(V-1) The Interim Report of theSubcouncil on the Internationalization of the Yen of the Council on Foreign Exchange andOther Transactions
| Provisional Translation |
Internationalization of theYen
- Interim Report -
November 12, 1998
Council on Foreign Exchange and Other Transactions
Subcouncil on the Internationalization of the Yen
1. Introduction
The Council on Foreign Exchange and Other Transactionswas assigned by the Minister of Finance at its plenary meeting on July 7, 1998, toinvestigate and deliberate on "the internationalization of the yen from theperspective of the ongoing changes in the economic and financial conditions in Japan andabroad." In response to this assignment, the Subcouncil on the Internationalizationof the Yen (hereafter referred to as the Subcouncil) was created to deliberate on variousissues and problems related to the internationalization of the yen from a practical andspecialized perspective. To date, the Subcouncil has held seven meetings and engaged inactive discussions, including the holding of various hearings.
This interim report reviews and outlines the variousissues and problems related to the promotion of the internationalization of the yen whichhave thus far been discussed by the Subcouncil. This report is being published with thefollowing purpose in mind. In view of the fact that the Subcouncil's discussions havecovered an extensive range of subjects and fields, including finance, taxation andtrade-related transactions, it is hoped that this report will be widely utilized in thediscussions of persons active and responsible in these various fields, and, in turn, thatthese discussions will extend and deepen the future deliberations of the Subcouncil.
2. Discussion of the Current Significance ofthe Internationalization of the Yen
(1) The internationalization of the yen was discussed during the 1980s intandem with the subject of the liberalization of the Japanese financial system.Subsequently, in March 1985, the Council on Foreign Exchange and Other Transactionssubmitted a report entitled "Internationalization of the Yen." While thefundamental definitions and conditions underlying the previous discussion remainapplicable today, the Subcouncil has, in the course of its discussions, identified thefollowing issues which lend current significance to the internationalization of the yen inview of recent economic and financial developments.
[1] One of the factors contributing to the Asian currency crises is said to have been the excessive dependence of Asian countries on the U.S. dollar. Promoting the internationalization of the yen is of particular significance at this time when Asian countries are moving away from virtually dollar-linked exchange regimes and looking for alternative systems. An increase in the use of the yen in Asia will contribute to stabilizing the exports and macroeconomic performance of these countries, which in the long-run will be conducive to the stability of the Japanese economy.
[2] The international monetary system will be entering a new phase with the introduction of the euro in January 1999. It is generally believed that the euro has the potential for functioning as a key currency of comparable stature to the U.S. dollar in the near future. With this prospect in mind, the promotion of the internationalization of the yen is essential given the importance of Japan in global economic activities. In addition, the internationalization of the yen can make a significant contribution to the risk diversification of the investments and fund management of international investors, central banks, and others.
[3] Cross-border transactions have been essentially liberalized under the revised Foreign Exchange Law which came into effect in April 1998, while progress is being made in reforming the Japanese financial system through the so-called "Big Bang." Against this background, improving the convenience of the yen in the financial and capital markets and, in particular, offering risk-free yen-denominated assets to non-residents can make significant contributions to improving the attractiveness of the Tokyo markets, while also heightening the effectiveness of the "Big Bang."
[4] In addition to the above benefits, the promotion of the internationalization of the yen can significantly contribute to reducing the foreign exchange risks of trade and capital transactions through the expansion of yen-denominated business. Especially for Japanese financial institutions, the internationalization of the yen can be expected to improve their competitiveness in the international financial markets. The first such advantage pertains to the BIS capital adequacy computations of Japanese financial institutions. With the growth of yen-denominated assets, capital adequacy levels will be less prone to be affected by exchange rate fluctuations. Secondly, Japanese financial institutions will be able to effectively reduce the availability risks of procuring foreign currency funds.
[5] In the past, various disadvantages of the internationalization of the yen were cited. These included the negative impact on Japan's export competitiveness resulting from the growing demand for the yen and the subsequent appreciation of the yen and restrictions on domestic monetary policies. Such views, however, are disappearing, while the significance of achieving the above-mentioned benefits has been growing.
