JAPANESE CAPITAL MARKET LIBERALIZATION AND INTERNATIONALIZATION OF THE YEN

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85M00364R000400550012-8
• Release Decision: RIFPUB
• Original Classification: C
• Document Page Count: 11
• Document Creation Date: December 22, 2016
• Document Release Date: May 8, 2009
• Sequence Number: 12
• Publication Date: October 19, 1983
• Content Type: REPORT

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CONFIDENTIAL
JAPANESE CAPITAL MARKET LIBERALIZATION
AND INTERNATIONALIZATION OF THE YEN
10/19/83
SIG-IEP
Since this Administration took office, Administration officials
have pressed the Japanese to open their capital markets to allow
greater foreign participation and increased internationalization
of the yen. Although the Japanese have taken a number of steps in
this direction, partly in response to U.S. pressure, many restrictions
remain, and fundamental steps toward liberalization have not been
forthcoming.
Recent concerns about the yen/dollar exchange rate and Japan's
growing trade surplus with the United States have exacerbated pro-
tectionist pressures in this country, and underscored the need for
bold and comprehensive action by the Government of Japan to liberalize
their capital markets and allow the yen to become more fully inter-
nationalized. Such developments would help ensure that the value
of the yen more fully reflected market forces.
Several measures aimed at liberalizing Japan's capital markets
are expected to be announced shortly by the GOJ as part of a broader
package of measures aimed at stimulating Japanese economic growth
and slowing the growth of Japan's trade and current account surpluses.
Those measures reportedly will include:
liberalization or elimination of restrictions on real
estate investment;
-- elimination of restrictions on foreign stock acquisition
of certain firms; and
-- announcement of Japanese Government agency bond-issues
(dollar denominated) in the New York.
While measures of this nature would be steps in the right
direction, they would have little impact on the overall investment
climate in Japan and therefore must be supplemented by further,
more significant steps. Following are two lists of possible additional
steps which we could press the Japanese to take in order to accelerate
the liberalization of their capital markets and internationalization
of the yen. The first list contains those measures to which we might
attach high priority for immediate action. The second list contains
measures which are also important to the longer-term process of
capital market liberalization, but which do not appear to be as
important in terms of immediate action. A third list of possible
steps which Japan could take in the area of direct investment also
is attached for the group's review.
NSC review completed.
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The ranking of items within each list is not necessarily accord-
ing to priority of importance; nor does the fact that an item appears
on the second list suggest that it is of less importance than items
appearing on the first list. It simply means that those items may
be logical candidates for attention over the course of our discussions
with the Japanese.
Some of the measures might, if taken in isolation, tend to
weaken the yen in the foreign exchange market in the short-term
(e.g., the elimination of the queuing system for foreign borrowing
in Japan). Other measures, however, (including many of the "immediate
priority actions") could tend to strengthen the yen in the short-term.
In addition, while some analysts disagree, a strong case can be made
that if many of these steps were taken as a "package," and if the GOJ
were firmly committed to the opening of its capital markets, such a
package would make the yen a more attractive currency.
In the attached lists, we have indicated to the best of our
knowledge the current GOJ policies toward the items in question.
However, changes in official regulations or policies do not always
mean immediate changes in practice. In addition, administrative
guidance given by financial authorities to Japanese firms is not
always possible to detect, in some cases because the issue is not
now active due to market considerations (e.g. there is little
interest at this time in foreign borrowing in the Japanese market).
As a result, it is not always entirely clear precisely what "current
policy" with respect to some items really is.
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Immediate Priorit Actions by Government of Japan
to Liberalize Japanese Capital Markets
and Internationalize the Yen
1. Eliminate Japanese tax withholdin on interest earnin s b all
nonresidents. Short of total elimination, seek elimination of
tax withholding on Euro-yen bonds and securities.
BACKGROUND: Non-official nonresidents subject to 20 percent
withholding tax, except where bilateral tax treaty stipulates
otherwise (10% for U.S.). Foreign official interest earnings
exempt from withholding. Elimination of withholding would make
investment in yen assets more attractive to foreigners.
2. Liberalize regulations on en-denominated certificates of deposit:
a) Remove ceilings on total amount of CDs which can be issued
by each bank;
b) eliminate minimum denomination for individual CD;
c) allow CDs to be freely negotiable.
BACKGROUND: Despite recent increase of ceiling on total amount of
CDs which can be issued by each bank to 30% of yen assets for
foreign banks (75% of capital for domestic banks), ceilings
limit banks' ability to raise yen funds. Minimum denomination
roughly $2 million (yen 500 million); to be reduced to roughly
$1.3 million (yen 300 million) by the end of 1983. CDs cannot
be traded without permission of issuing bank. Raising ceiling
and making CDs freely negotiable would make market much more
liquid and hence attractive to foreign and domestic investors.
