating of Bonds

Credit rating is a classification of credit risk, indicated by a rating symbol

based on measurement of the certainty of payment of the principal of, and in-
terest on, a bond, and it is ordinarily given by an credit-rating agency special-
izing in rating credit. Originally, the system developed in the bond market of
the United States and is believed to have taken root during the Depression of
the 1930s. It was introduced to Japan in the 1980s, and today, obtaining a
credit rating has become a general practice among issuers of corporate bonds.
　In assigning a credit rating to a given bond issue, a credit-rating agency in-
vestigates and verifies to see if the issuer has any collateral to back up its ob-
ligation and if it has a special financial contract and, if it has preferential or
subordinated creditors, analyzes its financial position and business; deter-
mines its capacity to pay the principal of, and interest on, the proposed bond;
and assigns a symbol on the basis of the findings of such investigations. Nor-
mally, any debt security with an AAA rating indicates that its issuer has the
highest credit standing and is virtually free from the uncertainties of paying
the principal of and interest on the obligation. The creditworthiness of a bond
declines as its rating goes down, in order, from AAA to AA, A, and BBB, and
a bond with any of these four ratings is called an investment-grade bond.
Bonds with a credit rating of BB, B, CCC, CC, or C are called“junk bonds.”
As these bonds carry high credit risk, their issuer offers a high yield to attract
buyers. Thus, they are called“high-yield bonds,”and their primary market
has developed on a relatively large scale in the United States and Europe.
This type of junk bond primary market did not exist in Japan because of a
policy that excluded bonds that did not meet the eligibility standards from the
market. However, today no such regulations restrict the issuance of junk
bonds because the eligibility standards were abolished in 1996. Nevertheless,
few BBB-rated bonds, let alone junk bonds, have been offered on the market.
　Designated credit-rating agencies now include both domestic players, such
as the Rating and Investment Information (R&I) and the Japan Credit Rating
Agency (JCR), and global agencies, such as Standard & Poor’ s and Moody’ s
and Fitch. In Japan, a new registration system of the credit-rating agencies
replaced the conventional system based on the Act for Partial Amendment of
the Financial Instruments and Exchange Act enforced in April 2010. Further,
90　Chap. V New Issues of Bonds in the Primary Market

Table V-4.　Definitions of Credit-Rating Symbols

Rating and Investment Information, Inc. (R&I)
Credit Rating Definition
AAA Highest creditworthiness supported by many excellent factors.
AA Very high creditworthiness supported by some excellent factors.
A High creditworthiness supported by a few excellent factors.
BBB Creditworthiness is sufficient, though some factors require attention in times of major environmental changes.
BB Creditworthiness is sufficient for the time being, though some factors require due attention in times of environmental changes.
B Creditworthiness is questionable and some factors require constant attention.
CCC Creditworthiness is highly questionable and a financial obligation of an issuer is likely to default.
CC All of the financial obligations of an issuer are likely to default.
C R&I believes that all of the financial obligations of an issuer are in default.

Japan Credit Rating Agency, Ltd. (JCR)

Credit Rating Definition
AAA The highest capacity of the obligor to honor its obligation to its financial commitment.
AA A very high capacity to honor its obligation to its financial commitment.
A A high capacity to honor its obligation to its financial commitment.
BBB An adequate capacity to honor its obligation to its financial commitment. However, this capacity is more likely to diminish in
the future than in the cases of the higher rating categories.
BB Although the capacity to honor the financial commitment on the obligation is not considered problematic at present, this capac-
ity may not persist in the future.
B A low capacity to honor its obligation to its financial commitment, giving cause for concern.
CCC There are factors of uncertainty that the obligation to financial commitment will be honored, and a possibility of default.
CC A high default risk.
C A very high default risk.
D In default.

Moody’
s Investor Service
Credit Rating Definition
Aaa Obligations rated“Aaa”are judged to be of the highest quality, subject to the lowest level of credit risk.
Aa Obligations rated“Aa”are judged to be of high quality and are subject to very low credit risk.
A Obligations rated“A”are considered upper-medium grade and are subject to low credit risk.
Baa Obligations rated“Baa”are subject to moderate credit risk. They are considered medium grade and as such may possess certain
speculative characteristics.
Ba Obligations rated“Ba”are judged to be speculative elements and are subject to substantial credit risk.
B Obligations rated“B”are considered speculative and are subject to high credit risk.
Caa Obligations rated“Caa”are judged to be speculative of poor standing and are subject to very high credit risk.
Ca Obligations rated“Ca”are highly speculative and are likely in, or very near, default, with some prospect of recovery of princi-
pal and interest.
C Obligations rated“C”are the lowest rated class and are typically in default, with little prospect for recovery of principal or in-
terest.

Standard & Poor’

s
Credit Rating Definition
AAA An obligation rated“AAA”has the highest rating assigned by Standard & Poor’
s. The obligor’
s capacity to meet its obligation
to its financial commitment is extremely strong.
AA An obligation rated“AA”differs from the highest-rated obligations only to a small degree. The obligor’ s capacity to meet its
obligation to its financial commitment is very strong.
An obligation rated“A”is somewhat more susceptible to the adverse effects of changes in circumstances and economic condi-
A tions than obligations in higher-rated categories. However, the obligor’ s capacity to meet its obligation to its financial commit-
ment is still strong.
BBB An obligation rated“BBB”exhibits adequate protection parameters. However, adverse economic conditions or changing cir-
cumstances are more likely to lead to a weakened capacity of the obligor to meet its obligation to its financial commitment.
An obligation rated“BB”is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing un-
BB certainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor’ s inadequate ca-
pacity to meet its obligation to its financial commitment.
An obligation rated“B”is more vulnerable to nonpayment than obligations rated“BB,”but the obligor currently has the capac-
B ity to meet its obligation to its financial commitment. Adverse business, financial, or economic conditions will likely impair the
obligor’ s capacity or willingness to meet its obligation to its financial commitment.
An obligation rated“CCC”is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and
CCC economic conditions for the obligor to meet its obligation to its financial commitment. In the event of adverse business, finan-
cial, or economic conditions, the obligor is not likely to have the capacity to meet its obligation to its financial commitment.
CC An obligation rated“CC”is currently highly vulnerable to nonpayment. The“CC”rating is used when a default has not yet oc-
curred, but Standard & Poor’ s expects default to be a virtual certainty, regardless of the anticipated time to default.
C An obligation rated“C”is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative se-
niority or lower ultimate recovery compared to obligations that are rated higher.
An obligation rated“D”is in default or in breach of an imputed promise. For non-hybrid capital instruments, the“D”rating
category is used when payments on an obligation are not made on the date due, unless Standard & Poor’ s believes that such
D payments will be made within five business days in the absence of a stated grace period or within the earlier of the state period
or 30 calendar days. The“D”rating also will be used upon the filing of a bankruptcy petition or the taking of similar action and
where default on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligation’ s rating is
lowered to“D”if it is subject to distressed exchange offer.
NR This indicates that no rating has been requested, or that there is insufficient information on which to base a rating, or the Stan-
dard & Poor’ s does not rate a particular obligation as a matter or policy.
 　91
Chap. V New Issues of Bonds in the Primary Market

in recent years, municipal bonds and FILP agency bonds have also come to
be rated.
　The outbreak of the U.S. subprime loan problem raised strong doubts over
the way ratings were given. To begin with, there were criticisms pointing out
that credit-rating agencies tended to give generous ratings because their
source of income was rating fees collected from issuers. Meanwhile, from a
different perspective, ratings were acknowledged as nothing more than refer-
ence. Currently, however, ratings are used in various financial regulations
and policies. Credit-rating agencies today operate under a registration system
also on a global basis and are placed under administrative supervision.

6. Corporate Bond Management

A drastic reform of the conventional corporate bond trustee system was car-
ried out by amending the Commercial Code in June 1993. Under this amend-
ment, the conventional name“bond trustee company”was changed to“bond
management company,”and its function was clarified. More specifically, (1)
the establishment of a bond management company was made mandatory, in
principle, and the eligibility for becoming one is restricted to banks, trust
companies, and companies that have received a license under the Mortgage
Bond Trust Law; (2) services to be provided by a bond management compa-
ny are restricted to the management of bonds that have been issued and are
outstanding; and (3) the power, duty, and liability of the bond management
company has been clarified. Put another way, the back-office services pro-
vided by the trust company at the time a bond is offered will not become the
core services of the bond management company, and the services to be pro-
vided by the bond management company after a bond is issued are restricted
to bond management.
　As a result of the amendment, the possibility of a bond trustee company
being involved in the issuance of corporate bonds of individual issuers has
been legally removed, and the power of the conventional bond trustee system
regulating individual issuers has thus come to an end. The amendment has
resulted in the following changes: (1) The fee the trustee bank had been col-
lecting was renamed“bond management fee,”and it was sharply lowered; (2)
by instituting exceptional provisions with respect to the mandatory establish-
ment of a bond management company (this applies when the face value of a
bond certificate is in excess of ¥100 million), issuers can appoint a fiscal
agent in lieu of a bond management company, and instances of making do
with a fiscal agent have since increased; and (3) as the services to be provid-
ed by the bond management company have been clarified, the lump purchas-
es of defaulted bonds that trustee banks had been making were discontinued,
92　Chap. V New Issues of Bonds in the Primary Market

Table V-5. Appointment, Power, and Liability of the Bond Manager under the
Companies Act
Item Contents Article
Appointment and Power
When a bond manager has A corporation issuing a corporate bond must appoint a bond manager. However, when the Article 702 of the New
to be appointed face value of a bond certificate is in excess of ¥100 million, and in such other cases as may Companies Act
be prescribed by an ordinance of the Ministry of Justice as one which poses no threat to the
protection of bondholders, the issuer need not appoint a bond manager.
Qualifications for becom- Banks, trust companies, and equivalent financial institutions Article 703
ing a bond manager
Matters entrusted The bond manager will be entrusted to receive payments, to preserve rights of claim, and Article 702 of the New
to take other steps necessary for the management of bonds on behalf of bondholders. Companies Act
Duty of the bond manager The bond manager must perform the administration of bonds in a fair and sincere manner Article 704
on behalf of the bondholders “ ( duty of fairness”). The bond manager must manage the
bonds with due care of a prudent manager to the bondholders “ ( duty of due care of a pru-
dent manager”). The exercise of contracted power (bond manager’ s power of representa-
tion) based on an agreement entrusting the management of the bond is included in the
management of the bond.
Power of the bond manager The bond manager has the authority do all judicial and non-judicial acts on behalf of bond- Paragraphs 1 and 4 of
holders that are necessary to receive payments relating to the bonds or to preserve the real- Article 705
ization of claims relating to the bonds. When the bond manager deems it necessary to take
such steps, the bond manager may, with the permission of the court, investigate the status
of the business and assets of the bond-issuing company.
Special regulation on the When the bond manager plans to take the steps described below, it must obtain a resolution Paragraphs 1 and 2 of
power of the bond manager of a bondholders’meeting. Article 706
(1) With respect to all of the bonds, granting extension for the payment of those bonds, or
releasing, or settling liability arising from the failure to perform the obligations of those
bonds
(2) With respect to all of the bonds, prosecuting lawsuits, or proceeding with bankruptcy Item (viii), Article 676
procedures, rehabilitation procedures, reorganization procedures or procedures regard-
ing special liquidation “( lawsuit”includes court-mediated settlement)
Under the Act, the bond manager has the power to take these actions without a resolution
of a bondholders’meeting if the bond management agreement so prescribes.
Power of the bond manager When a bondholder wants to object to any action taken by the issuer, he/she must obtain a Paragraghs 1 and 2,
in taking steps for the pro- resolution of a bondholders’meeting, in principle, but the bond manager can express its Article 740
tection of creditors objection on behalf of bondholders. This, however, shall not apply in cases where there is a
provision to the contrary in the contract entrusting bond management.
Liability
Liability (damages) When the bond manager takes an action in violation of the Companies Act or any resolu- Paragraph 1 of Article
tion of the bondholders’meeting, it is jointly and severally liable for damages incurred by 710
bondholders.
Statutory special liability (1) When the bond manager has received from the issuer of a bond collateral for the obli- Paragraph 2 of Article
(damages) gation represented by such a bond or when the issuer has taken an action extinguishing 710
such obligation within three months prior to a default on the redemption of, or on the
payment of interest on, the bond, or the suspension of payment by its issuer
(2) When the bond manager has received from the issuer collateral for the obligation or re-
payment with respect to the credit of the bond manager
(3) When the bond manager transfers its credit to a company controlling, or controlled by,
such bond manager, or to another company that has a special relationship with the bond
manager
(4) When a bond manager who has a credit to the issuer of the bond concludes an agree-
ment with the issuer authorizing it to dispose of the property of the issuer for the pur-
pose of offsetting such credit, or when the bond manager concludes an agreement to
take over any obligations of any company that owes a debt to the issuer.
(5) When a bond manager that owes a debt to the issuer offsets such debt by taking over a
credit to the issuer.
Exemption of debt The bond manager is exempt from debt when it has not been derelict in its management of Proviso to Paragraph 2
the bond, or when it is established that any loss caused to the bondholders is not blamable of Article 710
to an action taken by the bond manager.
Resignation of the bond (1) The bond manager may resign with the consent of the bond issuer and the bondholders’Article 711
manager and its liability meeting. (However, the bond manager must appoint in advance a successor who will
take over the administration of the bonds.)
(2) In case the bond manager has an unavoidable reason to resign, it may resign with per-
mission of the competent court.
(3) The bond manager may resign based of the causes prescribed in the agreement entrust-
ing the management of the bonds. (However, such agreement must have a provision
designating a succeeding bond manager that will take over the job.)
*) A bond manager that resigns after the issuer has defaulted on the redemption of the Article 712
bond or on the payment of interest on such bond, or that has resigned for reasons pre-
scribed in the agreement commissioning the management of the bond within three
months prior thereto, is not exempted from liability to pay damages under Paragraph 2
of Article 710.
Source: Compiled from the data drawn from Akihiro Sato, Shinkaishaho de kawatta kaisha no shikumi (The Changed Company System under
the New Companies Act), Nihon Horei, 2005, pp. 179 and 181.
 　93
Chap. V New Issues of Bonds in the Primary Market

and this practice has since become established.

　Under the New Companies Act adopted in June 2005 (enforced in May
2006), a bond management company is now known as a“bond manager,”
and its liability and power have been expanded. More specifically, (1) under
the former Commercial Code, the term“management of corporate bond”re-
ferred only to the exercise of power legally granted to the bond management
company and did not include the exercise of power based on an agreement,
etc., entrusting the management of bonds (contractual power); under the new
Companies Act, however, the exercise of the contractual power is included in
“the management of bonds”and the bond manager owes the duty of fairness
and the duty of due care of a prudent manager; (2) when the agreement en-
trusting the management of bonds contains a provision to that effect, the
bond manager may act in relation to filing a lawsuit and taking bankruptcy or
rehabilitation proceedings for all of the bonds without obtaining a resolution
of the bondholders’meeting; and (3) in taking steps to protect the creditors in
the case of a capital reduction or a merger, the bond manager may, in princi-
ple, object to such capital reduction or merger without obtaining a resolution
of the bondholders meeting.
　The Study Group to Vitalize the Corporate Bond Market previously de-
scribed takes into consideration the current situation in which a bond manag-
er is not assigned and discusses in its report a wide of range of roles that a
bond manager may possibly undertake.

7. Corporate Bonds with Subscription Rights/Warrants and Structured

Bonds

Subscription rights/warrants give their issuer an obligation to either issue

new shares or transfer shares in its treasury at a predetermined price to the
rights/warrants holder upon the exercise of their rights/warrants within a pre-
scribed period.
　Corporate bonds with subscription rights/warrants are divided into those
that in effect correspond to convertible bonds and those with undetachable
warrants. Corporate bonds with subscription rights/warrants correspond to
the former and refer to bonds (1) from which the rights cannot be detached or
separately transferred, (2) whose issue value is equal to the amount of money
payable upon the exercise of the rights, and (3) for which the exercise of the
subscription rights/warrants is always based on the contribution in kind of
the corporate bonds (debt equity swap). Except in the case of a stock split,
the conversion price is fixed at the time of its issue. In certain cases, howev-
er, the conversion price of rights may be revised downward when the price of
its underlying stock falls. Among these cases, bond issued under the condi-
 94　Chap. V New Issues of Bonds in the Primary Market

Table V-6.　Kinds of Structured Bonds

[Variable Cash Flow Bonds]

　Step-up Bond:　A bond issued initially with a coupon rate that is lower than the going rate then
prevailing and that rises after the lapse of a certain period. By its very nature, the issuer often issues
such a bond with a call option.
　Step-down Bond:　A bond issued initially with a coupon rate that is higher than the going rate then
prevailing and that declines after the lapse of a certain period.
　Deep-Discount Bond:　This bond carries an interest rate lower than the going rate throughout its
life, but it is issued at an under-par price to help its holders make up for the lower coupon by a
redemption gain.
　Reverse Floater Bond:　The coupon rate of this bond falls when the interest rate rises, and the
coupon rate rises when the interest rate declines. This is a kind of derivative bond using interest rate
swap.

[Index Bonds]
　Stock, interest rate, or bond-index-linked bond:　These are bonds whose redemption principal is
linked to the Nikkei average, whose coupon rate is linked to the Nikkei average, whose coupon rate is
linked to the interest swap rate, or whose redemption principal is linked to the Japanese government
bond futures price.
　Exchange Rate Index Bond:　Most of these dual-currency bonds are divided into those with a
principal and coupon in yen that are redeemable in a foreign currency and into reverse dual-currency
bonds with a principal and coupon redeemable in yen that carry a coupon in a foreign currency. As the
amount of principal is normally larger than the coupon, dual-currency bonds carry a larger risk of
exchange rate fluctuation.

[Bonds with Options]

　Exchangeable Bonds (EB):　Issuers of this bond may at their discretion pay redemptions with a pre-
fixed number of shares of another company. For the purchaser, this means the sale of a put option, and
under this arrangement, the coupon increases by as much as the option premium.
　Other Bonds with Options:　Included in this kind are callable bonds (the issuer can call the bond in
advance of its maturity at the discretion of the issuer); puttable bonds (its holder can demand
redemption in advance of its maturity); and knock-in, dual-currency bonds (a dual-currency bond with
an exchange-rate option).

Source: Compiled on the basis of the data drawn from the website of Hephaistos Investment Research
(http://hephaistos.fc2web.com/bond_guide/shikumi_sai.html) (Japanese) and the website of The
Central Council for Financial Services Information

tion that the conversion price can be adjusted downward with a frequency of
one or more times every six months are called“corporate bonds with sub-
scription rights/warrants with adjustable conversion price (MSCBs: moving
strike convertible bonds).”Because of market concerns about this type of
“death spiral”financing, however, few of these types of bonds have been is-
sued recently. On the other hand, as corporate bonds issued with detachable
warrants are deemed a concurrent offering of corporate bonds and equity
warrants, only those with undetachable warrants are included in the defini-
tion of“corporate bonds with subscription rights/warrants.”In such case, the
money to be paid upon the exercise of subscription rights/warrants should be
paid additionally, and the bond remains outstanding.
 　95
Chap. V New Issues of Bonds in the Primary Market

　“Structured bond”is the name popularly given to a bond structured with

derivatives. In recent years, various types of structured bonds have been is-
sued. A bond linked to the Nikkei average is a structured bond that incorpo-
rates Nikkei average options trading. In general, when the Nikkei average
rises, the deal generates a higher return, but when it falls, the option is exer-
cised, causing a loss, and the bond price falls below its par value. A corporate
bond with a clause to convert it into shares of another company “ ( exchange-
able bond”or EB) is a bond that incorporates a stock option of the target
company. In general, when the stock price of such corporation rises, the deal
generates a higher return because the holder can acquire the option fee, but
when the price of its stock falls, the option is exercised, and the holder has to
accept the share at a lower price and suffers a loss. However, unlike in the
case of a bond linked to the Nikkei average, the holder can hold the share un-
til its price recovers. Recently there have been fewer issuances of structured
bonds because of repeated cases of these bonds being sold to investors who
did not adequately understand the risks involved, resulting in occasional
court cases contesting whether securities companies had violated their obli-
gation to properly explain these products before selling them.
 CHAPTER VI

The Secondary Markets for Bonds

1. Trading of Bonds

Bonds are circulated by two different methods: (1) trading on a market oper-
ated by a financial instruments exchange, and (2) negotiated transaction be-
tween an investor and a securities company or other market intermediary.
The former is referred to as an exchange transaction and the latter as an over-
the-counter (OTC) transaction. OTC transactions account for the majority of
transactions on the bond secondary market.
　Conventionally, the trading volume on the secondary market for bonds was
limited and amounted to only ¥58 trillion in fiscal 1975, but subsequently
continued to increase and topped the quadrillion level in 2007. Although the
trading volume declined thereafter to levels of around ¥7,500 trillion, it has
turned upward in recent years and reached a near-quadrillion level in 2016.
　Looking at the bond trading volume by bond type, trading of JGBs account
for over 90% of all trading. The government has continuously been issuing
massive amounts of JGBs, resulting in a large increase in those outstanding
in the market and driving the expansion of the bond secondary market.
　This trend has remained constant in recent years. Comparing the change
from 2010 to 2016, while the trading volume of JGBs on the OTC market in-
creased ¥1,838 trillion, the overall increase was ¥1,820 trillion. As such, gov-
ernment securities outweigh by far other categories of bonds in overall fixed
income trading volume. The dominance of government debts stems mostly
likely from the difference in liquidity, which in turn is mainly because gov-
ernment debts are considered risk free in Japan and attract funds for various
investment needs.
　For the sake of development of secondary markets for bonds in Japan go-
ing forward, it is important that bonds other than JGBs are traded actively.
Recognizing the need to vitalize the corporate bond market, which plays an
important role in corporate finance, the Japan Securities Dealers Association
(JSDA) issued, in 2009, a report titled,“Toward Vitalization of the Corporate
Bond Market”that organized the issues faced by the country’ s corporate
bond market and also proposed specific measures to create a more efficient
 Chap. VI The Secondary Markets for Bonds 　97
Chart VI-1.　Annual Amount of Purchasing and Selling of Bonds (Face Value Basis)
and Share of OTC Trades
(trillions of yen)
14,000 100.000%
99.999%
12,000
99.998%
10,000 99.997%
8,000 99.996%
99.995%
6,000 99.994%
4,000 99.993%
Amounts of public and corporate bond trades (left) 99.992%
2,000
Share of OTC trades (right) 99.991%
0 99.990%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Note: Figures include gensaki trades and exclude corporate bonds with equity warrants.
Source: Japan Securities Dealers Association, Japan Exchange Group.

Chart VI-2.　Bond Trading volume by Bond Type

Shares of JGBs trades (right)

(trillions of yen) Interest-bearing ultra-long-term Interest-bearing long-term
4,500 Interest-bearing medium-term Short-term, etc 100%
4,000 99%
3,500 98%
3,000 97%
2,500 96%
2,000 95%
1,500 94%
1,000 93%
500 92%
0 91%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
(trillions of yen)
100 Financial bonds
90 Manicipal bonds (Including Nepotism bonds)
80 Government guaranteed bonds
Bonds (Including Agency bonds, etc.)
70
60
50
40
30
20
10
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Note: Including the repurchase trading volume, excluding the bonds with stock acquisition rigths.
Source: Japan Securities Dealers Association.
 98　Chap. VI The Secondary Markets for Bonds

corporate bond market with higher transparency and liquidity. The report
went on to state that vitalization of the Japanese corporate bond market
would be an important factor in Japan’ s new economic growth strategy and
that the public and private sectors should actively cooperate in advancing the
measures.
　Some of the specific initiatives taken by the JSDA are described later in
this Chapter.

2. Participants in the Secondary Bond Market

Looking at the OTC bond market by type of investor or transaction party,

trading is dominated by bond dealers, such as securities companies. In trad-
ing bonds, it is important that the transaction needs of market participants be
met as quickly as reasonably possible. That said, due to the large number of
issues and wide variety of transaction forms, it is not easy to rapidly locate a
matching counterparty for a particular transaction. Therefore, in most bond
transactions, securities companies or dealer banks act as the counterparty,
buying or selling as principal to facilitate client trading. Furthermore, securi-
ties companies, etc. trade bonds based on their own market view, which adds
to their overall trading volume. Following bond dealers, entities grouped as
“others”account for the next largest share of the total volume. This group in-
cludes the Bank of Japan, which functions as the underwriting agent for
JGBs and also buys and sells a range of debt securities as part of its open
market operations. Nonresident investors also are playing an increasingly
large role in the Japanese bond market as a means of investing in yen. They
are active players in the short-term JGB market, trading T-bills, and others.
Among other categories, city banks (large commercial banks) and trust banks
trade large volumes of bonds. In response to the recent difficult investment
environment, city banks vigorously engage in bond trading in pursuit of trad-
ing profits as well as resell municipal and other bonds underwritten by them
based on their own market view. It should also be noted that trust banks have
traditionally allocated large shares of assets under management or adminis-
tration, including pension assets, to bonds.
　When measured in terms of difference between selling and buying transac-
tions, almost all business categories have been net buyers of bonds in recent
years. The backdrop to this trend has been the ongoing low-interest-rate cli-
mate caused by recent economic conditions, financial crises, and other issues.
The continued trend among many business categories to be net buyers of
bonds can be attributed to financial institutions’reduced risk tolerance in
their loan portfolios. Another contributing factor to the net buyer trend has
been the flight of risk money into the low-risk, high-liquidity JGB market in
 Chap. VI The Secondary Markets for Bonds 　99
Table VI-1.　Trends in Bond Transactions by Investor Type

(Figure on the top line is the total of buy and sell; figure on the lower line is the net of buy and sell and
negative figure denotes selling on balance)
(¥10 billion)
FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016
City (commercial) banks 25,102 28,411 29,087 29,105 46,511 40,150 18,599 25,407 12,709 6,085
(990) (2,553) (3,706) (－193) (－1,997) (－2,861) (－2,837) (－2,630) (－973) (1,064)
Regional banks 3,624 3,733 4,479 4,857 5,891 5,765 4,140 4,550 3,480 2,525
(604) (1,002) (1,172) (1,130) (1,020) (644) (482) (303) (51) (－80)
Trust banks 24,190 20,089 24,174 24,928 24,789 22,294 16,800 14,175 10,861 10,000
(4,086) (3,976) (7,599) (6,409) (8,252) (8,109) (5,478) (1,298) (561) (299)
Agriculture-related banking 1,814 2,665 4,430 4,993 3,356 3,099 1,764 1,307 1,000 975
institutions (32) (1,336) (2,999) (4,002) (2,221) (2,126) (779) (486) (232) (240)
Other banking institutions 8,917 7,708 5,795 5,607 5,448 4,266 3,475 2,636 2,128 1,631
(3,649) (3,258) (3,277) (3,278) (2,346) (2,602) (2,016) (790) (806) (578)
Life and property casualty 3,756 4,594 3,653 4,186 4,583 4,826 4,256 2,704 1,956 1,555
insurance companies (941) (1,234) (1,743) (1,457) (1,896) (1,631) (1,387) (908) (507) (404)
Investment Trusts 3,220 2,920 2,856 2,886 2,885 3,108 4,318 4,372 3,961 2,139
(1,978) (1,498) (1,890) (1,963) (2,100) (2,309) (3,165) (3,045) (2,284) (416)
Public employees mutual 786 635 368 311 277 299 210 114 115 84
aid associations (611) (459) (245) (208) (166) (213) (151) (54) (15) (5)
Corporations 1,130 1,113 1,302 1,435 1,003 1,203 1,281 696 320 81
(960) (886) (1,250) (1,336) (922) (1,093) (1,104) (630) (256) (40)
Entities not domiciled in 30,233 28,834 26,835 31,074 36,902 34,131 34,799 35,730 37,609 36,466
Japan (5,808) (8,184) (8,474) (11,213) (14,891) (15,997) (16,300) (20,103) (21,575) (21,814)
Others 44,845 45,857 53,324 50,173 52,719 58,930 62,355 60,975 61,742 56,869
(－22,043) (－25,860) (－34,216) (－30,605) (－31,408) (－30,369) (－26,367) (－23,756) (－24,673) (－22,866)
Bond dealers 195,292 173,877 168,735 181,423 179,035 164,805 162,073 187,339 142,679 116,243
(－450) (182) (248) (－315) (－570) (－1,172) (－661) (－223) (－446) (－465)
Total 347,880 326,112 331,212 347,491 369,000 348,505 318,446 344,034 281,281 236,550
(including other investors) (－36) (1,552) (1,319) (1,843) (1,253) (1,432) (2,222) (1,984) (557) (1,490)

Note: These figures exclude the purchasing and selling value of repurchase agreements.
Source: Japan Securities Dealers Association.

reaction to the depressed stock market and the turmoil in the securitized
product and commodity markets. Interestingly, amid this net buyer trend, city
banks were net sellers from fiscal 2010 to fiscal 2015. This reversal likely re-
flects the commercial banks’desire to capture some profit given recent stable
bond prices. On the other hand, the“others”category has become a consis-
tent and substantial net seller of bonds because primary JGBs issued by auc-
tion are settled via the BOJ and reported as sales by the central bank.
100　Chap. VI The Secondary Markets for Bonds

3. Over-the-counter Bond Transactions

Depending on where transactions take place, the circulation of bonds may be

divided into exchange transactions and over-the-counter (OTC) transactions.
　An overwhelming majority of bond transactions takes place over the coun-
ter rather than on exchanges. This is due to the following reasons: (1) there
are so many issues of bonds that it is practically impossible to list all of them
on exchanges; (2) due to the wide variety of bond transaction forms and other
specifications that different buyers and sellers require, it is difficult to in-
stantly locate a matching counterparty for a particular transaction; (3) corpo-
rate investors, who account for the bulk of the bond trading volume, tend to
trade in large lots and often carry out complex transactions involving more
than one issue; and (4) tax on bond interest varies according to the tax pro-
files of bondholders. Due to these reasons, bond transactions, in general, do
not lend themselves to trading on exchanges, where the terms of transactions
need to be standardized. Bonds are more efficiently traded over the counter,
where trades are executed based on the terms individually negotiated be-
tween buyers and sellers.
　Unlike exchange markets, where all orders for a particular security are
concentrated in a single marketplace, OTC trading, in essence, is a decentral-
ized transaction process based on one-to-one negotiation that is conducted
over the counter at individual securities companies, etc. In that sense, it may
be said that the counter of each securities company is a market in itself and
that there are as many OTC markets as there are securities companies. A wide
variety of transactions may be executed over the counter once an investor
and a securities company agree on their terms. Private placement bonds as
well as publicly offered bonds may be traded, and the delivery and settlement
procedures are to be agreed upon between the buyer and the seller. The trans-
action price can also be decided between the two parties, often in reference to
the prices of other relevant financial instruments.
　In OTC trading, a securities company, etc. first buys bonds that a client of-
fers to sell and then resells them to another client afterward. When a client
wants to buy bonds, it sells them out of its inventory or sells short. These
types of transactions are generally referred to as“principal transactions.”

4. Reference Statistical Prices (Yields) for OTC Bond Transactions (1)

As OTC bond trading is a negotiated process between a securities company,

etc. and a client, it is difficult for a third party to discover the price at which a
transaction is consummated. Publication of prices and other information con-
 Chap. VI The Secondary Markets for Bonds 　101
Table VI-2.　Bond Trading by Market

(¥10 billion)
Corporate bonds with
Government
subscription rights/ Others
securities
warrants
FY2007 Stock Exchanges 0 48 0
Over the counter 1,232,317 62 21,059
FY2008 Stock Exchanges 0 66 0
Over the counter 1,036,073 72 15,042
FY2009 Stock Exchanges 0 112 0
Over the counter 781,286 52 9,175
FY2010 Stock Exchanges 0 56 0
Over the counter 761,950 70 10,175
FY2011 Stock Exchanges 0 40 0
Over the counter 829,983 46 10,773
FY2012 Stock Exchanges 0 30 0
Over the counter 842,314 45 9,760
FY2013 Stock Exchanges 0 27 0
Over the counter 936,753 24 9,230
FY2014 Stock Exchanges 0 8 0
Over the counter 1,039,157 11 11,273
FY2015 Stock Exchanges 0 30 0
Over the counter 1,025,087 20 14,432
FY2016 Stock Exchanges 0 18 0
Over the counter 921,027 31 7,335

Note: The figures for exchange trading volume are double those actually reported by exchanges to ac-
count for both buy and sell sides of transactions.
Source: Japan Securities Dealers Association and stock exchanges.

cerning OTC bond transactions not only helps efficient and orderly trading of
bonds but is also of critical importance from the standpoint of investor pro-
tection by promoting the formation of fair prices and facilitating investors’
access to trading at the best possible price. Publication of bond prices is thus
indispensable for the development of bond markets.
　With a view to providing investors, securities companies, and others with
reference information, the JSDA instituted the System for Dissemination of
Reference Statistical Prices (Yields) for OTC Bond Transactions, which pub-
lishes (midpoint between buy and sell quotes) quotes for publicly offered
102　Chap. VI The Secondary Markets for Bonds

Table VI-3.　Breakdown of Major Bond Categories, by Outstanding Balance and

Number of Issues

(¥10 billion, No. of issues)

Government Municipal Government- Straight bonds; Corporate Bank
securities bonds guaranteed asset backed bonds with debentures
(public bonds; FILP corporate bonds subscription (interest
offering) agency bonds rights/ bearing and
warrants discount)
FY2007 No. of Issues 372 1,836 1,108 2,560 84 1,978
Outstanding balance 681 38 57 55 1 22
FY2008 No. of Issues 395 2,010 1,200 2,486 55 1,838
Outstanding balance 677 41 58 57 1 21
FY2009 No. of Issues 410 2,208 1,350 2,513 41 1,664
Outstanding balance 716 45 61 60 1 19
FY2010 No. of Issues 423 2,376 1,474 2,614 32 1,514
Outstanding balance 755 48 63 63 1 17
FY2011 No. of Issues 449 2,525 1,634 2,684 21 1,272
Outstanding balance 781 52 64 63 1 15
FY2012 No. of Issues 470 2,655 1,772 2,733 17 1,163
Outstanding balance 814 55 66 61 1 14
FY2013 No. of Issues 476 2,805 1,916 2,844 18 900
Outstanding balance 848 57 69 61 0 12
FY2014 No. of Issues 493 2,917 2,021 2,883 22 789
Outstanding balance 873 58 69 60 0 12
FY2015 No. of Issues 497 3,008 2,151 2,847 24 526
Outstanding balance 901 59 69 58 0 11
FY2016 No. of Issues 506 3,059 2,244 2,977 26 428
Outstanding balance 927 60 68 60 0 10

Note: Outstanding balance figures are in trillions of yen.

Source: The Japan Securities Dealers Association.

bonds that meet certain criteria. The system was originally instituted in Au-
gust 1965 by the Bond Underwriters Association of Japan for publishing
OTC Quotes for Industrial Debentures and was succeeded by the Tokyo Se-
curities Dealers Association, the predecessor of the JSDA, which began the
system for dissemination of OTC quotations of bonds in March 1966. The
initiatives were implemented with a backdrop of social necessity to promote
the formation of fair prices and efficient and orderly trading for JGBs, issu-
 Chap. VI The Secondary Markets for Bonds 　103
Table VI-4.　The System for Dissemination of Reference Statistical Prices (Yields) for
OTC Bond Transactions

1. Outline
(1) Purpose
To publish quotations reported by member companies appointed by the Japan Securities Dealers Asso-
ciation to be used as reference by member companies of the association and their clients in trading
bonds over the counter between them.
　　 Note: In August 1965, the Bond Underwriters Association started publishing quotations on
OTC industrial bonds. Subsequently, the Tokyo Securities Dealers Association started
publishing OTC bond quotations in March 1966, and improvements have been made on
several occasions thereafter.

(2) Calculation of Reference Statistical Prices (Yields) for OTC Bond Transactions
The JSDA receives reports from its member companies affiliated with the system (14 securities compa-
nies as of February 28, 2018) on quotations of trades with a face value of approximately ¥500 million
as of 3:00 p.m. each trading day. The JSDA computes the reference prices (yields) of a given issue on
the basis of an arithmetic average of quotations on issues with respect to which it has received reports
from five or more member companies.

ance of which had been resumed after the war with a view to contributing to
public interest and investor protection. The system has since undergone many
changes and improvements in response to the changing environment sur-
rounding the bond market. During that period, the number of published is-
sues has ballooned from about 300 when the system was introduced to ap-
proximately 9,300. In August 2002, the JSDA changed the name of the data
to Reference Statistical Prices (Yields) for OTC Bond Transactions with the
intention of clearly indicating that it is for reference purposes. At the same
time, the system was enhanced by publishing high, low, and median values
of surveyed quotes in addition to their averages, which was the only data pre-
viously published.
　Since the system started publishing bond quotes 50 years ago, its use has
evolved from the original purpose of providing price references for OTC
bond trading in Japan. In addition to that role, it has become widely used for
mark to market valuation for financial reporting and tax accounting purposes
and the valuation of collateral for different types of transactions. This ex-
panded function demands an even greater degree of confidence in the system.
As a result, in 2013 a review was made of the quotation system primarily
with regard to publishing reference statistical prices (yields) for corporate
straight bonds. The new system arising from that review began operation in
November 2015.
104　Chap. VI The Secondary Markets for Bonds

Table VI-5.　History of System for Dissemination of Reference Statistical Prices (Yields)

for OTC Bond Transactions
Kinds of selectable issues No. of selected issues
March 1966 Government securities, municipal bonds, No. of issues announced:
Over-the-counter quotes announced government-guaranteed bonds, coupon 280
･ Date of announcement (Thursday of bank debentures, corporate bonds, tele- (as of May 12, 1966)
each week) graph and telephone (TT) coupon bonds
subscribed to by subscribers, discount TT
bonds, and such other bonds as may be
recognized by the Japan Securities Dealers
Association (JSDA)
January 1977 (1) Benchmark quotes (for institutional in- (1) Benchmark quotes:
･ Announcement of bench-mark and vestors) are selected from such bonds 　Issues announced: 14
standard quotes (Benchmark quotes whose volume of trading correctly re- 　(as of January 31, 1977)
are announced every day except Sat- flects the movement of the market. (2) Standard quotes:
urday. Standard quotes are announced (2) Standard quotes (for small-lot inves- 　Issues announced: 77
once a week on Thursday.) tors) are selected from one of govern- 　(as of January 27, 1977)
ment securities, municipal bonds, spe-
cial debts, bank debentures, corporate
bonds, and yen-denominated foreign
bonds, other than those listed in (1)
above in terms of maturities and inter-
est rates.
August 1978 The same as above. (1) Benchmark quotes:
･ Announcement of bench-mark and 　Issues announced: 19
standard quotes (bid and ask quota- 　(as of August 31, 1978)
tions are announced). (Benchmark (2) Standard quotes:
quotes are announced every day ex- 　Issues announced: 137
cept Saturday. Standard quotes are 　(as of August 31, 1978)
announced once a week on Thursday.)
January 1992 One of the government securities, mu- Issues announced: 298
･ Standard quotes on OTC bonds are nicipal bonds, government-guaranteed (as of January 31, 1992)
announced daily. bonds, bank debentures, corporate
bonds, and yen-denominated foreign
bonds that are not listed is selected in
terms of kinds, maturities, and interest
rates.
April 1997 Publicly offered but unlisted bonds Issues announced: 1,746
･ No. of selectable issues was sharply (with a remaining life of one year or (as of May 1, 1997)
increased (the new system started op- longer) that maintain a fixed interest
erating.) rate throughout their life and redeem
their principal in a lump sum were se-
lected.
December 1998 Publicly offered bonds (with paid-in Issues announced: 2,867
･ The duty to concentrate its trading on principal, interest, and redemption (as of December 1, 1998)
the exchange market was abolished. money all paid in yen) are selected.
August 2002 The same as above. Issued announced: 4,198
･ Name of system changed to“Refer- (as of August 1, 2002)
ence Statistical Prices (Yields) for
OTC Bond Transactions.”In addition
to average values, highs, lows and
medians are announced.
December 2013 The same as above. Issued announced: 7,931
･ Decision made to revise the calcula- (as of December 2, 2013)
tion method for corporate and other
bonds and announce quotes earlier.
November 2015 The same as above. Issued announced: 8,257
･ Start of operation of revised system (as of November 2, 2015)
Note: Selected issues reported on and after August 5, 2002, were transferred to the System for Dissemi-
nation of Reference Statistical Prices (Yields) for OTC Bond Transactions.
 　105
Chap. VI The Secondary Markets for Bonds

5. Reference Statistical Prices (Yields) for OTC Bond Transactions (2)

To provide reference information on bond prices, the JSDA publishes Refer-

ence Statistical Prices (Yields) for OTC Bond Transactions each business day
based on the values of quotations for trades with a face value of roughly ¥500
million reported as of 3:00 p.m. by Designated-Reporting Members (securi-
ties companies and banks registered as members of the JSDA). This publica-
tion system serves as an important infrastructure widely used by investors
and market participants. With calls for further increasing the reliability of this
publication system, however, the JSDA made revisions primarily to the cor-
porate bond part of the system and began operating the new system in No-
vember 2015.
　Major enhanced elements in the new system are as follows.
　(1) Stricter designation standards for Designated-Reporting Members:
Recognizing the need to appoint members with the capability to report ap-
propriate quotations that reflect movements of the corporate bond market as
Designated-Reporting Members in order to increase reliability of Reference
Statistical Prices (Yields) for OTC Bond Transactions, stricter designation
standards, such as the member’ s trading volume of corporate bonds, etc. must
be within the top 20, were added.
　(2) Enhancement and reinforcement of guidance and management struc-
ture at the JSDA: To ensure that proper reporting is made by Designated-Re-
porting Members, the JSDA performs checks to detect (i) any inappropriate
quotations for each business day and (ii) any problems with the reporting
system of each Designated-Reporting Member.
　(3) Revised calculation method for Reference Statistical Prices (Yields) for
OTC Bond Transactions: When the reported corporate bond quotations are
relatively dispersed and there is a major movement on the market, quotations
that deviate significantly from the average quote may actually be more ap-
propriate, and because abnormal values are eliminated in the checking per-
formed in (2), it was decided that truncating the highest and lowest values of
reported quotations, which was previously done mechanically, would no lon-
ger be performed.
　(4) Pushing back the time of reporting deadline and the time of announce-
ment: This change was in consideration of non-reporting members who
voiced the need to push back the time of reporting deadline for reporting
bond quotations in order to become reporting members.
　(5) Promoting better understanding of Reference Statistical Prices (Yields)
for OTC Bond Transactions: Easier-to-understand explanations on the nature,
etc. of Reference Prices for OTC Bond Trading, e.g., Reference Statistical
Prices (Yields) are values of mid-price quotations for buys and sells, are pro-
106　Chap. VI The Secondary Markets for Bonds

Chart VI-3.　Illustrated Flow of Procedure up to the Publication of Reference Statistical

Prices (Yields) for OTC Bond Transactions

Corporate bonds: Corporate bonds: Internet users

Designated Reporting by Japan Securities Announcement
reporting 5:45 p.m. Dealers Association around 6:30 p.m. Securities
member companies
OTC public & corporate
bonds Financial
Calculation of Buys and sells reference institutions
Public bonds: Public bonds:
reference prices Reporting by Compilation of statistics
Announcement Media members,
4:30 p.m. around 5:30 p.m. etc.

Table VI-6.　Designation of Designated-Reporting Members

The Japan Securities Dealers Association screens members intending to become Designated-Reporting
Members based on the following designation standards to specify Designated-Reporting Members.
(1) The member understands the purport of the System for Dissemination of Reference Statistical Prices
(Yields) for OTC Bond Transactions and intends to become a Designated-Reporting Member.
(2) The member is well versed in the operations for OTC bond trades.
(3) The member has in place an organizational structure and staffing required for properly executing the
operation for reporting quotations.
(4) Other matters set forth by the JSDA.
*For further details on screening standards, please see the website of the JSDA.

vided on the JSDA website, etc.

6. Reporting & Announcement System of Corporate Bond Trading

Recognizing the importance of increasing transparency of information on

corporate bond prices and securing reliability through providing bond trading
data in an aim to vitalize the corporate bond market, the JSDA decided to
publicize actual trading prices of corporate bond trades on the OTC market
from November 2015.
　This new initiative is composed of the JSDA’ s system to receive reporting
on transaction prices, etc. from member securities companies and the system
to disclose the reported transaction prices, etc.
　(1) System of reporting corporate bond transaction information: The JSDA
set out reporting requirements in its Self-Regulatory Rules against securities
companies (JSDA members) when they are on one side of a bond transaction.
Reporting is required for the following bonds: (i) bonds are subject to public
offering or secondary distribution in Japan, (ii) bonds are issued in Japan, (iii)
all the principal, interest, and redeemed principal are yen-denominated (ex-
 Chap. VI The Secondary Markets for Bonds 　107
Table VI-7.　Revisions to Reference Statistical Prices (Yields) for OTC Bond Transac-
tions

Revision measures Outline Revisions to bonds

applicable to reporting
(1) Stricter designation Added the following specific standards in ac- Corporate bonds, TMK
standards for Desig- knowledging that the member is“well versed in bonds, yen-denominated
nated-Reporting the operations for OTC bond trades.” foreign bonds
Members ･ A Designated-Reporting Member that reports
quotations on corporate bonds, etc. shall be
ranked within the top 20 in terms of the bond
trading volume.
･ However, reporting may be made for bond trades
for which the member serves as the lead manag-
ing underwriter.
(2) Enhancement and ･ Adoption of a process to check the reported quo- All debt securities
reinforcement of tations (including warnings issued to Designat-
guidance and man- ed-Reporting Members) every business day
agement structure at ･ Adoption of a process to check the reporting
the JSDA systems of Designated-Reporting Members
･ Setting self-regulatory regulation of prohibiting
information exchange, etc. relating to quotation
standards between Designated-Reporting Mem-
bers
(3) R e v i s i o n s t o t h e ･ Removal of the step to cut off the highest and Corporate bonds, TMK
method of calculat- lowest quotations reported bonds, yen-denominated
ing reference statisti- foreign bonds
cal prices for OTC
bond transactions
(4) Pushing back the ･ Pushed back the time of reporting deadline by 1 Corporate bonds, TMK
time of reporting hour and 15 minutes to 5:45 p.m. bonds, yen-denominated
d e a d l i n e a n d t h e ･ Pushed back the time of announcement by about foreign bonds
time of announce- 1 hour to 6:30 p.m.
ment
(5) Promoting better un- ･ Easier-to-understand explanations on the nature, All debt securities
derstanding of refer- etc. of reference statistical prices (yields) for
ence statistical prices OTC bond transactions, such as the possible de-
(yields) for OTC viation from actual trade prices, on the JSDA
bond transactions website, etc.

cluding short-term corporate bonds and corporate bonds with subscription

rights/warrants). Transactions subject to reporting include the following: (i)
transactions that are reported every business day (trades with a face value of
¥100 million or above) and (ii) transactions that may be reported on a month-
ly basis if notified to the JSDA (trades with a face value of less than ¥100
million; provided, however, that transactions with a face value of less than
¥10 million may be omitted from reporting).
108　Chap. VI The Secondary Markets for Bonds

Chart VI-4.　Illustrated Flow of Reporting & Announcement of Corporate Bond

Trading

JSDA members Internet users

Transaction Direct or Announcement at
JSDA
information (*1) via-JASDEC 9:00 a.m. the Securities companies
reporting by 5:15 p.m. following day

JASDEC Financial institutions

Transaction
information (*2) Media persons, etc.

(*1) Transactions processed (or approved) by the system between 3:00 p.m. on the previous business day and
3:00 p.m. on the day.
(*2) Trade reporting data transmitted to the settlement reconciliation system between 4:45 p.m. on the previous
business day and 4:45 p.m. on the day.

Chart VI-5.　Information announced

○Announced on November 5, 2015

Trade contract date: November 4, 2015
Issue code Issue name Redemption Coupon Transaction vol- Transaction vol- Contracted [Reference]
date rate ume (face value ume (face value unit price Reference Statisti-
basis) of ¥500 basis) of less (¥) cal Prices (Yields)
million or above than ¥500 mil- f o r O T C Bo n d
lion Transactions (Av-
erage Prices)
000039023 XX Industries 3 2016/09/20 1.9 ✓ 102.－－ 102.09
✓ 102.××
✓ 102.●●

Chart VI-6.　Example of suspension of announcement and removal of suspension of

announcement

Scheduled month of resuming announcement

Oct 21 Oct 22 Nov 15 Dec 1 Dec 15 Jan 1

announcement
Suspension of

Update judgment

Removal of suspension
standards for suspension
In accordance with the

date after carry-over

of announcement
Update judgment
of announcement

(resume announcement)
date

Extension of suspension Removal of suspension

of announcement of announcement
(no resumption of (resume announcement)
announcement)
 　109
Chap. VI The Secondary Markets for Bonds

　(2) System of publicizing corporate bond transaction information: The

JSDA sets a standard of publicizing information on corporate bonds with“a
rating of AA or its equivalent and above”and discloses information on bond
trades (limited to trades with a face value of ¥100 million or above) on its
website on the business day following the day on which reports on trades are
received. Items reported are: (i) contract date, (ii) issue code, (iii) name of is-
sue, (iv) due date, (v) coupon rate, (vi) trading value (face value is ¥500 mil-
lion or above, or not), and (vii) unit price (unit price per face value of ¥100).
　When certain conditions apply, the announcement of such corporate bond
transaction is suspended.
　(3) Periodical verification: The JSDA has decided to periodically verify
the impact, etc. of the implementation of the system of publicizing corporate
bond transaction information on the liquidity of corporate bonds and to con-
sider revising the system if needed.

7. Book-Entry Transfer System for Bonds

In the past, investors have held bonds in various forms—more specifically, in

physical certificates that had been issued by the issuer; in registered form,
where bondholders are registered on the registry at the registrar designated
for the issue; and as book-entry JGBs, where physical certificates are depos-
ited with the BOJ so that trades can be settled by book-entry transfers (within
a system established in 1980) among the accounts of brokers and other sys-
tem participants (account management institutions).
　In recent years, however, with the increasing bond trading volume and a
growing call for a flexible framework and an expedited process for the settle-
ment of transactions, certificates, which need to be physically delivered, or
registered bonds, whose transfer requires amendment in records of bond-spe-
cific registries, hardly stood the test of practical use, while the book-entry
transfer system for JGBs had several shortcomings. This situation first led to
the argument for the review of the current settlement procedures for bonds
and, later, for the complete overhaul of the securities settlement system in Ja-
pan. There was a growing perception that Japan urgently needed to renovate
the existing system to create a safer and more efficient infrastructure that
would make the country’ s securities markets globally competitive. Against
this background, the securities settlement system reform law was enacted in
June 2002, and, pursuant to its provisions, the existing legislation for book-
entry transfer was later amended and renamed the Act on Book Entry of Cor-
porate Bonds and Shares with objectives including the complete dematerial-
ization of securities, the shortening of settlement cycles, and the reduction in
settlement risk. The amended law provided for the legal framework of new
110　Chap. VI The Secondary Markets for Bonds

Chart VI-7.　Structure of Book-Entry Transfer System for Bonds

Central Custody and Transfer Agent

JGBs, TBs and FB (JGS): BOJ Non-JGS bonds: JASDEC

Master Account Master Account Master Account

Account Management Institution Account Management Institution

(Securities company/bank) Participant (Securities company/bank)
(Investor)
Account Account

Account Management Institution

(Securities company/bank) Participant
(Institutional
Account investor)

Participant Participant Participant

(Investor) (Investor) (Investor)

book-entry transfer systems for corporate and government securities. On the

basis of that framework, the BOJ renovated the existing JGB book-entry sys-
tem in January 2003, and the Japan Securities Depository Center (JASDEC)
started operating a new central custody and book-entry transfer system for
securities, including nongovernment bonds in January 2006.
　These book-entry transfer systems have a multitier, tree-like structure, with
a central custody and transfer agent—the BOJ in the case of JGBs, TBs, and
FBs and JASDEC, in the case of the other eligible securities—on the top tier,
from which account management institutions, securities companies, and other
institutions with respective master accounts in the system and system partici-
pants, other securities companies, and investors that have an account at one
of the account management institutions cascade down as subsequent tiers or
branches. Bond holdings of system participants are registered or recorded in
the transfer account book kept by the account management institution at
which they have an account. In principle, all bonds are deposited with the
central custody agency at the time of issuance, and the entire issue is demate-
rialized. None of those book-entry bonds may be withdrawn over their life in
the form of either physical certificates or registered bonds.
　The previously mentioned Securities Settlement System Reform Law also
 Chap. VI The Secondary Markets for Bonds 　111
Table VI-8.　Bonds under Custody and Book-Entry Transfer Volume

(No. of transactions, millions of yen)

Increase: Under- Decrease: Transfer Number of
writing new is- Redemptions and participating
sues retirement by issues (at fiscal
purchase year-end)
Account balance
FY2007 No. 33,245 15,128 484,041 72,817
Amount 40,491,108 12,840,198 240,536,068 241,002,170
FY2008 No. 33,961 38,830 492,394 73,298
Amount 37,812,077 38,539,738 223,475,737 240,274,559
FY2009 No. 31,642 38,176 411,272 71,202
Amount 38,124,350 32,846,953 132,878,030 245,552,257
FY2010 No. 29,501 36,849 439,327 67,788
Amount 37,212,947 32,691,251 146,347,996 250,073,952
FY2011 No. 26,664 35,619 439,867 60,701
Amount 32,955,046 30,589,808 156,713,049 252,439,190
FY2012 No. 27,326 33,476 471,798 58,486
Amount 33,558,410 33,213,581 143,537,681 252,784,020
FY2013 No. 26,726 31,642 437,387 55,595
Amount 34,446,614 34,030,438 135,561,923 253,200,196
FY2014 No. 25,761 32,082 465,813 54,294
Amount 33,410,427 34,831,065 158,293,806 251,779,558
FY2015 No. 25,722 30,604 524,130 53,825
Amount 31,146,061 32,462,918 204,529,981 250,462,702
FY2016 No. 27,401 28,040 349,226 58,288
Amount 41,737,175 35,052,475 131,163,539 257,147,401

Note: The JGB book-entry system began on January 10, 2006.

Source: Japan Securities Depository Center (JASDEC)

provided measures to abolish the Corporate Bond Registration Law follow-

ing the setup of the book-entry transfer systems.

8. Bond Yield and Terms of Issuance

Those who raise funds (fund raising party) by issuing bonds look for a meth-
od that offers the lowest possible cost. On the other hand, investors who buy
112　Chap. VI The Secondary Markets for Bonds

Table VI-9.　Reforms of Bond Delivery and Settlement System

Month/Year Changes implemented

April 1994 Delivery versus payment (DVP) of government bonds through the Bank of Japan
network starts.
April 1977 System of T+3 government bond rolling settlement starts.
October 1999 System of T+3 general bond rolling settlement starts.
January 2000 Real-time gross settlement (RTGS) of government bonds starts.
January 2003 Act on Book Entry of Corporate Bonds and Shares (stipulating paperless trading in
bonds, etc.) is enforced.
Paperless trading in government bonds starts.
May 2004 DVP trading in bonds other than government bonds starts.
May 2005 Trading in government bonds through a settlement organization starts.
January 2006 Paperless issuance of and paperless trading in bonds other than government bonds
starts.
April 2012 Settlement of JGBs scheduled to be shortened (T+2)
May 2018 Scheduled timing of enforcing shortened settlement of JGBs (T+1)

bonds choose issues that offer the highest possible return within the range of
tolerable risk. In theory, the issue terms of a new bond (subscriber’ s yield to
maturity) are determined at a certain level where opportunities for arbitraging
its subscriber’s yield to maturity and the secondary market yield (yield to ma-
turity) of outstanding issues of a nature similar to that of the bond are bal-
anced. When such a point of balance is achieved, it is said that“issue terms
that adequately reflect the secondary market conditions have been estab-
lished.”Important conditions for efficient arbitrage to occur include the fol-
lowing: the outstanding balance and trading volume of comparable bonds are
sufficiently large, new bonds are issued regularly, and the secondary market
yields of comparable bonds are available for reference at the time of pricing
new issues. It can be said that in the Japanese bond market yields at the issue
of bonds have come into line with yields of comparable bonds as the amount
of new issues of the bonds and secondary trading volume of such bonds in-
creased.
　More specifically, while JGBs had been issued through the underwriting
syndicate program for smooth and stable financing, the proportion of bond
issuance through competitive bidding that more closely reflect market condi-
tions has steadily increased under a market-oriented national debt manage-
ment policy, replacing the previous emphasis on non-competitive, syndicated
underwriting, where issue terms were based on the official discount rate or
other benchmarks. Currently, in principle, all government bonds (excluding
those for retail investors) are issued through auctions (the syndicated under-
 Chap. VI The Secondary Markets for Bonds 　113
Chart VI-8.　Changes in Issue Terms (Yields) of Bonds

(%) Long-term government bonds

1.1
Government-guaranteed bonds
1.0
Publicly offered local government bonds – jointly issued
0.9
0.8 Publicly offered local government bonds – individually issued
(Tokyo municipal bonds)
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
−0.1
−0.2
−0.3
’15/4 5 6 7 8 9 10 11 12 ’16/1 2 3 4 5 6 7 8 9 10 11 12 ’17/1 2 3
(year/month)

Chart VI-9. Changes in the Difference in Issue Terms and Secondary Market
Yields between Publicly Offered, Jointly Issued Municipal Bonds and
Government-Guaranteed Bonds
(%)
0.35
0.30
0.25
0.20
0.15 Spread in secondary market yields
0.10
0.05
0.00
−0.05
−0.10 Difference in issue terms (subscriber yield)
−0.15
−0.20
−0.25
’13/4 5 6 7 8 9 10 11 12’14/1 2 3 4 5 6 7 8 9 10 11 12’15/1 2 3 4 5 6 7 8 9 10 11 12 ’16/1 2 3 4 5 6 7 8 9 10 11 12 ’17/1 2 3
(month & year of issuance)

Notes: 1. Spread in secondary market yields is the difference in reference prices of OTC traded public and
corporate bonds (average value: simple interest) on the day prior to the term determination date of
jointly issued local government bonds and of government guaranteed bonds (10-year long-term).
2. Difference in issue terms (subscriber yield) is jointly issued local government bonds minus
government guaranteed bonds (each 10-year bonds).
114　Chap. VI The Secondary Markets for Bonds

writing program for JGBs was discontinued in March 2006).

　The market-oriented transition of bond issuance has also been witnessed in
pricing spreads among bonds with different credit qualities. For example,
yields at the issue of government-guaranteed bonds and local bonds were de-
termined in reference to the yield at issue of 10-year JGBs that had been is-
sued earlier in the month. From time to time in the past, the spreads of issues
among the three classes of bonds deviated from market spreads. In recent
years, however, as investors started to focus more on differences in credit
quality, the spreads of issues among the three classes have increasingly tend-
ed to move more in line with credit spreads prevailing in the market. Another
case in point that demonstrates the increased market orientation in bond issu-
ance is that a growing portion of government-guaranteed bonds is now issued
through a competitive bidding process (as individual issues). Investors are
also showing an increasing tendency to differentiate corporate bonds based
on credit ratings by rating agencies and other factors. In response to this,
many issuers go through a premarketing process to identify and estimate in-
vestors’demand and determine the terms of issue accordingly.

9. Gensaki Market for Bonds (1)

A repurchase agreement (gensaki transaction) (a conditional purchase or sale)

is a form of trading between a seller and a buyer of bonds whereby the seller
(or the buyer) agrees to repurchase (or resell) the securities at an agreed-upon
price at a stated time. When the holder of bonds sells them to a buyer under
an agreement to buy them back (a gensaki sell transaction), the holder can
raise funds temporarily. When an investor buys bonds from a seller under a
repurchase agreement to sell them back to the seller (a gensaki buy transac-
tion), the investor can earn a certain amount of interest by investing funds for
a short period. When a securities company, etc. acts as an intermediary and
arranges a repurchase agreement (gensaki transaction) by introducing a buyer
which wants to invest idle cash in bonds to a seller which wants to raise
funds by selling bond holdings, such a deal is called a brokered repurchase
agreement. When a securities company, etc. that is in need of short-term cash
sells bonds out of its inventory to an investor under a repurchase agreement,
it is called a proprietary repurchase agreement. As the repurchase (or resale)
price includes an amount equivalent to a return on investment or financing
charge based on an agreement by the buyer and seller, the price does not usu-
ally tally with the market price of the bond prevailing at the time of its repur-
chase (or resale). Repurchase agreements (gensaki transactions) can also be
concluded for commercial paper (CP) and certificates of deposit (CDs), CPs
issued overseas, etc.
 Chap. VI The Secondary Markets for Bonds 　115
Chart VI-10.　Working Mechanism of Bond Lending (secured with cash deposit)

[Proprietary repurchase agreement]

Debt securities → Purchase
Securities After the lapse of a certain period
Investor
company Repurchase of
← Debt securities
debt securities

[Brokered repurchase agreement]

Sale of debt → Purchase of →
securities debt securities
Selling After the lapse of Securities After the lapse of Buying
investor a certain period company a certain period investor
Repurchase of ← ← Resale of debt
debt securities 　 securities

Table VI-10.　Turnover and Balance of Bond Repurchase Agreements (Gensaki)

(¥10 billion, %)
Turnover of repur- Balance of
Turnover of
FY chase agreements B/A repurchase
bonds (A)
(B) agreements
2007 1,253,438 905,505 72.2 4,953
2008 1,051,186 724,941 69 2,326
2009 790,513 459,243 58.1 1,589
2010 772,195 424,664 55 1,518
2011 840,802 471,756 56.1 2,538
2012 852,118 503,564 59.1 2,354
2013 946,008 627,538 66.3 2,641
2014 1,050,441 706,429 67.3 3,079
2015 1,039,539 758,277 72.9 3,053
2016 928,393 691,841 74.5 3,344

Source: Japan Securities Dealers Association.

　Despite some annual fluctuation, gensaki transactions have maintained a

significant level of trading volume because they conveniently meet the short-
term funding and cash management needs of investors. The outstanding bal-
ance of gensaki transactions reached almost ¥50 trillion at the end of fiscal
2007, compared with ¥7 trillion in the latter 1980s. Although there have been
some dips in the balance since then due primarily to the effects of the global
financial crisis, the balance turned upward in 2010 and since has been at the
116　Chap. VI The Secondary Markets for Bonds

Table VI-11.　Balance of Bond Repurchase Agreements, by Major Investor Group

(¥10 billion)
FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016
Selling Buying Selling Buying Selling Buying Selling Buying Selling Buying Selling Buying Selling Buying Selling Buying Selling Buying Selling Buying
balance balance balance balance balance balance balance balance balance balance balance balance balance balance balance balance balance balance balance balance
Trust banks 0 18 0 8 0 68 0 88 0 97 0 13 0 0 0 2 0 0 0 0
Other banking
21 15 15 26 0 12 0 ３ 0 111 0 86 0 56 3 4 0 0 5 0
institutions
Investment Trusts 0 92 0 92 0 75 0 65 0 143 0 206 0 84 0 33 0 0 0 0
Corporations 3 31 0 31 0 47 0 43 0 82 0 50 0 31 0 25 0 4 0 3
Entities not
1,960 1,760 678 466 446 446 538 560 616 1,200 511 1,293 588 1,759 865 1,951 754 2,228 572 2,373
domiciled in Japan
Others 179 874 173 1,006 210 496 155 220 121 288 70 196 55 122 99 188 66 46 384 55
Bond dealers 2,790 2,163 1,460 697 933 446 825 539 1,800 618 1,772 511 1,998 588 2,111 876 2,233 774 2,383 914
Total 4,953 4,953 2,326 2,326 1,589 1,589 1,518 1,518 2,538 2,538 2,354 2,354 2,641 2,641 3,079 3,079 3,053 3,053 3,344 3,344

Source: Japan Securities Dealers Association.

¥30 trillion level.

　Previously, the overwhelming majority of gensaki transactions were for
short-term government securities (TBs and FBs). Despite intensifying com-
petition against other increasingly diversified money market instruments
these government bills have dominated the gensaki market, as the bills,
which have maturities and credit quality more suitable for gensaki transac-
tions, have been increasingly issued to the public. More specifically, these
short-term government securities dominated the market because (1) in 1986
the BOJ stopped reselling FBs that it had underwritten in the secondary mar-
ket, shifting this operation to the gensaki market; (2) since 1999 the govern-
ment has been issuing all FBs, in principle, directly to investors through pub-
lic auctions; (3) the TB program got started in 1986; and (4) the issuance of
both TBs and FBs has been regular and of large volume. Although the gensa-
ki market developed primarily against the backdrop of this expansion of the
short-term government securities market, interest-bearing JGBs have taken
center stage in recent years, partially because of the massive overall issuance
of government bonds.

10. Gensaki Market for Bonds (2)

In an effort to modernize and strengthen the international competitiveness of

Japan’s money market, the gensaki market underwent a reform to improve its
 Chap. VI The Secondary Markets for Bonds 　117
Chart VI-11.　Working Mechanism of the New Gensaki Transaction System

1. Start of transaction
Bonds
The buyer of bonds The seller of bonds
(the provider of funds) (the receiver of funds)
Fund
- Purchase money for bonds
The market price of the bonds prevailing at the time a deal is struck÷(1 + haircut rate)×number
of bonds traded

2. Control of credit risk during the life of the agreement

①The amount of money

corresponding to the
interest accrued on the
Haircut rate repurchase agreement Interest on the
The market during the period repurchase
price of the Haircut rate agreement
bond falls
the bond
Market price of

Purchase money

Purchase money
②Collateral deficiency
prevailing
of the bond then
The market price

developed by a fall
in bond price

The transaction starts During the life The transaction ends

of the agreement
- Credit given to the seller of the bonds by the buyer of the bonds (the provider of funds) = ① + ②
- In the case referred to above, the buyer of the bonds can demand collateral (cash and/or bonds) of
the seller, the value of which is equal to the credit given him (margin call).

3. End of transaction
Funds
(repurchase)
The buyer of bonds The seller of bonds
(the provider of funds) (the receiver of funds)
Bonds
- Money to repurchase the bonds is necessary for the seller at the time the transaction is
consummated.
- The money of the buyer is needed to purchase the bonds at the time the transaction started +
interest accrued on the repurchase agreement.
118　Chap. VI The Secondary Markets for Bonds

functions as a repo market that facilitates the need for both short-term financ-
ing and bond borrowing, and thus what came to be called new gensaki trans-
actions started in April 2001. Up to that point, gensaki transactions were
bought and sold much like the transactions commonly known as repo trades
in the U.S. and Europe but had various shortcomings that cried out for re-
form. In particular, the gensaki market did not have functional risk manage-
ment facilities or standard rules for dealing with counterparty default. By this
reform, new measures were instituted and existing provisions were enhanced
for risk management and other purposes, establishing the gensaki market in
accordance with global standards.
　The newly introduced provisions for risk management and other purposes
(clauses in the repurchase agreement) may be summed up as follows:
　(1) Risk control clause:
　　 The amount of collateral (bonds) shall be adjusted flexibly so as not to
cause a shortage of collateral on account of a fall in the price of bonds
submitted as collateral.
　　 (i) Application of the ratio for computing the purchase/sale value of
bonds (the haircut clause): Under this clause, the unit price of bonds
(collateral), on the basis of which a repurchase agreement is con-
cluded, is fixed at a level that is a certain percentage point lower
than the price prevailing at the time the repurchase agreement is
concluded, so that the value of the collateral will not be affected
even when the market price of the underlying bonds falls.
　　 (ii) Application of a margin call clause (collateral management, etc.):
Under this clause, when the market value of the underlying bonds
changes during the period of the repurchase agreement, the amount
of credit extended to a party to the repurchase agreement is main-
tained by adjusting the collateral so that the market value of the
bonds agrees with the amount of funds.
　　 (iii) Application of repricing: In a case in which the market price of the
underlying bonds falls sharply from that which prevailed at the
time of the repurchase agreement, the parties to the agreement
agree to cancel the agreement and renegotiate a new agreement on
the basis of the price then prevailing, on terms and conditions iden-
tical to those of the agreement thus canceled.
　(2) Substitution of underlying bonds:
　　 Under this clause, the seller of bonds can replace the underlying bonds
with other bonds with the consent of the buyer, allowing the seller to
use the underlying bonds if necessary.
　(3) Institution of a netting-out system:
　　 If the other party goes into default for any reason, such as bankruptcy,
the value of all transactions covered by the agreement will be reas-
 　119
Chap. VI The Secondary Markets for Bonds

sessed based on market prices, and the difference between claims and
obligations will be settled.

11. Bond Lending

When investors have shorted bonds (or sold bonds that they do not own) and
failed to buy them back before the settlement date, they turn to bond lending
services to borrow bonds to deliver. When the collateral is cash, bond lending
is also used to procure or invest money on a short-term basis similar to gen-
saki transactions.
　Since market participants can obtain bonds through bond lending facilities
after trades are consummated, they can sell bonds that they do not own (sell
short) when they feel that the bond market is too expensive or particular is-
sues are overvalued. Such operations contribute to greater liquidity in the
market.
　Bond lending was instituted by legislation in 1989, following the lifting of
the practical ban on bond short selling. In fear of potential effects on the fi-
nancial soundness of brokers and dealers and bond pricing, market partici-
pants had previously been requested to refrain from selling bonds short. The
ban, however, was lifted to help encourage active market making in cash
bonds, and arbitrage between cash bonds and futures and bond borrowing
and lending was introduced as one of the means to locate bonds to deliver.
Initially, cash collateral bond borrowing and lending was restricted in light of
potential conflicts with the gensaki market and other considerations, and,
subsequently, most transactions were uncollateralized. However, with credit
fears rising, the bond lending market remained stagnant and cash collateral
bond borrowing and lending transactions were effectively deregulated in
1996 in order to invigorate the market.
　When viewed from a legal standpoint, a bond lending transaction is
deemed to be a contract for a loan for consumption. A borrower borrows
bonds for the purpose of consumption and, when due, the borrower has only
to return bonds identical in kind and quantity with those originally borrowed.
Bond lending transactions may be broadly classified into“secured transac-
tions”and“unsecured transactions”depending on whether they are collater-
alized or not. Secured bond lending transactions may be further divided into
“cash-collateralized transactions”and“securities-collateralized transactions”
by the type of collateral being pledged. Cash-collateralized transactions used
to borrow specific bond issues are called SC torihiki (specified collateral
trades), while those for financing and cash management without such specifi-
cation are termed GC torihiki (general collateral trades). The size of the bond
lending market (in terms of the balance of outstanding loans) has generally
120　Chap. VI The Secondary Markets for Bonds

Chart VI-12.　Trading Mechanism of Repurchase Agreements

[Proprietary repurchase agreement]

Bonds

Selling investor Buying investor

Cash

[Brokered repurchase agreement]

Bonds

Bond lending rates

Selling investor Buying investor

Cash

Interest accrued from

the cash deposit

Table VI-12.　The Balance of Bond Lending Transactions, by Type of Collateral (on the
basis of delivery and face values)

(¥10 billion)
Bonds lent Bonds borrowed
Secured Secured by Unsecured Total Secured Secured by Unsecured Total
transactions cash deposit transactions transactions cash deposit transactions
FY2007 9,478 8,669 395 9,872 9,944 9,664 667 10,611
FY2008 6,863 6,679 246 7,109 6,863 6,679 246 7,109
FY2009 8,227 8,005 275 8,502 8,227 8,005 275 8,502
FY2010 7,333 7,128 284 7,617 7,333 7,128 284 7,617
FY2011 8,296 8,286 207 8,503 8,296 8,286 207 8,503
FY2012 8,239 8,200 227 8,467 8,239 8,200 227 8,467
FY2013 10,085 9,984 267 10,352 10,085 9,984 267 10,352
FY2014 10,483 10,310 322 10,805 10,483 10,310 322 10,805
FY2015 9,680 9,454 450 10,130 9,680 9,454 450 10,130
FY2016 12,316 12,178 428 12,744 12,316 12,178 428 12,744

Note: Breakdowns of bond lending transactions have been published since January 1997. A partial revi-
sion was made to the calculation method in January 2009.
Source: Japan Securities Dealers Association.
 　121
Chap. VI The Secondary Markets for Bonds

been growing since cash-collateralized transactions were deregulated in

1996. The market has grown from approximately ¥34 trillion at the end of
fiscal 1996 (including approximately ¥17 trillion in cash-collateralized trans-
actions) to ¥127 trillion at the end of fiscal 2016 (including approximately
¥122 trillion in cash-collateralized transactions). The majority of bond lend-
ing transactions are conducted with government securities.
 CHAPTER VII

Investment Trusts

1. Overview

An investment trust is a financial instrument that raises money from two or

more investors in order to establish a large fund that it invests in regarding a
variety of assets, such as stocks and bonds, under the management of an in-
vestment specialist, and the profits earned through that investment are then
distributed among the investors in proportion to their contributions.
　An investment trust allows investors to indirectly enter various asset mar-
kets even with a small amount of money as well as to enjoy the benefits of
scale economies and efficient diversified investment that are generated
through a joint investment with other investors, also allowing them to take
advantage of information analysis and investment sophistication gained by
having the investment managed by specialists. The repayment of the princi-
pal of an investment trust is not guaranteed, because its earnings depend
upon its performance. There are a variety of investment trusts depending on
investment instruments and methods, including one that is similar to deposit
and savings accounts and another that is like derivatives trading in that it
aims at achieving higher earnings by assuming higher risks.
　The overall structure of the Japanese investment trust system is stipulated
in the Act on Investment Trusts and Investment Corporations. Regulations
concerning the actions of investment trust management companies, the key
players in the management of investment trusts, are defined in the Financial
Instruments and Exchange Act. Investor protection is also provided by self-
regulatory rules established by The Investment Trusts Association, Japan
(JITA), an approved self-regulatory organization under the Financial Instru-
ments and Exchange Act.
　Investment trusts play a major role in making investments for the general
public and have the economic benefit of helping companies to raise money
by bringing in the funds of the general public on the securities market. They
also perform the function of contributing to the reasonable determination of
prices in the securities markets as an institutional investor.
　Chart VII-2 shows the growth of the total net assets of publicly offered in-
 Chap. VII Investment Trusts 　123
Chart VII-1.　Investment Trust Concept

Contributions from two or more investors

○ ○ ○

A return of profits to investors

Establishment of a large fund

Investment and administration by

asset management specialists

Diversified investment

Domestic and foreign stock markets

Domestic and foreign bond markets
Domestic and foreign real estate markets
Money markets, derivatives, etc.

Chart VII-2.　Trend of Total Net Assets of Publicly Offered Investment Trusts and Their
Positions

120 10%
Balance of net assets of investment trusts (left scale, trillions of yen)
9%
Ratio of investment trusts in individual financial assets (right scale)
100
8%
7%
80
6%
60 5%
4%
40
3%
2%
20
1%
0 0%
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Note: Figures for 2017 are as of the end of September (percentages in individual financial assets are as of
the end of June).
Source: Balance of net assets of investment trusts: the Investment Trusts Association, Japan; ratio of
investment trusts in individual financial assets: Bank of Japan“Flow of Funds Accounts” .
124　Chap. VII Investment Trusts

vestment trusts over the past 20 years in Japan. The market declined after the
burst of the bubble economy but rebounded temporarily around 2005 along
with the recovery of the stock market encouraged by a heightening of invest-
ment awareness among the people of the country in an ultralow-interest-rate
environment. The market fell again, a drop of 35% year on year, following
the global financial crisis in 2008. Nevertheless, the decline in the market
bottomed out in January 2009 and topped the ¥100 trillion level for the first
time in May 2015. Still, as of the end of 2016, Japan accounted for only 2.2%
of the net assets total of the world’
s publicly offered investment trust of more
than $36.8 trillion (¥4,300 trillion), a small portion compared with Japan’ s
approximately 6% share of the world gross domestic product (GDP). This
suggests that there is high growth potential for investment trusts in Japan, so
it is expected that investment trusts will grow as a core product, accelerating
the shift from“saving”to“asset-building”in the future.