(2) As indicated above, opinions emphasizing the significance and utilityof the internationalization of the yen formed a clear majority in the deliberations anddiscussions of the Subcouncil. In addition, it was indicated that the effective promotionof the internationalization of the yen would be predicated on the following conditions:[1] Sound macroeconomic management. (Given the current economic situation in Japan, it iscrucial that confidence in the Japanese economy itself be regained by rebuilding thefinancial system and restoring the economy to a path of stable growth.) [2] Stabilizationof the value of the yen. [3] Improved convenience of the procurement and management of yenfunds. The opinion was also voiced that the internationalization of the yen did not initself represent a policy goal, but rather was something that would be realized subsequentto the improvement of the general environment of Japan's financial and capital markets.Furthermore, it was noted that improving the convenience of the yen would involve theactive review and revamping of the current system by the government, as well as theintroduction of various modifications and reforms on the part of the private sector.Hence, it was agreed that the promotion of the internationalization of the yen wouldrequire the active efforts of both the government and private sector.
(3) Based on the above considerations, the Subcouncil has focused itsdiscussions on issues related to improving the convenience of the procurement andmanagement of yen funds. The principal elements of this discussion are summarized below.
3. Subcouncil's Principal Points ofDiscussion Regarding Specific Measures
(1) Issues Related to the Financial and Capital Markets
[1] Issues Discussed at the Subcouncil
Financial liberalization since the 1980s has resulted in the removal of a significant number of regulations and restrictions which previously existed in Japan's financial and capital markets. Improvements have also been made with regard to the tax system. For instance, market and tax rules have become more favorable for non-residents: The Tokyo offshore market has been created, past restrictions on the issuance and secondary markets for yen-denominated foreign bonds and Euro-yen bonds have been eased, and foreign corporations have been able for some time now to receive a full refund on withholding taxes for Treasury Bills (TBs) and Financing Bills (FBs) at the time of redemption. Nevertheless, ample room remains for further modifications in various areas which can effectively improve the convenience of the yen. The following points were discussed by members of the Subcouncil.
(a) In order to render Japan's financial and capital markets more attractive to foreign investors, it is necessary to achieve a level of market depth and infrastructure development which is at least on par with current levels in the U.S. and European markets. From the perspective of providing non-residents with risk-free and highly liquid financial products, and from the perspective of developing a benchmark function for all financial products, it is of particularly vital importance to improve Japan's market for short- and long-term government bonds.
(b) With regard to the short-term financial market: TBs and FBs constitute the principal instrument for short-term investment and fund management by non-residents including central banks because TBs and FBs offer reliability and liquidity and homogeneity as instruments. Particular attention should be paid to the following two points: [a] As compared to the U.S. market, there is a marked shortage of TBs and FBs in the Japanese market. Consequently, the market lacks adequate depth. [b] Due to special characteristics of TBs and FBs as financial instruments, taxes withheld at the time of issuance influence cash flows, which, in turn, might have the potential to affect price formation. In addition, investors in the Japanese market utilize repo transactions through cash-secured bond lending so that imposition of securities transaction taxes can be avoided. This practice is unique to Japan and steps must be taken to restructure the repo market along global standards. (Sale of securities with repurchase agreements are used in the European and U.S. markets.)
Note: Securities transaction taxes will be reviewed by the end of 1999, taking into consideration developments in financial system reform, trends in the market, and other factors and will be abolished together with the rationalization of taxation on capital gains derived from the alienation of securities and other instruments.
(c) With regard to the market for medium- and long-term government bonds: [a] Adequate liquidity is not necessarily available to match all the diverse forms of demand. Consequently, the markets are hampered from efficiently establishing a yield curve which can serve as an indicator for financial markets, which acts to restrict access to risk hedging measures. [b] Withholding taxes on the interest earnings received by non-residents may be one of the hindrances to non-resident participation in Japan's government bond markets.
