Japan Securities Markets_ver 2

8/6/2019 Japan Securities Markets_ver 2

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Japan SecuritiesMarketsBipul Sinha - #1009

Joseph Rodrigues - # 1016

Kamlesh Agarwal - #1018

Manoj - #1024

Raja Periyasamy - #1034


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Functions of Global SecuritiesMarkets

CLEARING AND SETTLING PAYMENTS

TRANSFERRING RESOURCES ACROSS SPACE ANDTIME

PROVIDING INFORMATION

ALLOCATION OF RISK

MANAGERIAL INCENTIVES

POOLING OF RESOURCES


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C le ar iga n

S et tl igP ay me nt s

CLEARING AND SETTLINGPAYMENTS

A financial system provides ways ofclearing and settling payments to facilitate

the exchange of goods, services and assets.


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Functions of the centralbank.

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Paymen ts

Issuance of banknotes

The Bank of Japan is the sole issuer of banknotes in Japan andbanknotes are given the status of legal tender under the Bank of Japan Law.

Provision of payment and settlement services

Payment through current accounts

At the end of 2010, 667 institutions, including banks, securitiescompanies and bankers associations, held current accounts with the centralbank. The Bank of Japan has been operating an online payment system, theBOJ-NET Funds Transfer System, since 1988 to process funds transfers betweenfinancial institutions through the central bank accounts.

The Bank of Japan may extend loans to financial institutionsexperiencing liquidity constraints, in its role as the lender of last resort, underArticles 33, 37 and 38 of the Bank of Japan Law.

Settlement of JGB transactions

The Bank of Japan has been providing services for registration of JGBssince 1906, as the sole registrar under the Law Concerning GovernmentBonds. In 1980, the Bank of Japan established the JGB Book-entry System, in

which the Bank serves as the depository, to promote the sound developmentof the JGB secondary market. In 1990, the Bank of Japan introduced an onlines stem the BO -NET GB Services to rocess transfer re istrations and book-


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Functions of the centralbank

C lea rinan

Se ttlin

Paymen ts

Oversight

To ensure the safety and efficiency of Japans payment andsettlement systems, the Bank of Japan collects and analysesrelevant information including statistical data, reviews andassesses the design and operation of each system, andencourages improvements in payment and settlement systems.

Examination and monitoring

The Bank of Japan conducts on-site examinations and off-site monitoring of the financial institutions that hold currentaccounts with it.

In on-site examinations, it analyses various issues such asasset quality and profitability of financial institutions, thereliability and security of computer systems and themanagement of settlement risks arising from participation inpayment and settlement systems.

In off-site monitoring, it analyses issues associated withsettlement activities, including financial institutionsmanagement of their daily liquidity and the total value ofsecurities eligible as collateral for the Banks credit extension.


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The role of other private and public sector

bodies

C lea rinan

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Paymen ts

Providers of payment services

Banks Banks, together with bankers associations,

cooperate in establishing and managing interbankclearing systems such as BCCSs, the Zengin Systemand the FXYCS. Also, to meet strong public demand forcash from depositors, banks provide a nationwidenetwork of automated teller machines (ATMs). Inaddition, banks provide direct debit and direct creditservices, and issue debit cards.

New types of banks As use of the internet and mobile phones has

become widespread and customer needs diversified,new types of banks have emerged, such as internet-only banks and also a bank that specialises in ATMservices.


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bodies

C lea rinan

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Paymen ts

Providers of securities settlement services Securities companies Securities companies provide various kinds of

securities-related services such as dealing, brokerage,underwriting and public offering and distribution ofsecurities in both primary and secondary markets.

At the end of 2010, there were 391 securitiescompanies including 80 foreign securities companies inJapan.

Japan Bond Settlement Network The Japan Bond Settlement Network Co Ltd (JB

Net) operates an online network system which linksparticipants (investors and dealers), registrars and theBank of Japan for funds transfers, thereby facilitatingthe smooth transfer of corporate and other registeredbonds, including corporate bonds, government-guaranteed bonds and municipal bonds.