Lower denomination would provide greater investment opp
for small and medium sized investors.
3. Reinforce rowin market pressures for libee;alization of controls
on government debt by following measur e
debt at market-determined interest rates;
b) encourage further diversification of the maturity structure
of official debt instruments, including increased reliance on
short term T-bills;
c)'encourage development of an active secondary market;
d) permit all banks (not just syndicate members) to trade in
Japanese Government securities.
BACKGROUND: This proposal would entail a substantial changesin
current GOJ system of debt management. GOJ below market rates only to syndicate of banks and securities firms
(Citibank has applied to join and would be the first foreign
bank to belong.) Only syndicate members may sell government
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debt to the public; foreigners permitted to purchase government
securities only upon resale by syndicate members. Secondary
market activity limited due to requirement that underwriting
syndicate hold debt 100 days before resale. (More active secon-
dary market could develop as ten-year debt issued in 1975 nears
maturity.) T-bills now issued on a limited basis, primarily for
cash management purposes, and must be redeemed within fiscal
year of issue.
GOJ debt concentrated in ten-year instruments, although steps
have been taken in recent years to diversify maturities. GOJ
reportedly considering further diversification of official debt
beginning in 1985, when ten-year debt issued in 1975 must be
rolled over and a large amount of new debt issued as well.
GOJ not likely to accept nonsyndicate trading in government
securities, since it would undermine the current system of govern-
ment debt management.
4. Action by GOJ to make membership of the Tokyo Stock Exchange
economically feasible for foreign securities firms by reducing
the security deposit requirement.
BACKGROUND: Although foreign firms have technically been permitted
for over a year to join the Tokyo Stock Exchange, the financial
commitment required (roughly $5 million in cash) makes membership
economically unfeasible for foreign firms. (No seats are currently
available, but the GOJ would almost certainly "find" one if a U.S.
firm were interested.) A seat costs roughly $1 million; the
remaining $4 million is a required security deposit to ensure
the firm can meet its obligations. U.S. firms, already subject
to SEC minimum capitalization requirements, would thus have to
bear a double burden.
In contrast, Japanese firms can readily join U.S. securities
exchanges because financial commitment is the cost of tie seat,
appropriate bonding (security deposit in cash not required), and
maintaining capitalization of U.S. subsidiary at or above minimum
SEC levels. GOJ should take account of capitalization requirement
in the United States and other foreign countries in setting level
of security deposit for foreign firms.
5. Extend 73% commission rebate on Japanese securities traded in Tokyo
to foreign securities firms with representative offices in Japan.
BACKGROUND: All non-members of the Tokyo Stock Exchange must
pay a commission for execution of trades on the exchange. Current
securities industry rules allow rebate of 73 percent of commission
only to foreign firms with branches in Japan. Extending rebate
to foreign firms with representative offices as well vitally
important; would enable them to compete more effectively with
Japanese firms in selling Japanese securities, especially in the
United States, thereby facilitating foreign investment in Japanese
securities.
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6. Take decisive steps to liberalize and encourage the development
of forward foreign exchange markets.
BACKGROUND: Use of the forward exchange markets currently limited
to underlying real transactions such as trade. Liberalization
and development of forward market could enhance willingness of
investors to purchase and hold yen.
7. Public GOJ statement that it desires increased denomination of
Japanese exports in yen. GOJ also could encourage Japanese trading
companies to hold a significant portion of their working balances
in yen, not dollars.
BACKGROUND: Currently between thirty and forty percent of Japan's
exports are denominated in yen (up sharply in recent years) and
only two to three percent of imports. Increased yen denomination
of Japan's exports would eliminate exchange risk for Japanese
exporters and could stimulate use of the yen in international
trade and finance, although it could face some resistance by
importers (including U.S.) reluctant to deal in yen.
8. Make official statement confirming that foreign firms are permitted
to lead manage foreign security/bond issues in Japan.
BACKGROUND: All U.S. firms with branches in Japan are licensed
to do so, but tradition and their small size have prevented them
from being lead managers. (One U.S. firm in 1982 co-lead-managed
a yen issue in Japan by a U.S. corporation.)
9. Publicly reaffirm past statements that applications for branches
of foreign securities firms will be processed expeditiously.
BACKGROUND: Application process remains tedious (can take over a
year) despite government efforts to make it simpler. (by such
means as setting up "information offices" last year). Periodic
prodding by the U.S. Treasury still necessary to facilitate
application process.