(d) Significant improvements have been made with regard to settlement systems in recent years. Nevertheless, additional efforts must be made to develop market infrastructures to further encourage investment by non-resident investors. Such efforts should focus on establishing systems and transaction practices which conform to global standards and which support the precise and speedy delivery and exchange of funds and bonds. Particularly, with regard to the settlement system for government bonds, the creation and improvement of efficient secondary markets for government bonds based on global standards (e.g. book-entry system) must be further examined while paying due consideration to the opinions of market participants. In this connection, it was pointed out that over the medium to long terms, Japan should investigate modifications in its legal framework in light of the global standard for the delivery of securities in general.
[2] Specific Measures to Be Considered
(a) Specific measures for the short-term financial market: [a] Public auction of FBs. [b] Elimination of withholding taxes on TBs and FBs at the time of issuance.
(b) Specific measures for medium- to long-term government bond markets: [a] Diversification of available products [diversification of maturities and examination of the introduction of Separate Trading of Registered Interest and Principal of Securities (STRIPS), etc.]. [b] Exemption of non-residents from withholding taxes on interest arising from interest-bearing government bonds.
(c) In the review of the taxation system outlined above, measures to ensure equitable taxation, including procedures for identification of beneficiaries and information return, must be formulated while keeping in mind the proper overall balance of taxes on financial income so that revisions do not lead to tax evasion or capital flights. It is important that the review be performed with the intent of creating a simplified and appropriate framework using the central depository system--a secondary market system for government bonds based on global standards.
(d) Specific measures for the improvement of settlement systems: [a] Promoting the use of Delivery-versus-Payment (DVP) and Real-Time-Gross-Settlement (RTGS) Systems. [b] Shortening the settlement period. [c] Extending the operating hours of the Bank of Japan network (BOJ-NET). Additionally, with regard to business practices, it is desirable that private-sector discussion of practices and responses related to fail settlement be promoted.
(2) Issues Related to Trade and Capital Transactions
[1] Issues Discussed at the Subcouncil
In view of Japan's importance in the world economy, the ratio of yen-denominated settlements in Japan's trade and capital transactions remains low, for instance as compared to Germany. Moreover, there has been very little change in this ratio over the past decade. The expansion of yen-denominated transactions in current and capital accounts together with the above-mentioned improvements in the financial and capital markets constitute the two wheels on which any effort to promote the internationalization of the yen must ride. The following issues were cited as factors hampering the growth of yen-denominated transactions and settlements, etc.
(a) The currency used in invoices for trade transactions is determined by such factors as relative market power, the currencies in which international commodities are invoiced, and trade structures. Japan's yen-invoiced trade has not grown for the following main reasons: [a] Raw materials (most importantly, crude oil) invoiced in U.S. dollars in international trade, account for a large portion of Japan's total imports. [b] In intra-firm trade between Japanese parent companies and overseas subsidiaries, there is a tendency for parent companies to assume the foreign exchange risks.
(b) In addition to the above, the ratio of Japan's yen-invoiced trade with Asia--a region with which Japan has strong economic ties--remains low due to various factors. Specific problems include [a] the inadequate development of foreign exchange markets for the yen and Asian currencies (The yen suffers the effects of a vicious cycle in which the foreign exchange markets for the yen and Asian currencies are underdeveloped because of the low volume of yen-invoiced transactions, and in turn, the volume of yen-invoiced transactions remain low because of the absence of adequately developed foreign exchange markets.) and [b] the instability of the exchange rates between the yen and other Asian currencies because such currencies had heretofore been linked to the U.S. dollar.
(c) Yen-denominated overseas lendings of Japanese banks have not been growing for the following main reasons: [a] Overseas demand for yen funds is low in the first place because use of the yen in current account transactions has not spread. [b] Especially today, the credit risks of Asian corporations and financial institutions are growing and the Asian economy is experiencing recession. [c] Because of the development of dollar-yen forward and swap markets, it is generally considered that there are no longer significant limitations in conducting yen business in dollars.
(d) For yen-denominated transactions to be activated, yen balances held by non-residents must first be expanded. To achieve this, it is likely necessary to increase yen-denominated imports. Moreover, increasing yen-denominated assets in countries that hold yen-denominated debt from Japan can be expected to be significant in controlling currency mismatches between assets and debts.