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bodies

C lea rinan

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Paymen ts

Providers of securities settlement services Japan Securities Depository Centre The Japan Securities Depository Centre (JASDEC)

was established as the CSD for stocks and startedoperation in 1991, under the Law Concerning CentralDepository and Book-Entry Delivery for ShareCertificates and Other Securities.

Stock exchanges There are five stock exchanges in Japan: the Tokyo

Stock Exchange, Osaka Securities Exchange, NagoyaStock Exchange, Fukuoka Stock Exchange and Sapporo

Securities Exchange.

The Tokyo Stock Exchange and the OsakaSecurities Exchange predominate in terms of bothvolume and value traded. The Tokyo Stock Exchange

dominates listed stock and convertible bond trades,and the Osaka Securities Exchange lists Nikkei Average


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Payment media used by non-banks

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This section describes means of payment, instruction instruments and accesschannels that are used

for making retail payments in Japan. While bank deposits are the most widely usedmeans of

payment, cash is also very frequently used, particularly for small-value payments. Inaddition, postal

deposits are commonly used for payments. Electronic money is not much in use in

practice, but prepaid cards, which have a function similar to electronic money, are very common.

Cash

Cash is used extensively in Japan compared with other industrial countries. The ratioof cash in

circulation to nominal GDP is 14.4%, was the highest among G10 countries. There are three reasons for the high preference for cash in Japan:

(1) obtaining cash is not expensive due to highly developed nationwide ATMnetworks;

(2) there is little risk in carrying cash because Japan is a comparatively safe countrywhere crime rates are low; and

(3) the public continues to have a high level of confidence in cash as a means ofpayment because

anti-counterfeiting measures have been effective.


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Postal savings

Postal deposits are also used for making retail payments. Payment services usingpostal accounts

include funds transfers, prearranged direct credits, direct debits, debit cards andATM services.

Prepaid cards

Prepaid cards are cards that store data regarding the amount paid for the cards

and the amount spentso far. They are used for specific services provided by the issuer, and the

remaining balance is usually displayed on the card reader during use.

Prepaid cards have spread rapidly in Japan since the 1980s as a means ofpayment for public

telephones and public transportation such as railways, underground railways andbuses.

Direct debits

Prearranged direct debits are intrabank funds transfer arrangements used widelyfor making a broad

range of recurring payments. They were first introduced in 1955 for the paymentof telephone bills.

They have expanded rapidly since the early 1960s and are now used extensively

for the payment ofpublic utility bills, credit card bills, taxes, school tuition, insurance premiums and


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Credit cards

Since the issuance of the first card in 1960, credit cards have becomeincreasingly popular in Japan.

The number of credit cards and the value of payments made using credit cardshave almost doubled

over the past 10 years. Major issuers of credit cards include bank affiliates,consumer credit companies and retailer affiliates.

Bills and chequesBills are used for payments in the business sector and can be discounted by

banks. Cheques are

widely used by government agencies and firms, but used only rarely for thepayment of salaries or by

individuals, eg for the payment of credit card bills and public utility bills.

ATMsAutomated teller machines (ATMs) were first introduced by several city banks in

1969, and spread

rapidly as many banks adopted online computer systems in the 1970s. ATMswere initially installed in

bank lobbies, but began to appear at other easily accessible locations in 1973.ATMs provided cash

withdrawal services only at the initial stage, but began to provide cash depositservices as well from


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Interbank paymentsystems

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There are four major payment systems for clearing andsettling interbank payments in Japan three clearing systems inthe private sector and a funds transfer system operated by thecentral bank. The three clearing systems are:

(1) Bill and cheque clearing systems (BCCSs), which clear bills andcheques presented at regional clearing houses.

