Bold Action is Needed to Revive the Securities Market

September 17, 1998

(Japan Federation of Economic Organizations)

The Obuchi administration has determined to make a plan for stabilizing the financial system, permanent cutting in income taxes, and implementing a variety of measures in a large-scale supplementary budget. The steps should provide a major boost to the struggling economy, and it is hoped that they will help to revive the securities market, which has been in a depression ever since the collapse of the "bubble economy" at the start of the 1990s.

When stock prices began sliding around the world, however, Japan's securities market was badly shaken. Plummeting share prices put sudden pressure on the profitability and financial situation of companies and financial institutions, and the accompanying credit crunch made an escape from the recessionary quagmire more difficult. To get a full-fledged economic recovery going, the government should quickly adopt bold measures to stimulate the securities market even before it moves forward on the components of its stimulus package.

In this light, the following specific steps are recommended.

  1. Measures for the mutual exchange of cross-held shares and additional measures for share buybacks
  2. The dissolution of cross-shareholdings has been one of the major factors putting downward pressure on the stock market. Because managers are now attaching more importance to return-on-equity, and because market -value accounting is to be applied in 2001, the dissolution of cross-shareholdings is steady progressing. These structural problems confronting the securities market should be promptly dealt with in the following manner:

    1. As a provisional measure to be implemented for publicly listed companies with the limit of approximately three years, permit companies to buy back their own shares through exchange deals.
    2. Provide special tax treatment for the cancellation of the shares.
    3. Speed up the studies to institutionalize treasury stock.
    4. Introduce the so-called safe harbor rule in relation to share buybacks.

  3. Reform of securities taxation
  4. The tax system must conform to internationally accepted practices, especially in the securities market. To improve the market's efficiency and its international competitiveness, the following tax reforms are urgently needed:

    1. Abolish securities-trading and stock-exchange taxes.
    2. Eliminate double taxation on dividends.
    3. Abolish withholding taxes on interest income of bonds held by nonresidents.
    4. Reduce taxation on long-term to encourage investments by individuals.

  5. Eliminating government-held shares
  6. The release of government-held shares of former national companies into the market may worsen the supplu-and-demand balance. From the viewpoint of improving the earning per share value and attaining complete privatization, the government should make direct sales of the shares to the privatized companies so that they cancel their shares.

  7. Encouraging individual investors to enter the market
    1. Products with a moderate level of risk for individual investors must be developed. Greater efforts in product development are needed by the people handling investment trusts.
    2. To rebuild the corporate pension system and also to familiarize individuals with securities investments, a defined-contribution pension system should be introduced immediately.
    3. The securities industry must do everything it can to regain the trust of individual investors by strengthening management and behaving strictly in an accountable fashion.
    4. The classification of insider trading must be refined to prevent excessive withering of stock deals.
    5. For the sake of sound and stable market management, the Securities and Exchange Surveillance Commission and the stock exchanges must promptly investigate suspicious prices movements and the spread of rumors, and they must make their findings public.

  8. Strengthening the fund-raising function of the securities market
  9. Progress in de-regulation is promoting a shift from indirect fund raising through banks to direct fund raising on financial markets, and this is elevating the importance of the securities market. As the issuing bodies, companies must meet all disclosure requirements and employ a style of management geared to shareholders and market principles. In order to enable steady fund raising from the securities market, moreover, the intermediary agents and other actors in it must improve their operations on their own initiative.

    1. At present only a limited number of companies can issue corporate bonds; those with a triple-B rating or lower are effectively denied access to this fund-raising source. Japan is in need of a more convenient bond market where more companies can take part. Toward this end, the environment of the primary market must be provided with conditions appropriately reflecting the corporate risk of the issuers, and the secondary market, where corporate bonds are circulated, must also be improved, as through an amendment of the Corporate Bond Registration Law.
    2. The market for commercial paper needs to be quickly upgraded from the perspective of diversifying the means of procuring short-term funds. Dealers must develop functions for their authorization as agents of CP investments, and infrastructure for "paperless" trading must be put in place.
    3. The slump in the over-the-counter market is frustrating smooth fund raising by up-and-coming firms. Securities companies must enhance their market-making operations to create a market with greater liquidity and more appeal.
    4. A financial service law must also be immediately enacted from the viewpoint of those services reaching across the traditional borders within the industry.

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