(e) Asian countries are experiencing a serious credit crunch in trade finance as well, as a consequence of the economic difficulties which have followed the currency crises. Although trade finance has been supplied mainly in dollars heretofore, it is both desirable and necessary for Japan to respond to this credit crunch by expanding the available facilities for yen financing in the future. This course of action will also contribute to promoting the internationalization of the yen in the Asian region.
[2] Specific Measures to Be Considered
(a) Specific measures pertaining to trade transactions: [a] Expanding yen-denominated trade finance facilities. [b] Expanding Tokyo international commodities markets in order to provide greater opportunities for hedging yen-denominated transactions. [c] Developing a fuller awareness of the foreign exchange risks of trade transactions and reviewing current business practices pertaining to trade transactions.
(b) Achieving a higher ratio of yen-invoiced trade transactions can be expected to have a significant impact on the growth of yen-denominated capital transactions as it will increase the needs of both borrowers and lenders for yen. In addition, the following specific measures should be considered. [a] Developing a fuller awareness among Japanese financial institutions of the risks of doing business in foreign currencies. [b] Using guarantees and other kinds of support from the Export-Import Bank of Japan.
(3) Miscellaneous Issues
In July 1998, the Bank of Japan introduced yen repo services. In addition to this, it was suggested that the BOJ could further expand the scope of its yen-denominated facilities for foreign central banks and international organizations, while supplementing the services provided by the private sector. It was also suggested that the administrative authorities should take care not to burden non-residents with undue clerical costs when using the yen.
4. Future Deliberations of the Subcouncil
In its future meetings, the Subcouncil shall bediscussing the above-mentioned issues in further detail. It will also be considering therecent changes in the international environment as they affect the yen, with particularattention to opinions in the Asian region to the internationalization of the yen, andcurrent developments pertaining to the euro. The Subcouncil will schedule itsdeliberations in consideration of the fact that the Council on Foreign Exchange and OtherTransactions intends to complete its assigned report for submission early next spring.
The issues mentioned in this interim report cover a very broad range offields. Thus, the Subcouncil strongly hopes that persons concerned with the various fieldscovered will engage in thorough discussions of the issues mentioned herein and that theywill without any delay launch their examination of appropriate measures to be taken alongthe lines of thought set forth by the Subcouncil.
(Attachment) Measures toFacilitate the Internationalization of the Yen
Provisional Translation
December 22, 1998
Ministry of Finance
Measures to Facilitate the Internationalization ofthe Yen
The following measures have been decided to be taken in order tofacilitate the internationalization of the yen.
(1) Competitive Price Auction of Financing Bills (FBs)
FBs will be offered to the public by competitive price auctions in accordance with the following new scheme. Further information on practical matters will be announced at a later date.
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FBs will be basically offered to the public by competitive price auctions instead of the current fixed-rate public offering scheme where the Bank of Japan (BOJ) underwrites the residual bills after public offering.
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The maturity of FBs will be basically 13 weeks (3 months) and will be issued about once a week.
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In the exceptional case where the bids are insufficient to cover the auctioned amount, or in case where unexpected demand for the government funding arises, the BOJ will underwrite the necessary amount of FBs. The FBs underwritten by the BOJ shall be redeemed as soon as possible in exchange for the funds raised by subsequent issuance of FBs.
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The competitive price auctions of FBs will begin in April, 1999. There will be a transition period of about one year, considering such factors as market conditions. During this period, the FBs not issued under the new system will be underwritten by the BOJ.
(2) Tax Reforms Related to the Internationalization of the Yen
The following measures were decided in the FY 1999 tax reforms. We will vigorously investigate and prepare for the necessary revision of laws, etc.
(Note) The BOJ book-entry system mentioned below excludes the individual registration system.
Original issue discounts for Treasury Bills (TBs) and FBs which are all registered in the BOJ book-entry system at the time of their issuance shall be exempt from withholding tax at the time of issuance. Original issue discounts for TBs and FBs which have been registered in the BOJ book-entry system from issuance until maturity shall, in principle, be exempt from corporation tax on foreign corporations. Accompanying these exemptions, necessary measures shall be taken, such as procedures for the identification of beneficiaries and information returns.
