Financial Services Agency Research Articles

Issues affecting decisions on mandatory adoption of International Financial Reporting Standards (IFRS) in Japan

Purpose – The purpose of this paper is to explore whether there are differences in either the level of support for the mandatory adoption of International Financial Reporting Standards or the arguments made by various stakeholder groups within Japan’s Business Accounting Council (BAC) during different time periods from 2009 to 2013. Design/methodology/approach – Using a content analysis of related BAC meetings and referring to Gernon and Wallace’s (1995) accounting ecology framework, this study provides rigorous and holistic insights into the debates concerning the adoption of IFRS in Japan. Time-series analyses are specifically applied to unravel continuous or discontinuous patterns of BAC members’ statements. Findings – The results indicated significantly higher levels of disapproval of mandatory adoption of IFRS by representatives from accounting academics, manufacturing industry, and the Financial Services Agency than by those from the Japanese Institute of Certified Public Accountants. Also, a lower level of disapproval of mandatory adoption of IFRS was found in 2009 than in 2012 and 2013. The results further demonstrated that diversity of opinions and arguments existed in different stakeholder groups as well as in different time periods. Research limitations/implications – The findings of this study suggest that accounting research will be enhanced by an objective and critical examination of the sociological context of the globalization (convergence) process. Originality/value – The results of this study will provide answers related to the possible, probable, and desirable aspects of the globalization (convergence) process by unraveling the causes and consequences of certain patterns presented in BAC members’ statements.

Effects of Price Regulations and Dark Pools on Financial Market Stability: An Investigation by Multiagent Simulations

SummaryWe built an artificial market model and investigated the impact of large erroneous orders on financial market price formations. Comparing the case of consented large erroneous orders in the short term with that of continuous small erroneous orders in the long term, if amounts of orders are the same, we found that the orders induced almost the same price fall range. We also analysed effects of price variation limits for erroneous orders and found that price variation limits that employ a limitation term shorter than the time erroneous orders exist effectively prevent large price fluctuations. We also investigated effects of up‐tick rules, adopting the trigger method that the Japan Financial Services Agency adopted in November 2013.We also investigated whether dark pools that never provide any order books stabilize markets or not using the model including one lit market, which provides all order books to investors, and one dark pool. We found that markets become more stable as the dark pool is increasingly used. We also found that using the dark pool more reduces the market impacts. However, if other investors’ usage rates of dark pools become too large, investors must use the dark pool more than other investors to avoid market impacts. When a tick size of a lit market is larger, dark pools are more useful to avoid market impacts. These results suggest that dark pools stabilize markets when the usage rate is under some threshold and negatively affect the market when the usage rate is over that threshold. Our simulation results suggest the threshold might be much larger than the usage rate in present real financial markets.This study is the first to discuss whether or not several concrete and actually adoptable regulations, including those that have never been employed (e.g. price variation limits with various parameters), could prevent large fluctuations of market prices, including those beyond our experience, using artificial market simulations, and to discuss quantitatively how spreading of dark pools beyond our experience could affect market price formations using the artificial market simulations. In short, this study is the first study to comprehensively discuss how regulations and financial systems beyond our experience could affect price formations using the artificial market simulations. Copyright © 2015 John Wiley & Sons, Ltd.

Web-based Data Analysis System Using the Content on New EDINET Site Operated by the Financial Services Agency

Web-based Data Analysis System Using the Content on New EDINET Site Operated by the Financial Services Agency

Impact of policy changes on the efficiency and returns-to-scale of Japanese financial institutions: An evaluation

This paper examines the impact of FSA's (Financial Services Agency) recent policy changes on the efficiency and returns-to-scale (RTS) of Japanese financial institutions including banks, securities companies and bank holding companies. Three kinds of efficiency are investigated namely, technical efficiency (TE), pure technical efficiency (PTE) and scale efficiency (SE) using the non-parametric methodology named data envelopment analysis (DEA). The DEA analysis shows a substantial improvement in the overall efficiency of Japanese banks, albeit a significant difference of efficiency scores between the major/city banks and the regional banks. Results are robust to alternative specifications of efficiency and scale changes.

The Impact of XBRL Adoption on theInformation Environment: Evidence from Japan

This article investigates whether and how the Japanese Financial Services Agency’s mandatory use of XBRL affects investors in assessing financial information. Although regulators expect the introduction of XBRL to enhance the transparency and quality of business reporting, given the non-trivial implementation and learning costs, whether the XBRL-based disclosure reduces the information asymmetry between sophisticated and less-sophisticated investors remains an empirical question. As prior studies in other countries employing mandatory XBRL adoption provide mixed results, our analysis of the Japanese case should be somewhat insightful because Japan is one of the few countries where thousands of listed firms were forced to use the XBRL format all at once. By examining various measures in the pre- and post-XBRL periods, we provide evidence consistent with the notion that the adoption of XBRL has helped to improve the information environment, as indicated by the reduction of event returns volatility, absolute cumulative abnormal returns, changes in the standard deviation of returns, and the abnormal bid-ask spread.

