CAFM Seoul Korea Capital Market Reform in

CAFM : Seoul, Korea Capital Market Reform in Japan December 9, 2006 Chiaki Wakazono Japan Securities Research Institute 1

Background Bubble Economy & Financial Crisis １．1985 -1989 : Bubble Economy Japanese banks extended huge amounts of loan with collateral (real estate). ２．1990: Collapse (burst) of Bubble Economy The property (ex: equity, real estate) price sharply fell. (Fig. 1) Significant amounts of non-performing asset were exposed. Dysfunction of indirect finance system. ３．1990’s : Delay of Reactive Measures Ministry of Finance delayed recognition of and taking actions against financial crisis. 　　　　　　　　 　　↓(1997 Fall) The entire financial system fell into a serious crisis. 　　 2

Stock Price and Trading Value from 1989 to 2005 3

Financial Big Bang Program　 Prime Minister Hashimoto announced the program. (November 1996) Background ・Non-Performing Asset (loan) Problem 　 ・Decline in the international status of financial market 　 ・Excessive over reliance on indirect finance (intermediary) Purpose 　 　・Acceleration capital market reform (Free, Faire, Global) 　　 ・Solving the non-performing asset problem 　　 “Financial System Reform Law “ (enact June 1998, effect December 1998) 　 ・ 22 Laws that relates to finance (Securities and Exchange Law, Investment Trust Law, etc ) were revised. ・But, these laws were kept vertically segmented. 4

Work Schedule ① 5

Work Schedule ② 6

Main achievement of Big Bang 7

Diversification of marketing channel Investment Trusts 8

Left Issues The program ended imperfectly in March 2002. 1. Excessive over reliance on indirect finance continues 2. Incomplete disclosure and systemic risk 3. Strengthening depositor and investor protection 4. Strengthening of the system of supervision 5. Remaining the non-performing asset problem 　　　　　　↓ Needs for new programs to 1. do a further capital market reform. 　 　2. solve the non-performing asset problem. 9

Financial Assets of Household Reliance on Deposit 10

Unsettled of the Non-Performing Asset Problem 11

New Programs by FSA 1. ”Program for Structural Reform of Securities Markets” ①program for further capital market reform (August 2001) ・Promotion of the delivery of electronic-form prospectus ・Realization of lowering the minimum amount for per unit stock investment ・Tax reforms for encouraging provision of risk capital from individual investors ・Investor Education (from deposit to investment) etc 2. “Program for Promoting Securities Markets Reform” ① program for further capital market reform (August 2002) 　 ・Promoting sales of securities through banks (joint store with securities companies) 　 ・Enhancing quarterly disclosure of listed companies 　 ・Developing rules in stock exchanges, OTC markets, private offering markets ・Promoting reform of Securities Settlement System 3. ”Program for Financial Revival” ② program for the non-performing asset problem (October 2002) 12

2 nd Big Bang (so called) Latest Market Reform Program “Program for Further Financial Reform” -Japan’s challenge: Moving toward a Financial Services Nation(December 2004) from “Financial System Stability” to “Financial System Vitality” Five aspects in this program 1. Institution building to enhance user’s convenience drawing out private-sector vitality, and development and thorough implementation of user protection rules. 2. Strategic use of IT for strengthening the competitiveness of financial institutions and further developing financial infrastructure. 3. Further development of a financial system which is internationally open and a financial administration with an international perspective. 4. Establishment of a financial system which contributes to the realization of vibrant regional economies. 5. Establishment of a reliable financial administration that complements market discipline. 13

Program for Further Financial Reform ① Concrete Measures 1. Creation of a vibrant financial system 　 　①Emphasis on user’s needs and thorough implementation of user protection rules 　　②Strategic use of IT for strengthening the competitiveness of financial 　　　　institutions and further developing financial infrastructure 　　③Further development of a financial system which is internationally open and 　　 the financial administration with an international perspective 2. Contribution to regional economies 3. Establishment of a reliable financial administration 14

Program for Further Financial Reform ② Main Pillars 1. Enactment of the “Investment Service Law” (tentative) (Financial Instruments and Exchange Law) (formal) (June 2006) 2. Enhancement of the provision and distribution framework for financial products and services 　　　 ・Securities introducing agent system (April, for banks December 2004) 3. The termination of a blanket government guarantee of deposits (excluding deposits for settlement purposes) (April 2005) 4. Expansion of financial and economic education 15

Financial Instruments and Exchange Law ① Basic legislation of capital market Background (following two Big Bang programs) 　1. Needs for comprehensive and cross-sectional rules 　 (Investor Protection) 　2. Needs to enhance fairness and transparency in the market 　 (Confidence in the market) 　3. Needs to enhance the attractiveness of the market 　 (International status of the market) 　　　　　　　Final Report from Financial Council 　　　　　　 (December 2005) ↓ 　　　“Financial Instruments and Exchange Law” 　　　　 (enact June 2006) Execution at four or more stages 16

Financial Instruments and Exchange Law ② Extended the Securities and Exchange Law to the Financial Instruments and Exchange Law 　・abolished 4 laws, amended 89 laws Basic frames 1. Full coverage of financial investment area ・expansion of the scope of securities ・expansion of the scope of derivative transactions ・expansion of business to be regulated (cross-sectional regulation) (investment advisory, investment management, customer asset administration) 2. Flexible regulatory structure ・flexible rules for entry into the business 　　・flexible regulation according to the attributes of customers (distinction between professional and general investors) 17

Financial Instruments and Exchange Law ③ Basic frames 3. Review of regulation on conduct of business ・review of principle of appropriateness (suitability rule) ・a ban on unwanted solicitation (cold calling), a ban on re-solicitation ・duty of explanation (deliver documents in a written format before make a contact) 4. Others ・enhancing disclosure by listed companies (quarterly reporting) ・mandatory requirement of internal control reports for listed companies (for each fiscal year) ・review of the tender offer system ・enhancing function of SROs (Stock Exchanges, Dealers Association) ・strict countermeasures against unfair trading (increasing in maximum criminal penalty, introduction of civil money penalty) 18

Financial Instruments and Exchange Law ④ Desired improvement point 1. Review of the scope of securities (getting rid of limited enumeration) 2. Difficult sentences 3. Further review of disclosure system 4. Further enhancement of SROs’ function etc 　　　　　　　↓ Further Step to the “Financial Services Law”？ 19

Other under Examining Problems 1. Improving reliability of the trading system 2. Enhancement of securities firms’ check function for stock issuer companies 3. Enhancement of function to prevent unfair trading 4. Strengthening of self-discipline of securities firms etc 20

고맙습니다 Thank You Very Much 21