10. Authorize establishment of off-shore banking facilities for
yen and foreign currencies, similar to the International Banking
Banking Facilities (IBFs) recently established in New York.
BACKGROUND: Current Japanese policy implicitly prohibits
establishment of such facilities, although there has been no
official statement on the question. Governmental support for
establishment of such facilities could be an important step in
overall internationalization of the yen, affording foreign in-
vestors an opportunity to purchase, borrow and lend in yen free
of interest rate controls, reserve requirements, etc.
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11. USG indication to GOJ that USG would support borrowings by GOJ
a gencies in New York or other overseas capital markets.
BACKGROUND: Initial GOJ agency borrowings likely to be announced
as part of October economic package. Although direct market
effect on yen/dollar rate likely to be minimal, could have
psychological effect on foreign exchange markets, strengthening
the yen.
12. GOJ action to accelerate interest rate liberalization on all
instruments, including bank deposits and postal savings deposits.
BACKGROUND: Ceilings exist on bank savings and postal savings
accounts, although most short-term lending rates are market
determined. Most long-term rates are administered. Removal of
interest rate ceilings could make yen deposits/investments more
attractive for both Japanese and foreign investors.
13. Permit foreign lawyers and other professionals to practice
in Japan.
BACKGROUND: While this is not a "capital-market liberaliza-
tion measure" per se, it could significantly facilitate foreign
investment in Japan. Current regulations effectively prevent
foreign lawyers from practicing in Japan. Changes in these
regulations could make it easier for foreign investors and
businesses to do business in Japan, thus helping draw capital
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Longer-Term Priority Actions by Government of Japan
ital Markets
C
to
nonprudential a
i Eliminate
BACKGROUND: MOF "guidance" for April-September, 1983 period
is about $3 billion in yen lending and about $8 billion in
foreign currency lending. Removing the ceiling on yen
would facilitate foreign, e.g. U.S., borrowers' access to yen
financing and generally facilitate the internationalization
of the yen. (At present there is little foreign interest in
borrowing yen in light of the expectation that the yenwil
strengthen, though this could change with a stronger yen.)
Remove limits on foreign banks' "swap" positions, unless needed
rudential ur oses.
BACKGROUND: BOJ sets limits on each bank's ability "swap
in" funds by selling dollars for yen po foreign
in ign
exchange market and making an offsetting the s p the
forward market. Thus, ability to "swap in" funds provides
another, possibly lower cost, funding alternative for foreign
banks, enabling them to compete more effectively in
taking the
yen loans. Increases in "swap" limits recently gran
of past utilization. Removal would contribute modestly
to promoting market detlmarkets~f intereastlsroatiesncrebyasiencfreoreasiignng
links with foreign capital
banks' yen lending activities. (Increased swap limits for foreign
banks would put them in a preferential position vis-a-vis Japanese
banks, which are subject to strict position requirements.)
3. Relax collateral and other requirements that ma
discriminate against foreign borrowers.
BACKGROUND: Japanese security issues are traditionally on
collateralized basis, debthinU.S. firm denturess cannot
covenants in existing
issuing on an unsecured basis in terms of net worth, assets,
As a
and income so stringent few U.S. firms would qualify.
practical matter, exceptions have beenhmahas in de to enableeU.S. l to
corporations to issue in Japan -
pressure for easing the standards for Japanese issuers as well
-- but the standards are still officially in effect.
4. Establish an independent stock/bond ratin s stem for Ja anese
securities.
BACKGROUND: Would facilitate issuance of securities on a
non-collateralized basis and familiarize Japanese investors
with concept of ratings rather than collateral, making them
more receptive to U.S. securities.
ap
Liberalize Japanese
and Internationalz.ze the Yen
nareaate limits on banks
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5. Permit all Japanese residents to maintain Alen and forein
currenc accounts with overseas banks and securities firms.
BACKGROUND: Except for roughly fifty major financial
institutions, Japanese residents are prohibited from doing so.
Would be an extremely important step in removing capi alo
controls by removing a key control mechanism. Would al
facilitate capital flows and permit foreign firms without
branches in Japan to compete for business currently going to
Japanese firms.
6. Make public statement that Trade associationslintwhichodecisions
become members of relevant trade
affecting their business are being made.
BACKGROUND: While decision is up to trade asociations,G ho
do not welcome foreign competitors, public s
could facilitate membership of foreign firms. While foreign
firms can become full members in some cases, in others they are
only allowed to participate informally. For example, American
Express is now allowed (after USG intervention) to participate
in informal group drawing up specificationsfor credit cards,
but it is not a full member. Important to establish principle
that foreign firms can join; as apractical
aumatter, tomatedUdata exchange.
are now full members in clearing house
7. Make a public statement indicatin that securities denominated
in foreign currencies ma be freely issued in the Japanese market.
