Investor Nation

The ACCJ Financial Services Forum advocates for stronger market policies in its latest white paper

The American Chamber of Commerce (ACCJ) is fully on board with the Japanese government’s stated ambition of transforming the nation into a global leader in asset and wealth management, with the chamber’s Financial Services Forum (FSF) broadly supportive of a series of policy initiatives announced by Tokyo since April 2023. But they point out that more can be achieved to better meet consumers’ needs and that vigilance is required to ensure the promised changes do not stall.

The FSF comprises the leadership of the chamber’s five financial services committees and is designed to ensure that the ACCJ’s position on financial services issues is approved by the board and addressed in a consistent manner.

After a close examination of the government’s proposals, the FSF issued a white paper in July entitled Transforming Japan into a Global Asset and Wealth Management Leader. Stating that “the commitment that the national government is making to the transformation of the investment industry is critical for success, as most of the essential resourcing and policies can be achieved only with central government leadership, action, and education,” the paper details a three-pronged strategy:

• Accelerating corporate governance reform.
• Reforming the asset management sector and asset ownership.
• Doubling asset-based income among individual investors.

The FSF white paper outlines its recommendations within the context of the Government of Japan’s Policy Plan for Promoting Japan as a Leading Asset Management Center, released in December 2023. This framework serves as the foundation for the government’s efforts to transform Japan into a global asset management leader and financial hub.

Corporate Governance Reform

The first issue highlighted by the FSF is to accelerate progress on corporate governance reforms in parallel with reforms to the asset management industry. The goal is to make Japan a global standard bearer by sharply increasing participation among individual investors and expanding access to asset-based income.

There is clear common ground with many of the plans of the Japanese government, some of which is outlined in a June 2024 statement entitled “Principles into Practice,” issued by the Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code. This council operates under the joint secretariat of the Financial Services Agency (FSA) and the Tokyo Stock Exchange (TSE).

The Japanese proposals emphasize greater corporate governance enforcement, training for independent directors, and stewardship activities, while the TSE has revised its listing rules to mandate English disclosures of financial statements and timely information effective April 1, 2025.

The FSF white paper makes clear, however, that many issues—including ensuring substantive reforms take root and enforcing deadlines for strategic shareholdings—remain incomplete or are still works in progress. Similarly, disclosure practices have improved, it points out, but there are concerns that some companies are still “going through the motions” instead of devoting the required effort to the procedures. Equally, there has been progress on efforts to unwind cross-shareholdings, although the paper emphasizes that greater reviews are still necessary.

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“Stating that ‘the commitment that the national government is making to the transformation of the investment industry is critical for success, as most of the essential resourcing and policies can be achieved only with central government leadership, action, and education,’ the paper details a three-pronged strategy.”

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“Board independence and diversity, progress on English-language disclosure, and electronic voting rights are cited as key improvements,” the white paper states. Transforming corporate governance “from a box-ticking exercise to a core business element” has received the strong support of Hiromi Yamaji, president of the Japan Exchange Group. This is seen as very important, but the white paper points out that “greater and quicker progress is needed to avoid complacency setting in among management, which could cause reform to stagnate.”

To ensure that does not happen, the FSF is calling on the FSA and the TSE to collaborate on a plan for stronger enforcement of the Corporate Governance Code and that the present recommendation that independent directors account for a minimum of one-third of Prime Market boards be increased to an outright majority. They would also like to see a new initiative to increase both the number and quality of training programs, with a focus on diverse director candidates.

Other proposals include making the recently extended tax incentives for spin-off companies permanent to enhance predictability when it comes to tax planning, promote the creation of innovative spin-offs, and optimize business portfolio strategy and planning. Yet another proposal in the white paper is for the TSE to work with listed companies to spread annual general meetings across the calendar and to permit virtual attendance by offshore investors.

Asset Management

Turning to asset management, 2023 legislation imposes a legal obligation on all parties in the investment chain to act in the best interest of customers. As the government implements its plan to translate this obli­gation into rules and regulations and/or codes of conduct for each set of players and actively enforce them, the FSF recommends that the FSA continue to take steps to strengthen measures that ensure the independence of asset management firms and improve the capabilities of management. It is also recommended that the FSA aggres­sively shift to a domestic retail brokerage revenue model from one dominated by transaction fees so that advisory fees become more important.

Other proposals include the introduction of a “comply-or-explain” approach to new standards, as well as formalizing a continuous process of monitoring implementation, with the outcomes published regularly and transparently.