2. History of Investment Trusts

The investment trust, a collective investment scheme, has proved popular in

both developed countries as well as emerging countries in various forms
since its inception in the U.K. in the late nineteenth century.
　In Japan, investment trusts existed before the war, but the current system
began with the enforcement of the Securities Investment Trust Act in June
1951. It was not naturally generated from demands from investors as in the
West but was politically introduced for a supply-and-demand adjustment of
stocks substantially released as a result of the break-up of the zaibatsu finan-
cial combines (democratization of securities) and in order to raise money for
revivifying industries during the postwar period, when there was a severe
lack of funds. Legislated in reference to the prewar investment trust, it was
launched in the form of the unit-type stock investment trust (contractual
type).
　The Securities Investment Trust Act was partially amended in 1967 after
the securities crisis, to establish the code of conduct for investment trust
management companies; to clarify the fiduciary duty of investment trust
management companies to beneficiaries (persons who process operations for
others in trust are required to act only for the benefit of the others); and to
adopt and strengthen provisions on prohibited activities. In 1995, a major re-
form was conducted, mainly for the purpose of advancing deregulation and
greater disclosure.
　The large amendments to the law made in 1998 were associated with im-
plementation of the Act on Revision, etc. of Related Acts for the Financial
System Reform under“free, fair, and global”principles. As a result of the
 Chap. VII Investment Trusts 　125
Table VII-1.　History of the Investment Trust in Japan (Post-war)
System Products Marketing Management
The Securities Investment Trust Investment trusts were Investment trusts became Assets were invested mainly
Act was implemented (1951) launched in the form of unit- available at securities compa- in domestic stocks
type investment trusts (1951) nies

Open-type investment trust

was launched (1952)

Investment trust management Bond investment trusts were The weight of domestic bonds
business was separated from established (1961) substantially increased (1961)
securities companies (begin-
ning operations in 1960)

The Securities Investment

Trust Act was amended to add
provisions for the duty of loy-
alty of investment trust man-
agement companies to benefi-
ciaries and the duty of
disclosure, etc. (1967)
Foreign securities began to be
The marketing of foreign in- included in assets of invest-
vestment trusts in Japan was ment trusts (1970)
liberalized (1972)
The medium-term govern-
Investment trust management ment bond investment trusts
companies entered the invest- were established (1980)
ment advisory business (1984)

Foreign companies entered

Japanese investment trust
management business (1990)
MMFs were established
Bank affiliates entered invest- (1992) Investment trust management
ment trust management busi- companies started to sell in-
ness (1993) vestment trusts directly (1993)

Investment trust reform was

determined (1994)
Reform was implemented in Nikkei 300 Exchange Trad- Investment restrictions were
1995 ed Fund was established deregulated, including utiliza-
(1995) tion of derivatives for purpos-
es other than hedging (1995)
Act on Revision, etc. of Related Banks and insurance compa-
Acts for the Financial System nies started to sell investment
Reform was implemented trusts (1998)
(1998) Private placement invest-
ment trusts were launched
(1999)

The Act on Investment Trusts Corporation type investment Target of investment trusts ex-
and Investment Corporations trusts were established panded to a variety of fields,
was implemented (2000) (2000) including real estate (2000)
Portfolio valuation method of Real estate investment trusts The Act on Sales, etc. of Fi- Some MMFs’net asset value
bond investment trusts shifted were established (2001) nancial Instruments was im- fell below their principle
to market value accounting plemented (2001) amount (2001)
(2001)
In-kind contribution ETFs
were listed (2001) Sales of investment trusts
started at post offices (2005)
The Financial Instruments and Target of investment trusts
Exchange Act was implement- was expanded to commodities
ed (2007) (2008)
Credit risk regulations were
introduced (2014)

Source: Author of the chapter

126　Chap. VII Investment Trusts

amendments, the corporation type investment trust, the mainstream in the

U.S. and Europe, was introduced in Japan, where only the contractual type
used to exist, from the standpoint of promoting the globalization of the in-
vestment trust business, deregulating the establishment of new funds by
changing from an approval system to a filing system, and allowing invest-
ment trust management companies to outsource the management of the fund
to outside companies. Distribution channels were also expanded to financial
institutions, and banks became able to distribute investment trusts. Disclosure
was enhanced by obligating investment trusts to meet disclosure require-
ments under the Securities and Exchange Act.
　In 2000, investment objects were expanded to those other than securities.
This allowed investment trust management companies to establish the“real
estate investment trust.”The law was renamed“the Act on Investment Trusts
and Investment Corporations,”deleting the word“Securities.”Amendments
were made to include additionally the duty of due care of a prudent manage-
ment (investment fund management companies are required to give instruc-
tions on asset management of investment trusts as good managers) in the
rules of conduct for investment trust management companies.
　In 2006, in relation to the enactment of the Financial Instruments and Ex-
change Act (implemented at the end of September 2007), the Act on Invest-
ment Trusts and Investment Corporations was amended to relegate provisions
on the rules of conduct for investment trust management companies. Further,
in 2014, risk regulations on managed assets were also introduced.

3. Forms of Investment Trusts

Investment trusts are broadly classified into the contractual type and the cor-
poration type.

Contractual Type (Investment Trust)

Some contractual type investment trusts take such legal form as a trust or a
common fund in most of the world; however, in Japan the contractual type
investment trust takes the legal form of a trust and is subclassified into in-
vestment trusts with investment instructions from trustors or without invest-
ment instructions from trustors.
　An investment trust with investment instructions from trustors consists of
three entities: the trustor, the trustee, and the beneficiary. The trustor is an as-
set management company (investment trust management company) regis-
tered with the Financial Services Agency. It carries out product development,
prepares a trust deed and files it with the authorities, and provides investment
instructions to a trustee (it has the authority to outsource the investment in-
 Chap. VII Investment Trusts 　127
Chart VII-3.　The Operating Structure of Investment Trusts with Instructions from
Trustors

Beneficiaries Distributing
companies Trustor Trustee
Instructions on Main
Handling of management, Safekeeping, investment
Purchase/holding subscription etc. etc. objectives
Sales/ Securities Investment
Investors

management companies
Redemption companies Securities

Trust banks, etc.

Investment trust
Distribution
Sales/ Registered agreement Trust Investment
Investors financial agreement Real estate
Redemption institutions

Investment
Sales/ Direct Others
Investors
Redemption marketing

Source: Partially adjusted flowchart from the Investment Trusts Association, Japan’s report on
“Investment Trusts in Japan 2014.”

structions to outside companies). The trustee is a trust company or a bank

concurrently engaging in the trust business of holding and administrating as-
sets under investment trusts according to a trust agreement. Investors obtain
the position of beneficiary by accepting a beneficiary certificate and receive
the profits arising from investment management as dividends or by redeem-
ing the certificate.
　In the case of an investment trust without investment instructions from
trustors, the trustee enters into a trust agreement with two or more investors
and combines their funds into a trust asset, which is then invested mainly in
specified assets excluding securities and held and administrated by the trustee
without instructions from the trustors.
　Chart VII-3 shows the structure of an investment trust with instructions
from trustors which is generally adopted in Japan.

Corporation Type (Investment Corporation)

The corporation type is operated in a legal form that is similar to a corpora-
tion. In Japan, an investment corporation with a corporate veil is established
and operated by officers who are appointed by an investors meeting, but it
must entrust its business, such as asset management, custody of the fund’ s as-
sets, general business administration, and the handling of subscriptions, to
outside companies. Investors obtain the position of shareholder by accepting
share certificates (investment certificates) issued by the investment corpora-
tion and receive the profits arising from the investment management as divi-
dends. Chart VII-4 illustrates such a structure.
128　Chap. VII Investment Trusts

Chart VII-4.　Operating Structure of Corporation Type (Investment Corporation)

Investment Trusts

Investment corporation Entrustment of

Appointment management
Auditor General meeting Investment adviser
(Certified public accountant, of investors (Financial instruments
accounting firm) business operators)
Auditing
Entrustment
of general Board of directors
business Entrustment of
administrations Executive directors and safekeeping Asset custody company
Administration supervisory directors (trust bank, securities
service providers firm, etc.)

Entrustment of subscription

Distributing company
(securities firms and
registered financial
institutions)

Investor

Source: The Investment Trusts Association, Japan,“Investment Trusts in Japan 2014.”

　Both the contractual type and the corporation type of investment trusts in
the world include the open-end type and the closed-end type. Which type
they are grouped into depends on the claims of investors to redeem issued
certificates. The open-end type accepts the beneficiary’ s request and redeems
the certificates at market price by selling trust assets, while the closed-end
type does not accept the beneficiary’ s request to redeem the beneficiary’ s cer-
tificates. The latter ensures liquidity by listing its issued certificates. In Japan,
contractual type investment trusts are principally of the open-end type, while
corporation type investment trusts, in particular, real estate investment trusts,
are of the closed-end type.

4. Investment Trust Products

The total net assets of broadly defined investment trust products amounted to
¥195 trillion in Japan as of the end of September 2017. They are classified by
a variety of methods.
 Chap. VII Investment Trusts 　129
Chart VII-5.　Overview of Investment Trusts (total net assets, number of funds)
As of September 30, 2017

Figures refer to total net asset value (billions of yen)

Figures in parenthesis indicate the number of funds
Shaded area represents securities investment trusts

Contractual-type Securities investment Stock investment Unit-type investment trusts 938,944

investment trusts trusts trusts (329)
105,232,000 105,232,000 92,109,296
(6,149) (6,149) (6,029) Open-type investment trusts 91,170,352
（5,700)
ETFs 20,347,311
(155)
Public offering Others 61,292,075
investment (5,400)
trusts Bond investment Unit-type investment trusts 9,806
113,950,971 trusts (20)
(6,210) 13,122,704
(120) Open-type investment trusts 13,607,234
(101)
MRFs 12,344,178
(12)
MMFs 0
(0)
Others 768,720
(88)

Investment trusts other than 0 Money trust benefit funds 0

Total investment securities investment trusts (0) (0)
trusts Investment trusts managed by trustee 0
195,698,831 (0)
(11,554)
Investment Securities investment companies 0
companies (0)
8,718,971 Real estate investment companies (Note) 8,699,118
(61) (58)
Infrastructure investment companies (Note) 19,853
(3)

Contractual-type Securities investment trusts Stock investment trusts 76,059,564

investment trusts 80,307,587 (4,519)
80,307,587 (5,318)
(5,318) Bond investment trusts 4,248,023
(799)
Private-
placement Investment trusts other than securities investment trusts 0
investment trusts (0)
81,747,860
(5,344) Investment Securities investment companies 7,204
companies (1)
1,440,274
(26) Real estate investment companies (Note) 1,433,070
(25)

Note: Figures on real estate investment companies and infrastructure investment companies are from the previous month.
Source: The Investment Trusts Association, Japan.

Public Offering of Investment Trusts and Private Placements of Invest-

ment Trusts
A public offering of investment trusts is offered to 50 or more unspecified in-
vestors, while a private placement is sold to Qualified Institutional Investors
or specified investors stipulated in the Financial Instruments and Exchange
Act or to fewer than 50 investors. Establishment of a private placement was
made possible by the 1998 amendment to the Investment Trust Act. It has the
margin to freely design products only with the approval of the investors, be-
130　Chap. VII Investment Trusts

cause a private placement is subject to less-rigid investment restrictions than

a public offering. Therefore, privately placed funds attract the attention of
large investors, in particular institutional investors, and rapidly increase in
volume as funds invested in by variable annuities, etc.

Stock and Bond Investment Trusts

The Japanese tax laws define stock investment trusts as funds that hold even
a small number of stocks, and bond investment trusts are funds that invest
not in stocks but only in bonds. Bond investment trusts include funds that in-
vest mainly in long-term bonds and Money Reserve Funds (MRF) that invest
in short-term money market vehicles.

Unit-Type and Open-Type Investment Trusts

Unit-type investment trusts are funds that do not allow additional subscrip-
tions after having accepted funds in principal value only during their initial
subscription period, while open-end investment trusts are funds that do ac-
cept additional subscriptions at market value after their establishment. In Ja-
pan, investment trusts were launched in the form of the unit type, which was
similar to savings instruments, in 1951; however, open-end investment trusts
have currently become a mainstream financial instrument, just as in foreign
countries.

Classification by Investment Object

The Investment Trusts Association, Japan, offers a product classification ac-
cording to the object of investment of the funds, so that investors can select
funds easily. The prospectus of funds clearly describes into which classifica-
tion the funds fall.

Exchange Traded Funds (ETF)

Among open-type funds, funds whose net asset value fluctuates closely with
securities price indexes, including the stock index, and whose units are listed
and traded on exchanges like stocks are called ETF. (In the U.S., actively
managed ETFs also exist.) They are formed by the in-kind contribution of
stocks by designated participants and others, and the units/shares of many
ETFs can be exchanged for the component stocks held in a timely manner.
This creates arbitrage opportunities with the component stocks, a mechanism
that keeps the gap between the traded prices of the fund on the exchange and
the indexes targeted by the fund within a small range.
 　131
Chap. VII Investment Trusts

5. Sale of Investment Trusts

The subscription and sale of investment trusts had been practiced only by se-
curities companies in Japan since the establishment of investment trusts in
1951. (Some investment trust management companies started direct market-
ing in the 1990s.) The entries of financial institutions, including banks, in
1998 and some post offices in October 2005 expanded the distribution net-
work rapidly. As a result, there was a substantial change in the breakdown of
the total net assets of investment trusts by distribution channel, as described
in Chart VII-6. Financial institutions, including banks, accounted for 27% of
public offerings of investment trusts and 31% of publicly offered stock in-
vestment trusts as of the end of September 2017. Banks had nearly an 80%
share in private offerings of investment trusts. In contrast, investment trust
management companies saw weak growth in direct marketing, partially due
to the exit of large companies related to securities companies (as such com-
panies absorbed the sales).
　Investment trusts are generally available over the counter in distributing
companies and through their sales agents. Recently, the number of online
transactions has also grown. According to a survey conducted by the Invest-
ment Trusts Association, Japan, in 2015, 18.6% of all respondents answered
that they had acquired investment trusts online.
　Distributing companies are subject to the Financial Instruments and Ex-
change Act, Act on Sales, etc. of Financial Instruments and the regulations of
the Japan Securities Dealers Association, and they are obliged to comply
with the rules on sales of the Investment Trusts Association, Japan. For ex-
ample, they must comply with the suitability rule, which requires distributing
companies not to engage in inappropriate solicitation activities in light of
customers’knowledge, experience, investment purpose, and assets and to as-
sume“accountability”for risk factors, including market and credit risk, and
for important portions in the structure of transactions and to maintain the
“duty of sincerity to customers”not to conduct“prohibited activities”at the
time of sale, such as providing conclusive evaluations. Depository institu-
tions, such as banks, shall be required to take measures to prevent customers
from mistaking investment trusts for deposits at the sale of investment trusts,
including explaining that they are not covered by the deposit insurance sys-
tem. As a part of the enhancement of accountability at the implementation of
the Financial Instruments and Exchange Act in 2007, the“duty to deliver
documents prior to the conclusion of a contract”was introduced. This duty,
however, is not required when the eligible prospectus has been delivered to
customers. For investment trusts, the requirement is satisfied by delivering
the eligible prospectus.
132　Chap. VII Investment Trusts

Chart VII-6.　Breakdown of Total Net Assets of Publicly Offered Stock Investment

Trusts by Distribution Channel (As of September 30, 2017)
Total public offering investment trusts Public offering stock investment trusts
Direct marketing 0.7% Direct marketing 0.9%

Banks, etc
Banks, etc Securities
27.0% Securities 30.8% firms
firms
68.3%
72.2%

Chart VII-7.　Changes in Composition of Total Net Assets of Publicly Offered Invest-

ment Trusts by Distribution Channel
Securities companies Banks, etc Direct marketing
3.8%
98 95.8% 0.5%
0.6%
03 72.0% 27.3%
0.5%
08 56.8% 42.7%
0.7%
13 66.4% 33.0%
0.7%
17/9 72.2% 27.0%

Chart VII-8.　Changes in Breakdown of Total Net Assets of Overall Private Placement

Trusts by Distribution Channel
Securities companies Banks, etc Direct marketing

99 43.3% 35.2% 21.5%

03 33.9% 60.6% 5.5%

08 25.1% 70.2% 4.7%

13 17.9% 72.5% 9.6%

17/9 16.9% 77.4% 5.6%

Source: All the above are based on statistics of the Investment Trusts Association, Japan.
 　133
Chap. VII Investment Trusts

　The sales commission for investment trusts, which had been determined
by the funds, was liberalized in Japan as a result of amendments to the busi-
ness rules of the Investment Trusts Association, Japan, in 1998. At present,
different companies can charge different commissions even for the same
fund. There have also been reductions in commissions and a diversification
of commission systems.

6. Investment Management of Investment Trusts

Investment trusts invest mainly in“specified assets”defined by the Order for

Enforcement of the Act on Investment Trusts and Investment Corporations.
(As of September 2017, the specified assets consist of 12 types of assets, in-
cluding securities, real estate, and rights associated with derivatives trading.)
Funds investing mainly in securities are called securities investment trusts.
　Chart VII-9 shows the distribution of assets under the management of pub-
licly offered securities investment trusts as of September 2017. Reflecting an
improvement in stock market conditions, the ratio of stocks is high while the
ratio of bonds is declining due to low interest rates. Moreover, blue-chip
stocks are being given preference in the selection of the domestic stocks in-
cluded in the funds, such as electric, information and communications stocks.
　In operating business activities, investment trust management companies,
which invest their assets according to the investment policies described in the
prospectus of funds, are subject to the Special Provisions Concerning the In-
vestment Management Business of the Financial Instruments and Exchange
Act. They assume the duty of sincerity to customers and the duty of loyalty
and the duty of due care of a prudent management to the beneficiaries; they
also are prohibited from undertaking these activities: (1) transactions be-
tween managing assets and the investment trust management company or its
directors/executive officers; (2) transactions among funds under management
(excluding certain portions); (3) transactions for the purpose of its own bene-
fit or the benefit of other parties by taking advantage of the changes in price
of specific financial instruments resulting from such transactions; (4) transac-
tions whose terms are different from those of ordinary transactions and that
affect adversely the benefits of beneficiaries; (5) transactions of securities
and other transactions for its own account by using information obtained
through transactions for investment management; and (6) cases in which an
investment trust management company or some third party provides benefi-
ciaries or a third party with compensation to offset a loss or increase profit.
As firewalls to promote profits of other businesses or of the parent company,
subsidiaries, etc., executing unnecessary transactions in light of the invest-
ment management policy, the amount of assets managed and market condi-
134　Chap. VII Investment Trusts

Chart VII-9.　Distribution of Assets of Investment Trusts in Japan (as of September 30,

2017, total publicly offered securities investment trusts)

Others
15.2%
Investment trust Stocks 40.9%
beneficiary securities &
investment securities
29.9% Bonds 14.0%

Chart VII-10.　Breakdown by Industry Group of Domestic Stocks Held by Investment

Trusts (publicly offered stock investment trusts as of the end of Septem-
ber 2017)

Electrical equipment 16.2%

Others 34.4%
Information and
Communications
9.4%
Machinery 8.0%

Banking Chemical 7.8%

4.7% Retail 6.3% Transportation-related
Pharmaceuticals 5.4% equipment
7.8%
Source: All of the charts on this page are based on data from the Investment Trust Association, Japan.

tions, was prohibited. Additionally, the Investment Trust Act imposes a re-
striction on investment trust management companies prohibiting them from
giving instructions to acquire stocks of the same issuing company when the
number of stocks held by all investment trusts managed by the given invest-
ment trusts management company exceeds 50% of the total number of out-
standing stocks of that same issuing company. The Investment Trusts Associ-
ation, Japan, has self-regulatory rules concerning investment instruments and
investment methods in addition to those concerning credit risk regulations.
　The Investment Trust Act stipulates that an investment trust management
company exercises the rights of shareholders, including voting rights, on
portfolio stocks. Investment trust management companies disclose their basic
policies on and the results of the exercise of voting rights on their websites.
Additionally, in accordance with Japan’ s Stewardship Code formulated in
2014, activities to promote engagement by listed companies are also under
way.
 Chap. VII Investment Trusts　135
Table VII-2.　Exercise of Voting Rights for Domestic Stocks at General Shareholders
Meetings by Investment Trust Management Companies (2016)
— Voting on Items Proposed by Companies, Total for 67 Companies that
Invest in Domestic Stocks —

Total of Total Percentage

Against number of of votes
For Against Abstain
Name of proposal and Abstain proposals against,
(A) (B) (C)
(D) (E) etc.
(B)+(C) (A)+(B)+(C) (D)/(E)
(1) Appropriation of surplus 30,520 1,160 9 1,169 31,689 4%
(2) Election of Directors*1 61,715 14,422 22 14,444 76,159 19%
(3) Election of Auditors*1 27,378 8,903 12 8,915 36,293 25%
(4) Partial amendment to the Articles of 14,802 783 3 786 15,588 5%
Incorporation
(5) Payment of retirement benefits 2,110 1,973 5 1,978 4,088 48%
(6) Revision of amounts of remuneration 18,154 729 9 738 18,892 4%
for corporate officers
(7) Issuance of subscription rights/warrants 3,535 578 0 578 4,113 14%
(8) Election of accounting auditor 767 5 0 5 772 1%
(9) Reconstruction related*2 779 35 0 35 814 4%
(10) Other proposals by the company*3 6,282 2,763 5 2,768 9,050 31%
Total 166,042 31,351 65 31,416 197,458 16%

*1 If for a proposal on election of multiple candidates, a vote against one candidate is made, the vote for
the proposal is recognized as“against”for data compilation purposes.
*2 Merger, business transfer/acquisition, share exchange, share transfer, company split
*3 Proposals other than (1) to (9) above (takeover defense measures, capital increase by third-party allot-
ment, decrease in statutory reserve, purchase of treasury shares, capital decrease, share consolidation,
etc.)
Source: The Investment Trusts Association, Japan“Results of Questionnaire Survey on Exercise of Vot-
ing Rights by Investment Trust Management Companies”2016

7. Customer Base of Investment Trusts

Chart VII-11 shows the breakdown of beneficiaries of investment trusts (in

terms of value). Over 50% of investment trust assets are held by households,
with the remaining nearly 40% accounted for by insurance companies, pen-
sion funds, business firms, and financial institutions. Japanese households
hold a high share of investment trusts, much like U.S. households, but pri-
vately held pensions are thought to account for a lower share compared with
the United States. Meanwhile, the holding ratio of the BOJ increased as a re-
sult of active ETF purchases made by the central bank.
136　Chap. VII Investment Trusts

Chart VII-11.　Breakdown of Holders of Investment Trusts (as of the end of 2016)

Japan (Reference) U.S.

Business Business
corporations Others Others
Central banks corporations
7.9% 1.8% 5.0% 10.6%
7.8%
Financial
Financial Households corporations Households
institutions 52.9% 3.2% 50.4%
14.9%

Insurance companies Insurance companies

and pension funds and pension funds
14.9% 30.7%
Source: Bank of Japan,“Flow of Funds Accounts”. Source: FRB, Flow of Funds Accounts.

Table VII-3.　Profiles of Individual Investors Holding Investment Trusts (2015)

Investment trust holding ratio by age

Investment trust holding ratio by annual income
Male Female
Aged 20 to 24 0.9% 1.1% Less than ¥1 million 5.6%
Aged 25 to 29 1.4% 3.8% ¥1 million or above, less than ¥2 million 6.9%
Aged 30 to 34 4.6% 1.0% ¥2 million or above, less than ¥3 million 10.7%
Aged 35 to 39 7.3% 4.3% ¥3 million or above, less than ¥4 million 10.0%
Aged 40 to 44 7.6% 4.3% ¥4 million or above, less than ¥5 million 10.3%
Aged 45 to 49 6.3% 7.6% ¥5 million or above, less than ¥7 million 10.9%
Aged 50 to 54 10.7% 8.2% ¥7 million or above, less than ¥10 million 17.6%
Aged 55 to 59 11.5% 8.5% ¥10 million or above 31.4%
Aged 60 to 64 11.8% 12.2%
Aged 65 to 69 14.6% 12.6%
Aged 70 to 74 18.4% 11.4%
Aged 75 to 79 11.8% 9.6%
Aged 80 to 84 17.2% 9.7%
Aged 85 to 89 15.4% 4.2%
Aged 90 or above 16.7% 0.0%
Overall average: 8.7%

Source: JSDA“Nationwide Survey (on individuals) concerning Securities Investment Trusts)”FY2015

issue

　Though households are a core holder of investment trusts, the penetration

of investment trusts into household financial assets is low. A 2015 survey that
was conducted by the Japan Securities Dealers Association indicates that
holders of investment trusts include only 8.7% of the adult population. That
ratio is extremely down from the level of more than 16% in 1988 during the
bubble economy. The penetration shows a sign of recovery after reaching the
 Chap. VII Investment Trusts 　137
Table VII-4.　Purpose of Purchasing Investment Trusts by Individual Investors

Japan (Reference) U.S.A.

Living costs after retirement 40.1% Funds after retirement 72%
No particular purpose but to increase funds 27.8% To prepare for emergencies 8%
Diversification of risks associated with assets 24.1% Supplementary to current revenue 7%
Learning about economics 12.3% Education funds 5%
Education funds for children or grandchildren 9.1% Reduction of taxable income 4%
Leisure funds 6.3% Funds to purchase house or other large item 3%
Housing funds 3.4% Others 1%

Source: The Investment Trusts Association, Japan“Questionnaire Survey on Investment Trusts”2015;

multiple answers allowed; indication of top items only
U.S.A.: ICI (2015), Profile of Mutual Fund Shareholders; response to“primary financial goal”

bottom of 6.1% in 2003. By age group, the holding rate of investment trusts
is 10% for people aged 60 or more, while it is only 0 to 3% for people in
their 20s. It is noticeable that the holding rate is extremely low in young peo-
ple. This indicates an environment in Japan in which financial assets held by
individuals are concentrated among the elderly. In the U.S., though the
groups of those aged 45 to 54 and 55 to 64 comprise the top groups, the
groups of those aged 35 to 44 and those under 35 stood at 46% and 35%, re-
spectively, demonstrating an environment in which the average penetration
of investment trusts among households is above 40% (as of 2016). It is de-
sired also in Japan that enhancing the individual-type defined-contribution
pension plan, including NISA, Junior NISA, Dollar-Cost Averaging NISA
and iDeCo, will drive an increase in the holding of investment trusts among
the younger age groups.
　In 2016, the amount subscribed by individuals averaged ¥4.04 million for
unit-type publicly offered stock investment trusts for which statistics are
available, while in terms of the numbers of subscribers, the category of ¥0.5
million – ¥1 million accounted for 25% and that of ¥1 million – ¥3 million
accounted for 35% of the total subscribers.
　Many investors previously answered that they had no specific investment
purpose as their reason for buying investment trusts (Japanese people tradi-
tionally save money for unexpected purposes, i.e.,“for a rainy day” ). Recent-
ly, however, more and more individuals are buying investment trusts for
“post-retirement living expenses.”In the U.S., the majority of individuals
buy investment trusts for their retirement. In many cases, Americans continu-
ously purchase the trusts via accounts for defined contribution pension plans,
including the 401k. (This results in a higher holding rate among the young
and middle-aged groups.) In contrast, many buyers do not have any specific
purpose in Japan. In many cases, they do not make monthly payments into
138　Chap. VII Investment Trusts

investment trusts; rather, they invest a good sum of money at one time, and
this is estimated to be largely dependent on the movement of the securities
markets.

8. Disclosure of Investment Trusts

Until 1997, disclosure of investment trusts was covered not by the Securities
and Exchange Act but by the framework defined in the Securities Investment
Trust Act (now the Act on Investment Trusts and Investment Corporations).
Following the deregulation of the establishment of funds, in which the filing
system replaced the approval system, as a result of the enforcement of the
Act on Revision, etc. of Related Acts for the Financial System Reform in
1998, the Securities and Exchange Act (now the Financial Instruments and
Exchange Act) was applied to investment trusts the same as to stocks, etc.
Therefore, publicly offered investment trusts are now subject to both the In-
vestment Trust Act and the Financial Instruments and Exchange Act in terms
of disclosure. Details of disclosure are summarized as follows.

Issuance Disclosure
As issuance disclosure, the Financial Instruments and Exchange Act requires
investment trust management companies to file the“securities registration
statement”with the regulatory authorities (for public inspection) and to de-
liver the“prospectus”to individual investors at the time of subscription. Giv-
en the unique characteristics of the way in which investment trusts are sold
(while offering for subscription of stocks is made only at initial public offer-
ing and capital increases, and at other times, investors purchase issued stocks
on the secondary market, investment trusts are continuously offered after es-
tablishment of funds by initial subscription), the prospectuses were split into
two volumes to“provide investors with information in an easy-to-understand
manner”in 2004. That is, the two volumes consist of a“summary prospec-
tus,”which distributing companies are required to deliver in advance to all
investors entering into contracts, and a“detailed prospectus,”which distrib-
uting companies deliver to investors when requested.
　As issuance disclosure, the Investment Trust Act requires investment trust
management companies to“notify the details of the basic terms and condi-
tions”to the regulatory authorities and to“deliver documents describing the
details of the basic terms and conditions”to the investors. Descriptions in the
prospectus are substituted for the latter.

Periodic Disclosure
In terms of disclosure after the establishment of investment trust funds, the
 Chap. VII Investment Trusts 　139
Table VII-5.　Publicly Offered Securities Investment Trusts Disclosure System of Japan

Voluntary
Statutory disclosure
disclosure
Disclosure for supervisory
Individual disclosure for Public disclosure
authorities and for public
investors for investors
inspection
Act on Invest- Act on Invest- The Investment
ment Trusts and ment Trusts and Trusts
FIEA FIEA
Investment Investment Association,
Corporations Corporations Japan Rules, etc.
Issuance Securities Registration on Prospectus Document Define the
Disclosure Registration the contents of (Summary summarizing the Guidelines on
(Disclosure at Statement the agreement prospectus) contents of the Preparation of
offering) Amendment of (Detailed agreement Prospectus
Securities prospectus) (may be indicated
Registration in the prospectus)
Statement
Periodic Annual Financial report Financial report Monthly
Disclosure Securities Report (investment (investment disclosure of
(disclosure while Semi-annual report) report) (Summary MMF, MRF and
under manage- Securities financial report) timely disclosure
ment) Report (full-version on the website of
Extraordinary financial report) each investment
Report management
company

Source: Author of the chapter

Financial Instruments and Exchange Act requires investment trust manage-

ment companies to file their“securities report”to the regulatory authorities
after the end of each accounting period (for public inspection). (Semi-annual
securities reports are also filed when funds settle accounts once a year.)
　As for periodic disclosure, the Investment Trust Act requires investment
trust management companies to deliver their“financial report”to individual
investors. In 2014, it was decided that the financial report would be made
available in two phases based on an approach similar to having two volumes
of prospectuses as described above: a summary financial report issued to all
beneficiaries and a financial report (full version) publicized on the website of
the management company and issued to beneficiaries upon request.
　In addition, the Investment Trusts Association, Japan, has established
“timely disclosure”provisions as self-regulatory rules that should be posted
on the website of each investment trust management company, and this dis-
closure is performed at least monthly for each fund.
140　Chap. VII Investment Trusts

Table VII-6.　Major Items in Summary Prospectus (Explanatory Document) of Publicly

Offered Investment Trust

Items recorded Contents recorded

(Items recorded on the front page, etc.)
(1) Name of fund and product category Name of the fund indicated on the securities registration state-
(2) Information on investment trust ment and product category in the Guidelines Concerning Prod-
management company, etc. uct Categories set forth by the Investment Trusts Association,
Japan.
Name of investment trust management company, date of estab-
lishment, paid-in capital, total net asset value of investment
trusts managed, website address, telephone number, name of
trustee, etc.
(Items recorded in the main text)
(1) Fund objective and characteristics Fund characteristics and investment focus based on the basic
investment policy, investment attitude, etc. provided in the
agreement; Matters reflecting the fund characteristics, e.g.,
fund structure, investment method, investment process, invest-
ment restrictions, and distribution policy; If investment man-
agement is outsourced, the name of the investment manager
and the content of outsourcing
(2) Investment risks Factors underlying fluctuations in standard price, risk manage-
ment system, comparison with other assets
(3) Investment performance ( i ) Transition of standard prices and net assets in the last de-
cade—standard prices illustrated using a line graph; net as-
sets illustrated using a bar or area graph
( ii ) Transition of distributions in the last decade
(iii) Status of core assets—top 10 portfolio issues, ratio by in-
dustry, ratio by asset type, etc.
(iv) Transition of annual earnings ratio in the last decade—il-
lustrated using a bar graph. For funds with benchmarks,
also indicate the percentage changes of benchmarks
(4) Procedure, commission, etc. ( i ) Subscription memo (purchase price, application procedure,
trust period, taxes, etc.)
(ii) Fund costs (commission at purchase, partial redemption
charge, investment management cost (trust fees) and allo-
cation thereof, other expenses, taxes
(5) Additional information If there is a need to provide explanations on fund characteris-
tics and risks in a greater detail (e.g., for fund of funds, use of
structured bonds and derivatives), the details

Source: Cabinet Office Order on Disclosure of Information on Regulated Securities and the JITA Rules
on Preparation of Summary Prospectus (as of September 2017)
 　141
Chap. VII Investment Trusts

9. Services and Products Based on Investment Trusts

Cash Management Account

The account is to combine the securities trading accounts of securities com-
panies and money reserve funds (MRFs), open-end bond investment trusts
for the account, via auto transfer. Recently, the MRFs have been replaced
with bank accounts in some cases. The account invests its remaining idle
monies, including the interest on bonds, dividends on stocks, and proceeds
from the sale of securities, in MRFs and also offers such services as payment
on the acquisition of securities, cash advance on ATMs, and securities-backed
loans. The accounts were established in October 1997 on the model of the
CMA (Cash Management Account) funds developed in 1977 by Merrill
Lynch in the U.S. The Investment Trusts Association, Japan, imposes rules
on MRFs on investment management, including one stipulating that invest-
ments should be made to financial instruments with high credibility and with
a short term up to maturity in light of liquidity and security.

Wrap Account
A wrap account is a product that securities companies, etc. bundle and for
which they offer a set of asset management services, including the determi-
nation and rebalancing of asset allocation and the selection of individual is-
sues and management reports, only in exchange for annual fees to customers’
balance of assets (no commission resulting from trading). Wrap accounts,
which invest their assets in investment trusts only, were commercialized fol-
lowing liberalization of sales commissions for investment trusts in 1998 and
after obtaining permission to engage in the discretionary investment manage-
ment business by securities companies. Wrap accounts are also commercial-
ized to offer asset management services with individual issues, such as
stocks, as a result of the complete liberalization of brokerage commissions in
October 1999.

Defined Contribution Pension Plans (e.g., Japanese 401k, iDeCo)

Partially backed by the increasing mobility of the employed and a deteriora-
tion in the financial positions of DB (defined benefit) corporate pensions, DC
(defined contribution) pension plans offering high portability began to be of-
fered in 2001. The participants in corporate DC plans invest their company
contributions (contributions to the reserves by employees have been permit-
ted since 2012), and participants in individual-type DC plans (referred to as
“iDeCo” ) invest their own distributions in investment instruments, including
investment trusts, stocks, bonds, and bank deposits, at their own responsibili-
ty. Their performances are reflected in future receivable pensions. Many in-
142　Chap. VII Investment Trusts

Chart VII-12.　Outline of a Securities General Account

Salary and annuity

Transfer Automatic transfer of
purchase money or the
proceeds of sale
ATMs at Investment in
banks and MRF stocks, bonds, and
post offices Deposit and investment trusts
withdrawal - Unit of subscription: ¥1 or
more
- No fee is charged on
subscription and cashing
- Purchase or cancellation on
the same day (until noon)
- Maximum amount of
cashing: ¥5 million

Settlement Withdrawal

Credit cards Utility bills, etc.

Source: Author of chapter.

Chart VII-13.　Flow of Wrap Account Service (example)

Investment counseling

Investment proposal (asset allocation, etc.)

Discretionary contract

Asset management Investment Group of invested funds

Management reports

Review of the investment plan

Source: The above chart is based upon information on the web site of Nomura Securities Co., Ltd.
 　143
Chap. VII Investment Trusts

vestment trust companies offer low-cost funds exclusively for individual-

type defined-contribution pension funds.

Variable Annuities
Variable annuities, which were launched in full scale in 1999, are products
offered by insurance companies. Just as with the defined contribution pen-
sion plans, variable annuities also invest premiums from policyholders in in-
vestment trusts, and receivable pension amounts are determined by their per-
formance. In addition to securities companies, banks have also begun selling
these products.

10. Foreign Investment Trusts

The sale of foreign investment trusts established under foreign laws in for-
eign countries was liberalized in 1972. Initially, foreign investment trusts
were subject to regulations stating that they should be invested mainly in for-
eign-currency-denominated assets and that a weighting of yen-denominated
assets was limited to below 50% of the total assets, in consideration of the ef-
fect on domestic investment trusts. However, foreign private placement in-
vestment trusts were introduced into Japan, as foreign investment trusts were
not subject to the Securities Investment Trust Act. At that time, private-place-
ment investment trusts had yet to be recognized in Japan.
　As a result of amendments to the Investment Trust Act in 1998, foreign in-
vestment trusts have become subject to the same regulations as Japanese in-
vestment trusts under the revised act. Namely, the amendments require for-
eign investment trust management companies to file the same notification as
Japanese investment trusts at the sale of foreign investment trusts in Japan
and to allow Japanese courts to issue an order to prohibit or stop the sale of
foreign investment trusts if inappropriate investment management of foreign
investment trusts impairs the profits of domestic investors and if there is an
urgent necessity to prevent further losses to investors. It is also permitted to
introduce yen-denominated funds into Japan, for which currently the same
tax system as Japanese investment trusts is applied to foreign investment
trusts. The disclosure system is common to Japanese and foreign investment
trusts, including preparation and delivery of a prospectus and financial re-
ports. The Japan Securities Dealers Association establishes“selection criteria
of foreign investment trust beneficiary certificates”in the“rules concerning
foreign securities transactions”to set the requirements for foreign funds
available in Japan.
　Table VII-7 shows the trend of total net assets of foreign investment trusts
sold in Japan for the recent 20 years. The total net assets had been dependent
144　Chap. VII Investment Trusts

Table VII-7.　Total Net Assets of Foreign Investment Trusts in Japan (¥100 million) and
Their Ratio to Total (Public Offering) Investment Trusts

Total net assets of Total net assets of

Year-end foreign investment domestic investment Total (C) (A)/(C)
trusts (A) trusts (B)
1997 15,236 406,495 421,731 3.6%
98 29,352 327,393 356,745 8.2%
99 35,099 513,536 548,635 6.4%
2000 36,084 493,992 530,076 6.8%
01 41,426 452,807 494,233 8.4%
02 47,147 360,160 407,307 11.6%
03 54,427 374,356 428,783 12.7%
04 62,411 409,967 472,378 13.2%
05 79,670 553,476 633,146 12.6%
06 87,104 689,276 776,380 11.2%
07 82,427 797,606 880,033 9.4%
08 51,473 521,465 572,938 9.0%
09 59,306 614,551 673,857 8.8%
10 58,800 637,201 696,001 8.4%
11 52,358 573,274 625,632 8.4%
12 57,839 640,600 698,439 8.3%
13 61,290 815,200 876,490 7.0%
14 62,893 935,045 997,938 6.3%
15 54,248 977,562 1,031,810 5.3%
16 53,540 966,415 1,019,955 5.2%
17/9 58,375 1,052,320 1,110,695 5.3%

Note: The total net assets of domestic investment trusts are the total net assets of publicly offered invest-
ment trusts in Japan.
Source: Total net assets of foreign investment trusts and domestic investment trusts were taken from the
Japan Securities Dealers Association and the Investment Trusts Association, Japan, respectively.

on the effects of exchange rates, etc. Sales of foreign investment trusts surged
in Japan after 1997, reflecting a higher demand for high-yield foreign bonds
and a tendency toward a weaker yen during the continued ultralow interest
rate. The ratio of foreign investment trust assets to total investment trust as-
sets, including domestic investment trusts, was above 13% in 2004. After
that, the growth in sales of overseas registered investment trusts came to a
halt due to the recovered popularity of domestic stock funds and an increase
in monthly distribution funds registered in Japan. Stock investment trusts in-
creased at one point as shown in Chart VII-14, and real estate and alternative
funds grew also, after 2004 when stock prices recovered globally though
broadly defined bond funds, including MMFs, continued to be mainstream.
Looking at foreign investment trusts by country of establishment, Luxem-
 Chap. VII Investment Trusts 　145
Chart VII-14.　Breakdown of Total Net Assets of Foreign Investment Trusts in Japan by
Product Category
100%
90% Other
80% MMF
70% Bond-type
60% (excluding MMF)
50% Equity-type
40%
30%
20%
10%
0%
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17/9
Source: Compiled by the author based on materials disclosed by the Japan Securities Dealers Association.

Chart VII-15.　Breakdown of Total Net Assets of Foreign Investment Trusts in Japan by

Presentation Currency
100%
90% Other
80% Yen
70% Euro
60% US dollar
50%
40%
30%
20%
10%
0%
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17/9
Source: Compiled by the author based on materials disclosed by the Japan Securities Dealers Association.

bourg investment trusts enjoyed an overwhelming share of the market in the

past, but Cayman investment trusts have increased their share since around
2005. At the end of September 2017, Cayman, Luxembourg, and other in-
vestment trusts accounted for 52.4%, 37.5%, and 10.1% in terms of total net
assets, respectively.
 CHAPTER VIII

The Derivatives Market

1. Futures Trading

“Futures trading”refers to an agreement to buy or sell a specific amount of a

commodity or financial instrument at a particular price on a stipulated future
date. The history of futures trading is said to be as old as that of commodities
trading. However, it is generally believed that the precursor of today’ s fully
developed futures market emerged in Japan as the account-balancing trading
in rice (the rice market) conducted in Osaka in the Edo period (1603–1868).
This was a method that made it possible for parties to consummate a transac-
tion by organizing one-on-one negotiated transactions in such a way as to en-
able them to settle the difference without delivery of the underlying com-
modity or financial instrument and is considered the beginning of Japan’ s
futures trading. By inheriting this tradition, stock futures were traded by set-
tling the difference in the form of margin transactions on the stock exchange
in Japan in prewar years. After the war, margin transactions were prohibited
by the General Headquarters (GHQ) of the Supreme Commander for the Al-
lied Powers (SCAP) in Japan in order to curb speculative transactions, but
some claim that margin trading with individual investors had been partly re-
vived on the stock market.
　In 1972, the Chicago Mercantile Exchange started trading in currency fu-
tures. The Chicago Board of Trade started trading in futures on fictitious
bonds called benchmark issues in 1974, and the Kansas City Board of Trade
started trading in stock index futures in 1982. And these types of futures trad-
ing spread to the stock exchanges of other countries around the world, in-
cluding the introduction of trading in securities futures also in Japan. Long-
term government bond futures trading that started on the TSE in 1985 was
the first financial futures trading conducted in Japan. More products emerged
in quick succession: the OSE’ s“Osaka Stock Futures 50 (OSF50)”in 1987;
the OSE’ s Nikkei 225 futures contracts trading and the TSE’ s TOPIX futures
trading in 1988; and the Tokyo Financial Exchange Inc. (TFX)’ s Japanese
yen short-term interest rate futures, U.S. dollar short-term interest rate fu-
tures, and yen-dollar currency futures in 1989.
 Chap. VIII The Derivatives Market　147
Table VIII-1.　Years in Which Major Financial Futures of the World Were Listed

Year Other countries Japan

1972 Currency futures (mark-dollar and yen-dol-
lar) (CME)
1976 TB futures (CME)
1977 Treasury bond futures (CBOT)
1981 Eurodollar interest rate futures (CME)
1982 S&P 500 futures (CME); T-note futures
(CBOT); U.K. government bond futures and
pound interest rate futures (LIFFE)
1984 FTSE 100 futures (LIFFE)
1985 Long-term government bond futures (TSE)
1986 French government bond futures (MATIF),
Nikkei average futures (SIMEX)
1987 Japanese government bond futures (LIFFE)
1988 CAC40 futures; PIBOR (Paris interbank of- Nikkei 225 futures (OSE); TOPIX futures
fered rate) futures (MATIF); BUND futures (TSE)
(LIFFE)
1989 Euroyen interest rate futures (SIMEX) Euroyen short-term interest rate futures
(TIFFE)
1990 Euromark interest rate futures (LIFFE); Nik-
kei average futures (CME); DAX futures and
BUND futures (DTB)
1991 Interbank interest rate futures (BM&F)
1992 USD/RUB currency futures (MICEX)
1996 Euroyen interest rate futures (LIFFE); NAS-
DAQ 100 futures (CME); KOSPI 200 futures
(KSE)
1997 E-mini S&P 500 futures (CME)
1998 EURIBOR futures (LIFFE), Euro STOXX
50 futures (EUREX)
1999 E-mini NASDAQ 100 futures (CME)
2000 CNX Nifty Index futures (NSE)
2001 Single stock futures (LIFFE), E-mini Russell
2000 futures (CME)
2002 Single stock futures (One Chicago)
2004 VIX index futures (CFE)
2005 RTS stock price index futures (RTS)
2006 Exchange FOREX margin contracts (TFX)
2008 Russell 2000 futures (ICE) Nikkei 225 mini futures (OSE)
2010 CSI 300 futures (CFFEX)

Note: BM&F: Brazilian Mercantile and Futures Exchange (presently BM&F BOVESPA), CBOT: Chica-
go Board of Trade, CFE: CBOE Futures Exchange, CFFEX: China Financial Futures Exchange,
CME: Chicago Mercantile Exchange, DTB: Deutsche Terminbörse (presently Eurex), ICE: ICE
Futures U.S., KSE: Korea Stock Exchange (presently KRX), LIFFE: London International Futures
and Options Exchange (presently ICE Futures Europe), MATIF: Marché à Terme International de
France (presently Euronext Paris), MICEX: Moscow Interbank Currency Exchange (presently
Moscow Exchange), NSE: National Stock Exchange of India, RTS: Russian Trading System (pres-
ently Moscow Exchange), SIMEX: Singapore International Monetary Exchange (presently SGX),
TSE: Tokyo Stock Exchange; OSE: Osaka Securities Exchange (presently Osaka Exchange), TFX:
Tokyo Financial Futures Exchange (presently Tokyo Financial Exchange).
148　Chap. VIII The Derivatives Market

　Technically speaking, futures contracts are traded on the exchange. How-

ever, while a futures contract can be assigned to a third party, a margin has to
be deposited to provide against nonperformance of the contract. A forward
contract is a transaction made between parties. While it cannot be assigned to
a third party, it does not require the deposit of a margin. Transactions in cur-
rency or short-term interest-rate futures are forward contracts often negotiat-
ed between a bank and its client, and they are called forward-exchange agree-
ments (FXA) or forward-rate agreements (FRA). Along with swap trading,
these two types of transactions played a leading role in boosting the deriva-
tives markets around the world in the 1990s.

2. Bond Futures Trading

Trading in securities futures (Government National Mortgage Association

[GNMA] certificates) started in 1974 in the United States. Trading in 10-year
government bond futures was conducted on the Tokyo Stock Exchange in
1985—the year in which they were issued in massive amounts—and this was
the first financial futures trading in Japan. In 1988, superlong-term (20-year)
government bond futures (discontinued in 2002, but resumed in 2014) were
listed on the Tokyo Stock Exchange, and trading in U.S. Treasury bond fu-
tures, which had the largest trading volume in the world, started on the Tokyo
Stock Exchange in 1989. With the trading in medium-term (5-year) govern-
ment note futures that started on the Tokyo Stock Exchange in 1996, Japan
had finally developed a product mix comparable to that of other countries.
　Bond futures are generally traded on the basis of a fictitious issue called a
benchmark issue whose price is assumed to indicate the level of yield curve
then prevailing. Therefore, the price of bond futures is formed in the belief
that the prices of individual bonds are above the yield curve of the bench-
mark issue or above a yield curve that runs parallel to it. Because a seller can
choose an issue just as in a regular settlement, the seller chooses the most
reasonably priced issue at that point in time, but the price of the issue to be
delivered is computed by multiplying the price of the benchmark issue by a
conversion factor prescribed by the exchange.
　One of the characteristics of the bond futures trading conducted in Japan is
that issues are traded in units with a total par value of ¥100 million, about 10
times as large as that of other countries. (This compares with $100,000 in the
case of treasury bond futures traded on the Chicago Board of Trade, or
100,000 Eurodollars in the case of BUND futures traded on the EUREX.)
This is due to the fact that in cash bond transactions, bonds whose value falls
short of ¥100 million are treated as a fraction of a trading unit. As bond fu-
tures trading is usually compared with that of other countries in terms of the
 Chap. VIII The Derivatives Market 　149
Table VIII-2.　Trading Mechanism of Bond Futures

Medium-term JGB futures Long-term JGB futures Superlong-term JGB futures

Trading object Medium-term JGB Stan- Long-term JGB Standard- Superlong-term JGB Stan-
dardized 3%, 5-year resid- ized 6%, 10-year residual dardized 3%, 20-year re-
ual sidual
Delivery object Interest-bearing 5-yr. govt. Interest-bearing 10-yr. Interest-bearing 20-yr.
notes with a remaining life govt. notes with a remain- govt. bonds with a remain-
of 4 yrs. to 5 yrs. and 3 ing life of 7 to 11 yrs. ing life of 19 yrs. and 3
mos. mos. to 20 yrs.
Contract month 3 contract months from 3 contract months from 3 contract months from
March, June, September, March, June, September, March, June, September,
December December December
Delivery date 20th of March, June, Sep- 20th of March, June, Sep- 20th of March, June, Sep-
tember, December tember, December tember, December
Final trading day 7 business days prior to 7 business days prior to 7 business days prior to
the delivery date the delivery date the delivery date
Trading hours 8:45-11:02, 12:30-15:02, 8:45-11:02, 12:30-15:02, 8:45-11:02, 12:30-15:02,
15:30–5:30 the following 15:30–5:30 the following 15:30–5:30 the following
day day day
Trading unit ¥100 million in par value ¥100 million in par value ¥100 million in par value
Price asked ¥0.01 per par value of ¥0.01 per par value of ¥0.01 per par value of
¥100 ¥100 ¥100
Daily price limit Standard: Base price Standard: Base price Standard: Base price
±¥2.00 ±¥2.00 ±¥4.00
Maximum: Base price Maximum: Base price Maximum: Base price
±¥3.00 ±¥3.00 ±¥6.00
Circuit breaker In a futures trading, if following a buy (sell) order for the central contract month
mechanism placed (or contracted) at the upper (lower) price limit, there is no trade execution at
a price outside the price range from the upper (lower price) limit to the immediately
executable price range (for medium-term and long-term JGB futures, last traded
price plus or minus 0.1 yen, for superlong-term JGB futures, last traded price plus
or minus 0.3 yen) for one (1) minute, trading is suspended for 10 minutes.

Table VIII-3.　Transition in Bond Futures Trading

Medium-term JGB futures Long-term JGB futures Superlong-term JGB futures

No. of No. of No. of No. of No. of No. of
deals contracts deals contracts deals contracts
2013 0 0 9,132,122 98,944 － －
2014 0 0 8,791,553 96,722 5,041 107
2015 0 0 8,677,576 95,509 2,978 127
2016 0 0 7,383,298 80,838 843 19
2017 0 0 8,190,265 96,251 303 1

Source: Website of the Japan Exchange Group (JPX).

150　Chap. VIII The Derivatives Market

number of contracts, futures traded in Japan tend to be underestimated.

　It is said that another characteristic of the bond futures market of Japan is
that it is concentrated in trading in long-term government bond futures. This
is likely to be related to the fact that the maturities of government bonds,
though to a lesser extent than before, tend to be primarily in 10-year issues.
Yet this stands in contrast with the U.S. and Germany where medium-term
bond futures trading maintains liquidity.
　Since the mid-1990s, however, the concentration of cash government bond
trading on the benchmark issue, which was a phenomenon peculiar to Japan,
has eased. Since the end of March 1999, the practice of designating a govern-
ment bond as a benchmark issue has been discontinued, with 10-year govern-
ment bond futures assuming the role played by benchmark issues. Among
new products, contract for difference (CFD) futures on mini-long-term gov-
ernment bonds, which are one-tenth the amount of normal bonds, were listed
on the Tokyo Stock Exchange from the end of March 2009, but trading ac-
counts for less than 1% of long-term government bond futures.

3. Stock Index Futures Trading

The first stock index futures contract was listed in the United States in 1982.
In Japan, the Osaka Securities Exchange started trading kabusaki 50, a fu-
tures contract for a basket of 50 stocks, in 1987. That product was followed
in 1988 by the listing of Nikkei 225 futures on the Osaka Securities Ex-
change and TOPIX futures on the Tokyo Stock Exchange. Nikkei 300 futures
were listed on the Osaka Securities Exchange in 1994. In 1998, High-Tech
40, Financial 25, and Consumer 40 stock index futures started to be traded on
the Osaka Securities Exchange and sector index futures contracts for three
industries, electric appliances, transportation equipment, and banks, were
listed on the Tokyo Stock Exchange. The Tokyo Stock Exchange launched
S&P/TOPIX 150 stock index futures in 2001, while three futures contracts
based, respectively, on the MSCI Japan, the FTSE Japan, and the Dow-Jones
Industrial Average indices were listed on the Osaka Securities Exchange
(OSE) in 2002. RN (Russell Nomura) Prime Index futures commenced trad-
ing on the OSE in 2005, followed by Nikkei 225 mini-futures on the OSE in
2006, and the TOPIX mini, TOPIX Core30, and TSE REIT index futures on
the TSE in 2008. In 2010, the OSE introduced the Nikkei Stock Average
Dividend Point Index and the TSE introduced TOPIX and TOPIX Core30
dividend indexes, while the Tokyo Financial Exchange launched Nikkei 225
equity margin contracts. In 2012, the OSE began trading Nikkei Stock Aver-
age Volatility Index futures and NY Dow Jones Industrial Average futures. In
2014, CNX Nifty futures and JPX Nikkei Index 400 futures, and in 2016,
 Chap. VIII The Derivatives Market 　151
Table VIII-4.　Trading Mechanism of Stock Index Futures

Nikkei 225 mini futures Nikkei 225 futures TOPIX futures

Trading object Nikkei stock average Nikkei stock average TOPIX
Contract month Jun & Dec: Jun & Dec: 5 months in the Mar, Jun,
Nearest 10 contract months Nearest 10 contract months Sept & Dec quarterly cycle
Mar & Sept: Mar & Sept:
Nearest 3 contract months Nearest 3 contract months
Other months:
Nearest 3 contract months
Trading unit Nikkei stock average×100 Nikkei stock average×1,000 TOPIX×¥10,000
Price asked Units of ¥5 in Nikkei stock Units of ¥10 in Nikkei stock Units of 0.5 points in
average average TOPIX
Maturity On the 2nd Friday of On the 2nd Friday of On the 2nd Friday of
Mar, Jun, Sept, or Dec Mar, Jun, Sept, or Dec Mar, Jun, Sept, or Dec
Final trading day One business day prior to One business day prior to One business day prior to
the delivery date the delivery date the delivery date
Trading hours 8:45–15:15, 16:30–5:30 the 8:45–15:15, 16:30–5:30 the 8:45–15:15, 16:30–5:30 the
following day following day following day
Daily price limit Standard: Base price Standard: Base price Standard: Base price
±8% ±8% ±8%
2nd Expansion: Base price 2nd Expansion: Base price 2nd Expansion: Base price
±12% ±12% ±12%
Maximum: Base price Maximum: Base price Maximum: Base price
±16% ±16% ±16%
Circuit breaker If, following a contract or buy (sell) order for the central contract month for a futures
mechanism trading placed at the upper (lower) price limit, there is no trade execution for one (1)
minute because of a fall (rise) of over 10% of the price limit range from the upper
(lower) price limit, trading is suspended for 10 minutes.

Table VIII-5.　Transition in Stock Index Futures Trading

Nikkei 225 mini futures Nikkei 225 futures TOPIX futures

No. of No. of No. of No. of No. of No. of
deals contracts deals contracts deals contracts
2013 233,860,478 673,736 30,907,691 420,037 22,714,121 594,299
2014 199,121,967 622,140 25,917,773 439,623 20,877,250 561,657
2015 247,159,359 370,373 27,678,234 416,962 22,303,956 602.235
2016 233,940,373 579,972 26,765,460 449,752 22,560,705 562,313
2017 219,518,050 683,633 23,054,495 413,373 24,392,610 665,746

Source: Website of the Japan Exchange Group (JPX).

152　Chap. VIII The Derivatives Market

TSE Mothers futures were listed on the Osaka Exchange. Prior to all these
domestic listings for Nikkei 225 futures, the Singapore International Mone-
tary Exchange (SIMEX, now SGX-DT) started trading SIMEX Nikkei 225
futures in 1986, followed in 1992 by dollar- and yen-denominated Nikkei
225 futures on the Chicago Mercantile Exchange (CME). In addition, SIM-
EX now also trades mini-futures.
　Out of many futures contracts based on a variety of Japanese stock indexes
or listed on different exchanges, the OSE Nikkei 225 futures are the most ac-
tively traded, while the TOPIX futures, Nikkei 225 mini-futures, and SGX
Nikkei 225 futures contracts, are quite liquid, creating a rather unique situa-
tion in which there is more than one contract having good liquidity among
the stock index futures.
　Since June 1989, the last trading day falls, as is the case with the United
States, one business day prior to maturity, and the final settlement price is de-
cided on the basis of a special quotation (SQ) that is computed on the basis
of the opening prices of component issues on the date of maturity. In addition
to a three-stage daily price limit, the stock exchanges in Japan have instituted
a system temporarily suspending trading (called the circuit breaker system)
applicable not to the cash market but to stock index futures trading, which
gives them the power to suspend trading when stock prices fluctuate violent-
ly. This system imposes restrictions on changes in stock prices in a manner
different from the circuit breaker system of the United States, which sus-
pends both cash and futures markets at the same time.

4. Financial Futures Trading

Currency futures trading started in the United States in 1972, and Eurodollar
short-term interest rate contracts were the first interbank futures listed on a
U.S. exchange, in 1982. In Japan, Euroyen futures, Eurodollar short-term in-
terest rate futures (trading was suspended in 1998), and Japanese yen-U.S.
dollar currency futures (contracts were delisted in 1992) were simultaneously
listed on the Tokyo International Financial Futures Exchange in 1989. These
contracts were followed by the TIFFE/TFX listings of dollar-yen futures in
1991; 1-year Euroyen futures in 1992 (trading was suspended in 1998); Eu-
royen LIBOR futures in 1999; 5-year and 10-year yen swap futures in 2003
(trading was suspended in 2007); and Exchange FOREX margin contracts
(Click 365) on U.S. dollars, Euros, UK pounds, and Australian dollars in
2005. In 2009, the TFX listed overnight (O/N) uncollateralized call rate and
general collateral (GC) spot-next (S/N) repo rate interest futures, and added
margin contracts for Nikkei stock average, FTSE 100, and DAX indexes
(Click 365) on the TIFFE (TIFFE was renamed the Tokyo Financial Ex-
 　153
Chap. VIII The Derivatives Market

Table VIII-6.　Trading Mechanism of Financial Futures

3-month Euroyen USD-JPY exchange Nikkei 225 margin con-

interest rate futures FOREX margin contracts tracts
Trading unit Principal ¥100 million US$10,000 Nikkei stock average×
100
Indicating method 100 minus rate of interest Yen equivalent per U.S. Yen equivalent per stock
(%, 90/360 day basis) dollar price index
Price asked 0.005 (¥1,250) 0.01 (¥100) ¥1 (¥100)
Contract month Mar, Jun, Sep, Dec, cycle No No
(20 contract months trad-
ed at any one time)
Final trading day Two business days prior No No
to the third Wednesday of
the contract month (trans-
actions on the day of ma-
turity must be executed
by 11:00 a.m.)
Final settlement Business day following No No
day the final trading day
Settlement Settlement of differences Making up differences Making up differences
method (the final settlement price
is equal to ¥100 less TI-
BOR rounded off at the
fourth decimal places)
Daily price limit No No No
Trading hours 8:45–11:30, 12:30–15:30, Monday 7:10 a.m. to 6:55 Friday 7:55 a.m. to 6:00
15:30–20:00 a.m. the following day a.m. the following day
Tuesday to Thursday 7:55 8:30 a.m.–6:00 a.m. the
a.m. to 6:55 a.m. the fol- following day
lowing day (5:00 a.m. during U.S.
Daylight Savings Time)

Table VIII-7.　Transition in Financial Futures Trading

3-month Euroyen USD-JPY exchange FOREX Nikkei 225 margin contracts

interest rate futures margin contracts
No. of No. of No. of No. of No. of No. of
deals contracts deals contracts deals contracts
2013 5,044,236 410,310 20,120,943 161,213 5,153,821 123,761
2014 2,708,318 243,219 12,550,958 461,345 5,065,037 139,036
2015 2,000,289 175,190 12,919,505 718,119 7,840,578 159,146
2016 2,506,430 159,565 14,992,697 544,263 5,203,500 172,940
2017 1,545,861 134,560 10,478,227 537,737 5,722,311 237,114

Source: Website of the Tokyo Financial Exchange.

154　Chap. VIII The Derivatives Market

change (TFX) in 2007) in 2010.

　Financial futures trading in the United States began with futures and fu-
tures options on commodity tradings while European countries introduced fi-
nancial futures exchanges for these products. In Japan, the market is split
with bond and stock futures and futures options trading on the stock ex-
changes, while interbank interest rate and currency futures and options are
traded on the TFX, a separate market established by some banks and securi-
ties companies.
　On the TFX, trading has been concentrated from the start in yen short-term
rate futures, with little trading in other futures. To increase the liquidity of
these financial futures, the market-making system was introduced for dollar
short-term rate futures and yen-dollar currency futures in 1990, dollar-yen
currency futures in 1991, and options on yen short-term rate futures in 1992.
However, their liquidity did not improve much.
　Meanwhile, in 1996 TIFFE introduced a TIFFE-SPAN (Standard Portfolio
Analysis of Risk) system on the basis of which the amount of margin com-
mensurate with the risks involved is computed. Moreover, in an effort to
stimulate financial futures trading, it linked the prices of its products to those
of the London International Financial Futures and Options Exchange (LIFFE)
and extended its trading hours in the same year. It made efforts to stimulate
trading by introducing the night-trading system for dollar-yen currency fu-
tures in 1997. Since 1995, however, TIFFE/TFX’ s business, which had
grown during the first half of the 1990s, has been decreasing on account of
the extremely low interest rate climate. Meanwhile, trading of Click 365,
which was listed with an eye to the expansion of foreign exchange margin
transactions, and trading of Click Stock 365, which is linked with Nikkei av-
erage stock prices, have established a presence.

5. Options Trading

Options trading refers to an agreement to trade the right to buy or sell a spe-
cific amount of a commodity or a financial instrument at a fixed price (the
exercise price) within a specified period in the future. The right to become
the buyer is called a call option, and the right to become the seller is called a
put option.
　The history of options trading goes back to antiquity. According to Aristot-
le, the first known option trading was written by Thales (ca. 620–ca. 555
BC), a Greek philosopher, on the sale of an olive press. The Chicago Board
Options Exchange (CBOE) established in 1973 is the first fully developed
options trading market. This was a method that made it possible for parties to
consummate a transaction by organizing one-on-one negotiated transactions
 Chap. VIII The Derivatives Market　155
Table VIII-8.　Years in Which Major Financial Options of the World Were Listed

Year Other countries Japan

1973 U.S. options on individual stocks (CBOE)
1974 U.S. options on individual stocks (AMEX, PHLX, PCX)
1978 U.K. options on individual stocks (LTOM)
1982 Currency options (PHLX), T-bond futures options
(CBOT)
1983 S&P 100 options; S&P 500 options (CBOE); S&P 500 fu-
tures options (CME)
1984 Currency futures options (CME), FTSE 100 options
(LIFFE)
1987 Pound interest rate futures options (LIFFE), options on
French individual stocks (MONEP)
1988 French government bond futures options (MATIF);
CAC40 options (MONEP); BUND futures options
(LIFFE)
1989 Bond OTC options (OTC); Nikkei
225 options (OSE); Nikkei 225 op-
tions (OSE); TOPIX options (TSE)
1990 Options on individual German stocks (DTB); Euroyen in- Long-term government bond futures
terest rate futures options (SIMEX); Euromark interest options (TSE)
rate futures options (LIFFE); DAX options and BUND
futures options (DTB)
1991 Euroyen short-term rate futures op-
tions (TFX)
1992 Nikkei average futures options (SIMEX)
1994 JGB futures options (SIMEX)
1997 KOSPI 200 options (KSE) Options on individual stocks (TSE,
OSE)
1998 EURIBOR futures options (LIFFE), Euro STOXX 50 op-
tions (EUREX), TAIEX options (TAIFEX)
2000 U.S. options on individual stocks (ISE)
2001 Nifty options (NSE), SENSEX options (BSE)
2006 VIX index options (CBOE)

Note: AMEX: American Stock Exchange (presently NYSE MKT), BSE: Bombay Stock Exchange,
CBOE: Chicago Board Options Exchange, CBOT: Chicago Board of Trade, CME: Chicago Mer-
cantile Exchange, DTB: Deutsche Terminbörse (presently EUREX), ISE: International Securities
Exchange, KSE: Korea Stock Exchange (presently KRX), LIFFE: London International Futures
and Options Exchange (presently ICE Futures Europe), LTOM: London Traded Options Market
(presently ICE Futures Europe), MATIF: Marché à Terme International de France (presently Eu-
ronext Paris), MONEP: Marché des Options Négociable de Paris (presently Euronext Paris), NSE:
National Stock Exchange of India, PHLX: Philadelphia Stock Exchange (presently Nasdaq OMX
PHLX), PCX: Pacific Exchange (presently NYSE Arca), SIMEX: Singapore International Mone-
tary Exchange (presently SGX), TAIFEX: Taiwan Futures Exchange,TSE: Tokyo Stock Exchange,
OSE: Osaka Securities Exchange (presently Osaka Exchange), TFX: Tokyo International Financial
Futures Exchange (presently Tokyo Financial Exchange).
156　Chap. VIII The Derivatives Market

in such a way as to enable them to settle the difference without delivery of

the underlying commodity or financial instrument, similar to a futures trad-
ing, and is considered to have been the groundbreaking event in the history
of options trading.
　The options trading started by the CBOE in 1973 spread to other financial
instruments, such as currency options trading, bond options trading, and bond
futures options trading, in 1982; stock index options trading, and stock index
futures options trading in 1983; and to currency futures options trading in
1984. And it has since spread to major financial markets worldwide. In Ja-
pan, OTC bond options trading (trading in bonds with options) was intro-
duced in April 1989. The Osaka Securities Exchange introduced Nikkei 225
options in June, the Tokyo Stock Exchange introduced TOPIX options in Oc-
tober, and the Nagoya Stock Exchange introduced Options 25 in October
1989 (discontinued in 1998). The Tokyo Stock Exchange introduced long-
term government bond futures options in 1990, and the Tokyo International
Financial Futures Exchange (TIFFE) introduced yen short-term rate futures
options in 1991. In addition, the Osaka Securities Exchange introduced Nik-
kei 300 options in 1994, and both the Tokyo Stock Exchange and the Osaka
Securities Exchange introduced options on individual stocks in 1997. In
1998, the Osaka Securities Exchange introduced three industry-specific stock
index options (High-Tech 40, Financial 25, and Consumer 40).
　Listed options are traded on exchanges. While they can be assigned to a
third party, the seller is required to deposit a margin with the exchange to
provide against defaults on the contract. OTC options trading is a one-on-one
transaction, and it cannot be assigned to a third party, but the seller is not re-
quired to deposit a margin. Unlike stock options and stock index options,
many of the currency or interest rate options are traded with banks or securi-
ties companies on the OTC market.

6. Bond Options Trading

Treasury bond (T-bond) options trading (on the Chicago Board Options Ex-
change) and T-note options trading (on the American Stock Exchange) con-
ducted simultaneously in 1982 constituted the first trading in listed bond op-
tions. And T-bond futures options were traded on the Chicago Board of Trade
for the first time in 1982. In Japan, the first bond options trading was con-
ducted on the OTC market in the name of“trading in bonds with options”in
April 1989. Trading in long-term government bond futures options started in
1990, and trading in medium-term government note futures options (discon-
tinued in 2002) started in 2000, both on the TSE.
　Unlike bond futures trading, which is conducted on the basis of a bench-
 Chap. VIII The Derivatives Market 　157
Table VIII-9.　Trading Mechanism of Bond Options Trading

OTC bond options Long-term government Medium-term government

bond futures options bond futures options
Trading All debt securities other Call options or put options on Call options or put options on
object than convertible bonds long-term government bond medium-sterm government
and warrant bonds futures bond futures
Contract Free March, June, September, De- March, June, September, De-
months cember cycle (nearest two cember cycle (nearest two
contract months traded at any contract months traded at any
one time), other months (up to one time), other months (up to
nearest two contract months) nearest two contract months)
Final ― The last trading day of the The last trading day of the
trading month immediately preceding month immediately preceding
day Mar, Jun, Sep, and Dec. Mar, Jun, Sep, and Dec.
Delivery Within one year and 3 Business day following the Business day following the
date months from the date of trading day trading day
contract
Trading ¥100 million in par value One contract on long-term One contract on medium-term
unit JGB futures JGB futures
Price asked ― ¥0.01 per par value of ¥100 ¥0.01 per par value of ¥100
Option Free 21 prices at ¥0.5 intervals, ad- 21 prices at ¥0.5 intervals, ad-
exercise ditional prices set according ditional prices set according
price to price movement in underly- to price movement in underly-
ing futures ing futures
Daily price ― Standard: Base price ±¥2.10 Standard: Base price ±¥2.10
limit Maximum: Base price Maximum: Base price
±¥3.00 ±¥3.00
Circuit ― When circuit breaker mecha- When circuit breaker mecha-
breaker nisms are in place for the un- nisms are in place for the un-
mechanism derlying futures contracts derlying futures contracts
Method of Free American option American option
exercising
the right

mark issue, OTC bond options are traded on the basis of individual issues,
such as government bonds, corporate bonds, or foreign bonds. Because they
are traded on the OTC market, bond options agreements cannot be assigned
to a third party (most of the transactions are for government bonds). As with
government bond futures trading, bond options are traded in units of ¥100
million in par value. Because their life (from the date of contract to the date
of delivery) is restricted to a maximum period of one year and three months,
and as they cannot be resold to a third party, contracts usually run a relatively
long period—six months or one year.
　By contrast, long-term government bond futures options are available in
158　Chap. VIII The Derivatives Market

Table VIII-10.　Transition in Bond Options Trading

OTC bond options Long-term government Medium-term government

bond futures options note futures options
Trading Outstanding No. of No. of No. of No. of
value price deals contracts deals contracts
2013 1,872,963 36,001 1,692,752 13,415 － －
2014 1,898,342 27,471 1,133,723 20,105 － －
2015 1,092,287 17,090 1,142,738 10,664 － －
2016 1,120,506 15,390 958,472 9,997 － －
2017 1,644,695 12,226 861,714 20,995 － －

Source: The websites of the Japan Exchange Group (JPX) and the Japan Securities Dealers Association
(JSDA).

the form of listed American options (the option can be exercised any day dur-
ing its life), and their trading mechanism is similar to that of long-term gov-
ernment bond futures. Whereas long-term government bond futures have
only three contract months with a maximum period of nine months, long-
term government bond futures options offer up to four contract months with
a maximum period of six months. In addition, compared with OTC bond op-
tions, transactions in long-term government bond futures and long-term gov-
ernment bond futures options are concentrated in those with a short remain-
ing life.
　In Western countries where options trading has long been conducted, in-
vestors are quite familiar with the system. However, in Japan, where there is
no custom of options trading, investors utilize options trading less often than
futures trading. Particularly, the amount of long-term government bond fu-
tures options trading is far smaller than that of long-term government futures
trading. This is because investors’interest is concentrated in outright transac-
tions that deal only in options, and covered transactions are not made in con-
junction with underlying assets (namely, long-term government bond fu-
tures). On the other hand, in conducting OTC bond options trading, investors
follow the strategy of combining underlying assets with covered call or target
buying.

7. Stock Index Options Trading

Trading in listed options on individual stocks started in 1973 on the Chicago

Board Options Exchange (CBOE). In 1983, the CBOE introduced S&P 100
options (the first stock index options). The Chicago Mercantile Exchange
(CME) listed S&P 500 futures options (the first stock index futures options
 Chap. VIII The Derivatives Market 　159
Table VIII-11.　Trading Mechanism of Stock Index Options

Nikkei 225 options TOPIX options

Trading object Call options or put options on Nikkei Call options or put options on TOPIX
stock average
Contract months Jun and Dec contracts are nearest 10 March, June, September, December
months, Mar and Sept contracts are cycle (nearest 5 contract months), oth-
nearest 3 months, other contract er months (nearest 3 contract months)
months are 6 months, nearest four
weekly contracts
Trading unit Nikkei stock average×1,000 TOPIX×¥10,000
Price asked ¥50 or less: ¥1; over ¥50 up to ¥1,000: 0.1 points for prices up to 20 points,
¥5; over ¥1,000: ¥10 0.5 points for prices over 20 points
Maturity On the 2nd Friday of the delivery On the 2nd Friday of the delivery
month month
Final trading day One business day prior to the delivery One business day prior to the delivery
date date
Trading hours 9:00–15:15, 16:30–5:30 the following 9:00–15:15, 16:30–5:30 the following
day day
Option exercise price Initially, 16 strike prices at ¥250 inter- Over-4 month contracts: ±6 prices at
vals; 16 strike prices at ¥125 intervals 50-point intervals (if 4 months, same
for closest 3 contract months when as 4 months or less), contracts of 4
less than 3 months remaining months or less: ±9 prices at 25-point
intervals
Method of exercising European option European option
the right
Daily price limit Normal: 4, 6, 8 or 11% according to Normal: 4, 6, 8 or 11% according to
the base price the base price
1st Expansion: Base price ＋3% 1st Expansion: Base price ＋3%
2nd Expansion: 1st Expansion ＋3% 2nd Expansion: 1st Expansion ＋3%
Circuit breaker Possible interruption in connection Possible interruption in connection
mechanism with the actuation of the circuit break- with the actuation of the circuit break-
er mechanism for Nikkei 225 futures er mechanism for TOPIX futures trad-
trading ing

ever) and the New York Stock Exchange (NYSE) listed the New York Stock
Exchange Composite Stock Index futures options in 1983. In Japan, a series
of stock index options have been listed—the Nikkei 225 stock index options
on the Osaka Securities Exchange in June 1989, Options 25 on the Nagoya
Stock Exchange in September of the same year (discontinued in 1998), and
the TOPIX options on the Tokyo Stock Exchange in 1989. In 1994, the Nik-
kei 300 stock index options were introduced on the Osaka Securities Ex-
change (discontinued in 2010). Three industry-specific stock index options
(High-Tech 40, Financial 25, and Consumer 40, discontinued in 2002) were
also introduced on the Osaka Securities Exchange in 1998, and S&P/TOPIX
160　Chap. VIII The Derivatives Market

Table VIII-12.　Transition in Stock Index Options Trading

Nikkei 225 options TOPIX options

No. of deals No. of contracts No. of deals No. of contracts
2013 57,269,727 3,212,114 386,231 40,406
2014 43,958,283 2,430,568 320,313 47,805
2015 37,806,896 1,778,198 329,529 19,145
2016 33,763,728 1,911,257 145,716 46,641
2017 32,594,768 2,083,846 259,384 76,958

Source: Website of the Japan Exchange Group (JPX).