(2) The Zengin Data Telecommunication System (Zengin System),

which clears retail credit transfers;(3) The Foreign Exchange Yen Clearing System (FXYCS), which

clears mainly yen legs of foreign exchange transactions; and

(4) The BOJ-NET Funds Transfer System is the central banks fundstransfer system and is used to settle interbank obligationsincluding net obligations of participants in the private sectorclearing systems.

In general, BCCSs and Zengin System are used mainly forsmaller-value transfers; and FXYCS and BOJ-NET Funds TransferSystem for larger-value transfers. These four systems areregarded as systemically important payment systems (SIPS),considering the total amount processed.


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C le ar iga n



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Bill and cheque clearing systems

Bill and cheque clearing systems (BCCSs) provide clearing servicesmostly for bills and cheques,

which are exchanged between financial institutions located within thesame geographical area.

The first clearing house in Japan was set up in Osaka in 1879; the Tokyo

Clearing House was

established in 1887. More than 70% of the total value of bills andcheques exchanged in clearing houses throughout Japan is cleared by the

Tokyo Clearing House.

Zengin Data Telecommunication System

The Zengin Data Telecommunication System (Zengin System), aninterbank clearing system for

domestic funds transfers, started operation in 1973. In 2010, the systemhandled a daily

average volume of 7 million transactions, while the daily clearing value

averaged JPY 16 trillion.



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C le ar iga n


Foreign Exchange Yen Clearing System

The Foreign Exchange Yen Clearing System (FXYCS) wasestablished in 1980 to facilitate the clearing of yen payments forcross-border financial transactions. Originally, the system operatedon a paper basis. To cope with the rapid growth of transaction

volume, the TBA automated the system and consigned operation tothe Bank of Japan in 1989. Clearing has since been conductedthrough the BOJ-NET.

BOJ-NET Funds Transfer System

The BOJ-NET Funds Transfer System is an online electronicfunds transfer system introduced in 1988. The BOJ-NET comprisestwo systems: a system for funds transfers (BOJ-NET Funds TransferSystem) and a system for the settlement of JGBs (BOJ-NET JGBServices). Although the BOJ-NET Funds Transfer System originallyoffered both designated-time settlement mode and RTGS mode forthe settlement of funds, the Bank of Japan abolished designated-timesettlement and made RTGS the only available settlement mode atthe beginning of 2001.



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Flow of Funds Accounts

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The flow of funds accounts (hereafter the FFA) is a statistic thatrecords the financial transactions and the resulting claim/debt held byeach economic entity such as households, enterprises and thegovernment. When any economic entity engages in economic activity, itinitiates various financial transactions in the form of flows of cash,deposits and other funds.

Examples of flow of funds : A household receives a salary payment from a company, if the

company pays through a bank deposit, its deposit will decrease while thebank deposit of a household increase. In this case, financial assets of thecompany decrease while that of a household increase.

When a household purchases a companys products, cash held by

the household will transfer to a company in exchange for its product. The

decline in the financial assets of the household is therefore matched by acorresponding increase in those of the company. A company makes an investment in plant and equipment. When the

amount of the investment exceeds the company's earned fund flow, thecompany will raise funds by making loans from a financial institution, orby issuing bonds or shares for the investment (excess investment =financial deficit). On the other hand, if the amount of investment is withinthe earned funds flow, the surplus is invested as financial assets or used

to repay its liabilities (excess net savings = financial surplus).


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Matrix for FFATransferri

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Contents of the Matrix

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In the matrix used for the FFA, the columns intowhich economic entities are classified are known as"sectors". They are broadly divided into six sectors,such as "financial corporations", "nonfinancialcorporations", "general government", "households","private nonprofit institutions serving households", and

"overseas". These sectors are further broken down to sub-

sectors. For example, under financial institutions,there are depository corporations, insurance andpension funds, and other financial intermediaries

etc, while, nonfinancial corporations are divided intopublic or private nonfinancial corporations. The items in the horizontal lines into which

financial instruments (transactions, or assets andliabilities) are classified are known as "transactionitems". They consist of totaled items such as "currencyand deposits", "loans", "securities other than shares"," " "


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Classification of economic entities in the FFA Financial institutions "Financial institutions" are institutions whose primary activities cover: financial intermediation activities that correspond to the intermediation of funds and involve

the holding of financial assets and liabilities; or financial auxiliary activities (non-intermediary typefinancial activities) comprising the provision of services that are closely linked with financialintermediation but do not involve the holding of financial assets and liabilities.