家庭どうぶつの保険と，その関連データを活用した予防啓発活動

Anicom has acquired the license of operating “Animal health insurance” from the Financial Services Agency and has now been issued the insurance policies to more than 430 thousands animals (89% dogs, 10% cats, and 1% birds/rabbits/ferrets) as at December, 2012.When animals are registered to Anicom’s insurance system, the individual data (species, breed, sex and age etc.) of animals are recorded in the computer database systems. Information on insurance coverage such as disease classification, time, breeds, areas and hospital, can be accumulated in above computer database. These insurance coverage data can be utilized for epidemiological study on animal diseases and the results can be useful in preventing future disease occurrence. For example, foreign body ingestions by dogs are dangerous behavior which can result in deaths, and careful monitoring of these behaviors should be carried out by veterinary personnel. We investigated data in regard to incidence of foreign body ingestion in order to understand the current situation and to prevent future incidence.Dogs can be a good sentinel animals for human health since environmental conditions and many diseases are shared between dogs and humans. We are trying to expand our epidemiological research using insurance data for the sake of mutual benefits and bonds between animals and humans.

The Impact of XBRL Adoption on the Information Environment: Evidence from Japan

This article investigates whether the Japanese Financial Services Agency’s mandatory use of XBRL affects investors in assessing the financial information. Although regulators expect the introduction of XBRL to enhance the transparency and quality of business reporting, given the non-trivial implementation and learning costs, whether the XBRL-based disclosure improves the information environment is an empirical question. As prior studies in other countries provide mixed results, our analysis of the Japanese case should be quite insightful, because Japan is one of the few countries where thousands of listed firms were forced to use the XBRL format all at once. By examining various measures in the pre- and post-XBRL periods, we provide evidence consistent with the notion that the adoption of XBRL has helped to improve the information environment, as shown by the reduction of event returns volatility, absolute cumulative abnormal returns, changes in the standard deviation of returns, and abnormal bid-ask spread.

The Relationship between the Government and the Private Sector under the Financial Regulation System since the Establishment of the Financial Services Agency (FSA) : Based on the Results of the survey on the Recognition of the Financial Regulators in Japan

The Relationship between the Government and the Private Sector under the Financial Regulation System since the Establishment of the Financial Services Agency (FSA) : Based on the Results of the survey on the Recognition of the Financial Regulators in Japan

Audit Quality and Auditor Reputation: Evidence from Japan

ABSTRACT We study events surrounding ChuoAoyama's failed audit of Kanebo, a large Japanese cosmetics company whose management engaged in a massive accounting fraud. ChuoAoyama was PwC's Japanese affiliate and one of Japan's largest audit firms. In May 2006, the Japanese Financial Services Agency (FSA) suspended ChuoAoyama for two months for its role in the Kanebo fraud. This unprecedented action followed a series of events that seriously damaged ChuoAoyama's reputation. We use these events to provide evidence on the importance of auditors' reputation for quality in a setting where litigation plays essentially no role. Around one quarter of ChuoAoyama's clients defected from the firm after its suspension, consistent with the importance of reputation. Larger firms and those with greater growth options were more likely to leave, also consistent with the reputation argument. Data Availability: All data in the paper are publicly available from the sources described in the text.

Audit Quality and Auditor Reputation: Evidence from Japan

We study events surrounding ChuoAoyama’s failed audit of Kanebo, a large Japanese cosmetics company whose management engaged in a massive accounting fraud. ChuoAoyama was PwC’s Japanese affiliate and one of Japan’s largest audit firms. In May 2006, the Japanese Financial Services Agency (FSA) suspended ChuoAoyama for two months for its role in the Kanebo fraud. This unprecedented action followed a series of events that seriously damaged ChuoAoyama’s reputation. We use these events to provide evidence on the importance of auditors’ reputation for quality in a setting where litigation plays essentially no role. Around one quarter of ChuoAoyama’s clients defected from the firm after its suspension, consistent with the importance of reputation. Larger firms and those with greater growth options were more likely to leave, also consistent with the reputation argument.

Japan: IOSCO Objectives and Principles of Securities Regulation: Detailed Assessment of Implementation

This report analyzes the functioning of the legal and regulatory framework for the securities market in Japan. The Financial Services Agency (FSA) enjoyed specific powers with respect to the various security laws and regulations laid down by the International Organization of Securities Commission (IOSCO). The FSA has been authorized to bring about certain changes, to implement new principles, and to develop new frameworks to ensure and strengthen the smooth functioning of supervision and investigation. It is also necessary to identify and assess risks to determine FSA intervention.

