Summary of the Report by the Special Subcommittee for Legislative Study
of
the Committee on Foreign Exchange and Other Transactions
December 19, 1996
1. The "front runner" of the "Tokyo Big Bang"
The Committee on Foreign Exchange and Other Transactions (the Committee) issued a report in June recommending the fundamental review of the foreign exchange control system. Since September, the Special Subcommittee for Legislative Study, under the direction of the Committee, has been discussing revision of the Foreign Exchange and Foreign Trade Control Act. Its discussion received a boost, in November, by the directive issued by the Prime Minister to the Finance Minister and Justice Minister, and successive request by the Prime Minister to the chairmen of relevant Ministerial Consultative Bodies, including the Committee, on the structural reform of the Japanese financial markets (the "Tokyo Big Bang"). The Subcommittee furthered its discussion from the view of reviving the Japanese financial markets as the international financial market competitive with New York and London by the year 2001.
The fundamental revision presented in this report can be positioned as the "front runner" of the structural reforms of the financial system. The Subcommittee members are convinced that its successful implementation will give positive effects to reforms in other areas to follow in the broader context of the financial system reform. With such thought, the Special Subcommittee for Legislative Study herewith submits a report to the Committee on Foreign Exchange and Other Transactions on the basic principles and steps to be taken for realizing the free and internationally open market towards the 21st Century.
2. The background and basic principles for a fundamental review of the Foreign Exchange Control System
(1) Reform geared toward the internationalization of financial and capital transactions
In order to revive the Tokyo financial market and make it internationally competitive with those in New York and London, it is necessary to make the systems that surround the market consistent with global standards. It is expected that the liberalization of cross-border capital transactions and settlements will promote the integration of the domestic and foreign markets, leading to the internationalization and revitalization of the Tokyo market as a whole.
(2) Development of the environment to facilitate free external transactions based on the market mechanism
To achieve a free market based on the market mechanism, existing permission and prior notification requirements should be abolished. In addition, to make free and prompt cross-border capital transactions available to all market participants, including those who conduct foreign exchange business, such as sale and purchase of foreign currencies, currency future contracts, currency swaps, options, it is necessary to improve the environment for facilitating external transactions, making it comparable to those in the most liberalized countries -- the United States, the United Kingdom, Germany, France, and others.
(3) Coping with international requirements and the establishment of a credible market
Even after the liberalization of cross-border capital transactions and settlements, foreign exchange business, compliance with international agreements such as those connected to economic sanctions is required. Moreover, in order to assure the sound development of the foreign exchange market based on the market principle, and to acquire information on developments of the foreign exchange market, the establishment of the ex-post facto reporting system and the continued provision of information to the market are essential.
3. Specific issues for the invigoration of the Tokyo market
(1) Liberalization of cross-border capital transactions
In order to enable companies and individuals in Japan to make smooth and prompt capital transactions and settlements with foreign companies and individuals, permission and prior notification requirements should be abolished with the exception of those pertaining to certain direct investments and in the case of economic sanctions.
Firms and individuals will be allowed to hold deposit accounts overseas and make settlements through multi-netting schemes without permission or prior notification. This will also enable them to enter into transactions with anyone regarding the sale and purchase of foreign currencies, currency future contracts, currency swaps, options, and other items.
(2) Liberalization of foreign exchange business and abolition of the authorized foreign exchange bank system
(a) The so-called authorized foreign exchange bank system should be abolished.
(b) In addition, the so-called designated securities firm system and money exchanger system should also be abolished.
(c) Thus, regulations on the conducting of foreign exchange business will be abolished, all market participants will be able to conduct smooth and prompt cross-border capital transactions, and free entry and exit to and from the foreign exchange business sector will be assured. This will facilitate the further improvement in the competitiveness of banks and other institutions, the entrance of new participants in the foreign exchange business sector, and an increase in the transaction volume in the market, which will result in the invigoration of the Tokyo market.
(d) Those who engage in foreign exchange business are expected to act as sound market participants acting on their own responsibility under the effective checking mechanism of the market. Given the introduction of such things as the market risk regulations by the Basel Committee on Banking Supervision, it would be appropriate to abolish restrictions on the foreign currency positions of banks and other institutions at ordinary times.
(3) Development of ex-post facto reporting system
(a) In order to satisfy the objectives of the law -- i.e., enabling the sound development of our external transactions and stabilizing the currency --the establishment of an efficient and effective ex-post facto reporting system concerning cross-border capital and other transactions is required.
(b) To alleviate the burden of reporting , it is necessary to review all reports, including existing ones, in order to ascertain their necessity and merits, and drastically reduce those reporting requirements with little importance. In short, we need to introduce a rather simplified and rational reporting system.
(c) Some intermediaries should be able to make consolidated reports on several transactions within a certain period, rather than reporting each and every transaction. It would be helpful to reduce such reporting burdens. Those who submit reports through certain intermediaries should be exempt from legal reporting requirements.
(d) In order to maintain the effectiveness of the ex-post facto reporting system, necessary reports should be legally required, as is the norm in Western industrial countries; and violations should continue to be punished.
(4) Coping with international requirements such as economic sanctions and other emergency restrictions
(a) In view of the need for harmonization with international agreements, a mechanism that can effectively impose economic sanctions should be maintained. As an emergency mechanism during times of drastic change to an economic situation, it is necessary to retain the means to impose emergency restrictions.
(b) When imposing economic sanctions, persons engaged in the transactions are required, firstly on their own responsibility, to comply with the legal obligation to get permission from authorities for the cross-border capital transactions, e.g. remittance of cash to specific countries.
(c) Existing requirements for banks and other institutions to check the legitimacy of all cross-border capital transactions should be curtailed to the minimum necessary to assure the effectiveness of economic sanctions. In addition, it is necessary to establish a system so that the government can confirm that banks observe their obligations.
(5) Direct investment
With respect to foreign direct investment, the prior notification system should be abolished and replaced by an ex-post facto reporting system, from which certain industrial sectors will be excluded. Moreover, the scope of restrictions should be revised from the viewpoint of necessity and the international rationality of imposing such restrictions so that exceptions are minimized. For example, prior notification requirement of foreign direct investment in certain industrial sectors such as banking industry, cultured-pearl industry, fiber manufacturing / processing industry should be abolished.
(6) Other matters
(a) Electronic money
(b) Further improvement of the off-shore market
(c) Others