150 options (discontinued in 2002) were listed on the Tokyo Stock Exchange
in 2001. In 2015, the Osaka Exchange introduced weekly options for the
Nikkei 225 options. Meanwhile, trading in the Nikkei average futures options
started in 1992 on the Singapore International Monetary Exchange (SIMEX,
or the present SGX-DT).
　In Japan, listed stock index options (the Nikkei 225 options) are most ac-
tively traded on the Osaka Securities Exchange. Unlike stock index futures,
other stock index options are virtually not traded in Japan.
　A comparison of the trading mechanisms of the Nikkei 225 options, the
TOPIX options, and the SGX’ s Nikkei average futures options shows that
while domestically traded stock index options are based on cash stock op-
tions, the Nikkei average futures options traded on the SGX are based on fu-
tures options. Another difference in the trading mechanisms is that the Nikkei
225 options and SGX’ s Nikkei average futures options offer long-term op-
tions. Meanwhile, in computing the amount of margins, all exchanges have
adopted the method of netting margins in accordance with risks called Stan-
dard Portfolio Analysis of Risk (SPAN) developed by the Chicago Mercantile
Exchange, and there is no significant difference among them. Among market
measures, when the circuit breaker mechanism is tripped in stock index fu-
tures trading, options trading is also halted.

8. Securities Options Trading

Options on individual stocks listed on the Chicago Board Options Exchange,

which was established in 1973, were the first call options on individual
stocks. In 1977, put options were also listed on the same exchange. While the
options on individual stocks were first listed and then stock index options
were listed in other countries, in Japan stock index options were introduced
in 1989 first and equity options on 20 individual stocks were listed afterward
 Chap. VIII The Derivatives Market 　161
Table VIII-13.　Trading Mechanism of Securities Options

Marketable securities options (TSE) Marketable securities options (OSE)

Trading object Call options or put options on domesti- Call options or put options on domesti-
cally listed marketable securities cally listed marketable securities
Contract month Nearest two contract months + nearest Nearest two contract months + nearest
two months from March, June, Septem- two months from March, June, Septem-
ber and December ber and December
Delivery date 5th day from the exercise of the right 5th day from the exercise of the right
Maturity On the 2nd Friday of the delivery month On the 2nd Friday of the delivery month
Final trading day One business day prior to the delivery One business day prior to the delivery
date date
Trading unit The trading unit of the underlying stock The trading unit of the underlying stock
Price asked 8 stages from ¥0.1 to ¥5,000 depending 16 stages from ¥0.1 to ¥5,000 depending
on the price of the underlying security on the price of the underlying security
Option exercise 5 prices at 16 stages from ¥25 to ¥5 mil- 5 prices at 16 stages from ¥25 to ¥5 mil-
price lion depending on the price of the under- lion depending on the price of the under-
lying stock, with additional prices avail- lying stock, with additional prices avail-
able afterwards based on market able afterwards based on market
Daily price limit Movement above and below the base The value derived by taking the base
price (price limit of eligible securities + price of the security for the option trade
allowable range for asking price) on the designated market as of the trade
date and multiplying it by 25%
Position limit Set for each eligible security Set for each eligible security
Trading hours 9:00–11:35, 12:30–15:15 9:00–11:35, 12:30–15:15
Method of exer- European option European option
cising the right

Table VIII-14.　Transition in Securities Options Trading

TSE Securities Options OSE Securities Options

No. of deals No. of contracts No. of deals No. of contracts
2013 1,129,358 136,525 23,723 957
2014 － － 1,062,389 171,176
2015 － － 834,886 69,594
2016 － － 922,341 32,543
2017 － － 915,787 78,082

Note: On March 24, 2014, the derivatives market on the Tokyo Stock Exchange was merged with the de-
rivatives market on the Osaka Exchange, and individual securities options trading on the Osaka
Exchange was integrated with the marketable securities options trading on the Tokyo Stock Ex-
change as of that date, and was renamed as securities options trading. Transactions on the TSE pri-
or to the integration are included in the OSE’
s data for the year 2014.
Source: Website of the Japan Exchange Group (JPX).
162　Chap. VIII The Derivatives Market

on the Tokyo Stock Exchange and the Osaka Securities Exchange in 1997
(seven of them were listed on both exchanges). Since then, option trading has
been extended to all listed securities along with a name change to“securities
options.”On March 24, 2014, the derivatives market on the Tokyo Stock Ex-
change was merged with the derivatives market on the Osaka Exchange, and
individual securities options trading on the Osaka Exchange was integrated
with the marketable securities options trading on the Tokyo Stock Exchange
as of that date.
　Soon after the Chicago Board Options Exchange was established, the ad-
visability of introducing securities options to Japan was considered. Howev-
er, it is said that their introduction was postponed for more than 20 years for
fear that they might compete with margin trading, a major source of income
for small- to medium-sized securities companies.
　The mechanism of trading in marketable securities options is basically
identical to that of stock index options but differs from that of stock index
options trading in that the securities certificate underlying an option must be
delivered to the buyer and that the final settlement price is decided on the ba-
sis of the closing price of the underlying certificate.
　Although it was thought that securities options might compete with margin
trading, they were not as actively traded. This is because there is no tradition
of trading in options in Japan, investors are not familiar with options trading,
and, unlike their Western counterparts, few individual investors are interested
in options trading. Options are traded in combination with their underlying
assets. In Japan, capital gains earned from trading underlying equities and
from securities options are subject to separate taxation. However, investors
are not allowed to offset gains and losses between these two categories. This
is believed to have discouraged individual investors from participating in se-
curities options trading. In other countries, brokers and dealers are granted
preferential treatment for their market-making in relatively illiquid securities
options. In a similar move, the Osaka Securities Exchange and Tokyo Stock
Exchange introduced the Securities Options Market-Maker Program and TSE
Securities Option Supporter system, respectively. These actions, however,
have not resulted in any significant increase in the trading of these options in
Japan.

9. OTC Derivatives Trading

The market on which derivatives trading achieved remarkable growth around

the world in the 1990s was not the exchanges but the OTC market. Particu-
larly, spurred by the financial liberalization, the interest rate swap trading that
started in 1982 has spread not only to banking institutions, but also to busi-
 　163
Chap. VIII The Derivatives Market

Table VIII-15.　OTC Trading in Securities Derivatives

Trading status (notional principal, ¥100 million)

Number of Forward Forward trading OTC options OTC index
transactions Total trading in OTC index, etc. trading swaps trading
FY2012 2,361,235 －26.59% 297 0% 2,052,821 87% 298,054 13% 10,063 0%
FY2013 2,534,193 7.32% 20,649 1% 2,093,916 83% 408,759 16% 10,869 0%
FY2014 2,898,768 14.39% 88,204 3% 2,483,307 86% 296,602 10% 30,655 1%
FY2015 5,901,582 103.59% 4,153 0% 5,054,114 86% 280,341 5% 562,974 10%
FY2016 5,165,442 －12.47% 1,874 0% 3,899,978 76% 237,830 5% 1,025,760 20%
Trading Forward Forward trading OTC options OTC index
value Total trading in OTC index, etc. trading swaps trading
FY2012 440,416 －36.60% 1,265 0% 231,222 53% 178,515 41% 29,413 7%
FY2013 597,907 35.76% 56,295 9% 286,370 48% 219,541 37% 35,703 6%
FY2014 1,229,462 105.63% 178,068 14% 120,961 10% 614,448 50% 315,983 26%
FY2015 2,395,266 94.82% 96,127 4% 181,752 8% 1,616,245 67% 501,141 21%
FY2016 2,122,106 －11.40% 85,368 4% 161,615 8% 1,525,389 72% 349,733 16%
Term-end Forward Forward trading OTC options OTC index
balance Total trading in OTC index, etc. trading swaps trading
FY2012 126,452 －28.39% 345 0% 2,609 2% 86,233 68% 37,264 29%
FY2013 135,679 7.30% 6,295 5% 3,196 2% 76,424 56% 49,765 37%
FY2014 386,987 185.22% 7,717 2% 3,752 1% 163,205 42% 212,313 55%
FY2015 450,669 16.46% 10,620 2% 6,112 1% 209,056 46% 224,879 50%
FY2016 525,234 16.55% 13,689 3% 13,643 3% 326,160 62% 171,742 33%

Brokering status (notional principal, ¥100 million)

Number of Forward Forward trading OTC options OTC index
transactions Total trading in OTC index, etc. trading swaps trading
FY2012 33,077 －45.3% 277 1% 4,527 14% 22,168 67% 6,105 18%
FY2013 48,063 45.3% 20,579 43% 4,894 10% 16,102 34% 6,488 13%
FY2014 174,599 263.3% 86,969 50% 2,326 1% 27,123 16% 58,181 33%
FY2015 747,952 328.4% 2,892 0% 1,335 0% 26,102 3% 717,623 96%
FY2016 1,478,066 97.6% 1,081 0% 1,700 0% 18,814 1% 1,456,471 99%
Trading Forward Forward trading OTC options OTC index
value Total trading in OTC index, etc. trading swaps trading
FY2012 1,180,965 －7.2% 1,592 0% 345,161 29% 759,661 64% 74,551 6%
FY2013 1,313,649 11.2% 56,197 4% 429,518 33% 727,941 55% 99,993 8%
FY2014 1,341,991 2.2% 143,579 11% 366,430 27% 743,337 55% 88,643 7%
FY2015 766,471 －42.9% 22,312 3% 127,158 17% 437,802 57% 179,200 23%
FY2016 652,812 －14.8% 73,469 11% 120,653 18% 205,564 31% 253,125 39%

Note: Figures next to annual total amounts represent percentage changes from the previous fiscal year.
Percentages in parentheses elsewhere represent the ratio to the total for the year under the respec-
tive transaction types.
Source: Compiled based on the data available on the JSDA website.
164　Chap. VIII The Derivatives Market

ness corporations and has come to play the leading role on the derivatives
market. As statistics on derivatives trading conducted on the exchanges have
been well kept, it was easy to follow changes occurring in their trading, but
because there was no organization that kept track of the derivatives trading
conducted on the OTC market, it was extremely difficult to find out how it
was doing. To remedy the situation, the Bank for International Settlements
(BIS) decided to investigate, beginning in 1995, the derivatives markets
along with—and on the occasion of—the triennial investigation of the for-
eign exchange markets to grasp the state of trading in derivatives on the OTC
market worldwide.
　According to a survey of the Japanese OTC derivatives market, including
FX spot transactions, conducted in April 2016, the daily average notional
value of OTC derivatives traded in Japan was $454.9 billion, representing an
increase of 22% from the figure in the previous survey in April 2013 (the re-
sults compare against a daily global total of $7.744 trillion and an increase of
1%). By contract type, FX swaps were $205.6 billion (up 21% from the 2013
survey); FX forwards were $62.7 billion (up 78%); interest rate swaps were
$47.4 billion (down 15%); currency options were $14.9 billion (up 132%);
interest rate options were $7.7 billion (down 10%); currency swaps were $5.8
billion (down 9%); and forward-rate agreements (FRA) were $0.8 billion
(down 69%). The total notional value of the outstanding OTC derivatives
contracts of financial institutions in Japan as of June 2016 stood at $59.3 tril-
lion, up 19% from June 2013, relative to the total of $544 trillion and a 22%
decrease worldwide. The breakdown of the total by contract type was 69.9%
in interest rate swaps (compared with 71.5% in the 2013 survey); 6.5% in in-
terest rate options (vs. 8.3% previously); 6.9% in foreign exchange forwards
and swaps (vs. 6.3%); 9.2% in FRAs (vs. 4.9%); 4.4% in currency swaps (vs.
3.9%); and 1.8% in currency options (vs. 3.2%). By underlying instrument,
equity increased 79%, and foreign exchange and interest rate derivatives con-
tracts also increased 21% and 20%, respectively. Meanwhile, credit and com-
modity derivative contracts decreased 52% and 65%, respectively.
　At the G20 Pittsburg Summit in 2009, it was agreed that all OTC deriva-
tives contracts standardized by the end of 2012 should be settled through
central clearing organizations. In Japan, Japan Securities Clearing Corpora-
tion (JSCC), which belongs to the Japan Exchange Group (JPX), began
clearing and settlement of CDS in July 2011, followed by clearing of interest
rate swaps starting in October 2012. JSCC settles ¥70 to ¥90 trillion worth of
yen-denominated interest rate swaps, which account for 90% of all interest
rate swaps, on a monthly basis.
 　165
Chap. VIII The Derivatives Market

10. Credit Derivatives Trading

“Credit derivatives trading”refers to trading in credit risks involved in loans

and corporate bonds in the form of swaps and options. While conventional
derivatives trading bought or sold market risks, credit derivatives trading
deals in credit risks. Credit risks trading may be characterized as trading in
guarantees in that it not only deals in guarantees against default but also pro-
vides a variety of products that cover the risk of declining creditworthiness
caused by a deterioration of business performance.
　Credit derivatives are traded largely in three typical types: credit default
swaps (CDS), total return swaps (TRS), and credit-linked notes (CLN). A
CDS is a type of options trading that guarantees the credit risks involved in a
loan, and when the borrower defaults on a loan underlying the CDS the dam-
age caused by such default is guaranteed. CDS derives its name from the
form in which the payment of a premium is swapped. Next, a TRS is a deal
that swaps the total profit or loss (coupon and evaluated profit or loss) with
the market rate, and it is used when the holder of a credit cannot sell it. And a
CLN is a deal that links credit risks to a bond issued by the issuer of the un-
derlying notes. Therefore, it may be said that a CLN is a CDS based on a
bond instead of a guarantee. A CLN is redeemed in full on maturity unless
the company designated in the contract defaults on its obligations, but when
the company defaults the CLN is redeemed at a reduced value prior to matu-
rity. While a CDS is concluded under the assumption that the guaranteeing
company has an adequate capacity to guarantee, a CLN is guaranteed by the
purchase of a bond. Therefore, a CLN has the advantage in that it can be con-
cluded regardless of the credit standing of the investor.
　According to the data published by the Bank of Japan, the total notional
value of outstanding credit derivatives in Japan has been accelerating in
growth since 2003, increasing by a factor of 83 from the end of December
2002 to the end of June 2011. Subsequently, however, the value declined al-
most constantly and was down to half or less of its peak by the end of June
2015. The notional value of outstanding credit derivatives has also been on a
decrease in the U.S. after hitting a peak in 2008, but the degree of decline has
not been as significant as that of Japan. During the period from 2008 when
the nominal value of outstanding credit derivatives recorded its peak in the
U.S., the outstanding balance of credit derivatives in Japan doubled over a
period of three years from then. However, the outstanding balance halved
from the end of June 2011 to the end of June 2015, reflecting erratic move-
ments on the market.
 Table VIII-16.　Credit Derivatives Trading in Japan
(Outstanding balance of notional principal; US $ million)
OTC trading Credit default swap Total return swap Credit spread product Credit-linked notes Other products
Total Total Sell Buy Total Sell Buy Total Sell Buy Total Issue Purchase Total Sell Buy
166　Chap. VIII

June 2007 275,351 271,516 145,659 125,856 814 766 48 0 0 0 3,004 3,004 0 24 24 0
Dec. 2007 389,231 381,945 201,893 180,053 820 820 0 0 0 0 6,427 6,344 83 35 35 0
June 2008 562,222 554,209 293,839 260,371 631 631 0 0 0 0 7,342 7,179 163 42 42 0
Dec. 2008 390,160 382,398 203,409 178,989 349 349 0 0 0 0 7,201 6,853 348 215 215 0
June 2009 894,196 887,258 451,942 435,316 384 374 10 0 0 0 5,662 5,280 382 890 270 620
Dec. 2009 1,029,791 1,022,922 525,688 497,235 522 512 10 0 0 0 5,661 5,258 403 689 114 575
June 2010 1,116,517 1,110,430 561,026 549,404 207 196 11 0 0 0 5,344 4,874 470 537 119 418
The Derivatives Market

Dec. 2010 1,144,710 1,137,088 577,434 559,653 2,001 1,101 900 0 0 0 5,215 4,745 470 407 125 282
June 2011 1,157,661 1,151,538 579,602 571,934 278 266 12 0 0 0 5,642 4,915 727 204 136 68
Dec. 2011 1,116,847 1,111,618 553,655 557,963 195 182 13 0 0 0 4,649 4,068 581 386 199 187
June 2012 1,105,389 1,098,891 547,638 551,253 209 196 13 0 0 0 6,038 3,933 2,105 252 107 145
Dec. 2012 1,047,913 1,040,915 529,454 511,462 473 374 99 0 0 0 6,302 3,510 2,792 226 93 133
June 2013 1,061,005 1,055,262 536,826 518,436 542 143 399 130 65 65 4,868 1,838 3,030 203 86 117
Dec. 2013 853,899 848,494 427,571 420,923 455 119 336 0 0 0 4,815 1,815 3,000 132 75 57
June 2014 785,138 778,255 389,898 388,358 367 123 244 0 0 0 5,999 2,316 3,683 514 455 59
Dec. 2014 710,060 703,689 356,398 347,292 261 104 157 0 0 0 5,664 2,471 3,193 444 394 50
June 2015 563,687 552,855 280,527 272,330 4,415 2,260 2,155 0 0 0 6,144 2,864 3,280 270 221 49
Dec. 2015 518,641 507,140 261,156 245,986 4,313 2,101 2,212 0 0 0 6,967 3,591 3,376 223 173 50
June 2016 510,693 505,278 255,136 250,141 5,414 2,054 3,360 0 0 0 － － － － － －
Dec. 2016 441,444 437,525 219,801 217,721 3,918 1,522 2,396 0 0 0 － － － － － －
June 2017 410,941 406,401 203,375 203,025 4,537 1,804 2,733 0 0 0 － － － － － －
Note: Figures for credit-linked notes and other products that were included in credit derivatives have not been released since 2016.
Source: Compiled based on the data on chronological coefficients in Bank of Japan,“A Survey of Regular Market Reports Concerning Derivatives Trading.”
(http://www.boj.or.jp/en/statistics/bis/yoshi/index.htm/)
 CHAPTER IX

The Securitized Products Market

1. What Is a Securitized Product?

The income-generating assets of a company are pooled separately from its

balance sheet into a special-purpose vehicle (SPV), and the SPV issues a se-
curity backed by the cash flow to be generated by such assets and sells the
security to investors. This method is called“securitization.”The security is-
sued through such a process is generally called a“securitized product.”Busi-
ness enterprises use their assets—such as auto loans, mortgage loans, leases
receivable, business loans and such claims as loans to corporations, and com-
mercial real estate—as collateral to back up their securitized products. As de-
fined by the Act on Securitization of Assets, intellectual property (such as
copyrights and patents) also can be securitized.
　When viewed from the standpoint of asset holders, securitization of assets
has the advantage of enabling them to use the proceeds of the assignment or
sale of such assets that they obtain at the time of issue in exchange for cash
flows that may be generated by the assets over a future period of years. In
other words, asset holders can monetize uncertain future cash flows into cur-
rent income. In addition, in case any holder of a piece of less-liquid commer-
cial real estate wants to issue a security by putting up such real estate as col-
lateral, such asset holder may easily sell the security by issuing it in small
denominations to attract a larger number of small investors, thereby increas-
ing liquidity.
　When viewed from the standpoint of investors, securitized products give
them an additional choice of investments that have a new character. More
specifically, a security backed by a piece of real estate gives them an oppor-
tunity to invest in real estate that otherwise they cannot afford to buy outright
with a small sum of money. Second, as asset holders can issue different class-
es, or tranches, of securities “( the senior/subordinated structure” ) at one and
the same time with varying levels of credit risks, they offer investors the op-
portunity to purchase a security that meets their needs. The issuers of asset-
backed securities—Security 1 to Security N in Chart IX-1—simply tailor
their terms of issue to best suit the needs of Investor 1 to Investor N, instead
168　Chap. IX The Securitized Products Market

Chart IX-1.　Conceptual Chart of Securitized Products

At the time a securitized product is issued

Money for the
Proceeds of the
Acquisition purchase of the
assignment/sale
of the asset security
of the asset
Asset 1 Security 1 Investor 1
Cash flow Sale of the

Special-purpose vehicle (SPV)

security
The holder of the asset

Asset 2 Security 2 Investor 2

・ Assignment/sale ・ ・
・ of the asset ・ ・
・ ・ ・

Asset N Security N Investor N

After the securitized product has been issued

Principal, interest,
Cash flow and dividends
Asset 1 Security 1 Investor 1
Special-purpose vehicle (SPV)

Asset 2 Security 2 Investor 2

・ ・
・ ・
・ ・

Asset N Security N Investor N

Assets pooled by the special-purpose vehicle

 　169
Chap. IX The Securitized Products Market

of making them uniform. For instance, by issuing securities with different

characters—differentiation of the order of priority for the payment of interest
and redemption of principal or granting credit-enhancing conditions (credit
enhancement)—the scope of choice for investors can be enlarged. By adding
such new wrinkles, investors can restructure their portfolios into more effi-
cient ones.

2. Basic Mechanism of Issuing Securitized Products

Generally, many of the securitized products are issued through the mecha-
nism described below. First, the holder of assets “( originator” ) such as mort-
gage loans and accounts receivable that are to be securitized assigns them to
a SPV. By doing so, such assets are separated from the balance sheet of the
originator and become assets of the SPV, which becomes the holder of the as-
sets. An SPV may take the form of a partnership, a trust, or a special-purpose
company (SPC). An SPC established under the Act on Securitization of As-
sets is called tokutei mokuteki kaisha (TMK, or a specific-purpose company).
To ensure bankruptcy remoteness (no impact even if the company, etc., held
by the SPC goes bankrupt), an overseas SPC is generally set up as a subsid-
iary through what are called charitable trusts under U.S. and U.K. laws using
what is termed a“declaration of trust,”and the domestic SPC established as
a subsidiary of the overseas SPC. In terms of originators, the entity responsi-
ble for the debt is called the original obligor.
　The next step is to formulate the terms of issue of the securitized product
to be issued by the SPV. If the originator opts for the trust method, it issues
beneficiary certificates like those of a trust company. If it chooses the SPC
method, it issues the kinds of securities decided upon by the SPC to provide
securitized products to investors, but it does not have to issue them on one
and the same terms of issue. In short, it can design each type (tranche) of se-
curity with a different character by differentiating the order of priority with
respect to the payment of interest and redemption of principal, by varying
maturities, or by offering the guarantee of a property and casualty insurance
company. By adding such variation, the originator can issue securities that
meet the diverse needs of investors. In the order of priority for payment, such
securities are called“senior securities,” “mezzanine securities,”or“subordi-
nated securities.”
　When the originator plans to sell its securitized products to an unspecified
large number of investors, it should make them readily acceptable to inves-
tors by offering them objective and simple indicators (credit ratings) for in-
dependently measuring the risks involved. In addition, there are other players
involved in different processes of securitized products, such as servicers, who
170　Chap. IX The Securitized Products Market

Chart IX-2.　Example of General Working Mechanism for Issuing Securitized Products

contribution
Equity
Charitable trust Overseas SPC
Equity
contribution

Proceeds of assignment
Originator
Loan
Assignment of loans
Original obligor

agreement
receivable
Agreement commis- Domestic SPC
sioning
Back-office operation
Servicer
Payment of
Payment of principal
principal and
and interest
interest
Issuance of securitized products Payment of
principal and
interest
Credit-rating Credit rating Proceeds of the sale of
agency securitized products
Credit-complementing
Guarantee organization

Underwriting Bond management

company company
Payment of the proceeds
Sale of securitized products of the sale of securitized Payment of principal and interest
products

Investors

manage assets that have been assigned to an SPV and securitized and also re-
cover funds under commission from the SPV, and bond management compa-
nies, which administer the securitized products (corporate bonds) purchased
by investors. Firms that propose such a mechanism for securitizing assets and
that coordinate the issuing and the sale of such products are called“arrang-
ers,”and securities companies and banks often act as arrangers.

3. Description of Major Securitized Products

Securitized products are divided into several groups according to the types of
assets offered as collateral and the character of the securities issued. Those
belonging to the group of products that are backed by real estate and the
 Chap. IX The Securitized Products Market 　171
Table IX-1.　Classification of SPVs

Types SPVs established under basic laws SPVs established under special laws
Corporation type Special-purpose company (SPC) Specific-purpose company–TMK (Act
Domestic: on Securitization of Assets)
－Corporation (Companies Act) Investment corporation (Act on Invest-
Overseas: ment Trusts and Investment Corpora-
－SPC (foreign governing law) tions)
Trust type General trust (Trust Act and Trust Busi- Specific-purpose trust (SPT) (Act on Se-
ness Act) curitization of Assets)
Investment trust (Act on Investment
Trusts and Investment Corporations)
Partnership type Silent partnership (Commercial Code), Silent partnership, general partnership
general partnership (Civil Code) (Act on Specified Joint Real Estate Ven-
tures)

Source: Prepared by the author from various materials.

claims collateralized by it are residential mortgage-backed securities

(RMBS), commercial mortgage-backed securities (CMBS), and real estate
investment trusts (REIT). RMBSs are issued in retail denominations against
a portfolio that pools home mortgage loans. The first securitized product
based on residential mortgage loans was the residential mortgage loan trust
launched in 1973. However, this product failed to attract the attention of both
issuers and investors because of too much limitation. Nevertheless, as the
scheme based on SPC became available thereafter, thanks to the enforcement
of the SPC Law, the volume of this type of issue has increased since 1999.
Although bonds backed by housing loans that have been issued by the Japan
Housing Finance Agency since 2001 were not issued through an SPC, they
may be included among the RMBSs. CMBSs are backed by loans given
against the collateral of commercial real estate (office buildings, etc.). The
mechanism of issuing them is almost the same as that for RMBSs. The REIT
that became available by virtue of enforcement of the Act on Investment
Trust and Investment Corporation in May 2000 is an investment trust in that
it can only invest in assets backed by real estate.
　Another group consists of asset-backed securities (ABS, narrowly de-
fined), such as accounts receivable, leases receivable, credits, auto loans, and
consumer loans, etc. Sales of these products began to increase in the latter
half of 1990s following the enforcement of the Specified Claims Law in June
1993. As these collateralized assets are a collection of relatively small assets
and can be dispersed, they are highly suitable for securitization. What is
more, as the laws governing the products have since been developed, they are
securitized more extensively than the real-estate-backed group.
 Table IX-2.　Description of Major Securitized Products
Underlying claims Securities issued Originator Governing laws Basic scheme
Residential mortgage- Banks Act on Securitization of Assets, Trust A banking institution that holds mortgage credits assigns
backed securities Other banking institu- Act, Trust Business Act, Financial In- them to an SPC; the SPC, in turn, issues a bond backed by
tions struments and Exchange Act such credits or entrusts them to a trust bank, which, in turn,
issues beneficiary certificates backed by them.
172　Chap. IX

Housing loans receivable Japan Housing Finance J a p a n H o u s i n g F i - Act on the Japan Housing Finance Housing loans receivable held by the Japan Housing Fi-
Agency bonds backed nance Agency Agency, Independent Administrative nance Agency are given in trust to a trust bank, and a speci-
by housing loans re- Agency fied corporate bond backed by the beneficiary certificates
ceivable (RMBS) Financial Instruments and Exchange of a trust is issued at that time through an SPC.
Act
Commercial mortgage Commercial mortgage- Business corporations, Act on Securitization of Assets, Trust The originator assigns the commercial mortgage credits and
credits and rental backed securities Banks Act, Trust Business Act, Financial In- rental revenues, etc., to an SPC, the SPC, in turn, issues a
revenues (CMBS) Other banking institu- struments and Exchange Act bond backed by such credits or entrusts them to a trust bank,
tions which, in turn, issues beneficiary certificates backed by them.
Real estate-specific Authorized or regis- Act on Specified Joint Real Estate An equity contribution is invited from a large number of re-
joint venture products tered firms Ventures tail investors, and the funds thus pooled are jointly invested
in real estate by taking advantage of the scheme of a volun-
tary association, an anonymous association, or a real estate
Real estate investment trust.
The Securitized Products Market

Real estate investment Owners of property Act on Investment Trusts and Invest- An investment corporation issues units of investment and
trusts (REIT) purchased by an in- ment Corporations purchases a piece of real estate and real estate loan claims
vestment trust Financial Instruments and Exchange with the proceeds of such units in accordance with instruc-
Act tions given by a management company.
Mortgage loans receivable Mortgage securities Mortgage securities Mortgage Securities Act Mortgage securities are issued by registering mortgage loan
created on land, buildings, companies Financial Instruments and Exchange receivables of the mortgage securities company, and jointly
and superficies Act held equity in mortgage securities is sold to investors.
Fiscal Loan Fund loan- Government Act on Securitization of Assets, The government entrusts the loan receivables from its Fis-
Fiscal Loan Fund loan backed securities Financial Instruments and Exchange cal Loan Fund to a trust company. Beneficiary certificates
receivables Act issued on the loans are then sold to an SPC, which issues
securities with the loans as the underlying assets.
Leases receivable, credit Asset-backed securities Business corporations Act on Securitization of Assets, Trust A business corporation that holds lease credits assigns them
card receivables, and (ABS, ABCP) Act, Trust Business Act, Financial In- to an SPC; the SPC, in turn, issues a bond backed by such
installment credit struments and Exchange Act credits or entrusts them to a trust bank, which, in turn, is-
accounts and notes sues beneficiary certificates backed by them.
receivable
Collateralized loan ob- Banks Act on Securitization of Assets, Trust A banking institution that holds general loans assigns them
General loans ligations (CLO) Act, Trust Business Act, Financial In- to an SPC; the SPC, in turn, issues a bond backed by such
struments and Exchange Act loans or entrusts them to a trust bank, which, in turn, issues
beneficiary certificates backed by them.
Collateralized bond ob- Banks and other bond- Act on Securitization of Assets, Trust The banks and other bondholders that hold a number of
Bonds ligations (CBO) holders Act, Trust Business Act, Financial In- bonds assign them to an SPC; the SPC, in turn, issues a bond
struments and Exchange Act backed by such credits or entrusts them to a trust bank,
which, in turn, issues beneficiary certificates backed by them.
 　173
Chap. IX The Securitized Products Market

　Other securitized products are called collateralized debt obligations

(CDO), which are securities issued against the collateral of general loans,
corporate bonds, and credit risks of loans that are held by banking institu-
tions. For instance, loans to small and medium-sized business enterprises that
are securitized may be considered CDOs. And CDOs are subdivided into col-
lateralized loan obligations (CLO) and collateralized bond obligations
(CBO). Moreover, since the eligibility requirements for issuing commercial
paper (CP) were abolished in 1996, an increasing number of business corpo-
rations have come to use asset-backed commercial paper (ABCP) as a form
of securitized product.

4. The Size of the Market

In 2011, the Bank of Japan announced retroactively balances for securitized

products back to the end of fiscal 2007, which were previously unavailable
figures. According to these statistics, the balance of securitized products out-
standing as of the end of fiscal 2016, stood close to ¥33 trillion. When com-
pared with that of stocks and beneficiary certificates of investment trusts
(¥1,261 trillion), loans by private financial institutions to corporations and
government entities (¥614 trillion), industrial bonds (¥77 trillion) and bank
debentures (¥10 trillion), their share of private-sector financing as a whole is
still not very large. In contrast, a similar balance (of ABS and mortgage-relat-
ed combined) in the United States, which is considered the most advanced
nation in securitizing claims, stood at about ¥1,100 trillion at the end of fiscal
2016. The total issuance amount came to ¥240 trillion, reflecting the extraor-
dinary size of the market compared to the Japanese one.
　The scale of the securitized products market that stood at a mere ¥400 bil-
lion at the end of fiscal 1989 increased sharply thanks to the enforcement of
the Specified Claims Law in 1993 (repealed in 2004), the Special Purpose
Companies Law in 1998 and the Act on Securitization of Assets, which is a
revised version of the Special Purpose Companies Law, in 2000. This also
suggests that assets that can be used as collateral have diversified and that as-
set securitization has found a growing number of applications. Looking back,
the issuance of securities backed by installment credits, which was made pos-
sible by the enactment of the Specified Claims Law, was the engine of
growth of the market. As these assets have short maturities and can be readily
pooled for diversification, they carry relatively low risks and can be securi-
tized, and such attributes have been a factor in expanding the scale of the
market for them. Since 2000, following the enforcement of the Act on Secu-
ritization of Assets, the securitization of mortgage loans, as well as of loans
to business corporations and the government, has expanded dramatically.
174　Chap. IX The Securitized Products Market

Chart IX-3.　The Balance of Securitized and Claims Liquidation-Related Products

trillions of yen
50
45 Claims liquidation-related products
40 Securitization products
35
30
25
20
15
10
5
0
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
(fiscal year-end)
FY 91 92 93 94 95 96 97 98 99 00 01 02 03
Asset-liquidation products 0.5 0.6 0.7 1.3 1.4 2.7 9.8 11.9 11.9 13.7 17.8 24.0 27.2
Securitized Products － － － － － － － － － － － － －
FY 04 05 06 07 08 09 10 11 12 13 14 15 16
Asset-liquidation products 30.1 35.5 38.5 34.2 31.3 27.7 25.5 24.8 22.2 20.8 20.2 19.3 18.5
Securitized Products － － － 45.7 43.1 40.0 37.8 37.6 34.9 33.2 33.0 32.7 32.3

Source: Complied on the basis of the data drawn from Nichigin shikin junkan-tokei (Flow-of-Funds
Statement of the Bank of Japan).

Table IX-3.　Changes in Composition of Collateralized Assets, etc.

(trillions of yen)
Ratio to net
2011 2012 2013 2014 2015 2016
operating income
Asset backed bonds (ABB) 14.2 13.8 13.6 13.8 14.4 14.6 45.1
MBS issued by JHFA 10.1 10.6 10.9 11.0 11.7 12.1 37.3
ABB backed by real estate properties 2.7 2.1 1.6 1.6 1.7 1.7 5.2
Other ABB 1.4 1.2 1.1 1.2 1.0 0.8 2.5
ABCP 2.6 2.3 1.9 1.8 1.7 1.7 5.2
Trust beneficiary rights 20.8 18.8 17.7 17.4 16.7 16.0 49.4
Of which backed by housing loans 8.5 7.7 7.6 7.6 7.8 7.7 23.8
Of which backed by loans to
2.3 1.9 1.6 1.7 1.6 1.7 5.2
companies and governments
Of which backed by accounts
5.8 5.1 4.4 3.6 2.7 1.7 5.2
receivable
Of which backed by lease and
3.5 3.2 3.0 3.3 3.7 4.1 12.7
consumer credits
Total 37.6 34.9 33.2 33.0 32.8 32.4 100.0

Source: Complied based on the data from Nichigin shikin junkan-tokei (Flow-of-Funds Statement of the
Bank of Japan).
 　175
Chap. IX The Securitized Products Market

This may be explained by the fact that, pressed by the need to raise the capi-
tal adequacy ratio in compliance with the Basel Accords, banks have sought
to unload loan assets from their balance sheets. After reaching a peak in fis-
cal 2006, the volume of securitized products has gone into decline under the
impact, etc., of the weakening of the economy set off by the subprime loan
crisis.
　“Securitized products”are defined as the total of asset-backed securities,
asset-backed commercial paper (ABCP) and trust beneficiary interests. Resi-
dential mortgage-backed securities (RMBS) issued by the Japan Housing Fi-
nance Agency (JHF; formerly, Housing Loan Corporation) account for no
less than 80% of asset-backed securities. Looking at the underlying assets of
trust beneficiary interests that account for nearly half of the total outstanding
balance, nearly 50% are mortgage loans while almost 25% are leases & cred-
it receivables.

5. Primary Market for Securitized Products

As the bulk of securitized products are issued in private placement transac-

tions between the parties concerned, it is difficult to accurately grasp the size
of the primary market of securitized products. However, the Japan Securities
Dealers Association (JSDA) currently compiles and publishes the“Securiti-
zation Market Trends Survey”conducted jointly with the Japanese Bankers
Association based on information on issuance trends of securitized products
received voluntarily from arrangers of securitized products and others. Ac-
cording to the Securitization Market Trends Survey, securitized products is-
sued in Japan in fiscal 2016 reached ¥4.5 trillion. Although securitized prod-
uct issuance reached a peak of ¥9.8 trillion in fiscal 2006, it went through a
period of decline under the impact of the weakening economy kicked off by
the subprime loan problem. However, it has been on a recovery trend over
the last few years.
　Looking at the trend by the type of asset pledged as collateral, while resi-
dential mortgage loans and shopping credits have exhibited a recovery trend,
other assets have declined—a result that reflects the differences in the types
of underlying assets. Residential mortgage loans account for a further in-
creasing percentage of the underlying assets used as collateral, a trend that
has not changed over the past few years. This trend reflects that lending
banks are actively securitizing mortgage loans of their own origination and
that the issuance of RMBS by the Japan Housing Finance Agency has re-
mained at a high level.
　According to the data on issuance compiled by the JSDA, the total value
of publicly offered asset-backed corporate bonds had steadily increased since
176　Chap. IX The Securitized Products Market

Chart IX-4.　Securitized Products Issuance

trillions of yen
10
9 Accounts receivable,
commercial bills
8 Lease receivables
7
Credit card receivables
6
Consumer loans
5
Residential loans
4
3 Real estate related

2 CDOs
1
Others
0
04 05 06 07 08 09 10 11 12 13 14 15 16

Source: Securitization department of Deutsche Securities Inc.

Chart IX-5.　Breakdown of Collateralized Assets

(FY)

16

14

12

10

08

06

04

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Others CDOs Real estate related Residential loans Consumer loans
Credit card receivables Lease receivables Accounts receivable, commercial bills
Source: Securitization department of Deutsche Securities Inc.
 　177
Chap. IX The Securitized Products Market

1997, the year in which the association started tracking the data. After hitting
a peak of ¥0.52 trillion in fiscal 2002, however, the total has declined, falling
to ¥0.1 trillion in fiscal 2016. The popularity of privately placed asset-backed
corporate bonds is thought to be the result of considerations with regard to
investor protection framework, taxes, and disclosure cost.
　The underwriting of these securitized products is concentrated in major
brokers/dealers and bank-affiliated securities companies. According to
Thomson-Reuters Corporation, a major information provider, the Mizuho Fi-
nancial Group accounted for a 40% share in the securitized products under-
writing market in 2016. Other top underwriters of those securitized products
were Sumitomo Mitsui Financial Group (over 11% share) and Mitsubishi
UFJ Morgan Stanley (nearly 9% share), followed by Nomura Holdings, Dai-
wa Securities Group and Goldman Sachs. Although the list has shown some
movement over the past few years, it has been minor. It may be said that the
results reflect their capabilities in distributing securitized products and pro-
curing collateral assets, as well as securitization expertise that meets client
needs.

6. Secondary Market for Securitized Products

With the exception of beneficiary certificates of real estate investment trusts

(REITs) and infrastructure funds to be discussed later, trading in securitized
products is not concentrated in stock exchanges. As is the case with the sec-
ondary market for bonds, securitized products and their transactions are too
complex and varied to lend themselves to exchange trading. Hence this has
led to the dependence on an over-the-counter interdealer market as the sec-
ondary market for their trading. In this section, we will overview the present
state of the interdealer market of securitized products by using primarily the
data on“TMK bonds”(which are publicly offered corporate bonds issued by
a corporation established based on the Act on Securitization of Assets. Asset-
backed bonds, which is an item for statistics for the primary market includes
the portion of the issuer established for funds raising purposes based on the
Companies Act.) published by the JSDA, which is in a position to obtain data
on interdealer transactions.
　Data on the trading amounts of TMK bonds compiled by the JSDA on the
basis of reports from member securities companies for the years prior to 1998
are not available. According to these reports, the trading amount of TMK
bonds has fluctuated frequently, reaching a peak in 2014. A comparison of
TMK trading amounts with those of other bonds in 2017 shows that TMK
bond trading amounted to nearly ¥130 billion, and those of corporate straight
bonds and utility bonds stood at ¥17.3 trillion and ¥3.2 trillion, respectively.
178　Chap. IX The Securitized Products Market

Chart IX-6.　The Amount of TMK Bonds Traded

¥100 million
18,000
15,903
16,000 14,539
14,000
12,000 10,912
9,686
10,000
8,000 7,324 7,048
5,749 5,274
6,000 4,518
3,797 3,838
4,000 3,001 2,930 2,735 2,986 2,570 2,133
1,561 1,279
2,000
0
0
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Source: Compiled on the basis of the data drawn from the Japan Securities Dealers Association.

Chart IX-7.　Yield to Subscribers of the Housing Loan Corporation Bonds

Housing Loan Corporation bonds backed by mortgage loans

10-year government-guaranteed bonds (secondary market yield)
(%) Spread
2.5

2.0

1.5

1.0

0.5

0.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: Compiled on the basis of the data drawn from Kinyu keizai tokei geppo (Monthly Report on
Financial and Economic Statistics) of the Bank of Japan.

Although these issues constitute only a part of the securitized products mar-
ket, it may be said that the asset-backed securities market of this country still
remains underdeveloped. The number of securities companies that offer them
is quite limited, and their liquidity is considerably low. On the other hand, a
large number of securities companies make a market in RMBS issued by the
Japan Housing Finance Agency, the bonds are classified as FILP agency
 Chap. IX The Securitized Products Market 　179
Chart IX-8.　Claims Liquidation-Related Product Holding Ratio

2015
2010
2005
2000
1995
1990
0% 20% 40% 60% 80% 100%
Financial institution Non-financial corporation Household Overseas

Source: Complied on the basis of the data drawn from Nichigin shikin junkan-tokei (Flow-of-Funds
Statement of the Bank of Japan).

bonds for statistical purposes, and their market seems to have a certain de-
gree of liquidity.
　As their trading market is yet to attain maturity, it is difficult to precisely
measure their secondary market yields, and they have to be substituted with
yields at issue. Measured in terms of yields at issue, the most highly liquid
JHF bonds are traded at a higher yield than government-guaranteed bonds.
Reinvestment risk occasioned by early mortgage loan repayment in addition
to the expected redemption period and the availability of a government guar-
antee may be a factor behind this. While the spread of these two bonds can
slightly widen at times, it is generally stable at no more than 0.5%.
　According to the balance of financial assets and liabilities of the Flow-of-
Funds Accounts of the Bank of Japan, most of the holders of credit liquida-
tion-related products (securitized products) currently are nonfinancial corpo-
rations and banking institutions. In 1990, households were the primary
holders. Since then, however, holdings by households have declined consis-
tently, and currently stand at zero. Meanwhile, during this time, financial in-
stitutions increased their holdings of securitization-related products and have
become the primary holders.

7. Primary and Secondary Markets for the Beneficiary Certificates of

Real Estate Investment Trusts

On September 10, 2001, the Japan Building Fund Investment Corporation

and the Japan Real Estate Investment Corporation listed their certificates on
the Tokyo Stock Exchange and became the first public real estate investment
trusts (REITs) in Japan. These real estate investment trusts owe their creation
180　Chap. IX The Securitized Products Market

Table IX-4.　The Listing Requirements of the Tokyo Stock Exchange

Item Listing requirements

Eligibility for becoming an The investment trust management company, the trust company for an in-
asset management company vestment trust without instruction by trustor, or an entity that otherwise
manages assets of a REIT applying for listing must be a member of the
Investment Trusts Association, Japan.
Ratio of real estate to the to- The ratio of real estate is expected to be 70% or higher.
tal value of assets managed
Ratio of real estate and relat- The ratio of real estate is expected to be 95% or higher.
ed assets and liquid assets to
the total assets under man-
agement
Total net asset value Expected to increase to ¥1 billion or more by the time of listing.
Total asset value Expected to increase to ¥5 billion or more by the time of listing.
Auditor’
s opinion (a) The securities report for the two immediately preceding terms are fair
and accurate and contain no false statements.
(b) The audit reports for the two immediately preceding terms contain
the remarks“unqualified opinion”or“qualified opinion with an ex-
ception.”
No. of units listed Expected to increase to 4,000 or more by the time it is listed.
Major beneficiaries or inves- The total number of units owned by major beneficiaries or investors is
tors expected to be 75% or less of the total units listed.
No. of beneficiaries or inves- Their number (except major beneficiaries or investors) is expected to in-
tors crease to 1,000 or more at the time of listing.

Source: Compiled on the basis of the data drawn from the website of the Tokyo Stock Exchange.

to the amendment of the Securities Investment Trust Act enforced in Novem-

ber 2000, which makes it possible to form trust funds through a real estate
investment trust scheme. In addition, the Tokyo Stock Exchange instituted a
rule granting a special exception to the securities listing regulations in favor
of real estate investment trust certificates and enforced it on March 1, 2001.
By December 31, 2016, the number of listed issues had increased to 59.
　The basic mechanism of REITs is this: investment corporations or invest-
ment managers called investment trust management companies pool funds of
investors, invest such funds primarily in real estate, and distribute the invest-
ment income (including rent income) to investors. The three types of securi-
ties defined in the Act on Investment Trusts and Investment Corporations—
beneficiary certificates of investment trusts with instruction by trustor,
beneficiary certificates of investment trusts without instruction by trustor,
and investment securities of investment corporations—may also be issued by
real estate investment trusts. The first type of trust is managed by a trust
 Chap. IX The Securitized Products Market 　181
Table IX-5.　Statistics Relating to REITs Listed on the Tokyo Stock Exchange

No. of issues Total net asset value Trading volume Amount of certificates
Calendar year
listed (¥100 million) (in 10,000 units) traded (¥100 million)
2001 2 2,314 810
2002 6 4,451 46 2,061
2003 10 7,088 100 5,057
2004 14 11,062 182 11,791
2005 26 18,937 297 20,551
2006 39 29,539 472 35,040
2007 41 35,910 811 74,428
2008 40 38,405 779 39,926
2009 40 38,733 618 22,423
2010 35 38,811 881 26,645
2011 34 40,211 1,058 28,664
2012 37 43,644 1,384 32,213
2013 45 53,200 3,570 87,800
2014 51 62,364 4,099 79,369
2015 52 73,482 4,658 100,284
2016 57 82,954 6,478 128,113

Source: Compiled based on the data available in the“Statistics on Real Estate Investment Companies”
issued by The Investment Trusts Association, Japan and other materials.

company that holds the assets in custody in accordance with instructions giv-
en by the management company. The second type is managed by a trust bank
in accordance with its own judgment. And the third is commissioned to a
management company by the investment corporation that holds the assets.
All of the certificates of the REITs listed on the Tokyo Stock Exchange are
investment securities issued by investment corporations.
　One of the advantages investors can derive from REITs is that they are
able to invest in real estate with a small amount of money, and they can enjoy
liquidity in freely trading their investments in the market. Another is that RE-
ITs offer diversification to their investment portfolio. REIT dividends may be
expensed provided that a REIT meets certain requirements, including distrib-
uting more than 90% of its income to its certificate holders.
　One problem that the managers of REITs have to address is the possibility
of a conflict of interests between investors and the manager of a REIT with
respect to any investment of its assets commissioned to a third party. In other
words, it is feared that the management company may force the REIT to buy
182　Chap. IX The Securitized Products Market

a piece of real estate held by its stockholders at a high price. To avoid the oc-
currence of such a situation, it is desirable to require the REIT to fully dis-
close information concerning its investments. And investors should consider
getting involved in the management of investment corporations through a
general meeting of investors.

8. Listed Infrastructure Funds

In April 2015, the Tokyo Stock Exchange (TSE) established an infrastructure

fund market for listing funds that invest in infrastructure properties. The in-
frastructure funds handled on this market hold infrastructure properties and
attain a cash flow that arises when lending the assets to operators. It is on the
infrastructure fund market that the securities issued as underlying instruments
of the cash flow are traded.
　The structure of infrastructure funds is basically similar to that of REIT.
While the listing rules for the infrastructure fund market are generally based
on the framework for the REIT market, there is a key difference in that the
policy for selecting operators who borrow and operate the infrastructure
properties is included in the rules.
　Since the infrastructure fund market was established only recently, only
four issues have been listed, two in 2016, and two in 2017. In addition, all
listed issues hold solar power generation facilities as underlying assets and
have issued securities. This is likely due to the projection that a solar power
plant would be a highly stable source of profits given that power companies
buy power at fixed prices following the enforcement of the Act on Special
Measures Concerning Procurement of Electricity from Renewable Energy
Sources by Electricity Utilities “( Feed-in Tariffs (FIT) Act” ) in 2011.
　Properties that support the livelihoods of people, including electricity and
gas facilities, water supply facilities, railroads and roads, can be the underly-
ing assets of infrastructure funds. One of the reasons why infrastructure funds
have been drawing attention is because earnings generated by such infra-
structure properties are considered to be relatively less vulnerable to eco-
nomic changes. This makes it possible for infrastructure funds to also main-
tain stable profits. While currently in Japan all funds pertain to solar power
plants, it is anticipated that infrastructure funds that invest in other types of
properties will emerge going forward.
　The total number of shares issued for the four issues combined amounts to
approximately 200,000 shares. Daily trading volume on the market in Octo-
ber 2017 stood at nearly 1,300 shares combined for the three issues that were
listed at the time. Also drawing attention is the future development of trading
on the market.
 Chap. IX The Securitized Products Market 　183
Chart IX-9.　Structure of Infrastructure Funds

Asset Management
Company
Supply Infrastructure Establish
Asset Instructions on Investment Invest Infrastructure Fund

Public Orgnization Infrastructure

Company
Sell Acquire
Ordinary Company Infrastructure
Ordinary Company
Invest
Infrastructure Infrastructure
Company Fund
(Investment Investor
Corporation)
Retail Investor
Management of
Infrastructure
(Operator) Institutional Investor
Lease Infrastructure Invest
Infrastructure
Company Corporate Investor

Source: Website of the Japan Exchange Group, Inc.

Target infrastructure

(Includes concessions targetting the assets)

Transportation
Energy related Other
related

Renewable power Airports Water and sewage

generation facilities
Roads Telecommunication
Electric Facilities equipment
(Power plants) Railways
Wireless equipment
Gas Facilities Harbor Facilities

Oil and Gas pipelines Energy ships

* Right to operate public facilities (concession) refers to the right to operate the public facility, which
collects charges for usage that can be outsourced to a private business operator while the ownership
of the facility remains with the public entity.
Source: “Infrastructure Funds” Section on the website of the Japan Exchange Group, Inc.
184　Chap. IX The Securitized Products Market

　In infrastructure investment, the terms greenfield and brownfield are used.
The former signifies a field that has not been touched by human hands, re-
flecting a type of investment made where nothing exists. Meanwhile, the lat-
ter refers to a state in which human intervention has already been made, re-
flecting an investment in an existing infrastructure facility.

9. Risks and Credit Enhancement of Securitized Products

As the structure of securitized products is complex, credit rating is widely

used as a criterion for making an investment decision. And in order to pack-
age assets into a securitized product that merits a high credit rating, a device
for controlling various risks has to be built into the product. The substance of
risks varies depending on the kind of underlying assets and the participants
in the scheme, but one thing in common among them is the default risk, or
the probability that the issuer may fail to pay its interest or principal prompt-
ly when due. The default risk of a securitized product is largely divided into
two kinds: the risk of changes occurring in the cash flow generated by the
underlying assets (bad debt or arrears) and the risk of bankruptcy of parties
involved in the securitization of assets (the debtor, the SPC, or the origina-
tor).
　The risk involved in the cash flow may be reduced by taking various cred-
it-enhancing measures. Unlike general corporate bonds, whose credit rating
is determined by the credit risk of their issuers, the credit rating of a securi-
tized product must be based on the results of examinations of assets underly-
ing each product. The arranger who underwrites and markets the securitized
product and the originator negotiate with a credit-rating agency to obtain a
high rating. There are various credit-enhancing measures to choose from for
different schemes employed for issuing a securitized product, but they may
be largely divided into two: an external credit-enhancing measure that utiliz-
es external credit (such as banking institutions) and an internal credit-enhanc-
ing measure that gives the structure of the security the function of enhancing
its credit. There are two methods of external credit enhancement: indirect and
direct. The former complements cash flows from underlying loan assets, and
the latter complements that of a securitized product. The indirect method has
a drawback in that it cannot eliminate risks associated with a servicer or any
other party involved in securitization. As a means of enhancing internal cred-
it, a senior subordinated structure is commonly used. In Japan, however, the
subordinated securities are often held by the originator because, among other
reasons, there are few investors who are willing to purchase them.
　A large part of the risk of changes in cash flows from underlying assets
can be covered by credit enhancing measures. However, the risk of bankrupt-
 Chap. IX The Securitized Products Market 　185
Table IX-6.　Main Credit Enhancing Measures

The originator owes recourse to a certain part of the assets

Recourse of the origi- sold to the SPC. Off-balance sheet accounting may not be au-
nator thorized depending on the extent to which the originator owes
such recourse.
Credit
The purchaser of a swap pays a certain amount of money in
enhancement
Credit default swaps premium in exchange for a guarantee of credit risk of a speci-
(external)
fied claim.
Guarantee, insurance A property and casualty insurance company provides insur-
by financial institu- ance covering the entire default risk is issued securities.
tions
The balance of funds remaining after deducting the amounts
paid to the investors and fees from the cash flow of the under-
Spread account
lying assets is deposited in a spread account to be used as
compensation money in case of default.
Credit
The credit standing of securities is enhanced by selling such
enhancement
part of the underlying assets whose value is in excess of the
(internal) Over collateral
amount of the securities issued to the special purpose vehicle
(SPV).
Senior/subordinated By designating part of the securities issued as subordinated
structure debt, the credit standing of the rest of the issue is enhanced.

cy of the parties involved in securitization is a serious problem. As assigned

claims and receivables of a bankrupt originator are typically subject to bank-
ruptcy proceedings, investors carry the risk of nonpayment of their principal
and interest. Therefore, it is important to check whether there is any risk in
the business of any party concerned or whether the party is shielded from the
risk of other parties concerned. Risks are complexly intertwined, and they are
summed up in Table IX-7.

10. The Enactment of Securitization-Related Laws

The existing legal system of Japan is built around business-specific laws, and
the regulatory system of financial instruments is vertically divided along the
lines of business-specific laws. As these laws contain many provisions regu-
lating or banning business activities outright, it was pointed out that to spur
the development of new business, such as the securitization of assets, the ex-
isting laws have to be amended, and new laws must be enacted.
　As regards the securitization of assets, pioneered by the Mortgage Securi-
ties Act introduced in 1931, the Specified Claims Law was enacted as an in-
dependent law in 1993. Since the enforcement of this law, the legal infra-
structure has been developed steadily. Under and thanks to the Specified
186　Chap. IX The Securitized Products Market

Table IX-7.　Typical Risks of ABS

Overall risks
Outline Measures necessary to avoid risks
of ABS
There is a risk of a failure to generate A review of credit-enhancing measures is
an expected cash flow due to a default needed. In the case of an underlying asset that
Credit risk
of the originator. consists of many credits, steps must be taken
to diversify such underlying assets.
If the issuer redeems the security ahead It is necessary to develop techniques such as a
of its maturity, the investors will be ex- collateralized mortgage obligation (CMO) and
Prepayment posed to prepayment risks. a security with a period of deferment that ad-
risk justs the relationship between the underlying
assets and the cash flow generated by the secu-
rity issued thereby.
When the funds flow out rapidly from The development of a secondary market for
the market, the holder cannot sell the trading ABSs is a must.
Liquidity security in a timely manner because the Also, the subordinated security shoud be traded
risk liquidity of the securitized product is widely among the investors.
not adequate, and the holder is thus ex-
posed to a liquidity crunch.
Risks of the
parties Outline Measures necessary to avoid risks
concerned
Once the claims of the originator sold It is necessary to ensure that the transfer of the
to the SPC are recognized as part of the claims is not for securing a loan but is their
bankruptcy estate, the investors have true sale.
Originator’
s
the risk of forfeiting their right to re- The assets must be separated from the balance
risk
ceive the payment of the principal and sheet.
interest of the security. Transaction must have the conditions neces-
sary for counteracting against a third party.
The commingling risk: A servicer of The designation of a backup servicer capable
receivables that went bankrupt may of putting up excess collateral is needed.
mingle the funds it had received before Payment of remittances received from debtors
Servicer risk it went bankrupt with its own funds must be made directly into the account of the
without remitting them to the SPV. SPV.
Management of a lock-box account must be
conducted.
Bankruptcy remoteness must be estab- The substance of business must be clearly de-
lished so that the SPC of an asset secu- fined, and an SPC in which the originator has
ritization scheme itself will not go no equity interest must be founded by estab-
SPC risk bankrupt or will not be affected by the lishing a charitable trust.
bankruptcy of other companies. The commencement of bankruptcy proceed-
ings must be averted by making the charitable
trust its beneficial shareholder.
 Chap. IX The Securitized Products Market 　187
Table IX-8.　Chronology Relating to the Securitization of Assets

Month &
Changes implemented
Year
Aug. 1931 The Mortgage Securities Act is enacted.
June 1973 Housing loan companies raise funds by offering beneficiary certificates of housing loan
claim trusts.
Sept. 1974 Housing loan companies raise funds by offering mortgage-backed securities.
Jan. 1988 The Law Concerning the Regulation of Mortgage-Backed Securities Business is enforced.
Apr. 1992 The Law Concerning the Regulation of Business Relating to Commodity Investment (the
Commodity Fund Law) is enforced.
Apr. 1993 The Securities and Exchange Act designates beneficiary certificates of housing loan claim
trusts as securities.
June 1993 The Law Concerning the Regulation of Business Relating to Specified Claims, etc. (the
Specified Claims Law) is enforced.
July 1993 The ban on the issuance of CPs by nonbanks is lifted.
Apr. 1995 The Act on Specified Joint Real Estate Ventures is enforced.
Apr. 1996 As a method of liquidizing assets under the Securities and Exchange Act, the issuance of
asset-backed securities (ABS and ABCP) is authorized, making it possible to issue them
other than under the Securities and Exchange Act.
June 1997 Beneficiary certificates of general loan claim trusts (including loans secured by real estate)
are designated as securities under the Securities and Exchange Act.
Feb. 1998 The Securities Investment Trust Act is amended (and the ban on corporation type invest-
ment trusts and privately placed investment trusts is lifted).
Apr. 1998 A total plan for the liquidation of land and claims is announced.
Sept. 1998 The Act on Securitization of Specified Assets by Specified Purpose Companies (the SPC
Law) is enforced.
Oct. 1998 The Law Concerning Exceptions to Requirements under the Civil Code for the Perfection
of Assignment of Receivables and Other Properties (the Perfection Law) is enforced.
Jan. 1999 A statement of opinion on establishing accounting standards for financial instruments is
published. (The financial component approach to conditional transfer of financial assets is
adopted.)
Feb. 1999 The Act on Special Measures Concerning Claim Management and Collection Business (the
Servicer Law) is enforced.
May 1999 Act on Issuance, etc. of Bonds for Financial Corporations’Loan Business (the so-called
Nonbank Bond Law) is enforced.
Nov. 2000 With the enforcement of the Act on Securitization of Assets, the scope of assets eligible for
securitization is expanded to include a broad range of property rights.
Nov. 2000 The Act on Investment Trusts and Investment Corporations (the revised Securities Invest-
ment Trust Act) is enforced, expanding the assets that can be securitized to real estate, etc.
Sept. 2001 The revised Act on Special Measures Concerning Claim Management and Collection Busi-
ness is enforced.
Dec. 2004 The Trust Business Act is amended, and the system requiring trust companies of the man-
agement type to register is launched.
Dec. 2004 The Specified Claims Law is repealed.
Oct. 2005 The Special Provisions of Assignment of Obligations was amended to the Act on Special
Provisions, etc. of the Civil Code Concerning the Perfection Requirements for the Assign-
ment of Movables and Claims.
May 2006 The Companies Act is enforced.
Dec. 2006 The Trust Act is amended and provided for business, personal, and purpose trusts.
Oct. 2007 The Financial Instruments and Exchange Act is enforced.
Nov. 2011 Revised Act on Securitization of Assets is enforced.
188　Chap. IX The Securitized Products Market

Claims Law, the liquidation and securitization of assets classified as specified

claims, such as leases receivable and credit card receivables, started. There-
after, various laws were enacted to help the banking institutions meet the
capital adequacy standards imposed by the Basel Committee on Banking Su-
pervision and to encourage the securitization of their assets to deal with the
bad loan problem that had become serious since the turn of the decade of the
1990s.
　Under the Special-Purpose Company (SPC) Law and the Act on Securiti-
zation of Assets enacted as the revised SPC Law, structures incorporating
SPVs, including specific-purpose companies (TMK) and specific-purpose
trusts (SPT), may be used for securitizing specified assets designated in the
provisions of the said laws (real estate, designated money claims, and benefi-
ciary certificates issued against such assets in trust) in the form of asset-
backed securities (such as senior subscription certificates, specified corporate
bonds, and specified promissory notes, etc.). Under the SPC Law, the system
of disclosing an asset liquidation plan and individual liquidation projects was
introduced, in addition to the disclosure requirements on the disclosure of in-
formation on securities under the Securities and Exchange Act (currently the
Financial Instruments and Exchange Act).
　In 1998 the Act on Special Provisions, etc. of the Civil Code Concerning
the Perfection Requirements for the Assignment of Movables and Claims
was enacted as a law prescribing exceptions to requirements under the Civil
Code for the perfection of the assignment of receivables and other properties,
and it was amended in 2005. The Civil Code provides the legal requirements
for the assertion of the assignment of nominative claims (claims with named
creditors) against obligors or third parties. Designated claims were transfer-
able, but the provisions of the Civil Code had been a major hurdle standing
in the way of securitizing them. And the Perfection Law set forth simple pro-
cedures for the perfection of such interests.
　The Act on Special Measures Concerning Claim Management and Collec-
tion Business, enacted to account for exceptions to the provisions of the At-
torney Law, allows accredited corporations to provide the services of admin-
istering and collecting debts. Under the Act on Special Measures Concerning
Claim Management and Collection Business, a debt collection company may
be established to provide a bad debt collection service without conflicts with
the Attorney Law. The Act on Issuance, etc. of Bonds for Financial Corpora-
tions’Loan Business conditionally lifted the ban imposed on nonbanks on the
issuance of corporate bonds and CPs for the purpose of raising capital for
lending operations and on ABSs.
　As a result of the revision of the Securities and Exchange Act based on the
Act on Revision, etc. of Related Acts for the Financial System Reform and
the enforcement of the Financial Instruments and Exchange Act, beneficiary
 　189
Chap. IX The Securitized Products Market

certificates of and trust beneficiary interests in assets that are deemed eligible
for securitization by the provisions of the Act on Securitization of Assets and
mortgage certificates under the Mortgage Securities Act are now legally con-
sidered securities. Furthermore, pursuant to the enactment of the Act on In-
vestment Trusts and Investment Corporations as revised, real estate was in-
cluded in eligible assets, which paved the way for the issuance of REIT
securities. Since then, the scope of eligible assets has been expanded, and the
infrastructure funds emerged.
 CHAPTER X

Financial Instruments Exchange, etc. (1)

1. The Function of the Financial Instruments Exchanges

The basic function of a financial instruments exchange (stock exchange) is to

establish a highly organized market and concentrate supply and demand of
marketable securities in a single market to enhance the liquidity of securities,
to help form fair prices that reflect supply and demand, and to promptly pub-
lish the prices thus formed. The purpose of a financial instruments exchange
is to establish a market for trading securities and executing exchange deriva-
tives trading and to run the market in such a way as to facilitate fair and effi-
cient trading in the public interest and for the protection of investors. The ba-
sic mission of the financial instruments exchange is to provide a fair and
transparent market. The market established by a financial instruments ex-
change has the function of providing a marketplace that enhances the liquidi-
ty of financial instruments and helps form fair prices so as to provide inves-
tors with an environment in which investors can conduct investment activities
free from anxiety, raise funds smoothly by issuing securities, and hedge risks
by executing exchange derivatives trading among other activities. Further-
more, prices formed on an exchange can serve as a base for assessing the as-
set value of securities among others and price indexes serve as an important
indicator of economic and business trends. Because financial instruments ex-
changes operated by stock exchanges perform an important role in support-
ing the economy of the nation, a license must be obtained from the prime
minister to open an exchange, and the operation of that exchange is placed
under supervision according to the Financial Instruments and Exchange Act.
　Stock exchanges were conventionally required to be membership organi-
zations under the Securities and Exchange Act. An amendment of that law
that went into effect in 2000, however, allowed stock exchanges to change
their legal status to that of a corporation. Starting with the Osaka Securities
Exchange (OSE) in 2001, the Tokyo Stock Exchange (TSE), Nagoya Stock
Exchange, and JASDAQ reorganized as corporations. The enforcement of
the Financial Instruments and Exchange Act in 2007 provided for the estab-
lishment by an exchange of an exchange holding company, self-regulatory
 Chap. X Financial Instruments Exchange, etc. (1) 　191
Chart X-1.　The Function of the Financial Instruments Exchanges
Price information (Internet · Newspapers, etc.)

Information
vendors
Price Price
Information distribution information information
●Stock price information
●Index information, etc.

Securities companies
Buy and sell Buy and sell

Investors
Benefits of listing orders orders
●Funding
Listed companies

●Improving
reputation and
trust Execution of
buying and selling
Delivery of
share certificates,
price, etc.
Clearing and
settlement
Cash market
Derivatives market

[Corporate Philosophy of Japan Exchange Group, Inc.]

“Our mission is to contribute to the realization of an affluent society by promoting continuous develop-
ment of the market by ensuring our public nature and credibility, constructing the foundation of the mar-
ket which is highly convenient, efficient and transparent, and providing creative and attractive services.
Our efforts bring rewards in the form of profits resulting from the increased support and confidence of
investors and other market users.”

[Purpose of the Tokyo Stock Exchange, Inc.]

Articles of Incorporation Article 2
1. The purpose of the Company shall be to conduct the following business:
(1) Providing market facilities for securities trading, publicizing market prices and quotations, ensuring
fairness of securities trading and other business regarding operation of the financial instruments ex-
change market
(2) Designating numbers to identify parties in a financial instruments transaction (excluding trading in
financial instruments exchange markets)
(3) Business incidental to the business mentioned in the preceding two items
2. The Company shall conduct its business, placing the highest value on ensuring securities trading is ex-
ecuted in a fair and smooth manner, thereby contributing to the public interest and the protection of in-
vestors.
192　Chap. X Financial Instruments Exchange, etc. (1)

corporation, etc. Given this revised law, in the same year, the Tokyo Stock
Exchange Group, Inc. was established as a holding company of the Tokyo
Stock Exchange and a self-regulatory corporation. The establishment of a
holding company was prompted by potential conflicts of interest between the
public role of an exchange as an operator of self-regulating operations and
the for-profit orientation of an exchange as a corporation, where exchanges
sought to reinforce the independence of their highly public function to ensure
self-regulation of the market. Furthermore, against the backdrop of intensify-
ing competition among markets across borders resulting from the advance-
ment of financial transaction systems, in 2013, the Tokyo Stock Exchange
Group and the Osaka Securities Exchange combined their operations to in-
crease the appeal and convenience of their markets and to enhance their
global competitiveness, forming the Japan Exchange Group (JPX).

2. The Listing System

The stock exchange imposes listing requirements from the viewpoint of in-
vestor protection and examines the listing applications of securities compa-
nies to see whether they satisfy the listing requirements. The listing require-
ments comprise formal and eligibility requirements. After the stock exchange
receives an application from a company wishing to list its stock, the ex-
change checks first whether or not the listing applicant meets the formal re-
quirements and then the eligibility requirements.
　The formal requirements include (1) those relating to the number of share-
holders; tradable shares (number of shares owned by shareholders other than
large shareholders and other specified persons, market value of tradable
shares, ratio of tradable shares); and market capitalization of the shares listed
from the standpoint of ensuring smooth trading in shares and forming fair
prices; (2) those relating to the number of years of business operation; share-
holders’equity; and the amount of Profits earned from the standpoint of
maintaining the suitability for listing in terms of continuity of business, fi-
nancial position, and profitability, etc.; those relating to financial statements,
audit comments and audits by a registered listed company audit firm from the
standpoint of ensuring appropriate disclosure of companies’activities; and
also those relating to the appointment of a transfer agent, the tangen trading
unit, the classes of shares, restricted shares, and appointment of a designated
custody and transfer agent from the standpoint of preventing forgeries and
other troubles in the share transfer process as well as ensuring smooth opera-
tion in connection with transactions.
　Meanwhile, the eligibility requirements are: (1) corporate continuity and
profitability, (2) soundness of corporate management, (3) effectiveness of
 Chap. X Financial Instruments Exchange, etc. (1) 　193
Table X-1.　The Listing Requirements of the Second Section of the Tokyo Stock Exchange
(as of September 2017)
Formal Requirements
Amount of net assets1) Consolidated: ¥1 billion or more (plus positive value for non-consolidated
(Expected at listing) net assets)
Amount of profit2) Consolidated: ¥500 million or more for the most recent two years
No. of shareholders3) 800 or more
(Expected at listing)
Tradable shares4) a. No. of tradable shares: 4,000 units or more5)
(Expected at listing) b. Market value of tradable shares: ¥1 billion or more
c. Ratio of tradable shares: 30% or more of the listed stocks
Market capitalization of ¥2 billion or more
the shares listed
(Expected at listing)
No. of years of business Three years or more in continuous operation with a board of directors in
operation place, calculated from the end of the prior business year
Financial statements The financial statements for the latest two years contain no false statements
Auditor’
s opinion “Unqualified opinion”or“qualified opinion”for the latest two years
“Unqualified opinion”for the latest year
Others Audited by a registered listed company audit firm6)
Appointment of a shareholder services agent
Number of shares in Tangen trading units; class of stocks
Restriction on stock transfer
Appointment of designated custody and transfer agent
Notes: 1. Amount of net assets＝Total net assets＋Reserves－Subscription rights/warrants (indicated in
the section of net assets).
2. The amount of profits is the amount derived by adding or subtracting minority interests in sub-
sidiaries to/from the amount of current profit (loss). If market capitalization of the shares listed
is ¥50 billion or more (excluding when net sales in the latest year amounted to less than ¥10 bil-
lion), there is no need to meet the standard on the amount of profits.
3. No. of shareholders means the number of shareholders who own one or more units of shares.
4.“Tradable shares”refers to listed shares excluding shares held by parties with a special interest
such as officers, shares owned by the company itself, and shares held by persons who individu-
ally own 10% or more of listed shares.
5. One unit is the number of shares that constitute one unit.
6. An audit firm that is registered in the registry of listed company audit firms based on the Regis-
tration System for Listed Company Audit Firms of the Japanese Institute of Certified Public Ac-
countants (including audit firm which is subject to quality control reviews by the Japanese Insti-
tute of Certified Public Accountants).

(as of September 2017)

Eligibility Requirements
[Corporate continuity and profitability]
A business is operated continuously and a stable revenue base is present.
[Soundness of corporate management]
The company is carrying out business in a fair and faithful manner.
[Effectiveness of corporate governance and internal management system of an enterprise]
Corporate governance and internal management system are properly prepared and functioning.
[Appropriateness of disclosure of corporate information, etc.]
The company is in a status where disclosure of corporate information, etc. may be carried out in an
appropriate manner.
Other matters deemed necessary by the Exchange from the viewpoint of the public interest or the
protection of investors.
194　Chap. X Financial Instruments Exchange, etc. (1)

corporate governance and internal management system of an enterprise, (4)

appropriateness of disclosure of corporate information, etc., and (5) other
matters deemed necessary by the stock exchange from the viewpoint of the
public interest or the protection of investors. Examination of fulfillment of
these eligibility requirements is made on the basis of the documents submit-
ted by, and hearings conducted on, the issuing company.
　A company newly listing on the First or the Second Section of the market
is first listed on the Second Section, and when it meets the listing require-
ments for the First Section it is allowed to transfer to the First Section. How-
ever, if the company is judged to be capable of meeting the formal listing re-
quirements of having 2,200 or more shareholders, 20,000 units or more of
tradable shares, a ratio of tradable shares of 35% or more, and a market capi-
talization of ¥25 billion or more by the time it actually lists, it will be allowed
to list directly on the First Section.

3. The Listing Management System

With a view to carrying out the proper management of listed securities and to
protecting investors, stock exchanges have instituted various rules relating to
the management of listings and have sought to ensure the effectiveness of
these rules by requiring issuers to promise to observe them in the listing
agreement they sign at the time of listing.
　In the case of the Tokyo Stock Exchange, its listing requirements include
rules requiring listed companies to make timely disclosure of information re-
garding any material corporate matters, a code of corporate conduct requiring
companies to adhere to appropriate behavior, and rules concerning changes
in market section classification and the delisting of securities.
　Rules Requiring Timely Disclosure of Material Corporate Matters: To
ensure the formation of fair market prices and to foster the sound develop-
ment of a financial instruments market, it is extremely important for listed
companies to make proper disclosure in a timely manner of information con-
cerning material corporate matters that may influence the investment deci-
sion-making of investors, the very basis on which stock prices are formed.
The Tokyo Stock Exchange has established rules as part of its listing require-
ments for listed companies to make timely disclosure of material corporate
information.
　Code of Corporate Conduct: The Tokyo Stock Exchange has introduced
a code of corporate conduct. The multifold purposes of requiring proper con-
duct by listed companies are to raise awareness of their role as members of
the financial instruments market, to ensure greater transparency by enhancing
the disclosure of corporate information, and to achieve the proper operation
 Chap. X Financial Instruments Exchange, etc. (1) 　195
Table X-2.　Outline of Code of Corporate Conduct of the Tokyo Stock Exchange

(as of September 2017)

Matters to be observed (if a listed company violates a Matters desired to be observed (listed compa-
provision regarding these matters, it may be subject to nies are expected to make efforts to observe
measures enforced by the TSE) them)
• Matters to be observed regarding third-party allotment • Efforts toward the shift to and maintenance of
• Prohibition of stock split, etc., that could cause turmoil the desired investment unit level
in the secondary market • Efforts toward unification of trading unit
• Matters to be observed pertaining to issuance of • Respect for the principles of the Corporate
MSCB, etc. Governance Code
• Duty to exercise of voting rights in writing, etc. • Securing management structure that includes
• Duty to carry out framework improvement to facilitate independent directors
exercise of voting rights for listed foreign companies • Framework improvement to enable proper
• Duty to secure an independent director/auditor functioning of independent directors/auditors
• Duty to explain the reasons for implementing or not • Provide information on independent directors/
implementing the Corporate Governance Code auditors, etc.
• Duty to appoint a board of directors, an audit board or • Framework improvement to facilitate exercise
committee, and an accounting auditor of voting rights
• Duty to select a certified public accountant or public • Delivery of documents to shareholders own-
audit firm to provide the audit certificate of the ac- ing stock without voting rights
counting auditor • System improvement for prevention of occur-
• Duty to carry out necessary structural development of rence of insider trading
a system for ensuring the appropriateness of business • Development of system, etc. for excluding
• Matters to be observed pertaining to introduction of anti-social forces
takeover defense measures • Development of systems and structures to
• Matters to be observed pertaining to disclosure of properly respond to changes in accounting
MBOs, etc. standards, etc.
• Matters to be observed pertaining to significant trans- • Fair provision of supplementary explanatory
actions, etc., with controlling shareholders materials on details of account settlement
• Audit by an audit firm placed on the TSE’ s Listed
Company Audit Firm Register
• Prohibition of insider trading
• Exclusion of anti-social forces
• Prohibition of behavior destructive to the functioning
of the secondary market or the rights of shareholders

of investor protection measures and market functions.