(Note) The above measures will be effective for TBs and FBs issued on and after April 1, 1999.
Interest accrued from government bonds (JGBs) in the BOJ book-entry system received by non-resident individuals and foreign corporations shall be exempt from withholding tax, on certain conditions. Accompanying these exemptions, necessary measures shall be made, such as procedures for the identification of beneficiaries and information returns.
(Note) The above measure will be effective for interest accrued from JGBs whose period for interest calculation begins on and after September 1, 1999.
Neither the scope of interest from JGBs, which is exempt from withholding tax on designated financial institutions, etc., nor the scope of interest from JGBs, which is exempt from corporation tax on public corporations, etc., shall include interests accrued from the JGBs, which are not in the BOJ book-entry system and whose period for interest calculation begins on and after January 1, 2001.
(cf.) Securities Transaction Tax and Bourse Tax will be abolished on March 31, 1999.
(Note) The special measure to allow the option of separate withholding taxation for capital gains on listed stocks will be applied until March 31, 2001, and will then be abolished.
(3) Abolishment of the Call Provision on JGBs
The call provision on JGBs issued in and after January, 1999 will be abolished.
(4) Others
Thirty-year JGBs and one-year TBs will be issued in and after FY 1999 to pursue further diversification of maturities of government bonds.
The Council on Foreign Exchange and Other Transactions will continue to investigate and deliberate on issues in a broad range of fields to facilitate the international use of the yen, and will complete its assigned report for submission early next spring.
(V-2) Title of the Views andOpinions Stated by the Council and Subcouncil Members and Outside Experts
The 47th Council Meeting (July 7, 1998)
Current Status of Internationalization of the Yen
Secretariat
Mandate by Minister of Finance and Establishment of the Subcouncil on the Internationalization of the Yen
The 1st Subcouncil Meeting (July 8, 1998)
Current Status of Internationalization of the Yen
Secretariat
The 2nd Subcouncil Meeting (July 23, 1998)
Current Significance of Internationalization of the Yen
Mr. Mitsuhiro Fukao Member of the Subcouncil Mr. Chi Hung Kwan Member of the Subcouncil
The 3rd Subcouncil Meeting (September 10, 1998)
Internationalization of the Yen and Short-term Money Market
Mr. Takashi Murakami Member of the Subcouncil Mr. Masayoshi Amamiya Chief Manager, Money and Capital Markets Division, The Bank of Japan Mr. Takeshi Fujimaki Managing Director and Branch Manager, Morgan Guaranty Trust Company Mr. Akiyoshi Horiuchi Professor, University of Tokyo
The 4th Subcouncil Meeting (September 25, 1998)
Internationalization of the Yen, and Medium-and Long-Term Bond Markets such as Government Bond Markets
Mr. Hiroshi Toda Member of the Subcouncil Mr. John D. McGeehan Executive Director, Tokyo Branch, Morgan Stanley Japan Limited Mr. Takatoshi Ito Chairman of the Subcouncil
The 5th Subcouncil Meeting (October 12, 1998)
Expansion of the Use of the Yen as an Invoicing Currency of Trade and Capital Transactions
Mr. Hidefumi Yamagami General Manager, Research Division, Bank of Tokyo-Mitsubishi Mr. Osamu Mori General Manager, Finance Division, Mitsui & Co. Mr. Tsutomu Higuchi Director, Foreign Exchange and Trade Finance Division, Ministry of International Trade and Industry
The 48th Council Meeting (October 20, 1998)
Recent situation of International Finance
Secretariat
Deliberation at the Subcouncil on the Internationalization of the Yen
Mr. Takatoshi Ito Chairman of the Subcouncil
The 6th Subcouncil Meeting (October 27, 1998)
Review of the Issues Discussed at the Subcouncil
Secretariat
The Bureaus Concerned, Ministry of Finance
