Summary Points from

Progress and Assessment of the Strategic Directions and Priorities

2016-2017

October 2017

Provisional Translation As January 2018

Financial Services Agency

Progress and Assessment of the Strategic Directions and Priorities 2016-2017: Its Roles in the JFSA’s PDCA cycle This document lists key elements of the JFSA’s Progress and Assessment of the

Strategic Directions and Priorities 2016-2017 (“the Report”), which outlines the analysis on Japan’s financial system and the challenges identified during the program year 2016 (July 2016 to June 2017).

The Report is published as a part of the JFSA’s PDCA cycle. The Strategic

Directions and Priorities corresponds to the “Plan” stage of the cycle. The Report plays a role in the “Check” stage by reviewing the progress made during the year. The JFSA is committed to repeating the PDCA cycle for continuous enhancement of the quality of regulation and supervision.

The Strategic Directions and Priorities 2017-2018 for program year 2017 (July

2017 to June 2018) will reflect findings and observations of the Report.

1

Contents

I. Financial stability and effective financial intermediation 1. Global economy and financial markets 2. Banking sector in Japan 3. Three Mega-bank groups 4. Regional banks 5. Real estate loans to the housing rental business and banks’ consumer loans

II. Transforming the flow of funds 1. Realizing the long-term and diversified investment 2. Customer-oriented asset management and intermediation 3. Enhancing corporate value through engagements of asset owners and asset managers 4. Market surveillance 5. Improving the quality of disclosure, accounting standards and audit

III. Other policy priorities 1. FinTech, cyber security, and high-speed trading 2. Global regulatory reforms, building global network

IV. Supervisory reform and reform of the JFSA

2

I-1. Global economy and financial markets

Credit provided to the private non-financial sector is growing at a faster pace than the global economic growth. The non-bank sector is expanding, whereas advanced countries’ banking sector shrinks partly due to tightening

of financial regulations. Prices of risky assets continue to rise, and market volatility remains at a historically low level. While the global economy is recovering, close attention should be paid to impacts of possible future changes in

the interest rates.

GDP and credit to private non-financial sector Assets of banking and non-bank sector High-yield bond prices

Emerging countries

(Note 1) Advanced countries consists of Japan, the US, the UK, Germany and France. Emerging countries consists of Brazil, Russia, China, and India.

(Note 2) GDP is a sum of respective nominal GDPs (converted to USD). (Source) UN, BIS

(Year) (Year)

(2000年=1) (2000年=1) Advanced countries

(Year) 50

100

150

200

250

300

350

09 11 13 15 17

米国

欧州

新興国

(Note) Data are high yield bond indices calculated by Bloomberg. (Source) Bloomberg

0

5

10

15

20

25

30

35

40

45

00 02 04 06 08 10 12 14 16

43

36

0

5

10

15

20

25

30

35

40

45

50

08 16

(Note) The 2008 data of G-SIBs in Japan are as of the end of March 2009. (Source) Bloomberg

(Note) Definition of data were changed in 2015. (Source) Investment Company Institute

(Year) (Year)

（兆ドル） （兆ドル）

mutual funds

(global basis)

(Year 2000=1) (Year 2000=1)

(Trillion USD) (Trillion USD) US

Europe

Emerging countries

0.8

1.2

1.6

2.0

2.4

2.8

00 03 06 09 12 15

GDP

total credit to

private non-

financial sector

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

00 03 06 09 12 15

GDP

total credit toprivate non-financial sector

3

I. FINANCIAL STABILITY AND EFFECTIVE FINANCIAL INTERMEDIATION

G-SIBs in Japan, the US and Europe

(Year 2009=100)

The ratio of non-performing loans is low, compared to both historical and other countries’ levels. Banks’ domestic net interest income, which is the primary source of revenue, continues to decline due to the

shrinking interest margin on loans. This raises a concern on the sustainability of banks’ current business models.

JPY interest rate risk is growing at regional financial institutions. Interest rate risk management is a key issue to prepare against uncertainties in the global economy and

markets.