　Changing Section Classifications: The Second Section of the Tokyo
Stock Exchange was established separately from the First Section in 1961
initially with a view to better protecting investors with regard to problems
with being attracted from the then immature over-the-counter market into the
exchange market. At present, the principal difference between the First and
Second Sections is generally perceived as liquidity. The Tokyo Stock Ex-
change’ s listing requirements stipulate the criteria for assignment to the First
Section and the criteria for reassignment from the First Section to the Second
Section.
　Criteria for Delisting Stocks: A stock may be delisted whenever it meets
any of the conditions set forth in the criteria for delisting stocks in the listing
196　Chap. X Financial Instruments Exchange, etc. (1)

Table X-3.　Criteria for Delisting Stocks (Tokyo Stock Exchange)

(as of September 2017)
Item Outline
① No. of shareholders Less than 400 (with a grace period of one year)
② Tradable shares When any of a through c corresponds:
a. No. of tradable shares: less than 2,000 units (with a one-year grace period)
b. Market value of tradable shares: less than ¥500 million (with a one-year
grace period)
c. Ratio of tradable shares: less than 5% of listed stocks
③ Trading volume Either the average monthly trading volume over the past one year is less than
ten units or no trades were made for the past three months
④ Market capitalization When market capitalization of the shares listed falls below of ¥1 billion and
of the shares listed does not increase to ¥1 billion or above within nine months1)
⑤ Liabilities If the issuer’ s liabilities exceed assets and this state remains unchanged for
one year2)
⑥ Bankruptcy, etc. When an issuer becomes insolvent or falls into a situation requiring rehabili-
tation or reorganization proceedings, or in situations equivalent thereto3)
⑦ Suspension of business When a listed issuer suspends its business activities or falls into a situation
activities similar thereto
⑧ Inappropriate mergers When the stock exchange determines that a listed company that acquired an-
other company has in effect failed to survive the merger and that the surviv-
ing company has failed to meet standards equivalent to the initial listing re-
quirements within three years of such merger
⑨ Deterioration in sound- When the stock exchange determines that there has been a marked deteriora-
ness of transactions tion in the soundness of transactions between the company and its controlling
with controlling share- shareholder within three years of a change in the controlling shareholder due
holder to a third-party allotment
⑩ Delays in securities fil- When a listed issuer fails to file an annual or quarterly securities report to-
ings gether with an auditor’ s report or quarterly review report within one month
following the statutory deadline (if an extension of deadline has been ap-
proved for filing, when the listed issuers fails to file within 8 days following
that deadline)
⑪ False statements or ad- • When a false statement is made in a securities report, etc. and the compe-
verse opinion tent stock exchange finds that maintaining order on the exchange could be
difficult without immediate delisting of the issue
• When an audit report contains an improper opinion or no auditors’opinion
and the competent stock exchange finds that maintaining order on the ex-
change could be difficult without immediate delisting of the issue
⑫ Securities on Alert • When despite the issue meeting criteria to be designated as securities on
alert, the competent stock exchange determines that there is no likelihood
of improvement in the issuing company’ s internal control system, etc.
• When during the process of designating the issue as securities on alert, the
competent stock exchange determines that there is no likelihood of im-
provement in the issuing company’ s internal control system, etc.
• When despite having designated the issue as securities on alert, the compe-
tent stock exchange determines that there is no likelihood of improvement
in the issuing company’ s internal control system, etc.
⑬ Breach of the listing When a listed company seriously violates the listing agreement or pledge
agreement concerning timely disclosure or when it becomes no longer a party to the list-
ing agreement
⑭ Undue restrictions on When shareholders’ rights or exercise thereof are unduly restricted
shareholders’ rights (Example) Introduction of a rights plan without contingency, introduction of
a dead hand-type rights plan, issuance of a golden share (classified stock with
veto power), etc.
⑮ Others Suspension of a listed issuer by the bank, failure to appoint a shareholder ser-
vices agent, certain restrictions on share transfers, becoming a wholly owned
subsidiary of another company, cancellation of the custody and transfer agent
agreement, wholly call, involvement with antisocial groups, and when the
competent stock exchange finds that the delisting of a given stock is in the
public interest or appropriate for the protection of investors
Notes: 1) Three months in the case that a document indicating the current business status, future develop-
ment, improvement of business plan, etc. is not submitted.
2) The grace period is extended for another year if such issuer has a credible plan to wipe out the
negative net worth within a year after the grace period through rehabilitation proceedings.
3) Excluding a case where a reconstruction plan is disclosed and market capitalization for a period
of one month is ¥1 billion or above.
 　197
Chap. X Financial Instruments Exchange, etc. (1)

requirements.
　When any stock is in danger of falling within the purview of the criteria
for delisting stocks, the issue will be put on the watch list to notify general
investors. When any stock actually falls within the purview of the delisting
criteria, the issue will be put on the liquidation list to publicize the informa-
tion and allow the trading of such issue to continue for a specified period (or-
dinarily one month).

4. The Corporate Governance Code

Application of the Corporate Governance Code: Following the govern-

ment’ s growth strategy“Japan Revitalization Strategy (Revised in 2014),”
the Corporate Governance Code, a set of key principles that contribute to re-
alizing effective corporate governance of listed companies (hereafter, the
Code), has been applied to listed companies from June 2015.
　The Code consists of a total of 73 principles, including general principles,
principles, and supplementary principles, and adopts the“comply or explain”
(either comply with the principles or explain the reasons for non-compliance)
approach. The scope in which the requirements under the“comply or ex-
plain”approach are imposed differ depending on the market category. In the
case that a company listed on the First or the Second Section of the existing
markets chooses to not comply with any of the 73 principles and in the case
that a company listed on Mothers or JASDAQ chooses not to comply with
any of the five basic principles, the company must explain the reasons for
non-compliance.
　Furthermore, since it would be desirable for companies to disclose and ex-
plain matters in a standardized framework, the status of adoption of the Code
by listed companies is to be described in the Corporate Governance Report,
which the listed companies are required to submit, and the Corporate Gover-
nance Report is made available on the website of the respective stock ex-
change, etc. for public inspection.
　Response to the Corporate Governance Code: Looking at the status as
of July 2017, out of the 2,544 companies listed on the First and Second Sec-
tions of the market, 663 companies (26.1%) complied with all 73 principles
and 2,262 companies (88.9%) complied with 90% or more of the principles.
As a consequence of reviews conducted by each of the listed companies in
consideration of the Corporate Governance Code, the compliance rate has
been on the rise. In terms of individual principles, the compliance rate
showed a significant increase particularly for Supplementary Principle 4-11.3
(Evaluation of effectiveness of the board), an increase of 35.0 basis points
from the level at the end of December 2015 immediately after the adoption
198　Chap. X Financial Instruments Exchange, etc. (1)

Chart X-2.　Overview of the Corporate Governance Code

• Formulated as part of the growth strategy, the Code seeks“growth-oriented governance”that contributes to
demonstrating healthy corporate entrepreneurship
• The Code calls for the enhancement of corporate value through appropriate cooperation with not only sharehold-
ers but also with a variety of stakeholders
• Shareholders with medium- to long-term holdings have the potential to become important partners for compa-
nies and the Code encourages sufficient constructive dialogue between companies and their shareholders
⇒Promotes sustainable corporate growth and increased mid- to long-term corporate value of companies, thereby
contributing to the development of overall economic growth
• Principles-Based Approach: Review activities against [3. Information Disclosure]
the aim and spirit of the principles, not against the lit- Companies should appropriately disclose information
eral wording and statement in judging whether or not in compliance with the relevant laws and regulations,
the activities are truly appropriate and ensure that such information is accurate, transpar-
• Comply-or-Explain: The Code adopts the approach of ent and highly useful.
not requiring companies to comply with all of its prin-
ciples uniformly since, unlike laws and regulations, [4. Responsibilities of the Board]
the Code is not legally binding. Instead, the Code asks In order to promote sustainable corporate growth and
the companies to comply with a principle, or, if not, enhance earnings power and capital efficiency, the
explain the reasons for non-compliance. board should appropriately fulfill the following roles
and responsibilities:
[1. Securing the Rights and Equal Treatment of (1) Setting the broad direction of corporate strategy;
Shareholders] (2) Establishing an environment where appropriate
Companies should take measures to fully secure risk-taking by the senior management is support-
rights and equal treatment of shareholders. ed; and
• Securing the substantial rights of shareholders (3) Carrying out effective oversight from an indepen-
⇒Measures for giving shareholders sufficient time to dent and objective standpoint
consider the agenda of general shareholder meetings ◎If a management decision causes unexpected damage
(early delivery of convening notices, etc.) to the company, there is a risk of a shareholder deriv-
• Cross-shareholdings ative lawsuit, etc. In such court cases, there is focus
⇒Disclosure of the shareholding policy, explanation on the reasonableness of management’ s decision-
of the objective and rationale for shareholding based making process.
on the examination of economic rationale, establish- 　　⇒Supporting the company s sound risk-taking
’
ment and disclosure of standards for the exercise of 　• Use of independent/external directors that contrib-
voting rights ute to sustainable corporate growth
[2. Cooperation with Stakeholders Other Than Share- 　　⇒Appoint two or more persons who can contrib-
holders] ute to constructive discussions
Companies should recognize that their sustainable 　　　※If a company in its own judgment believes it
growth is brought about as a result of contributions needs to appoint at least one-third of directors
made by a variety of stakeholders, including employ- as independent directors, it should disclose a
ees, customers, business partners, and local commu- roadmap for doing so.
nities, and should endeavor to appropriately cooperate [5. Dialogue with Shareholders]
with these stakeholders. In order to contribute to sustainable growth, compa-
• Appropriate response to issues surrounding sustain- nies should engage in constructive dialogue with
ability, including social and environmental problems shareholders.
• Ensuring diversity, including active participation of
women in companies

Source: Materials released by the Financial Services Agency.

of the Code, and General Principle 4-8 (appointment of at least two indepen-
dent directors, etc.), an increase of 27.2 basis points.
　Meanwhile, the principle with the highest explain rate was Supplementary
Principle 1-2.4 (Creation of an infrastructure allowing electronic voting and
provision of English translations of the convening notices of general share-
holder meeting). Looking at the contents of explanations given, the majority
indicated reasons underlying the intent to not comply with the respective
 Chap. X Financial Instruments Exchange, etc. (1) 　199
Chart X-3.　Compliance with of the Corporate Governance Code (as of July 2017)
[Compliance by Market Division]
Full Compliance ≧90% Compliance ＜90% Compliance

Dec. 2015 11.6% 66.4% 22.0%

Total (216 Companies) (1,233 Companies) (409 Companies)

Jul. 2017 25.9% 63.0% 11.1%

(659 Companies) (1,599 Companies) (282 Companies)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

[Principles with which the“compliance”rate rose significantly]

No. of No. of
Change from
companies. companies.
Principles “Compliance” Compliance December
“Compli- “Explana- 2015
ance” tion”
Supplementary The board’ s analysis and evaluation of its
Principle effectiveness and disclosure of a summary 1,812 728 71.3% +35.0pt
4-11.3 of the results
Principle Appointment of at least two independent
2,153 387 84.8% +27.2pt
4-8 directors
Enhancement of disclosure of the follow-
ing information
(i) Company objectives (e.g., business
principles), business strategies and
business plans;
(ii) Basic views and guidelines on corpo-
rate governance based on each of the
principles of the Code;
Principle (iii) Board policies and procedures in de-
2,349 191 92.5% +20.6pt
3-1 termining the remuneration of the se-
nior management and directors;
(iv) Board policies and procedures in the
appointment/dismissal of the senior
management and the nomination of
directors and auditor candidates; and
(v) Explanations with respect to the indi-
vidual appointments/dismissals and
nominations based on iv.

[Principles with high“Explanation”rate]

No. of No. of
Principle companies. companies.
“Compliance” Explanation
Contents “Compli- “Explana-
ance” tion”
Creation of an infrastructure allowing electronic voting,
Supplementary
including the use of the Electronic Voting Platform, and
Principle 1,122 1,418 55.8%
the provision of English translations of the convening
1-2.4
notices of general shareholder meeting
Supplementary
Bearing in mind the number of foreign shareholders,
Principle 1,794 746 29.4%
take steps for providing English language disclosures
3-1.2
200　Chap. X Financial Instruments Exchange, etc. (1)

principle due to circumstances specific to their companies, such as the low

percentage of foreign investors in the company’s shareholder population.

5. The Stock Trading System (1)

A floor auction is the most widely used trading method on the stock exchang-
es. In the case of the Tokyo Stock Exchange, the trading hours are divided
into two sessions: the morning session, from 9:00 a.m. to 11:30 a.m., and the
afternoon session, from 12:30 p.m. to 3:00 p.m.
　There are mainly two types of orders: a limit order, by which a customer
limits the acceptable price, and a market order, which is executed immediate-
ly at the price available in the market without restrictions or limits. Limit or-
ders can be made in such increments as ¥1 or ¥10, with the allowable price
increments being determined according to the price range of the stock. Par-
ticularly for some highly liquid issues, more minute units of pricing are set
for the purpose of improving contract prices and easing the wait until con-
tract, and currently orders can be made even in increments of ¥0.1 (when the
price is ¥1,000 or below). The allowable price for a limit order is restricted to
a fixed price range based on the closing price of the previous trading day,
which also controls any sharp movement in stock prices.
　Trading of shares on the exchange floor is conducted in accordance with
the price-priority rule (under which a buy/sell order with the highest/lowest
bid/offer price takes precedence over the others) and the time-priority rule
(when there is more than one order offering or bidding at the same price, the
order placed the earliest takes precedence over others) and by either the
Itayose method (single-price auction using an order book) or the Zaraba
method (continuous auction).
　Itayose method: The Itayose method is a system that is used to determine
the opening or first price when trading commences or resumes on the floor.
All buy and sell orders for a given issue are matched according to the price-
priority rule to find a single price that clears all market orders and meets cer-
tain other conditions.
　Zaraba method: The Zaraba method is a system by which, following the
establishment of the opening price by the Itayose method, trades are executed
in a continuous auction, in principle, through the end of a session. Through
this method, a newly placed buy/sell order is matched against the existing
sell/buy order that has the highest precedence based on price priority and
then on time priority in order to determine the execution price.
 Chap. X Financial Instruments Exchange, etc. (1) 　201
Table X-4.　Methods of Concluding Transactions
Itayose method Zaraba method
A memo (on a board) about an order received at the time A memo (on a board) about a Zaraba order for a
an opening price is decided given issue received
(Asked price) (Price) (Bid price) (Asked price) (Price) (Bid price)
H(2) I (4) Market K(1) M(3) Market
Quotation Quotation
◯◯◯ ¥503 ◯◯◯ ¥503
◯◯◯ ¥502 T(1) ◯◯◯ ¥502
◯◯ ¥501 P(5) N(2) ◯D(2) C(4) ¥501
G(1) F(1) E(1) ¥500 A(4) B(3) C(2) D(1) B(3) A(3) ¥500
S(2) ¥499 ◯◯◯ ¥499 F(3) G(2)◯
R(4) ¥498 ◯◯◯ ¥498 ◯◯◯
¥497 ¥497 ◯◯◯
Notes: 1. Alphabetical letters represent securities companies.
2. Figures given in parentheses represent the number of trading units, each consisting of 100 shares.
3. ◯◯◯ are blanks to be filled with securities companies bidding or asking prices and the number of trad-
ing units.
4. In the case of the Itayose method, all bid and asked prices are considered to have been proposed simulta-
neously (simultaneous outcry).
The Itayose Method
a. First, a sell order for 600 shares at a market-asked price without limit (200 shares by securities company H and
400 shares by securities company I) is matched against buy orders for 400 shares at a market-bid price without
limit (100 shares by securities company K and 300 shares by securities company M). At this point, 200 shares at
a market-asked price without limit are left unmatched.
b. Then, assuming that the opening price will be ¥500, the remaining unfilled sell orders for 200 shares at a market-
asked price without limit and those for 600 shares at an asked price of ¥499 or less (200 shares by securities com-
pany S and 400 shares by securities company R) are matched against buy orders for 800 shares at a bid price of
¥501 or more (500 shares by securities company P and 200 shares by securities company N and 100 shares by se-
curities company T). As a result, sell orders for 1,200 shares at an asked price and buy orders for 1,200 shares at
the bid price are matched.
c. Lastly, a sell order for 300 shares at an asked price of ¥500 (100 shares by securities company E, 100 shares by
securities company F, and 100 shares by securities company G) are matched against buy orders for 1,000 shares
at a bid price of ¥500 (400 shares by securities company A, 300 shares by securities company B, 200 shares by
securities company C, and 100 shares by securities company D). However, there are only 300 shares offered for
sale at an asked price of ¥500, while there are buy orders for 1,000 shares at a bid price of ¥500. In such cases, all
the sell orders for 300 shares at an asked price of ¥500 are matched against the buy orders for 100 shares each
from securities company A, B, and C (for a total of 300 shares) at an asked price of ¥500. As a result, the opening
price is decided at ¥500, and orders for a total of 1,500 shares are consummated at such price.
The Zaraba Method
a. When the contents of an Ita (board) are as shown in the chart, a buy order of securities company M for 200
　shares at a bid price of ¥500 can be consummated by matching the sell order of securities company A for 200
　shares out of its original sell order for 300 shares.
b. When securities company N places a buy order for 1,000 shares at a bid price without limit, it can be consummat-
ed by matching it against the remaining 100 shares offered for sale by securities company A at an asked price of
¥500 and a sell order of securities company B for 300 shares at an asked price of ¥500 and then a sell order of se-
curities company C for 400 shares at an asked price of ¥501 and a sell order of securities company D for 200
shares at an asked price of ¥501.
c. If securities company K places a sell order for 500 shares at an asked price of ¥499, a contract can be concluded
by matching it against a buy order of securities company F for 300 shares at a bid price of ¥499 and a buy order
of securities company G for 200 shares at a bid price of ¥499.
d. As a result, the following trading agreements can be concluded
Selling securities company Buying securities company Contracted price No. of shares
Securities company A Securities company M ¥500 200 shares
Securities company A Securities company N ¥500 100　〃
Securities company B Securities company N ¥500 300　〃
Securities company C Securities company N ¥501 400　〃
Securities company D Securities company N ¥501 200　〃
Securities company K Securities company F ¥499 300　〃
Securities company K Securities company G ¥499 200　〃
e. In such a manner, asked and bid prices are offered without interruption during the session hours, and when buy
orders (sell orders) are matched against sell orders (buy orders), trading agreements are concluded.
202　Chap. X Financial Instruments Exchange, etc. (1)

6. The Stock Trading System (2)

Floor trading is the predominant form of securities trading conducted on the

stock exchange. To complement the floor trading system, stock exchanges
introduced off-floor trading systems in the second half of the 1990s.
　During the initial period that followed the introduction of these systems,
the systems were used solely for executing cross transactions (buy and sell
orders by the same trading participant) due in part to the restriction that re-
quired orders to be placed via fax. However, the Tokyo Stock Exchange auto-
mated its off-floor trading system to improve efficiency and convenience
with the introduction of ToSTNeT in June 1998 and expanded its trading sys-
tem by adding new classes of transactions.
　The Tokyo Stock Exchange has continuously improved this trading system
to meet the various transaction needs of investors, including the extension of
its trading hours in January 2008 and establishing it as an independent mar-
ket from the trading floor.
　ToSTNeT, the off-floor trading system of the Tokyo Stock Exchange, ac-
commodates the following four types of transactions: single-stock trading,
basket trading, closing-price trading, and off-floor corporate share repurchas-
es.
　Single-Stock Trading: Under the single-stock trading system, investors
can effect transactions in an individual stock issue at a price within plus-mi-
nus 7% (¥5 when 7% of the price is less than ¥5) of the last price of the issue
on the floor or some other reference price as specified.
　Basket Trading: The basket-trading system enables investors to trade bas-
kets of a minimum of 15 stocks worth at least ¥100 million in aggregate val-
ue within plus-minus 5% of the value of the basket based on the last prices of
the component issues on the floor or some other reference prices as specified.
　Closing-Price Trading: Under the closing-price trading system, off-hour
orders of investors are matched, in principle, based on time priority before
the morning and afternoon sessions and after the afternoon sessions at the
closing prices of the preceding session of floor trading (i.e., the closing prices
of the previous day, those of the morning session, or those of the afternoon
session) or some other reference prices as specified.
　Off-Floor Corporate Share Repurchases: This is a method of trading
shares off the floor before the morning session at the previous day’ s closing
prices or some other reference price as specified. Buyers eligible for the fa-
cility are limited to listed companies that intend to repurchase their own
shares.
 Chart X-4.　A Comparison of the Trading Value of Floor Trading and Off-Floor Trading of the Tokyo Stock Exchange

(billion yen) Floor trading

4,500 Off-floor trading 18.0%
Ratio of off-floor/floor trading volumes
4,000 16.0%

3,500 14.0%

3,000 12.0%

2,500 10.0%

2,000 8.0%

1,500 6.0%

1,000 4.0%

500 2.0%

0 0.0%
1 3 5 7 9 1 1 3 5 7 9 1 1 3 5 7 9 1 1 3 5 7 9 1 1 3 5 7 9 1 1 3 5 7
.0 .0 .0 .0 .0 .1 .0 .0 .0 .0 .0 .1 .0 .0 .0 .0 .0 .1 .0 .0 .0 .0 .0 .1 .0 .0 .0 .0 .0 .1 .0 .0 .0 .0
0 12 12 12 12 12 12 13 13 13 13 13 13 14 14 14 14 14 14 15 15 15 15 15 15 16 16 16 16 16 16 17 17 17 17
2
Chap. X Financial Instruments Exchange, etc. (1)
　203
204　Chap. X Financial Instruments Exchange, etc. (1)

7. The Clearance and Settlement System (1)

Securities trading executed on the exchanges is cleared and settled through

the Japan Securities Clearing Corporation (JSCC). Since January 2003, all
the clearing and settlement for securities trading carried out for each market
have been unified under the JSCC.
　Those who are qualified for handling clearing and settling securities trans-
actions through the JSCC are called“clearing participants.”Clearing partici-
pants settle with the JSCC the securities transactions that have been conduct-
ed on participating exchanges. Meanwhile, securities transactions conducted
by those not qualified “ ( non-clearing participants”) are first settled with
clearing participants designated by respective non-clearing participants,
which, in turn, clear such transactions with the JSCC on behalf of non-clear-
ing participants. The main functions performed by the JSCC are (1) to as-
sume obligations, (2) to permit the netting of securities positions and fund
transfers, (3) to issue transfer instructions, and (4) to make a settlement guar-
antee.
　Upon the execution of a transaction on a stock exchange, the JSCC as-
sumes associated obligations (for the seller to deliver the securities sold and
for the buyer to make payment for them) and, at the same time, acquires
claims corresponding to both obligations. The JSCC nets long and short posi-
tions (by issue) and the proceeds and payments (of all transactions) for each
clearing participant and settles the net balances. Based on this process, the
JSCC helps to enhance efficiency in securities deliveries and fund payments
and to streamline operations. Following netting, the JSCC instructs “ ( transfer
instructions” ) the Japan Securities Depository Center to make transfers of net
securities positions and the Bank of Japan or a bank designated by the JSCC
as “
( the fund settlement bank” ) to make a transfer of the netted amount be-
tween the accounts of the JSCC and each clearing participant. Throughout
the series of netting and settlement processes, the JSCC performs and guar-
antees the settlement of a trade as the settlement counterparty against the
trade counterparty “ ( settlement guarantee” ). Thanks to this arrangement, par-
ties can trade securities without being concerned about the settlement default
risk of original trade counterparties.
　The JSCC also performs clearing and settlement functions for OTC trad-
ing. It has expanded its scope in recent years, offering clearing and settlement
services for securities traded on proprietary trading systems (PTSs) in 2010.
After the global financial crisis, moreover, the regulatory reform of OTC de-
rivatives trading has proceeded in all countries, with each country being obli-
gated to clear and settle standardized OTC derivatives trading through a cen-
tral clearing house (central counterparty clearing). For its part, the JSCC
 Chap. X Financial Instruments Exchange, etc. (1) 　205
Chart X-5.　Delivery and Settlement Using JSCC (Exchange Transactions)

Tokyo Stock Nagoya Stock Fukuoka Stock Sapporo Stock PTS

Exchange Exchange Exchange Exchange
Trade Trade Trade Trade Trade
contract contract contract contract contract

Trade Trade Trade Trade Trade

verification verification verification verification verification

JSCC

Acceptance of obligation
Central Clearing participant
counterparty Market participants
functions Netting Designation
Clearing participant other than clearing
Guarantee participant (non-
payment Clearing participant clearing participant)
Instruction to transfer

DVP settlement
(delivery of securities and payment of proceeds are linked)
Custody and transfer agency Settlement banks

Account of Account of Account of Account of Account of

clearing clearing clearing clearing clearing Account of
participants
participants agencies participants participants agencies

Notes: 1. As transactions were settled and the account transfer of securities and proceeds was carried
out independently at each stock exchange, the system of delivery of securities and payment
of their proceeds varied from one stock exchange to another.
2. As of July 2010, the JSCC began assuming obligations of transactions done on PTSs.

commenced clearing and settlement services for credit default swaps (CDS)
transactions in 2011 and for interest rate swaps in 2012. In October 2013, the
JSCC merged with the Japan Government Bond Clearing Corporation and
thereby added OTC JGB transaction clearing and settlement services.

8. The Clearance and Settlement System (2)

With a view to eliminating the risk involved in the settlement of transactions

in shares (and other securities handled by the Japan Securities Depository
Center), in general, and the risk of a default in the payment of the principal,
in particular, after the delivery of underlying securities, the JSCC has intro-
duced a delivery-versus-payment system (DVP settlement) system.
　To lessen the risk and to ensure the efficiency of settlement, the JSCC has
incorporated various features into its DVP settlement system. Among other
things, it has added the netting facility to its DVP settlement version. Under
206　Chap. X Financial Instruments Exchange, etc. (1)

Chart X-6.　Delivery and Settlement Using JSCC (OTC Derivatives Transactions)

Clearing
OTC market Clearing
participants Contract (CDS and interest rate swaps) Contract participants/
concluded concluded Non-clearing
participants*

Verification platform
Verification and Verification and
assumption of assumption of
Post-verification
obligation obligation
transaction data

JSCC
Obligation assumption
Notification of (implemented after verification of Notification of
obligation appropriateness, etc., of transaction) obligation
assumption assumption
status and • Position management status and
deposit amount, • Calculation of initial deposit amount,
etc. Settlement margin, variation etc.
guarantee margin, clearing fund,
Deposit and etc. Deposit and
return, etc., • Collateral management return, etc.,
of collateral of collateral
Settlement instructions
* Non-clearing participants commission
Bank of Japan clearing participants to clear their
transactions, carrying out requests for
Account of Account of obligation assumption, receiving information
clearing Account of clearing on margins, and applying for deposit and
participants Bank of Japan participants return of collateral through their designated
clearing participant.

the traditional DVP settlement system, a buyer basically cannot take delivery
of shares until such time as payment for them (via fund transfer) has been
verified. This, however, could undermine the overall efficiency of settlement,
including payment and delivery between clearing participants and non-clear-
ing participants or customers, etc. Therefore, improvements have been made
so that buyers can take delivery of the shares earlier.
　More specifically, a buyer’ s clearing participant may take delivery of secu-
rities of a value equivalent to the following three amounts (1), (2) and (3)
prior to the completion of funds settlement.
　(1) The provisional net purchase amount deposited with the JSCC as cash
collateral. (Cash collateral is appropriated to the payment relating to
the funds settlement when cash payment is due. The provisional net
amounts will be adjusted by the amount of failed deliveries, if any, at
2:15 p.m., when cash is due from paying participants, and at 2:45 p.m.,
when cash is paid to receiving participants.)
　(2) The deposit for the facilitation of DVP settlement (voluntarily deposit-
ed with the JSCC).
　(3) The securities delivered to the JSCC for settlement purposes.
　In the event that a participant should fail to deliver a security on the settle-
ment date of a DVP trade (known as a“fail” ), the JSCC will carry over the
delivery of and payment for the security to the following day, when delivery
 Chap. X Financial Instruments Exchange, etc. (1) 　207
Chart X-7.　DVP Settlement Timetable
DVP Settlement
9:00 13:00 14:15 14:45
Securities settlement
＊Seller’s clearing participant ⇒ JSCC (securities delivery)
(Night batch Securities delivered to JSCC as soon as balance
transfer) appears in seller’s clearing participant’s account
Securities settlement deadline (delivery) ▲＜Fail Determined＞

＊Buyer’s clearing participant ⇒ JSCC (securities receiving)

(Night batch Transfer is effected by JSCC, which holds the deposit for facilitation of DVP
settlement and delivers the securities, based on the status of the exchange,
transfer) deposit of provisional net purchase amount, and additional payment.
Cash settlement provisional net purchase amount (cash collateral) deposit cut off≧△ Additional payment cut off≧▲ ▲≦cash received

Note: The receiving of securities by the buyer’s clearing participant is carried out in a way that eliminates
the risk of principal default versus the cash payer JSCC through nonperformance of obligations or
of delivery of collateral.

Chart X-8.　The DVP Scheme (normal setllement)

Japan Securities Clearing Corporation

A shares (¥900,000) (i) A shares (¥900,000) (iii)

A
–13:00 hours (a) after delivery of B shares
B shares (¥1.2m) (v) B shares (¥1.2m) (ii)
Securities company X

Securities company Y
B
after delivery of A shares –13:00 hours (a)
and transfer of an estimated Funds (purchase money)
purchase money ¥300,000 (vii)
¥
14:45 hours (c)
(vi) Time to establish the amount
Cash (estimated purchase of purchase money
money) ¥300,000 (iv)
Collateral
–13:00 hours (a)

Deadline for settlement:

a. Deadline for the delivery of securities and the deposit of the estimated purchase money
(cash collateral): 13:00
b. Deadline for the payment of purchase money: 14:15
c. Time for the receipt of purchase money: 14:45
(i) Securities company X delivers A shares while (ii) securities company Y delivers B shares to
JSCC by 13:00.
(iii) Securities company Y can receive A shares after delivering B shares to JSCC.
(iv) Securities company X deposits the estimated purchase money to JSCC by 13:00.
(v) Securities company X can receive B shares after (i) and (iv) have been executed.
(vi) JSCC appropriates the estimated purchase money for the payment relating to funds settlement
at the time the amount of the purchase money is finalized.
(vii) Securities company Y receives the funds (purchase money) at 14:45.
208　Chap. X Financial Instruments Exchange, etc. (1)

and payment are netted for settlement against the deliveries and payments for
transactions of the said participant due to be settled on that day. However, as,
in principle, trades are supposed to be settled on the settlement date, pro-
longed fails cannot be tolerated. For this reason, the DVP settlement rules
also provide for penalties for damages resulting from settlement delays and
the right of a buyer participant who has been assigned a failed position to buy
in (or to force the failing seller to buy and deliver the required security).

9. The Book-Entry Transfer System for Stocks, Etc.

Following the computerization of stock certificates for publicly listed compa-

nies, stock certificate shares are being electronically deposited and trans-
ferred based on the collaboration of the Japan Securities Depository Center,
Inc. (JASDEC), the central depository for shareholder ownership rights, and
account management institutions, which are securities firms, etc., that have
set up transfer accounts.

Chart X-9.　Relationships Among Participants, JASDEC and Issuers in the Book-Entry

Transfer System for Stocks, etc.

Transferring institution (JASDEC) (4) Notice on shareholder Issuing company

(Book-entry Account and number of shares (Shareholder Register Controller)
Register) (5) Creation of Shareholder Register

(2) Recording of (3) Notice on shareholder

shares in the and number of shares
account

Account management institution

(securities company, bank, etc.)
(Book-entry Account Register)

(1) Recording of shares

in the account

(6) Voting rights exercise

Participant (6) Various notices concerning the general
meeting of shareholders, etc.
(Shareholder)
(6) Dividend payment
 　209
Chap. X Financial Instruments Exchange, etc. (1)

Table X-5.　Major Changes in the System Before & After Implementation of Electronic
Share Certificate System

Securities Custody and Book-Entry Trans- Book-Entry Transfer System (current)

fer System (prior to going paperless)
Share • Share certificates • No share certificates
certificates • Stock certificates deposited with JASDEC
are centrally stored at JASDEC and is-
sued upon request
• Stock certificates outside the Book-Entry
System are kept individually by owners
Attribution • Presumption of rights on stock by owner- • Presumption of rights regarding stocks
of rights ship of stock certificates (outside the recorded in the book-entry account regis-
Book-Entry System) ter
• Party recorded in the account register is
regarded as the owner of stock certificates
Form of • Managed by shareholder register (outside • Uniformly managed by shareholder regis-
shareholder the Book-Entry System) ter
management • Managed by substantial shareholder reg- • JASDEC performs name-based aggrega-
ister (within the Book-Entry System) tion and notifies the shareholder register
• Name-based aggregation of shareholders controller
is performed by the shareholder register
controller
Transfer of • Issuance of share certificates (outside the • Account transfer
stocks Book-Entry System)
• Account transfer (within the Book-Entry
System)

　Securities eligible for the book-entry transfer system for stocks, etc., in-
clude stocks listed on domestic public exchanges; convertible-type corporate
bonds (CB); investment units, such as real estate investment trusts (REIT);
and preferred shares of cooperative financial institutions, subscription rights/
warrants, beneficiary certificates of exchange-traded funds (ETFs), Japanese
depositary receipts (JDR), and others.
　The features and functions of the book-entry transfer system for stocks,
etc., are as follows.
　(1) Shareholders’ownership rights are administered based on the records
of the transfer account book, with transfers of shares being processed through
the transfer account. (2) Account management institutions inform JASDEC
of the identification of beneficiary shareholders, including their names and
addresses along with their share ownership data. JASDEC then compiles the
information to periodically report to respective issuers (general shareholder
notification). (3) Issuing companies produce their records of voting rights for
general meetings of shareholders and retained earnings distributions based on
a register of beneficiary shareholders drawn up from the general shareholder
210　Chap. X Financial Instruments Exchange, etc. (1)

notification. (4) Minority shareholders, etc., can exercise their rights by ap-
plying to JASDEC to have a notification sent to the issuer verifying their
shareholdings, duration of ownership, and other particulars (individual share-
holder notification). They can then exercise their rights for a limited period
of time following receipt of the notification.
　The main benefits that are expected from transition to the electronic book-
entry transfer system include:
　(1) shareholders can eliminate the risks of loss, theft, or forgery of certifi-
cates that are held at their own risk, and they also do not need to submit cer-
tificates to the issuer for replacement in the event of a corporate name change
or change in the share trading unit; (2) issuers can save costs associated with
issuance, such as printing costs and stamp duties, as well as those associated
with corporate reorganization (such events as corporate mergers, stock ex-
changes, stock transfers) for collecting old certificates and distributing new
ones; and (3) securities companies can reduce the risks and costs associated
with the storage and transport of certificates.

10. Trading and Clearing Systems of the Financial Instruments

Exchange (Stock Exchange) (1)

The following is a summary of the stock trading system and the settlement
and clearance system that support the stock market.
　On the spot market of the Tokyo Stock Exchange (TSE), the stock trading
system processes stocks, corporate bonds with subscription rights/warrants,
etc. (convertible bonds), and other transactions from floor trading and the
off-floor ToSTNeT market. Orders from a trading participant are mainly en-
tered through the trading partner’ s in-house system or through a direct con-
nection to the TSE’ s trading system.
　The computerization of securities trading at the TSE started with the TSE2
trading system (the old stock trading system) that went into operation in Jan-
uary 1982. The current stock trading platform consists of arrowhead, re-
newed in September 2015, and the ToSTNeT system, which was renewed in
March 2017. With the basic policy of enhancing three features—reliability,
convenience and processing capacity—arrowhead was renewed in order to
accommodate the further development of electronic trading, a continuing in-
crease in the number of orders, and other changes in the market environment
as well as to respond better to risks that the development of electronic trading
can create on the market. The ToSTNeT system was also renewed with the
basic policy of expanding the processing capacity and increasing conve-
nience.
　The market information system, which had been serving the role of dis-
 Chart X-10.　System Integration Schedule of Japan Exchange Group, Inc.
∼FY2016 FY2017 FY2018 FY2019 FY2020∼

arrowhead Launch ※
(Cash) 2015.9
Renewal
Cash
ToSTNeT System Launch ※
Trading
(Off-Auction) 2017.3
System Launch

ISC Launch ※
(Index and Statistics 2015.9
Calculation) Renewal

Launch Start of the ※

Derivatives J-GATE Service
System (Futures/Options) 2016.7 2016.9
Launch Service Launched for TOCOM

Function Partial RP RP ※
addition
JSCC Clearing System
2015.10 FY2017 4Q Undecided
Respond to Upgrade Enbance Renew Derivatives Clearing Function
new BOJ net correspondence Advancement of risk and collateral management functions
Clearing Function RP ※
OTC Clearing System addition
System 2017.10 FY2017 4Q
Add new products

Launch Upgrade ※
JGB Clearing System
2015.10 2018.5
Chap. X Financial Instruments Exchange, etc. (1)

New operation Shorter Settlement Cycle

※Detailed schedule will be considered in the future.
　211

Source: IT Master Plan, Japan Exchange Group, March 2017

212　Chap. X Financial Instruments Exchange, etc. (1)

closing marketing information, was integrated into arrowhead when arrow-

head was renewed in 2015.
　The Japan Exchange Group, Inc. (JPX) commenced operations in January
2013. In July 2013, it amalgamated the cash equity markets of the TSE and
OSE while also integrating the stock and CB trading system of the OSE into
the TSE’ s arrowhead and ToSTNeT systems.
　The settlement and clearance system for stocks and CBs is designed to
support delivery and other operations for the settlement and clearance of
transactions executed on the TSE and other markets. Since January 2003, the
JSCC has acted as the cross-market clearing organization for all domestic ex-
changes. Also in terms of the settlement and clearance system, the OSE’ s
system was integrated into the TSE’s platform in November 2014.
　The data for this process from trading participants, etc., is passed through
the TSE’ s dedicated arrownet network.

11. Trading and Clearing Systems of the Financial Instruments

Exchange (Stock Exchange) (2)

The following is a summary of the trading system and the settlement and
clearance system that support the derivatives market.
　The derivatives trading system is a system for entering and matching or-
ders, preparing transaction reports, and inquiring into the state of the order
book, etc., of the derivative market of the OSE. The system processes fu-
tures, options, and other transactions from floor trading and the off-floor
market. Orders from a trading participant are mainly entered through the
trading partner’ s in-house system or through a direct connection to the TSE’s
trading system.
　The OSE’ s trading system for derivatives, J-GATE, has the same functions
and transaction formats used by the systems of major overseas markets. In
introducing the system which began operation in February 2011, the OSE re-
viewed the complex transaction system peculiar to Japan to address the shift
among investors to algorithmic and other advanced and diversified trading
methods. In July 2016, the system was renewed with NASDAQ’ s Genium
INET Trading at the base with a view to further increasing stability and reli-
ability as well as promoting liquidity.
　Following the launch of JPX in January 2013, the derivatives markets of
the TSE and the OSE were amalgamated on the OSE market in March 2014,
with the trading systems integrated into J-GATE. The J-GATE network was
also consolidated into arrownet in September 2014.
　Although the OSE had been using the OSE clearing system while the TSE
used the JSCC clearing system, the clearing organizations were integrated
 s System
Chart X-11.　Image Diagram of Japan Exchange Group’

Dedicated VPN, etc.

Primary Center

Trading Systems
Securities Cos.
and Other Users AP
3 Clearing Systems

Other Systems

AP
1 arrownet
Optical Ring Network
Secondary Center

Tokyo Stock Exchange

Trading Systems
(Kabuto-cho)
AP
2 Clearing Systems

Other Systems
Osaka Securities
Exchange (Kitahama)
Chap. X Financial Instruments Exchange, etc. (1)

Back-up Office

Source: IT Master Plan, Japan Exchange Group, March 2017

　213
214　Chap. X Financial Instruments Exchange, etc. (1)

into the JSCC in July 2013 and all margin operations relating to derivates
trading have since been processed on the JSCC clearing system. Subsequent-
ly, in November 2014, clearing and settlement operations were also integrat-
ed into the JSCC clearing system. In February 2018, partial replacements
were made for the settlement and clearance function for futures options trans-
actions among others.
 CHAPTER XI

Financial Instruments Exchange, etc. (2)

1. Footsteps of Emerging Markets

During the period after World War II when all stock exchanges were closed,
stock trading was done on the OTC market and subsequently trading became
more organized and trades were executed in group transactions. In fact, the
OTC market remained active even after the country’ s stock exchanges were
reopened, resulting in the establishment of an OTC authorization system in
June 1949 to provide some control over active trading. That system was abol-
ished in 1961 after the Tokyo Stock Exchange, Osaka Securities Exchange,
and Nagoya Stock Exchange set up Second Sections that absorbed almost all
authorized OTC issues. Amid Japan’ s high economic growth, however, there
remained a need for unlisted companies to procure funding. So the Japan Se-
curities Dealers Association (JSDA) introduced the OTC registration system
(OTC Stock Market) in 1963. This was the origin of today’ s TSE JASDAQ
market. The OTC registration system became the new OTC Stock Market in
1983 and served to complement the conventional stock exchanges, particu-
larly as a capital market for growth and start-up companies.
　In 1998, the Securities and Exchange Act was amended, and it redefined
the OTC Stock Market from one to complement the conventional stock ex-
changes to a market that exists in parallel with other exchange markets. In
2004, the market became a securities exchange called the JASDAQ Securi-
ties Exchange, which was subsequently merged with the OSE-operated Her-
cules in 2010. As a result of the management integration of the TSE and the
OSE, the exchange has been operated as the TSE JASDAQ market since July
2013.
　In 1999, though, the Tokyo Stock Exchange (TSE) created a start-up mar-
ket called Mothers. This new market strengthened investor protection through
enhanced disclosure requirements, making it possible for companies with
high growth prospects to list even if they had negative net worth or were not
yet profitable. Consequently, start-up companies were thus able to obtain
funding on the market even at their growth stage, while investors were given
an opportunity to invest early in these growth companies. Subsequently,
216　Chap. XI Financial Instruments Exchange, etc. (2)

Table XI-1.　History of the JASDAQ Market

Nov. 1983 New over-the-counter (OTC) market is launched.

Dec. 1998 The Securities and Exchange Act defines the JASDAQ market as an OTC securities mar-
ket (in parallel with other exchange markets).
Apr. 2002 JASDAQ selects J-Stocks and starts publishing the J-Stock Index.
Dec. 2002 JASDAQ acquires a stock exchange license and changes its name to the JASDAQ Securi-
ties Exchange.
Aug. 2007 JASDAQ establishes the NEO market.
Oct. 2007 JASDAQ, NEO, and Hercules markets merge, forming the new JASDAQ market.
JASDAQ-TOP20 issues selected and publication of index begins.
July 2013 TSE and OSE combine their businesses, with the TSE continuing to operate JASDAQ

Table XI-2.　History of the Mothers Market

Nov. 1999 Mothers market is launched.

Nov. 2000 Listing system for foreign companies is established.
To ensure a sound market:
• Require check prior to listing application (verification of soundness of business between
a company and an underwriter).
• Enhance degree of detail of inspections in listing screening (increased scope of survey of
relationships with anti-social forces, etc.).
May 2002 Listing criteria reviewed:
• Newly establish delisting criteria regarding sales.
• Newly establish listing screening standards and delisting criteria regarding market capi-
talization.
• Newly establish requirements for first public offering.
Sep. 2003 Starts publishing TSE Mothers Index.
Dec. 2006 Undertakes the first phase of a comprehensive listing system improvement program.
• Require new applicants to obtain a letter of recommendation from the managing under-
writer.
Nov. 2007 Undertakes the second phase of a comprehensive listing system improvement program.
• Abolish provisions for moving from main exchange to Mothers market (clarify Mothers’
position as a start-up market).
• Abolish sales-related listing criteria.
• Liberalize sales-related delisting criteria (no longer applicable after 5 years on market).
Nov. 2009 Takes steps to improve confidence in market.
• Newly establish“appropriateness of business plan”as a listing criteria.
• Newly establish stock price related delisting criteria.
• Require holding of information meeting at least twice a year.
Mar. 2011 Takes steps to improve confidence in market and stimulate market.
• Require listed companies to be audited by an audit firm registered with exchange.
• Newly establish requirement to choose whether to stay on Mothers after 10 years.
• Introduce listing screening policy in line with market concept (confirm appropriateness
of business plan).
 　217
Chap. XI Financial Instruments Exchange, etc. (2)

scandals among some of the listed companies quickly overrode the merits of
the Mothers market and prompted the TSE to raise the listing requirements.
Investor protection was further fortified under the Financial Instruments and
Exchange Act with the introduction of quarterly financial reporting require-
ments and the mandatory establishment of internal control systems.
　However, the discovery in 2010 of multiple cases of companies submitting
false performance reports starting even before their listings, dramatically de-
teriorated confidence in the market once again. In addition, listings were con-
tinuing to fall after hitting the peak in 2004. Consequently, in 2011, the TSE
undertook a review of the Mothers’listing system and implemented measures
to increase confidence and stimulate activity in the market. Among those
measures, the exchange added the requirement for listed companies to be au-
dited by an audit firm registered in JICPA’ s Company Audit Firm Resister.
The TSE also changed its listing screening policy to one of evaluating wheth-
er the business plans of companies seeking to list were achievable in the long
term.

2. Start-up Market Concepts

Mothers Market Concept

In 1999, the Tokyo Stock Exchange (TSE) launched its Mothers market for
start-up companies under a concept that differentiated Mothers from the
TSE’ s First and Second Sections. The TSE established a listing system for
Mothers to bring out the special characteristics of, to increase investor confi-
dence in, and to vitalize trading on this new market. Companies wishing to
list on Mothers are required to demonstrate high growth potential based on
their business models, business environment, or other means. Eligibility for
listing and thereby accessing the capital market is open to a broad range and
number of growth companies and is not restricted by business scale or cate-
gory. Among Mothers’listed companies are those with only several tens of
employees and those in such infrastructure fields as information and telecom-
munications that boast thousands of employees.
　To clarify its start-up market concept, the TSE in 2011 established a pro-
cess of verifying whether corporations listed on the Mothers market matched
that concept. Listed companies enjoy relatively lax listing criteria for the first
10 years, after which they are compelled to choose whether to stay on the
Mothers market under more strict criteria, or move to the Second Section of
the TSE. To stay on Mothers, they must have a total market capitalization of
¥4 billion or more or submit a report prepared by an independent specialist
affirming the company’ s continued high growth potential.
 Chart XI-1.　Positioning of Mothers and JASDAQ Markets within the Tokyo Stock Exchange

TSE, First Section Transfer

218　Chap. XI

Blue Chip Company Market

1,900 companies
JASDAQ JASDAQ
Standard Growth
Group of Group of
Change companies that companies that
1st Section Designation
Transfer Designation meet certain have special
business scale technologies or
and performance business models
standards and with high
have business growth potential
TSE, Second expansion
potential
Financial Instruments Exchange, etc. (2)

Section
Start-Up Market for Start-Up Market for Market for companies in various
Growth Companies Mid-Sized Companies business categories and growth stages

213 companies 546 companies 817 companies

Market selection Transfer

after 10 years
on Mothers (As of August 2015)
 　219
Chap. XI Financial Instruments Exchange, etc. (2)

JASDAQ Market Concept

The JASDAQ market’ s policy as the largest start-up market in Japan is“to
support the growth of new industries and small to midsized start-up compa-
nies by providing them with access to equity capital and to offer attractive in-
vestment opportunities for investors.”Based on this policy, JASDAQ is di-
vided into the two sections of JASDAQ Standard and JASDAQ Growth to
enable the supply of equity capital to a broad range of companies.
　JASDAQ Standard is for companies of a certain business size and results
that are expected to expand. JASDAQ Growth is for companies with out-
standing technology or business models and ample growth potential.
　Underlying the JASDAQ market are the concepts of confidence, innova-
tion, and regional and global business. These three concepts guide JASDAQ’ s
continuous development as the largest start-up market in Japan and as an
original benchmark for start-up markets globally.

3. Start-up Market Listing Systems

Outline of Listing Criteria for Start-up Markets

The listing criteria for start-up markets are similar to those for the First and
Second Sections of exchanges in that they comprise qualitative (formal re-
quirements) and quantitative (eligibility requirements) criteria. When a stock
exchange receives an application from a company wishing to list on the start-
up market, it screens for eligibility based on these qualitative and quantitative
criteria.

Mothers Market Listing Criteria

The Mothers market targets growth companies that have an eye on moving
up to the First Section of the exchange as soon as possible. A requirement for
listing, therefore, is that the company has high growth potential and a letter
of recommendation to that effect from its managing underwriter.
　As with the First and Second Sections, the formal requirements for listing
on the Mothers market include liquidity-related standards, such as the num-
ber of shareholders and tradable shares and market capitalization; and such
going concern related standards as the number of consecutive years in busi-
ness, regular audits by a listed audit firm, and compliance with standards re-
lated to the disclosure of business information. Among the notable points
about the requirements is that the initial public offering must be 500 trading
units or more and the lack of standards regarding profits and net assets.
　The eligibility requirements for the Mothers market take into account the
market concept. They revolve around whether the company seeking to list is
in a position to disclose its business, its risk, and other parts of its relevant
220　Chap. XI Financial Instruments Exchange, etc. (2)

Table XI-3.　Summary of Listing Criteria for the Mothers and JASDAQ Markets
(as of September 2017)
Quantitative Criteria (Formal Requirements)
Mothers JASDAQ
Standard Growth
Amount of net assets —
¥200 million or more A positive figure
(Expected at listing)
Amount of profit —- <Consolidated> —
(or total market capitaliza- Profits of at least ¥100 million
tion at the time of listing) over the most recent year (or
market capitalization of ¥5 bil-
lion or more)
No. of shareholders1)
300 shareholders or more
(Expected at listing)
Tradable shares2) a through c must be satisfied. Market capitalization of shares in distribution:
(Expected at listing) No. of tradable shares: 2,000 units or more ¥500 million or more
Market value of tradable shares: ¥500 million
or more
Ratio of tradable shares: 25% or more of the
listed stocks
Public offering or second- Public offering of at least 500 trading units3) by Public offering or secondary distribution of at
ary distribution the time of listing least 1,000 trading units or 10% of listed shares
which ever is larger by the time of listing
Market capitalization of the ¥1 billion or more —
shares listed
(Expected at listing)
No. of years in business Established a board of directors and have had —
continuous operations for more than a year
counting backward from the listing application
date
Financial statements, etc. The financial statements for the latest two years contain no false statements
Auditor’ s opinion “Unqualified opinion”or“qualified opinion”for the latest two years
“Unqualified opinion”for the latest year
Others Audited by a registered listed company audit firm4); appointment of a shareholder administration
agent; number of shares in tangen trading units; class of shares; restriction on stock transfer; ap-
pointment of designated custody and transfer agent
Notes: 1. No. of shareholders means the number of shareholders who own one or more units of shares.
2.“Tradable Shares”refer to listed shares excluding shares held by parties with a special interest such as officers, shares
owned by the company itself, and shares held by persons who individually own 10% or more of listed shares.
3. One unit is the number of shares in one tangen trading unit when adopting the tangen unit shareholder system, and one
share if the tangen unit shareholder system is not adopted.
4. An audit firm that is registered in the registry of listed company audit firms based on the Registration System for Listed
Company Audit Firms of the Japanese Institute of Certified Public Accountants (including an audit firm which is sub-
ject to quality control reviews by the Japanese Institute of Certified Public Accountants).
Qualitative Criteria (Eligibility Requirements)
Mothers JASDAQ Standard JASDAQ Growth
[Reasonableness of the business plan] [Going concern] [Company’ s growth potential]
The listing applicant has developed rea- No obstacles to continuing business oper- Has high growth potential
sonable and suitable business plans, and ations
has developed the operating base neces-
sary for executing such business plans, or
there is reasonable expectation that it will
develop such operating base.
[Soundness of corporate management] [Reliability of corporate conduct]
The company is carrying out business in a No suggestion that the company’ s conduct will disrupt the market.
fair and faithful manner.
[Effectiveness of corporate governance [Establishment of sound corporate gover- [Sound corporate governance in line with
and internal management system of an nance and effective internal control] the growth stage and establishment of an
enterprise] Company has established a corporate effective internal control system]
Corporate governance and internal man- governance and internal control system in Company has established a corporate
agement system are developed in accor- line with its size and the system functions governance and internal control system in
dance with the size, corporate maturity, effectively. accordance with its stage of development.
etc. of the enterprise, and functioning
properly.
[Appropriateness of the disclosure of cor- [Adequate corporate disclosure]
porate information, risk information, etc.] The company has the organization and systems to make proper disclosure of its
The company is in a state to make disclo- business conditions, etc.
sure of the corporate information, risk in-
formation, etc. in an appropriate manner.
Other matters deemed necessary by the Exchange from the viewpoint of the public interest or the protection of investors.
 　221
Chap. XI Financial Instruments Exchange, etc. (2)

information and the reasonableness of its business plan and whether it has or
is expected to develop the operating base necessary to execute that plan.

JASDAQ Market Listing Criteria

The new listing criteria for the JASDAQ market, just as those of the First and
Second Sections, formally set out requirements on the number of sharehold-
ers, the market capitalization of tradable shares, net assets, and profits. JAS-
DAQ also requires a ¥500 million or more market capitalization of tradable
shares on the initial day of listing, but has no requirements for the number of
tradable shares or the ratio of tradable shares to issued shares. JASDAQ also
accommodates the special characteristics of its JASDAQ Standard and JAS-
DAQ Growth sections by setting separate net assets and profits criteria. The
eligibility requirements for JASDAQ also consider the special characteristics
of each section.
　They include such criteria as the lack of obstacles to continuing business
operations and evidence of high growth potential. In addition, there are dif-
ferent net assets and profits criteria for JASDAQ Standard and JASDAQ
Growth.

4. Start-up Market Listing Management Systems

The listing administration system for the start-up market operates much like
the system for the First and Second Sections. Stock exchanges have estab-
lished listing administration rules and conclude an agreement with listing
companies regarding compliance with those rules to secure effectiveness of
the rules.

Timely Disclosure, Etc. of Corporate Information

The Tokyo Stock Exchange has established rules as part of its listing regula-
tions requiring listed companies to make timely disclosure of material corpo-
rate information.
　It requires listed companies to provide timely and accurate disclosure of
any material corporate information. Timely disclosure requirements are basi-
cally the same whether companies list on the First and Second Sections, on
Mothers, or on JASDAQ. One difference for companies on the Mothers mar-
ket is the requirement to hold an investor information meeting at least twice a
year. Additionally, on the JASDAQ market, JASDAQ Growth section com-
panies are obliged to formulate and submit a medium-term business plan to
the exchange, to hold an investor information meeting about that plan, and to
make the plan public.
222　Chap. XI Financial Instruments Exchange, etc. (2)

Table XI-4.　Summary of Delisting Criteria for Mothers/JASDAQ (Tokyo Stock Ex-

change)
(as of September 2017)
Mothers JASDAQ
① No. of shareholders Less than 150 (with a grace period of one year)
② Tradable shares When any of a through c corresponds: When either a or b occur.
a. No. of tradable shares: Less than 1,000 units a. No. of tradable shares: Less than 500 units (with
(with a one-year grace period) a one-year grace period)
b. Market value of tradable shares: Less than ¥250 b. Market value of tradable shares: Less than ¥250
million (with a one-year grace period) million (with a one-year grace period)
c. Ratio of tradable shares: Less than 5% of listed
stocks
③ Negative net worth If the issuer falls into negative net worth1) (with a If the issuer falls into negative net worth1) (with a
one-year grace period) one-year grace period)
④ Trading volume Either the average monthly trading volume over —
the past one year is less than ten units or no trades
were made for the past three months
⑤ Sales Less than ¥100 million for the most recent one —
year2).
⑥ Market capitalization When market capitalization falls below ¥500 mil- —
of the shares listed lion and does not increase to ¥500 million or
above within nine months3).
⑦ Stock price When the stock price falls below 10% of the pub- When the stock price falls below ¥10 and does not
lic offering price at the time of initial listing be- recover to ¥10 or above within three months.
fore a period of three years lapses since listing and
fails4) to increase its price back to 10% or more
within 9 months3).
⑧ Performance — When the operating profit and the cash flow from
operating activities for four consecutive fiscal
years are negative and the operating profit or the
cash flow does not become positive within one
year.
⑨ Profits — (Only for Growth Section)
When consolidated operating profit of a company
stands negative and had been negative for nine
consecutive fiscal years after the listing, and the
amount of operating profit does not become posi-
tive within one year.
⑩ Bankruptcy, etc. When an issuer becomes insolvent or falls into a situation requiring rehabilitation or reorganization
proceedings, or in situations equivalent thereto5).
⑪ Suspension of busi- When a listed issuer suspends its business activities or falls into a situation similar thereto
ness activities
⑫ Inappropriate merg- When the stock exchange determines that a listed company that acquired another company has in ef-
ers fect failed to survive the merger and that the surviving company has failed to meet standards equiva-
lent to the initial listing requirements within three years of such merger
⑬ Deterioration in When the stock exchange determines that there has been a marked deterioration in the soundness of
soundness of transac- transactions between the company and its controlling shareholder within three years of a change in
tions with controlling the controlling shareholder due to a third-party allotment
shareholder
⑭ Delays in securities When a listed issuer fails to file an annual or quarterly securities report together with an auditor’ s re-
filings port or quarterly review report within one month following the statutory deadline (if an extension of
deadline has been approved for filing, when the listed issuers fails to file within 8 days following that
deadline)
⑮ False statements or • When a false statement is made in a securities report, etc. and the competent stock exchange finds
adverse opinion that maintaining order on the exchange could be difficult without immediate delisting of the issue
• When an audit report contains an improper opinion or no auditors’opinion and the competent stock
exchange finds that maintaining order on the exchange could be difficult without immediate delist-
ing of the issue
⑯ Securities on Alert • When despite the issue meeting criteria to be designated as securities on alert, the competent stock
exchange determines that there is no likelihood of improvement in the issuing company’ s internal
control system, etc.
• When during the process of designating the issue as securities on alert, the competent stock ex-
change determines that there is no likelihood of improvement in the issuing company’ s internal con-
trol system, etc.
• When despite having designated the issue as securities on alert, the competent stock exchange deter-
mines that there is no likelihood of improvement in the issuing company’ s internal control system,
etc.
⑰ Breach of the listing When a listed company seriously violates the listing agreement or pledge concerning timely disclo-
agreement sure or when it becomes no longer a party to the listing agreement
⑱ Undue restrictions on When shareholders’ rights or exercise thereof are unduly restricted
shareholders’ rights (Example) Introduction of a rights plan without contingency, introduction of a dead hand-type rights
plan, issuance of a golden share (classified stock with veto power), etc.
⑲ Others Suspension of a listed issuer by the bank, failure to appoint a shareholder services agent, certain re-
strictions on share transfers, becoming a wholly owned subsidiary of another company, cancellation
of the custody and transfer agent agreement, wholly call, involvement with antisocial groups, and
when the competent stock exchange finds that the delisting of a given stock is in the public interest or
appropriate for the protection of investors
Notes: 1. For the Mothers market, excluding cases where an issuer records negative net worth in a period of three years after the
listing. For both the Mothers and JASDAQ markets, the grace period is extended for another year if such issuer has a
credible plan to wipe out the negative net worth within a year after the grace period through rehabilitation proceedings.
2. Excluding cases where the company has posted a profit and where the company’ s sales have been less than ¥100 mil-
lion for five years following listing.
3. Three months in the case that a document indicating the current business status, future development, improvement of
business plan, etc. is not submitted.
4. Limited to Mothers-listed companies listed on or after November 9, 2009.
5. Excluding a case where a reconstruction plan is disclosed and market capitalization for a period of one month is ¥500
million or above.
 　223
Chap. XI Financial Instruments Exchange, etc. (2)

Code of Corporate Conduct

Start-up markets, just as the First and Second Sections of exchanges, have
codes of corporate conduct in the listing rules that require listed companies to
take appropriate response. The JASDAQ Growth section, however, grants
listed companies a grace period in the application of some aspects of its code
of conduct.

Criteria for Delisting Stocks

In the case of the Tokyo Stock Exchange, a stock may be delisted whenever
it meets any of the conditions set forth in the criteria for delisting stocks in
the listing regulations. Securities under supervision and securities on alert on
its Mothers start-up market face the same conditions for avoiding delisting as
those on the TSE’ s First and Second Sections.
　After reviewing its Mothers listing system, the exchange has established
new delisting criteria for sales and stock prices on the Mothers market. The
exchange took this step to earn greater trust among Mothers’investors, to en-
hance the appeal of the Mothers market, and to prevent any sudden changes
in the quality of the management of a corporation following its listing on the
Mothers market.
　Similarly, the JASDAQ market’ s delisting criteria are also designed to
maintain or improve the overall quality of its issuers. Newly established cri-
teria include business performance standards to ensure investor confidence in
the market without neglecting listed companies whose business models have
collapsed and stock price standards that eliminate issues with stock prices
that have languished at low levels for a certain period of time. Following,
moreover, the separation of issuers into the JASDAQ Standard and JASDAQ
Growth sections, the exchange revised its delisting criteria in line with the
special characteristics of each section.

5. An Outline of the OTC Stock Market

(1) What is OTC trading?

In addition to shares traded on stock exchanges, shares are also traded over
the counter. As only those listed issues that meet certain listing standards may
be traded on exchanges, issues that are not eligible for exchange trading need
to be traded elsewhere, outside listed exchanges. Such shares are traded be-
tween securities companies serving as brokers/dealers or between customers
and brokers/dealers over the counter in negotiated transactions known as
“over-the-counter (OTC) transactions.”While trading and other activities in-
volving listed shares are regulated by the competent stock exchange, OTC
stock trading executed through securities companies is regulated by the
 224　Chap. XI Financial Instruments Exchange, etc. (2)

Table XI-5.　A Brief History of the OTC Market

1945 Group trading in shares emerges spontaneously after the war.

1949 A system of trading in OTC-authorized issues is launched in June under the rules of the JSDA.
1961 The stock exchanges create the Second Section, into which OTC-authorized issues are ab-
sorbed, and the OTC authorizing system is terminated.
1963 The OTC registration system is launched in February.
1976 The OTC market broker, Japan OTC Securities, Inc., is established.
1983 A new OTC Stock Market (the JASDAQ market) is launched in November.
1991 The JASDAQ system comes into operation.
1992 The Prohibited Acts Rule is applied to the JASDAQ market.
1997 The green sheet system is launched.
1998 The JASDAQ market becomes the OTC securities market for the purpose of the Securities and
Exchange Act (currently, the Financial Instruments and Exchange Act).
2001 Japan OTC Securities changes its name to JASDAQ, Inc., and takes charge of the market.
2004 The JASDAQ market becomes a securities exchange in December and the OTC securities mar-
ket is closed.
2005 Green sheet issues become“to-be-handled securities”for the purpose of the Securities and Ex-
change Act in April, and the regulations of insider trading are applied to green sheet issues.
2008 The Phoenix issue system is spun off from the green sheet system into an independent system.
2015 Equity Crowdfunding Scheme and Shareholders Community System are established in May.
2018 The Green Sheet system is scheduled to be abolished in March.

“Rules Concerning Over-the-Counter Securities”of the Japan Securities

Dealers Association (JSDA) and by other rules.
　OTC transactions include transactions in unlisted shares (including unlist-
ed shares issued by listed companies); transactions effected in the OTC secu-
rities market; and off-exchange transactions in exchange-listed shares.

(2) An Outline of the OTC Stock Market

As OTC trading becomes active, information about quotes and prices is ex-
changed among securities companies and distributed to investors, and the
market becomes more organized. After the war, OTC trading remained active
even after the reopening of stock exchanges. In 1961, actively traded OTC
issues were moved to the Second Section of the stock exchanges, but stocks
continued to be actively traded over the counter to such an extent, in fact,
that an OTC stock market, an organized market where OTC securities that
meet the registration requirements of the JSDA are traded, was launched in
February 1963.
　As solicitation for investments was restricted in the early years, the OTC
 　225
Chap. XI Financial Instruments Exchange, etc. (2)

stock market was generally characterized as a market for the liquidation of

stock holdings. To remedy the situation, the legal framework was enhanced
by the 1971 amendment to the Securities and Exchange Act, and, in 1983, the
OTC stock market was defined as a market that complements exchange mar-
kets and was reorganized drastically into the JASDAQ market for trading
shares of mid-tier small-to-medium sized enterprises with reasonable track
records. The JASDAQ market has since grown larger as a market for emerg-
ing companies, and it was redefined as an“OTC securities market”under the
Securities and Exchange Act in 1998. But the designation of“OTC securities
market”exists only in law following the upgrading of the JASDAQ market
into the JASDAQ Securities Exchange in December 2004.
　Because a need arose for trading unregistered or unlisted stocks also out-
side the JASDAQ market, the JSDA established the green sheet system in
July 1997 and in May 2015 created a system for equity crowdfunding in ad-
dition to the shareholders community system that replaced the green sheet
system, thereby enabling sales solicitations for such issues. Another category
of traded unregistered or unlisted stocks is the Aozora issues or private equity
issues.

6. OTC Securities, Etc.

(1) Unlisted/unregistered Issues (Aozora Issues)

Issuers of unlisted or unregistered stocks are not required by law to disclose
their corporate information, and, in principle, JSDA rules prohibit securities
companies from soliciting investment in such issues. This is because solicit-
ing the investing public, including individual investors, for an order to buy or
sell a security on which no pertinent corporate information is available would
subject the public to significant risks and cause various problems from the
standpoint of the protection of investors, and such self-regulatory rules have
been in place for a long time.
　However, brokers/dealers may accept unsolicited orders for such issues
and trade them with customers as so-called Aozora issues (OTC securities) in
negotiated transactions. The rules pertaining to such transactions (including
those prohibiting them from accepting market orders or affecting when-is-
sued or margin trading) are contained in the Rules Concerning Over-the-
Counter Securities of the JSDA.
　The April 2004 amendment to the Securities and Exchange Act authorized
a company to issue an equity product in private placements limited to quali-
fied institutional investors. Under this amendment, securities companies are
allowed to solicit only Qualified Institutional Investors for the purchase of
such shares on the condition that they do not resell their holdings to anyone
226　Chap. XI Financial Instruments Exchange, etc. (2)

Chart XI-2.　Relationships Between OTC Securities and Listed/Registered Issues

Financial Instruments Exchange Markets: Listed issues

(Tokyo, Osaka, Nagoya, Sapporo, and Fukuoka)

OTC securities market: Registered issues

(At present, there is no market or issue falling within the purview of this category)

OTC securities
(Unlisted/unregistered issues)

OTC-handled securities Equity Crowdfunding Shareholders Community

Shares and other securities A scheme in which solicita- A scheme in which the se-
issued by companies in tion for investment is per- curities companies desig-
compliance with periodic formed only via the Internet nated by the JSDA may so-
disclosure requirements or website and email licit investment only from
those disclosing specified participants of the share-
corporate information in an Restrictions apply in terms holders community
Explanatory Note on busi- of the amount of funds
ness Conditions raised per issuer and the
amount of investment per
Green sheet issues investor
Phoenix issues
Tradable securities under
the Financial Instruments
and Exchange Act

Issues for which securi-

ties companies that have
been designated by the
JSDA present quotations
and solicit investments

other than Qualified Institutional Investors.

(2) OTC-handled Securities

Securities whose issuers regularly disclose specified corporate information in
the form of an Explanatory Note on Business Conditions are considered to
carry less risk than other unregistered issues. And the rules of the JSDA de-
fine them as“over-the-counter-handled securities,”or OTC securities eligible
 　227
Chap. XI Financial Instruments Exchange, etc. (2)

for solicitation by promoting brokers/dealers.

　An Explanatory Note on Business Conditions is a type of disclosure mate-
rial required by the JSDA and prepared in accordance with the format for the
“corporate information”section of a securities report pursuant to the Finan-
cial Instruments and Exchange Act. It shall be accompanied by annual finan-
cial statements with an audit report that includes the opinion of certified pub-
lic accountants or persons with equivalent designation that the company’ s
financial statements are unqualified or qualified in light of the provisions of
the Financial Instruments and Exchange Act or in conformity with those of
the Companies Act. Such explanatory note shall also contain forward-looking
statements as to the outline of the company’ s business plan, its feasibility,
and other aspects. In the case of a company in compliance with periodic dis-
closure requirements, a securities report or a securities registration statement
with an unqualified or qualified opinion of the auditor can be substituted for
the Explanatory Note on Business Conditions.
　At present, the ban on solicitation for the purchase of OTC-handled securi-
ties is partially lifted for primary or secondary offerings of securities on the
condition that the transfer of such shares is restricted for two years based on
an agreement among the issuer, securities companies, and investors and that
the issuer publishes an Explanatory Note on Business Conditions. The ban is
fully lifted for unlisted securities of listed companies based on the condition
that the issuer publishes an Explanatory Document on Securities Information,
etc.

7. Equity Crowdfunding (1)

(1) What is Equity Crowdfunding?

The term“crowdfunding”is a coined word composed of“crowd”and raising
funds or“funding.”It refers to the practice of funding start-ups and growth
companies by asking a large number of people to each contribute a small
amount of money, often performed via Internet-mediated registries.
　With the use of the Internet, crowdfunding makes it possible to raise funds,
even on a small scale, at low cost and over a wide range by collecting a small
amount of money from a large number of contributors. Thus crowdfunding,
primarily the purchase-type and lending-type, has rapidly become a popular
option for raising capital in the last few years. Given the circumstances, an
equity crowdfunding system was also introduced in May 2015 with a view to
promoting provision of risk money to start-ups and growth companies and
enabling such companies to raise funds by issuing OTC securities.
　The equity crowdfunding scheme may be used only by securities compa-
nies and intermediaries specializing in small-amount equity crowdfunding
228　Chap. XI Financial Instruments Exchange, etc. (2)

Chart XI-3.　Concept Diagram of Equity Crowdfunding

Issuer Crowdfunding vendor Investor

Portal site

• Business contents
• Application of funds, etc.

Table XI-6.　JSDA’ s Self-Regulatory Rules

Key components of the Rules Concerning Equity Crowdfunding Operations

1 . Solicitation for investments conducted by members of the JSDA (securities companies and Type I
Small Amount Electronic Subscription Handling Agents) under the equity crowdfunding scheme is
permitted as an exception to the prohibition of investment solicitation relating to unlisted stocks.
2 . Examination of issuers and measures to eliminate antisocial forces
3 . Indication of equity crowdfunding deals on the website
4 . Issuance of document prior to conclusion of contract
5 . Request for letter of intent from investors purchasing unlisted stocks for the first time under the eq-
uity crowdfunding scheme
6 . Small-amount requirements (total amount of funds raised per issuer: less than ¥100 million a year;
investment per investor for one issuer: no more than ¥500,000 a year)
7 . Prohibition of simultaneous use of solicitation method other than the Internet (e.g., telephone and
face-to-face contact)
8 . Conclusion of an agreement to the effect that the issuer provides proper information on a periodical
basis to investors after the completion of handling of investment under the equity crowdfunding,
and confirmation of information provision
9 . Establishment of an operation management system
10. Reporting and publication of monthly results
 　229
Chap. XI Financial Instruments Exchange, etc. (2)

(Type I Small-Amount Electronic Public Offering Service Operators) that are

registered as Type I Financial Instruments Business Operators.

(2) Small Amount Requirements and Prohibition of Concurrent Use of

Unspecified Solicitation Methods
In light of the nature of the equity crowdfunding scheme of raising a small
amount of funds from each of a large number of investors, certain restrictions
apply in the equity crowdfunding system. The amount of funds raised per is-
suer must be less than ¥100 million per year and the amount of funds contrib-
uted per investor to an issuer must not exceed ¥500,000 per year. In addition,
considering that investment frauds involving unlisted stocks and corporate
bonds continue to take place, the method of solicitation for investment is lim-
ited to using (i) the website and (ii) email assuming the use of the aforesaid
website, and solicitation by telephone and visits by securities companies, etc.
are prohibited.

(3) Examination of Issues and Issuers

In handling OTC securities using the equity crowdfunding scheme, securities
companies, etc. may carefully examine each issuer and verify the nature of
their business, financial standing, appropriateness of business plan, intended
use of funds, etc. in accordance with their internal rules and may handle only
such issuers they recognize to be proper. Securities companies, etc. also enter
into a contract with each issuer to the effect that the issuer is not an antisocial
force, and must not use an equity crowdfunding scheme if it is recognized
that an issuer corresponds to an antisocial force.

8. Equity Crowdfunding (2)

(4) Provision of Information via Website and Receipt/Delivery of Docu-

ments
While using the equity crowdfunding system, securities companies, etc. must
provide information on issuers and fund raising as well as on risks, etc. spe-
cific to the acquisition of OTC securities issued by the issuers (such as no
obligation to provide disclosure comparable to that prescribed by the Finan-
cial Instruments and Exchange Act or to the timely disclosure required by
stock exchanges) via the website for inspection by investors.
　Furthermore, in order to receive confirmation from investors purchasing
OTC securities for the first time under the equity crowdfunding scheme of
their understanding of risks, commission, etc. involved and of making the in-
vestment based on their judgment and responsibility, securities companies,
etc. must provide advance explanations of these matters, request a letter of
230　Chap. XI Financial Instruments Exchange, etc. (2)

Chart XI-4.　Provision of information to investors and receipt/delivery of documents in

equity crowdfunding
During the term of crowdfunding (during the offering period) After completion of
crowdfunding
(periodically)

Securities firm Securities firm Securities firm

Intermediary specializing Intermediary specializing Intermediary specializing
in small-amount in small-amount in small-amount
Issuer
equity funding equity funding equity funding

Provision of information Request for a letter of Issuance of pre-contract Information on business

via website intent from investors documents conditions
• Information on issues purchasing OTC • Information on issues
and issuers securities through the and issuers
• Information on equity crowdfunding • Information on
financing scheme for the first financing
• Risk information time • Risk information
• Other • Other

Table XI-7.　Handling of Equity Crowdfunding

As of January 31, 2018

Number of registered firms Number of deals handled Amount of financing
(companies) (deals) (¥1,000)
2015 — — —
2016 — — —
2017 3 18 514,740
2018 3 4 121,880

intent from each investor, and deliver the document prior to conclusion of
contract containing at minimum the matters to be informed via the website
concerning individual issues for every investment handled.

(5) Periodical Subsequent Information Offering by Issuer

After completing the handling of investment under the equity crowdfunding
scheme, securities companies, etc. must enter into an agreement with each
respective issuer with regard to the proper offering of information on a peri-
odic basis by the funds-raising issuer to the investors who purchased the
 　231
Chap. XI Financial Instruments Exchange, etc. (2)

OTC securities and must ensure that the issuer provides such information in
accordance with the agreement.

(6) Reporting and Announcement of Investment Status

Securities companies, etc. must report the status of investments made under
the equity crowdfunding scheme on a monthly basis to the JSDA, and the
JSDA publishes the information reported.

(7) Establishment of an Operation Management System, Etc.

Securities companies, etc. must formulate internal rules and put in place an
operation management system necessary for properly carrying out equity
crowdfunding while complying with laws and regulations and their self-regu-
latory rules. In addition, securities companies, etc. are required to prepare an
outline of their equity crowdfunding procedure and publish it on the compa-
ny’ s website to enable investors to view the information.
　When a securities company or such party is requested to make improve-
ments, etc. to its operation management system due to a violation of law or
its self-regulatory rule or for other reasons, the securities company or such
party must not be engaged in equity crowdfunding until the requested im-
provements, etc. are completed.

9. Shareholders Community (1)

(1) What is Shareholders Community?

The JSDA has been operating the green sheet system, a mechanism for pro-
moting the smooth circulation of unlisted securities. However, the use of the
system has become stagnant, due to the weakening significance of the system
as a function to complement stock exchanges as listing criteria for emerging
markets becoming lax and to the disclosure burden imposed, which is com-
parable to that of listed companies (Corporate Information Memorandum
similar to those reguired by the Financial Instruments and Exchange Act and
the timely disclosure obligation associated with the application of insider
trading regulations). Meanwhile, needs for trading and conversion of unlisted
stocks of locally operating firms, etc. continued to exist at a certain level, and
there were calls for a system to accommodate these needs.
　Under these circumstances, the Shareholders Community System was in-
troduced in May 2015 as a system for unlisted stock trading and fund-raising
to replace the green sheet system.
　With a view to restricting distribution, Shareholders Community was es-
tablished as a mechanism in which a securities company creates a sharehold-
ers community by OTC issue and accepts investments only from investors
232　Chap. XI Financial Instruments Exchange, etc. (2)

Chart XI-5.　Basic Mechanism of Shareholders Community

Operating members (securities firms)

Shareholders community
who are not shareholder community participants to participate
Operating members are prohibited from soliciting investors

Operating members may solicit investors who participate

in a shareholders community or to make investments.

in a shareholders community to make investments.