The 7th Subcouncil Meeting (November 12, 1998)
Deliberation(and Publication) of Interim Report
The 8th Subcouncil Meeting (December 4, 1998)
Internationalization of the Yen From the Asian Perspective
Mr. Olarn Chaipravat President, Siam Commercial Bank Thailand Mr. Jusuf Anwar Chairman, Capital Market Supervisory Agency, Indonesia
The 9th Subcouncil Meeting (January 19, 1999)
Euro and Internationalization of the Yen
Mr. Eiji Ogawa Associate Professor, Hitotsubashi University Mr. Jim ONeill Chief Currency Economist & Managing Director, Economic Research, Goldman Sachs International Mr. Koichirou Arai Chief Economist and Director, Research Department, Institute for International Monetary Affairs
The 10th Subcouncil Meeting (February 9, 1999)
Discussion for Drafting the Outline of the Report
The 49th Council Meeting (March 9, 1999)
Recent Situation of International Finance
Secretariat
Deliberation at the Subcouncil on the Internationalization of the Yen
Mr. Takatoshi Ito Chairman of the Subcouncil
The 11th Subcouncil Meeting (March 25, 1999)
Discussion for Drafting the Report
The 50th Council Meeting (April 20, 1999)
Resolution and Submission of the Report
| The Members' List of the Council on Foreign Exchange and Other Transactions |
Member
Acting Tomomitsu Oba President, Japan Center for International Finance Chairman Seiichi Kato
Satoru Kishi
Akiko Kimura
Toyoo Gyohten
Yukiharu KodamaChairman, Japan Securities Dealers Association
Chairman, Federation of Bankers Associations of Japan
Attorney-at-Law
President, Institute for International Monetary Affairs
President, The Shoko Chukin BankChairman Ryutaro Komiya Professor, Aoyamagakuin University/
Professor emeritus, University of TokyoFumio Sato
Miyako Suda
Megumi Sudo
Sakuya Fujiwara
Takeshi Furuta
Yoshiharu Matsuo
Minoru Murofushi
Hiroshi Yasuda
Chairman of the Board, Toshiba Corporation
Professor, Gakushuin University
Professor, Chuo University
Deputy Governor, The Bank of Japan
President, Kaneka Corporation
Professor, Matsusaka University
Chairman, Japan Foreign Trade Council, Inc.
Governor, The Export-Import Bank of Japan
Special Member Mitsugu Ishizuka
Makoto Utsumi
Hiroshi Kaneko
Hideki Kanda
Takehiko MizushiroMember, Prime-Ministers Council for Science and Technology
Professor, Keio University
Professor, Gakushuin University
Professor, University of Tokyo
NHK News Commentator,
Japan Broadcasting Corporation
| The Members' List of the Subcouncil on the Internationalization of the Yen |
Chairman Takatoshi Ito Professor, Institute of Economic Research,
Hitotsubashi UniversityMotoshige Ito Professor, Faculty of Economics,
University of TokyoHideto Ozaki General Manager, Toyota Motor Corporation Yukio Ono Senior Partner, Deleoitte Touche Tohmatsu Chi Hung Kwan Senior Economist, Nomura Research Institute Acting Hideki Kanda Professor of Law, University of Tokyo Chairman Akira Kojima Director, Editorial Page Editor,
Nihon Keizai ShimbunHajime Shinohara Managing Director,
Institute for International Monetary AffairsTetsuo Shimura Senior Managing Director,
Bank of Tokyo MitsubishiSawako Takeuchi Associate Professor, Department of Civil Engineering,
University of TokyoHiroshi Toda Head of Global Debt Market Division,
Nomura Securities CompanyMinoru Nakazato Professor of Law, University of Tokyo Shunji Nanjo Editorial Writer, Yomiuri Shimbun Mitsuhiro Fukao Professor, Keio University Toshikatsu Fukuma Executive Vice President, Mitsui&Co.,LTD Takehiko Mizushiro NHK News Commentator,
Japan Broadcasting CorporationTakashi Murakami Director, International Department ,
Bank of JapanRyuji Yasuda Managing Director (Japan and East Asia),
A.T. KEARNEYMasahiro Yamada Managing Director,
Nippon Life Insurance CompanyRobert Alan Feldman Managing Director (Chief Economist),
Morgan Stanley JapanAkihiro Wani Senior Partner, Mitsui&Yasuda