(tentative translation)

Reforming the Short-term Financial Markets and
Enhancing the International Use of the Yen

June 16, 1998

Keidanren
(Japan Federation of Economic Organizations)

In the aftermath of the Asian currency and economic crisis last year, it has been pointed out that the Asian economies depended on the dollar to a large extent. There are, at the same time, concerns that the role of the yen may be undermined by the upcoming advent of the European single currency, Euro. In the circumstances to promote Japan's Big Bang, enhancing the international use of the yen, in accordance with the size of the Japanese economy, is called for.
The following two measures have to be carried out to boost the international role of the yen. The first is to enhance the yen's "confidence" by accelerating the structural reform of the Japanese economy. It is, in particular, vitally important to implement the deregulation, the reform of tax structure and financial systems and others to achieve economic strengthening , with in mind the "Global Standard".
The second is to increase the yen's holdings by making the domestic financial market more attractive as investment markets. It is, above all, necessary to reform the "short"-term financial market and make the market mechanism work fully, where an enormous amount of yen trading-domestic and foreign- is carried out.
Although several measures, including the increase of transaction by the yen, the reform of the long-term financial markets, etc., are needed to enhance the international role of the yen, we make some policy proposals in this statement by focusing on the reform of the short-term financial markets. It is greatly expected that realizing our proposals will surely result in boosting the international role of the yen, by making the short-term financial markets attractive and open to both domestic and foreign investors, and user-friendly.

  1. Improving the Quality of the Short-term Financial Products
    1. FB (Financing Bill)
    2. The issuing rate of FB is set below the official discount rate, and most amount of issued FB has been underwritten by the Bank of Japan. The current fixed-rate public subscription system should be replaced by a public auction system, from the standpoint of ample supply of the financial products with little financial risk, principle of fiscal authority not to depend on central bank, the BOJ's independence as a central bank , and the establishment of the index rate of the short-term financial products.
      With regard to technical problems such as government interventions in exchange markets, brought about by adopting the public auction system, the practitioners concerned should solve these problems by such measures as temporary financing by BOJ.

    3. CD (Negotiable Certificate of Deposit)
    4. The current procedure of purchasing and selling CDs in Japan is based on the designated negotiation method, where all transaction dates are pre-fixed at the notary public, which makes CD transactions much inconvenient. This procedure should be simplified by introducing the convenient electric notary public and holding system by issuing bank.

    5. CP (Commercial Paper)
    6. The CP market has undergone its deregulation and its direct dealing became possible. The use of CP markets by firms, however, is still limited, due to insufficiency of infrastructures there.
      The CP s, which are legally interpreted as promissory notes, are currently under the regulation of The Law of Notes, thereby, many firms feel the burden of stamp duties and inconvenience on the delivery. The new legislative measures should be taken to get rid of these detriments on CPs. It is, moreover, necessary to establish the central certificate services system of transfers and settlements without requiring direct delivery of CP itself.

    7. Repo
    8. The Repo in Japan, which is carried out within the framework of Consumption Loan transaction of Bond , differ from that in the United States, which is characterized by the Repurchase Bond Agreement. The difference of accounting system between Japan and the U.S. hinders the Japanese Repo to be accepted globally. On top of that, the abolishment of the Securities Transaction Tax will make the Japanese Repo similar to the existing Repurchase Bond transactions. The present contract form of the Repurchase Bond Agreement dose not manage risks sufficiently well. It is necessary to provide the comprehensive basic contract form which can include both the Repo and Repurchase Bond Agreement. It is, moreover, needed to establish the institutions of settlements to facilitate the trading.

  2. Reviewing Related Taxation
    1. Reviewing the Withholding Tax System
    2. In the most industrialized countries, on the one hand, no withholding tax is imposed on the non-residents under the condition of tax-payers' identification. In Japan, on the other, non-residents have to pay a 18 % withholding tax on interest gained from the discounted securities such as short-term government bills. Tax-exempt corporations, such as foreign private financial institutions, are refunded at the time of redemption. Foreign central banks and other governmental institutions are refunded at the time of purchase.
      Although these lessen tax burdens on foreign institutions, tax refunding procedure are so complicated that foreign investors are reluctant to purchase the discounted securities. The withholding tax on the non-residents should be abolished under the condition of tax-payers' identification.
      As for Repo, whose circulation is hindered by the presence of the withholding tax on the interest of bond and cash-collateral received by non-residents, the withholding tax should be abolished, or the Article-8 of the Special Taxation Measures Law should be made applicable to non-residents.

    3. Abolishing the Securities Transaction Tax
    4. The cabinet has already decided to abolish the securities transaction tax by the end of 1999. It should be abolished as soon as possible.


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