Internet Solicitation Solicitation Internet

Solicitation Solicitation
Telephone Telephone

Solicitation Solicitation
Face-to-face Face-to-face

Table XI-8.　Major Components of the JSDA’

s Self-Regulatory Rules regarding
Shareholders Community

1 . Securities companies construct a shareholders community for an unlisted stock. Investors intending
to invest in the unlisted stock participate in the shareholders community.
• Assumed principal participants include officers and employees and their families of the issuer;
shareholders and business partners of the issuer; and users and customers of the issuer’
s business.
2 . Securities companies structuring and operating a shareholders community receive designation by
the JSDA as operating members.
3 . Solicitation for investment is allowed only toward investors who participate in a shareholders com-
munity.
• No solicitation for investment to investors who are not participants.
• No solicitation for participation to investors who are not participants.
• Investors not participating in a shareholders community are provided with only the basic informa-
tion concerning the shareholders community issue.
4 . Examination of issuers and measures to eliminate antisocial forces
5 . Investors participating in a shareholders community are provided with financial statements, busi-
ness reports and other information based on the Companies Act in regard to the issuer.
6 . Issuance of document prior to conclusion of contract
7 . Investors who participate in a shareholders community for the first time are requested to submit a
letter of intent.
8 . Establishment of an operation management system
9 . Weekly reporting and public disclosure of trades
10. The Green Sheet system will be abolished as of March 31, 2018.
 　233
Chap. XI Financial Instruments Exchange, etc. (2)

that proactively declare and participate in the community. Since distribution

of unlisted issues is restricted under the Shareholders Community System be-
cause the scope of solicitation and trading is limited to participants of the
shareholders community, the System is not subject to the application of in-
sider trading regulations.

(2) Designation and Cancellation of Designation of Operating Members

In order for a securities company to create and operate a shareholders com-
munity, it must register with the JSDA and receive designation as an operat-
ing member. The JSDA designates and announces a securities company as an
operating member if it finds no fault in the registration documents, but may
decide not to grant designation if the securities company is found to be in vi-
olation of law or self-regulatory rules.
　Cancellation of designation as an operating member is normally based on
a notification submitted by the operating member. It may cancel the designa-
tion altogether or suspend the designation for a certain period of time even
without the aforesaid notification if, however, the JSDA finds that an operat-
ing member is in violation of law or self-regulatory rules, etc.

(3) Prohibition of Solicitation for Participation in a Shareholders Com-

munity and of Solicitation for Investment
Participation in a shareholders community is based on an investor’
s proactive
declaration. Therefore, operating members may not solicit investors who are
not shareholders community participants to participate in a shareholders
community or to make investments.
　OTC trading of shareholders community issues must be executed between
participants of a shareholders community operated by an operating member
or between a participant and the operating member.

10. Shareholders Community (2)

(4) Examination of Issues and Issuers

In handling OTC securities for which a shareholders community is to be cre-
ated, operating members may strictly examine each issuer and verify the na-
ture of their business, financial standing, etc. in accordance with their internal
rules and may handle only such issuers they recognize to be proper. Operat-
ing members also enter into a contract with each issuer to the effect that the
issuer is not an antisocial force, and must dissolve the shareholders commu-
nity if it is recognized that an issuer corresponds to an antisocial force.
234　Chap. XI Financial Instruments Exchange, etc. (2)

Chart XI-6.　Receipt/delivery of documents regarding shareholders community issues

Operating Member (securities company)

Shareholders Community

To an investor who does not To an investor who intends to To an investor participating in a shareholders
participate in a shareholders participate in a shareholders community:
community: community: (1) Disclosure documents provided for in the
(1) Name of issue (1) Basic information on issuers Financial Instruments and Exchange Act
(2) URL of issuer’ s website (or of shareholder community (Securities Registration Report, Securities
telephone number, if the issues, such as business year, Report, etc.)
issuer does not have a timing of annual general (2) Financial statements and business report
particular website) meeting of shareholders, provided for in the Companies Act
(3) Benefits for shareholders and record date of voting Information conforming to“Business
(shareholder incentives) rights of annual general risks, etc.”and“Overview of stock
(4) If handling an offering, meeting of shareholders administration of the submitting company”
private placement or (2) Information on the method of the Securities Report
secondary distribution, the of receiving information on (3) If handling an offering, etc., information
fact thereof and the issuers of shareholders conforming to“Securities information”of
application period community issues or the the Securities Registration Report
method of inspecting such (4) Other information recognized as necessary
information by the operating member

Chart XI-7.　Provision of information regarding shareholders community issues

Operating Member (securities company)

Shareholders Community

In order to have an investor who intends The following is addressed to a participant

to participate in a shareholders community (investor) who executes transactions of
for the first time understand the contents shareholders community issues:
of risks, commission, etc. and to receive (1) Issue pre-contract documents, and
confirmation to the effect that the investor (2) Convey to the participant that theparticipant
will execute transactions on its judgment may request explanations on the contents
and responsibility, a document indicating of documents prescribed under the Financial
the contents of pre-contract documents Instruments and Exchange Act and the
is issued and an explanation on the Companies Act provided to investors
document is given. Then the investor is participating in a shareholders community.
asked to submit a confirmation note.
 Chap. XI Financial Instruments Exchange, etc. (2) 　235
Table XI-9.　Handling of Shareholders Community

As of January 31, 2018

Number of operating members Number of portfolio issues Trading amount
(companies) (issues) (¥1,000)
2015 2 11 71,149
2016 3 13 441,599
2017 3 16 551,013
2018 4 17 5,056

(5) Provision of Information Regarding Shareholders Community Issues

and Receipt/Delivery of Documents
Operating members are to provide investors with the necessary information
on shareholders community issues depending on the magnitude of involve-
ment (participation or declaration of participation in the shareholders com-
munity, or not) by each investor with the shareholders community.
　Furthermore, in order to receive confirmation from investors executing
OTC transactions of shareholders community issues for the first time on their
understanding of risks, commission, etc. involved and of making the invest-
ment based on their judgment and responsibility, operating members must
provide advance explanations of these matters, request a letter of intent from
each investor, and deliver the document prior to conclusion of contract con-
taining at minimum the risks specific to such OTC transactions and other
matters (e.g., no disclosure obligation comparable to the disclosure pre-
scribed in the Financial Instruments and Exchange Act or to the timely dis-
closure required by stock exchanges is imposed) concerning individual is-
sues, and explain the contents thereof.

(6) Withdrawal from and Dissolution of Shareholders Community

Operating members shall perform the withdrawal procedure when notified by
a participant of the shareholders community of the participant’ s intent to
withdraw or when there are other reasons as prescribed in the handling guide.
If an operating member’ s designation is cancelled by the JSDA, the operating
member must immediately dissolve all shareholders communities it operates.

(7) Reporting and Announcement of Investment Status

Operating members must report the status of OTC trading of shareholders
community issues they handle on a weekly basis to the JSDA, and the JSDA
must publish the information reported.
236　Chap. XI Financial Instruments Exchange, etc. (2)

(8) Establishment of an Operation Management System

Operating members and securities companies intending to become operating
members must formulate internal regulations and put in place an operation
management system necessary for properly operating shareholders communi-
ties. In addition, operating members are required to prepare an outline of
their shareholders community operating method, etc. and publish the outline.

11. The Green Sheet and Phoenix Issue Systems (1)

(1) Outline of the Green Sheet System

Even after the listing standards of exchanges had been eased to allow some
of the loss-making companies to go public, it was deemed necessary to im-
prove the market for issuing and trading unlisted shares in order to improve
the financing environment for venture businesses. Aware of this, the Japan
Securities Dealers Association (JSDA) partially eased its rules concerning
OTC securities in July 1997 to allow its member brokers to solicit customers
for investment in securities, including OTC-handled securities, filing an Ex-
planatory Note on Business Conditions so that brokers may market such se-
curities at times, provided that the brokers continuously publish quotes and
other relevant market information for the securities. This trading framework
is called the green sheet system. Subsequently, based on the amendment to

Chart XI-8.　Green Sheet Statistics

(thousands of yen) (issues)
600,000 120
Trading volume
No. of designated issues
500,000 100

400,000 80

300,000 60

200,000 40

100,000 20

0 0
Jun
De 2000
Jun . 2000
De 2001
Jun . 2001
De 2002
Jun . 2002
De 2003
Jun . 2003
De 2004
Jun . 2004
De 2005
Jun . 2005
De 2006
Jun . 2006
De 2007
Jun . 2007

De 2014
De 2008
Jun . 2008
De 009
Jun . 2009
De 2010
Jun . 2010
De 2011
Jun . 2011
De 2012
Jun . 2012
De 2013
Jun . 2013

Jun . 2014
De 2015
Jun . 2015
De 2016
Jun . 2016
De 2017
c

c
c

c
c

c. 2
e

e2

e
017
 Chap. XI Financial Instruments Exchange, etc. (2) 　237
Chart XI-9.　Flow of Investment Solicitation for Green Sheet and Phoenix Issues

Customer executing a green sheet issue transaction for the first time

Issuance of
pre-contract
Indication that
Request for a documents
“the issue is Order receipt/ Delivery/
confirmation (Explanation using a
a green sheet Contract Settlement
note company description
issue of
sheet)
XX category”
Solicitation of
investment

Chart XI-10.　Outline of Trading in Green Sheet and Phoenix Issues and Trade Reports

Quotations and Acceptance of an order

report of contracts and confirmation note
Handling member company
Japan Securities
(the PTS is not used, and a General securities
Dealers Association
contract is concluded companies
(JSDA)
within the company)

Customers Customers

the Securities and Exchange Act in April 2005, insider trading rules were also
applied to green sheet issues and the issuers of green sheet issues were re-
quired to provide timely disclosure using the TDnet.
　In conjunction with the establishment of the shareholders community sys-
tem, a new trading system for unlisted stocks, the green sheet system will be
abolished at the end of March 2018.

(2) Phoenix Issue System

The Phoenix issue system is an OTC trading system launched by the JSDA
on March 31, 2008, to provide a marketplace for issues that had been delisted
from stock exchanges. Phoenix issues started off as a category in the green
sheet system. In response to the successive delisting of large-cap issues, such
238　Chap. XI Financial Instruments Exchange, etc. (2)

as Seibu Railway, Kanebo, and Livedoor, however, the JSDA established the
system for Phoenix issues to improve investors’opportunities to cash out of
delisted issues and to provide the necessary framework for delisted compa-
nies to have a second chance at re-listing.
　The Phoenix issue system differs substantially from the green sheet system
in that it utilizes the book-entry transfer system for stocks, etc. to give inves-
tors an opportunity to cash out their holdings through the stock exchange
even after the decision to delist the stock whereas the receipt, delivery, and
settlement of green sheet issues are conducted using the stock certificates.

(3) Designation of Issues

When a securities company chooses to handle a particular delisted share as a
Phoenix issue, it must submit a notification to the JSDA after verifying that
the accompanying audit report contains an opinion from the auditor and that
the issue meets certain conditions with regard to the consignment of share
administration, etc. The JSDA checks the contents of the notification and
then provides the designation as a Phoenix issue and handling member.
　Since the green sheet system is scheduled to be abolished as previously
mentioned, new designation of issues and handling members is no longer be
made.

12. The Green Sheet and Phoenix Issue Systems (2)

(4) Timely Disclosure

Issuers of green sheet and Phoenix issues are obligated to carry out timely
disclosure to the extent comparable to that of listed companies, including the
disclosure of quarterly reports, via the TDnet. In addition, handling members
are expected to take responsibility in guiding issuing companies regarding
disclosure.

(5) Investment Solicitation and Trading

A broker must obtain from the customer who conducts a transaction in green
sheet or Phoenix issues for the first time a letter confirming that he or she
will invest with a full understanding of the green sheet system and the risks
associated with green sheet issues. In addition, in soliciting customers for in-
vestment in a green sheet security, a broker must give a full and fair explana-
tion of the issue and issuer using the Explanatory Note on Business Condi-
tions as well as deliver the Document Prior to Conclusion of Contract
provided for under Article 37, Paragraph 3 of the Financial Instruments and
Exchange Act and provide explanation on the contents of the document.
　Trading hours run from 9:00 a.m. to 3:00 p.m. on business days. Handling
 Chap. XI Financial Instruments Exchange, etc. (2) 　239
Table XI-10.　Comparison of the Green Sheet and Phoenix Issue Systems

Green sheet system Phoenix issue system

Eligible securities Stocks, share option certificates, Stocks and corporate bonds with
corporate bonds with subscription subscription rights/warrants at-
rights/warrants, preferred notes, tached that have been delisted
investment securities, and invest-
ment equity subscription right
certificates
Designation required Yes Sames as left
Obligation for handling mem- Yes No
ber to review issue
Criteria for losing designation Yes Sames as left
Investment solicitation Only handling members and asso- With the exception of investors
ciate handling members selling on their own volition, only
handling members and associate
handling members
Confirmation Yes Yes (unnecessary for sales)
Trading process Negotiated transaction Sames as left
Delivery and settlement Direct delivery and settlement Directly through JASDEC’
s trans-
(in principle, 4 business days or fer system
T+3) (in principle, T+3)
Trading hours 9:00～15:00 Sames as left
Reporting and disclosure obli- Yes Sames as left
gations for quotes and orders
Disclosure materials Explanatory Note on Business Sames as left
Conditions and securities report (Financial statements with only
(Financial statements for the two an auditor’s opinion stating fair
previous terms must be accompa- representation for the previous
nied by an auditor’ s opinion stat- term are acceptable)
ing fair representation)
Timely disclosure Disclosure items specified by the Sames as left
JSDA
Insider trading rules Applied Sames as left

members may make investment solicitation and accept orders at any time.
Those registered as associate handling members may also make investment
solicitation and accept orders, and other securities companies are also al-
lowed to trade within the scope of the system.
　Transactions shall be settled and the securities traded shall be delivered, in
principle, on the fourth business day counting from and including the trade
date (T+3 settlement). While green sheet issues are settled in share certifi-
cates, Phoenix issues are settled through the Book-Entry Transfer System for
Stocks, etc.
240　Chap. XI Financial Instruments Exchange, etc. (2)

　In addition to the application of insider trading regulations as mentioned

earlier, trading rules ban member brokers/dealers from accepting market or-
ders; effecting margin trading or when-issued transactions with customers;
prearranging trades with other brokers/dealers; or engaging in excessive trad-
ing, kiting, bear-raiding, or other improper trading practices. Furthermore,
the JSDA, as part of its trading management function, suspends and inspects
trading.

(6) Reporting and Disclosure of Quotes and Contract Information

Handling members and associate handling members shall, as a general rule,
report quotes and trading information every business day. Securities compa-
nies that have accepted orders from, or have entered into transactions with,
their customers must report such orders or transactions to the JSDA, and the
JSDA, in turn, compiles the data received and publishes such information.

(7) Revocation of Designation of Issues

The designation as a green sheet issue or a Phoenix issue is revoked when
there is no longer a sponsoring handling member. In addition, the JSDA may
revoke the designation upon certain events occurring to the issue or its issuer,
including listing on stock exchanges, the commencement of bankruptcy pro-
ceedings, and false statements in disclosure documents.

13. TOKYO PRO Market

The TOKYO PRO Market is a market for professional investors operated

jointly by the Tokyo Stock Exchange (TSE) and the London Stock Exchange
(LSE). It is based on the TOKYO AIM market launched by the TSE in June
2009. TOKYO AIM, Inc., was originally operated as a partnership (owner-
ship: TSE 51%; LSE, 49%). In March 2012, however, the TSE acquired LSE’ s
stake and merged Tokyo AIM with the TSE in July 2012. TOKYO AIM is
operated under the professional investor market system provided for by the
enactment of the December 2008 revision of the Financial Instruments and
Exchange Act (FIEA).
　Placing orders on traditional exchanges is not limited to any special cate-
gory of investor. The professional investor market system, conversely, re-
stricts trading to specified investors and nonresidents. Where fund procure-
ment is limited to professional investors, securities registration statements are
not required, and issuers need only make public financial information, etc.
(called specified securities information), using the format and method stipu-
lated by the TSE. Companies already listed on the exchange, moreover, need
not submit annual securities reports and need only make public financial in-
 Chap. XI Financial Instruments Exchange, etc. (2) 　241
Table XI-11.　Overview of TOKYO PRO Market Listing System

Disclosure language • Japanese or English

Listing criteria • No quantitative criteria
Subject of evalua- • J-Adviser (Conducts review and check on listing eligibility on behalf of the ex-
tion change)
Period from listing • As a general rule, ten (10) business days
application to listing • (provided, however, that there is a check procedure by the exchange to J-Ad-
approval viser 30 business days prior to application)
Audit certification Latest one (1) year
Internal control re-
Optional
port
Quarterly disclosure Optional
• Professional investors (Note) and non-residents
Note: Professional investor refers to:
Specified investors Qualified Institutional Investors (e.g., financial insti-
(Tokutei Toushika) tutions); National government; Bank of Japan
Specified investors
(Tokutei Toushika) Listed companies and corporations with paid-in-capi-
Investors (may shift to general tal of no less than ¥500 million
investors)
Corporations other than specified investors
Individuals with financial assets and net assets worth
“Deemed ”specified
no less than ¥300 million and with the experience of
investors
dealing with financial instruments for one (1) year or
more

Chart XI-11.　Role of J-Adviser

Tokyo Stock Exchange J-Adviser System

 Roles
• The J-Adviser investigates and confirms listing
Certification of J-Adviser Qualification eligibility for new listings (so-called listing
Entrustment of certain business examination)
Examination for J-Adviser • Provides continuous give advice and guidance to
ensure that listing eligibility can be maintained
J−Adviser even after listing
• Listing companies are obligated to maintain one
(1) responsible J-Adviser at all times
Investigates and confirms listing eligibility on behalf of the TSE  Requirements
• The applicant company must have experience in
corporate finance advisory operations and human
Business due diligence Legal due diligence Financial due diligence resources well versed in such operations and
must be authorized by the exchange.

List of approved J-Advisers today

(11 companies; in alphabetical order)
Conclude a “J-Adviser agreement” Judgment of listing eligibility; • Daiwa Securities Co., Ltd.
(cost and cancellation matters, etc.) Support after listing • GCA FAS Co., Ltd.
• IR Japan, Inc.
• Leading Securities Co., Ltd.
• Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
• Mizuho Securities Co., Ltd.
Listing applicant company/Listed company • Nomura Securities Co., Ltd.
• OKINAWA J-Adviser Co., Ltd.
• Phillip Securities Japan, Ltd.
• SMBC Nikko Securities Inc.
• TAKARA PRINTING Co., Ltd.
*As of End of December 2017
242　Chap. XI Financial Instruments Exchange, etc. (2)

formation, etc. (issuer information), using the TSE-stipulated format and

method. The submission of internal control system reports and quarterly dis-
closure are voluntary. By premising requirements on the fact that only pro-
fessional investors—those capable of analysis and making investment deci-
sions—will invest in the market, the cost burden of issuing has been reduced
in comparison with traditional stock exchanges.
　The statutory penalties for falsifying financial information, etc., and for in-
sider trading apply as much to the professional investor market system on the
report of possession of large volume and tender offer systems. The page on
the right shows details of how the TOKYO PRO Market aims to provide a
flexible but disciplined market system for issuers and investors through the
J-Adviser system (approved adviser system) within the previously mentioned
legal framework. This operational method, which has the J-Adviser system at
its core, has been drawn substantially from the Nomad (Nominated Adviser)
system of the LSE’ s Alternative Investment Market (AIM). Under the sys-
tem, specialists in corporate finance, etc., who have been approved as J-Ad-
visers are required to guide a company through the admission process and to
fulfill a duty to provide advice and instruction on timely disclosure and other
regulatory matters following listing.
　As of December 31, 2017, the TOKYO PRO Market had 11 J-Advisers
and 22 listed companies.
 CHAPTER XII

Financial Instruments Business (Securities Business)

1. Overview of Financial Instruments Business Operators (Securities

Companies) (1)

While the Financial Instruments and Exchange Act (FIEA), a comprehensive

overhaul of the former Securities and Exchange Act, was fully enforced in
September 2007, the basic legal framework regulating securities companies
remains intact. The FIEA defines the four financial instruments businesses as
including the Type I and Type II Financial Instruments Businesses, the In-
vestment Advisory and Agency Business, and the Investment Management
Business. What has traditionally been known as the securities business is in-
cluded in the Type I Financial Instruments Businesses (Article 28, Paragraph
1 of the FIEA), and, accordingly, securities companies are required to regis-
ter with the prime minister as Type I Financial Instruments Business Opera-
tors (Article 29).
　The securities business registration system that had been in place since
1948, when the Securities and Exchange Act was first enacted, was replaced
by a licensing system in April 1968. The licensing system was designed to
help stabilize the management of securities companies by curbing excessive
competition and obligating them to specialize (ban, in principle, on concur-
rently operating non-securities business), thus strengthening the investor pro-
tection. As a result, the regulatory regime increasingly took on a defensive
bias, and virtually no companies entered the securities business anew.
　However, as the securities market developed, the types of financial prod-
ucts handled by securities companies became increasingly diverse. Further-
more, as the years rolled on into the 1990s, customer needs for securities ser-
vices started to change and vary, from private equity and asset securitization
to M&A advisory, asset management, and online brokerage, against the back-
ground of the nation’ s shifting industrial structure, aging population, dying
traditional long-term employment practices, and ongoing information tech-
nology revolution (such as the proliferation of the Internet).
　The licensing system did play a role in stabilizing the management of se-
curities companies. On the other hand, there turned out to be a number of
244　Chap. XII Financial Instruments Business (Securities Business)

Table XII-1.　The Scope of Business of Securities Companies (Type I Financial Instru-

ments Businesses), and Requirements
1. Type I Financial Instruments Businesses (Article 28 Paragraph 1, Items Securities-related business (FIEA Article 28, Paragraph 8)
(i)–(v) of the Financial Instruments and Exchange Act (FIEA))
(1) Proprietary securities trading, intermediary, brokerage, or agency service Of the Type I Financial Instruments Businesses listed, the business that corre-
of securities, market transactions of derivatives or foreign market deriva- sponds to the conventional securities business (in principle, the scope of business
tives transactions; intermediary, brokerage, or agency service for the en- which financial institutions are prohibited from conducting).
trustment of the transactions listed above; brokerage for the clearing of
securities, etc.; secondary distribution of securities; or the handling of Refusal of Registration (i.e., registration requirements) (Article 29-4, Paragraph 1
public, primary offering or secondary distribution of securities or the of the FIEA, Article 15 of the FIEA Enforcement Order)
handling of the private placement of securities (1) An applicant who had his/her registration rescinded and for whom five years
(2) Intermediary, brokerage, or agency service of commodity-related market have not passed since the rescission; an applicant who has been punished by a
derivatives trading; intermediary, brokerage, or agency service for the fine for violating the provision of any applicable law or regulation and for
entrustment of the transactions listed above; or brokerage for clearing whom five years have not passed since the imposition of the fine
(3) Intermediary, brokerage, or agency service of OTC derivatives trading (2) An applicant with an officer, etc., who is bankrupt or has received certain
and brokerage for clearing of such transactions criminal punishment and for whom five years have not passed since the com-
(4)“Underwriting”of securities pletion of the sentence
(5) Sale or purchase of securities or intermediary, brokerage, or agency ser- (3) An applicant without appropriate personnel resources to properly conduct the
vice therefor, which is conducted through an electronic data processing financial instruments business
system and in which a large number of persons participate simultane- (4) An applicant with stated capital or net worth of less than ¥50 million
ously as a party or parties of the transaction (business of operating a pro- (5) An applicant that is not a corporation
prietary trading system (PTS business) (6) An applicant whose additional business other than incidental or registered/ap-
(6) Acceptance of deposit of securities, etc., in relation to the transactions, proved concurrent business is found to be against the public interest or to pose
etc., listed above or book-entry transfer of stocks or corporate bonds (se- difficulty in risk management
curities management business) (7) An applicant whose major shareholder (with 20% or more of voting rights) is
disqualified for registration
Note: (5) requires approval (Article 30, Paragraph 1). PTS stands for Propri- (8) An applicant with a capital-to-risk ratio less than 120%
etary Trading System. (9) An applicant with a trade name that is the same as or similar to that of an al-
ready existing Financial Instruments Business Operator
Minimum Capital Requirement (Article 15, Paragraphs 7 and 11 of the FIEA En-
forcement Order)
(1) When conducting wholesale underwriting as a lead managing underwriter: ¥3
billion
(2) All other underwriting: ¥500 million or more
(3) Business of operating PTS: ¥300 million
(4) All other Type I Financial Instruments Businesses: ¥50 million
2. Incidental businesses (Article 35, Paragraph 1, Items (i)–(xv)
(1) Lending or borrowing of securities, or intermediary or agency service (The following items are newly included as incidental businesses under the
thereof FIEA.)
(2) Making a loan of money incidental to a margin trading (10) Custody of assets of a registered investment corporation
(3) Making a loan of money secured by securities held in safekeeping for (11) Provision of consultation to any other business with regard to assignment of
customers a business, merger, spin-off, share exchange or share transfer or intermedia-
(4) Agency service for customers concerning securities tion thereof
(5) Agency service of the business pertaining to the payment of profit distri- (12) Provision of management consultation to any other business
bution or proceeds from redemption at maturity or at the request of an (13) Sale or purchase of currencies and other assets related to derivatives trading
investment trust or intermediary, brokerage, or agency service thereof
(6) Agency service of the business pertaining to the payment of dividends or (14) Sale or purchase of negotiable deposits or other monetary claims or interme-
refunds or distribution of residual assets with regard to investment cer- diary, brokerage, or agency service thereof
tificates of an investment corporation (corporate type investment trust) (15) Management of assets under its management as investment in specified as-
(7) Conclusion of a cumulative investment contract sets defined in the Investment Trust Act
(8) Provision of information or advice in relation to securities
(9) Agency service of the business of any other Financial Instruments Busi-
ness Operator, etc.
3. Other businesses requiring notification (Article 35, Paragraph 2 of the FIEA; Article 68 of the Cabinet Office Order on Financial Instruments Business, etc.)
(1) Conducting a transaction on a commodity exchange 　 (6) business pertaining to lease of real properties owned by a FinancialInstru-
(2) Conducting a transaction in a derivative contract on a commodity price ments Business Operator itself; (7) goods leasing business; (8) business per-
or other benchmark taining to creation and sale of computer programs for the business of any other
(3) Money-lending business or intermediary service for lending and borrow- business operator, and a business to accept the entrustment of computing ser-
ing of money vice; (9) business of management of the defined contribution pension; (10)
(4) Business pertaining to building lots and buildings transaction business Trust Agreement Agency Business; (11) intermediary service for forming a
and lease of building lots or buildings trust by will or concluding a contract for the disposition of an estate of a de-
(5) Real estate specified joint enterprise ceased party; (12) Financial Institution Agency Service; (13) real property
(6) Commodity investment management business management business; (14) advisory business related to real property invest-
(7) Business of investing property entrusted under an investment manage- ment; (15) business of trading emission rights and emission derivatives or act-
ment contract in assets other than securities or rights pertaining to deriv- ing as an intermediary, broker or agent therefor; (16) business of undertaking
atives trading administrative operation entrusted by an investment corporation or a special-
　 Among the businesses designated by a Cabinet Office Order, the main purpose company; (17) business of investing money or other properties for
businesses include: other person, as an investment in assets other than securities or rights pertain-
　 (1) business pertaining to purchase and sale of gold bullion, or an inter- ing to a derivative transaction ; (18) business of concluding a contract for a
mediary, brokerage or agency service therefor; (2) business pertaining to guarantee or assumption of an obligation, or an intermediary, brokerage or
conclusion of a Partnership Contract; (3) business pertaining to conclu- agency service therefor; (19) business of making an arrangement with or intro-
sion of a Silent Partnership Contract; (4) business pertaining to conclu- ducing another business operator, to customers of its business; (20) business of
sion of a Loan Participation Contract or an intermediary, brokerage or creating any advertisement or promotion in regard to the business of any other
agency service therefor; (5) business pertaining to insurance solicitation; business operator; and (21) funds transfer business.

Notes: 1. A Financial Instruments Business Operator may, in addition to the above, engage in a business
for which approval has been obtained from the prime minister (approved business, Article 35,
Paragraph 4 of the FIEA).
2. A discretionary investment contract is now included as“investment management business”,
which is one of the independent investment management businesses that can be conducted with-
out special approval from the prime minister.
 　245
Chap. XII Financial Instruments Business (Securities Business)

drawbacks, including a detriment to creativity in business approaches, such

as branch network management and the development of new products and
services and a lower sense of self-reliance on the side of securities compa-
nies. Increasingly concerned about such negative fallout, the government
amended the Securities and Exchange Act as part of the Act on Revision, etc.
of Related Acts for the Financial System Reform, and a new registration sys-
tem replaced the licensing system for the securities business in December
1998.
　With the objective of providing an equal and uniform investor safeguard
across various financial products and services with considerable risk, the
FIEA was subsequently enacted to cover a wider range of objects, including
collective investment schemes and derivatives trading. The FIEA is compre-
hensive legislation that combines the Securities and Exchange Act, the Fi-
nancial Futures Trading Act, and the Investment Advisory Services Act, and
aims at achieving effective regulation of a unified financial instruments busi-
ness across a securities-related industry once vertically segmented into the
securities business, financial futures trading business, and investment adviso-
ry business. Also as a result of amendments to the Financial Instruments and
Exchange Act in 2012, commodity derivatives trading was added to the Type
I Financial Instruments Business.

2. Overview of Financial Instruments Business Operators (Securities

Companies) (2)

The former securities intermediary service is redefined as“Financial Instru-

ments Intermediary Service”under the FIEA. The term“Financial Instru-
ments Intermediary Service”means services comprising the following acts
conducted under entrustment from a Type I Financial Instruments Business-
es, an investment management business, or a registered financial institution
(see section 12): (1) intermediation for the sale or purchase of securities (ex-
cluding PTS transactions); (2) intermediation for the sale or purchase of se-
curities conducted in an exchange market or market transactions of deriva-
tives; (3) handling of a public, primary offering or secondary distribution of
securities or handling of a private placement of securities; and (4) intermedi-
ary service for the conclusion of an investment advisory contract or a discre-
tionary investment contract (Article 2, Paragraph 11 of the FIEA). As is com-
mon with the items listed above, the provider of the service does not have
customer accounts but solicits customers and redirects their orders for trans-
actions to brokers/dealers, etc., from which it receives a commission.
　Compared with the former definition for securities intermediary service,
an intermediary service for derivatives trading and intermediary service for
246　Chap. XII Financial Instruments Business (Securities Business)

Chart XII-1.　An Outline of Financial Instruments Intermediary Service Providers

Affiliated financial Liability for damages Affiliated financial

instruments firm (burden sharing instruments firm
supervised by Finance agreement) supervised by FSA
Bureau

To cause securities agents Financial Bureau

to submit—and examine— (with jurisdiction
a report on the state of ob- over the area in
servance of the laws and which C is located)
regulations and to take
disciplinary action against Agreement commissioning Agreement commissioning
them or make a recom- an order, remuneration for an order, remuneration for
mendation for rectification commissioned service (A commissioned service (B
to them to C), and responsibility to C), and responsibility
for supervision (A to C) for supervision (B to C)

Registration of Financial
Financial Instruments Agency Business
Instruments Firms Notification of concurrent
operation Inspection Bureau of
Association
Supervision and inspection the Financial Services
Agency, Securities and
Exchange Surveillance
Commission
Financial Instruments Agent, an
individual or a corporation (ex- Inspection
cluding banking institutions)
Registration of regis-
tered representatives
and supervision Securities agent,
registered repre-
sentative E
Securities agent, Securities agent,
registered repre- registered repre-
sentative D sentative F

Duty to preserve records

of transactions

Opening an account, safekeeping, Opening an account, safekeeping,

and trading (conveyed by C); is- and trading (conveyed by C); is-
suance of a transaction report; suance of a transaction report;
and liability of A for damages and liability of B for damages

Securities businesses and conclusion of an

investment advisory or discretionary in-
vestment contract (agency or intermediary
service only)
Identification of the affiliated financial in-
struments firms to which transaction or-
ders are forwarded (acceptance of deposits
of customer assets is prohibited)

Customers

Note: More than one agreement commissioning an order is allowed.

Source: Compiled on the basis of the data drawn from materials published by the Financial Services
Agency.
 　247
Chap. XII Financial Instruments Business (Securities Business)

the conclusion of an investment advisory contract or a discretionary invest-

ment contract are newly included in the new financial instruments intermedi-
ary service. In spite of the expanded coverage, however, the underlying regu-
latory principles remain intact. The provisions of the FIEA are designed to
ensure the protection of investors by instituting a number of preventive mea-
sures. More specifically, they require all financial instruments intermediary
service agents to be registered and prevent any disqualified person from be-
coming an agent. The FIEA makes all agents subject to the same set of pro-
hibited and regulated acts that are applicable to Financial Instruments Busi-
ness Operators (the prohibition of loss compensation, the duty to observe the
suitability rule, etc.); explicitly defines agents under the control and authority
of securities companies employing them; and holds these securities compa-
nies legally responsible for supervision and damage compensation. The FIEA
also gives the regulatory authority power to inspect and supervise financial
instruments agents.
　Registration requirements for financial instruments agents under the FIEA
are essentially identical to those for the securities intermediary service under
the former law. The requirements are less stringent than those for Type I Fi-
nancial Instruments Business Operators to facilitate their market entry. More
specifically, (1) either an individual or a legal entity can register as an agent
and a legal entity does not need to be a corporation and (2) there are no mini-
mum requirements for capital, net worth, or capital-to-risk ratio. However,
they can only solicit investors for orders and redirect such orders to their bro-
ker/dealer. They are not allowed to take a deposit of cash or securities from
their customers. (For this reason, they are exempt from joining an investor
protection fund.) As is the case with registered representatives of Financial
Instruments Business Operators, salespersons of financial instruments agents
shall be qualified as registered representatives and register with the Japan Se-
curities Dealers Association (JSDA) (as an Authorized Financial Instruments
Firms Association).
　Financial instruments agents may be affiliated with one or more securities
companies. As of the end of September 2017, for example, there were 852
actual financial instruments agents (537 companies and 315 individuals) act-
ing as a total of 1,139 agents (785 companies and 354 individuals). Accord-
ing to the Financial Services Agency’ s“List of Financial Instruments Inter-
mediary Service Providers,”many agents are affiliated with mid- and small-
sized securities companies and Internet securities companies seeking to
expand their sales networks, such as the 388 agents affiliated with Ace Secu-
rities and the 166 agents affiliated with SBI Securities. As registered financial
institutions may also conduct the financial instruments intermediary service,
banking institutions may provide a securities agency service with respect to
stocks, corporate bonds, and foreign bonds (please see section 12). As a re-
248　Chap. XII Financial Instruments Business (Securities Business)

sult, major securities companies are eager to conclude securities agency ser-
vice contracts with regional financial institutions.

3. Overview of Financial Instruments Business Operators (Securities

Companies) (3)

For quite some time after the war, securities companies in Japan had one
characteristic in common: heavy reliance on the stock brokerage business

Table XII-2.　The Number of Securities Companies and Their Capital and Employees

Securities companies (head office) No. of employees

No. of
business Total Capital No. of office No. of
Year-end Members of Nonmembers registered
the stock of the stock Total offices (incl. (¥100 million) bound
head offices) representa-
exchange exchange employees
tives
2010 115 184 299 2,220 18,289 16,143 75,913
(10) (13) (23) (24)
2011 113 179 292 2,211 19,585 15,911 76,776
(8) (14) (22) (24)
2012 103 168 271 2,138 17,349 13,372 69,684
(6) (11) (17) (17)
2013 101 157 258 2,106 17,378 12,256 82,976
(6) (10) (16) (17)
2014 253 2,107 17,539 13,016 85,358
(16) (18)
2015 252 2,130 17,936 13,562 88,108
(13) (15)
2016 260 2,142 18,352 14,552 89,942
(11) (13)
2017 263 2,163 18,561 14,319 77,782
(11) (13)

Notes: 1. Figures in parentheses represent the number of branches of foreign securities companies in Ja-
pan included in the figures above them. Their Tokyo branches are counted as head offices.
2. Number of companies, number of branches, amount of total capital, and number of employees
for 2017 are as of the end of June of the year. The number of employees does not include 3,509
registered representatives employed by Financial Instruments Intermediary Service Providers
(as of the end of June 2017).
3. Foreign securities companies are excluded from the amount of capital.
4. By virtue of an amendment dated April 16, 2003, the definition of“commission-registered rep-
resentative”and qualification requirements were abolished, and the indication of category of
members of the stock exchange was abolished at the end of March 2014.
Source: Compiled based on the data issued by the Japan Securities Dealers Association, Shoken gyoho
(JSDA Monthly Report), Gyomu houkokusho (JSDA Operation Report), etc.
 Chap. XII Financial Instruments Business (Securities Business) 　249
Table XII-3.　JSDA Member Categories

(March 31, 2016)

Breakdown
Securities Non-securities
business business Asset FX (FOREX
operator operator Management Margin Others
Service Transactions)
Domestic brokers: 185 firms 142 43 22 16 5
Foreign brokers: 64 firms 39 25 22 3

Note: Non-securities business operator refers to a business operator whose primary business is not the se-
curities business.“Asset Management Service”refers to investment management and sale of struc-
tured funds and securitized products. The number of foreign brokers is estimated by the author.

Table XII-4.　Breakdown of 142 Japanese Brokers (securities-related) by Controlling

Shareholder, Size, Region and Business Characteristics

Second-tier small &

Large securities companies (2 Bank-affiliated Online brokers
midsize (face-to-face)
Nomura-affiliated, Daiwa): 3 22 companies 9 companies
83 companies
Listed securities companies: Megabank-affiliated: 5 Tokyo: 20 PTS specialists
Breakdown

Breakdown

16 Regional bank-affiliated: 14 Osaka: 8 6 companies

Others
Other bank-affiliated: 3 Regional: 55
3 companies

both in terms of revenues and business volume. In the process, (1) there de-
veloped a bipolarization of securities companies—integrated securities com-
panies that hired a large number of employees and ran multifaceted securities
business on a large scale, on the one hand, and small and midsized securities
companies that relied on the brokerage business generated by commission-
registered representatives, on the other—and (2) the large integrated securi-
ties companies—Nomura, Daiwa, Nikko, and Yamaichi, collectively referred
to as the“Big Four” —captured a large share of the market in all segments of
the securities business. And they had gained an oligopolistic control of the
market as a group by creating a network of affiliated small securities compa-
nies. This was a major characteristic of the postwar securities market of Ja-
pan, unknown before the war or in other countries. And this structure was
maintained until the latter half of the 1990s with only minor changes.
　However, in the 1990s, after the speculative bubble finally burst, the secu-
rities slump worsened and Yamaichi Securities and a number of smaller secu-
rities companies went bankrupt in the process in 1997 and afterward. In addi-
tion, large securities companies abandoned the strategy of forming a network
250　Chap. XII Financial Instruments Business (Securities Business)

of affiliated small and midsize securities companies, making the management

of securities companies increasingly fluid. Around the same time, large
banks, etc. acquired the right to manage securities companies while a number
of firms that were armed with a unique business style and focused on select-
ed segments of the securities business have entered the market.
　In addition, a number of foreign securities companies have opened branch-
es in Japan. Since 1990, some have increased their shares in the equity and
derivatives trading markets in their existing securities business, largely
thanks to increases in orders received from their overseas customers. They
are playing a major role in new types of business, such as the securitization
of assets, packaging structured bonds, and M&A.
　With the enforcement of the Financial Instruments and Exchange Act in
2007, the JSDA widened its member eligibility requirement from‘securities
companies’to‘Type I Financial Instruments Business Operators’(see section
9), allowing entities that do not engage in the securities-related business as
their primary business to register under the Type I Financial Instruments
Business and become members of the JSDA. Over the nine years between
April 2007 and March 2016, 134 companies left (of which 56 were mergers,
59 were voluntary business closures), while 79 companies entered (of which
58 were newly registered) the business, reflecting fluidity of the industry.
While there are 11 foreign securities companies with operating sites in Japan
(as of September 30, 2017), many more foreign entities are actually in opera-
tion through the establishment of a Japanese subsidiary, conversion to a Japa-
nese corporation, or acquisition of a domestic securities company (see Table
XII-3).
　As such, the Japanese securities industry, where the“Big Four”(Nomura,
Daiwa, Nikko, and Yamaichi Securities) used to have an oligopolistic control
of the market and where brokering was the core and standard operation,
changed drastically, resulting in having diverse players, such as foreign enti-
ties and banks, hold stakes in securities businesses. And as the securities
business itself became increasingly diverse to cover operations other than
brokerage, a growing number of firms whose primary business is not a secu-
rities-related business have entered the market.

4. Securities Businesses (1)̶The Principal Businesses (1)

The principal businesses that securities companies are authorized to conduct

under the Financial Instruments and Exchange Act (FIEA) have been ex-
panded and are referred to as the Type I Financial Instruments Businesses.
By product, principal businesses may be largely divided into those relating to
stocks, bonds, investment trusts, and derivatives. By type of service, they
 Chap. XII Financial Instruments Business (Securities Business) 　251
Table XII-5.　Business Volume Handled by TSE and OSE Member Companies

Cash Stock Transaction Value Listed Derivatives Trading

(Trillions of yen) (Trillions of yen)
Proprietary Agency Traded on margin (%) Notional principal (stocks, bonds, etc.)
2005/3 287 503 20 1,421
2006/3 441 886 21 2,007
2007/3 525 982 18 2,273
2008/3 552 1,036 16 2,776
2009/3 381 665 18 1,846
2010/3 291 540 21 1,467
2011/3 243 595 16 1,632
2012/3 152 537 15 1,420
2013/3 177 672 17 1,888
2014/3 273 1,348 21 2,295
2015/3 249 1,174 18 2,381
2016/3 285 1,317 15 2,689
2017/3 280 1,212 14 2,178

Notes: 1. The accounting year runs from April 1 to March 31 of the following year.
2. Figures are double the actual volume because both sales and purchases are included.
3. Cash stock transaction volumes are those handled by 92 general members (including foreign se-
curities companies, as of March 31, 2017).
4. Of these members, 82 members also participate in derivatives trading on the OSE.
5. In addition, 27 financial institutions participate in JGB futures trading on the OSE.
6. Derivatives trading include those executed on the former TSE prior to the integration.
Source: Compiled from statistical data issued by Japan Exchange Group

may be largely divided into those relating to (1) dealing—proprietary trad-

ing; (2) brokerage—agency trading; (3) investment banking—underwriting;
and (4) public offering and private placement—distribution of securities.
　The bulk of the securities-related business of brokers/dealers in the sec-
ondary market is the brokerage business of executing customer orders on
stock exchanges, and the rest is the proprietary trading conducted for their
own account. As not many customer orders for bonds—except for convert-
ible bonds, whose prices are linked to underlying stock prices—are executed
on stock exchanges, most bond orders are executed by matching them against
the positions of securities companies’proprietary accounts (bond dealing).
Along with stock exchanges, securities companies play an important role in
forming fair prices and maintaining the liquidity of securities through their
broker/dealer functions.
　In addition to underwriting publicly offered new issues of public bonds
 252　Chap. XII Financial Instruments Business (Securities Business)

Table XII-6.　PTS Transactions

(Billions of yen)
Proportion of
Trading on Trading off PTS Proportion of
Total PTS Trading to
Exchange Exchange transactions PTS Trading off
(A)+(B) Total
(A) (B) (C) Exchange (C/B)
(C/(A+B))
Mar. 2009 521,095 36,357 557,452 2,073 5.7% 0.4%
Mar. 2010 395,501 24,484 419,984 3,090 12.6% 0.7%
Mar. 2011 397,577 24,801 422,378 4,937 19.9% 1.2%
Mar. 2012 335,080 32,299 367,379 15,203 47.1% 4.1%
Mar. 2013 382,653 36,328 418,981 21,247 58.5% 5.1%
Mar. 2014 722,202 72,361 794,563 44,004 60.8% 5.5%
Mar. 2015 655,514 72,505 728,019 36,177 49.9% 5.0%
Mar. 2016 755,464 86,191 841,655 38,381 44.5% 4.6%
Mar. 2017 671,447 83,932 755,379 30,967 36.9% 4.1%

Notes: 1. The accounting year runs from April 1 to March 31 of the following year.
2. Figures are actual volume because only one side of the transaction is included.
3. Major PTSs include SBI Japannext and Chi-X.
Source: Compiled based on statistical data from the PTS Information Network.

(government securities, etc.), nonconvertible bonds of private business cor-

porations, and equity securities (stocks and bonds with subscription rights/
warrants) of public companies, securities companies also underwrite the
shares of companies to be listed on exchanges, etc., in the process of initial
public offerings. The term“underwriting”means an act of acquiring a securi-
ty by a securities company with the aim of ensuring successful issuance of a
new security or secondary distribution of shares by reselling them to others
and, if so agreed, purchasing the unsold portion of the security, if any. More
specifically, the act of acquiring new security from the issuer is called
“wholesale underwriting”(and the securities company that negotiates a
wholesale underwriting agreement with the issuer is called“the managing
underwriter”), and acquiring the security from a wholesale underwriter is
called“sub-underwriting.”Beneficiary certificates of investment trusts are
also sold in public offerings, in addition to the new-issue securities men-
tioned above. Secondary distribution means the placing of already issued se-
curities and includes block sales of major shareholders, etc.
　In 1998, over-the-counter derivative trading and PTS services were newly
authorized. The former refers to an act of effecting or entrusting to effect
with a customer a forward or options trading of a stock or a stock index or a
swap contract involving, for example, a stock index and an interest rate off
 Chap. XII Financial Instruments Business (Securities Business) 　253
the exchange. Actually, most of these OTC derivative contracts are embed-
ded in and sold as structured bonds (such as equity-linked bonds). The PTS
service matches orders from investors by utilizing an electronic information
processing system. As the PTS service requires specialized technical exper-
tise and advanced risk management skills, securities companies wishing to
provide the PTS service must be authorized to do so by the prime minister
under the FIEA (see section 1 of this chapter).

5. Securities Businesses (2)̶The Principal Businesses (2)

Because the Financial Instruments and Exchange Act (FIEA) combined the
Securities and Exchange Act and the Financial Futures Trading Act, the Type
1 Financial Instruments Businesses includes financial futures, etc., as well as
securities derivative trading. Moreover, the OTC derivatives business no lon-
ger requires authorization from the authorities (for an overview of the OTC
derivatives business, see section 9 of Chapter 8).
　The underlying assets of derivatives can comprise financial instruments,
such as (1) securities, deposits, and currencies (Article 2, Paragraph 24 of the
FIEA) and (2) financial indexes, such as price and interest rate of a financial
instrument, and weather indexes (Article 2, Paragraph 25). In the 2012

Chart XII-2.　OTC FOREX Margin Transactions

(trillions of yen)
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200

0
20 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
05 006 006 007 007 008 008 009 009 010 010 011 011 012 012 013 013 014 014 015 015 016 016 017
3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q

Notes: 1. Figures compiled based on reports from association members and special members.
2. Trading volume includes both buy and sell sides, including agency transactions.
3. Foreign currency amounts have been converted into Japanese yen using the spot rate at the end
of each period.
Source: The Financial Futures Association of Japan.
254　Chap. XII Financial Instruments Business (Securities Business)

Table XII-7.　OTC CDF Transactions on Securities

March-end March-end March-end March-end March-end March-end

2012 2013 2014 2015 2016 2017
Number of Accounts 145,258 101,196 102,939 105,790 123,137 148,692
Margin Deposit Balance
82 63 77 107 152 161
(100 million yen)
(Transactions)
Other
Individual Stock index Bond
securities Total
stock related related related
related
FY2014
Transaction amount (100 million yen) 807 83,737 1,460 11 86,015
Number of transactions 102,463 2,354,873 7,867 603 2,465,806
Open interest (100 million yen) 20 196 61 1 278
FY2015
Transaction amount (100 million yen) 949 129,494 2,031 32 86,015
Number of transactions 191,989 4,825,379 12,154 14,616 2,465,806
Open interest (100 million yen) 14 237 32 2 278
FY2016
Transaction amount (100 million yen) 795 80,886 2,463 876 85,020
Number of transactions 145,694 3,393,572 17,828 336,316 3,893,410
Open interest (100 million yen) 22 247 27 6 302

Note: Transaction amounts and open interest are on a notional principal basis. Open interest is as of the
end of the fiscal year. Figures represent the sum of transaction value, etc. of JSDA regular and spe-
cial members.
Source: Compiled from materials issued by the Japan Securities Dealers Association.

amendment of the FIEA, the definition of financial instrument was expanded

to include commodities (excluding rice). The main customers for derivatives
are financial institutions or institutional investors. In addition to acting as
swap intermediaries, securities companies typically use OTC stock options as
sweeteners for structured bond issues or conclude interest rate or currency
swap agreements with companies issuing foreign currency denominated
bonds when underwriting the issue.
　Although individual investors are not frequently users of OTC derivatives,
other than Nikkei 225 mini-futures (Osaka Exchange), foreign exchange
(FX) transactions are among the products that they use relatively often. In-
vestors use OTC FX transactions to purchase or sell currencies by depositing
a margin with the broker and settle the transaction usually on a net basis.
 　255
Chap. XII Financial Instruments Business (Securities Business)

These OTC transactions got their start in Japan when some commodity trad-
ers became the first to use them following the deregulation of foreign ex-
change transactions through the 1998 amendment of the Foreign Currency
and Exchange Law (currently Foreign Exchange and Foreign Trade Act.)
These FX transactions enable high leverage factors of 20 times on average
and up to 100 times on small margins.
　Without any laws or regulations initially, problems did occur in the FX
market, resulting in the 2005 revision of the Financial Futures Trading Act,
currently included in the Financial Instruments and Exchange Act. The re-
vised law introduced a registration system for the FX business, which steadi-
ly eliminated many of the bad operators. As a result, there was a sharp expan-
sion in the use of FX transactions, as can be seen in Chart XII-2. Moreover,
in a bid to make FX transactions more transparent, the Tokyo International
Financial Futures Exchange (TIFFE, now TFX) listed an FX product in 2005
called Click 365. The ceiling on leverage in FX transactions was lowered to
50 times in August 2010 and again to 25 times in August 2011.
　Today, investors have shifted from face-to-face transactions with brokers
to online brokers for FX transactions, with Internet trading specialist FX
firms, such as Gaitame.com and Gaitame Online, aggressively developing
the market. This type of OTC trading, where investors can place orders with
low margins and settle the contracts on a net basis, is called contract for dif-
ference (CFD transaction) and is available not only for FX but also for secu-
rities, indexes, interest rates, and commodities. First emerging in the United
Kingdom, CFDs are now available from a number of brokers in Japan (see
Table XII-7).

6. Securities Businesses (3)̶Incidental Business, Concurrent Business,

and Other Businesses

In addition to the principal businesses outlined in the foregoing, securities

companies may conduct businesses incidental to their principal businesses
and other businesses that require notification to the authorities. Management
of assets of investment trusts, those entrusted under discretionary investment
contracts, or properties pertaining to collective investment schemes used to
require notification only, but, under the FIEA, securities companies are re-
quired to make registration in order to conduct this type of“investment man-
agement business”(Article 28, Paragraph 4). The registration requirements,
however, are equivalent to those for the Type I Financial Instruments Busi-
nesses.
　The volume of margin trading, or transactions in securities that are lent on
margin to customers or financed by margin loans extended to them, began to
256　Chap. XII Financial Instruments Business (Securities Business)

Chart XII-3.　Changes in the Number of M&As Involving Japanese Companies

3,000
Out-In
2,500 In-Out
In-In
2,000

1,500

1,000

500

0
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
1-9
Note: In-In signifies M&A between Japanese firms. In-Out signifies M&A initiated by a Japanese firm
against a foreign firm while Out-In signifies M&A initiated by a foreign firm with respect to a
Japanese firm. Figures for 2017 are for January through September.
Source: Compiled from the data section of MARR magazine, RECOF Corporation.

Table XII-8.　Number of Wrap Accounts and Assets Under Management

(¥100 million)
Discretionary investment Investment advisory Grand Total
No. Amount No. Amount No. Amount
March-end 2010 41,773 5,696 317 22 42,090 5,718
March-end 2011 43,509 5,890 260 17 43,769 5,907
March-end 2012 42,467 5,799 5 6 42,472 5,805
March-end 2013 51,758 7,689 0 0 51,758 7,689
March-end 2014 105,706 13,760 0 0 105,706 13,760
March-end 2015 307,346 38,973 0 0 307,346 38,973
March-end 2016 482,217 57,776 4 0 482,221 57,776
March-end 2017 564,622 65,702 0 0 564,622 65,702
June-end 2017 590,835 69,272 0 0 590,835 69,272

Note: A wrap account is an account that is managed for a flat fee covering fees for investment advisory,
trading commission expenses, account management fees, etc. in proportion to the balance of man-
aged assets.
Source: Compiled from statistics produced by the Japan Investment Advisers Association.
 　257
Chap. XII Financial Instruments Business (Securities Business)

increase around 1999, and it has been accounting for approximately 14 to

20% of agency transactions in the 2000s (see table in Section 4). The term
“securities lending and borrowing”refers to the lending and borrowing of
stock or bond certificates and is also known as stock lending or bond repur-
chase agreements (repo). As a lending broker demands a borrowing investor
to pledge cash as collateral, these transactions may also be considered as a
means of financing secured by stock or bond certificates, and therefore a
bond repo transaction is equivalent to a bond gensaki transaction economi-
cally. This practice makes it easier for securities companies to finance stocks,
bonds, and cash and hence to accept large orders or basket orders from cus-
tomers. For this reason, it contributes to the formation of fair prices of securi-
ties and improves the liquidity of the market. By“consultation with any other
business operator with regard to a business assignment, merger, company
split, share exchange or share transfer, or intermediation for these matters”is
meant the M&A consulting service that an investment bank provides to its
clients with respect to the spinning off of a business division, the computa-
tion of an IPO price, or an acquisition offer, etc.
　Major securities companies, including the top- and second-tier brokers,
also registered themselves under the investment management service and
have started to market a“wrap account”discretionary investment service and
to launch and manage collective investment schemes to invest in nonpublic
companies, real estate, and others. As of the end of June 2017, according to a
survey by the Japan Investment Advisers Association, there were a total of
590,835 wrap accounts in the industry, holding approximately ¥6,927.2 bil-
lion, reflecting a stable increase. Major brokers, foreign affiliates, and securi-
ties subsidiaries of mega-banks focus on M&A; structuring of private equity
funds; and securitization (defined as business to trade monetary claims and
requires notification), collectively known as investment banking services,
along with securities underwriting, which is often conducted in association
with these services.
　In addition, following the full deregulation of brokerage commissions (in
October 1999), low-commission online stock brokers offering service over
the Internet have emerged, and their share of the market has been increasing
rapidly. The number of online brokers stood at 70, with the number of ac-
counts rising to 23.33 million at the end of March 2017. The value of cash
stock and margin transactions of these online brokers during the period be-
tween October 2016 and March 2017 amounted to ¥144,086.9 billion, ac-
counting for 21.3% of the total value of agency transactions, and the online
brokers sold ¥708.2 billion worth of investment trust units according to the
JSDA Monthly Report for July 2017. Growth in the business of Internet bro-
kers was particularly notable.
258　Chap. XII Financial Instruments Business (Securities Business)

7. Income and Expenditure of Financial Instruments Business Opera-

tors (Securities Companies)

Sources of revenue for securities companies include (1) brokerage commis-

sion; (2) management and underwriting fees; (3) selling concessions from
public offerings and secondary distributions; (4) trading income (net of trad-
ing losses); (5) financial income in the form of interest on loans made in con-

Table XII-9.　General Trading Participants of TSE Non-Participants of TSE

Term ended Change Term ended Change

(Millions of yen) FY2016 FY2016
March 2007 ratio March 2007 ratio
No. of companies 110 92 (%) 193 163 (%)
Operating income 4,457,603 3,391,856 －23.9% 228,881 564,702 146.7%
Commissions received 2,797,143 1,862,705 －33.4% 159,644 271,338 70.0%
Brokerage commissions 987,622 517,109 －47.6% 54,925 41,541 －24.4%
Underwriting fees 214,388 164,245 －23.4% 878 2,254 156.7%
Selling concession 400,042 274,078 －31.5% 16,861 24,600 45.9%
Other fees and commissions 1,194,946 907,153 －24.1% 87,125 203,063 133.1%
(26.81%) (26.75%) (38.07%) (35.96%)
Trading profit/loss 821,560 893,868 8.8% 35,227 219,358 522.7%
Financial income 828,621 627,832 －24.2% 19,321 23,867 23.5%
(Profit from margin trading) 118,911 85,604 －28.0% 5,148 1,802 －65.0%
Financial expenses 630,482 388,464 －38.4% 16,216 28,147 73.6%
(Margin trading expenses) 29,582 16,615 －43.8% 3,844 901 －76.6%
(Interest expense) 149,043 47,869 －67.9% 2,670 11,509 331.0%
Other operating income 10,279 7,451 －27.5% 14,689 50,139 241.3%
(0.23%) (0.22%) (6.42%) (8.88%)
Net operating income 3,827,064 3,003,341 －21.5% 212,721 536,605 152.3%
Selling, general and 2,825,201 2,352,201 －16.7% 218,005 470,937 116.0%
administrative expenses
(Transaction-related expenses) 550,670 481,723 －12.5% 35,845 248,306 592.7%
(Personnel expenses) 1,311,480 938,641 －28.4% 119,601 120,549 0.8%
Operating profit/loss 1,001,828 651,134 －35.0% －5,249 65,673 －

Note: The figure at the bottom of the“Other fees and commissions”column and“Other operating in-
come”column represents the ratio to operating income. Effective April 2014, members are not re-
quired to set their fiscal years to the end of March.
Source: Compiled from Financial Overview of Regular Member Firms, JSDA and Earnings Summary of
General Trading Participants, TSE.
 Chap. XII Financial Instruments Business (Securities Business) 　259
Table XII-10.　Profitability Comparison by Member, Domestic or Foreign and Business
Characteristics (FY2015)

No. of Return on Operating Turnover Leverage

companies equity profit on sales rate ratio
All-company 249 11.48% 23.46% 2.74% 17.88
of which, General Trading Participants 102 12.30% 25.74% 2.56% 18.68
　Non-Trading Participants 147 4.78% 8.18% 5.14% 11.36
of which, Japanese securities-related 142 11.35% 23.05% 3.68% 13.39
　of which, Foreign securities-related 39 11.26% 27.62% 1.12% 36.39
　of which, Japanese non-securities-related 43 14.97% 18.76% 23.94% 3.33
of which, Foreign non-securities-related 25 16.52% 14.28% 64.72% 1.79

Notes: Return on equity＝Operating profit/Net assets＝(1)×(2)×(3)

(1) Operating profit on sales＝Operating profit/Net operating income (2) Turnover rate = Net op-
erating profit/Total assets (3) Leverage＝Total assets/Net assets Difference in profitability is more
clearly reflected in a comparison by domestic or foreign and by business characteristics as well as
by Trading Participant or not.
Source: Calculated based on data issued by the Japan Securities Dealers Association.

junction with margin trading and lending fees on shares lent to customers,
lending fees on shares and bonds lent in conjunction with transactions other
than margin trading (such as repos), collateral for shares or bonds borrowed,
interest, and dividends and other distributions on securities held in inventory;
and (6) other fees and commissions, including those received in connection
with incidental or concurrent businesses, chiefly among them agency fees re-
ceived from investment trust management companies for handling the pay-
ment of dividends and other distributions and fees from investment banking
customers for the provision of information and advice, etc., on best capital
policies and M&A opportunities.
　On the other hand, expenditures of securities companies consist of (1) sell-
ing, general and administrative expenses (personnel expenses, rent and other
real estate expenses, administrative costs, trade-related expenses, etc., and (2)
financial expenses (interest and fees on brokers’loan and stock certificates
borrowed from securities finance companies, etc. in connection with margin
trading, interest and fees on brokers’loans and bonds borrowed in connection
with repos, interest on bank loans and outstanding bonds, etc.). Revenues
generated from the securities business are called“operating income.”De-
ducting financial expenses from that amount yields“net operating income,”
and net operating income less selling, general and administrative expenses is
called“operating profit.”Nonoperating profit or loss is added to operating
profit to reach“current profit.”Profit or loss, if any, from the sale of invest-
ment securities or real estate holdings and losses due to capital contribution
260　Chap. XII Financial Instruments Business (Securities Business)

to affiliates, subsidiaries, etc. (such as nonbank lenders) are further added or

deducted as extraordinary profit.
　When compared with the circumstances of 10 years ago immediately be-
fore the financial crisis triggered by the collapse of Lehman Brothers, com-
mission income, particularly from brokerage commissions, has slumped con-
siderably. Underlying fees that account for 15% of commission received
pertain to investment trust sales for the most part.“Other fees and commis-
sions”form the largest source of income today, while“other operating in-
come”that represents income from operations other than the securities busi-
ness is also on the rise. The trend is evident namely for brokers that are not
members of the TSE accounting for nearly half of the operating income. Ma-
jor components are advice fees for M&A, etc., intermediary fees for OTC
derivatives, etc., agency commission for investment trusts, fees for invest-
ment trust management, investment advisory fees for discretionary invest-
ment contracts, business tie-up fees, and foreign exchange margin trading
commission.
　As mentioned in Section 3, a total of 68 Japanese and foreign investment
managers, fund and securitization structuring managers, FX specialists, etc.
have entered the market. Most of these players are not members of the TSE.
It appears that there is a growing diversity in the types of businesses handled.

8. Financial Condition of Financial Instruments Business Operators

(Securities Companies)

Reflecting—and because of—the uniqueness of their business, the balance

sheets of securities companies appear to be larger than they actually are. The
biggest items on their balance sheets are“loans against the collateral of secu-
rities”and“borrowings against the collateral of securities.”These are depos-
its made in connection with the lending and borrowing of securities (see sec-
tion 6). Funds received from the borrower of a bond or other security to
secure them are treated as borrowings, while funds deposited with the lender
of a bond or other security to secure them are treated as loans. The trading
instrument is one that arises from the dealing of securities, and a net long po-
sition in cash securities (securities held for trading purposes) is entered on
the debit side, and a net short position is entered on the credit side of the bal-
ance sheet. Derivatives (futures, options, and swaps) are marked to market,
and unrealized gains are entered under the item of derivatives transactions on
the debit side and under unrealized losses on the credit side. In case a trans-
action was not settled after execution, an amount equivalent to the value of
securities sold is entered under the item of collateral account on the debit
side, and an amount equivalent to the value of securities purchased is entered
 Chap. XII Financial Instruments Business (Securities Business) 　261
Table XII-11.　Major Accounts of Securities Companies in Japan (256 firms) as of
March 31, 2017

Assets In ¥ millions Liabilities and capital In ¥ millions

Cash and deposits 8,543,446 Trading products 31,452,408
Deposit 5,884,576 (Trading securities, etc.) 17,571,136
(Segregated customer asset trust) 5,194,142 (Derivatives trading) 13,881,257
Trading products 42,444,604 Collateral-for-contract account 699,011
(Trading securities, etc.) 27,477,769 Debt on margin trading 1,366,273
(Derivatives trading) 14,966,811 (Debt for margin trading) 429,219
Collateral-for-contract account 1,919,389 (Money received for securities 936,997
lent for margin trading)
Assets for margin trading 3,246,971 Borrowings against the collat- 68,387,879
eral of securities
(Money lent for margin trading) 2,653,892 Deposit received 4,236,393
(Cash collateral deposited to secure the 593,026 Guarantee money received 5,561,806
securities lent for margin trading)
Loans against the collateral of securities 69,216,024 Short-term debt 13,968,423
Short-term guarantee money submitted 5,762,362 Total of current liabilities 127,233,563
Short-term loans 628,414 Long-term liabilities 5,488,273
Total of current assets 138,799,349 Total liabilities 132,860,042
Tangible fixed assets 181,255 Total Capital 1,941,572
Intangible fixed assets 361,249 Capital surplus 3,166,122
Investment, etc. 1,233,677 Retained earnings 2,483,410
(Investment securities) 916,123
Total of fixed assets 1,776,412 Total capital 7,715,727
Total of assets 140,575,892 Total of liabilities and capital 140,575,892

Source: Compiled from materials prepared by the Japan Securities Dealers Association. These figures ex-
clude those of companies that have suspended their operations. Totals may not match sums.

on the credit side. Securities companies hold both long and short positions in
a security for the purpose of speedy execution of customer orders involving
cash security, derivatives, or bond repos, as well as the pursuit of arbitrage
gains, and, instead of netting them out, they are required to adhere to the
trade-date accounting process with stringent risk management on a contract
basis.
　Incidentally, a loan to facilitate margin trading is made in an amount
equivalent to the amount required to make the margin purchase of a security
by a customer, and cash collateral is deposited with a securities finance com-
pany as a borrowed securities deposit. On the other hand, the cash for con-
ducting margin trading is borrowed from a securities finance company, and it
is equivalent to the amount that needs to be paid to a customer for the securi-
ties sold on margin.
　Securities companies are required to keep customer assets segregated from
262　Chap. XII Financial Instruments Business (Securities Business)

Table XII-12. Capital-to-Risk Ratio of General Trading Participant Members of the

TSE (92 companies) as of June 30, 2017

The minimum ratio 203.2%

The maximum ratio 1676.9%
The median ratio 456.1%
The average ratio 513.5%
Distribution
Those in the range of
100% to 199% 0 company
200% to 299% 13 companies
300% to 399% 24 companies
400% to 499% 17 companies
500% to 599% 16 companies
600% to 699% 8 companies
700% to 799% 3 companies
800% or higher 11 companies

Source: Compiled from materials produced by the Tokyo Stock

Exchange.

Table XII-13.　An Outline of the Capital-to-risk Ratio Requirements for Type I Finan-
cial Instruments Business Operators (Securities companies)

(Article 46-6, Paragraph 1 of the FIEA and Article 178 of the Cabinet Office Order on Financial Instru-
ments Business, etc.)
Capital-to-risk ratio＝(non-fixed primary capital÷the equivalents of various risks)×100%
Non-fixed primary capital＝Tier I item (equity cap- Equivalents of various risks＝market risk + cus-
ital) + complementary item (subordinated debt, al- tomer risk + fundamental risks
lowance)－deducted assets (fixed assets, etc.)
Market risk＝risk of loss that may arise from a fall in the prices of securities held by securities compa-
nies
Customer risk＝risk of a loss arising from the default by the other party to a transaction effected by se-
curities companies
Fundamental risks＝risks that may arise in the ordinary course of business by mistakes made by mem-
bers of the administrative department of securities companies

Note: Large companies having assets totaling more than ¥1 trillion are designated as“Special Financial
Instruments Business Operators”and are subject to primary capital regulations on a consolidated
basis (Article 57-2, Paragraph 1 of the FIEA; as of September 30, 2017, 20 companies) Among
such companies, since the shareholding companies of two groups—Nomura and Daiwa—corre-
spond to the Designated Parent Companies prescribed in Article 57-12, Paragraph 1 of the FIEA
(capital ratio against the entire group including the parent company and fellow subsidiaries), they
are eligible for selecting the consolidated capital-to-risk ratio under the Basel III Accord.
 Chap. XII Financial Instruments Business (Securities Business) 　263
Table XII-14.　Orders Issued on the Basis of the Capital-to-Risk Ratio to Take a Prompt
Corrective Action

Capital-to-Risk Ratio
140% or less Required to notify the regulatory Art. 179 of the Cabinet Office Order
agency on Financial Instruments Business,
etc.
120% or more Obligated to maintain ratio at such a Art. 46-6, Para. 2 of the FIEA
level
Less than 120% - Denial to accept a registration ap- Art. 29-4, Para. 1, Item (vi) of the
plication FIEA
- Orders to change the method of Art. 53, Para. 1 of the FIEA
business and deposit its property
Less than 100% Orders to suspend business for a pe- Art. 53, Para. 2 of the FIEA
riod of three months or less
Less than 100% and has Cancellation of registration Art. 53, Para. 3 of the FIEA
no prospects for recovery

their own assets and to hold them in an outside trust (see section 11); this
system is called“segregated customer asset trust.”
　Ceilings on the ratio of individual products to the total net worth were used
to control risks. However, as new products have since increased and the les-
son was learned from Black Monday of 1987 (the market crash on Wall
Street), the industry and the authorities became painfully aware of the need
to control risk on a total basis. At the same time, the International Organiza-
tion of Securities Commissions (IOSCO) called for the international harmo-
nization of securities regulations. Against this backdrop, securities companies
have been subjected to requirements for their capital-to-risk ratio. (The re-
quirements were put into effect in 1990, and a law institutionalizing them
was enacted in 1992.)
　As securities companies handle products whose prices fluctuate in the
market, their revenues are vulnerable to sudden changes in market prices.
Therefore, a framework of capital-to-risk ratio regulations was put into place
so that they can maintain their solvency and protect the interests of their cus-
tomers even when the prices of their assets fall by providing for a sufficient
amount of liquid assets against various risk contingencies.

9. Financial Instruments Firms Associations (1)

The former Japan Securities Dealers Association was regarded as the Autho-
rized Financial Instruments Firms Association under the Financial Instru-
264　Chap. XII Financial Instruments Business (Securities Business)

Table XII-15.　Principal Functions of the Japan Securities Dealers Association (JSDA)

(1) Drawing up and enforcing
With a view to facilitating the efficient operation of the financial instruments
self-regulatory rules
market, the JSDA establishes various forms of self-regulatory rules applicable
to Financial Instruments Business Operators, etc. and endeavors to ensure the
fairness and efficiency of trading of financial instruments. The principal rules
regulate: OTC trading in stocks and bonds, underwriting of securities, off-ex-
change trading in listed stocks, safe custody of securities, code of conduct of
directors and officers, internal control system of member companies, qualifi-
cations and registration of registered representatives, advertising of member
companies, solicitation and management of customers of member companies,
financial instruments intermediary service, segregation and management of
customers’assets, settlement of disputes with customers, and standardized ac-
counting methods of securities-related businesses.
(2) Auditing, monitoring, and The JSDA audits member companies to see whether they comply with the laws and
self-regulating regulations, the rules of self-regulation in carrying out business activities and other rel-
evant rules and whether they have an adequate internal control system; monitors the
operation of member companies and checks to see whether they segregate customers’
assets; and takes actions to discipline member companies and their directors and em-
ployees who have violated the laws and the rules of self-regulation.
(3) Qualification tests, qualifica- The JSDA conducts qualification tests on registered representatives and on the person-
tion renewal training and nel in charge of management and control, and carries out training for the renewal of
registration of registered rep- qualifications. (The administrative work relating to the registration of registered repre-
1. Self-Regulatory Operations

resentative sentatives is commissioned by the prime minister.)

(4) Settlement of securities- Consultation regarding complaints concerning the business carried out by a member
related disputes through the firm or by Financial Instruments Intermediary Service Providers; and mediation of a
mediation of the JSDA and dispute between a member firm and a customer pertaining to securities transactions
the handling of trade-related (complaint handling and dispute mediation have been commissioned to the Financial
complaints of investors Instruments Mediation Assistance Center (FINMAC), a non-profit organization).
(5) Services provided by the au- The organization provides services for the proper handling of personal information of
thorized personal informa- members of the JSDA as an authorized personal information protection organization
tion protection organization under the Act on the Protection of Personal Information.
In addition to general improvement of the securities market, such as a securities settlement reform, changes and amend-
ments to the trading rules of the equity market, and measures to deal with new financial products (including new types of
investment trusts and securitization-related products), the JSDA performs the following market administration functions.
(6) Enhancement and improve- (i) JSDA establishes and reviews the rules concerning transactions and practices in
ment of the bond market the over-the-counter market of bonds.
(ii) JSDA publishes Reference Statistical Prices (Yields) for OTC Bond
Transactions.
(iii) JSDA collects materials and compiles statistics concerning the bond mar-
ket.
(7) Management of off-exchange (i) JSDA takes steps to ensure the fairness and efficiency of off-exchange trading in
trading of listed stocks listed stocks and the protection of investors.
(ii) JSDA collects and publishes data on the volume of listed stocks traded off
exchange and publicly announces in real time price quotations, contract,
and other information on listed shares traded on PTSs.
(8) The expansion of the green (i) JSDA manages green sheet and Phoenix issues (designation and cancellation).
sheet market (ii) JSDA publishes information concerning green sheet issues (corporate in-
formation of their issuers, quotations, and trading volume, etc.).
(iii) JSDA takes steps to improve the green sheet system and the unlisted secu-
rities trading system.
2. Services to promote the sound devel- (1) Investigates and studies the financial instruments market and publishes opinions (2)
opment of financial instruments Establishes a common platform for the securities market (3) Makes public statistical
business and financial instruments material, etc., on the stock and bond markets (4) Disseminates knowledge about finan-
market cial instruments, indexes, and markets and educates investors (5) Communicates and
exchanges views with market-related organizations (6) Implements education and
training programs (7) Supports actions to eliminate antisocial forces
3. International business and Participates in international conferences, such as those of the International Council of
international exchange Securities Association (ICSA), Asia Securities Forum (ASF), and International Organi-
zation of Securities Commissions (IOSCO), exchanges information with securities-re-
lated organizations of foreign countries, and promotes international exchange.

