JIN-432 -- An inspector calls: financial regulation in Japan

J@pan Inc Newsletter

The 'JIN' Japan Inc Newsletter
A weekly opinion piece on social, economic and political trends
in Japan.
Issue No. 432 Wednesday September 19, 2007 TOKYO

Intellectual Property-Jury System-Arbitration-ALB Awards
PLUS Failed Businesses in Japan & Women in the Workplace

An inspector calls: financial regulation in Japan

In the midst of political crisis, business in Japan proceeds as
usual. New financial legislation comes out of the hands of the
legal bureaucracy, through one door of the Diet and out of the
other. But does it make any difference? This week’s newsletter
looks at the problems faced by foreign financial institutions
in Japan and questions whether the much-hyped arrival of new
laws to prevent the occurrence of scandals such as Livedoor and
Murakami, will stand any chance of making an impact.

At the end of this month the Financial Instruments and Exchange
Law will be enacted which is a key piece in a series of
legislation most commonly referred to as Japan’s Sarbanes-Oxley
(J-SOX) act. When asked by the Nikkei a few weeks ago about the
inclusion of hedge funds under this new law, finance minister
Watanabe responded:

‘We're not trying to use excessive rules to make Japan's markets
into a body of sterile water where fish cannot survive. We must
make them an environment in which fish from all over the world
can gather. When piranhas and other such species try to creep
in, then we need to expel them. We just want to create a
transparent and fair market that welcomes money from all corners
of the globe. We don't intend to make funds a whipping boy.’
(See http://www.nni.nikkei.co.jp/AC

Although it is easy to be alarmed by the figuring of funds as
carnivorous entities, there is little substance in such
statements that people working in the finance industry can take
offence at. What is perhaps more worrying is that although
Japan’s leaders make such statements about turning Japan into a
happy pond where fish from all over the world can play together,
this is apparently not backed up by the pond authorities and if
you happen to be foreign, avoiding the rod of the regulator is
that much harder. The point is easily illustrated by a look at
the inspection system, when the Financial Services Authority
(FSA) actually decides to go in and investigate.

Peter Godwin, partner at Herbert Smith, Tokyo, told us that
while it is right that the regulators, government and financial
industry must protect the consumer, when it comes to inspections
‘what happened under the old rules, and I’m sure that it will
continue under the new, is that junior and middle ranking
inspectors believe it is their job to find something wrong.’
Lacking good communication between the companies, banks,
auditors and regulatory bodies, inspectors in Japan are a law
unto themselves. Inspectors, who can turn up in droves at only
a moment’s notice, often believe that if they don’t find
something wrong, then they haven’t done their job properly. As
are result, Godwin continues, ‘minor issues get blown out of
proportion and create a world of pain for the banks that is
simply unnecessary.’

[Continued below...]
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[...Article continues]

Dominic Roughton, also a partner at Herbert Smith gave us the
example of a group of inspectors who came across a formula for
an interest rate where the denominator was a zero. The equation
thus working out to an infinite number was quite naturally over
the maximum limit allowed by the FSA, ‘but the formula was
entirely theoretical, nobody was paying this rate, but the
investigators had to check with a lawyer—appointed by the FSA—
and a business improvement order was issued.’ Such practices are
widespread and it appears that foreign banks are much more
likely to be hit. Last year the FSA openly announced on its
website that it was going to focus on foreign institutions
leading to a wave of protests from the European Business Council
(EBC) and the American Chamber of Commerce in Japan (ACCJ). This
year, although there has been an absence of such blatantly
anti-foreign statements, investigations have been carried out
with their normal ‘ruthless inefficiency’ that both Godwin and
Roughton believe to be seriously holding Japan back from
becoming an international financial centre along the lines of
Hong Kong or Singapore.

That said, the J-SOX legislation will force both Japanese and
foreign corporations to be more transparent and, although it
will take a long time to implement, and for staff to be
properly trained as to its requirements, it should help prevent
the corrupt practices that it is was designed to deal with. An
executive at one of the major accountants told us that ‘J-SOX
will help prevent misleading financial data and insider
trading.’ He added, that the recruitment process will be the
largest challenge and that auditors ‘have to work with the FSA
and understand that we have the same objectives.’ However,
Godwin and Roughton claim that this cooperation is not yet
taking place and that auditors, as well as heads of compliance
at the banks are effectively subordinates to the wills and
whims of the FSA. Without more communication, the J-SOX could
provide more reasons for inspectors to investigate foreign banks
and companies and could thus ultimately cause more headaches
than it cures.

One of the fora where dialogue and collaboration can slowly be
achieved is through the International Bankers Association (IBA)
of Japan. Committed to making Japan a global financial center,
but sensitive to the concerns and process of the bureaucracy,
the IBA has gone some way to bridging the gap between the banks,
corporations and the regulator. In their ‘Recommendations to
Promote Tokyo as a Global Financial Center’ published earlier
this year (accessible at http://www.ibajapan.org/), the IBA
makes a number of recommendations in the hope of making Tokyo
a friendly home for international trade and investment.
Addressing the concerns of many concerning the J-SOX and
targeting of foreign firms, it recommends that the authorities
‘ensure to ease the so-called ‘J-SOX’ requirements as applied
to foreign firms which have already filed equivalent reports
in other major markets so that any additional burden for them
to meet the requirement shall in fact be minimized.’ This aims
to address the fear within the industry that the FSA or the
government may, as they have done in the past, demand that
compliance procedures be re-made specially for Japan even if
they already meet international standards.