What kinds of credit associations favour introducing new financial technology?

Since 2003, the Financial Services Agency (FSA) has set relationship banking enhancement program as an important strategic task to improve the functions of regional financial institutions. In this enhancement program, the FSA recommended that regional financial institutions introduce new financial products such as collateralized loan obligations (CLOs) and collateralized bond obligations (CBOs). However, this was left up to each institution's discretion rather than being mandatory. This resulted in a large difference in the introduction of new products. Therefore, this article has analysed what kinds of credit associations favourably increased the use of new financial products. As a result, it has been confirmed that the larger their lending shares and management scale and the better their business conditions are, the more positively they work on the introduction of new products. Considering the fact that relationships between financial institutions and enterprises tend to be fixed in Japan, this means that medium and small enterprises will have restrictions on the financial products they can use depending on the situation of their main banks.

A new systems engineering approach for a Socio‐Critical System: A case study of claims‐payment failures of Japan's insurance industry

AbstractSince the 1950s there have been numerous contributions proposing solutions to failures of social systems. However, we have hardly found a holistic and interdisciplinary approach to a failed social system beyond “stove‐piped” academic disciplines. This paper identifies a new holistic and interdisciplinary systems engineering methodology of systems engineering for a social system through a case study of Japan's insurance industry. The new methodology is a “soft” systems‐approach to accommodate goals of stakeholders in a failed social system. First, the three elements of a social system are identified. Second, the multiple viewpoint model transforms these three elements of the human activity view to a new set of elements of the Holon view. Third, a social system of the Holon view is redefined as a Socio‐Critical System (SCS). Finally, the Vee Model is applied for fixing a problem in the SCS. From 2005 to 2008, massive claims‐payment failures cases were found in Japan's private insurance companies. They became big social scandals. The insurance claims‐payment system is a typical SCS. The Financial Services Agency (FSA), Japan's financial services supervision authority, identified, with the “unintended” systems approach, dysfunctions of the insurance claims‐payment system. This FSA action, even though the authority was not aware of the effectiveness of the methodology, proved to be positive in applying the Vee Model for solving failures in those claims‐payment systems. © 2011 Wiley Periodicals, Inc.

What Kinds of Credit Associations Favor Introducing New Financial Technology?

Since 2003, the Financial Services Agency has set relationship banking enhancement program as an important strategic task to improve the functions of regional financial institutions. In this enhancement program, the FSA recommended that regional financial institutions introduce new financial products such as collateralized loan obligations (CLOs) and collateralized bond obligations (CBOs). However, this was left up to each institution’s discretion rather than being mandatory. This resulted in a large difference in the introduction of new products. Therefore, this paper has analyzed what kinds of credit associations favorably increased the use of new financial products. As a result, it has been confirmed that the larger their lending shares and management scale, and the better their business conditions are, the more positively they work on the introduction of new products. Considering the fact that relationships between financial institutions and enterprises tend to be fixed in Japan, this means that medium and small enterprises will have restrictions on the financial products they can use depending on the situation of their main banks.

The Japanese FSA's efforts to make their payment and settlement systems more attractive to foreign markets

The Financial Services Agency (FSA) is making efforts to enhance the security, efficiency and convenience of the payment and settlement systems on behalf of Japan's markets in order to strengthen their competitiveness. In 2007, the FSA performed an analytical study of Japan's payment and settlement systems and established objectives for strengthening them. This paper outlines the main findings of the study for the purpose of promoting discussions between the people concerned.

Comment on “Financial Crisis and the Lost Decade”

Comment on “Financial Crisis and the Lost Decade”

Financial Crisis and the Lost Decade*

Japanese banks incurred heavy losses in the early 1990s due to the bursting of the bubble economy of the 1980s. Japanese regulators allowed undercapitalized banks to operate under a very lenient application of capital requirement rules. At first, the regulators did not have strong institutional mechanisms and budgetary funds to take care of weakened banks. Even after obtaining strong power and money in 1988 to tackle the banking problem, the regulators would not nationalize a large number of banks because they could not manage nationalized banks themselves. The recent recovery of the Japanese economy gives the Financial Services Agency a chance to make up for the lost decade of regulatory discipline.