This sector includes the "central bank", "depository corporations", "insurance corporations

and pension funds", "other financial intermediaries", and "financial auxiliaries".

Central bank "Central bank" is a financial institution that issues currency, controls interest rates and the

volume of money and credit. It refers to the Bank of Japan.

Depository corporations "Depository corporations" are financial institutions that engage in financial intermediation

through accepting deposits and deposit-like instruments from general investors. The sector includes"banks", "postal savings"(until the third quarter of 2007) and "collectively managed trusts".

Insurance and pension funds

"Insurance and pension funds" are defined as institutions that engage in financialintermediation through managing funds received from the policy holders of insurance andbeneficiaries of private pension funds. This sector includes insurance and pension funds.

Financial auxiliaries

Institutions that guarantee financial instruments. Stock exchanges, financial exchanges: Banks Shareholdings Purchase Corporation Foreign exchange brokers, foreign exchange margin trading firms

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Classification of economic entities in the FFA Nonfinancial corporations "Nonfinancial corporations" are institutions that engage in ordinary

production of goods and services. This sector includes private nonfinancial

corporations and public nonfinancial corporations. General government "General government" refers to institutions that provide government

services based on tax revenues. "Government services" include the provisionof public goods and services and income redistribution.

Households "Households" consists of small groups that engage in consumption and

production activities and includes employers, employees, and soleproprietorships and recipients of property income and transfer income.

Private nonprofit institutions serving households "Private nonprofit institutions serving households" are institutions that

provide services to households without seeking profits. They include thefollowing institutions.

Overseas The "overseas" sector covers nonresidents, including international

organizations, foreign governments, and foreign corporations. With theexception of overseas SPCs that issue samurai bonds.

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Balance of Payments

What Does Balance Of Payments - BOPMean?

A record of all transactions made between oneparticular country and all other countries duringa specified period of time. BOP compares the

dollar difference of the amount of exports andimports, including all financial exports andimports. A negative balance of payments meansthat more money is flowing out of the countrythan coming in, and vice versa.

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Recent Trends of Japan's Balance ofPayments

Japan's current account surplus decreased in 2009 forthe second consecutive year to 13.3 trillion yen,

down from 16.4 trillion yen in 2008, mainly due to adecrease in the income surplus. The capital and financial account deficit (net outflow)

decreased to 12.7 trillion yen in 2009, down from18.4 trillion yen in 2008.

Reserve assets continued to increase, rising by 2.5

trillion yen in 2009 compared to an increase of 3.2trillion yen in 2008. Balance of payments data for the whole of 2009 and

the fourth quarter of 2009 in this report arepreliminary unless otherwise stated.

In balance of payments statistics, the followingrelationship holds true at all times: Current account+ capital and financial account + changes in reserveassets + errors and omissions = 0.

Japan's balance of payments for 2009 shows that thecurrent account surplus earned is mirrored byreverse flows abroad in the form of a capital andfinancial account deficit (outflows) and an increase

in reserve assets.

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Recent Trends of Japan's Balance ofPayments

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ProvidinInformation

PROVIDINGINFORMATION

A financial system provides priceinformation that helps coordinatingdecentralized decision-making in varioussectors of the economy.


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Sources of information :

Regulatory bodies

Credit Rating Agencies.

Interest rates and asset prices

Implied Volatility

ProvidinInformation


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Regulatory bodies in Japans financialindustry.Financial Services Agency (FSA) Responsible for economic policy planning and

supervision and inspection of financial institutions. TheFSA, previously named Financial Supervisory Agencywas established on July 1, 2000 as a result of theintegration of the Financial Supervisory Agency and theFinancial System Planning Bureau of MOF.

