The Staff Report for the 2003 Article IV Consultation for Japan discusses financial sector reforms in the context of an overall policy package.
See Bank of Japan, “Japan’s Nonperforming Loan Problem,” released on October 11, 2002; later published in the Bank of Japan Quarterly Bulletin, November 2002.
The scheme set up earlier for sales to a government-supported Banks’ Shareholdings Purchase Corporation required banks to invest 8 percent of the value of the equities sold in subordinated debt of the Corporation.
The creation and maintenance of deferred tax asset balances is subject to accounting rules established by the Japanese Institute of Certified Public Accountants (JICPA), which limit balances to anticipated future profits over five years. The extent companies make use of these arrangements is scrutinized by external auditors.
The analysis will be updated on the basis of March 2003 data and provided to the Board.
In practice banks generally prefer to operate with a margin of 1 or 2 percentage points above the statutory minimum ratio.
Legislation has recently been passed providing for an out-of-court mechanism to permit insurers to reduce their guaranteed yields with the approval of a high percentage of policyholders before falling into bankruptcy. Granting insurers the flexibility to pursue an out-of-court restructuring is desirable and should be combined with a tightening of the solvency standards to promote a more accurate assessment of their financial conditions.
APPENDIX I Observance of Financial Sector Standards and Codes: Summary Assessments
This appendix contains summary assessments of adherence to the major international standards and codes applicable to the financial sector. The assessments have helped to identify the extent to which the regulatory and supervisory frameworks are adequate to address the risks in the financial system. They have also provided a source of recommendations for improved financial regulation and supervision in various areas.
Detailed assessments of standards were undertaken based on a collegial peer review process as part of the FSAP by: William Ryback (Federal Reserve Board), Stefan Spamer (Bundesbank), and Tarisa Watanagase (Bank of Thailand) for the Basel Core Principles for Effective Banking Supervision; Alan Cameron (formerly Australian Securities and Investment Commission) for the IOSCO Objectives and Principles of Securities Regulation; Donald McIsaac (World Bank) and Helmut Muller (formerly German Insurance Supervisory Agency) for the IAISInsurance Core Principles; Sean O’Connor (Bank of Canada) for the Core Principles for Systemically Important Payment Systems; and Charles Siegman (formerly Federal Reserve Board), Peter Hayward (IMF), and the sectoral experts for the IMF Code of Good Practices on Transparency in Monetary and Financial Policies.
The authorities were requested to complete self-assessment questionnaires for each standard or code in advance of the mission. The questionnaires and self-assessments were made available to the peer group of experts in advance of the mission. During the mission, the responses to the questionnaires and self-assessments of compliance with the standards and principles were clarified and checked through subsequent discussions with the authorities and market participants in critical areas.
The assessments conclude that substantial improvements have been made in the supervisory process since the FSA was set up. However, it is not clear that the authorities are yet in a position to enforce their requirements fully, especially with regard to the valuation of assets and the quality of capital. The institutional structure also creates scope for the FSA to be subject to political pressures and the FSA would benefit from more and better qualified staff.
The assessments have been discussed in detail with the Japanese authorities but responsibility for the assessments remains that of the assessors. The authorities’ response to the assessments is included at the end of each summary.
The assessment was conducted by William Ryback, Federal Reserve Board; Stefan Spamer, Deutsche Bundesbank; and Tarisa Watanagase, Bank of Thailand, in October 2002.
The principal assessor with respect to securities regulation was Alan Cameron, former chairman of the Australian Securities and Investments Commission, the Executive Committee of IOSCO, and the Joint Forum. The assessment with respect to clearing and settlement systems was conducted by Ms. Daniela Russo of the European Central Bank. The assessments were carried out in October 2002.
The assessment was prepared by Mr. Donald McIsaac, lead insurance specialist, Financial Sector Department of the World Bank and Dr. Helmut Müller, former head of insurance supervision for Germany, in October 2002.
The assessment was prepared by Mr. Sean O’Connor (Bank of Canada) in October 2002.
The assessment was conducted by Charles Siegman (former Federal Reserve Board and International Monetary Fund) in June 2002.
This assessment was conducted in October 2002 by Peter Hayward (IMF, MFD), Donald McIsaac (lead insurance specialist, Financial Sector Department of the World Bank), and Alan Cameron (former chairman of the Australian Securities and Investments Commission, the Executive Committee of IOSCO, and the Joint Forum).