I. The background and basic principles pertaining to a fundamental review of the foreign exchange control system
1. Reform geared toward the globalization of financial and capital transactions
The globalization of financial and capital transactions continues to progress with the development of information and telecommunications technology and the expansion of derivative transactions. Because of this trend, the Japanese financial system itself, not to mention specific firms doing business within that system, has come under fierce international competition, and there is now in evidence a growing tendency to shift domestic financial and capital transactions to foreign markets displaying higher degrees of efficiency.
An international financial center is expected to supply low-cost capital to those in need, both at home and abroad, and provide both domestic and foreign investors with good opportunities for capital investment. In order to revive the Tokyo market and make it competitive with those of New York and London, it is necessary to erect a financial system that is based on global standards. The creation of such a financial system would transform the Tokyo market into one that is attractive not only to Japanese individuals and companies but to foreign individuals and companies as well.
Liberalizing cross-border capital transactions will integrate domestic and foreign markets, allowing the Japanese financial system to become more directly associated with foreign financial systems. This will speed up reform of the Japanese financial market, which will in turn enhance the globalization and vitalization of the entire Tokyo market.
2. Cultivation of an environment that facilitates free cross-border transactions based on market principles
The history of the Japanese foreign exchange control system dates back to the pre-war Capital Flight Prevention Law. The current Foreign Exchange Law was enacted in 1949 and amended in 1980 to a legal system based on the principle of free cross-border transactions.
When it was revised in 1980, the Japanese foreign exchange control system allowed for greater freedom than the systems prevailing in European countries at the time. In the late 1980s, however, international transactions were rapidly liberalized to facilitate the integration of the European Union, and as a result, Japan has fallen behind the advanced Western industrial countries in terms of the liberalization of its foreign exchange control system.
Although cross-border transactions are basically free under the current foreign exchange control system, under the authorized foreign exchange bank system, foreign exchange business is limited to authorized foreign exchange banks (hereinafter "foreign exchange banks"), with the exception of safe and purchase of foreign currencies and currency derivative transactions by designated securities firms. Thus, individuals and companies must receive permission or make prior notification should they want to make transactions without using an authorized foreign exchange bank as an intermediary.
The authorized foreign exchange bank system has been an effective means of gaining an understanding of transactions and aiding the development of the foreign exchange market. But with the increasing globalization of the business activities of financial institutions and companies, the ability to conduct swift transactions in order to quickly seize business opportunities has become indispensable to increasing international competitiveness. Permission and prior notification requirements become obstacles in such an environment.
In order to develop a free market based on market principles, it is necessary to abolish the permission and prior notification requirements, thus fostering an environment that facilitates free cross-border transactions comparable to those in Western industrial countries in that it allows free and swift cross-border transactions, including cases where foreign exchange transactions are conducted as a business.
3. Response to international requirements and the establishment of a trustworthy market environment
Even after international capital transactions and foreign exchange business are liberalized, issues requiring attention will still remain.
In a market where free transactions are guaranteed, effective market mechanisms and fair transactions based on the notion that market participants act on their own responsibility should also be guaranteed. To this end, it is appropriate that we create an environment in which the information and data necessary for market analysis flows back to the market. In this way, market participants can gain access to sufficient information on the market and make informed decisions.
At the same time, understanding the international flow of funds and creating balance of payments statistics is necessary not only for the effective management of the Japanese economy but also for the stability of international financial and capital markets, based on international cooperation. It is therefore necessary to set up an effective and efficient ex-post facto reporting system.
International conditions in the post-Cold War period have not always been stable. Economic sanctions based on resolutions of the United Nations Security Council have increased with the intensification of regional skirmishes. With the liberalization of cross-border transactions, it will be necessary to set up appropriate mechanisms for economic sanctions and other actions taken in response to particular international situations. In this way, Japan can carry out its international responsibilities.
We believe that international confidence in Japan and its international financial market can be maintained through the implementation of the above measures.