0

1

2

3

4

5

6

7

8

9

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

日本

米国

英国

ドイツ

フランス

（年末）

（％）

Ratio of non-performing loans

(Source) JFSA

JPY interest rate risk

(Note) Japan’s data are on a fiscal year basis. (Source) CEIC

▲ 6,000

▲ 5,000

▲ 4,000

▲ 3,000

▲ 2,000

▲ 1,000

0

1,000

2,000

3,000

07 08 09 10 11 12 13 14 15 16

主要行等（国内業務部門）＋地域銀行

（年度）

（億円）

資金利益：5.6兆円

（16年度）

▲ 30

▲ 20

▲ 10

0

10

20

30

40

50

60

▲ 4

▲ 2

0

2

4

6

8

08 09 10 11 12 13 14 15 16

主要行等

（年度）

（兆円） （％）

▲ 30

▲ 20

▲ 10

0

10

20

30

40

50

60

▲ 4

▲ 2

0

2

4

6

8

08 09 10 11 12 13 14 15 16

地域銀行

（年度）

（兆円） （％）

▲ 30

▲ 20

▲ 10

0

10

20

30

40

50

60

▲ 4

▲ 2

0

2

4

6

8

08 09 10 11 12 13 14 15 16

信用金庫・信用組合

（年度）

（兆円） （％）

貸出金 有価証券 預金デリバティブ差 その他運用・調達（ネット） 対自己資本比率(右軸)

Major banks (domestic business) + Regional banks

(Billion yen)

Net interest income: 5.6 trillion yen (as of FY2016)

(Trillion yen) (%)

Major banks, etc.

(Trillion yen) (%)

Shinkin and Shinkumi banks Regional banks

(FY) (Year) 利鞘要因 残高要因

その他 資金利益増減Lending (loans)

Others

Balance Net interest income (capital gain) trend

Lending (loans) Derivative differential

Securities Other investment and funding (net)

Deposits Ratio of Interest rate risk to capital (right axis)

Japan

US

UK

Germany

France

%

4

I-2. Banking sector in Japan I. FINANCIAL STABILITY AND EFFECTIVE FINANCIAL INTERMEDIATION

(FY) (FY) (FY)

(Trillion yen) (%)

Composition of net interest income

(Note) JRY interest rate risk: Yen bonds 100BPV/Capital (Source) JFSA

The capital and revenue levels are stable. Meanwhile, as their overseas businesses rapidly grow, the groups face a challenge, to ensure timely exposure management and secure stable foreign currency funding to keep up with changing global economic and market environments. As domestic lending increases under the assumption of continued low interest rate environment, the groups need appropriate loan screening and appropriate credit portfolio management.

Given the growth of business alliances among group companies, it is increasingly important to manage their conflicts of interests and prevent abuse of a superior bargaining position. With the initiative of the groups’ holding companies, it is vital that the customer-oriented business model is shared as the core value within the groups.

It is important for the groups to further enhance their governance so that they can adequately respond to changes in the business environment including technological innovation.

The ratio of shareholdings to equity capital remains higher than that of major US and European banks. Reduction of stock price fluctuation risk is needed.

Ratio of shareholding to equity capital USD funding cost

(Note) USD funding cost: the exchange cost incurred in converting JPY to USD through short-term (3 months) foreign exchange swaps. (Source) Bloomberg

11.7 9.5

7.5 6.8 6.8 6.3 4.9 4.8

45.1

37.5

34.4

37.6 39.1

45.4

36.9 35.5

0

10

20

30

40

50

09 10 11 12 13 14 15 16

（Fiscal year）

（％）

欧米主要銀行 ３メガバンクグループ

Overseas lending and earning ratio to gross profit

0%

10%

20%

30%

40%

0

20

40

60

80

100

07 08 09 10 11 12 13 14 15 16

海外貸出金 海外収益比率

(Fiscal year)

(Trillion yen) (%)

0

0.5

1

1.5

2

12/1 13/1 14/1 15/1 16/1 17/1

（%）

(Note1) Ratio of shareholding to equity capital: outstanding of shareholding (market value) / Tier 1 (as of fiscal-year ends)

(Note2) The major banks in the US and Europe are 23 banks of G-SIBs excluding four China’s banks and three Japan’s Mega-bank groups.