Securities and Exchange Surveillance Commission

(SESC) Supervises exchange activities. The exchanges are

governed by the Securities and Exchange Law,

although there is a strong reliance on self-regulation.Functions include compliance inspections on securitieshouses, stock exchanges or financial futures brokers toobserve codes of conduct for fair trading; daily marketsurveillance; and the investigation of securities crimesincluding insider trading, market manipulation and

falsified financial statements.

ProvidinInformation


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Regulatory bodies in Japans financialindustry.Securities and Exchange Surveillance

Commission (SESC)

ProvidinInformation

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Regulatory bodies in Japans financialindustry.Information received from general public.

ProvidinInformation

R l b di i J fi i l


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Regulatory bodies in Japans financialindustry.Bank of Japan (BOJ) Pursues price stability to maintain an

economic environment in which there is neitherinflation nor deflation. Other operations includethe issuance of banknotes; the conduct ofmonetary policy; providing settlement services

and ensuring the stability of the financial system.Ministry of Finance (MOF) The central government arm responsible for

the provision of the budget bill, the issuance of

financial policies, the management of tax incomeand the management of governed property.

ProvidinInformation


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Japan Credit Rating AgencyInformational ServicesJCR Ratings"JCR Ratings "(monthly in English) lists all JCR ratings

and carries a summary on rating rationale with theissuer's background information and financial analysiswith JCR's review on current specific issues. "JCR

Ratings" is a vital source of information for investors.

JCR Kakuzuke"JCR Kakuzuke "(monthly in Japanese) lists all JCR ratings

and contains the rating information with a key financialstatistics of an issuer and contains some analyses oninteresting topics.

ProvidinInformation


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Providing InformationInterest rates and asset prices Interest rates and security prices, for example, are

information that house-holds or their agents use inmaking their consumption-saving decisions and inchoosing the porfolio allocations of their wealth. Thesesame prices provide important signals to managers offirms in their selection of investment projects andfinancings.

Implied Volatility As the diversity of financial markets has increased

during the past two decades, so too have the

opportunities to extract useful information from theprices of financial instruments. Information about thefuture volatility of changes in security, currency andcommodity prices can be extracted from option-likesecurities. Volatility is a critical input for virtually alldecisions relating to risk management and strategicfinancial planning.

ProvidinInformation


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LLO C A T IO N O F R IS Kfin a n cia l sy ste m p ro v id e s w a ys to m a n g e

n ce rta in ity a n d co n tro l risk


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Types of Risks

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Diversification

Cash Asset Class (Cash and Cash Equivalents)

Cash (in form of currency) and other cash equivalents

like certificates of deposit (COD), money markets,

commercial paper and treasuries

Fixed Income Asset Class (Bonds)

Stocks Asset Class

Large-cap, mid-cap and small-cap stocks

Real Estate Asset Class

Commodities Asset Class

Commodities are raw materials like petrol, gas,

agricultural products (wheat, corn, cattle), and

metals like iron, copper and aluminum

Precious Metals Asset Class (Gold and Silver)

l l o c a t i o n

St k t l i J


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Stock as an asset class in Japan

Japan loses out on stock as asset class l l o c a t i o n


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Bonds as an asset class

One of the major asset class for pension plan sponsors

Allocation weight is more than 30%

Japanese Bond Market has become ticking bomb. This fiscal years budget called for the issuance of 44

trillion yen in government bonds despite projected tax revenuesof only 37 trillion yen.

Standard & Poors changed its rating of Japanese governmentbonds from AA (stable) to AA (negative).

Japan has 834.4 trillion yen ($6.82 trillion) in public debt, theequivalent of the economic output of Asia-Pacific's next

largest 13 economies combined.

Japan Post Bank Co., holds more than 150 trillion yen (US$1.74trillion) in government bonds.

public pension program holds 80 trillion yen.