Organizations beyond the ACCJ have also welcomed efforts by Japan to implement reforms in the asset management sector. The Washington DC-based Investment Company Institute (ICI) said in a July 1 statement:

“The Japanese government’s policy plan for the coming year consists of extremely important reforms, such as changes to Japan’s individual defined contribution retirement program, including increasing contribution limits and providing more opportunities for older workers to save,” said ICI President and Chief Executive Officer Eric J. Pan. “These reforms can help households adapt to changing macroeconomic conditions by making greater use of the diversified investments offered by asset managers to build household wealth, prepare for retirement and meet other important financial objectives.”

NISA and Asset-based Income

Pan also applauded the expansion of the Nippon Individual Savings Account (NISA) program through the simplification of operational procedures and promoting more people to take advantage of the scheme.

The changes to NISA were outlined by then-Prime Minister Fumio Kishida in a speech to the Economic Club of New York in September 2022 as a way of attracting more overseas companies into Japan and improving the offerings of the asset management industry. In a similar speech in September 2023, Kishida announced plans to establish special business zones for asset management firms where administrative procedures can be completed entirely in English. The administation of Prime Minister Shigeru Ishiba has committed to continuing this important initiative.

This initiative ties in neatly with the third focus of the FSF’s white paper, individual investors and asset-based income, with the report pointing out that in comparison with the US and European markets, “Japan’s individual investment and retirement market has enormous growth potential and opportunities to better serve the needs of investors, which is particularly important in view of Japan’s demographic and fiscal challenges.”

The FSF recommends further expansion of NISA limits as well as the range of investments that would qualify. The fact that flows into NISA accounts have increased dramatically in response to the previous increase of annual investment limits to ¥3.6 million underlines just how popular this form of investment is becoming.

Stronger Market

Placing priority on developing and resourcing programs that nurture an ecosystem of independent financial advisers—and where individual investors can receive advice free of influence from the companies that are offering products—is another evolution called for in the white paper. This would strengthen the quality of financial advisers and enhance client–adviser relationships.

The FSF’s proposals may be ambitious and far-reaching, but the forum is confident that, if adopted, they can deliver benefits to both consumers and providers in the Japanese market, as well as transforming Japan into a global asset and wealth management leader.

Attracting Global Investment

Ideas for making Japan a top financial center

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Two recent papers produced by committees of the American Chamber of Commerce in Japan (ACCJ) have highlighted the considerable opportunities that would result from changes to regulations that currently hinder Japan’s financial sector from attaining its full potential. And with the Japanese government committed to raising Tokyo’s profile as one of the world’s top financial centers, the committees are hopeful that regulatory authorities here might embrace some of the proposals.

The Investment Management Committee published a viewpoint entitled Relax or Eliminate Unrelated and Onerous Regulatory Requirements for Marketing of Offshore Funds to Professional Investors Conducted by Global Investment Managers, while the Financial Services Forum released a white paper headlined Reimagining Japan as a Global Financial Center, the latter proposing changes that would drive the nation’s long-term economic growth.

License to Sell

Japan’s financial regulations are designed to protect investors, both retail and institutional, which is a “worthwhile goal” according to David Nichols, executive advisor at EY Strategy and Consulting Co., Ltd. The type of investment is determined by the definition of the investment and the sales license held by the distributor.

“The licenses entail certain responsibilities—some fiduciary and some customer best-interest,” said Nichols, who also chairs the Investment Management Committee.

“While distributors do not have a fiduciary duty to their clients, they are holding their customers’ security purchases in firm accounts,” he added. “As such, the state of the distributors’ balance sheets can impact the client holdings. If the distributor goes bankrupt, clients may have difficulty accessing their investments.” As a result, the Type 1 license required by a distributor has capital adequacy requirements to safeguard investors.

While offshore funds fall under the definition of securities that can only be sold by distributors with a Type 1 license, the fund assets are not part of a distributor’s balance sheet and, therefore, are not impacted by the health of that balance sheet, Nichols pointed out.

“So, the reason the regulations are in force is that offshore funds have been classified as a security but do not hold the same dependency on the distributor’s balance sheet as a normal security does, since the fund assets are held by an independent custodian,” he explained, describing the situation as “an unintended consequence of regulations intended to protect investors.”

To correct the situation would require a root-and-branch revision of the 2006 Financial Instruments and Exchange Act, which would be a major undertaking and would require an amendment approved by the national Diet. Instead, the ACCJ is proposing some administrative changes that the Financial Services Agency can enact and “that would get us to materially the same place,” Nichols said.

Norihiko Tsukada, managing director and head of compliance at BlackRock Japan Co., Ltd. and vice-chair of the Investment Management Committee, identified “certain off-site monitoring items, including daily calculations of capital ratios” as one regulation that is unnecessarily obstructive, although he points out that regulations in Japan are broadly equivalent to those of other jurisdictions. In the United States, however, limitations are less of a concern, as the market there is sufficiently large to make it economically feasible to package investments in US onshore vehicles.