Note: The Self-Regulatory Organization is responsible for self-regulatory operations and market adminis-
tration while the Securities Strategy Board is responsible for operations that promote the sound de-
velopment of the securities market and the securities business.
 Chap. XII Financial Instruments Business (Securities Business) 　265
Table XII-16.　Permissible Forms of Business by Registered Representatives (JSDA
Rules: Article 2, Regulations Concerning Qualification and Registration,
Etc., of Sales Representatives of Association Members)

Class 1 Sales Representa- Sales representative who is authorized to engage in all acts of a sales repre-
tive sentative with the exception of designated over-the-counter transactions of
derivatives
Class 2 Sales Representa- Sales representative who is authorized to engage in all Acts of a Sales Rep-
tive resentative related to any securities with the exception of stock subscription
rights/warrants or covered warrants (excluding Acts of a Sales Representa-
tive related to securities derivative transactions or transactions in bonds
with options, and limited to the cases prescribed by the detailed rules re-
garding margin transactions)
Special Member Class 1 Sales representative who is authorized to engage in all Acts of a Sales Rep-
Sales Representative resentative related to the business of a registered financial institution (with
the exception of designated over-the-counter transactions of derivatives, fi-
nancial instruments intermediary service of registered financial institution,
or brokerage with written orders)
Special Member Class 2 Sales representative who is authorized to engage in all Acts of a Sales Rep-
Sales Representative resentative related to transactions of public and corporate bonds, commer-
cial papers, investment trust certificates, etc. (excluding Acts of a Sales
Representative related to securities derivatives trading or transactions in
bonds with options)
Special Member Class 4 Sales representative who is authorized to engage in all Acts of a Sales Rep-
Sales Representative resentative related to“Specified Financial Instruments Business”(market-
ing of investment trusts and other specified acts of an insurance company or
other financial institution)
Margin Trading Sales Sales representative who is authorized to engage in all Acts of a Sales Rep-
Representative resentative by a Class 2 Sales Representative and acts of a sales representa-
tive relating to margin trading (including“when-issued”trading)

Note: Qualification tests for Special Member Class IV Sales Representative and Margin Trading Sales
Representative are not performed (as of September 2017).

ments and Exchange Act (FIEA). Under the FIEA, an association is com-
posed of Type I Financial Instruments Business Operators (excluding OTC
financial futures business operators) and must be authorized by the prime
minister (Article 67-2, Paragraph 2 of the FIEA). The association aims to en-
sure the fair and smooth sale and purchase of securities, etc., and to contrib-
ute to the protection of investors and to enable the establishment of a market
where over-the-counter securities are traded (Article 67, Paragraph 1 and 2).
The principal functions of the association are (1) to undertake self-regulatory
operations, (2) to undertake the financial instruments business and businesses
that contribute to the development of the financial instruments market, and
(3) to promote international businesses and international exchange (see Table
XII-15). At present, the Japan Securities Dealers Association (JSDA) is the
266　Chap. XII Financial Instruments Business (Securities Business)

country’ s only organization established as the Authorized Financial Instru-

ments Firms Association under the FIEA.
　In 1940, the government ordered securities companies to form one securi-
ties dealers association in every prefecture for the purpose of facilitating the
wartime control of the securities market. After the war, the Japan Securities
Dealers Joint Association was established in 1949 as a national federation. In
1968, 33 associations were consolidated into 10, and a single national body,
the JSDA, with the 10 associations as regional units, was formed. At present,
there are 9 regional associations: Hokkaido, Tohoku, Tokyo, Nagoya,
Hokuriku, Osaka, Chugoku, Shikoku, and Kyushu. (The regional associa-
tions of Kyushu and South Kyushu were consolidated into one in 1995.)
　Since securities company scandals came to light, pressure to strengthen the
self-regulatory function of the JSDA has mounted, and the status of the JSDA
was changed from a public-service corporation under the Civil Code to a le-
gal entity under the Securities and Exchange Act in 1992, and the Ministry of
Finance (currently, the prime minister) commissioned the JSDA to handle the
registration of registered representatives. This helped define the status of the
JSDA as a self-regulatory organization of the securities industry. In July
1998, the Bond Underwriters Association of Japan was consolidated into the
JSDA, and in July 2004 the JSDA was reorganized into a structure consisting
of the Self-Regulation Division, the Securities Strategy Division, and the
General and Administration Division. As the JASDAQ Securities Exchange
was established (see Chapter 11) in December 2004, the OTC securities mar-
ket was closed, and the JSDA consolidated the Securities Information Center
under its wing in April 2005.
　In September 2007, the JSDA became the association authorized under the
FIEA and established the Code of Conduct Committee in July 2011 to delib-
erate the code of conduct of member firms and make proposals. Handling of
consultation matters and complaints from users of securities transactions and
mediation of disputes between users have been commissioned to the Finan-
cial Instruments Mediation Assistance Center (FINMAC), a non-profit orga-
nization, since February 2010.
　Registered financial institutions under the provision of Article 2, Paragraph
11 of the FIEA (see section 12) joined the JSDA as special members in 1994.
As of September 2017, the JSDA had 264 regular members and 209 special
members (including 131 banks, 13 foreign banks, 39 shinkin banks (credit
unions), 11 life insurance companies, 4 property and casualty insurance com-
panies, and 11 others).
 　267
Chap. XII Financial Instruments Business (Securities Business)

10. Financial Instruments Firms Associations (2)

Unlike the Securities and Exchange Act, the Financial Instruments and Ex-
change Act (FIEA) provides for the comprehensive regulation of a diverse
range of collective investment schemes (so-called funds) and investment trust
beneficiary certificate sales businesses. Self-offerings by funds, investment
trust beneficiary certificates sales businesses, and some other businesses are
defined under the FIEA as Type II Financial Instruments Businesses “ ( Type
II Businesses”). Because financial instruments, such as funds, etc., are not
highly circulated, the registration requirements for Type II Businesses are le-
nient, such that even individuals may register as businesses. The underlying
assets of funds, investment trust beneficiary certificates, and similar products
cover a wide range of real estate, specified instruments, and other assets.
Registered Type II Businesses, therefore, are not solely securities companies;
many real estate companies also have entered the market.
　As a result, the number of registered Type II Businesses had risen to 1,167
as of the end of September 2017, exceeding by roughly four times the num-
ber of Type I Financial Instruments Businesses (securities business, financial
futures trading business, etc., hereinafter referred to as“Type I Businesses” ).
The lax registration requirements, however, have resulted in lawsuits regard-
ing the solicitation for self-offerings, etc., of funds and other incidents requir-
ing administrative discipline because of legal violations.
　To address such issues, the Type II Financial Instruments Firms Associa-
tion was established in November 2010 and designated as a Certified Finan-
cial Instruments Firms Association (FIEA, Article 78, Paragraph 1). The as-
sociation aims to contribute to the fair and smooth operation of Type II
Businesses as well as to their sound development and to investor protection.
It was set up taking into account the self-regulatory systems of the self-regu-
latory organizations (SROs) already in place for Type II Businesses, invest-
ment management business, investment advisory and agency business, etc.
　Establishing an“authorized”association in Japan requires the authoriza-
tion of the prime minister of Japan. But“certified”associations are granted
certification by the prime minister following their establishment. The Japan
Securities Dealers Association is the only“authorized”association in Japan’ s
securities market. The country’ s“certified”associations, however, include
the Financial Futures Association of Japan; the Japan Investment Advisers
Association; The Investment Trusts Association, Japan; and, of course, the
Type II Financial Instruments Firms Association. The major difference be-
tween the two types of associations is that“authorized”associations are able
to establish and operate OTC securities markets (refer to section 9).
　Other than that single difference,“authorized”and“certified”associations
268　Chap. XII Financial Instruments Business (Securities Business)

Table XII-17.　Numbers of Registered Financial Instruments Business Operators and

Related Financial Instruments Firms Associations
Business Number of Related Financial Instruments Firms Associations
Category Registered Firms
(as of September 30,
2017)
Type I 291 (Authorized) Japan Securities 264 Regular members
Dealers Association (as of September 30, 2017)
(Certified) Financial Futures 143 Regular members
Association of Japan (as of May 31, 2017)
Type II 1,167 (Certified) Type II Financial 447 Regular members
Instruments Firms Association (as of October 2017)
Investment advi- 985 (Certified) Japan Investment 478 Investment advisory and
sory and agency Advisers Association agency members
business (March 2017)
Investment man- 359 273 Investment management
agement busi- members (March 2017)
ness (Certified) The Investment 99 Investment trust members
Trusts Association, Japan (October 2017)
80 REIT members
(October 2017)
Total 2,802 (total number
of registrants)
1,953 (actual number
of firms)
Note: Of the 291 Type I businesses, 27 (FX specialists) are not members of JSDA, but have joined the Fi-
nancial Futures Association of Japan. Because some firms are registered under multiple business
categories and with multiple associations, the totals do not match the sum of the individual num-
bers.
Source: Produced using the Financial Services Agency’ s“List of Certified Financial Instruments Firms
Associations”and“List of Registered Financial Instruments Business Operators”and data from
associations’websites.
• In addition to the above, there are firms deemed to be Business Operators Engaging in Specially Permit-
ted Business for Qualified Institutional Investors, etc. (the so-called firms handling funds for profes-
sional investors) that are not required to register, most of which are not members of any of the above Fi-
nancial Instruments Firms Associations. (See the Financial Services Agency’ s“List of Qualified
Institutional Investors and other Registered Special Business Operators.”
When one or more investor is a Qualified Institutional Investor and other investors (general investors)
number 49 or less among investors in a collective investment scheme (fund), under the Special Provi-
sions Concerning Specially Permitted Businesses for Qualified Institutional Investors, the financial in-
struments firm is exempt from registration and may conduct management and self-offering of the fund
by submitting notification of such to authorities. (Art. 63, Para. 1 and 2)
Reference: Essentially, firms or individuals with special investment skills have been allowed to partici-
pate in the market without registering and only a duty to submit notification of their businesses in order
to enable them to offer their superlative investment instruments to professional investors at low cost. Of
course, there are firms or individuals within this group that achieve excellent results and become mem-
bers of one of the above associations, thereby being covered by self-regulatory rules. However, there are
also firms or individuals that clearly have gathered together one (1) Qualified Institutional Investor and
49 individual investors with the intention of using the provisions as a legal loophole to avoid registration
of a Type II business or investment management business. Hence the amendments to the FIEA for limit-
ing subscriptions to affluent groups that satisfy certain conditions were promulgated in May 2015 and
then enforced in March 2016.
 　269
Chap. XII Financial Instruments Business (Securities Business)

carry out the same self-regulatory operations. The associations are responsi-
ble for (1) forming rules and regulations, (2) inspecting members to deter-
mine their state of compliance with laws and ordinances and self-regulation
rules, (3) disciplining members that have violated laws and ordinances and
self-regulation rules, (4) resolving complaints and disputes involving mem-
bers’businesses, (5) mediating conflicts about members’businesses, and (6)
carrying out sales representative registration operations when so commis-
sioned by the government authorities.
　There are 1,953 firms registered under financial instruments businesses in
Japan, with some firms being registered under multiple business categories
and some being members of multiple SROs. In addition, there are 2,190 or-
ganizations classified as Business Operators Engaging in Specially Permitted
Business for Qualified Institutional Investors, etc. that are not registered de-
spite carrying out self-offerings of funds just like Type II Businesses (as of
end of July 2017). Since almost all of these Business Operators Engaging in
Specially Permitted Business for Qualified Institutional Investors, etc. were
not covered by self-regulatory rules, causing troubles to arise, rules were
strengthened under the amendment to the FIEA in 2015.

11. Investor Protection Fund

The purpose of an investor protection fund is to protect the claims that gener-
al customers have on the securities companies they deal with. As we saw in
section 1, the 1998 amendment to the Securities and Exchange Act changed
the licensing system of securities companies to a less-demanding registration
system for securities business, encouraging non-securities companies to enter
the securities market, and relaxed restrictions against conducting side busi-
ness, liberalizing the lines of business that securities companies can under-
take. And this created the need to take measures to protect investors from any
unforeseen loss that they may suffer from insolvency of the securities com-
panies they deal with. The government instituted provisions in the 1998
amendment to the Securities and Exchange Act (the present FIEA) with a
view (1) to preventing bankruptcy of securities companies, empowering the
Financial Services Agency to take a prompt corrective action on the basis of
the capital-to-risk ratio (Article 53 of the FIEA) (see section 8) and as a
framework to protect investors in case the securities companies they deal
with went bankrupt; (2) to requiring securities companies to manage their
customer assets separately (Articles 43-2 and 3); and (3) to establishing an
investor protection fund (Articles 79-20 through 80). In line with this, the
law concerning the bankruptcy proceedings of financial institutions (Act on
Special Measures for the Reorganization Proceedings of Financial Institu-
270　Chap. XII Financial Instruments Business (Securities Business)

Table XII-18.　Investors Eligible for Compensation, Compensation Procedures, and

Sources of Funds of the Investor Protection Fund

(1) Eligible “General Customer”who conducts a Subject Securities-related Transaction or a

persons Subject Commodity-related Derivatives Trading with a Financial Instruments
Those eligible for compensation

(Art. 79-20, Business Operator that conducts the securities-related business or commodity-re-
Para. 1 of the lated exchange derivatives trading agency service, etc. (excluding a Qualified In-
FIEA) stitutional Investor, central or local government, or any other person specified by
a Cabinet Order)
(2) Scope of (i) Money or securities deposited as a margin for exchange transactions of deriv-
customer assets atives, etc., or money or securities deposited as guarantee money for margin trad-
eligible for ing, etc.; (ii) money belonging to the account of or deposited by a customer with
compensation regard to a transaction pertaining to the Financial Instruments Business (such as
(Art. 79-20, advance payment for purchase, proceeds from a sale that have not been with-
Para. 3) drawn, etc.); (iii) securities (securities deposited for sale or held in safekeeping);
and (iv) other customer assets specified by a Cabinet Order
Notice and When the Fund receives a notice from a Financial Instruments Business Operator
recognition or the Prime Minister, it shall recognize whether or not there is any difficulty for
(Art. 79-53 and the firm to perform the obligation to return or refund customer assets pertaining
79-54) to such notice.
Public notice of When a Fund has granted recognition to the effect that it is difficult for a notify-
recognition ing Financial Instruments Business Operator to perform the obligation to return
(Art. 79-55) or refund customer assets (such a Financial Instruments Business Operator re-
ferred to as the“Recognized Financial Instruments Business Operator” ), it shall
Compensation procedures

give a public notice that prompts the relevant customers to file a claim for the re-
turn or refund of their assets.
Payment of A Fund shall, when having made a payment to General Customers, acquire
claims eligible claims eligible for such compensation of the amount commensurate with its pay-
for compensa- ment. The Fund shall collect the claims from the bankrupt Financial Instruments
tion Business Operator through bankruptcy proceedings.
(Art. 79-57,
Para. 4)
Loans to a When the financial position of a“Notifying Financial Instruments Business Op-
“Notifying erator”has deteriorated to such a point that, while it does not yet face difficulties
Financial in returning and refunding customer assets, loans from the Fund could facilitate
Instruments expedited return or refund, the Fund may make loans to such“Notifying Finan-
Business cial Instruments Business Operator.”
Operator”
(Art. 79-59)
Investor Burden charges collected from member Financial Instruments Business Opera-
Source of funds

Protection Fund tors shall be the source of funds.

(Art. 79-64 and
79-65)
Borrowing Borrowings from financial institutions may be made with the approval of the
(Art. 79-72) Prime Minister of Japan and the Minister of Finance.
 Chap. XII Financial Instruments Business (Securities Business) 　271
Table XII-19.　Comparison Between New and Former Systems

Former System New System

Name, Year of Estab- Entrusted Securities Indemnity Japan Investor Protection Fund (December
lishment Fund (August 1969) 1998)
Underlying Entity Incorporate foundation with Corporation defined under the Securities and
no legal basis Exchange Act (current Financial Instruments
and Exchange Act) (must be approved by the
Prime Minister and the Minister of Finance)
Membership obliga- Voluntarily by each securities Compulsory membership
tion company
Contribution Donation (subject to taxation) Burden charges (tax deductible as expenses)
Limit of the amount ¥2 billion per bankrupt securi- ¥10 million per customer
as indemnity (Note) ties company
Past records 7 cases in and after May 1997 ・Minami Securities (went bankrupt in March
(succeeded by the new fund in 2000); indemnity amount of approximately
December 1998) ¥5.9 billion (including ¥2.4 billion returned
from bankruptcy trustee)
・Marudai Securities (went bankrupt in March
2012); indemnity amount of approximately
¥170 million

Note: Up till March 2001, however, a special provision on full indemnity was available (Article 4 of Re-
vision Provisions of the Securities and Exchange Act).

Table XII-20.　An Outline of the Investor Protection Fund

Japan Investor Protection Fund Securities Investors Protection Fund

No. of members (at 235 companies (224 domestic and 11 46 companies (1 domestic and 45 foreign-
the time the fund foreign-affiliated companies) affiliated companies)
was established)
Scale of the fund ¥30 billion at the time of establish- ¥10 billion at the time of establishment (¥3
ment; ¥50 billion at the end of March billion in cash and ¥7 billion guaranteed)
2001 and ¥5 billion in cash and ¥5 billion guar-
anteed after April 2001
Burden charge on A fixed amount and a fixed rate of 1% of the customer assets, and a bank
members burden charge (computed on the basis guarantee of an amount equivalent to 50%
of the operating income and the num- of margin trading requirement. When the
ber of registered representatives). The fund falls ¥1 billion or more short of ¥10
total of annual burden charge is ¥4 billion, members are asked to contribute
billion. an additional burden charge.
Remarks The fund has taken over the compen- Members are required to have their books
sation service provided by the En- audited by outside auditors.
trusted Securities Indemnity Fund and
its entire assets and liabilities.
The two organizations were consolidated in July 2002 into the Japan Investor Protection Fund. As of
2017, there were 256 member firms and the size of the fund was approximately ¥57.3 billion (end of
March).
272　Chap. XII Financial Instruments Business (Securities Business)

tions) was amended, and this amended law has become applicable to securi-
ties companies.
　The system of the segregated custody of securities is designed to recover
the assets of customers in preference to other creditors of a security company
if it goes bankrupt by holding the cash and securities of its customers sepa-
rately from its proper assets. It is done in two ways: (1) securities of its cus-
tomers are managed separately and (2), with respect to a customer’ s cash and
substitute securities deposited with the securities company as collateral for
margin trading, etc., that are impossible to physically identify when they are
rehypothecated, the securities company trusts in an outside account an
amount equal to its customers’claim, net of their liability, to the securities
company (this is called the“customer segregated fund”). If this system of
separate management were strictly enforced, customers would not suffer any
unforeseen loss even if their securities company went bankrupt. However, the
rub is that the customer segregated fund is computed only once a week, and
the possibility of misappropriation of its customers’fund by a securities com-
pany cannot be ruled out.
　Therefore, with a view to strengthening the protection of investors, inves-
tor protection funds were established as legal entities under the Securities and
Exchange Act (currently under the FIEA). To accomplish the above purpose,
the investor protection fund (hereinafter referred to as the“fund”) will (1)
pay a specified amount of money (up to ¥10 million per customer to insure
the repayment of his/her assets in the case of bankruptcy of a securities com-
pany and (2) make loans to securities companies to facilitate the prompt re-
turn of customer assets.
　To enable the fund to provide such services, it is empowered by law to (1)
perform any and all acts that are necessary to preserve customer assets held
by securities companies, (2) become a trust manager of securities companies,
and (3) create an“Investor Protection Fund”to secure the necessary funds
and collect burden charges from its member companies. Members of the fund
must be Financial Instruments Business Operators. More than one investor
protection fund may be created, and securities companies (Type I Financial
Instruments Business Operators) must participate in one of them.

12. Securities Operations of Financial Institutions

In 1948, banking institutions were prohibited, in principle, from conducting

the securities business under Article 65, Paragraph 1 of the Securities and
Exchange Act. As the Banking Act did not explicitly authorize banking insti-
tutions to conduct certain business related to public bonds or brokerage with
written orders, which were provided for as exceptions to the above prohibi-
 Chap. XII Financial Instruments Business (Securities Business) 　273
Table XII-21.　Balance of Investment Trusts, by Seller (as of September 30, 2017)
(¥100 million)
Direct sales (investment
Banks (registered
Securities companies trust management Total
financial institutions)
companies)
Stock invest- 629,355 68.3% 283,868 30.8% 7,871 0.8% 921,095
ment trusts
Bond invest- 130,782 99.6% 441 0.34% 3 0.0% 131,227
ment trusts
Total 760,138 72.2% 284,310 27.0% 7,874 0.75% 1,052,322

Note: These figures are only for publicly offered investment trusts. Given the introduction of a negative
interest policy by the Bank of Japan, early repayment of MMFs continued, and the balance has
been zero since May 2017.
Source: Compiled from the statistics produced by The Investment Trusts Association, Japan.

Table XII-22.　Banking and Securities Joint Branch Offices and Financial Instruments
Intermediary Service of the Three Largest Financial Groups
Customer Introduction and Intermediary Services of Megabanks

Banks Securities companies Joint branch offices

Mizuho Bank, Ltd. Mizuho Securities Planet Booth 166 (March 2017)
The Bank of Tokyo-Mit- Mitsubishi UFJ Morgan Stanley Se- MUFG Plaza 26 (as of October 2017)
subishi UFJ, Ltd. curities
Sumitomo-Mitsui Bank- SMBC Nikko Securities Customer introduction service (ex-
ing Corporation panded to all branches from 2014)

Source: Compiled based on IR information, etc. of each company. The collaborative business between
Sumitomo-Mitsui Banking Corporation and SMBC Friend Securities were transferred and inte-
grated with SMBC Nikko in 2011.

Contribution from Intermediary Business to the Retail Operation of Mitsubishi UFJ Morgan Stanley Se-
curities (FY2017/3)

Number of Individual
Balance of Sale of stock
outstanding investor Sale of retail
(¥100 million) assets under investment
accounts government foreign bonds
custody trusts
(in thousands) bonds
Amount via 31,552 (28,329) 325 (313) 4,449 (5,430) 143 (49) 6,984 (5,979)
intermediary
% of total 11.47% (11.06%) 24.73% (23.62%) 26.74% (26.16%) 5.14% (4.34%) 53.31% (49.19%)

Note: Balance of assets under custody and number of outstanding accounts figures are as of the end of
March 2017. Percentages are of total amounts. Assets under custody pertain to domestic sales divi-
sions (including financial institutions). Figures below in parentheses are for the fiscal term ended
March 2016.
Source: Compiled from the databook provided for the FY2016 investor information meeting of the Mit-
subishi UFJ Financial Group.
274　Chap. XII Financial Instruments Business (Securities Business)

Table XII-23.　Major Regional Bank-Affiliated Securities Companies

Year established Year established

Parent bank (or the year of Parent bank (or the year of
Name of company Name of company
(investment ratio) making it a (investment ratio) making it a
subsidiary) subsidiary)
The Shizuoka
Shizugin TM Fukuoka Securities The Bank of
Bank Group Dec. 2000 April 2012
Securities Co., Ltd. Co., Ltd. Fukuoka (100%)
(85.1%)
Daishi Securities Senshu Ikeda
Co., Ltd. The Daishi Bank, Tokai Tokyo The Senshu Ikeda
March 2006 January 2013
(former Niigata Ltd. (47.0%) Securities Co., Bank, Ltd. (60%)
Securities Co., Ltd.) Ltd.
Hachijuni The Hachijuni The San-In Godo Gogin Securities
April 2006 August 2015
Securities Co., Ltd. Bank, Ltd. (100%) Bank, Ltd. Co., Ltd. (100%)
Yamaguchi
YM Securities Toho Securities The Toho Bank,
Financial Group, July 2007 January 2016
Co., Ltd. Co., Ltd. Ltd. (100%)
Inc. (60%)
The Joyo ecurities Gungin Securities The Gunma Bank,
Joyo Bank, Ltd. November 2007 July 2016
Co., Ltd. Co., Ltd. Ltd. (100%)
Hamagin Tokai The Bank of Hokuhoku Tokai Hokuhoku
Tokyo Securities Yokohama, Ltd. July 2008 Tokyo Securities Financial Group, October 2016
Co., Ltd. (51%) Co., Ltd. Inc. (60%)
Chugin Securities The Chugoku 77 Securities Co., The 77 Bank, Ltd.
June 2009 January 2017
Co., Ltd. Bank, Ltd. (81%) Ltd. (100%)
Hyakugo Securi- The Hyakugo Kyogin Securities Bank of Kyoto,
August 2009 March 2017
ties Co., Ltd. Bank, Ltd. (100%) Co., Ltd. Ltd.
Nishi-Nippon City Nishi-Nippon City
Okigin Securities The Bank of
Tokai Tokyo Bank, Ltd. May 2010 March 2017
Limited Okinawa, Ltd.
Securities Co., Ltd. (60%)
Chibagin Securi- The Chiba Bank, Hirogin Securities The Hiroshima
January 2011 June 2017
ties Co., Ltd. Ltd. (100%) Co., Ltd. Bank, Ltd.
Iyogin Securities The Iyo Bank, Ltd.
February 2012
Co., Ltd. (100%)

Source: Compiled based on websites of corporations and newspaper coverage.

tion (Article 65, Paragraph 2 of the Securities and Exchange Act), banking
institutions (except for trust banks, which could pass their customer orders on
to a securities company) did not conduct the securities business. Following
the issuance of massive amounts of JGBs since 1975, the government enact-
ed a new Banking Act in 1981, explicitly authorizing banking institutions to
trade in public bonds, and it also correspondingly amended the Securities and
Exchange Act. Accordingly, banking institutions started selling public bonds
over the counter in 1983 and dealing in public bonds in 1984.
 　275
Chap. XII Financial Instruments Business (Securities Business)

　Subsequently, the following services have been added to types of securities

businesses that banking institutions are allowed to provide: (1) brokerage for
transactions in bond futures trading (1988); (2) trading, etc., and involvement
in private placement of commercial papers (CPs), foreign certificates of de-
posit (CDs), beneficiary certificates of mortgage bond trusts, etc. (1992); (3)
handling of OTC derivatives of securities and public offerings of beneficiary
certificates of investment trusts (1998); and (4) securities agent business
(2004; currently the financial instruments intermediary service). The registra-
tion system of securities companies and the system of authorizing certain se-
curities businesses instituted in 1998 are also applied to banking institutions.
And banking institutions that have registered under this system are called
“registered financial institutions.”The revised FIEA of 2007 redefined the
scope of the securities business prohibited in principle as securities-related
businesses (section 1), no material changes to the provisions of law were
made (with the only change being the number of the article: Article 65, Para-
graph 1 and 2 became Article 33, Paragraph 1 and 2 of the FIEA).
　On the other hand, the 1992 Institutional Reform Law authorized banks,
securities companies, and trust banks to enter markets of one another through
subsidiaries. Securities subsidiaries of banks were defined as“Specialized
Securities Companies”(Article 16-2, Article 52-23 of the Banking Act) and
the scope of their businesses was provided to include the“Securities-Related
Business”(Article 28, Paragraph 8 of the FIEA), incidental businesses (items
(i) through (viii) in Article 35, Paragraph 1 of the FIEA) and notified busi-
nesses (Article 35, Paragraph 2). At first, with a view to preventing potential
adverse effects, the regulatory agency (1) restricted the scope of business that
the securities subsidiaries of banks may conduct (i.e., the prohibition of stock
brokerage, etc.) and (2) required the installation of a firewall between securi-
ties subsidiaries and their parents.
　The restrictions on the scope of business have been lifted in stages, and the
stock brokerage business was also deregulated in October 1999. Restrictions
on the firewall were also eased in phases. In September 2002, the ban on
opening banking and securities joint branch offices was lifted. And in March
2005, banks were allowed to introduce customers to securities companies as
initial public offering (IPO) candidates (business-led service). In June 2009,
the joint position regulations prohibiting officers and employees of securities
companies and banks from working on both sides of the firewall were lifted,
allowing them to share confidential information of corporate customers as
long as the clients did not opt out of this arrangement. Recently, not only
megabank groups but also regional banks have been entering into financial
instruments intermediary service agreements with securities companies in
developing joint banking and securities businesses through introducing cus-
tomers, opening accounts and handling orders.
 276　Chap. XII Financial Instruments Business (Securities Business)

13. Competition Structure of the Securities Industry

In the securities industry of Japan, given that the Big Four securities compa-
nies had commanded the largest share in all segments of the market and had
many small- and mid-sized securities companies as their affiliates (called
“keiretsu companies” ), the structure of competition used to be characterized
as the“Big Four oligopoly.”However, the Big Four oligopoly broke down in
the 1990s as (1) Yamaichi Securities went bankrupt in 1997; (2) Daiwa and
Nikko split up their companies into two divisions in 1998—the wholesale di-
vision (providing underwriting, M&A advisory, proprietary trading and other
services to corporate customers) and the retail division (providing individual
investors with a brokerage service and offering the sale of investment trusts)
(Daiwa later reintegrated the divisions); and (3) Nomura, Nikko (later
changed name to Nikko Cordial), and Daiwa liquidated their holdings of
shares in their affiliates. Following an accounting scandal, Nikko Cordial
was acquired by Citigroup in 2007 and then was acquired by Sumitomo Mit-
sui Banking Corporation in October 2009 and became SMBC Nikko Securi-
ties.
　The conventional business strategy of the former Big Four was to increase
their shares in the brokerage market and win the mandate as the lead manager
of equity financing by taking advantage of their share in brokerage. To
achieve such goals, they sought to build a nationwide network of branches,
hire a large number of employees loyal to their company, and lure many
member companies of the stock exchanges under their umbrella. However, as
such strategy entailed huge costs and risks, only a small number of securities
companies could afford to pursue the strategy by providing full-line services
(and by diversifying the sources of income thereby). In consequence, there
came into existence only a few big and integrated securities companies that
adopted the Japanese-style employment system with many affiliated brokers.
　Their business strategies and management systems had played an impor-
tant role during the rapid economic growth period as mechanisms nimbly
supplying large amounts of capital to cash-starved industries of the country.
As the years rolled on into the 1990s, however, the basic structure of the Jap-
anese economy drastically changed, causing a mismatch between their busi-
ness strategy and reality. The challenges facing today’ s Japanese economy
are to improve the effectiveness of the use of funds to reorient the structure
of its industries and to provide for the aging of its population. The roles the
securities industry is expected to play in the coming years are (1) to find and
incubate emerging companies by promoting private equity investments; (2)
to help legacy industries and incumbent businesses expedite their renovation
and streamlining by advising them on the securitization of assets, M&A, and
 Chap. XII Financial Instruments Business (Securities Business) 　277
Chart XII-4.　Mega-Bank Securities Subsidiaries and Independent Securities Companies
Mega-bank affiliations (keiretsu) Independents

Mitsubishi UFJ Group Mitsubishi UFJ Morgan Stanley Securities Nomura Securities
affiliations (60% owned by Mitsubishi UFJ Securities Holdings)
(Terminated business alliance with
Mitsubishi UFJ Securities (Former Bank of Tokyo- Sumitomo Mitsui Financial Group in
(securities subsidiary) Mitsubishi keiretsu) →
Daiwa Securities 2009, and acquired shares of the joint
venture Daiwa Securities SMBC
Kokusai (former Nomura Merged in from the Financial Group (currently
Securities keiretsu) → (Acquired shares in 1999)→ 2002 Merged in Became Daiwa Securities Capital Markets))
(Mitsubishi → October 2005 → Mitsubishi Okasan Securities
Ryoko (former Mitsubishi Securities) (Mitsubishi UFJ Morgan
Bank keiretsu) → Merged in 1999 UFJ Stanley
(becoming Securities) Securities in Tokai Tokyo (Merged with Toyota Financial Services
Dainana (former Bank of Tokyo-Mitsubishi → May 2010 Securities in April 2010)
→ Securities
Tokyo keiretsu) Personal Securities)

UFJ Capital Markets (Former Sanwa Bank keiretsu) Marusan Securities

(securities subsidiary) → →
(Since 2010, absorbed Tamaki, Iida,
Universal (former Daiwa (Ref.) Merged with the Investment Banking Ichiyoshi Securities Sasebo, Ise, Daihoku and Nishiwaki
Securities keiretsu) → Division of Morgan Stanley Japan securities firms in mergers)
Sanwa Bank acquired Merged in Securities
shares of Universal, 2002 Iwai Cosmo Securities (Iwai and Cosmo merged in May 2012)
Taiheiyo (former Yamaichi
Securities keiretsu) → Taiheiyo, and (UFJ
Daiichi in 1999. Tsubasa
The four securities → Securities)
Mito Securities
Daiichi (former Long-Term
Credit Bank keiretsu) → companies merged
to become Tsubasa Toyo Securities
Securities in 2000.
Towa (former Sanwa
Bank keiretsu) →
Tachibana Securities
Mizuho affiliations Mizuho Securities (95.8% owned by Mizuho Financial Group)
Acquired management Aizawa Securities
Mizuho Securities etc.
(securities subsidiary) control of Norin Chukin →
Securities in 2004
Merged in Online brokers (5 firms)
Shin Nihon (former Industrial
Bank of Japan (IBJ) keiretsu) → 2009
(Mizuho → (Softbank acquired Ozawa Securities in
Merged in 2000 Securities) 1999; Fides Securities, formerly Nissho
(Shinko Securities) →
Mizuho SBI Securities Iwai Securities, in 2005; and SBI
Wako (former IBJ keiretsu) → Securities Securities (former World Nichiei
and Frontier Securities) in 2007, folding
Mizuho these into one company, and changed
Mizuho Investors Securities (100% owned by Mizuho Bank) Investors the name to SBI Securities. In 2009,
Securities it acquired the business of Nihon
Kankaku (former Daiichi merged in Investors Securities.)
Kangyo Bank (DKB) keiretsu) → January 2013 Matsui Securities
Merged in 2000 (Mizuho
Kokyo (former (Mizuho Investors → Absorbed Securities) (Rakuten acquired DLJ Direct Securities
DKB keiretsu) → Securities)
Taito in → Rakuten Securities in July 2004, establishing its wholly
2001 owned Rakuten Securities)
Daito (former (Acquired Saison Securities in 2001 and
Fuji Bank keiretsu) → merged with: Nikko-Beans in 2005,
Monex Securities
Orix Securities in 2010, and Sony Bank
Securities in 2013)
Sumitomo Mitsui Group SMBC Nikko Securities (100% owned by SMBC) (In 2000, e-Wing Securities (former
affiliations Sanwa keiretsu) and Nihon Online
(SMBC acquired business in SMBC Nikko Kabu.Com Securities (former Itochu affiliate)
2009 and merged Nikko Citi merged, establishing Kabu.Com
Nikko Cordial Securities → (Was made a subsidiary in → Securities’underwriting and →
Securities
Securities. Absorbed Me Net Securities
2007 by Citigroup) investment banking advisory (changed name
in April 2011) in 2005. Tokyo-Mitsubishi UFJ Bank
operations with its operations) has a 44.87% share and Mitsubishi UFJ
SMBC Friend Securities 2018年１月両社 Securities Holdings has 11.85%.)
(100% owned by Sumitomo Mitsui Financial Group) は合併予定
Yamatane (former
Mitsui Bank keiretsu) → Merged in 2000 SMBC
(Sakura Friend → Friend
Shin’
ei Ishino (former Securities) Securities
Taiyo-Kobe Bank keiretsu) → Merged in (sold its
2003 Acquired collaborative
Meiko (former (SMBC → Izumi → banking and
Sumitomo keiretsu) → Merged in 1999 Friend Securities securities
(Meiko National → Securities) in 2004 operations
National (former Matsushita Securities) to SMBC
Electric keiretsu) → Nikko
Securities
Izumi (former Sumitomo in 2011)
Life keiretsu) →
278　Chap. XII Financial Instruments Business (Securities Business)

other measures and by underwriting the securities they issue; and (3) to direct
household savings into the securities markets by offering investment advice
based on quality research and professional investment management services.
　To accomplish this, it is necessary for securities companies to train and se-
cure specialists by spinning off business divisions according to their special-
ties. What is more, the practice of maintaining an extensive network of affili-
ates no longer makes economic sense, and the shares of affiliates the parent
securities companies hold will have to be liquidated. Meanwhile, banks and
other corporations that are keen to enter the securities business have bought
the shares that parent securities companies wanted to dispose of, and reorga-
nization of the banking industry has resulted in the merger and consolidation
of bank-affiliated brokers. Some brokers also have been bought out by the
management (MBO). The keiretsu of brokers, therefore, is no longer rigid.
 CHAPTER XIII

Asset Management Service

1. Management of Individual Financial Assets

According to a survey by the Bank of Japan,“Comparison of the Flow of

Funds between Japan, the United States, and Europe,”at the end of March
2017 individuals in Japan had ¥1,809 trillion worth of financial assets. Of
this amount, 51.5% was invested in cash and deposits and 16.8% in securities
investments. Compared with the United States and Europe, Japan’ s individual
financial assets are heavily skewed toward cash and deposits more so than
not only the U.S. but also the Euro area, and thinly invested in securities. In
the 2016 survey by The Central Council for Financial Services Information,
45.7% of respondents said that they focused on“security”as their reason for
selecting financial instruments, while 24.7% said“liquidity.”Only 17.5% of
respondents said that they focused on“profitability.”Individual financial as-
sets in Japan thus are mainly invested in low-risk bank deposits, with little
preference for more profitable securities. Certainly during Japan’ s era of de-
flation, the heavy investment in bank deposits probably turned out to have
been the right call. With, however, the introduction of an inflation target in
Japan and the implementation of massive quantitative easing to achieve that
target, it is possible that the focus on safety carries with it the risk that the
real value of cash will erode because of inflation.
　Under these circumstances, the government introduced a preferential tax
treatment investment system (NISA, a small-amount investment tax exemp-
tion scheme) in 2014 to promote the shift from“Savings to Investment.”
Subsequently in 2016, the tax deductible line was expanded from ¥1 million
to ¥1.2 million, and Junior NISA for the underaged was newly introduced.
Additionally in 2018, the installment-type NISA was launched. Furthermore,
in 2017, the coverage of iDeCo (individual-type defined-contribution pen-
sion) which had been limited to self-employed persons and white collar
workers, etc. working for a company that does not have a corporate pension
plan, was widened to also include government employees, full-time house-
wives (househusbands), and white collar workers who work for a company
with a corporate pension plan.
280　Chap. XIII Asset Management Service

Chart XIII-1.　Composition of Household Assets (at March 31, 2017)

Insurance, pension
Cash and deposits Investment and fixed
Bonds trusts Stocks, etc. warranty Others total

Japan (51.5%) (28.8%) (¥1,809 trillion)

(1.4%) (5.4%) (10.0%) (2.9%)

U.S.A (13.4%) (11.0%) (35.8%) (31.2%) ($77.1 trillion)

(5.6%) (2.9%)

Europe
(33.2%) (18.2%) (34.0%) ( 23.3 trillion)
Area

(3.2%) (9.2%) (2.3%)

0 10 20 30 40 50 60 70 80 90 100
Percentages of the total financial assets
Note: Others total is the remains after deducting“Cash and deposits”,“Bonds”,“Investment trusts”,“Stocks, etc.”,
and“Insurance, pension and fixed warranty”from total financial assets.
Source: Bank of Japan.

Table XIII-1.　Points of Focus When Selecting Financial Products

<Households Holding Financial Assets> (%)

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Profitability 16.5 15.8 16.6 15.8 18.7 16.9 14.7 16.7 17.6 17.5
High return 13.7 12.6 13.8 13.2 13.8 12.1 9.8 11.7 11.9 12.1
Anticipated price increase in the
2.8 3.1 2.8 2.6 4.9 4.9 4.9 4.9 5.6 5.4
future
Safety 46.5 45.7 44.9 48.4 48.0 46.7 47.0 45.7 46.1 45.7
Principal is guaranteed 28.4 28.7 30.1 29.8 30.3 28.7 29.6 29.5 29.3 29.9
Financial institution handling the
18.1 17.0 14.8 18.6 17.6 18.0 17.4 16.3 16.8 15.8
product is reliable and secure
Liquidity 28.1 29.4 30.9 28.5 23.7 24.7 25.0 25.1 23.1 24.7
Easy to convert to cash 6.3 6.7 5.3 4.5 4.6 5.3 5.9 6.0 6.0 6.7
Free to deposit/withdraw even in
21.7 22.7 25.7 24.0 19.0 19.4 19.1 19.1 17.2 18.0
small amounts
Product content is easy to understand 2.4 2.0 2.0 1.8 2.2 2.5 2.5 3.1 3.2 2.4
Others 4.1 4.5 4.3 4.4 5.4 6.7 8.5 7.9 8.5 7.9
No response 2.4 2.5 1.3 1.0 2.0 2.4 2.2 1.5 1.7 1.9

Source: The Central Council for Financial Services Information.

 　281
Chap. XIII Asset Management Service

　Asset management companies include trust banks, life insurance compa-

nies, and discretionary asset management companies that manage the pension
and insurance reserves of individuals, i.e. people’
s security for the future. In-
vestment trust management companies are also asset management compa-
nies, handling investment trusts for individual financial assets. Either indi-
rectly or directly, asset management companies play an important role in
financial asset formation by individuals in a society with low birth and mor-
tality rates. These asset management companies also contribute to growth in
corporate performances and to the sound development of the economy—and
therefore society—through the following two functions. To begin with, they
fulfill a role in achieving the efficient allocation of capital by supplying
growth companies with capital through the market. Furthermore, they engage
in stewardship activities to increase investment returns for customers and
beneficiaries on a medium- to long-term basis, thereby contributing to en-
hancing corporate value and promoting sustainable growth of investee com-
panies.

2. Pension Fund Management

Japan’ s pension plan system is a three-tier system consisting of (1) a founda-

tional national pension (basic pension benefits) common to all citizens sup-
plemented by (2) employee pension plans (employees’pension insurance
system) for employees of private companies and government employees, and
(3) corporate pension plans (employees’pension funds, defined-benefit cor-
porate pension, and individual-type defined-contribution pension) for civil
servants and private-sector salaried employees. Of these plans, the national
pension and employee pension plans utilize a pay-as-you-go system that pro-
vides support shared among generations in the form of public pensions, while
corporate pension plans use a funding system in the form of private pensions.
　Employees’pension funds comprise a substitutional portion received from
the public employees’pension insurance system and their own fund termed
the“plus alpha”portion. In the past, the substitutional portion formed the
core of these funds. Following the bursting of the economic bubble in Japan,
however, difficult asset management conditions resulted in the substitutional
portion placing a heavy burden on employees’pension funds. Companies one
after the other reacted by either terminating the funds or returning the substi-
tutional portion to the government and converting their funds to defined-ben-
efit corporate pension, etc. At present, no new establishment is allowed. De-
fined-benefit corporate pension does not have this substitutional portion,
allowing for flexible system planning with the agreement of the labor force.
The individual-type defined-contribution pension plan differs from the previ-
282　Chap. XIII Asset Management Service

Chart XIII-2.　Structure of Pension System

Defined Defined Employee

type)
(individual
Defined contribution pension 
National Pension Funds
contribution benefit pension
pension corporate funds
(corporate type) pension
(Substitute
part)

Employees’
Pension Insurance

National Pension (basic pension)

Dependent spouses Self-employed Private sector salaried workers

of category-2 persons, etc. and Civil Servant, etc.
insured persons

Category-3 Category-1 Category-2

insured persons insured persons insured persons, etc.

Source: Ministry of Health, Labor and Welfare.

Chart XIII-3.　GPIF’ s Investment Assets and Portfolio Allocation (total reserve funds)
(as of June 30, 2017)

Short-term assets
7.67%

Foreign stocks Domestic bonds

23.91% 30.48%

Foreign bonds
13.53%
Domestic stocks
24.41%
Source: GPIF
 　283
Chap. XIII Asset Management Service

ous pension system with fixed benefits (defined-benefit pension) in that the
contributed premium of each individual is clearly segregated, with pension
benefits being determined based on the total of a fixed premium and invest-
ment income.
　The management of pension plans must be safe and efficient in the interest
of protecting future benefits. With the exception, therefore, of a few large-
scale pension funds that manage investments in-house, asset management of
the pension fund is commissioned to outside investment companies. Accord-
ing to the 2015 fiscal year asset management survey by the Pension Fund As-
sociation, the allocation of corporate pension funds (employees’pension
funds and defined-benefit corporate pension plans) to asset managers was
trust banks, 50.5%; discretionary asset management companies, 25.8%; and
life insurance companies, 23.7%. By composition of fund assets, domestic
bonds accounted for 25.9%, domestic stocks for 11.7%, foreign bonds for
14.0%, foreign stocks for 13.4%, the general account of life insurance com-
panies for 16.2%, and others for 11.6%.
　The cumulative reserves of the national pension and employee pension
plans, which are public pensions, are administered and managed by the Gov-
ernment Pension Investment Fund (GPIF). By composition of fund assets of
GPIF (as of the end of June 2017), domestic bonds accounted for 30.48%,
domestic stocks for 24.41%, foreign bonds for 13.53%, and foreign stocks
for 23.91%. Although previously pension funds were managed primarily by
domestic bonds, steps are taken to promote diversified investment by invest-
ing also in stocks and foreign-denominated assets considering that the Japa-
nese economy pulled out of deflation and domestic bond interest rates have
declined to a low level.

3. Asset Management of Trust Banks

Entrustment occurs when (1) an entity (trustor) transfers its rights to property
to an entity that can be depended on (trustee) based on a trust or some other
legal agreement and when (2) the trustee is enabled to legally manage and
dispose of the entrusted property on behalf of the trustor or a third party
(beneficiary). In the case of the entrustment of a fund-based company pen-
sion plan trust, for example, the company’ s pension fund is the trustor and
beneficiary, while the trust bank is the trustee. Because the system is pre-
mised on the dependability of the trustee, trust banks have a duty of due care
of a prudent manager, duty of loyalty, and duty of segregated asset manage-
ment.
　Trust banks can service pension funds in three different ways. They can
manage the funds at their own discretion (designated asset management-type
284　Chap. XIII Asset Management Service

Chart XIII-4.　Trust Scheme

Trustee
Trust Contract or Monitoring and
Will Supervision

Transfer of Trust Income

Assets
Trustee Beneficiary

Fiduciary Duties and

Administration and Segregation of
Disposition Assets, etc.

Trust Assets

Source: Trust Companies Association of Japan.

Chart XIII-5.　Fund-Type Company Pension Plan Trust Scheme

① Employee pension fund

contract
Employees and
Business
beneficiaries
Employee contributions

Contributions by employer and employees

Company Pension Fund (Trustor and Beneficiaries)

Contributions by
③ Pension plan agreement employer and
② Authorization employees ④ Pension plan benefits

Ministry of Health,
Trust Bank (Trustee)
Labor and Welfare

Source: Trust Companies Association of Japan.

 　285
Chap. XIII Asset Management Service

trust) or not become involved in management without administering the as-

sets (specified asset management-type trust), or be an intermediary trustee
(general manager) representing the trustees and insurers in acting as the gen-
eral manager for dealings with the trustor when the administration function is
commissioned to multiple trust banks and insurance companies.
　The two main features of trust bank operations are the high proportions of
pooled asset management and passive investment policies in comparison
with discretionary asset management companies. Pooled asset management
combines the assets of multiple funds into one account. Compared with the
independent management of assets, where the assets entrusted by each fund
are kept separate and investment is made in specific securities, etc., this sys-
tem enables even small-scale funds to diversify their investments. Another
advantage is that the asset management fees and transaction costs are cheap-
er. On the other hand, with independent management it is easier to manage
assets according to the needs of each fund involved than it is with pooled as-
set management.
　Passive management is an investment method that aims to achieve a return
in line with movement in a specified benchmark (index). In comparison with
active management, where a manager makes trading decisions based on the
investment value of individual securities with the aim of outperforming a
benchmark, passive management has the advantage of keeping trading turn-
over costs low as well as curtailing management fees because detailed re-
search and analysis is not required for individual securities. Moreover, in
contrast with discretionary asset management companies, trust banks’busi-
nesses encompass not only asset management but also fund administration.
With the relatively large assets under management and the amount of busi-
ness involved, trust banks have two synergies of the economies of scale and
the economies of scope. These benefits combine to provide an advantage to
the client in terms of lower asset management fees. With passive manage-
ment, on the other hand, clients can only expect benchmark asset perfor-
mance. And there is such criticism that passive management gets a free ride
on active management because of its little function of capital allocation.

4. Asset Management of Life Insurance Companies

Life insurance policyholders pay a premium based on the likelihood of their

living or dying. There are generally two types of life insurance: mortality in-
surance that insures a policyholder against death and annuities that provide
for their livelihood in old age. Life insurance companies (insurers) accumu-
late the insurance premiums received from policyholders into a liability re-
serve to provide for future claim distributions and invest them. There are two
286　Chap. XIII Asset Management Service

Table XIII-2.　Asset Composition

(%)
Tangible
Cash and Money Total
Call loans Securities Loans fixed Others
deposits trusts assets
assets
FY2011 1.1 0.8 0.6 78.8 12.9 2.0 3.8 100.0
2012 1.0 0.8 0.6 80.7 11.7 1.9 3.4 100.0
2013 1.3 0.8 0.7 81.3 10.9 1.8 3.3 100.0
2014 1.5 1.0 0.9 81.5 10.0 1.7 3.3 100.0
2015 2.0 0.3 1.0 81.8 9.5 1.7 3.5 100.0
Figures excluding Japan Post Insurance Co., Ltd.
2011 1.0 0.8 0.8 78.4 12.1 2.8 4.1 100.0
2012 1.1 1.0 0.7 80.8 10.8 2.5 3.0 100.0
2013 1.0 0.9 0.7 81.8 10.3 2.4 2.8 100.0
2014 1.2 1.1 0.7 82.6 9.5 2.2 2.7 100.0
2015 2.0 0.3 0.7 82.9 9.1 2.1 2.8 100.0

Source: The Life Insurance Association of Japan.

Table XIII-3.　Composition of Securities under Management

(100 millions of yen, %)

Government Municipal Corporate Foreign Other
Stocks Total
securities bonds bonds securities securities
Amount % Amount % Amount % Amount % Amount % Amount % Amount
FY2011 1,412,757 54.9 131,630 5.1 253,429 9.8 147,444 5.7 469,267 18.2 161,074 6.3 2,575,603
2012 1,487,692 53.5 139,346 5.0 251,551 9.0 167,256 6.0 559,864 20.1 176,735 6.4 2,782,448
2013 1,498,157 52.6 140,089 4.9 248,959 8.7 180,299 6.3 614,509 21.6 168,303 5.9 2,850,317
2014 1,487,617 49.7 138,686 4.6 248,553 8.3 226,979 7.6 732,804 24.5 159,654 5.3 2,994,295
2015 1,485,684 49.4 135,178 4.5 253,634 8.4 198,130 6.6 786,531 26.2 146,074 4.9 3,005,235
Figures excluding Japan Post Insurance Co., Ltd.
2011 813,135 44.4 53,851 2.9 191,154 10.4 147,434 8.1 463,081 25.3 161,074 8.8 1,829,732
2012 922,966 44.9 52,361 2.5 186,713 9.1 167,246 8.1 550,842 26.8 176,735 8.6 2,056,866
2013 972,928 45.1 48,351 2.2 184,540 8.6 180,289 8.4 602,114 27.9 168,303 7.8 2,156,527
2014 1,006,752 43.2 43,127 1.8 182,028 7.8 226,969 9.7 712,990 30.6 159,654 6.8 2,331,523
2015 1,043,898 44.1 41,123 1.7 191,265 8.1 198,120 8.4 749,643 31.6 145,073 6.1 2,369,126

Source: The Life Insurance Association of Japan.

 　287
Chap. XIII Asset Management Service

types of accounts used to manage the investment of insurance premiums. The

general account guarantees the policyholder a certain fixed amount of bene-
fits regardless of how the general account performs, while the special account
policies pay out benefits that vary based on asset management performance.
　Under a general account life insurance policy, the insurer promises to pay
a certain amount of benefits, and the policyholder agrees to pay a premium
that is commensurate with the promised benefit. The premium is computed
on the premise of an assumed basic rate comprising such factors as assumed
mortality rate, assumed ratio of expenses, and assumed rate of return. Since
the assumed basic rate is set conservatively, a positive difference can occur
between the assumed and actual rate. When this happens, a portion of the
profit is returned to policyholders as a dividend.
　According to the 2016 issue of Trends in the Life Insurance Business, pub-
lished by the Life Insurance Association of Japan, of the total assets under
management by life insurance companies at the end of fiscal 2015, securities
accounted for 81.8%, while loans accounted for 9.5%. The recent trend has
been an increase in the amount of securities coupled with a decrease in loan
holdings. Looking at the breakdown of securities, Japanese government
bonds made up the greatest portion (49.4%), followed by foreign securities
(26.2%, of which bonds accounted for 24.0% and equities 2.2%); Japanese
corporate bonds (8.4%); Japanese equities (6.6%); and Japanese municipal
bonds (4.5%).
　In recent years, insurance companies have come to focus more on asset li-
ability management (ALM) because of the introduction of mark-to-market
accounting and stricter regulations on solvency margins. Liability reserves,
which account for most of insurance company liabilities, are superlong liabil-
ities with a duration (average maturity) of more than 10 years. As such, in
their asset management strategies, the insurance companies have increasingly
favored investment in 20-year and other superlong Japanese government
bonds. On the other hand, insurance companies also are cautiously investing
in stocks with a risk of high price volatility and foreign bonds which carry an
exchange rate risk. In addition, there is a trend toward using currency hedges
to avoid currency risk when investing in foreign securities.
　Targeting group pension plans, special account insurance offers several op-
tions. In a policy with a Class 1 rider, the assets of multiple customers are
managed as a pool based on the investment policies of the life insurance
company. In a Class 2 rider policy, the assets of each customer in the group
are managed separately using investment policies that reflect the wishes of
the individual customer. Within a Class 1 rider policy, there also are bal-
anced-type consolidated accounts for which the life insurer determines the
allocation among asset classes and separate designed investment accounts
that reflect individual customer preferences in asset allocation.
288　Chap. XIII Asset Management Service

5. Asset Management of Discretionary Asset Management Companies

Discretionary asset management companies manage the assets of customers

based on a discretionary investment contract that gives those companies the
necessary authority to make investment decisions and investments on behalf
of their customers. Among the major customers of these companies are insti-
tutional investors, such as public pensions, pension funds, financial compa-
nies, business companies, and sovereign wealth funds. Discretionary man-
agement companies can be considered the business sector where
liberalization and internationalization have progressed the most, even in the
financial industry, which has low barriers to entry for non-financial or foreign
companies. As a category for investment specialists, the asset management
company category includes investment trust management companies and
fund managers that sell units in group investment schemes, such as venture
capital funds, as well as discretionary management companies.
　The Japan Investment Advisers Association is a self-regulatory body for
the discretionary asset management industry. It is designed to protect inves-
tors by ensuring the fair and smooth operation of members’investment man-
agement business. It also contributes to the sound development of the invest-
ment management business and related matters. The investment management
industry’ s business and other activities contribute significantly to the capital
market. In consideration of this important role, the association also works to
improve corporate governance by collecting and announcing information
about initiatives taken by members of the association in adopting the Stew-
ardship Code, by forming study groups on the Stewardship Code, and by car-
rying out discussions and research.
　A special feature of discretionary asset management companies in compar-
ison with trust banks is the high proportion of active investment and custom-
ized asset management services that closely reflect the wishes of customers.
When commissioned to handle the management of assets, they leave the ad-
ministration side of the business to trust banks and other financial institu-
tions. Reacting to the pension plan fraud scandal in 2012 and other incidents,
trust banks are expanding and reinforcing their monitoring systems by
strengthening their independent party checking function and other measures.
　Allocation of the assets of customers is done based on investment guide-
lines and other agreements determined through discussions with pension
funds and additional customers. Trends in recent years show that along with
the diversification of the investment needs of pension funds, these funds are
not limited to such traditional investment instruments as stocks and bonds
but also involve investments in the stocks and bonds of high-growth emerg-
ing countries and alternative investments that target absolute rather than rela-
 Chap. XIII Asset Management Service 　289
Chart XIII-6.　Investment of Pension Assets by Discretionary Asset Management
Company

Pension fund,
Discretionary
etc. customer Tokkin specified money trust
investment contract

Discretionary Asset Trust bank

Management Company Tripartite agreement (custody and manage-
(asset management) ment of assets)

Purchase/sale
and delivery of
Investment instructions securities

Placing orders
Securities companies,
etc.

Table XIII-4.　Scheme comparison

Traditional discretionary Real estate private

Wrap Account
investment contract placement fund
Customer Institutional investors Fund Individual investors
Investment Traditional securities Real estate trust benefi- Traditional securities
target ciary rights
Managing Specialized management Specialized management Company concurrently
entity company company engaged in securities
business

tive returns, such as real-estate-related securities and hedge funds.

　In addition to the aforesaid traditional discretionary investment services
for institutional investors as customers, schemes for real estate private place-
ment funds as customers as well as the wrap accounts provided by securities
companies and trust banks for individual investors have also been attracting
attention in the last few years.
290　Chap. XIII Asset Management Service

6. Asset Management of Investment Trusts

Investment trusts are a type of collective investment scheme based on pool-

ing small investments from many investors and have three significant fea-
tures. First, they enable the diversification of small investments. Using in-
vestment trusts allows individual investors to lower their risk through
diversification just the same as institutional investors even with small invest-
ments. For example, investment in an investment trust fund that has diversi-
fied its investments into no less than one thousand stocks and in 40 or more
countries starts from about ¥10,000. The second feature is that investment
trusts are managed by professionals. Building the optimum investment port-
folio based on macroeconomic analysis as well as financial trends and stock
price analysis requires advanced knowledge, analytic capabilities, and invest-
ment technology. Through investment trusts, even individual investors can
benefit from the skills of professional fund managers. The third feature of in-
vestment trusts is transparency. The mark-to-market net asset value of these
investment trust funds is published on a daily basis, and Japanese laws have
beefed up disclosure requirements.
　An investment trust with instructions from trustors is representative of
schemes adopted in Japan. Assets collected from investors (beneficiaries)
through subscriptions by distributing companies, such as securities compa-
nies and registered financial institutions, are managed by a trustor (invest-
ment trust management companies) and held in safekeeping and administered
by a trustee (trust banks).
　When the investment trust system was first set up, government regulators
only approved investments in Japanese stocks. However, over the 60-year
history of the industry the investment regulations have gradually been liber-
alized, and today it is possible to create a truly wide range of investment in-
struments based on the products available. For example, by including short-
term financial instruments, they can structure investment trusts, such as
money reserve funds (MRFs), that mimic bank deposits. Furthermore, since
the approval of investment in real estate and commodities, individual inves-
tors can take a stake in office buildings, gold, oil, and other investments
through investment trusts.
　Entry into the investment trust market has also been liberalized from a
limitation to only approved companies associated with major securities com-
panies to a registration system that requires only that companies meet certain
conditions. As a result, the industry has grown from only about 10 companies
at one time to over 100 investment trust management companies. Moreover,
with the lifting of the bans on outsourcing asset management and on invest-
ing in a fund of funds, investment trusts can also indirectly offer their cus-
 Chap. XIII Asset Management Service 　291
Table XIII-5.　Trends in the Liberalization of Investment Trust Regulations in Japan

1951 Securities companies begin investment trust management business

1959 Investment trust management companies made independent of securities companies
1961 Ban on inclusion of public bonds lifted (Bond investment trusts established)
1970 Ban on inclusion of foreign securities lifted
1978 Ban on use of forward exchange contracts lifted
1986 Ban on inclusion of OTC-registered stocks lifted
1987 Ban on use of derivatives for hedging purposes lifted
1990 Foreign-affiliated investment management companies enter market
1993 Bank-affiliated investment management companies enter market
1995 Ban on use of derivatives for other than hedging purposes lifted (Bull/Bear funds established)
Exchange traded funds (ETFs) introduced
Ban on conducting both discretionary asset management and commissioned investment trust
management businesses lifted
1998 Financial System Reform Law passed (Japanese Big Bank)
Deregulation converts investment trust management companies from licensing to approval
system
Ban on outsourcing asset management lifted
Ban on investment trusts being sold through banks on an agency basis lifted
1999 Ban on fund of funds (FoFs) lifted
2001 Real estate investment trusts (REITs) introduced
2007 Further deregulation converts investment trust management companies from approval to regis-
tration system
2008 Ban on inclusion of commodities lifted

Chart XIII-7.　The Structure of Investment Trusts with Instructions from Trustors

Distributing
Beneficiaries companies Trustor Trustee

Instructions on Main
Handling of management, Safekeeping, investment
Purchase/holding subscription etc. etc. objectives
Sales/ Securities Investment
Investors
management companies

Redemption firms Securities

Trust banks, etc.
Investment trust

Distribution
Sales/ Registered agreement Trust Investment
Investors financial agreement Real estate
Redemption institutions

Investment
Sales/ Direct Others
Investors
Redemption marketing

Source: The Investment Trusts Association, Japan.

292　Chap. XIII Asset Management Service

tomers access to the investment services of foreign asset management com-

panies. Although sales were restricted to securities companies previously,
sales access points have been expanded through direct distribution by invest-
ment management companies and by agency sales by banks and other regis-
tered financial institutions.

7. Stewardship Code

Given the Cabinet’ s approval of the Japan Revitalization Strategy in June

2013, the Principles for Responsible Institutional Investors (Japan’ s Steward-
ship Code) formulated by the Council of Experts Concerning the Japanese
Version of the Stewardship Code (secretariat placed in the Financial Services
Agency (FSA)) were announced in February 2014, and then in May 2017, a
revised version was released.
　The Stewardship Code defines the principles considered to be helpful for
institutional investors in fulfilling their stewardship responsibilities of en-
hancing the medium- to long-term investment return for their clients and
beneficiaries by increasing the investee companies’corporate value and sus-
tainable growth through conducting“constructive dialog”based on in-depth
knowledge of the companies and their business environment. The Steward-
ship Code and the Corporate Governance Code serve as two wheels of a cart
so-to-speak, and in expectation that broad penetration and implementation of
these two Codes will contribute to realizing effective corporate governance
in Japan, over 200 institutional investors have also adopted the Stewardship
Code. The Stewardship Code is not a law or a legally binding regulation. It
also adopts a principles-based approach instead of a rule-based approach.
The Stewardship Code calls for the following three key actions to be taken
by institutional investors toward investee companies: (1) monitoring (Princi-
ple 3); (2) engagement (Principle 4); and (3) exercise of voting rights (Princi-
ple 5).
　First, according to the Code, (1) institutional investors should monitor in-
vestee companies so that institutional investors can fulfill their stewardship
responsibilities with an orientation towards the sustainable growth of the
companies. Monitoring should be performed continuously and effectively,
and should cover a variety of factors, including non-financial matters. Next,
(2) engagement refers to having“purposeful dialog”with investee companies
in order to arrive at an understanding in common with investee companies
and work to solve problems. Institutional investors are expected to have a
clear policy in advance on how they design dialog with investee companies.
Further, (3) institutional investors should seek to exercise voting rights on all
shares held. In exercising their voting rights, they are expected to decide on
 Chap. XIII Asset Management Service 　293
Table XIII-6.　The Principles of the Stewardship Code

　So as to promote sustainable growth of the investee company and enhance the medium- and long-term
investment return of clients and beneficiaries,
1. Institutional investors should have a clear policy on how they fulfill their stewardship responsibili-
ties, and publicly disclose it.

2. Institutional investors should have a clear policy on how they manage conflicts of interest in fulfill-
ing their stewardship responsibilities and publicly disclose it.

3. Institutional investors should monitor investee companies so that they can appropriately fulfill their
stewardship responsibilities with an orientation towards the sustainable growth of the companies.

4. Institutional investors should seek to arrive at an understanding in common with investee companies
and work to solve problems through constructive engagement with investee companies.

5. Institutional investors should have a clear policy on voting rights and disclosure of voting activity.
The policy on voting rights should not be comprised only of a mechanical checklist; it should be de-
signed to contribute to the sustainable growth of investee companies.

6. Institutional investors in principle should report periodically on how they fulfill their stewardship re-
sponsibilities, including their voting responsibilities, to their clients and beneficiaries.

7. To contribute positively to the sustainable growth of investee companies, institutional investors

should have in-depth knowledge of the investee companies and their business environment and skills
and resources needed to appropriately engage with the companies and make proper judgments in ful-
filling their stewardship activities.

the vote in light of the results of the monitoring of investee companies and
the contents of dialog with them. Institutional investors should also have a
clear policy on voting rights and publicly disclose it.
 CHAPTER XIV

Securities Taxation

1. Transitions in Securities Taxation (1)

Basically, the income tax system of Japan is based on comprehensive taxa-

tion (taxation on the total income). It traces its origin to a recommendation
made soon after the war by the Shoup Recommendation on Japanese Taxa-
tion. Under the Shoup taxation system enforced in 1950, not just interest and
dividends but also capital gains from sales of securities (the whole amount of
a capital loss from the sale of securities was deductible) were subject to com-
prehensive taxation. After the end of the Allied military occupation, however,
the Japanese government authorized separate taxation on interest and ex-
empted from tax, in principle, capital gains from the sale of securities primar-
ily from a policy standpoint to encourage accumulation of capital—with the
result that the ideal of comprehensive taxation on income has disintegrated
rapidly. And it was a sweeping reform of the taxation system carried out in
1987–1989 that helped the basic framework of the present income tax system
take shape. At that time, the structure of income taxation was changed from
one consisting of 15 brackets (10.5%–70%) to a flat one consisting of five
brackets (10%–50%), and the financial income taxation system was over-
hauled thoroughly, including the uniform separate withholding taxation on
interest income; the abolition of the tax-exempt savings system, in principle;
and separate taxation, in principle, on capital gains from the sale of securi-
ties. The structure of income tax rates was amended to 4 brackets (10%–
37%) in the fiscal 1999 tax reform and to 6 brackets (5%–40%) in the fiscal
2006 tax reform. In the fiscal 2013 tax reform, from the perspective of cor-
recting income disparity and reviving the income redistribution function,
starting with income tax for 2015, the rate for taxable income in excess of
¥40 million was set at 45%. Based on the fiscal 2016 tax reform, the basic
corporate income tax rate was reduced to 23.4% from the existing 23.9% in
FY2016, and will be further reduced to 23.2% in FY2018. As a result, the tax
rate for national and local combined (the effective corporate tax rate) will be
29.74% in FY2018.
　Looking at major trends in Japan’ s securities taxation system during the
 Chap. XIV Securities Taxation 　295
Table XIV-1.　Securities Taxation Evolution Timeline (1949－2002)

Year Major amendments Income tax brackets

1949 Shoup recommendation
1950 A comprehensive taxation of interest, dividends, and capital gains from the sale of 8 brackets (20%－55%)
securities is enforced.
1951 The optional separate withholding tax (50%) on interest is revived.
1952 The withholding tax on dividends (20%) is revived.
1953 Securities capital gains are exempted from income tax, in principle. 11 brackets (15%－65%)
The securities transaction tax is instituted (0.15% of the value of stock transaction).
A uniform separate withholding tax on interest (10%) is instituted.
1954 The withholding tax on dividends is reduced (from 20% to 15%).
1955 Interest is exempted from income tax.
The withholding tax on dividends is lowered (from 15% to 10%).
1957 The separate withholding tax only on interest on short-term savings is revived (10%). 13 brackets (10%－70%)
1959 The separate withholding tax on interest on long-term savings is revived (10%).
1961 Securities capital gains tax is levied on certain large-lot transactions.
1962 15 brackets (8%－75%)
1963 The withholding tax rate on interest and dividends is lowered (from 10% to 5%).
1965 The withholding tax rate on interest and dividends is raised (from 5% to 10%).
The system of not requiring declaration and the optional separate withholding tax on
dividends (15%) are introduced.
1967 The withholding tax on interest and dividends is raised (from 10% to 15%).
The optional withholding tax on dividends is raised (from 15% to 20%).
1969 16 brackets (10%－75%)
1970 19 brackets (10%－75%)
1971 The optional separate withholding tax on interest (20%) is revived.
1973 The optional withholding tax on interest and dividends is raised (from 20% to 25%). (The taxable income applicable
The securities transaction tax is raised (from 0.15% to 0.3%). to tax rate brackets is raised in
1976 The optional withholding tax on interest and dividends is raised (from 25% to 30%). 1971 and again in 1974.)
1978 The withholding tax rate on interest and dividends is raised (from 15% to 20%).
The optional withholding tax rate on interest and dividends is raised (from 30% to
35%).
The securities transaction tax is raised (from 0.3% to 0.45% for stocks, etc.).
1981 The securities transaction tax is raised (from 0.45% to 0.55%).
1984 15 brackets (10.5%－70%)
1987 A sweeping tax reform 12 brackets (10.5%－60%)
1988 - The maruyu system is abolished, in principle.
1989 - Uniform separate withholding tax on interest (20%) (products similar to financial 5 brackets (10%－50%)
instruments are also subject to the uniform separate withholding tax).
- Securities capital gains are taxed, in principle (introduction of a separate withhold-
ing tax of 1% of the stock transaction value).
- The securities transaction tax is lowered (from 0.55% to 0.3%).
1995 (In 1995, the taxable income
applicable to tax rate brackets is
raised.)
1996 Securities capital gains tax is normalized (from 5% of deemed capital gains to
5.25%).
The securities transaction tax is lowered (from 0.3% to 0.12%).
1998 The securities transaction tax is lowered (from 0.12% to 0.06%).
1999 The securities transaction tax is abolished. 4 brackets (10%－37%)
2001 A tax exemption system is launched for small-amount capital gains from the sale of
stocks held long term (abolished after the 2003 tax system reform).
An emergency investment tax break is established.
2002 The special account system is established (implemented January 2003).
296　Chap. XIV Securities Taxation

late 1990s and early 2000s, the government built taxation systems for stock
options, specific-purpose companies, and corporation type investment trusts
in 1998. Effective April 1999, it abolished the securities transaction tax and
the exchange tax (imposed on futures and options trading), which had long
been issues of concern. Further measures followed with the enhancement of
the Angels Taxation System in 2000 and the introduction of the tax-exemp-
tion system for profits on small sales amounts of stocks being held for the
long term (a ¥1 million special tax exemption on stocks, etc., held for one
year or more) and an emergency investment tax break (a tax exemption on up
to ¥10 million of principal) in 2001. The establishment of the special account
system was included in the tax revisions for fiscal 2002 and launched on Jan-
uary 1, 2003. During the same period, the government reorganized its small-
amount tax-exemption system for small-sum savings of the elderly, etc.
(Maruyu savings system for the elderly, etc.), converting it into a small-
amount, tax-exemption system for persons with disabilities, etc.

2. Transitions in Securities Taxation (2)

Since 2003, the reforms in the securities taxation system have focused mainly
on revisions in the preferential tax system for dividends and capital gains on
listed stocks, etc., expanding the scope of offsetting losses against gains, and
revisions concerning the systems of non-taxables.

Table XIV-2.　Securities Taxation Evolution Timeline (Since 2003)

Year Major amendments Income tax brackets

2003 Non-declaration system is introduced for dividends and capital gains of listed
stocks, etc.
The tax exemption system for small-amount capital gains from the sale of stocks
held long term is abolished
2004 Preferential tax rate on dividends and capital gains from publicly offered stock in-
vestment trusts is introduced
Tax rate on capital gains is reduced from the sale of unlisted stock (from 26% to
20%).
2007 The expiration date of application for a preferential tax rate is extended for a year 6 brackets (5%－40%)
for dividends and capital gains of listed stocks, etc.
2009 Mechanism is introduced enabling netting of dividends and capital gains and losses
from listed stocks, etc.
Preferential tax rate on dividends and capital gains of listed stocks, etc. is extended
for three more years
2011 Preferential tax rate on dividends and capital gains of listed stocks, etc. is extended
for two more years
2014 Nippon Individual Savings Account (NISA) is introduced
2015 7 brackets (5%－45%)
2016 Tax system for bonds, etc. is changed and scope of profit and loss netting expanded
Junior NISA is introduced
2017 Installment-type NISA is introduced (from 2018)
 　297
Chap. XIV Securities Taxation

Chart XIV-1.　Conceptual image of Dollar-Cost Averaging NISA

Nontaxable period: 20 years

Year Year Year Year Year Year Year Year Year Year Year
Investment 1 2 3 4 5 20 21 22 23 24 39
start year
JPY
2018 400,000 Nontaxable period (20 years)
Dollar-Cost Averaging NISA annual
investment limit (2018−2037)

JPY
2019 400,000

JPY
2020 400,000

JPY
2021 400,000

Upper limit nontaxable investment:

JPY
2037 JPY 8,000,000
400,000
(on annual investment: JPY 400,000)

Source: Website of the Financial Services Agency (FSA)

　In terms of the revisions relating to the preferential tax rate, in the fiscal
2003 tax reform, the government introduced a non-declaration requirement
system that imposed only a fixed withholding tax of 20% (15% in income tax
and 5% in local inhabitant tax) on dividends and capital gains from listed
stocks, etc., and distributions of gains from publicly offered stock investment
trusts. At the same time, the government introduced a preferential tax rate of
10% on a limited-time basis. In the fiscal 2004 tax reform, the government
extended this preferential tax rate to cover taxable gains from publicly of-
fered stock investment trusts. Then in the fiscal 2007 tax reform, the govern-
ment carried over the preferential tax treatment for dividends and capital
gains from listed stocks etc., for another year. Furthermore, in the fiscal 2008
reform, with a view to abolishing the preferential tax rate at the end of 2008
and to transition smoothly into the new system, the government implemented
a special measure of applying the preferential tax rate on capital gains of no
more than ¥5 million and dividends of no more than ¥1 million for two years
in 2009 and 2010. However, the fiscal 2009 tax reform extended the prefer-
ential tax rate to December 31, 2011, and the tax reform for fiscal 2011 ex-
tended it another two years. To help fund the restoration of the areas stricken
by the Great East Japan Earthquake, a special income tax for reconstruction
is being levied from 2013 to 2037.
　Looking at the trend in the scope of allowing netting of losses against
298　Chap. XIV Securities Taxation

gains, the fiscal 2003 tax reform made it possible for investors to offset loss-
es on redemptions (termination of agreement) of publicly offered stock in-
vestment trusts on equities, etc., for the year. The fiscal 2004 tax reform add-
ed a tax deduction carryforward system (three years) for capital losses on
publicly offered stock investment trusts. To reduce the risk of investing in
equities for individual investors, the fiscal 2008 tax reform also added a
mechanism allowing investors to offset capital losses on listed stocks, etc.,
against dividends beginning in 2009. Although the application of this mecha-
nism was limited to investors who chose to separately declare their dividend
income from listed stocks, etc. in 2009, it became possible to also do so us-
ing an income tax withholding account from 2010. Furthermore, the fiscal
2013 tax reform enforced changes to the taxation method for bonds, etc.,
making it possible to offset income against losses for interest and capital
gains on specified bonds, etc., and income from listed stocks starting in 2016.
　The revision concerning a tax exemption system introduced NISA in 2014,
followed by the introduction of Junior NISA in 2016. Further, a Dollar-Cost
Averaging NISA will be introduced in 2018 (see section 8). Meanwhile, the
scope of persons eligible to apply for individual-type defined-contribution
pension plan has been widened from 2017 (see section 11).

3. Taxation of Interest

Under the fiscal 2013 tax reform, changes were made to the taxation system
regarding interest income to go into effect in 2016. The outline of the current
system is as follows. The method of separate taxation on the basis of self-as-
sessment or non-declaration is applied for interest on specified bonds and
profits distributed by publicly offered bond investment trusts and investment
trusts managing publicly offered bonds, etc. after paying a 20% withholding
tax (20.315% including the special income tax for reconstruction). Specified
bonds are certain bonds and bond investment trusts, such as government
bonds, local government bonds, foreign government bonds, publicly offered
bonds, and listed bonds. Interest on deposits and savings, and bonds other
than specified bonds and profits distributed by jointly invested trust accounts
and privately placed bond investment trusts are treated, in principle, as inter-
est income, and is subject to a withholding tax at a rate of 20% (20.315% in-
cluding the special income tax for reconstruction) separately from other in-
come.
　Discount bonds may be categorized into two types from the perspective of
taxation on redemption gain. One is subject to an 18% separate withholding
tax (18.378% including the special income tax for reconstruction) on the dis-
count portion (redemption gain) at the time of issuance. Note, however, that
 Chap. XIV Securities Taxation 　299
Table XIV-3.　Interest Taxation System

Classification Outline
・Interest on specified bonds
・Profits distributed by publicly offered Separate taxation on the basis of self-assessment or no dec-
bond investment trusts and investment laration necessary
trusts managing publicly offered bonds, (20% withholding tax including 5% inhabitant tax)
etc.
・Interest on deposits and savings
・Interest on bonds other than specified
bonds (Note 1) Separate withholding tax
・Profits distributed by jointly managed (20% including 5% inhabitant tax)
investment trusts and privately placed
bond investment trusts
・Tax-exempt interest income earned from a small-amount
deposit by persons with disabilities, etc. (on principal of
up to ¥3.5 million)
・Tax-exempt interest income earned from a small-amount
investment in public bonds by persons with disabilities,
Tax-exempt savings system
etc. (on principal of up to ¥3.5 million)
・Tax-exempt system for the workers’property accumula-
tion savings for house construction plan and the work-
ers’property accumulation savings plan (on principal of
up to ¥5.5 million)

Note: 1. Excluding interest on corporate bonds issued by a family company the payment of which is re-
ceived by a corporate executive, etc. of the family company.
2. Special income tax for reconstruction is levied from 2013 to 2037.

discount bonds issued by the Trans-Tokyo Bay Highway Corporation and the
Organization for Promoting Urban Development are subject to a 16% sepa-
rate withholding tax (16.336% including the special income tax for recon-
struction). The other type of discount bonds is basically subject to separate
taxation on the basis of self-assessment at the time of redemption.
　Tax-exempt systems of interest income include the tax-exempt small-
amount savings system for persons with disabilities, etc. and the tax-exempt
system of interest income for workers’property accumulation savings plan
(tax-exempt system for property accumulation).
　The tax-exempt small-amount savings system for persons with disabilities
includes a tax-exempt system for interest income on small-sum savings for
persons with disabilities (Maruyu savings for persons with disabilities, etc.)
and one for interest income on small-amount public bonds for persons with
disabilities (special Maruyu for persons with disabilities, etc.). Both of these
systems have an upper limit of ¥3.5 million for tax-exempt principal, making
earnings on a total of up to ¥7 million in principal tax free when both types
of systems are used. The government abolished the previously available tax-
300　Chap. XIV Securities Taxation

Table XIV-4.　The Status of Taxation on Interest Income, Etc. (2015)

(millions of yen)
Withholding tax
Classification Amount paid
Taxable amount amount

Public bonds 10,188,814 240,952 36,879

Corporate bonds 3,326,196 781,598 118,811
Deposits (Banks) 691,557 572,265 87,029
Deposits (Others) 608,275 360,126 54,859
Jointly invested trusts 22,902 13,770 2,084
Bond investment trusts 86,306 80,984 12,201
Redemption gains from discount bonds 28,002 28,002 5,141
Others 667,682 605,882 113,165
Total 15,619,734 2,683,577 430,169

Notes: 1. Taxable amount includes not only that paid to individuals but also that to corporations.
2. As fractions were rounded to the nearest whole number, the figures may not add up to the actual
total amounts.
Source: Compiled based on the data available on the website of the National Tax Agency of Japan.

exempt system for interest income on postal savings for persons with disabil-
ities, etc., after the privatization of postal services. Now qualified persons
with disabilities include persons with a physical disability certificate, wives
of insured persons receiving survivors’basic pension benefits, and recipients
of widow’ s pension benefits.
　The tax-system for property accumulation includes the workers’property
accumulation savings for house construction plan and the workers’property
accumulation savings plan. These savings are designed to encourage workers
below 55 years of age to buy houses and stabilize their retirement lives, and
the interest on combined principals of ¥5,500,000 or less would be nontax-
able. However, the workers’property accumulation savings plan investing in
life insurance and property insurance, etc., have a nontaxable upper limit of
¥3,850,000.