Japan Post Insurance Co. 70 trillion yen, Bank of Japan 60 trillionyen, Life and non life insurance companies 60 trillion yen.

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P f f B d
http://www.google.com/hostednews/afp/article/ALeqM5ipJeuAMuWYBxzNpR27iApqa8M7_ghttp://www.google.com/hostednews/afp/article/ALeqM5ipJeuAMuWYBxzNpR27iApqa8M7_g


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Performance of Bonds:

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Yen as another asset class

Forex another asset class: bets on direction ofyen

The concept of foreign exchange as an asset

class exists to give portfolio managers anew way to create alpha (uncorrelated skill-based returns) from conventional assetclasses.

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Hedging

Exchange Traded Osaka Securities Exchange handles almost 100% of

trading in options market and 59% of stock futures.

Variety of derivative instruments include s: INDEX- Futures, Options, Options on Futures

STOCK- Options CURRENCY- Futures INTEREST RATE- Futures, Options in Future BONDS- Futures , Options in future COMMODITIES- Futures

OTC OTC derivatives market daily turnover US$100.9billion

IR swaps continued to increase by 67% as compared toyear 2007.

Yen linked IR derivative txn rose by 6.5%

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Insurance

90 percent households have life insurance policies Japanese market is a gigantic, yet it comprises only 29

companies( 2000 companies in US) resulting in fewerchoices for customers.

Major Risks Facing Japanese Life Insurance Companies

Business risksFinancial risksWeak Japanese economyStrong earnings pressuresLack of policyholder confidence, flight to qualityLow interest rates, exposure to domestic, overseasinvestment market fluctuationsDeregulation, mounting competitionPoor asset qualityInadequate policyholders safety netWeakened capitalization

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I t di i f ilit ti i k


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Intermediaries facilitating riskmanagement

Credit Ratings by JCR, Mikuni & Co., Ltd.,Rating and Investment Information, Inc. (R&I)help inaccessing credit ratings of different securities

Insurance companies like Allianz, Nipponkoa

Insurence ,Sompo japan Interglobal , Japanearthquake reinsurence

Derivative Exchanges :Osaka security exchange,Tokyo Commodity Exchange , Osaka Textile Exchange ,Tokyo Stock Exchange , Tokyo International FinancialFutures Exchange etc

Investment funds DFA Japanese Small Company , NomuraPartners The Japan SFidelity Japan,JPMorgan Intrepid JapanSelect, Commonwealth Japan

Deposit taking institutions like Japan Financecorporation, Japan Bank of International

Corporation,Okinwa Development Finance corporation

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http://www.mikuni-rating.co.jp/enindex.htmlhttp://www.r-i.co.jp/eng/index.htmlhttp://www.r-i.co.jp/eng/index.htmlhttp://www.mikuni-rating.co.jp/enindex.html


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anagerial Incentivesfinancial system provides ways to deal with

ncentive problems when one party to a financialransaction has information that the other party

, .oes not or when one party is an agent for another

Traditional Japanese


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Traditional Japanesecorporate governance

According to the Ministry of Finance (MOF), Japanesecorporate governance has been seen as

1) a board that consists mainly of internally promotedsenior managers;

2) incomplete separation of the board and executives;3) a large number of the board members; and4) relatively low and non-performance-linked

compensation for directors

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Difference b/w U S and


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Difference b/w U.S andJapan

The U.S. model of corporate governance ischaracterized by diffused stock ownership, a lowlevel of ownership concentration and a generalunderstanding that managers are supposed tomaximize shareholder value

The instruments that U.S. companies often use toalign managers' interests with those of shareholdersare high-powered incentives such as stock-basedcompensation plans

Enron and WorldCom showed that these could alsoprovide incentives for the managers to "manage"the companies' earnings by manipulatingaccounting numbers and stock prices

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Japan

The Japanese model typically features blockshareholding and an understanding that managersare not just supposed to maximize shareholdervalue but broaden stakeholder value, with particularemphasis on the well-being of employees.

