Zeitschrift für Japanisches Recht

2. Jahrgang 1997 - Heft Nr.4

Globalization of Financial Markets and
Financial Regulation in Japan

Hideki Kanda

Contents

I. Introduction

II. Regulatory Trends in Japan: the Banking Sector

1. Dealing with the banking crisis

2. Regaining and enhancing the competitiveness of banks

III. Regulatory Trends in Japan: the Securities Sector

1. Fundamental dilemma in securities regulation

2. Deregulation of anti-competitive measures

3. Other trends

IV. Globalization of Financial Markets and the Japanese Response

1. Global standards for financial regulation?

2. Evaluating recent trends in Japan

V. Conclusion

I. Introduction

"During the past 20 years financial markets have changed and developed at an astonishing pace. The markets have expanded, globalized, integrated, disintermediated, and innovated at a rate unknown to history and in doing so have escaped the bonds of control traditionally provided by government officials and regulators. Market forces and disciplines now rule the global economy."

The astonishing growth of the global financial system inevitably affects, and is affected by, Japanese financial markets and Japanese financial institutions. Globalization of financial markets does not mean that there is one market on the earth. It means that many markets coexist in a multi-layer fashion, and they interact with one another. Financial transactions take place across the country borders and financial institutions and others act across the country borders in these multi-layer markets. Under this environment, a risk arisen in one market can easily be transmitted to another, but from a regulatory standpoint, it is difficult to regulate these multi-layer financial markets.

The interaction between Japanese and global financial markets, however, is not entirely clear. In December of 1989, a historical drop in stock prices on the Tokyo Stock Exchange began. Accelerated by the discovery of the "loss compensation scandal" in 1991, the stock price decline led to a sixty percent drop in the market in 1995. This market decline spread to real estate and other financial assets and led to the worst banking crisis in Japan's history driving the real economy into recession. Although this bursting of the stock market and real estate "bubbles" resulted in unheard damage to Japanese institutions and the national economy, it did not spread to other countries' markets.

From a Japanese perspective, however, the competitiveness of Japanese financial institutions and Japanese financial markets inevitably declined. Under these circumstances, Japan faced two fundamental issues related to its legal and regulatory systems.

First, Japan's traditional legal and regulatory systems were found to be insufficient to deal with bankrupting banks, securities companies and other financial institutions. The bankruptcy of banks or securities companies was almost unknown in Japan's history after