[Continued below...]

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[...Article continues]
A number of IT firms view the J-SOX as an opportunity. Having
created software elsewhere that takes care of compliant auditing
procedures, some IT companies such as Dell and Protiviti are
trying to sell their compliance software in Japan as they have
already had experience with US SOX. Agreeing that there are only
about a dozen Japanese tax lawyers well-equipped to deal with
the new legislation Simon Dealy, Chairman of Control Solutions—
also a SOX specialist IT firm—told us that IT software is one
of the ways in which Japan can adjust to the ‘globalization of
the legislation landscape.’ Control Solutions have adapted IT
systems for the Japanese version of SOX legislation that will
enable companies to meet internal auditing standards and
facilitate such requirements as quarterly reporting. Dealy
explains that, like it or not, the only way to deal with the
new legislation is to comply or be liable to severe penalties.
He argues that the best way to prepare is for the people at the
top to take the initiative, make sure they have IT support in
place and be well versed in the details of the requirements.

If the accounting, IT and recruitment difficulties can be
overcome on the side of the banks and corporations, then it
is down to the FSA and organizations such as the IBA to ensure
that the legislation is implemented fairly and efficiently,
which at the moment, is seemingly far from the reality.
Long-term, there is the potential for the new regulations to be
a real positive, particularly with the emphasis on transparency
and accountability, but in the meantime, life in the pond looks
as unpredictable as ever.

By Peter Harris
Chief Editor

Want to comment? It is now even easier to voice your opinion
than ever before! Simply visit www.japaninc.com/jin432 and
post a comment below the article. Alternatively, you can email
it directly to the author at peter.harris@japaninc.com


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Last week's article on Jews in Japan (www.japaninc.com/jin431)
stated that the Russo-Japanese war of 1904-5 concerned the
struggle for influence between Japan and Russia in Southern
China. More accurately the war was fought over the fight for
dominance over Korea, Manchuria and Northeasten China. JIN
thanks Sachiko Tado Iwao for bringing this to our attention.


RidgeRunner Niseko
International Cricket Competition 15-17 September 2007

This is your invitation to three days of fun at an
international cricket tournament in Niseko being held to
the benefit of the Tyler Foundation for Childhood Cancer.

Cricketing legend Dennis Lillee will be attending the event
which is being co-hosted by the Higashiyama Prince Hotel and
includes two days of cricket, a golf match and charity
dinner dance and auction.
For more information, and the chance to win a
dinner with Dennis,

please visit www.ridgerunner.jp/cricket
or contact Simon Jackson
(simon@rad-development.com, 011-876-3704)

------------------- ICA Event-Sept 20 -------------------


Speaker: Tim Williams, Founder and Director of Value Commerce
Topic: Japan Success Stories - Value Commerce

Details: Complete event details at http://www.icajapan.jp/
(RSVP Required)
Date: Thursday, September 20, 2007
Time: 6:30 Doors open
(Light buffet, beer, wine, soft drinks included)
Cost: 3,500 yen (members), 5,500 yen (non-members)

Open to all-location is Australian Embassy B2


YMCA Foreign Community Support Committee (FCSC) Charity Ball
on September 28th at Hilton Shinjuku. Donation of 25,000yen
person. Table of 10 = 10% discount.

Champagne, wine, dinner, live band and dancing, raffle draw,
and auction featuring authentic signed items:
Guitars by Eric Clapton and Keith Richards, David Beckham's
jersey, Michael Schumacher's F1 Glove, baseball bat by Ichiro,
photo Johnny Depp, Brad Pitt, Valentino Rossi, and much more!

Bid on these rare items from Aug 23rd at
All proceeds to benefit YMCA's Challenged Children Project.
Please contact: 03-5367-6640 fcsc@ymcajapan.org

Start a Company in Japan

Entrepreneur's Handbook Seminar 6th of October, 2007

If you have been considering setting up your own company,
find out what it takes to make it successful.
Terrie Lloyd, founder of over 13 start-up companies in Japan,
will be giving an English-language seminar and Q and A on
starting up a company in Japan.
This is an ideal opportunity to find out what is involved,
and to ask specific questions that are not normally answered
in business books.
All materials are in English and are Japan-focused.

For more details: http://japaninc.com/terrie_lloyd/


Japan's First Family Social Network is here! www.piqniq.jp

Are you raising a family in Japan? Do you speak English?
Would you like to meet other English speaking families in
your area? Piqniq is a Social Network Service tailored
specifically for you!
Our concept is "Families helping Families" and we invite
anyone that wants to meet other families, help other families,
or discuss family-related issues pertinent to life in Japan
to come and join the Piqniq today!

For more information: www.piqniq.jp