II. Specific issues for the invigoration of the Tokyo market
1. Liberalization of cross-border capital transactions
With the exception of some types of direct investment and economic sanctions, the permission and prior notification requirements should be abolished to enable companies and individuals in Japan to make smooth and prompt capital transactions and settlements with foreign companies and individuals.
Under this measure, the settlement of export-import payments through overseas deposits and multi-netting payments will be liberalized, thus further improving the efficiency of capital settlements. At the same time, transactions such as the sale and purchase of foreign currencies, currency future contracts, currency swaps, and options will be conducted freely with anyone, whether or not he or she is a resident, which will allow for the concentrated management of exchange risks in consolidated basis within the group companies and precise response to customer's needs.
2. Liberalization of foreign exchange business and abolition of the authorized foreign exchange bank system
(1) With the rapid internationalization of the Japanese economy since the end of World War II, the authorized foreign exchange bank system has played a major role in the effective use of foreign currencies and the sound development of the foreign exchange market. It has also contributed significantly to the achievement of the legal objectives of the Foreign Exchange Act by facilitating a greater understanding of the actual conditions of transactions and confirming their legality.
However, due to the globalization of financial and capital transactions, competition between financial markets has intensified. In order for the Tokyo market to be internationally attractive, it must be efficient and expandable, allowing for free entry and exit and the freedom of the business activities participants choose.
Accordingly, the vitalization of the Tokyo market requires that the authorized foreign exchange bank system be removed from the Foreign Exchange Law, thus allowing market participants to freely engage in such foreign exchange business as the sale and purchase of foreign currencies and derivative transactions. In addition, the designated securities firm system and the money exchanger system should also be abolished.
Implementing the above measures would mean that all regulations related to foreign exchange business have been removed, and free entry and exit into and from foreign exchange business would be guaranteed allowing market participants to conduct their activities freely. These measures would help financial institutions such as banks bolster their competitive strength, as well as increase the number of new market entrants and expand the business scope of the market. And those developments would fuel the vitalization of the Tokyo market.
(2) Once the authorized foreign exchange bank system is abolished and foreign exchange business is liberalized, the stable management of foreign exchange business should be adequately secured under the Banking Law and other related laws and regulations. Participants in foreign exchange business other than banks must provide adequate disclosure under the relevant regulations. It is expected that the market's checking mechanisms will work effectively where the participants act on their own responsibility and ensure the soundness of the participants' activities.
The checking mechanism and the existing legal framework should respond to protect foreign exchange investors and prevent unfair transactions. However, certain improvements may be necessary in response to future challenges.
(3) The restrictions of the authorized foreign exchange banks' foreign exchange positions have played an important role in maintaining their international credence and in preventing drastic exchange rate fluctuation of Japanese yen. Because the need to regulate the maintenance of international trust -- that is, regulating the soundness of banks through the Foreign Exchange Law -- has been decreasing, foreign currency positions should in future be governed by the Banking Law and other bank-related laws following the introduction of market risk regulations by the Basle Committee on Banking Supervision.
On the other hand, the restriction is still important to prevent drastic exchange rate fluctuation of Japanese yen, even if the function of the stabilizing the foreign exchange market by the restrictions may be somewhat limited in consideration of the rapid expansion and globalization of the foreign exchange market. Thus, it is expected that cooperation among the currency authorities of all countries and intervention into the foreign exchange market will become increasingly important in the future. Because of this, it would be appropriate to abolish the present restrictions of the authorized foreign exchange banks' foreign exchange position at ordinary times.
3. Development of an ex-post facto reporting system
(1) The legal objectives of the new foreign exchange control system include the sound development of external transactions and the stabilization of the foreign exchange market. In order to fulfill these objectives, it is necessary to request reports from market participants to ensure a proper understanding of market trends and to prepare statistics on the balance of payments and external assets and liabilities. Through these measures, we must develop a smooth market mechanism that assures that necessary information such as that concerning trends in international financial transactions is made available to market participants. In addition, international requests have been increasing for an improvement in statistics in order that a proper macroeconomic understanding of international capital transactions from the perspective of flow and stock can be achieved. In response to these domestic and international requests, it is appropriate to develop an efficient and effective ex-post facto reporting system on cross-border capital transactions.
(2) Upon the erection of an ex-post facto reporting system, a number of measures should be carried out from the viewpoint of alleviating the burden of reporting. All reports should be reviewed, including current ones, and those which are deemed unnecessary should be eliminated or integrated. It will also be necessary to streamline and simplify reporting procedures by ensuring concise content and pursuing a paperless reporting system.