4. Taxation of Dividends

In principle, not taking into consideration the special income tax for recon-
struction, the balance of dividends, distributions of gains from publicly of-
fered stock investment trusts, and other applicable income earned by stock-
holders or investors after the payment of a 20% withholding tax (15% in
 Chap. XIV Securities Taxation 　301
Table XIV-5.　An Outline of Dividend Income Taxation

Classification Outline
Distributions from publicly offered stock invest- ・Comprehensive taxation
ment trusts, etc. 　(may apply tax credits for dividends)
　(5% to 45% income tax; 10% inhabitant tax)
Dividend on listed stocks,
　(20% withholding (15% income tax; 5% inhabitant
etc. (excluding large
tax))
shareholdings) (Note 1)
・Select either separate taxation on the basis of self-
assessment
　(20% (15% income tax; 5% inhabitant tax)) or
Dividend of sur- withholding tax (20% (15% income tax; 5%
plus, dividend of inhabitant tax))
profits, distribu- 　(non-declaration is also possible)
tion of surplus, Other than above Comprehensive taxation (tax credits for dividends)
etc. (5% to 45% income tax, 10% inhabitant tax)
Dividend paid at one time
(20% (20% income tax) withholding)
is no more than:
¥100,000×
Dividend computational period
No declaration necessary
12
(20% (20% income tax) withholding)
Items below

Notes: 1.“Dividends on listed stocks, etc. (other than those paid to large shareholders)”means those paid
to shareholders holding less than 3% of the outstanding shares of the listed company.
2. In addition, from January 2013 to December 2037, a 2.1% special income tax for reconstruction
is levied against the amount of income tax as a time-limited measure.
Source: Based on the web site of the Ministry of Finance.

income tax and 5% in local inhabitant tax) is subject to comprehensive taxa-

tion. When comprehensive taxation is levied on dividend income, the Income
Tax Act allows the deduction of a certain percentage of dividend income (tax
credits for dividends) to avoid double taxation.
　For distributions, etc., of gains on publicly offered stock investment trusts
and for dividends paid on listed stocks other than those paid on large share-
holdings (those paid to a shareholder who holds 3% or more of the outstand-
ing shares of a corporation), the payee of dividends has the option of adopt-
ing comprehensive taxation, separate taxation on the basis of self-assessment,
or non-declaration of dividend income (withholding tax only on their divi-
dend income). For a limited period, stockholders and investors have enjoyed
a preferential tax rate of 10% (10.147% in 2013) on this income. However,
from 2014 to 2037, the rate will be 20.315%, after which a tax rate of 20%
will be applied. For a limited period, stockholders and investors have enjoyed
a preferential tax rate of 10% (10.147% in 2013) even for separate taxation
on the basis of self-assessment. However, from 2014 to 2037, the rate will be
20.315%, after which a tax rate of 20% will be applied. It was from 2009 that
choosing the separate taxation on the basis of self-assessment became an op-
302　Chap. XIV Securities Taxation

Table XIV-6.　Taxation of Dividend Income (withheld at source) (2015)

(millions of yen)
Amount paid
Withholding
Classification Taxable Tax-exempt tax amount
amount amount
Dividends on profit or interest income, dis-
tribution of retained earnings, and dividends, 27,982,277 20,787,341 7,194,937 3,830,091
etc., / on interest on fund corporations
Distributions of profits of investment trusts
and investment trusts with specific invest- 3,402,506 2,604,133 798,373 398,830
ment purposes
Remittance to optional withholding tax ac-
2,372,740 2,372,740 － 362,772
count
Total 33,757,523 25,764,214 7,993,309 4,591,692

Notes: 1. Bond investment trusts and investment trusts managing publicly offered bonds, etc., are not in-
cluded in“investment trusts.”
2.“Taxable amount”includes not only that paid to individuals but also that to corporations.
3. As fractions were rounded to the nearest whole number, the figures may not add up to the actual
total amounts.
Source: Compiled based on the data available on the website of the National Tax Agency of Japan.

tion. Moreover, from 2010, investors have been able to combine dividends,
etc., from listed stock, etc., in their withholding tax accounts. The term“list-
ed stock, etc.,”refers to shares that are listed on domestic and foreign stock
exchanges and includes such shares as ETFs (exchange traded funds).
　Meanwhile, dividends on stocks other than listed stocks (unlisted stocks)
and those received by large individual shareholders are subject to compre-
hensive taxation after paying a 20% withholding tax (20.42% from 2013 to
2037). In this case, shareholders have the right to select the non-declaration
of dividends paid at one time of no more than the amount derived by propor-
tionally dividing ¥100,000 over the dividend-computation period. However,
local inhabitant tax is subject to comprehensive taxation.
　Distributions of profit from publicly offered stock investment trusts are
treated as dividend income when investors opt for the comprehensive taxa-
tion method, entitling the investors to tax credits. However, the rate of deduc-
tion varies depending on the ratio of foreign currency denominated assets and
non-stock assets of the stock investment trust concerned. If the percentage of
either foreign currency denominated assets or non-stock assets is over 75%,
the deduction of dividends is not allowed. For profits distributed by privately
placed stock investment trusts of the contractual type (see section 10 below),
such dividends less withholding tax are subject to comprehensive taxation
(dividends are deductible).
 　303
Chap. XIV Securities Taxation

　For the purpose of computing the amount of dividend income, interest paid
on a debt incurred to acquire stocks, etc., may be deducted from the taxable
income. However, this is recognized only when the investor files a tax return.

5. Adjustment of Double Taxation Relating to Dividends

Profits generated by a business corporation through its business activities

should, basically, be returned to the owner of that corporation. However, cor-
porate income is usually taxed twice: corporate income tax and individual in-
come tax (dividend tax and capital gains tax). Considering that, ultimately, it
is the individuals who have the duty of paying taxes, some adjustments have
to be made to avoid double taxation. This is the question of consolidating
corporate tax and an individual’ s income tax. Ideally, all forms of double tax-
ation of corporate income—be it retained earnings or dividends—should be
rectified. However, adjustments are chiefly made to the dividend portion.
　The method employed to adjust for double taxation related to dividends
varies according to whether the recipients are individuals or corporations. In
the case of individual shareholders, a dividend tax credit system is applied
that makes 10% of their dividend income (and 2.8% for inhabitant tax) de-
ductible from their tax liability. However, in the case of those whose taxable
income exceeds ¥10 million, 5% of such part of their dividend income that
pushes their taxable income over and above ¥10 million (and 1.4% for inhab-
itant tax) is deductible. For instance, when individual shareholders have a to-
tal taxable income of ¥13 million (¥9 million in general income and ¥4 mil-
lion in dividend income), they are entitled to a tax deduction of 5% of such
part of their dividend income that pushes their taxable income over and
above ¥10 million, which is ¥3 million (=¥13 million－¥10 million), and
10% of other part of their income, which is ¥1 million. Therefore, they are
entitled to a tax deduction of ¥250,000 (¥150,000 (=(¥13 million－¥10 mil-
lion)×0.05)＋(¥100,000 (=(¥10 million－¥9 million)×0.1). Also, in regard
to dividends received by corporate shareholders, the scope of taxable income
was revised in the fiscal 2015 tax reform. As for investments in stocks with a
high shareholding ratio, revisions were made to the criteria on shareholding
ratio, while the entire amount of dividends received on such shares were not
to be counted as taxable income. On the other hand, in regard to investments
in stocks, etc. with a low shareholding ratio, a new category was established
and the ratio for not counting as taxable income was partially lowered.
　In foreign countries, the imputation method has broadly been adopted as a
method to adjust for double taxation. The method of dividend-received de-
ductions employed in Japan and the partial imputation method employed in
the United Kingdom are both types of imputation methods. Other methods
304　Chap. XIV Securities Taxation

Table XIV-7.　Adjustment of Double Taxation in Major Countries (individual stage)

(As of January 2017)

Countries Adjustment method Remarks
[When selecting no declaration nec-
For dividends on listed stocks, etc., withholding at source
essary or separate taxation on the
is applied, allowing an option of selecting no declaration
basis of self-assessment] necessary and comprehensive taxation. In addition, since
No adjustment treatment capital losses on stocks can be offset against gains,
separate taxation on the basis of self-assessment may also
Japan
[When selecting comprehensive be chosen.
taxation]
Dividend credit
(dividend-received deduction
method)
No adjustment treatment A preferential tax rate similar to the capital gains tax is
applied to a certain level of dividend income at the indi-
United States vidual shareholder level. The U.S. abolished the adjust-
ment treatment for corporation tax and income tax at the
individual shareholder level in 1936.
Dividend-received partial deduction Although partial adjustment had been made based on the
method partial imputation method, the treatment was abolished
U.K.
(£5,000 deducted from dividend when the £5,000 deduction from income was introduced
income of individuals) in April 2016.
No adjustment treatment Under the comprehensive taxation system, the dividend-
received partial deduction method (50% of dividends re-
ceived are included in shareholder’
s taxable income) was
employed until 2008. However, non-declaration (separate
Germany taxation) treatment for a uniform 25% rate on interest,
dividends and capital gains was introduced in 2009 as a
result of which adjustment between corporate tax and in-
come tax at the individual shareholder level was abol-
ished.
Dividend-received partial deduction Under the comprehensive taxation system, the dividend-
method received partial deduction method (60% of dividends re-
(60% of dividends received are in- ceived are included in shareholder’ s taxable income) was
cluded in shareholder’s taxable in- employed until 2007. However, with the introduction of a
come) method to allow selecting of comprehensive taxation or
separate taxation in 2008, no adjustment between corpo-
France
rate tax and income tax at the individual shareholder level
was made when the separate taxation method was select-
ed. Based on the 2013 budget law, the system of selecting
separate taxation for interest, dividends and capital gains
was terminated. As a result, a progressive tax rate has
been applied uniformly starting with the 2013 income.

Source: Compiled based on the data in Illustrated Taxation System of Japan, FY2017 edition, page 303,
Iichiro Yoshino.
 　305
Chap. XIV Securities Taxation

used to adjust for double taxation include the dividend paid deduction meth-
od (which authorizes deduction of dividends paid on the corporate level from
corporate taxable income) and the comprehensive business income tax meth-
od (CBIT). Interest and dividends are not deductible from taxable income on
the corporate level, and such interest and dividends received by individuals
are not subject to income tax.

6. Capital Gains Taxation (1)

In 2003, the system of opting for a separate withholding tax or for separate
taxation on the basis of self-assessment for gains on the sale of stocks, etc.,
was abolished, and these taxes were unified into the latter system of sepa-
rately filing an income tax return. In other words, not taking into account the
special income tax for reconstruction, a 20% tax rate (a 15% income tax and
a 5% inhabitant tax) is applied to an amount of income arrived at by deduct-
ing the cost of acquiring or selling the security and interest paid on the fund
used for the purchase of such security from the proceeds of such security.
The capital gains from the sale of listed stocks, etc. may be treated so as to
deal with issues related to taxable income based on withholding tax only us-
ing a specified account which will be discussed later. Previous to 2003, capi-
tal losses from the sale of stocks, etc., were deductible only from capital
gains from the sale of other stocks, etc., if any, made during the same year,
and it was not permissible to carry forward any unused losses. However,
since 2003, investors have been able to carry forward capital losses from the
sales of listed stocks, etc., for three years starting with the year following
their occurrence. Also, since 2009, investors have been able to deduct capital
losses on listed stocks, etc., from dividends, etc., received from listed stocks,
etc. Furthermore, starting in 2016, based on the change in the taxation meth-
od for bonds, etc., it became possible to offset income against losses for in-
terest and capital gains from specified bonds, etc., and income from listed
stocks, etc.
　Along with the abolition of the separate withholding tax system, the au-
thorities sought to lessen the reporting burden on investors by establishing a
special account system. Under this type of account, a securities company
computes capital gains or losses, as the case may be, for its customer from
the sale of shares of a listed stock, etc., made through a special brokerage ac-
count. The account is divided into two categories: the income tax withhold-
ing account and the simplified income tax return account (no tax is withheld).
When an investor sells his shareholdings through the income tax withholding
account, his securities company withholds the income tax, obviating the need
for the investor to file an income tax return. Furthermore, from 2010, it be-
306　Chap. XIV Securities Taxation

Table XIV-8.　Outline of the Capital Gains Taxation System for Stocks, Etc. (from 2016)

Outline

Separate taxation on the basis of self-assessment

　Capital gains on listed stocks, etc. ×20%
　　　　　(15% income tax: 5% inhabitant tax)
*Special exception on no declaration necessary for withholding tax
account
　For income maintained in a withholding account (specified account se-
Listed stocks, etc.
lected for tax withholding purpose) from the sale of listed stocks, etc.
・Listed stocks taxable-income-related issues may be completed based on withholding
・ETF tax (20%: income tax 15%. inhabitant tax 5%) only.
・Publicly offered in- *Gain/loss offset and carrying-forward of unused deductible losses
vestment trusts relating to listed stocks, etc.
・Specified bonds, etc. 　Losses from the sale of listed stocks, etc. may be deducted from the
amount of dividend income, etc. on listed stocks, etc. for the same
year.
　For unused deductible losses relating to unlisted stocks, etc., the inves-
tor may carry it forward for a three-year period starting from the fol-
lowing year as deduction from the amount of capital gains from listed
stocks, etc. (Note 3) and the amount of dividend income, etc. from list-
ed stocks, etc.

General stocks, etc. Separate taxation on the basis of self-assessment

(Stocks, etc. other than 　Capital gains on general stocks×20% (15% income tax, 5% inhabitant
listed stocks) tax)

Notes: From January 2013 to December 2037, a 2.1% special income tax for reconstruction is separately
levied against the amount of base income tax as a time-limited measure.
Source: Compiled based on information available on the website of the Ministry of Finance.

came possible for the securities company to deposit dividends from listed
stocks, etc. of customers that are subject to withholding tax in the income tax
withholding account set up for the customers. However, if an investor using
such an account also files a final return, the investor is also allowed to in-
clude capital gains or to offset capital losses from the sale of such shares
through another account. Further, in conjunction with the change in the taxa-
tion method for bonds, etc. effective 2016, the scope of application of the
special account has also been widened. When an investor opts for the income
tax withholding account and does not file a final return, the capital gains are
not included in the total amount of his income for the purpose of income tax
and local inhabitant tax, and the spousal deduction is not affected. By con-
trast, if an investor opts for the simplified income tax return account, such an
investor may file a simplified version of the income tax return by attaching to
it an annual statement of stock trading made under a special brokerage ac-
 Chap. XIV Securities Taxation 　307
Chart XIV-2.　Withholding Taxes on Capital Gains on the Sale of Listed Stock, Etc.,
Managed in Special Brokerage Accounts

(millions of yen)
600,000 577,913
516,579
500,000
433,386
400,000

300,000
223,942 210,356
200,000

100,000
49,652 50,449 46,817 38,895 43,371
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Based on the website of the National Tax Agency of Japan.

count received from his securities company. Currently, securities companies

must send an annual statement of stock trading to the customer and the tax
office no matter what type of special brokerage account is selected by the
customer.

7. Capital Gains Taxation (2)

While, in principle, separate taxation on the basis of self-assessment is ap-

plied on capital gains on stocks, etc., capital gains on the sale of zero-coupon
bonds, interest-bearing bonds that fall under bonds depending on the method
of discount, discount bonds issued in Japan by the Japan Housing Finance
Agency, the former Housing Loan Corporation, Okinawa Development Fi-
nance Corporation, Urban Renaissance Agency, foreign governments, foreign
local government bodies, international organizations and such like, certain
short-term discount bonds issued in Japan, and bonds (excluding discount
bonds) for which no interest is paid by December 31, 2015 are subject to
comprehensive taxation. In addition, capital gains on golf club membership
in the form of stocks are subject to comprehensive taxation.
　The Angels Taxation System was created under the fiscal 1997 amendment
to the taxation system. It is a special measure designed to encourage individ-
ual investors (angels) to invest in venture-stage firms or start-ups and applies
to shares (specified shares) of venture-stage firms or startups (specified
308　Chap. XIV Securities Taxation

Chart XIV-3.　An Outline of the Angels Taxation System

Preferential tax measures for start-up investment (selective application of methods 1 and 2)

1. When an investment is made in any venture-stage firm (specified small-to-midsize firm), the investor may
apply the contributions tax deduction for up to ¥10 million.

Total employment
Investment amount income, etc.
(¥5 million) ( ¥13 million)

Application of contributions Taxable amount ¥ 8 million

tax deduction
comprehensive taxation

2. There is a reduction in capital gains on the stock when an investment is made in a start-up firm (specified
small-to-midsize firm).

Investment amount Capital gains on stock

(¥5 million) (¥13 million)
Deduction from capital gains Taxable amount ¥ 8 million
on stock in same year
separate taxation
Note: 1. When preferential tax measures 1 or 2 are applied, the acquisition costs of the stock of the start-up firm is
the amount less the tax deduction stated above.
2. Tax exemption on capital gains on general stock, etc., or on listed stocks, etc. (starting with fiscal 2016
income).

Preferential tax measures following investment

3. Should the business of the start-up firm (specified small-to-midsized firm) fail, and a loss to be suffered from the sale,
etc., of stock prior to listing, etc., the investor may carry forward unused deductible losses for a three-year period.

Stock capital gain Stock capital gain Stock capital gain Stock capital gain

Following year Second year Third year

Loss 1. Capital loss occurring in the year is netted again any capital gain from general stock, etc.,
and any remaining capital loss may be netted with capital gain on listed stock, etc., to a
maximum of the capital gain for the year.
2. Carry forward unused deductible losses may be netted with remaining capital gain to a
maximum of the remaining capital loss on general stock, etc., and listed stock, etc.
(1. and 2. Above start with fiscal 2016 portion)

Note: When an investor sells specified shares acquired before April 30, 2008, and held for more than three years
within three years of listing or before listing by reason of a merger, the resulting capital gains are reduced
by half.
Source: Illustrated Taxation System of Japan, 2016 edition [Zaikeishouhousha], page 113, compiled by
Yoshiyuki Tahara.

small-to-midsize firms) that meet certain requirements. This taxation system

has been revised several times since the establishment of this plan. Most re-
cently, the special tax treatment reducing the rate on capital gains for speci-
fied small-to-midsize firms to 50% was extended for two years in the fiscal
2005 tax revisions. The fiscal 2007 tax reform added another two years and
liberalized the eligibility requirements for the special tax treatment and ratio-
nalized the approval process. This special tax treatment was abolished under
 　309
Chap. XIV Securities Taxation

the fiscal 2008 tax reform. However, at the same time, the government set up
a contributions tax deduction system for investors that invest in these types
of venture companies (specified start-up small-to-midsize firms) during their
start-up period. Furthermore, under the fiscal 2016 amendment to the taxa-
tion system, the scope of stocks eligible for the Angels Taxation System was
changed assuming that the Enforcement Regulations for the Local Revital-
ization Act be amended.
　The outline of the current Angels Taxation System is as follows. (1) since
April 1, 2008, investors that have acquired stock in a specified small-to-mid-
size firm through direct investment may apply the contribution deduction for
up to ¥10 million of the amount invested in the said company (investors may
choose to apply either (1) or (2) per stock issue); (2) investors may deduct
the acquisition costs of shares of a specified small-to-midsize firm from their
capital gains in the same year; and (3) when investors suffer losses from the
sale of the specified stocks up to a day before the listing date, or when they
suffer losses from the dissolution and liquidation of issuers, these losses are
deductible from gains on the sale of stocks in the same year. Unused deduct-
ible losses may be carried forward for three years starting with the following
year.

8. NISA

Based on the fiscal 2013 tax reform, NISA was introduced in Japan in 2014.
NISA is another word for a small amount investment tax-exemption scheme,
the tax exemption measure on dividends and capital gains on small invest-
ments in listed stocks, etc., in tax-free accounts. NISA is modeled on the In-
dividual Savings Account (ISA)—a preferential tax system for investments
and savings introduced in the U.K. in 1999—and it was initially referred to
as the Japanese-version ISA. The“N”in NISA stands for NIPPON (Japan).
This system may also be referred to as the General NISA.
　An outline of NISA is provided below. Dividends, coupons, and capital
gains from listed stocks, etc. in the NISA account are tax-exempt. A NISA
account may be opened by residents of Japan aged 20 years or older on Janu-
ary 1 of the year of the account opening. The amount of annual investment
was initially set at a maximum of ¥1 million making the total tax-exemption
investment amount ¥5 million (¥1 million×5 years). However, starting in
2016, the annual investment amount was increased to a maximum of ¥1.2
million with the total tax-exemption investment amount coming in at ¥6 mil-
lion (¥1.2 million×5 years). The NISA account may be maintained for 10
years from 2014 to 2023, with a maximum tax-exempt period of five years.
Stocks, etc. may be freely sold during the period but the tax-exempt coverage
310　Chap. XIV Securities Taxation

Table XIV-9.　Comparison of General NISA and Installment-type NISA

General NISA Dollar-Cost Averaging NISA

Persons eligible to apply Persons aged 20 or above living in Japan
One account per person; select either General NISA or Dollar-Cost Averaging
Account opening
NISA
Switching the General NISA account↔Dollar-Cost Averaging NISA account
By applying for the account switch procedure, the other product can be used.
Account switch
(Note) If a user applies for a loan under the General NISA account, no switching
to the Dollar-Cost Averaging NISA is allowed during the year.
Up to 5 years from the initial year of Up to 20 years from the initial year of in-
Tax-exempt period
investment vestment
Investment trusts that satisfy certain re-
Listed stocks, stock investment trusts, quirements as appropriate means of long-
Tax-exempt product
etc. term, installment and diversified invest-
ment
Limit of usage
Up to ¥1.2 million a year Up to ¥0.4 million a year
(Tax-exempt line)
Investment period Until December 31, 2023 Until December 31, 2037
Netting of profit and loss No netting of profit and loss with a specified account and general account
Early sale Yes (no reuse of the sold portion)
Change of financial institution Possible to change by year
Others Must provide My Number at the time of account opening
Method of purchase is limited to periodi-
cal purchase (e.g. once a month) of a cer-
tain amount (installment investment)

Source: Compiled based on the data available on the website of the Japan Securities Dealers Association
(JSDA).

of the sold portion cannot be reused. Although initially account-holders were

not permitted to switch the financial institution at which the NISA account is
opened for a maximum of four years, effective January 1, 2015, the rule was
changed to allow switching of the financial institution on a yearly basis.
　Furthermore, based on the fiscal 2015 tax reform, Junior NISA (a small
amount investment tax-exemption scheme on dividends and capital gains on
small investments in listed stocks, etc., in tax-free accounts of underaged per-
sons) was introduced from 2016. Under the Junior NISA scheme, the tax ex-
emption treatment applies on dividends and capital gains on small invest-
ments in listed stocks, etc., in tax-free accounts opened by persons under the
age of 20. The maximum annual investment amount is ¥800,000, making the
maximum tax-exempt investment amount ¥4 million (¥800,000×5 years).
The account may be opened for eight years from 2016 to 2023 and the maxi-
mum tax-exempt period is set at five years. In principle, no withdrawal can
 Chap. XIV Securities Taxation 　311
Table XIV-10.　Outline of Junior NISA

Small amounts of dividends and capital gains on listed stocks in tax-free Ju-
Tax-Exempt
nior NISA account
Eligible account openers Residents under the age of 20 on January 1 of the year of account opening
(investors) or born in the year
Maximum annual invest-
¥800,000
ment
Tax-exempt investment
Maximum of ¥4 million
amounts
Account opening period 8 years from 2016 to 2023
Tax-exempt period Maximum of 5 years
Investments are made by agency or upon concurrence of a person with pa-
Investment management rental authority and, in principle, no withdrawal can be made until the ac-
count holder reaches the age of 18.

Source: Compiled based on various data issued by the National Tax Agency and the Ministry of Finance

be made until the account holder reaches the age of 18.

　Furthermore, based on the fiscal 2017 tax reform, the Dollar-Cost Averag-
ing NISA will be launched from 2018. The primary characteristics of the
product are: (1) investors can start by making contributions in small amounts
to tax-exempt investment trusts; (2) investors can contribute up to ¥400,000
a year, with capital gains tax exempt for up to 20 years; (3) investors hold
only one NISA account, either the general NISA or the Dollar-Cost Averag-
ing NISA; and (4) the applicable investment trusts are expected to be appro-
priate for long-term installment and diversified investment aimed at stable
asset formation as provided for under relevant laws and regulations.

9. Taxation of Nonresidents

The Income Tax Act of Japan divides individuals into residents and nonresi-
dents. Residents are individuals who have a domicile in Japan or a temporary
residence at which they have been living for one year or more. All individu-
als other than residents are deemed nonresidents. Of the residents, individu-
als who do not have Japanese citizenship and who have or have had a domi-
cile in Japan or a temporary residence at which they lived for a total of no
more than five years in the past 10 years are referred to as non-permanent
residents. The entire income (worldwide income) of residents other than non-
permanent residents is subject to income tax. For non-permanent residents,
income generated in Japan (domestic source income) and other income
312　Chap. XIV Securities Taxation

Table XIV-11.　Outline of Matters Related to Taxation of Nonresidents, Etc.

Nonresident category Nonresidents with a permanent establishment

in Japan Nonresidents without a
Withholding
Income attributable to permanent establish-
Other income sourced ment in Japan tax
permanent establish-
in Japan
Type of income ment
(Business income) [Tax-Exempt Income] None
(1) Income arising from invest-
ment/holding of assets
＊ [Comprehensive None
Excluding those corresponding to
taxation] [Comprehensive taxation (partial)]
(7) through (15) below
(2) Income arising from transfer of
None
assets
(3) Distribution of business profit
[Tax-Exempt Income] 20.42%
of partnership
(4) Proceeds from sales of land, etc. 10.21%
(5) Compensation for personal ser-
[Separate withholding tax followed by 20.42%
vices
comprehensive taxation]
(6) Rental income, etc., from real
20.42%
estate
(7) Interest, etc. 15.315%
(8) Dividends, etc. 20.42%
(9) Loan interest 20.42%
[Separate withholding
(10) Usage fees, etc. tax followed by 20.42%
(11) Salary or other remuneration comprehensive
for personal services, public taxation]
20.42%
pension income, severance
pay, etc.
[Separate withholding tax]
(12) Prize money from business ad-
20.42%
vertising and promotion
(13) Annuity income, etc., from life
20.42%
insurance contract
(14) Interest payment from invest-
15.315%
ment savings plan
(15) Distribution of profit from
20.42%
anonymous partnership, etc.
[Comprehensive
(16) Other income sourced in Japan [Comprehensive taxation] None
taxation]

Notes: 1. Income attributable to permanent establishment may overlap with income sourced in Japan pro-
vided in (1) through (16) above.
2. Based on the provisions of the Act on Special Measures Concerning Taxation, certain income
included in the income subject to comprehensive taxation in the above table may be applicable
for separate taxation on the basis of self-assessment or separate withholding tax.
3. Based on the provisions of the Act on Special Measures Concerning Taxation, withholding tax
rates relating to certain income among the withholding tax rates in the above table may be re-
duced or exempted in some cases.
Source: Complied from“Withholding Tax Basics,”FY2017 edition, National Tax Agency of Japan.
 　313
Chap. XIV Securities Taxation

earned in Japan or income remitted to Japan is taxable. And for nonresidents,

tax is imposed on their domestic source income only. The method of imposi-
tion of income tax for nonresidents, i.e. whether the comprehensive taxation
applies or the separate withholding tax applies, varies depending on the type
of domestic source income, whether the nonresident has a permanent estab-
lishment (PE) in Japan or not, and whether the domestic source income is
traced to the PE. A permanent establishment refers to (1) a branch, plant, or
other fixed location for business in Japan of a nonresident, etc.; (2) a place
for construction in Japan of a nonresident, etc.; or (3) a party in Japan which
has the right to enter into a contract for a nonresident, etc. or any party equiv-
alent thereof.
　For example, looking at the taxation system for interest and dividends, of
the domestic source income of a nonresident, etc., income attributable to a
permanent establishment of the nonresident, etc. (income attributable to PE)
is subject to comprehensive taxation after withholding at the source, while
income other than that corresponding to income attributable to PE is subject
to a separate withholding tax. The withholding tax rate is 15.315% and
20.42%, respectively. The withholding tax rates applied to nonresidents and
foreign corporations are finally determined in accordance with the tax trea-
ties Japan has signed with the countries where nonresidents, etc. receiving
the payments reside.
　Japanese government bonds owned by nonresidents are tax exempt. In
other words, interest on government bonds held by a nonresident without a
permanent establishment in Japan in an account with a specified central cus-
tody and transfer agent or a qualified foreign intermediary is exempt from in-
come tax if it meets certain conditions. In addition, while interest on book-
entry government bonds may not be tax-exempt, the withholding tax rates
applied to nonresidents and foreign corporations are relaxed in accordance
with the tax treaties Japan has signed with the countries where nonresidents,
etc. reside.

10. Tax Treatment of New Products

(1) New types of investment trusts

Profits received from a privately placed stock investment trust of the contrac-
tual type are, in principle, subject to a withholding tax and then are taxed
comprehensively together with other incomes of the recipients of such prof-
its. The tax credit for dividends is also applied, and when the recipient meets
certain requirements, he is exempted from the requirement of filing an in-
come tax return. Capital gains from selling beneficiary certificates of such
investment trusts are subject to separate taxation on the basis of self-assess-
314　Chap. XIV Securities Taxation

Table XIV-12.　Outline of Taxation Framework for New Investment Trusts

Profit distribution,
Classification Cancellation (redemption) gains Capital gains
etc.
Privately placed stock Taxable as dividend Taxable as dividend income; Separate taxation
investment trusts income separate taxation on the basis of on the basis of self-
Contractual type

self-assessment applies to the assessment

portion deemed capital losses
I n v e s t m e n t t r u s t s Separate withhold- Separate withholding tax; sepa- Separate taxation
man ag ing privately ing tax rate taxation on the basis of self- on the basis of self-
placed asset-manage- assessment applies to the portion assessment
ment trust bonds, etc. deemed capital losses
Publicly Open-end Separate taxation on Separate taxation on the basis of Separate taxation
offered type the basis of self-as- self-assessment on the basis of self-
sessment, compre- assessment
Corporation type

hensive taxation, no
declaration
Closed-end Taxable as dividend Taxable as dividend income; Separate taxation
type income separate taxation on the basis of on the basis of self-
(Unlisted) self-assessment applies to the assessment
portion deemed capital losses
Privately placed

Source: Compiled based on the information available in“FY2017 Zeikin no Chishiki (knowledge on tax-
es)”by SMBC Nikko Securities Solution Planning Division; CHUOKEIZAI-SHA, INC.; pp124
and 130; and“FY2017 Zeikin Dokuhon (tax handbook)”by Daiwa Institute of Research Ltd., pp
186.

Table XIV-13.　Taxation on Stock Options

At grant of
At exercise of stock options At the sale of stocks
stock options
Qualified stock Separate taxation on the basis of self-
options － － assessment on (selling price - exer-
cise price) (Note)
Non-qualified Comprehensive taxation on Separate taxation on the basis of self-
stock options － (market value of stocks at assessment on (selling price - market
exercise-exercise price) value of stocks at exercise) (Note)

Note: Taxed as income on the sale of stocks.

ment. Profits received from an investment trust managing privately placed

bonds are subject to a separate withholding tax, and capital gains, which used
to be tax-exempt, are currently subject to separate taxation on the basis of
self-assessment. Tax rates related to open-ended corporation type investment
trusts are the same as those applied to listed stocks. In other words, on divi-
dends received from open-end investment trusts, a withholding tax of
 　315
Chap. XIV Securities Taxation

20.315% is imposed before comprehensive taxation, separate taxation on the

basis of self-assessment, or non-declaration. A credit for dividends is not ap-
plied when the comprehensive taxation is selected on dividends. Capital
gains associated with open-ended corporation type investment trusts are sub-
ject to the separate taxation on the basis of self-assessment. On the other
hand, dividends received from closed-end (unlisted) or privately placed in-
vestment trusts are subject to a withholding tax of 20.42% and then to com-
prehensive taxation. In general, a taxation system is selected that does not re-
quire the declaration of such income when certain requirements are satisfied.
A credit for dividends is not applied when the comprehensive taxation is se-
lected on dividends. Capital gains associated with open-ended corporation
type investment trusts are subject to the separate taxation on the basis of self-
assessment. For REITs (real estate investment trusts), if listed would be
closed-end, but dividends and capital gains from the sale of listed REITs are
subject to almost the same taxation as listed stocks. However, a credit for
dividends is not applied when comprehensive taxation is selected on divi-
dends.

(2) Stock options

The stock option system is a system under which a company grants its offi-
cers and employees the right to purchase its stocks at a certain price (exercise
price) for a certain period (exercise period). The company then pays its offi-
cers and employees remunerations linked to any increase in its stock price.
Stock option is classified into a qualified stock option and a non-qualified
stock option, depending on whether it satisfies the requirements stipulated in
the Act on Special Measures Concerning Taxation or not. The former is tax
deductible on economic benefits gained from its exercise (the difference be-
tween the market price and the exercise price). When selling stocks acquired
through rights exercise, separate taxation on the basis of self-assessment is
applied on the difference between the selling price and the exercise price. For
the latter non-qualified stock option, comprehensive taxation is imposed on
economic benefits gained from its exercise. Separate taxation on the basis of
self-assessment is imposed on the selling price of stocks issued on the exer-
cise, deducting the market price of the stocks at the time of exercise, when
the stocks are sold.

11. Tax Treatment of Pension-Type Products

To cope with the economic and societal changes that have occurred over the
years—a swollen unfunded corporate pension obligation, a growing shortage
of public pension funds, the introduction of international accounting stan-
316　Chap. XIV Securities Taxation

Chart XIV-4.　Beneficiaries of Defined Contribution Pension, Ceiling on Contributions,

and the Existing Pension System (2017)

iDeCo iDeCo
The ceiling on
The ceiling on contributions:
contributions: ¥144,000 per
¥240,000 per year
(¥12,000 per
year month) iDeCo
iDeCo (¥20,000 per
month) Corporate-type DC
The ceiling on
contributions:
¥144,000 per
The ceiling on The ceiling on
year
contributions:
contributions: Corporate-type DC ¥330,000 per (¥12,000 per
month)
¥816,000 per The ceiling on
year
(¥27,500 per
year month) ※2 Defined benefit plan iDeCo
iDeCo contributions: The ceiling on
(¥68,000 per pension systems contributions:
month) The ceiling on ¥660,000 per Defined benefit plan (Employee pension ¥144,000 per
contributions: year pension systems funds, defined benefit year
※Total amount (¥12,000 per
¥276,000 per (¥55,000 per (Employee pension funds, corporate pension,
 with National iDeCo month) defined benefit corporate private mutual aid
month)
 Pension Fund The ceiling on year Pension payment or
(¥23,000 per ※1 pension, private mutual association, etc.) Retivement Benefits by
National public officers
contributions: aid association, etc.) no ceiling on mutual aid association
¥276,000 per month) no ceiling on contributions contributions Regional public officers
mutual aid association
National Pension Fund year
※Duplicate subscription
(¥23,000 per Employees welfare pension insurance and mutual-aid pension plans
 with iDeCo is possible month)

National Pension (Basic pension)

National Pension National Pension National Pension Civil servants

(No. 1 insured persons) (No. 3 insured persons) (No. 2 insured persons)
※1 If Employer implements only Corporate-type DC Employee will be permitted to participate in Individual-type DC only in the case
   where the pension agreement provides that the contribution by Employer to the Corporate-type DC shall not exceed ¥420,000 per
   year (¥35,000 per month).
 2 If Employer implements both Corporate-type DC and Defined-benefit Pension, Employee will be permitted to participate in
   Individual-type DC only in the case where the pension agreement provides that the contribution by Employer to Corporate-type DC
   shall not exceed ¥186,000 per year (¥15,500 per month).

Source: The web site of the Ministry of Health, Labor and Welfare (http://www.mhlw.go.jp).

dards, and an increasing slackness in the job market—a defined contribution

pension plan (the Japanese version of the 401(k) plan) was introduced in Oc-
tober 2001. The defined contribution pension plan is a private pension plan
whereby an employee participating in the plan gives instructions about in-
vesting his or her contributions, with the understanding that pension benefits
may vary depending on the results of such investment. It is divided into the
individual type (iDeCo), in which the individual himself makes contribu-
tions, and the corporate type, in which the company in principle makes con-
tributions on behalf of its employees. In order to encourage the spread of
pension products based on such a system and to enhance the efficiency of the
management of such plans, it is essential to give a fixed tax incentive. And in
devising such a taxation system, due care must be exercised in striking a suit-
able balance between the taxation system for such pension plans and that for
other pension plans as well as in the transferability of pension assets when
changing jobs. The government has taken the following tax measures appli-
cable to defined contribution pension plans.
　Tax measures for defined contribution plans are as follows.
　(1) At the contribution stage: Premiums paid to a pension plan of the indi-
 Chap. XIV Securities Taxation 　317
Table XIV-14.　Tax Treatment of Defined Contribution Pension Plans

Division Individual type Corporate type

Contribution stage: Counted as a loss of the
employer and not added to
Portion borne by the
the salary of the employee
employer
Premiums paid by em- Premiums to small-scale company mutual aid association are deducted as a
ployee loss (Note)
Management stage: Special corporate income tax is applied (frozen until the end of Fiscal 2016)
Benefits payment stage:
Old-age Pension Miscellaneous income (deduction for public pensions is applied)
benefits
Lump sum Retirement income (deduction for retirement income is applied)
Disability Pension Income and inhabitants’taxes are deductible
benefits
Lump sum
Lump-sum payment at Taxed as an inheritance income
the time of death
Lump-sum payment at Occasional income
the time of withdrawal

Note: Premium payments by employees for Corporate type of plan started in January 2012.

vidual type by a self-employed person are eligible for income deduction (de-
duction for small enterprise mutual relief premium). Premiums paid to corpo-
rate pension plans by a company are counted as a loss of such company and
are not counted as an income of the employee for whom such premiums are
paid. As of January 2012, matching contributions by employees have been
approved for corporate pension plans. Therefore, the entire amount of contri-
butions by employees is eligible for the deduction for the small enterprise
mutual relief premium.
　(2) At the management stage: The balance of reserves for a pension plan of
the individual type and that of the corporate type are subject to a special cor-
porate tax of 1.173% (1% in national tax and 0.173% in local tax). However,
this provision has been frozen until March 31, 2020.
　(3) At the stage of benefit payment: (i) Old-age pension benefits: The ben-
eficiary can receive pension benefits from the reserve in five or more annual
installments or in a lump sum. When the beneficiary opts for benefits in in-
stallments, such benefits are deductible from taxable income. The amount
deductible varies according to the age of the beneficiary and the amount of
income the beneficiary receives from publicly managed pension plans. How-
ever, a minimum benefit of ¥1.2 million is recognized for those who are 65
years of age or older or ¥700,000 for those who are less than 65 years of age.
318　Chap. XIV Securities Taxation

Benefits paid in a lump sum are eligible for retirement income deductions.
(ii) Benefits for persons with disabilities: When a beneficiary has disabilities
of a certain level, the beneficiary can receive the payment of benefits from
the month in which he or she is disabled, and the benefits are exempted from
income tax and inhabitant tax. (iii) Death benefits: Death benefits paid in a
lump sum to the survivors when the subscriber died are deemed as inherited
property, and up to ¥5 million for each legal heir is exempted from inheri-
tance tax. (iv) Withdrawal benefits: Benefits paid in a lump sum upon with-
drawal from a pension plan are subject to income tax and inhabitant tax pro-
vided that certain criteria are fulfilled.
 CHAPTER XV

Prohibited and Regulated Acts of Securities Trading

1. Outline

With a view to establishing a fair securities market and enhancing its credi-
bility, the Financial Instruments and Exchange Act (FIEA) provides for vari-
ous prohibited and regulated acts. They include a ban on market manipula-
tion (see section 2); insider trading by persons associated with the companies
concerned (see section 3); and discretionary-account trading and massive
promotional campaigns on particular securities by securities companies (see
section 4). In addition, the Financial Instruments and Exchange Act requires
trade participants to disclose certain transaction-related information, such as
the submission of reports of possession of large volume, to ensure the fair-
ness of securities transactions (see section 5).
　However, it is practically impossible to list in the Financial Instruments
and Exchange Act all unfair trading in connection with securities transac-
tions. In addition, as those securities transactions are complex and their struc-
ture changes rapidly, new methods that were unforeseeable at the time of leg-
islation could emerge later. Faced with such issues, Article 157 of the
Financial Instruments and Exchange Act bans unfair transactions in broad
terms. More specifically, it prohibits the use of wrongful means, schemes, or
techniques with regard to the sale, purchase, or other transaction of securi-
ties, etc. (Item (i) of the article); the acquisition of money or other property
using a document or other indication which contains false indication on im-
portant matters or lacks indication about important matters necessary for
avoiding misunderstanding with regard to the sale, purchase, or other trans-
action of securities, etc. (Item (ii)); and the use of false quotations in order to
induce the sale, purchase, or other transaction of securities, etc. (Item (iii))
This article is considered to be a general provision that comprehensively pro-
hibits wrongful acts, including new types of unfair trading yet to emerge.
　In addition to the above, Article 158 of the FIEA prohibits the spreading of
rumor, use of fraudulent means, assault, or intimidation for the purpose of
carrying out the sale, purchase, or other transaction of securities, etc., or
causing a fluctuation of quotations on securities, etc. Article 168 prohibits the
320　Chap. XV Prohibited and Regulated Acts of Securities Trading

Table XV-1.　Main Provisions Relating to the Ban on Unfair Trading

Article of the Financial Instruments

Contents
and Exchange Act (FIEA)
General ・Prohibition of wrongful acts Art. 157
provisions
・Prohibition of fake transactions or prear- Art. 159, Para. 1
ranged transactions
・Prohibition of transactions aimed at manipu- Art. 159, Para. 2, Item (i)
lating securities prices
・Prohibition of making an indication with the Art. 159, Para. 2, Items (ii) and (iii)
aim of manipulating securities prices
・Prohibition, in principle, of stabilization Art. 159, Para. 3, and Arts. 20-26 of the
transactions Order for Enforcement of the Act
Market ・Prohibition of purchase for own account dur- Art. 117, Para. 1, Item (xxii) of the
manipulation ing the stabilization period Cabinet Office Order on Financial In-
struments Business, etc.
・Prohibition of spreading of rumors or use of Art. 158
fraudulent means, assault, or intimidation
・Prohibition of securities companies from get- Art. 117, Para. 1, Item (xx) of the Cabi-
ting involved in an artificial formation of net Office Order on Financial Instru-
stock prices ments Business, etc.
・Prevention of use of corporate share repur- Art. 162, Para. 2
chase for manipulating stock prices
・Prohibition of insider trading Arts. 166 and 167
・Duty of officers to report securities transac- Arts. 163 and 164
tions and the duty to restitute profits made in
short-term trading
・Prohibition of short selling by officers Art. 165
Insider trading
・Prohibition of disclosure of information and Art. 167-2
inducement of insider trading
・Prohibition of accepting orders that are sus- Art. 117, Para. 1, Item (xiii) of the Cab-
pected to be in violation of insider trading inet Office Order on Financial Instru-
regulations ments Business, etc.
・Prohibition of public notice, etc., of false Art. 168
quotations
・Restriction on the expression of opinion in Art. 169
False newspapers, etc., for consideration
indication ・Prohibition of indication of advantageous Art. 170
purchase, etc.
・Prohibition of indication of a fixed amount of Art. 171
dividends, etc.
・Regulations on tender offers Art. 27-2 through 27-22-4
Tender offers
・Filing of Report of Possession of Large Volume Art. 27-23 through 27-30
・Prohibition of compensation of loss Art. 39
・Restriction on Transactions conducted for Art. 161
their own account and excessive transactions
・Regulations on short selling Art. 162
・Prohibition of massive promotional campaign Art. 117, Para. 1, Item (xvii) of the
of particular securities Cabinet Office Order on Financial In-
Others struments Business, etc.
・Restriction on front-running Art. 117, Para. 1, Item (x) of the Cabi-
net Office Order on Financial Instru-
ments Business, etc.
・Ban on deliberate market manipulation by Art. 117, Para. 1, Item (xix) of the Cabi-
means of trading securities for own account net Office Order on Financial Instru-
ments Business, etc.
 　321
Chap. XV Prohibited and Regulated Acts of Securities Trading

publishing of false quotations on market prices of securities, etc. Restrictions

on expression of opinions in newspapers, etc., in exchange for consideration
are stipulated in Article 169, while Articles 170 and 171 prohibit indication
of advantageous purchase, etc., and that of a fixed amount of dividends, etc.,
respectively.
　Although OTC-handled securities (green sheet issues) also became subject
to unfair trading regulations based on the amendment enforced in 2004, given
the scheduled termination of the green sheet system on March 31, 2018, new
designation has been terminated.

2. Regulation of Market Manipulation

Market manipulation is an act of artificially influencing securities prices that

would otherwise be determined by the securities market through natural sup-
ply and demand. With a view, therefore, to ensuring fair price formation in
securities markets and protection of investors, the Financial Instruments and
Exchange Act prohibits market manipulation and imposes heavy penalties for
the violation thereof.
　Acts of market manipulation are largely divided into the following five
types: (1) fake transactions, (2) prearranged transactions, (3) price manipula-
tion, (4) indication made for the purpose of market manipulation, and (5) sta-
bilization transactions (Article 159).
　A fake transaction is a securities transaction in which the same person
places purchase and sale orders during the same time frame with no actual
change in ownership occurring. With prearranged trades, similar transactions
are carried out in collusion with different persons. In both cases, the intention
is to mislead other investors into thinking trading in the security is very ac-
tive; the requisite for being deemed a wash transaction is the existence of
someone whose purpose is to mislead other investors regarding trading sta-
tus. Price manipulation refers to an act of engaging in transactions that could
possibly cause a fluctuation in securities prices for the purpose of misleading
(inducing) other persons into believing that, despite intentional price manipu-
lation, the prices are determined by natural supply and demand, and thus in-
ducing them to purchase or sell the securities. (Supreme Court ruling on the
Kyodo Shiryo case, July 20, 1994)
　Stabilization transactions are transactions done for the purpose of pegging,
fixing, or stabilizing the prices of specific securities. However, when primary
offerings and secondary distributions are made, there is the concern that
flooding the market with the securities could result in a large decline in the
security price, making it difficult to float the issue. For that reason, stabiliza-
tion transactions are only permitted with a primary offering or secondary dis-
322　Chap. XV Prohibited and Regulated Acts of Securities Trading

Table XV-2. Provisions of the Financial Instruments and Exchange Act Relating to
　 Market Manipulation

No person shall, for the purpose of misleading other persons about the state
of securities transactions, conduct fake sale and purchase of securities with-
Fake transactions
out the purpose of transferring a right (Art. 159, Para. 1, Items (i) through
(iii)).
No person shall, for the purpose of misleading other persons about the state
of securities transactions, conduct sale and purchase of securities at the same
Prearranged transactions
time and price, etc., based on collusion with another party (Art. 159, Para. 1,
Items (iv) through (viii)).
No person shall, for the purpose of inducing the sale and purchase of securi-
ties in securities markets, conduct sales and purchases of securities that
Price manipulation
would cause fluctuations in the prices of the securities (Art. 159, Para. 2, lat-
ter part of Item (i)).
No person shall, for the purpose of inducing the sale and purchase of securi-
ties in securities markets
(1) spread a rumor to the effect that the prices of the securities would fluctu-
Market manipulation by ate by his/her own or other party’ s market manipulation (Art. 159, Para.
indication 2, Item (ii)) or
(2) intentionally make a false indication or an indication that would mislead
other parties with regard to important matters when making a sale and
purchase of securities (Art. 159, Para. 2, Item (iii)).
No person shall conduct sales and purchases of securities in violation of a
Stabilization transactions cabinet order for the purpose of pegging, fixing, or stabilizing the prices of
the securities (Art. 159, Para. 3).

tribution of securities pursuant to the provisions of a cabinet order.

　The offense of market manipulation carries a punishment of imprisonment
with work for not more than 10 years or a fine of not more than ¥10 million.
In some cases, both penalties can be inflicted and the property gained through
market manipulation confiscated and, if it cannot be confiscated, the value
thereof shall be collected from the offender. If market manipulation is con-
ducted by trading securities for the purpose of gaining property benefits (in-
direct financial benefits), the offense is subject to a punishment of imprison-
ment with work for not more than 10 years or a fine of not more than ¥30
million. The offense is also subject to an Administrative Surcharge Payment
Order. Moreover, there are provisions on liability for compensation for dam-
ages claims for investors in violation of market manipulation regulations
(Article 160 of the FIEA).
　In the Cabinet Office Order on Financial Instruments Business, etc., secu-
rities companies are prohibited from accepting the entrustment of orders
from customers with the knowledge or expectation that acceptance of the en-
trustment may lead to artificial market manipulation and are required to have
in place trading surveillance systems for the prevention of such violations.
 　323
Chap. XV Prohibited and Regulated Acts of Securities Trading

3. Prohibited and Regulated Acts of Corporate Insiders

Regulations concerning the acts of corporate insiders are largely classified

into two categories: those prohibiting insider trading per se and those de-
signed for its prevention.

Prohibition of Insider Trading

“Insider trading”refers to acts of effecting the sale, purchase, or other type of
transaction of securities pertaining to any unpublished corporate information
that may significantly influence the decision-making of investors before such
information is publicized by an insider of a listed company who has come to
know the information through the performance of his/her duties or due to his/
her position (Article 166). If such transactions were to take place, the invest-
ing public would be put at a significant disadvantage and the credibility of
the securities markets would be seriously undermined.
　With a view to effectively checking insider trading and in keeping with the
modernization of the securities market, Japan’ s insider trading regulations
were introduced in an amendment to the Securities and Exchange Law in
April 1989. The regulation framework has since been extended to include
company splits, corporate share repurchases and other activities, with the rel-
evant legislative changes effected thereafter. In 2013, further amendments (1)
expanded the scope of criminal charges and Administrative Surcharge Pay-
ment Orders to include disclosure of information and inducement of insider
trading by a corporate insider and (2) expanded the scope of regulation to in-
clude REIT transactions.
　Since the introduction of the regulation, penalties for insider trading have
been increased stepwise to punishment by imprisonment with work for not
more than five years or a fine of not more than ¥5 million. In some cases,
both penalties can be inflicted. For the case of a legal entity, it is subject to a
fine of not more than ¥500 million. And the property gained through insider
trading shall be confiscated and any deficient amount collected from the of-
fender. In addition, when receiving an Administrative Surcharge Payment
Order, the offender must pay an amount equivalent to the profit made (half
the profit in the case of disclosure of information and inducement of insider
trading by a corporate insider) to the government treasury.

Preventing Insider Trading

Along with the prohibition of insider trading, the officers and principal share-
holders of listed companies, etc., are required to officially report any transac-
tions in the shares of the company concerned. They are required to return to
the company any short-term trading profit they have made in the shares of
324　Chap. XV Prohibited and Regulated Acts of Securities Trading

Table XV-3. An Outline of the Targets of Regulations, Materials Facts, Methods of

Announcement Relating to the Regulation of Insider Trading
Item Outline
1. Targets of regulation (i) Directors of the listed company (directors, officers, agents, key employees)
　(1) Persons associated 　 → information not announced to the public that came to their knowledge
with the company (ii) Persons who have the right to inspect the books and accounting records of the com-
pany (for example, those who hold 3% or more of the outstanding shares of the com-
pany)
　 → Information not announced to the public that came to their knowledge in the
course of the exercise of the right to inspect the books and accounting records of
such company
(iii) Persons who have the power vested in them by laws and regulations to inspect the
books and accounting records of listed companies (for example, officials of the regu-
latory agencies)
　 → Information not announced to the public that came to their knowledge in the
course of the exercise of such power
(iv) Persons who have concluded a contract with the listed company (for example, banks,
securities companies, certified public accountants, lawyers, etc.)
　 → Information not announced to the public that came to their knowledge in the
course of negotiating, signing, and performing a contract.
(v) In case any person referred to in (ii) or (iv) above is a corporation or director, etc., of
such corporation
　 → Information not announced to the public that came to such person’ s knowledge in
the course of performing his/her official duty
　(2) Recipients of (i) Persons who have received information concerning a material fact from persons as-
information sociated with the company
(ii) Directors of a corporation to which the person who has received information con-
cerning a material fact from a person associated with the company belongs and who
have learned of information not announced to the public in the course of the perfor-
mance of their duty
2. Material facts
　(1) Matters decided A decision made by a decision-making body of the listed company to carry out or not to
carry out the matters set forth below:
The issuance of new shares, a decrease in capital, the acquisition or disposal of its own
shares, a stock split, a change in the amount of dividend, a merger with another com-
pany, transfer of business, dissolution of the company, commercial production of a
newly developed product or commercial application of a new technology, an assign-
ment or acquisition of fixed assets, etc.
　(2) New facts When any of the facts set forth below has occurred to the listed company:
A loss caused by a disaster; a change in major shareholders; a development that could
cause a delisting of its shares; lawsuits relating to a claim against the property right of
the company; an administrative disciplinary action ordering the suspension of busi-
ness, etc.; a change in the parent company; a petition for bankruptcy of the company; a
failure by the company to honor its notes or bills falling due; suspension of business
with its bank; or the discovery of natural resources, etc.
　(3) Information on When newly announced results, projected or actual, are significantly at variance with
settlement of those announced earlier:
accounts Sales (10% or more up or down); current profit (30% or more up or down, and its ratio
to the total net assets is 5% or more up or down); net profit (30% or more up or down,
and its ratio to the total net assets is 2.5% or more up or down)
　(4) Others Material facts, other than those listed in (1)－(3) above, relating to the management,
business, or property of a listed company that have a profound influence on the invest-
ment decisions the investors make
　(5) Material facts (1) to (4) above apply
related to
subsidiaries
3. Methods of When a company notifies the stock exchange on which its stock is listed of material facts
announcing and the material facts are placed on the website of the stock exchange that received the
information information for public inspection.
When twelve hours must elapse after the company that has issued the stock in question
has disclosed its material facts to two or more news media.
When a company has notified the stock exchange on which its stock is listed, and the
stock exchange has placed the securities report, etc. containing the information notified
on its web site for public inspection.
Note: Any person who had been associated with any listed company and had learned of a material fact of
such company as set forth above and who is no longer associated with such listed company is sub-
ject to these regulations for one year after that person dissolves association with the company.
 　325
Chap. XV Prohibited and Regulated Acts of Securities Trading

the company held for a period of six months or less, and they are prohibited
from selling the securities, etc., of the company in excess of the share certifi-
cates, etc., of the company that they hold.
　Checks by securities companies on orders they receive and internal frame-
works of listed companies (to manage and control corporate information and
regulate employee trading of company shares) and posting information on J-
IRISS play a critical role in preventing insider trading. J-IRSS stands for Ja-
pan-Insider Registration & Identification Support System, a searchable data-
base where securities companies regularly register information on their
customers and listed companies post information on their directors.

4. Prohibited and Regulated Acts for Financial Instruments Business

Operators (Securities Companies) and Their Employees, Officers,
and Directors

Various regulations, mainly items as follows, have been set out for securities
companies and their employees, officers, and directors from the standpoint of
ensuring the protection of investors, the fairness of transactions, and other
aspects of trading.

Business Relationships with Customers

From the perspective of investor protection, securities companies must exe-
cute business with customers in good faith and fairly. Securities company
personnel have a duty to provide customers with appropriate information and
the use of false notifications or disclosure, fraudulent means, violence or
threats or other unfair methods to gain access to customers’assets is banned
as is the use of excessive solicitation. Meanwhile, to ensure fairness in trans-
actions, personnel are barred from compensating customers for losses, pro-
viding them with extraordinary profits or concluding a discretionary invest-
ment contract with customers without establishing the appropriate
management system—even if the customer requests such services. Securities
company personnel are also prohibited from receiving consignment when be-
ing aware that a customer transaction corresponds to insider trading or mar-
ket manipulation.
　Securities companies must conduct their business operations in such a way
as to avoid being deficient in protecting investors, such as solicitations that
are recognized as inappropriate for the customer in light of his/her level of
knowledge, experience, and financial resources and the purpose of conclud-
ing the financial instruments transaction contract (Suitability Rule).
326　Chap. XV Prohibited and Regulated Acts of Securities Trading

Chart XV-1.　Major Prohibited and Regulated Acts of Securities Companies (Duties and
Prohibited Acts)

Investors (customers)

• Duty to act in good faith

• Duty to provide appropriate information • Prohibited: Accepting • Prohibited: Solicitation
and to explain important matters regarding orders when aware they by providing information
investment trusts involve insider trading on corporations
• Prohibited: Use of false notifications and or market manipulation
disclosure, offering conclusive judgments,
fraudulent plans, violence or threats or
unfair methods to gain access to customer
assets, excessive solicitation, solicitation
at improper hours, uninvited solicitation
(limited to specific transactions)
• Prohibited: Loss compensation, providing
extraordinary profits, illegal discretionary
account transactions, large-scale
promotional sales campaigns
• Duty to apply suitability principle

Securities Companies
Sales Division
(Responsible mainly for brokerage and offering business operations)
• Duty to screen issues for wholesale
underwriting
• Prohibited: Trading on own • Duty to underwrite issues based on
account before executing a appropriate share volume, price,
trade commissioned, etc. Management of sensitive and other terms
from customer for the corporate information:
Issuers (Listed companies, etc.)

purpose of executing the Chinese wall (information

same transaction barrier)
(front running)
Investment Banking
Division
(responsible for
underwriting,
M&A and other
advisory businesses)

Proprietary Trading Division

(responsible for proprietary Securities Analysis (Analysts)
account trading) Division

• Prohibited: Others
Trades utilizing • Duty to manage electronic information
sensitive orporate processing system (computer)
information • Duty to prevent legal violations of financial
instrument intermediaries, etc.
−−−−−Management to prevent erroneous orders−−−−−

Markets (stock exchanges, etc.)

 　327
Chap. XV Prohibited and Regulated Acts of Securities Trading

Management of Sensitive Corporate Information

Through their underwriting and M&A-related advisory and other businesses,
securities companies have access to undisclosed information that could influ-
ence the stock price, etc. of issuers (sensitive corporate information). To pre-
vent unfair trading based on such information, securities companies are re-
quired to establish appropriate systems. Specifically, securities companies
can set up an information barrier (Chinese Wall) between the investment
banking and similar divisions that regularly deal with sensitive corporate in-
formation and the rest of their operating divisions to enable proper manage-
ment of information-sharing in-house. In addition, personnel are forbidden to
use sensitive corporate information to solicit customers or to engage in trad-
ing.

Management to Prevent Erroneous Orders

Securities companies are required to establish management systems to pre-
vent erroneous orders (name of issue, number of shares, share prices, etc.).

Management of Information Processing Systems

Securities companies are tasked with adequately managing the information
processing systems (computer systems) used to conduct their businesses.
　Besides the previously mentioned areas, Article 117, Paragraph 1 and Arti-
cle 123, Paragraph 1 of the Cabinet Office Order on Financial Instruments
Business, etc. and the self-regulation rules of the Japan Securities Dealers
Association and each Financial Instruments Exchange, etc., set out various
strongly advised or required management systems for securities companies.

5. Other Regulated Acts̶Information Disclosure to Ensure Fairness of

Transactions

A tender offer or takeover bid (TOB) is a type of corporate action in which

an acquiring company publicly announces its offer to buy a certain number
of share certificates, etc. of a target company at a certain price in a certain
period of time in an aim primarily to gain control of the target company.
Since such an offer involves purchasing share certificates, etc. from an un-
specified number of investors off the exchange, the bidder is expected to dis-
close information by which investors can judge whether or not to sell the re-
spective shares and deal with shareholders in a fair and rightful manner.
Additionally, as it is likely that control over the target company may be trans-
ferred as a result of the takeover bid, disclosure of information on the buyer
is also required. Given such factors, takeover bidders are required to: (1)
publish the purpose of TOB, purchase price, number of shares to be pur-
328　Chap. XV Prohibited and Regulated Acts of Securities Trading

Table XV-4.　Flow of Tender Offer

(1) Begin offer

・Publicly announce the start of tender offer (TOB) (publish the purpose of TOB, purchase price,
number of shares to be purchased, purchase period, etc. in a daily newspaper).
・On the date of the public notification, file the Tender Offer Notification addressed to the Prime
Minister and send copies thereof to the target company of TOB, stock exchanges, and parties that
have submitted the Tender Offer Notification regarding the company.
(2) Purchase period (as a general rule, a period of 20 days or more and up to 60 days)
・Issue the Tender Offer Statement to parties intending to sell or offer stock certificates, etc.
・Terms of TOB purchase price are consistent; decrease of purchase price and reduction of purchase
period are not allowed as a general rule.
・Withdrawal of application for purchase and cancellation of contract are not allowed as a general
rule. Obligation to purchase all shares if the allotment ratio of stock certificates, etc. after the TOB
exceeds two-thirds
・The party intending to sell or offer may cancel the contract at any time
・The target company submits its Position Statement addressed to the Prime Minister and sends cop-
ies thereof to the takeover bidder and the stock exchange.
・The party intending to execute a TOB is prohibited, as a general rule, from purchasing the respec-
tive shares, etc. through a method other than TOB
(3) Completion of purchase
・Issue a public notice or disclosure regarding the number of stock certificates, etc. associated with
the TOB and submit the Tender Offer Report to the Prime Minister.
・Send the notice containing the number of stock certificates, etc. for TOB to applying shareholders.
・Settle purchases without delay.

Table XV-5.　Flow of Disclosure of Possession of Large Volume of Shares

(1) Obligation to submit the Report of Possession of Large Volume arises

・A shareholder or joint shareholder submits, if its holding ratio of share certificates, etc. exceeds 5%
of the total number of issued shares, the Report of Possession of Large Volume (containing share-
holder or joint shareholder’ s name and address, business description, matters concerning the hold-
ing ratio of share certificates, purpose of holding, matters concerning purchase funds, etc.) to the
Prime Minister within five business days from the occurrence of the obligation, and sends copies of
the Report to the stock exchange and the issuing company.
・In the case of an institutional investor, etc., if its holding ratio of share certificates does not exceed
10% of the total number of issued shares, the Report of Possession of Large Volume may be sub-
mitted within five business days from the record date on which the obligation arises (twice or more
a month) (Special Reporting System).
(2) Subsequent reporting obligation
・After a Large Volume Holder submits the Report of Possession of Large Volume, if its holding ratio
of share certificates, etc. increases or decreases by 1% or more, it submits the Change Report ad-
dressed to the Prime Minister within five days, as a general rule, from the date of the aforesaid in-
crease or decrease, and sends copies of the Change Report to the stock exchange and the issuing
company.
・The party that has submitted the Report of Possession of Large Volume or the Change Report of
Possession of Large Volume submits the Correction Report to the Prime Minister if any deficiency
was found with the content of the report initially submitted.
(3) Public inspection of reports
・The Prime Minister and stock exchanges disclose the reports for public inspection for a period of
five years.

Note: Effective from April 2007, the reports are required to be submitted via EDINET.
 　329
Chap. XV Prohibited and Regulated Acts of Securities Trading

chased, purchase period, etc.; (2) submit the Tender Offer Notification; (3)
issue the Tender Offer Statement, a document explaining the TOB, to apply-
ing shareholders; and (4) report the results of the TOB after the completion
of the purchase period. In order to prevent the use of TOB for market manip-
ulation or abuse, cancellation of TOB is prohibited as a general rule, and cer-
tain restrictions apply for making changes to the terms of purchase. Mean-
while, information on the views of the target company regarding the TOB is
extremely important for shareholders in judging whether or not to accept the
tender offer. For this reason, the target company of a TOB must immediately
submit its Position Statement addressed to the Prime Minister.
　While the act of purchasing a large amount of share certificates, etc. in it-
self does not immediately cause a problem, it can, in many cases, cause fluc-
tuations in stock prices or influence the controlling interests of the company
concerned and may lead to inflicting damage on general investors. In consid-
eration of such possibilities, any person or entity, if it becomes a holder of
more than 5% of the shares or other equity securities of a listed company,
etc., is required to file a Report of Possession of Large Volume to the Prime
Minister. In addition, such a person or entity, after having become a Substan-
tial Shareholder, is required to file a Change Report Pertaining to Report of
Possession of Large Volume addressed to the Prime Minister if its sharehold-
ing ratio in the entity covered by the aforesaid Report increases or decreases
by 1% or more or there is a material change to any other entry in the Report.
The Reports of Possession of Large Volume and Change Reports are publicly
disclosed. This system was put in place with the aim of further protecting in-
vestors by encouraging timely and accurate disclosure of information on
large-scale purchases and on holding and secondary offering of shares, etc. to
investors and promoting high fairness and transparency in the securities mar-
ket.
 CHAPTER XVI

The Information Disclosure System and

Investor Protection

1. The Information Disclosure System in the Securities Market

When a company lists its security on the financial instrument market opened
on a stock exchange, the issuer of such security is required by the Financial
Instruments and Exchange Act and by the rules of the stock exchange to dis-
close information concerning certain matters of its business. Such rules are
called disclosure requirements, and they consist of statutory disclosure rules
under the Financial Instruments and Exchange Act and the timely disclosure
required by the securities exchanges.
　There are four types of statutory disclosures that the issuers of securities
are required to make: (1) issuance disclosure, which requires companies to
disclose information concerning certain matters when they publicly offer se-
curities on the primary market; (2) periodic disclosure, which requires com-
panies whose securities are listed and traded on the securities market to dis-
close information concerning certain matters on a continuing and regular
basis; (3) tender offer disclosure; and (4) large volume holding disclosure
(shareholdings of 5% or more). The latter two types of statutory disclosure
are required under the Financial Instruments and Exchange Act. On the other
hand, timely disclosure, which is required by the stock exchanges, obliges
companies to continuously disclose their information after listing their secu-
rities on the exchanges, and the type of information required is classified into
(1) information on listed companies; (2) information on subsidiaries, etc.;
and (3) other information, such as supplemental information on majority
shareholders, etc. Information is categorized as (1) decisions made, (2) oc-
currences, and (3) information on financial results. At present, both statutory
and timely disclosures are made via an electronic disclosure system using the
Internet. Statutory disclosure is made via the EDINET (Electronic Disclosure
of Investors’NETwork) while timely disclosure is made using the TDnet
(Timely Disclosure network).
　Companies that are required to make issuance disclosure and periodic dis-
closure are also required by the Companies Act to disclose certain informa-
 Chap. XVI The Information Disclosure System and
Investor Protection 　331
Chart XVI-1.　The Scheme of the Disclosure System on the Securities Market

Statutory disclosure Disclosure of corporate Disclosure for the new-issues market

affairs
- Securities Registration Statement
- Shelf Registration Statement
- Shelf Registration Supplements
(- Written Notice of Securities)

Continuous disclosure on the trading market

- Annual Securities Report

- Quaterly Securities Report
- Ammendment Report
( - Report on the status of acquisition of
Treasury Shares )
Disclosure of information A tender offer for a security conducted by
concerning a tender offer persons other than its issuer

- Tender Offer Notitication

- Position Statement
- Tender Offer Report

A tender offer for a security conducted by

its issuer

- Tender Offer Notitication

- Tender Offer Report

Disclosure of the status of large shareholdings

- Report on the status of large

shareholdings
- Report on changes in the status of
large shareholdings

Timely disclosure

Table XVI-1. Disclosure Systems under the Companies Act and under the Financial
Instruments and Exchange Act

Disclosure System under the Finan- Disclosure System under the Companies
cial Instruments and Exchange Act Act
Furnishing information necessary Purpose of disclosure Report on profits available for dividends
for investors to make an investment and the company’ s capacity for offering
judgment security for loans (solvency)
Investors (including those who are Targets for which the Shareholders and creditors
not shareholders of the company at disclosure is intended
a given time)
Providing disclosure through EDI- Method of disclosure Preparation of computing documents,
NET and stock exchanges, replying keeping of such documents at the head of-
to investor requests for disclosure fice, and publication of a summary of an-
nual settlement of accounts
332　Chap. XVI The Information Disclosure System and
Investor Protection

tion. The disclosure of accounting documents required to be made by the

Companies Act is aimed at protecting the interest of shareholders and bond-
holders and at regulating the amount that can be paid in dividends. In con-
trast, the disclosure required to be made under the Financial Instruments and
Exchange Act and under exchanges’regulations is designed to disclose infor-
mation concerning the state of business of listed companies to help the inves-
tors to make informed and reasonable investment decisions.

2. The System of Disclosing Corporate Information under the Financial

Instruments and Exchange Act

Issuance Disclosure
When a company publicly offers, or makes a secondary distribution of, a se-
curity whose aggregate value is ¥100 million or more, the issuer of such se-
curity must, in principle, file a securities registration statement with the
Prime Minister. On the primary market, information is disclosed through the
securities registration statement submitted. The statement shall describe (1)
matters pertaining to said offering or secondary distribution, (2) the trade
name of the issuing company, (3) the name of the business group to which it
belongs, (4) the financial position of the issuing company, and (5) important
information on other material matters concerning its business. In addition,
when a securities company solicits customers for the purchase of a newly is-
sued security, it is required to provide investors with a prospectus that fur-
nishes them with information concerning the issue that is deemed necessary
for them to assess its value and to make an informed investment decision.

Periodic Disclosure
The issuer of securities listed on an exchange must file with the Prime Minis-
ter an annual securities report for each business year within three months af-
ter the expiration of such business year. The annual securities report consti-
tutes the main document of statutory disclosure for the secondary market.
More specifically, it must provide (1) the name of the issuer, (2) the name of
the business group to which it belongs, (3) information concerning the state
of its finances, and (4) information on other material matters concerning its
business. Moreover, companies that are required to make periodic disclosure
must regularly file quarterly securities reports, extraordinary report, and
share buyback report where necessary.
　Issuers of securities that are traded on the financial instruments market are
expected to disclose sufficient information concerning their corporate affairs,
on the basis of which the prices of securities will be formed. If they do not
disclose information that is to their disadvantage, the prices of their securities
 Chap. XVI The Information Disclosure System and
Investor Protection 　333
Table XVI-2.　Statutory Disclosure Documents Required to be Filed

Classifi-
Documents filed Cases requiring the filing of documents (a summary)
cation
If a company issuing new shares or making a secondary distribution
of shares through an offering whose total issuing or secondary distri-
bution price is ¥100 million or more plans to solicit 50 or more in-
vestors for the purchase of its new shares or plans to sell to or solicit
50 or more investors for the secondary distribution on uniform terms
and conditions, it must file a registration statement.
* Small amount offering: In the case of a company issuing new
shares or making secondary distribution of shares through an offer-
ing whose total issuing or secondary distribution price is less than
¥500 million the contents of the securities registration statement re-
quired to be filed by such company are simplified.
Securities Registration
* Incorporating system: A company that has been filing Annual Se-
Statement
curities Reports continuously for one year may substitute a securities
registration statement other than matters relating to the offering or
Issuance Disclosure

secondary distribution of securities with the annual securities report

and quarterly securities reports filed in its place.
* Reference system: When transactions of issued securities fulfill
certain requirements of the securities market with which the issuer
has been filing Annual Securities Reports for a year and the issuer’ s
corporate information has broadly been disclosed, the description
that one should refer to the last Annual Securities Reports, etc., may
be substituted with a securities registration statement concerning
Disclosure of corporate affairs, etc.

matters other than the offering or secondary distribution of securities.

When any issuer who is authorized to file a securities registration
statement under the reference system plans to issue new shares or
Shelf Registration
make a secondary distribution of shares through an offering whose
Statement
total issuing or secondary distribution prices are ¥100 million or
more, such issuer may file a shelf-registration statement of its shares.
When a shelf-registration statement of a security has taken effect,
and when the issuer of such security plans to issue new shares or
Shelf Registration
make a secondary distribution of shares whose total issuing or sec-
Supplement
ondary distribution prices are ¥100 million or more, such issuer is re-
quired to file supplementary documents relating thereto.
Any company that is (1) the issuer of a security to be listed on a
stock exchange; (2) the issuer of securities stipulated by cabinet or-
der as that similar to distribution conditions in (1); (3) the issuer of a
security who is required to file a securities registration statement
Annual Securities
when it issues new shares or makes a secondary distribution of
Report
shares through an offering; or (4) the issuer of a security the number
of whose owners was 1,000 or more at the end of any of the latest
five years (excluding certain cases), is required to file a securities re-
Periodic disclosure

port.
Among companies required to submit Annual Securities Reports, is-
Quarterly Securities suers of securities listed on stock exchanges or or stipulated by cabi-
Report net order as being similar in terms of distribution conditions must
file quarterly securities reports.
If any material fact has occurred in a company submitting Annual
Extraordinary Report
Securities Reports.
Any issuer of a security listed on a stock exchange or stipulated by
cabinet order as being similar in terms of distribution conditions and
Share Buyback Report that has passed a resolution at a general meeting of its shareholders
or at a board of directors’meeting to acquire its own shares must file
a report.
334　Chap. XVI The Information Disclosure System and
Investor Protection

will be formed on the basis of an erroneous assessment of their value that

does not reflect such withheld information. This is why the law requires the
issuers of securities to periodically disclose all pertinent information, good or
bad, in their annual securities reports, and why it contains penal provisions to
discipline issuers who file an annual securities report containing false state-
ments.

3. Other Disclosures to Be Made under the Financial Instruments and

Exchange Act

Disclosure Relating to a Tender Offer

The act of soliciting an unspecified large number of persons through a public
notice for an offer to purchase or to sell shares and of purchasing such shares
off of the exchange is called a“tender offer.”If any person other than the is-
suer of a listed stock who is required to file an annual securities report pro-
poses the purchase of such shares outside the market of a stock exchange, he
must, except in cases that fall within the purview of certain requirements,
such as the purchase will result in the ownership of more than 5% of the se-
curities, etc., purchase such shares through a tender offer. The tender offerer
is obligated to serve a public notice of (1) the purpose of the tender offer; (2)
the purchase prices, etc.; (3) the number of stocks to be purchased; (4) the
period during which stocks will be purchased; and (5) other items stipulated
in other cabinet ordinances “ ( public notice for commencing tender offer”)
and must also file the tender offer notification with the Prime Minister. In ad-
dition, the tender offerer must, on the day immediately following the day on
which the tender offer period has expired, serve a public notice or make an
announcement indicating the number of shares offered to sell, the number of
shares it has actually purchased, and the method of payment to be made to
sellers and file with the Prime Minister a tender offer report furnishing infor-
mation about such matters.
　The regulation on tender offers is designed to disclose information for in-
vestors in advance and give shareholders equal opportunities to sell their
stocks from the standpoint of ensuring the transparency and fairness of off-
exchange trading when the transactions would have effects on the control of
the target corporation.

Disclosure of Status of Large Volume Holding of Share Certificates, etc.