BACKGROUND: Bonds denominated in foreign currencies have been
issued in the Japanese capital market in the past, although
none has been issued in the past three orfour t
invuld
ment
strengthen role of market forces by providing another s
alternative.
8. Make ublic statement that Japanese firms are free to use
forei n investment banks when issuin securities overseas.
BACKGROUND: No formal requirement, but issues of anesurities
corporations now invariably led or co-led by Japanese
firm. (Until five or six years ago, U.S. investment banks led
all dollar-denominated Eurobond issues of Japanese corporations,
and then all at once every such issues was led by a Japanese
firm.) Informal MOF "advice" to firms to include a Japanese
securities firm in a leading role provides another mechanism
for controlling financial activities of Japanese firms abroad.
rnMFT fENTIAL
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9. Permit foreign certificates of deposit and commercial paper to
be traded in Japan.
BACKGROUND: Decision to allow this announced over a year ago.
Implementation still awaited, pending strengthening of the yen.
Would be another step towards liberalizing Japans capital markets
(by providing another investment alternative) and facilitating
international capital movements.
10. Eliminate queuing system for foreign firms and governments
wishing to borrow in Japan.
BACKGROUND: Size of individual public issues limited to $45
to $90 million, and securities industry "consults" with MOF
to~avoid market "congestion." Relatively unimportant now,
due to low level of foreign interest in yen borrowing, but
could become crucial when such interest reappears.
11. Inform GOJ that U.S.G. would support GOJ's efforts to permit
GOJ to issue debt instruments overseas, both in yen and in
foreign currencies.
BACKGROUND: Currently under considerabion by the GOJ. Issuing
debt abroad currently prohibited by law. Would enable GOJ to
issue securities abroad in its own right rather than only
through agencies. While actual effect on the yen would depend
on the size of the issues, psychological effect (strengthening
the yen) could be more significant.
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Priority Actions by Government of Japan
to Liberalize Direct Investment
1. Amend the investment notification and a roval Provisions of
the Foreign Exchange and Forei n Trade Control (Forex) Law to:
a) eliminate 30 day waiting period, moving to a post-investment
notification system for both new investments and expansion
of existing investments
b) exclude ministries other than Finance
c) eliminate criterion relating to adverse effects on Japanese
enterprises or the national economy
BACKGROUND: The Forex Law requires investors to notify proposed -
investments to the Ministry of Finance 30 days prior to the invest-
ment. If MOF or other concerned ministries do not object to the
investment or call for alteration of the proposal, the investment
may proceed as planned. These amendments should remove some uncer-
tainty and confusion that may be created by the current system.
Items b and c would narrow the scope for GOJ review of investment
applications.
The GOJ is likely to claim that the notification process does
not hamper foreign investment, but may consider some modification.
2. Eliminate "designated company" method of limiting foreign owner-
ship, also take other actions to facilitate acquisition of
financial and non-financial enterprises.
BACKGROUND: GOJ has authority to limit total foreign investment in
"designated companies" in four industries (agriculture, oil, mining,
and leather) and in other firms on national security grounds (e.g.
atomic energy). Elimination of the designated company list may be
included in the October economic stimulus package. Other steps may
be more difficult to achieve.
3. Reaffirm publicly that access to government procurement oppor-
tunities, R&D fundin , industry rationalization schemes and
similar programs are o Den to foreign-owned firms on a national
treatment basis.
BACKGROUND: GOJ indicated at recent bilateral investment consultations
(October 13 and 14) that it will implement Forex Law according to
OECD principles and thus will extend national treatment to foreign
investors. Similar language also appears in new bilateral High
Technology Agreement. GOJ should be willing to agree to this request.
Issue clouded, however, by uncertainty over precise meaning of
"national treatment". GOJ now discriminates among domestic firms
in programs listed above; will GOJ also discriminate among foreign
firms? Does USG sup ort or approve of such discrimination, even if
it implies national treatment.
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4. Increase the transparency of Japanese investment regulations,
clearl delineating all stews necessar to make an investment
in all sectors.
BACKGROUND: The Japanese Export Trading Organization (JETRO) has
issued publication, "How Can Foreign Affiliates Succeed in Japan",
which outlines some of the procedures to follow in investing in
in Japan. GOJ might be willing to consider a more detailed
publication.
5. Take "affirmative action' reasures to facilitate foreign
investment.
BACKGROUND: GOJ might argue that former Prime Minister Suzuki
stated publicly that Japan welcomes foreign direct investment.
HowevLar, GOJ may accept the idea of other types of affirmative
action, such as creating an office of investment ombudsman.
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