In this model, the incentives of managers aresupposed to be more closely aligned with theinterests of employees, which sometimes raisesconcern that managers with low-powered incentives

tend to become risk-averse and may not pursue themost profitable projects

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J-SOX

J-SOX is the informal name for a new legislativeframework of internal controls over financialreporting (ICFR) that falls within the scope ofthe Japanese Financial Instruments andExchange Law.(in effective from 2006)

The new framework is called J-SOX because itwas modeled after the U.S. Sarbanes-Oxley Act,which was enacted in 2002 in the wake of hugeaccounting frauds at energy trader Enron Corp.

and telecommunications company WorldCom,Inc.

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J-SOX

The Section 1 guidance, which covers thebasic framework for internal control,stipulates establishing a control frameworkthat includes the common COSO elements

of:1. Control Environment

2. Risk Assessment

3. Control Activities

4. Information and5. Communication Monitoring

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J-SOX

The Section 2 guidance covers managementassessment and reporting of ICFR and includesthe following six areas:

1.Definition of Financial Reporting2.Scoping of Management Assessment

3.Structure for Internal Control Assessment Methodand Use of Specialists

4.Evaluation of Company Level Controls5.Process Level Controls Assessment of Operating

Effectiveness

6.Recording and Retention of AssessmentProcedures

7.

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Committee systemThe Committee System or the committee-based

corporate governance structure is a newlyintroduced corporate structure that came aboutthrough the revision of the 2003 CommercialCode.

Under the Committee System, directors areprimarily responsible for monitoringmanagement. Executive officers, who arechosen by the directors, conduct business

operations within the scope of authority that isdelegated by the directors.

There are three committees in the system:

the Nomination Committee, the AuditCommittee and the Com ensation Committee.

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Committee systema n a g e r i a l


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Free Trade Agreement entered into by Japan

ASEAN Japan Comprehensive Economic PartnershipAgreement

Japan Brunei Economic Partnership Agreement

Japan Indonesia Economic Partnership Agreement

Japan Malaysia Economic Partnership Agreement

Japan Philippines Economic Partnership Agreement Japan Singapore Economic Partnership Agreement

Japan Thailand Economic Partnership Agreement

Japan Vietnam Economic Partnership Agreement

Japan Australia Economic Partnership Agreement

Japan Chile Economic Partnership Agreement

Japan India Economic Partnership Agreement

Japan Mexico Economic Partnership Agreement

Japan Republic of Korea Economic Partnership

Agreement

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B i i f 1990 k d th d f J '


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o o l i n g o f

Beginning of 1990s marked the end of Japan'shigh growth period.

The Nikkei index fell from its peak of 38,917 inDecember 1989 to 14,309 in August 1992.

Land prices in metropolitan commercial areasdeclined to one-fifth to one-quarter of theirpeak level (Kuroda 2003).

International competitiveness of Japanesefinancial markets and institutions worsened

Banks faced a massive overhang of bad loans forwhich securities and property that had becomealmost worthless served as collateral.

"Japanese Big Bang


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Japanese Big Bang

Aimed at

To increase investors' opportunities

To improve the quality of financial services andpromote competition

To make markets more "user friendly" To make trading fairer and more transparent.

Emphasis will be laid on a phenomenon called

"institutional complementarity"

o o l i n g o f

Banks are engaged in bond underwriting, sell capitalk d h h ld d i i l


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market products to households and securitize loansin bundling them into packages to be sold in themarket.

Financial intermediation stress the role of transactioncosts and asymmetric information.

The range of financial innovations is wideningincluding new kinds of derivatives, securitised loans

and the creation of synthetic assets throughdynamic trading strategies.

Explosion of trading in interest rate swaps and theirgrowing use as benchmarks in international fixed-

income markets

Bureaucratic quality is high and corruption low.

The quality of accounting standards is well above the

average of Asian countries and there are fewrestrictions on the press so that the overall quality

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P oo li nfR es ou rc es


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Both Financial institutions and non financial

institutions have access.