Lost in Translation

Distributors in Japan also face administrative hurdles and language requirements that make it more complicated to set up and run an asset management business. That should be a concern since Tokyo has designs on a larger role in the global financial services market.

The committee has recommended that regulations surrounding the offsite monitoring of investment management companies (IMCs) should be relaxed, as certain reporting items are not relevant to the activities of global IMCs, along with the initial registration process for distributors of standard Type 1 Financial Instruments Business (FIB).

“Tailoring regulatory requirements to address relevant business risks will not impact client protection,” the paper emphasizes, adding that “such relaxation of regulatory requirements would improve the appeal of Japan to foreign investment managers interested in establishing a presence in Japan, and would be consistent with the [government of Japan’s] objectives to promote Tokyo as a global financial city.”

The solution, the committee suggests, would be the creation of a new type of FIB, that might be called a “solicitation-only” Type 1 FIB.

Seize the Moment

Aaron Lloyd, director of Sompo Japan DC Securities Inc., said the regulations are not new, “but you could say that dissatisfaction has reached a tipping point, as many foreign investment management companies would like this regulation changed.”

Failure to seize this opportunity, he believes, may have lasting negative implications—particularly with Tokyo and Singapore competing to attract companies that might be considering leaving Hong Kong as a result of the Chinese government’s recent crackdowns in a city that, until now, has been the Asia–Pacific region’s preeminent financial center.

“Japan should introduce changes,” Lloyd told The ACCJ Journal. “The government should be making it easier for foreign asset managers to solicit their funds, not more difficult. With the costs of maintaining an investment management business high in Japan, it would be a boon to the industry if overburdening regulatory requirements were reduced.”

Driving Disruptive Innovation

The Investment Management Committee’s aims have a good degree of crossover with those of the ACCJ Financial Services Forum, which is confident that Japan can position itself as one of the leading financial gateways for Asia, and prosper were the region to become the leader in global economic growth.

“Financial services firms ultimately help grow capital markets and the economy, which creates jobs and a higher standard of living. They also help solve the financial wellness challenges of institutional and retail investors’ clients in a way that creates confidence and [encourages] participation in capital markets,” said Derek Young, a Chartered Financial Analyst charterholder who is president and representative director for Japan at FIL Investments (Japan) Limited.

Relative to its size and the diversity of its economy, at present Japan’s finance industry “punches far below its weight,” according to Young, who also serves as vice-chair of the ACCJ Financial Services Forum and is a member of Fidelity International’s Global Operating Committee.

Introducing more competition in this sector also helps to drive disruptive innovation in the pursuit of expanding Japan’s capital markets and helping Japanese investors solve the challenges that they face, Young added.

“Japan is the third-wealthiest country in the world, and is a super-aging society,” he pointed out. “The need for assets to last for longer and to provide income makes Japan a prime target for financial services firms that want to help solve that challenge.”

Roadmap

The Financial Services Forum has drawn up an extensive list of recommendations for the Japanese government that can be distilled into six main areas:

• Make it easier to live and work in Japan, as well as to enter and return
• Improve governance, transparency, and stewardship
• Address the need for more specialized professionals
• Broaden market participation for individual investors
• Address shortcomings in selected financial regulations
• Facilitate development of key financial infrastructure functions

In conclusion, the report states that, “Japan possesses the necessary attributes to achieve this goal: a highly educated and motivated population, a diverse and large economy and corporate base to support it, high levels of technological development and adoption, and a stable political environment underpinned by commitment to the rule of law.”

Critically, however, what has been missing to date is a coordinated commitment, across the government and corporate sectors, to address legacy structural shortcomings that are impeding the development of a financial center that leads rather than follows. On its current trajectory, Japan is likely to fall further behind nimbler centers.

“Many of the issues needing attention are challenging to address,” the report concludes. “Nevertheless, developing a more robust financial ecosystem in Japan demands that policymakers take up this challenge with a sense of urgency and determination. Doing so not only would establish Japanese leadership in global finance, but also make a vital contribution to Japan’s long-term economic growth.”

And Young is optimistic that change is in the air.

“One of the most encouraging facets of this white paper exercise was meeting with prominent Japanese government officials about the findings,” he said. “It’s clear that there is existing momentum to change the business environment in Japan, [and] to make it more friendly to foreign investors.

“Change is not easy—especially in a tradition-rich country such as Japan—but we met with very little resistance in a general sense and, instead, were greeted with a friendly acknowledgment that Japan is thinking about ways to improve its positioning as a global financial center.”

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