JIN-259 -- Japan's FSA Takes on the World

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T H E J @ P A N I N C N E W S L E T T E R

Commentary on the Week's Business, Technology and Cultural News
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Issue No. 259
Thursday, January 29, 2004
TOKYO

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CONTENTS

@@ VIEWPOINT: Japan's FSA Takes on the World

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@@ VIEWPOINT: Japan's FSA Takes on the World

Just when we were starting to get used to the idea of the Japanese
Financial Services Agency (FSA) being a bit toothless and ineffectual,
the new kid on the administrative block has started to get tough.

Over the weekend, it appeared very much as though it was business as
usual for Takenaka and his merry crew of bank inspectors. A rumor broke
some time ago that UFJ was sitting on a far worse bad loan problem
than it was currently admitting to, and that even with its slow methods,
the FSA would eventually get round to spotting this apparently
gaping hole.

On Saturday we were jolted out of our weekend torpor by an authoritative
article in the Nikkei which said as much. In a lovely piece of drama,
it even described a room within UFJ head office where a second -- and
more realistic -- set of accounts were stored. The article boldly
paraded its "insider" knowledge that the FSA was set to launch a special
probe into the bank's activities.

Now, this being the Nikkei -- a platform for seemingly infinite leaks
from government and industry alike -- the market was inclined to believe
the scoop. Shares in UFJ tumbled and brokers whistled-up a series of
"worst case scenario" investment advice memos to their clients. UFJ's
prompt and categorical denial of both the probe and the naughty room
were ignored for entirely historical reasons. Leaks to the Nikkei tend
to be on the money, and all too many denials so often turn out to be
worth less than the fax paper they are issued on.

But this time, it does seem that the Nikkei got it wrong. The FSA is
indeed conducting a "special probe" into UFJ activities, but it is also
doing so into all the other banks -- and it told the market about that
ages ago. Its only obvious fault is to call the probes "special" when
"normal" would perhaps have been a less dramatic way of putting it.

Rumors among the Japanese press suggest that the Nikkei hack responsible
for all this is now looking for a job on a magazine somewhere in Tochigi.

The incident was marked by the now standard criticisms of the FSA: that
they were incompetent for not finding the alleged problem before, and
that their cries of "no comment" when asked about the Nikkei article
were lily-livered and unhelpful. In fact the agency seems to have done
the right thing. When you think about it, the idea of a room full of
more realistic accounting of the bad loan problem, while worrying, is
also conversely rather heart-warming -- at least someone at the big
banks is skilled enough at risk-assessment to know that the bad
loan problem needs constant monitoring.

But what about all that "toughness" we mentioned in the first
paragraph? Well, the FSA -- in addition to battling poor journalism
from the Nikkei -- is also heading off to London to fight in the
corner of Japanese businesses who list stock or bond on the London
Exchange.

New rules under consideration by the UK Financial Services Authority
(FSA) would, by 2005, make the accounts submitted by Japanese companies
listed in London, or issuing bonds there, unacceptable. The proposed
changes would insist that equity or debt issuers with either a primary
or secondary listing in London would by required to use International
Accounting Standards (IAS) or US Generally Accepted Accounting Principles
(US GAAP).

The Japanese FSA believes that the rule would force companies to shoulder
the unnecessary, but very large, expense of producing a second set of
accounts simply because they want to raise money on London's otherwise
attractive capital markets. Some of Japan's biggest banks and industrial
titans are threatening to leave the London Stock Exchange (LSE) entirely
if the British authorities do not change their minds.

Japanese authorities believe that their country's accounting standards
already match those demanded by Britain and the EU, and argue that their
early 90s version of the City's "Big Bang" has brought Japan GAAP up
to a par with other apparently acceptable systems.

"Japan is a big economy and a big capital market. All we are saying is
that our accounting standards should be treated as equivalent to IAS,"
says Naohiko Matsuo, a member of the FSA delegation headed to London.

The FSA's letter added its own stark warning that the new rules would
discourage Japanese companies' activities within the City of London and
"shift the focus of Japanese financing efforts outside Japan to non
EU-markets."

Love them or loathe them, this is all pretty tough stuff. The FSA has
managed to get the powerful Keidanren business lobby on its side, and
that group will also be making its strong feelings on the matter
known to the authorities in London.

Remember when MITI was the most powerful ministry in Japan and could
charge around the world telling business leaders and governments how
it was going to be? The FSA is full of bright young things, so watch
this space.

-- The Editors

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Written and edited by Roland Kelts and
Leo Lewis (editors@japaninc.com)

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