Most important source of Short term fundsaccounts to around 40%.

Maturities in this market range from half a day to

several days

A typical money market transaction goes asfollows:

The lender bank transfers a deposit to a moneymarket broker receiving a promissory note inreturn. The borrower bank, in turn, gives apromissory note to the broker receiving inreaction the lender's deposit. Settlement takesplace on the banks' accounts kept with the Bankof Japan with the latter functioning as a clearing


Types of Money Market Transaction


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yp y

Cash-collateralized bond lending

Gensaki market

Private non-banking organisations with a licence

Repo operations may reduce credit risk and costof funds.

Two markets that are part of the Japanese foreignexchange market are the dollar call market andthe Tokyo Offshore Market.

The offshore market is not open to Japanese

residents. Trading volume is low.

Less attractive because of taxes and thenonexistence of securities trading.

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Treasury Bills


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Treasury Bills They were underwritten close to one hundred per cent

by the Bank of Japan.

Held by the Bank and by official institutions such as The Trust Fund Bureau The National Debt Consolidation Fund The Postal Live Insurance and Postal Savings

schemes

Before privatisation, the Japanese National Railways.

Foreign Exchange Fund Special Account (FEFSA) whichwas initially established to manage the foreign fundsof the Japanese government.

On the asset side, the largest item besideinternational reserves was yen assets depositedwith the Trust Fund Bureau, the predecessor of theFiscal Loan Fund Special Account, making theaccount an important channel for the finance ofpublic spending programmes and a major source of

funds for the Japanese Fiscal Investment and LoanPro ram (FILP)

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Abolition of restrictions on off-exchange markettrading for exchange-listed stocks in1998

allowed the establishment of electroniccommunication networks (ECNs) and privatetrading systems (PTS).

The Japanese government was reported to havepumped more than 12 trillion into the marketthrough the purchase of equities using pensionfunds and postal savings

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Bond Markets


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Bond Markets The high volume of government borrowing in the

market is greatly crowding out private business

Different kinds of corporate bonds in Japan

Straight bonds offer the holder a stream of interestpayments

Convertible bonds, that exist since 1966

Warrant bonds with a warrant. i.e. an option topurchase shares of the firm's stock, attached

Detachable warrants, first authorized in Japan in1989, may be traded independently of the bondswith which they are issued.

Samurai bonds yen-denominated bonds issued in

Japan by non-residents Shogun bonds are foreign-currency denominated

bonds issued by non-residents in Japan

Daimyo bonds, non-resident eurobonds issued inJapan and sold to investors in the euromarkets.

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D i i


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Derivatives

Trading volumes in derivatives markets are muchhigher than in any other financial marketsegment traditionally but are weaker than othersegments in Japan

Derivatives are traded over the counter (OTC)and on organised exchanges

Bond futures and stock price index futures /

interest rate and currency futures bothcategories are listed and traded on differentexchanges.

Tokyo International Financial Futures ExchangeTIFFE

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M t l F d


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Mutual Funds

Total Assets under Management approx 130trillion Yen with around 120 plus players

Some Major Players are Nomura Asset Management Company Ltd.

Daiwa Asset Management Company Ltd.

UBS, HSBC, Deutsche, etc

Well developed Mutual Fund industry

Usually people invest for a short duration insteadof longer term

Have most types of Funds Open Ended

Close Ended

Life Cycle, Balanced, Money Market, SectorSpecific etc

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Deposits rates have fallen significantly during the


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last couple of years, drawing people to capitalmarkets for better returns.

Normal trends suggest that Males are majorcontributors to the financial markets ascompared to females.

People normally prefer to invest in Mutual Fundsthan accessing the asset classes directly.

Investment in capital markets rises with increasein age of the investors and usually they accessthrough Mutual Funds route.

Few important things taken into considerationwhile investing in Mutual Funds

Expected returns, Past performance, Frequency

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THANK YOU!!

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