When the number of shares of a listed company held by a person exceeds 5%
of its outstanding shares (large-volume holders), such person is principally
required to file a Report of Possession of Large Volume with the Prime Min-
ister within five days (excluding Sundays and other holidays as may be stipu-
 Chap. XVI The Information Disclosure System and
Investor Protection 　335
Table XVI-3.　Transitions in Tender Offer Bid (TOB) System

　 Major Developments
1971 • Public tender offer system introduced
1990 • Principles set down for forcing tender offers
• Percentage share offer that triggers obligation to make tender offer decreased (from 10% to
5%)
• Prior notification system abolished
• Duration of offer extended
• Shareholders’withdrawal rights expanded
2001 • Along with the deregulation, in principle, of purchasing treasury shares, system for making
tender offers for a company’
s own shares introduced
2003 • Scope of acquisitions exempt from the TOB system enlarged
2004 • TOBs restricted to companies with equity securities
• Electronic notification system introduced
2005 • ToSTNeT transactions made independent of market transactions
2006 • Disclosure for TOBs upgraded (purpose of acquisition, basis of price calculation, disclosure
for MBOs)
• Regulations implemented concerning the combined acquisition of shares on and offmarket
• Obligation introduced for investors acquiring a large stake in a company during TOB by an-
other party to also make a TOB
• Acceptance for lowering TOB price when share split occurs
• Reasons for withdrawing TOB expanded
• Obligation introduced for targeted company to submit a Position Statement
• Obligation introduced for investor making TOB to answer targeted company’ s questions
(reply to submitted questions) for the purpose of submitting a Position Statement
• Calculation of duration of TOB set using business days
• Targeted company allowed to demand extension of TOB
• Obligation introduced for TOB investor to acquire all tendered shares
2008 • Specified listed securities added to securities eligible for TOBs
• Monetary surcharge system introduced regarding TOB rules

lated in cabinet orders) from the date when such person’ s holding rate is
above 5% (called the“5% rule” ). The Report of Possession of Large Volume
must furnish information concerning (1) matters relating to the ratio of shares
held by such person, (2) matters relating to the funds acquired by such person
for the purpose of purchasing such shares; and (3) the purpose for which such
person has acquired such shares. And when the percentage of shareholdings
of such person who must submit the report increases or decreases by 1% or
more, such person must file a Change Report indicating the change that oc-
curred in the percentage of such person’ s holdings of such shares. This dis-
closure is required because the actions of a single person holding a large vol-
ume of shares can have large effects on the formation of stock prices at the
market.
336　Chap. XVI The Information Disclosure System and
Investor Protection

4. Timely Disclosure System of Financial Instruments Exchange (Stock

Exchange)

As described at the start of this chapter, stock exchanges require listed com-
panies to disclose corporate information according to their rules. For exam-
ple, the Tokyo Stock Exchange stipulates in the rules of the exchange gov-
erning the listing of securities that listed companies shall, in a timely fashion,
disclose information having effects on investors’decisions and defines con-
crete matters to be disclosed and procedures for disclosing such matters (see
Table XVI-4). These listed companies need to disclose both the resolutions
and decisions adopted by their executive body promptly after such resolu-
tions or decisions were adopted and any developments caused by external
factors at the time the companies had learned of such developments.
　Promptness is a feature of timely disclosure. For example, stock exchanges
require listed companies to disclose their financial results immediately after
their determination. In response, the listed companies disclose earnings re-
ports (kessan tanshin) according to the given format. The earnings report car-
ries more importance in terms of helping investors to learn about financial
results because it is released earlier than the annual securities report.
　In addition, listed companies are obliged to provide stock exchanges with
concise information on inquiries from the stock exchanges immediately if re-
quired and to disclose the details of information immediately when the secu-
rities exchanges deem it necessary and proper. For example, in the case
where there is a broadcast or rumor regarding corporate information but the
accuracy of such information is unconfirmed, the stock exchange concerned
may make a query to the company about the accuracy of information and re-
quire the company to disclose the response to such query.
　The Tokyo Stock Exchange has put in place a system for issuing alerts
where if the TSE identifies any unclear piece of information among the infor-
mation about a listed company that can have a material impact on investment
decisions of investors and the listed company requires time before offering
proper information disclosure regarding the aforesaid unclear piece of infor-
mation or can disclose only certain information immediately, the TSE issues
an alert to investors.

5. Ensuring the Appropriateness of Information Disclosure

In order to ensure the effectiveness of securities listing requirements, includ-

ing rules on timely disclosure, stock exchanges may implement prescribed
measures against violations found, such as when the disclosed information
 Chap. XVI The Information Disclosure System and
Investor Protection 　337
Table XVI-4. Main Points of Corporate Information Required by Timely Disclosure (in
the case of the Tokyo Stock Exchange)
1. D e c i s i o n s b y 1. Offering of new shares to be issued, treasury shares to be disposed of, issued subscription Rights/
Listed Compa- warrants, or offering to entities who will subscribe to treasury subscription rights/warrants to be dis-
nies posed of, or a secondary distribution of shares or subscription rights/warrants
2. Shelf-registration and the commencement of a demand survey
3. Decrease in amount of capital
4. Decrease in amount of capital reserve or profit reserve
5. Acquisition of one’ s own stock
6. Gratis allotment of shares or gratis allotment of subscription warrants
7. Shelf-registration concerning gratis allotment of subscription rights/warrants or commencement of a
demand survey or a survey on intention to exercise the warrants
8. Share split or reverse share split
9. Issue of stock options
10. Dividend from surplus
11. Share exchange
12. Share transfer
13. Merger
14. Demerger
15. Takeover bid or take over bid for own shares
16. Announcement of opinions about a takeover bid, etc.
17. Transfer or acquisition of all or part of a business
18. Dissolution (excluding dissolution by means of merger)
19. Commercialization of a new product or new technology
20. Business alliance or dissolution of business alliance
21. Transfer or acquisition of shares or equity interest accompanied by a change in a subsidiary or other
matters accompanied by a change in a subsidiary
22. Transfer or acquisition of fixed assets
23. lease of fixed assets
24. Suspension or abolishment of all or part of a business
25. Application for delisting
26. Petition for commencement of bankruptcy, commencement of rehabilitation proceedings, or com-
mencement of reorganization proceedings
27. Commencement of a new business
28. Change in representative directors or representative executive officers
29. Rationalization such as personnel reduction
30. Change in a trade name or a corporate name
31. Change in the number of shares for a share unit of a stock, or abolition/introduction of provisions for
the number of shares for a share unit
32. Change in accounting period (change in the end date of the business year)
33. Petition to the Prime Minister stating an excess of liabilities or possibility of the halt of repayment of
deposit, etc. (petition under the provisions of Article 74, Paragraph 5 of the Deposit Insurance Act)
34. Petition for mediation in accordance with specified mediation procedures pursuant to the Act on
Specified Mediation for Promoting Adjustment of Specified Liabilities, etc.
35. Inportant matters related to rights pertaining to listed bonds
36. Change in certified public accountants, etc.
37. Putting notes on matters related to the going concern assumption
38. Submission of application for approval of deadline extension for submission of annual securities re-
port or quarterly securities report
39. Cancellation of entrustment of shareholding services to a shareholding service proxy institution
40. Submission of internal control reports containing content to the effect that there is a material defi-
ciency or that the evaluation result cannot be stated
41. Amendment to the articles of incorporation
42. Acquisition of all classified stocks subject to whole acquisition clause
43. Approval or rejection of a special controlling shareholder’ s request for sale of shares, etc.
44. Other important matters related to listed company operations, business, assets, or listed company
stock certificates, etc.
2. Facts which Oc- 1. damage arising from a disaster or in the performance of its operations
curred for a List- 2. Change in major shareholders or the largest shareholder
ed Company 3. Fact which causes delisting
4. Filing of a lawsuit or a court decision
5. Petition for a provisional disposition or decision on such petition, etc.
6. Cancellation of a license, suspension of a business or any other disciplinary action corresponding to
these on the basis of laws and regulations by an administrative agency or accusation of violation of
laws and regulations by an administrative agency
7. Change in a parent company, change in controlling shareholders (excluding a parent company) or
change in other related company
8. Petition or notification for commencement of bankruptcy proceedings, commencement of rehabilita-
tion proceedings, commencement of reorganization proceedings, or execution of enterprise mortgage
9. Dishonor of a bill or check or suspension of trading by a clearing house
10. Petition for commencement of bankruptcy proceedings, commencement of rehabilitation proceed-
ings, commencement of reorganization proceedings, or execution of enterprise mortgage pertaining
to a parent company, etc.
11. Default on obligations or delay in collection
12. Suspension of trade with a business partner
13. Financial support, such as exemption of obligations
14. Discovery of natural resources
15. Special controlling shareholder’ s request for sale of shares, etc.
16. Claim for suspension of issue of stock or subscription rights/warrants
17. Demand for convocation of a general shareholders meeting
18. Unrealized loss of securities held
19. Acceleration of obligations pertaining to a corporate bond
20. Convocation of a bondholders’ meeting for a listed bond, etc. and other important facts pertaining to
rights of a listed bond, etc.
21. Change in certified public accountants, etc.
22. Delay in submission of annual securities report or the quarterly securities report
23. Approval, etc. of deadline extension for submission of the annual securities report or quarterly secu-
rities report
24. The fact that an audit report attached to financial statements, etc. contains an“adverse opinion” ,
“opinions are not expressed” , or a“qualified opinion”with making issues concerning a going con-
cern assumption as exceptions
25. An internal control audit report contains an“adverse opinion”or the fact that“opinions are not ex-
pressed”
26. Receipt, etc. of a notice of canceling a shareholder services agent agreement
27. Other important matters related to operation, business or assets of such listed company or related to
a listed stock certificates, etc.
3. Listed Company 1. Earnings reports (kessan tanshin), quarterly earnings reports (shihanki kessan tanshin)
Earnings Infor- 2. Amendments to performance estimates, differences in estimates and earnings values
mation 3. Amendments to dividend estimates, etc.

Note: In addition to the above, listed companies are required to disclose important decisions and new developments
related to subsidiaries and other matters relating to controlling shareholders, etc.
Source: Tokyo Stock Exchange, Securities Listing Requirements, Guidebook for the Timely Disclosure of Corporate
Information.
338　Chap. XVI The Information Disclosure System and
Investor Protection

Table XVI-5.　Measures to ensure effectiveness

○Penalty measures ○Improvement measures

　• Methods of announcing information 　• Improvement Report, Improvement Status Re-
　• Penalty on breach of the listing contract　 port
　• Designation as Securities on Alert

Chart XVI-2.　Flow from Designation as Securities Under Supervision/Alert to Remov-

al of Designation

Applicable to designation as a security

under supervision/alert
No improvement
can be expected Improvement can be expected

Designation as a security under supervision/alert Designation

Improvement period

1 year from designation

Examination for removal
Delisting
No improvement Improvement
Continuation of
Removal
designation Improvement period after
continuation of designation

Examination for 1 year and 6 months

removal from designation
No
improvement Improvement

Removal

Note: If it is found during the period of designation that no improvement can be expected, the security is
delisted.

contains false statements or when there is a violation of matters to be ob-

served under the Code of Corporate Conduct. These measures to ensure the
effectiveness are classified into two categories: improvement measures and
penalties. The former requires the listed company concerned to make im-
provements while the latter imposes a penalty on the listed company.
　Improvement measures are categorized into the designation as a security
 　339
Chap. XVI The Information Disclosure System and
Investor Protection

under supervision/alert and the submission of Improvement Report/Improve-

ment Status Report. For example, if a listed company has made a false state-
ment in its securities report, etc. and a stock exchange recognizes that there is
a strong need for the listed company to make improvements to the company’ s
internal management system, etc., the listed company is designated as a“se-
curity under supervision/alert.”The designation as a security under supervi-
sion/alert is removed if the listed company makes improvements to its inter-
nal management system, etc. within the prescribed period for improvement.
If, however, no improvement is made within the prescribed period or there is
no likelihood of improvement, the company will be delisted. The securities
on alert system is a mechanism for having the listed companies concerned
make proper improvements while removing the possibility of delisting in the
future, and has been introduced as a measure equivalent to delisting. If it is
found that there is difficulty in maintaining order on the market unless a
stock is immediately delisted, such stock is delisted without receiving the
designation as a security under supervision/alert.
　Meanwhile, if a stock exchange finds that there is a strong need for a listed
company to make improvements even when the status of the listed company
does not correspond to giving designation as a security under supervision/
alert, which is a measure leading to possible delisting, the stock exchange
may require the listed company to submit an Improvement Report containing
the circumstances behind the misconduct and improvement measures. The
listed company that has submitted the Improvement Report must submit an
Improvement Status Report containing the status of implementation and op-
eration of improvement measures in a timely way after six months have
passed since the submission of the initial Improvement Report. The Improve-
ment Report and the Improvement Status Report submitted by the listed
company concerned are made available for public inspection on the website
of each stock exchange.
　Meanwhile, penalties are categorized into a penalty (a fine) against a
breach of listing contract and a disclosure measure. Depending on the degree
of damage given to the trust that shareholders and investors place in the mar-
ket, a judgment will be made on whether to apply the penalty (a fine) against
a breach of contract, which is the more serious treatment.

6. Recent Moves of Information Disclosure

Movement toward Introduction of International Financial Reporting

Standards (IFRS)
International Financial Reporting Standards (IFRS) are accounting standards
developed by the International Accounting Standards Board (IASB).
340　Chap. XVI The Information Disclosure System and
Investor Protection

Chart XVI-3.　Number of Companies Adopting IFRS on the TSE

Rasio among the total market capitalization

of TSE limited comoanies: 30% 171
(market capitalization
(Number of companies) 188 trillion)
162
160 19
141 20
140 27
128
26 31
120 112 22
100 21 30
32
80 73 23

60 125
35 111
42
40 85
15 68 74
20 38
27
0
Jun. 30, 2014 Mar. 31, 2015 Aug. 31, 2015 Mar. 31, 2016 Jun. 30, 2016 Mar. 31, 2017 Jun. 30, 2017
Adopting IFRS Decided to adopt IFRS planning to adopt IFRS

　In total, over 100 countries now use or plan to use the IFRS as their own
accounting standards. In the EU, companies listed in the region have been re-
quired to use the IFRS since 2005. And financial statements prepared based
on the IFRS are accepted in the United States.
　Also in Japan, since 2010, listing companies have been allowed to volun-
tarily adopt the IFRS on condition, among other requirements, that the com-
panies conduct international financial or business activities. However, in fact,
only a few companies took advantage of this option. Under such circum-
stances, in 2013, with a view to expanding voluntary adoption of the IFRS,
the requirements were relaxed. In addition, given the recommendations pro-
posed by the government in its growth strategy, initiatives were taken toward
expanding the scope of application, including the release of a report by the
FSA in 2014 that summarized the objectives of companies pursuing volun-
tary adoption of the IFRS at the time of shifting to the IFRS and the advan-
tages of adopting the IFRS. Currently, there are 171 companies listed on the
TSE that have either already adopted the IFRS or are scheduled to adopt the
standards. These companies account for 30% of the overall market in terms
of market capitalization.

Introduction of the Japanese-Version Fair Disclosure Rules

In April 2018, a bill amending the Financial Instruments and Exchange Act
to include the Fair Disclosure Rules was enacted. The Fair Disclosure Rules
are referred to as the rules which ensure that when a listed company, etc. pro-
 Chap. XVI The Information Disclosure System and
Investor Protection 　341
Table XVI-6.　Outline of the Japanese-Version Fair Disclosure Rule

Target information • Important information that influences investment decisions

range • Basically consistent with the scope of information subject to insider trading
regulations
• Of other above information, it is included information that is unpublished de-
finitive and affected to the price of issuer securities when published
• Mosaic information that does not influences investment decisions immediately
itself is not eligible.
Target of informa- • In addition to the officers of the issuer, employee or servant or an agent (limited
tion providers to the person that communicates information to recipient)
Target of informa- • Suppliers to provide information related to trading results of securities and fi-
tion recipients nancial results analysis results, etc. to third parties, that is securities companies,
investment managers, investment advisers, investment corporations, credit rat-
ing agencies, etc.
• The person that it is assumed that the issuer securities are bought and sold
based on information to be provided by the issuer
Provision of infor- • Do not need publication if the information recipient assume an obligation that
mation that does not the information recipient concerned does not transmit to a third party, and does
require publication not use it in an investment judgment even if it is the offer to an information re-
cipient targeted for the rule.
• When an information provider grasps that an information recipient transmitted
information to others targeted for the rule in violation of obligation of keeping
secrecy, publication of the information is required by the issuers.
Publication method Providing disclosure through EDINET, Timely disclosure through TD-net, and
of information Publication on the issuer’
s home page
Enforcement • At first, pressing the issuers for prompt publication of the information when it
conflicts with this rule.
• And so, when appropriate correspondence does not have it stolen by this. in-
structions giving it an order to start the effect of this rule by administrative.

Source: Produced on Financial Services Agency publication“council for finance market working group
fair disclosure rule taskforce report”

vides inside information which might have an impact on investment deci-

sions to a specific third party, such as an analyst of a securities company or a
fund manager of an investment management institution, such information
also be equally disclosed to other investors. According to a report released by
the Task Force on Fair Disclosure Rules, the scope of such information
should, in principle, correspond with the scope of information which triggers
Japan’ s insider trading regulations but should also include non-public infor-
mation of a precise nature concerning an issuer which would likely have a
material effect on the price of the issuer’s securities if made public.
 CHAPTER XVII

The Securities Regulatory System

1. Financial Instruments and Exchange Act

In 2006, the Securities and Exchange Act underwent major revisions and was
renamed the Financial Instruments and Exchange Act (FIEA). These revi-
sions were enforced for the purpose of introducing cross-sectional regula-
tions and flexibility into the financial system. Introduction of cross-sectional
regulations meant revising the conventional vertically segmented regulations
and applying the same types of rules to financial instruments with similar
economic functions and risks. This was achieved by expanding the FIEA’ s
scope of application and by revising various related laws and regulations.
More specifically, the scope of application was extended to include not only
general investment trust beneficiary rights and mortgage securities, etc. but
also collective investment schemes, making it possible to implement regula-
tions comprehensively. In addition, various related laws were revised to es-
tablish a regulatory framework where financial instruments not covered by
the FIEA but sharing many of the same aspects were subject to similar rules.
Another move to cross-sectional application was the standardization of the
registration of sales and solicitation, investment advisory, asset management,
and asset administration, etc., businesses under the umbrella of Financial In-
struments Business Operators with the aim of applying as common a code of
conduct as possible.
　The authorities introduced flexibility into the law through (1) disclosure
regulations, (2) industry regulations, and (3) separating rules for dealing with
different classes of investors. More specifically, (1) they placed strict disclo-
sure obligations on highly liquid securities, strengthening the disclosure sys-
tem by requiring listed companies to provide quarterly securities reports, in-
ternal control reports, and confirmation letters from auditors. In contrast,
illiquid securities, in principle, are exempt from these disclosure regulations.
(2) While all Financial Instruments Business Operators are required to regis-
ter under the comprehensive industry regulations, businesses are classified
into the three categories of Type I and Type II Financial Instruments Busi-
nesses, Investment Advisory and Agency Business, and Asset Management
 Chart XVII-1.　Transition from Securities and Exchange Act to Financial Instruments and Exchange Act

Bill to partially revise the Securities and Exchange Law, etc. Bill Concerning Amendments of
(Establishing cross-sectional legislative framework to protect investors) Related Legislation Concerning
the Partial Revision of the Securities
and Exchange Law, etc.
So-called Investment Services Act regulations Disclosure System
from a vertical to a horizontal ● Quarterly reporting required by law
Cross-sectional (converting
legal framework) 1. The following laws were abolished.
● Strengthening of internal control
●
● Financial Futures Trading Law
Equivalent regulations for all financial products and for financial reporting ● Law Concerning the Regulation of
services with strong investment characteristics.
Note: Confirmation by management Investment Advisory Services Relating
of appropriateness of disclosure, to Securities
● Law Concerning Foreign Securities

Comprehensive coverage of collective investment schemes (funds) etc.

Firms
● Law Concerning the Regulation of
● Revision of tender offer (TOB)
Flexible (converting from uniform to variable regulations) Mortgage Business
system
● Differentiating by so-called professional and general ● Revision of large shareholding

investors (level of knowledge and experience) regulations reporting system 2. Amendments of Regulations of Related

Revision
that vary according to the type of product, etc., being sold. Laws
● Laws related to commodity investment
Note: Shortened deadlines on special
Exchange System large shareholding reports business (so-called Commodity Fund
● Within 15 days of end of each Law)
Strengthening the SRO functions (listing screening, trading

Securities and Exchange Law

investigations, etc.) of exchanges (making the SRO an quarter

So-called Investment Services Act

independent organization). → Within 5 business days
every two weeks ● FIEA

Financial Instruments and Exchange Act

Punitive Measures and Monetary Penalties Expanded, etc., obligation to explain
● Increasing criminal penalties (maximum prison term of products to customers
five years→ten years) → estimated amount of civil liability
● Raising monetary and criminal penalties for Misogyoku (loss of principal), etc.
(dummy-order market manipulation)

Note: Terms such as “securities firm” and “stock exchange” were not changed.
● Banking Act, Long-Term Credit Bank Law, Shinkin Bank Act, Small
and Medium Sized Cooperative Savings Insurance Corporation Law In principle, the same type of investor
● Insurance Business Law
protection regulations apply as in the FIEA.
Chap. XVII The Securities Regulatory System

● Securities Exchange Law

● Act Concerning Designated Real Estate Joint Enterprises
　343

Source: Materials produced by the FSA.

344　Chap. XVII The Securities Regulatory System

Business, with separate rules applying for each category. In addition, (3) cus-
tomers are classified into professional investors and general investors, with
various exceptions to the general industry code of conduct applying to deal-
ing with professional investors.
　Major revisions to the FIEA included those relating to firewall regulations
between securities companies, banks and insurance companies enforced in
2008, the introduction of public regulations on credit-rating agencies, estab-
lishment of the Alternative Dispute Resolution (ADR) System in the finan-
cial sector, establishment of a framework for alliances among financial in-
struments exchanges and commodity exchanges that went into effect based
on the revisions in 2009, and the introduction of a disclosure system relating
to rights offering that was made based on the revisions enforced in 2011.
Subsequently, in the 2015 revision, regulations on funds for professionals
(specially permitted businesses for Qualified Institutional Investor, etc.) were
amended. And the most recent 2017 amendments included (1) the introduc-
tion of rules on high-speed trading (HST) where a registration system for
high-speed traders was adopted along with a call for the establishment of an
operation management system; and (2) the introduction of the Fair Disclo-
sure Rules.

2. Other Laws and Regulations Related to the Securities Market

While the Financial Instruments and Exchange Act (FIEA) serves as the most
fundamental law concerning securities, securities business operators, and
transactions on the securities markets, there are, in fact, many other related
laws and regulations.
　As previously stated, in addition to the enforcement of the FIEA, from the
point of view of investor protection, other laws were revised so that they
shared, to the extent possible, common regulations with the FIEA for finan-
cial instruments not covered by the FIEA but having the same economic
function. For example, such related laws as the Banking Act (Art. 13-4), In-
surance Business Act (Art. 300-2) and the Trust Business Act (Art. 24-2) im-
plemented provisions equivalent to the FIEA’ s code of conduct, perhaps the
most important area for customer protection. Specifically, these laws have
regulation of advertising, etc.; obligation to clarify conditions of transactions
in advance; delivery of document prior to conclusion of contract; behavior
prohibitions; prohibition of compensations of loss, etc.; and best execution
policy.
　The Act on Sales, etc. of Financial Instruments was formulated to provide
cross-sectional regulations regarding the sale and solicitation of sales for de-
posits, investment trusts, insurance, securities, and other financial instru-
 Chap. XVII The Securities Regulatory System 　345
Table XVII-1.　Banking Act, Insurance Business Act, and Trust Business Act
1. Acts that have sales and solicitation rules equivalent to those of the FIEA for deposits,
insurance policies, and investment trusts with strong investment characteristics
(Points of view on which regulations have been implemented for each act)
Banking Act (specified depos- Insurance Business Act (speci- Trust Business Act (specified
its, etc.) fied insurance policies, etc.) trust agreements)
Advertising, etc. • In the case of derivative de-
regulations posits, if the bank has the
right to extend the term of the
deposit, it must indicate to the
customer the risk that the in-
terest rate could fall below
the market rate to the disad-
vantage of the customer.
Obligation to • Exceptions to the obligation • The document prior to con- • Exceptions to the obliga-
deliver written to deliver written documents clusion of contract must con- tion to deliver the docu-
documents - When a document on for- tain notes on material items ment prior to conclusion of
eign currency deposit, etc. in accordance with provisions contract
was delivered within the in supervisory guidelines re- (Documents regarding a
past year garding the contract outline similar contract has pre-
- When a similar document and cautionary information viously been delivered,
was delivered within the Eg.: The contract outline is and the customer has
past year dictated on the statutory level, made it clear that issu-
Note: Establish transitional while cautionary information ance of documents is not
measures at the time is dictated on the cabinet of- necessary, etc.)
of enforcement (can fice order level.
be issued prior to en- • Items covered in the docu-
forcement; can be is- ment delivered upon conclu-
sued within three sion of contract can be ad-
months of enforce- justed in line with the items
ment) included in the insurance pol-
• In the case of derivative de- icy, etc.
posits, the document prior to Eg.: Items regarding the type
conclusion of contract must and content of the contract
contain the same contents as can be omitted from the docu-
the items shown in the adver- ment delivered upon conclu-
tisement, etc. sion of contract if they are
contained in the insurance
policy, etc.
Prohibited acts • Generally prohibited acts in • Generally prohibited acts for • Generally prohibited acts in
the banking business concluding or soliciting pur- underwriting trusts
• Concluding a contract with- chase of insurance policy • Concluding a contract
out adequate explanation nec- • Concluding a contract with- without adequate explana-
essary for understanding the out adequate explanation nec- tion necessary for under-
document prior to conclusion essary for understanding the standing the document prior
of contract or the document document prior to conclusion to conclusion of contract
on foreign currency deposits, of contract
etc.
Specified investors • One type (contract for speci- • One type (contract for speci- • One type (contract for
(Tokutei Toushika) fied deposits, etc.) fied insurance policies, etc.) specified trusts)
(Type of contract)

2. Business scope of banks and insurance companies 3. Business scope of banking and insurance company
(Auxilliary businesses) subsidiaries

• Expanded to include agency or intermediary business • Business scope of securities subsidiaries expanded
for concluding investment advisory and discretionary (full coverage of Financial Instruments Businesses).
investment contracts (banks only). • Scope of financial-related businesses expanded (pri-
• Expanded to include emission rights derivatives trad- vate placements, investment advisory and agency
ing. (intermediary and consulting services for emis- business, self-management, emission rights trading,
sion rights trading also permitted as incidental busi- emission rights derivatives trading, etc.).
nesses).
Source: The FSA.
346　Chap. XVII The Securities Regulatory System

Chart XVII-2.　Enhancement of the Act on Sales, etc. of Financial Instruments

Principles on actions for damages under Financial Products Sales Act

civil act (section 709 of the Civil Law)
Customers (sufferers) shall prove all the The act prescribes special treatment on actions for
requirements fromto ① to ④ to win actions for damages regarding a wide range of financial products.
damages against financial firms. including deposits, insurance, securities, etc.

No fault liability of
Duty to explain financial firms
Violation of
・possibility of loss duty to Presumption of loss as
to principals explain
loss to principals
② intention or negligence ・risk No need for customers
④ damages to prove requirements
① malfeasance Proof of ① from ② to ④

③ causation
Strengthening Financial Products Sales Act
● Enlarging the scope of duty to explain
・Adding a possibility of losses beyond original principals
and important part of schemes of financial instruments in
the scope of duty to explain
● Introducing prohibition of provision of conclusive judgment

・no-fault liability and presumption of loss in case of the

Source: The FSA. violation

ments. The law was revised in 2006 at the same time the FIEA came into
force to make it easier for customers to press civil liability suits. For exam-
ple, the law expanded the scope of obligation to explain products to custom-
ers (Article 3, Paragraph 1, Items (ii), (iv) and (vi)) and added a suitability
rule (Article 3, Paragraph 2). These revisions defined the responsibility, in
the case of a violation of the suitability rule, to compensate the customer for
damages, which are presumed to be any loss of principal (Article 6). The
Commodity Exchange Act (currently the Commodity Derivatives Transac-
tion Act) was also reformed to include similar regulations for its financial in-
struments. The revisions implemented advertising regulations and inserted an
obligation to explain financial products in a manner appropriate to the cus-
tomer. Furthermore, loss compensation was prohibited and made punishable
by penalties.
　While most of the business and code of conduct regulations regarding the
investment trust intermediary business and asset management business of in-
vestment corporations have been included in the FIEA, the Act on Invest-
ment Trusts and Investment Corporations (Investment Trust Act) was left to
focus solely on investment trust regulations and to serve as one of the pillars
of investment trust regulations along with the FIEA.
　There are several laws pertaining to issuance of securities. For example,
issuing of public bonds is approved based on the provisions of the Public Fi-
 　347
Chap. XVII The Securities Regulatory System

nance Act and the Local Government Finance Act while deficit-covering
bonds are governed by the special law of each fiscal year (legislation is not
required up until fiscal 2020 based on the Special Bond Act of 2016). There
are also laws concerning issuing administration for government bonds. For
private securities, the Companies Act provides for the issuance of stocks and
corporate bonds by corporations. As for corporate bonds and other bonds, the
Secured Bond Trust Act and the Enterprise Mortgage Act are separately en-
forced in regard to collateral. In addition, the Act on the Securitization of As-
sets is in place regarding the issuance of asset-backed securities.

3. Organization of the Securities Regulatory System

During the period after the war, the Securities and Exchange Act was in place
and the Securities and Exchange Commission, which was modeled after the
U.S. Securities and Exchange Commission (SEC) and established as an ex-
ternal bureau of the Ministry of Finance, oversaw the securities regulatory
system. However, after the end of the U.S. occupation in 1952, the securities
regulatory system was once again placed under the control of the Securities
Business Division in the Finance Bureau of the Ministry of Finance. Then in
1964, the Securities Bureau was established within the Ministry of Finance.
The Securities Bureau oversaw the securities regulatory system as a core en-
tity for operating the license system for securities business operators over a
period of about 30 years under the revised Securities and Exchange Act of
1965. During Japan’ s bubble economy years, the country’ s securities market
demonstrated significant growth to become one of the major markets on a
global level. On the other hand, the market came under severe criticism for
lacking openness and being scandal-ridden. This, in particular the major fi-
nancial and securities scandals in 1991, prompted efforts to strongly promote
reforms of the securities regulatory system along with market reforms.
　In 1992, the Ministry of Finance bolstered its market surveillance by es-
tablishing the Securities and Exchange Surveillance Commission (SESC) and
transferring surveillance to this body. Further change came in June 1998
when the government set up the Financial Supervisory Agency as an external
bureau (Article 3,“Committees”of the National Government Organization
Act) of the Prime Minister’ s Office, to which the Ministry of Finance trans-
ferred the SESC. Subsequently, with the enforcement of the Act on Revision,
etc. of Related Acts for the Financial System Reform in December 1998, the
Financial Supervisory Agency took over the role of overseeing the securities
regulatory system. Concurrently, the Financial Reconstruction Commission,
which was established around the same time, was given the highest responsi-
bility over the financial and securities regulatory system.
348　Chap. XVII The Securities Regulatory System

Chart XVII-3.　Securities Administration and the Monitoring System for Securities

Transactions, etc.

Prime Minister

Appointment
(subject to Diet approval)

Recommendations or
FSA Proposals
SESC

Filing Chairman
Criminal
Charges
2 Commissioners
Public
Administrative
prosecutors
Actions or Orders
to Pay
Administrative
Monetary Penalty Monitoring Inspection Investigation

Financial Instruments Listed Companies, etc. Market

Business (Violations of Misconduct
Operators, etc. disclosure (Insider trading/
(Violations of laws) requirements) Market manipulation)

Source: Materials available on the website of the Securities and Exchange Surveillance
Commission.

　Then in 2000, the Financial Supervisory Agency was reorganized as the

Financial Services Agency (FSA) to which the Ministry of Finance trans-
ferred the financial system planning and law drafting functions in 2001, the
same year as the Financial Reconstruction Commission was transferred to the
FSA and the SESC also became part of the FSA. Through this process, the
major portion of securities regulation in Japan was consolidated into a system
administered by the FSA and the SESC. And the policy on securities regula-
tion shifted from preventative administration to regulatory violation surveil-
lance. Behind this shift was the clarification of the objective of the adminis-
tration to increase the welfare of people in Japan primarily through promoting
sustainable growth of corporations and the economy and stable asset forma-
tion, following the winding-down of a bad debt issue among others after the
collapse of the bubble economy.
　New challenges for the administration have also been pointed out, includ-
ing the call for further enhancement of the financial intermediary function
and the design for a system to handle financial technologies. The FSA re-
leased its reorganization plan in August 2017, which included the following
main objectives: (1) enhance the administration’ s strategy development func-
 Chap. XVII The Securities Regulatory System 　349
Chart XVII-4.　Reorganization of the Financial Services Agency

＜Current＞ ＜After review＞

Planning and Strategy Development Strengthen support for Fintech etc.,
Coordination Bureau and Management Bureau Strengthen market functions
(Planning Department)
Minister of State for Financial Services

Enhancement of Strategy planning,

Vice Commissioner Policy and Markets
Enhancement of general adjustment
Bureau function
(Government Department)
Commissioner
State Minister

Macro/
specialty team
Vice Commissioner Macroprudence, Specialized team
Inspection
Bureau ※Specialized team collaborates with teams by business type
Teams by
in Supervision Bureau to conduct on-site inspections.
business type
Parliamentary Vice-Minister

Integrated monitoring of each bussiness

Supervisory Bureau Supervision Bureau category (integrated on/off monitoring)

Source: The FSA.

tion, (2) upgrade the administration’s professional expertise, (3) strengthen

the response to FinTech, and (4) pursue a unified approach to inspection and
supervision by abolishing the Inspection Bureau and integrating the role into
the Supervision Bureau. The key points of functional enhancement are: (1)
new establishment of Vice Commissioner for Strategy Development and
Management Bureau who will also be in charge of FinTech, (2) launch of a
FinTech Support Desk, and (3) establishment of a supervision & monitoring
system for high-speed traders, etc.

4. Law Enforcement by the Financial Services Agency

The executive authority for the Financial Instruments and Exchange Act lies
with the prime minister of Japan, the top cabinet minister, who in turn over-
sees the Financial Services Agency (FSA). In actual practice, the prime min-
ister delegates this authority (with some exceptions such as the authority on
approval and other treatment) to the commissioner of the FSA as stipulated
in Article 194-7“Delegation of Authority to the Commissioner of the FSA.”
Major types of authority delegated to the commissioner include the authority
350　Chap. XVII The Securities Regulatory System

Chart XVII-5.　Flow Leading to the Payment of Administrative Surcharge

Commissioner

(4) Selection of examiners

(6) Draft order

Tribunal formed by 3 examiners (3) Decision to start trial process

(7) Monetary Penalty Payment Order
(4) Selection of assigned (Written ruling sent)
Financial Markets Division staff
Corporate Accounting and
Office of Trial Procedures
Disclosure Division

(2) (5) Trial Procedures

Report Trial date
(Preparatory
proceedings date)
Executive Bureau
Civil Penalties Investigation and Respondent
Disclosure Document Inspection (1) Investigations (Council)
Division
Securities and Exchange Surveillance Commission

Note: Designated staff members are selected among the employees by the FSA Commissioner to assert
and verify the violations, etc., in the trial proceedings. They submit preparatory documents and
give evidence, etc.
Source: Materials available on the website of the Securities and Exchange Surveillance Commission.

to issue a Business Improvement Order to Financial Instrument Business Op-

erators and Registered Financial Institutions (Article 51, Article 51-2) or an
order to suspend operations or rescind their registration or approval (Article
52, Article 52-2). The FSA commissioner is also required to issue an Admin-
istrative Surcharge Payment Order if certain conditions are met. Primary ex-
amples subject to the issuance of the Administrative Surcharge Payment Or-
der include non-submission of securities registration statements, etc. and
false statement (Articles 172, 172-2, 172-3, and 172-4) and non-submission,
misrepresentation and false statement of the public announcement of the start
of an offering or the Tender Offer Notification (Articles 172-5 and 172-6).
When any case of unfair trading practice is noted based on facts of spreading
rumors, use of fraudulent means, market manipulation, or insider trading
(Articles 173, 174, 174-2, 174-3, and 175), an Administrative Surcharge Pay-
ment Order is normally decided through a trial procedure and based on a
draft produced by examiners (Articles 178, 185-6, and 185-7).
　In addition, the following inspection authority for issuing disciplinary ac-
tion by order or measures by the FSA is delegated by the commissioner to the
SESC. Certain other matters and some of the matters delegated to the com-
 Chap. XVII The Securities Regulatory System 　351
Table XVII-2.　Major Legal Basis of Inspection and Supervision by the FSA

Financial Instruments and Exchange Act

Article 56-2 Financial Instruments Business Operators, Etc.
Article 60-11 Authorized On-Exchange Transaction Service Operators, Etc.
Art. 63 Para. 8 Specially Permitted Business Notifying Persons, Etc.
Article 66-22 Financial Instruments Intermediary Service Providers, Etc.
Article 75 Authorized Financial Instruments Firms Association, Etc.
Article 79-77 Investor Protection Fund, Etc.
Article 106-16 Major Shareholders, Etc. of Financial Instruments Exchanges and Their
Holding Companies
Article 151 Financial Instruments Exchange, Etc.
Article 153-4 Self-Regulatory Organizations
Article 155 Foreign Financial Instruments Exchange, Etc.
Article 156-5-8 Major Shareholders, Etc. of Clearing Organization
Act on Investment Trusts and Investment Corporations
Article 22 Investment Trust Management Companies and Trustee Companies, Etc.
Article 213 Investment Corporations, Etc.

mission may be delegated to the Director-General of the Finance Bureau or

to the Director-General of the local finance bureau. The Director-General of
the Finance Bureau collaborates with the Director of Securities and Exchange
Surveillance Department of each location.
　(1) The authority to require Financial Instruments Business Operators and
parties executing transactions with Financial Instruments Business Operators
to produce or submit for inspection reports related to such operators, and
similar authority over Financial Instruments Intermediary Service Providers
　(2) Similar authority over Authorized On-Exchange Transaction Service
Operators (Foreign Securities Companies), etc.
　(3) Similar authority over authorized-certificated organizations or parties
that have received consignment of operations from such organizations
　(4) The authority to require authorized associations or issuers of OTC se-
curities to produce or submit for inspection reports
　(5) The authority to require financial instruments exchanges and their sub-
sidiaries, issuers of securities listed on respective exchanges and foreign fi-
nancial instruments exchanges to produce or submit inspection reports
　(6) The authority to require related parties of incidents subject to adminis-
trative surcharge to produce or submit inspection reports
　The commission members carry out their investigations within the permis-
sible scope and when considered necessary, the commission may report the
matter to the prime minister or the FSA commissioner for administrative dis-
ciplinary action (Act for Establishment of the Financial Services Agency, Ar-
ticle 20) and other measures.
352　Chap. XVII The Securities Regulatory System

5. The Securities and Exchange Surveillance Commission

The Securities and Exchange Surveillance Commission (SESC) comprises a

chairman and two other committee members appointed by the prime minister
with the approval of the house of representatives and the house of councilors
(Act for Establishment of the Financial Services Agency, Arts. 10 to 12). As
described in the preceding section, the commission has the authority delegat-
ed by the FSA commissioner to require a wide range of people related to Fi-
nancial Instruments Business Operators and registered financial institutions
to produce or submit for inspection reports and materials (FIEA Art. 56-2,
Art. 60-11, Art. 63, Art. 66-22, Art. 75, Art. 79-4, Art. 79-77, Art. 151, Art.
156-15, Art. 156-34, etc.). The commission also has the authority to demand
the production or submission for inspection of reports and materials from the
submitters of securities registration statements or Statements of Large Vol-
ume Holders and tender offers (FIEA Art. 26, Art. 27-22, Art. 27-30, etc.).
　Based on this process, the commission mainly carries out the following
tasks: (1) market analysis screening (daily market surveillance) involving a
review of the securities trading activity of Financial Instruments Business
Operators; (2) securities inspections involving wide-ranging and detailed
branch inspections of Financial Instruments Business Operators and regis-
tered financial institutions; (3) disclosure inspections to ensure the appropri-
ateness of disclosure by submitters of securities registration statements and
annual securities reports; and (4) administrative surcharge investigations un-
dertaken to determine whether certain behavior requiring an Administrative

Table XVII-3.　SESC Recommendations by Business Year (as of January 31, 2018)

Business Year 92－10 2011 2012 2013 2014 2015 2016 2017
Total 142 15 7 3 6 8 7 4
Fake statement of
Annual Securities 32 4 0 0 2 3 0 0
Reports, etc.
Disseminating
Unfounder Rumors・ 17 4 1 1 1 2 2 0
Fraudulent Means
Market manipulation
21 1 0 1 2 1 3 2
or price fixing
Insider trading 65 6 2 1 1 2 2 2
Others 7 0 4 0 0 0 0 0

Source: Materials available on the website of the Securities and Exchange Surveillance Commission.
 Chap. XVII The Securities Regulatory System 　353
Chart XVII-6.　Activities of the SESC

New coverage of inspection (trade repositories)

Inspection of securities
New coverage of inspection (group companies, etc. following the
introduction of consolidated regulation)

companies
New coverage of inspection (credit rating agencies, etc.)
New coverage of inspection (funds, etc.)
(Investment advisory companies, etc.)
Inspection of Inspection for financial soundness
securities
companies Inspection for maintaining market fairness

Widening the scope of violations subject to administrative monetary penalties

Recommendations & proposals

[tipping, trading recommendations and other acts related to insider trading]
Collection, analysis and examination of information

Widening the scope of violations subject to administrative monetary penalties

Investigation of market

[unfair trading, etc. committed on the account of others by persons other than
financial instruments business operators]
misconduct

Expanded scope of investigation and administrative monetary penalties

[Included in market manipulation: fictitious buying and selling of stocks, exchange
of stocks based on collusive arrangements and illegal stabilization operation trade]
Expanded scope of investigation and administrative monetary penalties
[“Misegyoku” sham order transactions]
Insider trading, market manipulation with actual trading, disseminating unfounder
rumors regarding stock markets, and fraudulent means

Widening the scope of violations subject to administrative monetary penalties

(involvement in the submission of documents containing false disclosure statements)
Inspection of
statements

Expanded scope of investigation and administrative monetary penalties

disclosure

Expanded scope of investigation and administrative monetary penalties

[Quarterly securities reports*, internal control reports, etc.]
Securities registration statements*, Annual securities reports*,
Semi-annual securities reports*, Extraordinary reports*, etc.
*Signifies the disclosure documents subject to administrative monetary penalties
Investigation of

Investigation of infringement cases

infringements

Insider trading (including tipping, trading recommendations and other acts),

market manipulation, disseminating unfounder rumors, fraudulent means, Filing
submission of false securities reports, compensation for loss, etc. criminal
charges
and petitioning

Seeking
Investigation
of injunction

Investigation for seeking petitions for court injunctions

petitions
for court
injunctions

Source: Data disclosed by Securities and Exchange Surveillance Commission.

Surcharge Payment Order, such as unfair trading practices or disclosure vio-

lations, has occurred. Furthermore, in the case of a criminal investigation,
such as the misrepresentation of material facts in a securities registration
statement or annual securities report submitted or market manipulation, offi-
cials of the commission are authorized to arbitrarily investigate by question-
ing, examination, retention, etc. and keeping documents in custody (FIEA
Article 210). In such criminal investigations, the officials also have inspec-
tion, search, and seizure authority within the scope of the warrant issued by a
354　Chap. XVII The Securities Regulatory System

judge (FIEA Article 211, etc.).

　As described in the preceding section, after the commission has made its
recommendations based on its securities investigations, the FSA commis-
sioner issues orders to improve business operations, rescinds registration, or
suspends operations. When the commission recommends action as a result of
its administrative surcharge investigations, the commissioner issues an Ad-
ministrative Surcharge Payment Order when he/she is convinced that regula-
tions have been violated. Furthermore, when the commission is convinced
that irregularities have been committed following the investigation in a crim-
inal case, it must report the case to the Public Prosecutors Office pursuant to
the provision of Article 226, Paragraph 1 of the FIEA.
　One area that has been receiving attention in recent years is the issuance of
Prohibition Orders and Stay Orders (Article 192, Paragraph 1) issued by the
courts based on a petition made by the SESC. In the 2008 revision of the
FIEA, the Securities and Exchange Surveillance Commission was given the
authority to petition for these legal actions. It first used this power to deal
with a business operator not registered as a financial instruments business
operator in 2010 (November 2010, Daikei Co., Ltd.). It has continued to do
so (most recently, F Support Co., Ltd. in April 2016 and Repair House Co.,
Ltd. in July 2016).

6. Self-Regulatory Organizations

A self-regulatory organization is an organization established voluntarily by

intermediaries, etc. under the respective legal framework with the purpose of
ensuring fair and smooth trading of securities and other transactions and of
contributing to the protection of investors. It takes on the role of securing the
public nature of the securities market through formulating its own rules and
ensuring adherence to those rules along with the laws, regulations and other
rules set out by the government.
　The Financial Services Agency (FSA) acknowledges the financial services
associations, certified payment service associations and designated dispute
resolution organizations as self-regulatory organizations in addition to the Fi-
nancial Instruments Firms Associations. Financial Instruments Firms Associ-
ations are categorized into authorized financial instruments firms associations
approved by the prime minister under the FIEA (Article 67-2) and certified
financial instruments firms associations designated by the prime minister un-
der the FIEA (Article 78). The JSDA is currently the only Authorized Finan-
cial Instruments Firms Association and its members comprise Financial In-
struments Business Operators and registered financial institutions. The JSDA
has in place Articles of Association; fair, conventional regulations; board res-
 Chap. XVII The Securities Regulatory System 　355
Table XVII-4.　List of Self-Regulatory Organizations Governed by the FIEA (November
2017)

Rules, etc. Organization

Financial instruments Licensed Japan Exchange Regulation (see main text)
exchange Same as above Nagoya Stock Exchange
Same as above Fukuoka Stock Exchange
Same as above Sapporo Securities Exchange
Financial Instruments Authorized JSDA
Firms Associations Certified The Investment Trusts Association, Japan
Same as above Japan Investment Advisers Association
Same as above Financial Futures Association of Japan
Same as above Type II Financial Instruments Firms Association
Investor Protection Certified Financial Instruments
Organization Mediation Assistance Center
(FINMAC)

Source: Compiled based on data available on the website of the FSA, etc.

Table XVII-5.　Principal Rules of the Japan Securities Dealers Association (as of No-
vember 2017)

Self-Regulatory Rules
Rules Concerning Solicitation for Investments and Management of Customers, Etc. by Association
Members
Rules Concerning Establishment of Confidential Corporate Information Management System by
Association Members
Rules Concerning Internal Administrators, Etc. of Association Members
Rules Concerning Application for Confirmation, Examination, Confirmation, Etc. of Incidents
Rules Concerning Financial Instruments Intermediary Services Providers
Rules Concerning Elimination of Relationships with Antisocial Forces
Rules Concerning Employees of Association Members
Rules Concerning Qualification and Registration, Etc., of Sales Representatives of Association
Members
Rules Concerning Distributions, Etc. of Securitized Products
Rules Concerning Maintenance of and Compliance With Ethical Code by Association Members
Uniform Practice Rules
Rules Concerning Handling of OTC Incident-Related Securities
Rules Concerning Exchanges of Bonds Drawn for Redemption by Lottery in OTC Trading
Rules Concerning Elimination of Fails in Bonds, Etc.
Dispute Handling Rules
Rules Concerning Outsourcing, etc. for Resolution of Disputes, Etc. Between Customers and As-
sociation Members
Rules Concerning Mediation of Disputes Between Association Members
 356　Chap. XVII The Securities Regulatory System

olutions; and dispute handling rules; and its members are required to carry
out securities transactions in compliance with these regulations and rules.
The JSDA is also empowered to take disciplinary action when its members
violate these association rules. The scope of its disciplinary action may in-
clude reprimand, imposition of monetary penalties, suspension or limitation
of membership or expulsion, or the issuing of a formal warning (JSDA Arti-
cles of Association, Article 28, Article 29).
　Certified Financial Instruments Firms Associations include The Investment
Trusts Association, Japan that has investment trust management companies,
trust companies, etc. that serve as trustees in investment trusts without in-
struction by trustor, and securities companies and registered financial institu-
tions that purchase and sell beneficiary certificates of investment trusts as
members, and The Japan Investment Advisers Association having investment
advisory companies as members.
　The Financial Instruments and Exchange Act (FIEA) distinguishes“stock
companies that operate financial instruments exchange markets”from a
“self-regulatory organization”and recognizes a“financial instruments ex-
change”or“its self-regulatory organization”as a self-regulatory organization
relating to the exchange market. With the authorization of the prime minister,
the self-regulation-related services of exchanges in Japan have been commis-
sioned to Japan Exchange Regulation pursuant to Article 85 of the FIEA.
Those services include the listing and delisting of financial instruments, in-
spections of compliance of members with laws and regulations, etc., and oth-
er measures specified by cabinet office order for the purpose of ensuring fair
trading practices (Article 84, Paragraph 2). Japan Exchange Regulation’ s or-
ganizational structure contains a listing examination department that screens
listing applicants for suitability; a listing compliance department that main-
tains and improves the quality of the financial instruments listed on the ex-
change; a market surveillance and compliance department that investigates
and seeks to prevent unfair trading practices; and a participant examination
and inspection department that monitors compliance and implements disci-
plinary action. Under rule 34 of the Trading Participant Rules, violations of
laws or rules and regulations by participants are punishable by revocation of
trading qualifications, suspension or restriction of trading, and monetary pen-
alties or official warnings, etc.

7. International Organization for Securities Regulation

The International Organization of Securities Commissions (IOSCO) is an in-

ternational organ that sets forth global standards for the securities sector in
various countries. It takes on the role of promoting, in particular, the devel-
 Chap. XVII The Securities Regulatory System 　357
Chart XVII-7.　IOSCO Organization Chart (as of June 2016)

Presidents General
Committee IOSCO Board Secretariat

Asia-Pacific Regional
Committee

Committee 1 Growth and Emerging TF on OTC Derivatives European Regional

【Issuer Accounting,
Audit and Disclosure】 Markets Committee Regulation Committee

Committee 2 Affiliate Members TF on Securitization Inter-American Regional

【Regulation of
Secondary Markets】 Consultative Committee Markets Committee

Committee 3 Finance and WG on Margin Africa/Middle-East

【Regulation of Market
Intermediaries】 Audit Committee Requirements Regional Committee

Committee 4 Capacity Building

【Enforcement and Exchange of Information TF on Market Conduct Policy Standing Group
and the Multilateral Memorandom of
Understanding Screening Group】
Resource Committee

Committee 5 Committee on TF on Financial Implementation

【Investment
Management】 Emerging Risks Benchmarks Monitoring SG

Committee 6 Assessment WG for Harmonization

Audit Quality TF of key OTC derivatives
【Credit Rating Agencies】 Committee data elements

Committee 7 CPMI-IOSCO
WG on Cyber-resilience
【Derivatives】 Steering Group

Committee 8 WG on Digital
【Retail Investors】 Innovations

Table XVII-6.　Major IOSCO Committees

Presidents Committee The Presidents Committee is composed of all the Presidents (Chairs) of ordi-
(Presidents Committee) nary and associate members and meets once a year during the Annual Confer-
ence. It has the right to make decisions on all matters necessary for the IOS-
CO to achieve its objectives.
The IOSCO Board The IOSCO Board is comprised of securities regulators of 34 countries, in-
(IOSCO Board) cluding the FSA. It is the governing and international standard-setting body
for the securities industry. Under the Board are (1) policy committees that
discuss policy issues and conduct policy work; among other committees is (2)
the Growth and Emerging Markets Committee, comprised of regulators of
emerging markets and countries, which seeks to promote the development
and greater efficiency of emerging markets by establishing principles and
standards and providing training, etc.
Regional Committees There are four regional committees—Asia-Pacific Regional Committee, In-
(Regional Committees) ter-American Regional Committee, European Regional Committee, and Afri-
can/Middle-East Regional Committee—and they discuss specific issues perti-
nent to their own regions.
Japan belongs to the Asia-Pacific Regional Committee.

Source: Websites of IOSCO and the FSA.

358　Chap. XVII The Securities Regulatory System

opment and implementation of, and compliance with, internationally recog-

nized securities regulations. In the process of implementing reforms to the
international rules after the financial crisis, IOSCO worked in cooperation
with the G20 and the Financial Stability Board (FSB) below. The IOSCO
framework was established in 1974 as the Inter-American Association of Se-
curities Commissions. In 1983, the code of the organ was revised to expand
membership beyond the Americas, and the organization was renamed as
IOSCO at the Paris Annual Conference in 1986. As of November 2017, there
were a total of 218 member organizations, representing the regulators of over
90% of the world’ s securities markets. The Securities Bureau of Japan’ s Min-
istry of Finance became an ordinary member in 1988. The FSA succeeded
the position thereafter and is an ordinary member at present. Other than the
FSA, the Securities and Exchange Surveillance Commission also holds mem-
bership as an associate member. In addition, the Ministry of Economy, Trade
and Industry and the Ministry of Agriculture, Forestry and Fisheries that
share jurisdiction over commodity futures are associate members of the orga-
nization. Meanwhile, Japan Exchange Group, Inc. and the JSDA are affiliate
members. IOSCO has published a wide range of principles, policies, stan-
dards, guidance, codes, recommendations, and practices regarding securities
trading that have been implemented in many countries. IOSCO’ s documents
are important also for Japan’ s securities regulators, which have taken steps to
implement policies through defining laws and self-regulatory systems. The
Financial Services Agency closely follows IOSCO trends and publishes them
on its website.
　The Financial Services Board (FSB) was established as an international
body in April 2009, as the successor to the Financial Stability Forum (FSF)
founded in 1999, with a broadened mandate to promote financial stability, the
function of the FSF. Members of the FSB include financial supervising or-
gans and central banks of 25 major countries and regions, including Japan. In
addition, international organizations such as IOSCO, IMF, the World Bank,
the Bank for International Settlements (BIS), and the Basel Committee on
Banking Supervision are also members of the FSB. From Japan, the Bank of
Japan, the FSA and the Ministry of Finance are participating members. Ac-
cording to the FSB Charter, the organization is responsible for the monitoring
and assessment of vulnerabilities affecting the global financial system and
for identifying and reviewing regulations, supervisory and related actions
needed to address these vulnerabilities and their outcomes. Particularly im-
portant tasks of the FSB include the authorization of global systemically im-
portant financial institutions (G-SIFI) crucial for systems that are in place
across borders and the formulation of guidelines for establishing the supervi-
sory college. The organization also examines international standards and
principles relating to the shadow banking system and other activities that
 　359
Chap. XVII The Securities Regulatory System

have not been subject to regulations thus far, and serves as an intermediary
function to coordinate matters among related entities. The outcomes of activ-
ities of the FSB are reported and addressed as recommendations when appro-
priate at the G20 summit.
 APPENDIX
Chronology of Events Related to Securities

(1870−2017)

Year　Date Changes implemented

Apr. 23, 1870 The Japanese government publicly offers 9% coupon bonds
on the London market (the first public bond ever to be so
offered).
Oct. 13, 1874 The stock trading ordinance is enacted (the nation’
s first se-
curities law), but it is not enforced.
May 4, 1878 The stock exchange ordinance is promulgated.
May 15, 1878 The Tokyo Stock Exchange is established.
June 17, 1878 The Osaka Securities Exchange is established.
Mar. 4, 1893 The Securities Exchange Law is promulgated.
Aug. 1, 1894 The Sino-Japanese War breaks out.
Mar. 9, 1899 The Commercial Code is promulgated (the basic law of to-
day’s Companies Act).
Feb.10, 1904 The Russo-Japanese War breaks out.
Mar. 13, 1905 The Secured Bonds Trust Act is promulgated.
Feb. 1910 Securities brokers engage in sub-underwriting in the issu-
ance of the No. 1 issue of public bond with 4-percent inter-
est.
July 28. 1914 World War I breaks out.
Apr. 1, 1918 The Securities Installment Sales Act is promulgated.
Mar. 15, 1920 Stock prices crash, touching off a reactionary depression.
Apr. 20, 1922 The Securities Exchange Law is amended: development of
membership-based exchange, two transaction categories -
spot transactions and net-balance settlement transactions
Sept. 1, 1922 Osaka Securities Exchange starts short-term futures transac-
tions (time bargains).
 　361
APPENDIX Chronology of Events Related to Securities

Sept. 1, 1923 Great Kanto Earthquake, September 7 Moratorium.

June 2, 1924 The Tokyo Stock Exchange starts short-term futures trans-
actions (time bargains).
Mar. 15, 1927 Financial crisis occurs.
Mar. 30, 1927 The Banking Act is promulgated.
Apr. 22, 1927 Financial crisis continues, 3-week moratorium is imple-
mented.
1928 The Tokyo Stock Exchange and the Osaka Securities Ex-
change mark their 50th anniversaries. The Tokyo Stock Ex-
change computes a stock price index for the first time
(Fisher’s ideal index, monthly average) and starts publish-
ing it.
Oct. 24, 1929 The New York Stock Exchange crashes (Black Thursday),
setting off a world-wide depression.
Jan. 11, 1930 Gold embargo is lifted, causing an outflow of massive
amount of specie and an outbreak of industrial depression
(Showa Depression).
Sept. 18, 1931 The Manchurian Incident breaks out.
Sept. 21, 1931 U.K. decides to terminate the gold standard, setting off a
worldwide financial crisis.
Dec. 13, 1931 Reimposition of gold embargo is executed.
May 15, 1932 The Bank of Japan begins underwriting issuance of deficit-
covering government bonds.
May 5, 1933 Banks and trust banks as trustees of corporate bonds initiate
a clean-up movement of corporate bonds, disallowing issu-
ance of unsecured corporate bonds.
May 27, 1933 The U.S. enacts the Securities Law.
June 6, 1934 The U.S. enacts the Securities and Exchange Law.
July 7, 1937 Marco Polo Bridge Incident occurs, setting off the Second
Sino-Japanese War.
July 17, 1937 Fujimoto Bill Broker Securities forms a securities invest-
ment partnership–the first investment trust.
Mar. 29, 1938 The Securities Business Control Act is promulgated.
Mar. 31, 1938 The Securities Underwriting Business Act is promulgated.
362　APPENDIX Chronology of Events Related to Securities

Sept. 3, 1939 World War II breaks out.

Aug. 30, 1941 The Stock Price Control Ordinance is promulgated.
Dec. 8, 1941 The Pacific War breaks out.
Feb. 18, 1942 The Act for Registration of Corporate Bonds, etc. is pro-
mulgated.
Mar. 11, 1943 The Japan Securities and Exchange Act is promulgated. On
June 30, the Japan Securities Exchange is established, and
the 11 stock exchanges (as corporations) are abolished to
become branch exchanges of the Japan Securities Ex-
change.
Oct. 19, 1943 Exchange Member Administration Guidelines are issued;
Securities Business Administration Guidelines are issued
(December 17)
Mar. 10, 1945 After the Great Tokyo Air Raid, the Wartime Finance Bank
decides to provide unlimited support by buying at the
March 9 price.
Aug. 10, 1945 Japanese stock exchanges nationwide temporarily suspend
operations.
Aug. 15, 1945 Japan loses the war.
Sept. 26, 1945 The GHQ releases a memorandum (dated Sept. 25) banning
the resumption of business by the securities exchange.
Dec. 1945 Investors start group trading in stocks in Tokyo and Osaka.
Apr. 17, 1946 Shinnihon-Kogyo Corporation’ s stock is publicly offered as
the first public stock offering after the war.
Aug. 8, 1946 The Holding Company Liquidation Commission is estab-
lished and begins designation of holding companies.
Jan. 18, 1947 The Act Concerning Adjustment, etc. of Disposal of Securi-
ties is promulgated.
Mar. 28, 1947 The Act Concerning Dissolution of Japan Securities Ex-
change is promulgated, and the securities exchange is dis-
solved on April 16.
Mar. 28, 1947 The Securities and Exchange Law (of 1947) is promulgated.
Apr. 14, 1947 The Antimonopoly Act is promulgated.
July 23, 1947 The Securities and Exchange Commission is established.
 　363
APPENDIX Chronology of Events Related to Securities

Apr. 13, 1948 The revised Securities and Exchange Act (of 1948) is pro-
mulgated, and it makes securities companies subject to reg-
istration.
Nov. 7, 1948 Article 65 of the Securities and Exchange Act is enforced.
Jan. 31, 1949 The GHQ announces a policy authorizing the resumption of
securities trading.
Feb. 12, 1949 Securities companies hold inauguration meetings of stock
exchanges in Tokyo (Feb. 12), Osaka (Feb. 15), and Nagoya
(Mar. 7).
Apr. 20, 1949 Adams GHQ Officer in charge of securities instructs the
three principles of securities exchange.
May 9, 1949 The Japan Securities Dealers Association is founded (as a
federation of securities dealers associations).
May 16, 1949 The stock exchanges of Tokyo, Osaka, and Nagoya start
floor trading.
July 4, 1949 Stock exchanges in Fukuoka, Hiroshima, Kobe, Kyoto, and
Niigata start floor trading.
Apr. 1, 1950 The Sapporo Stock Exchange starts floor trading.
June 25, 1950 Disturbance outbreaks in Korea.
June 1, 1951 Margin trading is started.
June 1, 1951 The Securities Investment Trust Act is promulgated and en-
forced, and stock investment trusts start operating on June
15.
Jan. 4, 1952 Based on the Dow Jones stock pricing method, average
stock prices (TSE average stock price) are adopted on ex-
changes and announced.
Apr. 28, 1952 Treaty of Peace with Japan and the U.S.-Japan Security
Treaty come into effect.
Aug. 1, 1952 The Securities and Exchange Commission is abolished, and
its function is transferred to the Securities Section of the Fi-
nance Bureau of the Ministry of Finance.
Sept. 10, 1952 The Securities and Exchange Council is created.
Mar. 5, 1953 Nationwide stock markets crash at the news of Russian
leader Stalin is in a critical condition.
364　APPENDIX Chronology of Events Related to Securities

Oct. 26, 1954 The Tokyo Stock Exchange’ s labor union goes on strike,
demanding improvements in labor conditions.
June 1955 Movements to revive term (time bargain) transactions reach
a peak.
Apr. 2, 1956 The stock exchanges in Tokyo and Osaka open a bond trad-
ing market.
Oct. 7, 1958 Trading on the Tokyo Stock Exchange tops 100 million
stocks for the first time.
Feb. 18, 1959 Foreign currency-denominated bonds (USD public bonds)
are issued for the first time after the war.
Jan. 11, 1961 Bond investment trusts are launched.
July 18, 1961 The Dow Jones average stock price hits the peak at
1,829.74.
Oct. 2, 1961 The stock exchanges of Tokyo, Osaka, and Nagoya open
Second Sections.
July 18, 1963 President Kennedy of the United States proposes the cre-
ation of an interest equalization tax, and stock prices on the
Tokyo Stock Exchange crash on July 19.
Jan. 20, 1964 Japan Joint Securities is founded and continues to buy
stocks from the fall season to the end of the year.
Sept. 25, 1964 Capitalization Coordinating Committee agrees to restrain
capital increases after February 1965.
Jan.12, 1965 Japan Securities Holding Association is founded, takes on
stock holdings of investment trusts.
May 21, 1965 Talks about the rehabilitation of the near-bankrupt Yamaichi
Securities are reported, plunging the market into a semi-
crash.
May 28, 1965 The Bank of Japan decides to provide special loans to 19
management companies including Yamaichi Securities.
July 27, 1965 Economic reconstruction measures, including the policy for
issuing deficit-covering government bonds, are decided.
Oct. 1, 1965 The amended Securities and Exchange Act is enforced;
among other things, it requires securities companies to ob-
tain a license from the government.
July 1, 1967 Liberalization of capital transactions (first round) is imple-
mented.
 　365
APPENDIX Chronology of Events Related to Securities

Apr. 1, 1968 Securities companies are fully transfered to a license sys-

tem.
June 4, 1968 The Tokyo Stock Exchange’ s market capitalization on its
1st section reaches ¥10 trillion.
Jan. 31, 1969 Nihon Gakki pursues capital increase by issuing shares on
market with preferential terms for shareholders. Issuing of
shares on market becomes active.
July 1, 1969 TOPIX is introduced.
Mar. 3, 1971 The Law Concerning Foreign Securities Firms is promul-
gated.
Jan. 24, 1973 The Dow Jones average stock price hits a peak of 5,359.74.
Feb. 13, 1973 The government shifts the exchange rate system to a float-
ing exchange rate system.
June 2, 1973 Agreement reached with OPEC on major oil companies and
raising of oil prices; the first oil crisis begins.
1975 The Ministry of Finance starts issuing a massive amount of
government bonds, and the turnover of bonds on the OTC
market increases sharply.
May 15, 1978 The Tokyo Stock Exchange celebrates its 100 year anniver-
sary and enters its second century.
Mar. 30, 1979 Unsecured corporate bonds (Sears, Roebuck and Company)
are issued for the first time since the end of the war.
Dec. 1, 1980 A new Foreign Exchange and Foreign Trade Act is en-
forced, and in- and out-bound securities investments are
liberalized, in principle.
Oct. 1, 1982 Revised Commercial Code is enforced, unit share system is
introduced, and the face value of newly founded company’s
stock is set at ¥50,000.
Apr. 9, 1983 City banks and other financial institutions start OTC sale of
government bonds.
Apr. 20, 1984 The Law Concerning the Custody and Transfer of Stock
Certificates is promulgated.
Oct.19, 1985 The Tokyo Stock Exchange starts bond futures trading, the
first securities futures trading since the end of the war.
Dec. 24, 1985 Merrill Lynch and five other foreign securities firms are ad-
mitted to the Tokyo Stock Exchange for the first time.
366　APPENDIX Chronology of Events Related to Securities

Oct.11, 1986 NTT begins offering its shares to the general public.
Nov. 25, 1986 The Law Concerning the Regulation of Investment Advis-
ers Relating to Securities is enforced.
June 9, 1987 The Osaka Securities Exchange starts Futures 50 trading as
the first stock futures trading market.
Oct. 20, 1987 The Tokyo Stock Exchange records the largest fall (14.9%)
following the crash of the New York market, Black Mon-
day; stock price crash ripples throughout the world.
Dec. 15, 1987 The Law Concerning the Regulation of Mortgage-Backed
Securities Business is enforced.
Sep. 3, 1988 The Tokyo Stock Exchange (TOPIX) and the Osaka Securi-
ties Exchange (the Nikkei 225) start stock index futures
trading on full scale.
June 12, 1989 The stock exchanges in Osaka (Nikkei 225); Nagoya (Op-
tion 25, on Oct. 17); and Tokyo (TOPIX) start trading stock
index options.
Dec. 29, 1989 The Dow Jones average (the Nikkei average) shoots up to
an all-time high of 38,915.87.
Mar. 20, 1990 With the rapid plunge in stock prices, public offering of
stocks on the market has come to a halt.
Oct. 1, 1990 Given the plunge in stock prices, the Finance Minister
quickly announces measures to bolster stock prices.
June 24, 1991 Following the involvement of the big four securities compa-
nies in the loss compensation issue with corporate clients
and in transactions with antisocial forces, the President of
Nomura Securities and the President of Nikko Securities
take responsibility and resign, which leads unfolding securi-
ties scandals over the subsequent several months.
Oct. 3, 1991 The revised Securities and Exchange Act is approved. Revi-
sions include the prohibition of discretionary account trans-
actions and prohibition of loss compensation dealings.
June 26, 1992 The Law Concerning Realignment of Related Laws for a
Reform of the Financial System and the Securities Trading
System is promulgated, and the Securities and Exchange
Surveillance Commission is launched on July 20.
 　367
APPENDIX Chronology of Events Related to Securities

Aug. 18, 1992 The Nikkei stock average plunge to 14,309.41 and emer-
gency measures are quickly announced. Comprehensive
economic measures, including the injection of public funds,
are revealed (August 28).
July 2, 1993 Kogin Securities and other securities companies affiliated
with financial institutions were established for the first time.
Apr. 1, 1994 Brokerage commissions securities companies charge on
block trading are liberalized.
Oct. 1, 1994 Amendment to the Commercial Code for deregulating trea-
sury stock purchases is enforced.
Feb. 26, 1995 Barings Securities of U.K. goes bankrupt.
Aug. 30, 1995 Hyogo Bank goes bankrupt under the Banking Act for the
first time after the war and the BOJ provides a special loan.
Sept. 8, 1995 The Bank of Japan cuts the discount rate to an all-time low
of 0.5%.
Jan. 1, 1996 The regulation of the issuance of corporate bonds is abol-
ished.
June 21, 1996 Six laws relating to housing-loan and financial matters are
promulgated.
Nov. 11, 1996 Prime Minister Ryutaro Hashimoto instructs his cabinet to
come up with ideas for a sweeping financial system reform
to revive the Tokyo market in preparation for the 21st cen-
tury (a Japanese version of the“financial Big Bang”).
Apr. 25, 1997 Nissan Life Insurance becomes the first bankrupt life insur-
er after the war.
June 13, 1997 The Securities and Exchange Council, the Financial System
Research Committee, and the Insurance Council submit re-
ports on measures to be taken to achieve the goals of the
Japanese Big Bang.
June 20, 1997 The Act for Establishing Financial Supervisory Agency is
promulgated.
Nov. 3, 1997 San’yo Securities, Hokkaido Takushoku Bank (Nov. 17),
and Yamaichi Securities (Nov. 22) go virtually bankrupt.
Apr. 1, 1998 The government starts carrying out Big Bang reforms, the
amended Foreign Exchange and Foreign Trade Act is en-
forced, and the brokerage commission on trades worth ¥50
million or more and less than ¥1 billion are liberalized.
368　APPENDIX Chronology of Events Related to Securities

June 22, 1998 The Financial Supervisory Agency is launched.

Sept. 1, 1998 The SPC Act is enforced.
Oct. 16, 1998 Eight laws related to financial reconstruction are promul-
gated.
Oct. 23, 1998 The Long-Term Credit Bank of Japan and Nippon Credit
Bank, Ltd. (December 13) are placed under temporary gov-
ernment control.
Dec. 1, 1998 The Act on Revision, etc. of Related Acts for the Financial
System Reform is enforced.
Dec. 15, 1998 The Financial Reconstruction Commission is launched.
Apr. 1, 1999 Securities companies start managing their customers’assets
separately from their own.
Oct. 1, 1999 Brokerage commissions on stock transactions are liberal-
ized.
Nov. 11, 1999 The Tokyo Stock Exchange launches Mothers market, a
market for high-growth and start-up stocks.
Mar. 1, 2000 The Niigata Stock Exchange and the Hiroshima Stock Ex-
change are consolidated into the Tokyo Stock Exchange.
Mar. 17, 2000 The regulatory agency cancels the securities registration of
Minami Securities, the first such cancellation ever in Japan.
May 8, 2000 The Osaka Securities Exchange opens the NASDAQ Japan
market, later converted to the Hercules market for start-up
companies on Dec. 16, 2002.
May 31, 2000 The Securities and Exchange Act as amended in 2000 is
promulgated, and the portion of the Securities and Ex-
change Act that provides for reorganizing stock exchanges
into corporations is enforced on Dec. 1.
May 31, 2000 The Act on Sales, etc. of Financial Instruments is promul-
gated.
July 1, 2000 The Financial Services Agency goes into operation.
Mar. 1, 2001 The Kyoto Stock Exchange is consolidated into the Osaka
Securities Exchange.
Apr. 1, 2001 The special measure for the protection of the entire deposit
of investors at the time of bankruptcy of a securities compa-
ny is abolished.
 　369
APPENDIX Chronology of Events Related to Securities

Apr. 1, 2001 The Osaka Securities Exchange reorganizes itself into a co-
orporation.
June 1, 2001 The system of electronically disclosing the contents of se-
curities reports, etc. (Electronic Disclosure for Investors’
NETwork“EDINET” ) goes into operation.
Oct. 1, 2001 The amended Commercial Code—lifting the ban on trea-
sury stocks and instituting the system of trading units of
shares—is enforced.
Nov. 30, 2001 The amended securities taxation system (which reduces the
tax rate applicable to capital gains made by individuals
from the sale of shares) is enforced.
Dec. 17, 2001 Nomura Holdings is listed on the NYSE.
Jan. 30, 2002 Banks’Shareholdings Purchase Corporation is established.
Apr. 1, 2002 The special measure for the protection of the entire deposit
of investors expires, and the blanket government guarantee
of deposits is partially lifted.
June 5, 2002 The Act on Securities Settlement System Reform Law is
enacted.
Nov. 29, 2002 The Bank of Japan starts buying up cross-held shares re-
leased by banks.
Apr. 28, 2003 The Nikkei average drops to a 21-year low of ¥7,607.88.
Dec. 1, 2004 The ban on banking institutions against engaging in the se-
curities intermediary service business is lifted.
Dec. 13, 2004 The JASDAQ Stock Exchange opens for business.
Apr. 1, 2005 The blanket government deposit guarantee is scrapped (ex-
cluding deposits used for settlement purposes).
Dec. 8, 2005 A trading error involving shares of the newly listed J-Com
Co. occurs. The related transactions are settled in cash for
investors on Dec. 13.
Jan. 16, 2006 The Livedoor scandal occurs, leading to the Murakami fund
problem in June.
June 14, 2006 The Financial Instruments and Exchange Act is published
and goes into effect Sept. 30, 2007.
Aug. 2007 The subprime loan problem looms large in U.S. markets
and spreads to European markets as well.
370　APPENDIX Chronology of Events Related to Securities

Sept. 15, 2008 Lehman Brothers Holdings Inc. files for protection under
Chapter 11 of the U.S. Bankruptcy Code, creating the Leh-
man Shock that spins the world into financial crisis.
Jan. 5, 2009 Japan implements a fully dematerialized registration system
for stocks.
Jan. 19, 2010 Japan Airlines Co., Ltd., files with the Tokyo District Court
for protection under the Corporate Reorganization Law be-
coming the largest business failure in Japan’ s post-war his-
tory.
Feb. 4, 2010 European markets plunge due to the sovereign debt crisis in
Greece.
Sept. 10, 2010 The Incubator Bank of Japan, Limited declares its bank-
ruptcy to the FSA, which announces the first ever triggering
of the government’ s deposit insurance cap system.
Mar. 11, 2011 Great East Japan Earthquake occurs, followed by a hydro-
gen explosion at Tokyo Electric Power Company’ s Fukushi-
ma nuclear power facility on March 13.
Aug. 5, 2011 S&P lowers the long-term credit rating for U.S. government
bonds from AAA to AA+.
Jan. 1, 2013 The Tokyo Stock Exchange Group, Inc. and Osaka Securi-
ties Exchange Co., Ltd., merged their operations, giving
birth to the Japan Exchange Group, Inc. (JPX)
April 4, 2013 The Bank of Japan introduced a quantitative and qualitative
monetary easing program aimed at achieving 2% inflation
in the Japanese economy within two years.
Jan. 1, 2014 NISA, a tax saving scheme for small-amount investments,
is launched.
Jan. 6, 2014 Nikkei, JPX and TSE begin calculation and distribution of
JPX-Nikkei Index 400.
Mar. 5, 2015 FSA and TSE decide on the Corporate Governance Code.
Nov. 27, 2015 MOF records negative yield for the first time in the 2-year
JGB auction.
Jan. 29, 2016 BOJ decides on additional monetary easing policy of apply-
ing negative interest rates in part on excess reserves at its
Monetary Policy Meeting.
 　371
APPENDIX Chronology of Events Related to Securities

Feb. 23, 2016 JSDA announces conclusion of a first trade with negative
interest rates on the Japanese corporate bond secondary
market.
Aug. 31, 2016 Nomura Asset Management ends the management of
MMFs.
May. 29, 2017 FSA recommends individual disclosure of the results of vot-
ing rights exercise for institutional investors.

The“Chronology of Events Related to Securities”that covers more details of

events from 1945 is available on the Japanese-language website of the Japan
Securities Research Institute (JSRI) (http://www.jsri.or.jp/). Events may be
searched by name.
　The“Chronology of Events Related to Securities”is also contained in the
following publication issued by the JSRI:
　“Chronology of Events Related to Securities (Meiji, Taisho, Showa)”
(1595 to January 7, 1989)
Published September 1989; B5 size; 1,026 pages; ¥11,650
　From 1989 up to 2011, the“Chronology of Events Related to Securities”
in“Shoken Shiryo”is published each year for the events of the previous year.