Law and the Market: The Impact of Enforcement

The intensity of enforcement efforts by securities regulators varies widely among financially developed nations, but countries with appear to systematically expend more on securities regulation than countries with civil origins. However, whether this variable of relative enforcement intensity explains the greater financial development of countries with common origins or is instead the product of that differential in development remains open to question and depends on the direction of causality. This paper examines several explanations and prefers the that enforcement intensity is a product of the level of retail ownership in the jurisdiction, with a high level of retail ownership creating a political demand for greater enforcement. Even more striking than this disparity between law and civil law countries, however, is the outlier position of the United States, whose public and private enforcement efforts dwarf those of other nations. The United States is unique not in its expenditures on securities regulation, but in the amount and severity of the penalties it imposes. Enforcement efforts can be sensibly measured either in terms of inputs (i.e., budget and staff size) or outputs (i.e., enforcement actions brought or financial sanctions levied). After adjustment for market size or GDP, the U.S. does not differ materially from other common countries in its expenditures, but it brings far more enforcement actions and imposes far greater financial penalties. For example, in 2005/06, the financial penalties imposed by the SEC exceeded those imposed by the U.K.'s Financial Services Agency (FSA) by a thirty to one ratio, which, even after adjustment for differences in market capitalization, still translates into a ten to one ratio. The greater emphasis on enforcement in the United States is also evident in a comparison of the budgets of the major securities regulators, with the SEC devoting a percentage of its budget to enforcement that more than doubles that of the FSA. Behind this varying emphasis on enforcement may lie different approaches to regulation: an ex ante advisory and consulting approach elsewhere and an ex post, deterrence-oriented emphasis in the United States. The greater use of public enforcement in the United States is more than paralleled by corresponding disparities in private enforcement and the use of the criminal sanction. Virtually alone, the United States recognizes the class action and the contingent fee. The actual financial sanctions imposed by private enforcement in the United States exceed those imposed by public enforcement, and the margin appears to be increasing. The only nation to rival the U.S. among origin countries is Australia, which actually devotes a higher percentage of its securities regulator's budget to enforcement and also uses the criminal sanction heavily. Australia is also characterized by a high level of retail ownership. What has been the consequence of this greater emphasis on enforcement in the United States? Much recent commentary has suggested that it has deterred foreign issuers from entering the U.S. and threatened U.S. capital market competitiveness. Closer examination suggests, however, that the firms most deterred from cross-listing have been firms with controlling shareholders and a pattern of extracting high private benefits of control. Foreign issuers that do cross-list in the United States incur a cost of capital reduction averaging 13% and a valuation premium (measured in terms of Tobin's q) that is 32% greater than that of non-cross-listing firms. Although the cross-listing decision involves a complex interaction of bonding, signaling, self-selection, and reduced informational asymmetry, the overall evidence supports the bonding hypothesis and suggests that U.S.'s greater emphasis on enforcement reduces informational asymmetry and gives it a lower cost of equity capital.

After the banquet: Japan’s power elite revisited

The demise of Japan’s iron triangle, consisting of the LDP’s parliamentary party, the central ministries and the keiretsu conglomerates ruling Japan conjointly, has been diagnosed since some time now (Thayer, 1993; Blechinger, 2001). After more than one decade of an unprecedented crisis in Japan’s political economy which severely tested the competences and the legitimacy of Japan’s ruling classes it is about time to resume and to take stock of changes and continuities in her power structures. In a nutshell it appears that (1) the political system after serious shifts and jolts during the 1990s has reverted to the old one-and-a-half party system—with the conservative democrats (DPJ) displacing the Socialists of old as the main opposition party-and with the LDP remaining firmly in the lead role, exercising increased zoku control over the ministries and continuing hereditary pork barrel oriented constituency politics as its power base. The role of the party’s factions appears as somewhat diminished. (2) the central bureaucracy suffered a gradual erosion of functions and legitimacy, affecting notably the lead ministries MOF, MITI (METI) and MFA. This was however compensated in part by the large discretionary spending volumes disbursed by the merged Infrastructure Ministry (MLIT), the supervisory functions of the new Financial Services Agency (FSA), and the strengthened competences of the Prime Minister’s Office (PMO). (3) the prolonged economic crisis and asset deflation affecting city banks as keiretsu lead managers consequent to a series of bank mergers has seen some keiretsu disintegrate or amalgamate. Yet it appears that other keiretsu, like Sumitomo (having taken over Mitsui) and Mitsubishi remain consolidated, while some of the previously less integrated banking keiretsu continue in a fairly oversized and loosely merged fashion. Thus the keiretsu system’s micro-economic importance may have eroded somewhat compared to their heydays in the 1980s. Still keiretsu affiliated companies continue to dominate organized zaikai business interests, like the merged Keidanren–Nikkeiren.

Explaining cosmetic compliance with international regulatory regimes: The implementation of the Basle Accord in Japan, 1998–2003

A central theme of much recent international political economy (IPE) scholarship has been the question of what determines compliance with international regulatory regimes.1 The contemporary debate ...