(3) It is necessary to develop a system where certain intermediaries, including foreign exchange banks and securities firms, can make consolidated reports on several transactions conducted within a certain period of time rather than reporting each and every transaction, should they so wish. It is also necessary to create a system in which those conducting transactions with certain intermediaries who make consolidated reports that are acting as transaction partners, mediators, or agencies are exempt from the obligation to report.
(4) Finally, in order to maintain the effectiveness of the ex-post facto reporting system, it would be appropriate that those reports necessary for the achievement of legal objectives be established as obligations under the law and penalties put in place for the violation of those obligations, as is the norm in Western industrial countries. At the same time, it would also be appropriate to establish an environment in which those involved in transactions are informed of the reporting system so that they may fulfill their reporting obligations.
4. Response to international requirements such as economic sanctions and other emergency restrictions
(1) International requirements for the proper implementation of economic sanctions have intensified in the post-Cold War environment. Even after the permission and prior notification requirements are abolished, Japan, in order to fulfill its responsibility as a member of the international community, will be required to maintain a mechanism that enables the prompt and effective implementation of economic sanctions.
In addition, it is fitting to retain a mechanism for imposing emergency restrictions during times of drastic change to an economic situation.
(2) During times of economic sanction, parties engaged in certain transactions are legally obligated to get permission from authorities for cross-border capital transactions, -- e.g., the remittance of cash to specific countries. In order to fulfill their obligations to the international community, all parties involved in such transactions are required to act on their own responsibility. It will also be necessary to ensure that the administration is able to keep all parties informed of their obligations and provide appropriate responses.
(3) In order to assure the effectiveness of economic sanctions, it is necessary to establish a mechanism by which the legitimacy of all cross-border capital transactions will be checked by banks and other institutions as part of their duties of remitting money on behalf of others. It will also be necessary to curtail existing requirements for banks and other institutions, specified in Article 12 of the current law, to an obligation that ensures the effectiveness of economic sanctions so that the government can confirm that banks carry out their obligations.
(4) With growing international requests for the prevention of international money laundering, it is appropriate to introduce a system requiring prior reports to the Customs authorities in cases involving the export or import of means of payments such as large amount of cash. In addition, it is requested that banks and money exchangers satisfy identification requirements for foreign remittance and money exchange in order to prevent cross-border money laundering. Other authorities concerned, such as tax offices, should also examine appropriate measures to be taken.
5. Direct investment
(1) Foreign direct investment
In light of the fact that the objectives of the current review of the foreign exchange control system are to abolish permission and prior notification requirements, which are part of the cause of the cost increases in cross-border transactions, and to develop an environment that facilitates free cross-border transactions on a par with those of Western industrial countries, it is appropriate to review the systems related to foreign direct investment in line with the following measures:
(a) For general business, excluding certain industrial sectors (and business conducted in countries subject to economic sanctions), prior notification requirements should be abolished and replaced by an ex-post facto reporting system, as is the case with other capital transactions.
(b) The scope of restrictions should be revised from the viewpoint of necessity and the international rationality of imposing restrictions and minimized. For example, prior notification requirements for investment in industrial sectors such as banking, cultured-pearl production, and fiber manufacturing / processing should be abolished.
(2) Direct domestic investment
Under the 1992 revision of the Foreign Exchange Law, direct domestic investment has been transferred, as a general rule, to the ex-post facto reporting system but permission and prior notification requirements remain in some cases. In the future, however, it will be necessary to promote liberalization in accordance with the revised plan to promote deregulation decided on by the Cabinet in March last year, and discussions at the OECD.
6. Other
(1) Electronic money
Electronic money has been enjoying growing attention worldwide as a new means of conducting transactions that reduces transaction costs and is convenient for users. Banks have begun studies and experiments in this area in Japan. Because electronic money offers the possibility of further development in cross-border and cross-currency transactions, the Study Group on Electronic Money and Electronic Settlement, jointly run by the Financial System Research Council and the Committee on Foreign Exchange and Other Transactions, has been examining it in terms of its affect on the settlement system and the financial system as well as in terms of the safety of international transactions and fairness. The results of that study are eagerly awaited.
In light of this study, it would be appropriate to begin examining the development of a reporting system suited for cross-border transactions with electronic money.
(2) Further improvement of the off-shore market
In view of the activation of the financial and capital market in Japan, it is appropriate to continue examining the further development of the current off-shore market, in which securities may be added to the objectives of transactions to improve the mechanism of Tokyo's current off-shore market .
(3) Other
We should carrying out other necessary improvements.