(Source) Disclosure documents of respective institutions.

(Note1) Overseas lending: the lending by the banks’ international business divisions (average balance outstanding). (Note2) Earning ratio of overseas lending: the ratio of international business divisions profit to the gross profit. (Source) Disclosure documents of the Three Mega banks.

Major banks in the US and Europe

Three Mega-bank Overseas lending Earning ratio of

overseas loans to gross profit

5

I-3. Three Mega-bank groups I. FINANCIAL STABILITY AND EFFECTIVE FINANCIAL INTERMEDIATION

Regional banks’ balance sheets are sufficiently sound. However, due to shrinkage of loan margins, the number of regional banks with losses in their core businesses (i.e. lending and fee businesses) is increasing.

Some regional banks are trying to secure short-term profit by increasing investments in high-risk securities and real estate loans (including loans to the housing rental business).

While more regional banks may have concerns about the sustainability of their current business model, there are increasing number of banks that have initiated their reforms.

Profit of customer services (From March 2015 to March 2017)

Composition of annual growth of corporate loans

Interest rate risk and dependency on securities investments （As of March 2017)

Most of the regional banks recorded declines in profits of their core business as of March 2017, and the half of regional banks recorded losses.

Many of the regional banks that recorded negative profits from the core business are becoming more dependent on securities investments. Consequently, the interest rate risk increases.

The increase in outstanding of corporate loans is mostly derived from real estate loans (including loans to the housing rental business).

▲ 0.4%

▲ 0.3%

▲ 0.2%

▲ 0.1%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

▲ 0.20 ▲ 0.15 ▲ 0.10 ▲ 0.05 0.00 0.05 0.10 0.15 0.20

利益率増減幅（%pt）

利益率

(Note 1） The yellow dot ( ) is the average of 106 regional banks. (Note 2) Profit ratio: (loan outstanding x difference in interests rates for depositors and

borrowers + net income from fees and commissions – operating costs) / deposits (average balance outstanding)

0%

5%

10%

15%

20%

25%

30%

35%

40%

0% 10% 20% 30% 40% 50%

金利リスク量

有価証券運用依存度

Red marker: Banks that recorded negative profit ratio of customer services (as of March 2017) Blue marker: Banks that recorded positive profit ratio of customer services (as of March 2017)

0.5 0.4 1.4 1.6 2.0 0.5 0.6 0.5 0.7 0.9

2.2 2.6 4.5 4.6 4.3

▲ 1 13/3 14/3 15/3 16/3 17/3

不動産業（個人貸家業除く） 個人貸家業

製造業 卸・小売業

電気・ガス・水道業 金融・保険業

運輸業、郵便業 物品賃貸業

医療・福祉 その他

0.5 0.5

1.4 1.62.1

0.6 0.6

0.6

0.7

0.9

2.2

2.6

4.5 4.6 4.3

▲ 1

0

1

2

3

4

5

6

13/3 14/3 15/3 16/3 17/3

（Trillion yen）

(Source) JFSA (Source) JFSA

Profit ratio

Variation of profit ratio

Inte

rest

rat

e r

isk

Dependency on securities investment

Real estate (excluding individual housing rental)

Manufacturing

Electricity, gas, and water

Transport and postal business

Medical and Health care

Individual housing rental

Wholesale and Retail trade

Finance and Insurance

Goods rental and lease

Others

6

I. FINANCIAL STABILITY AND EFFECTIVE FINANCIAL INTERMEDIATION I-4. Regional banks (1/2)

(Note1) Dependency on securities investments = interests and dividends on securities / (gross business profits – five bond accounts*)

*Five bond accounts comprises gain on sale of bonds; profit on maturity; loss on sale of bonds; loss on maturity; write off of bonds.

(Note2) Interest rate risk: (Yen bonds and foreign bonds 100BPV) / Capital

(Source) JFSA

According to a survey by the JFSA (to which 8,901 client companies answered), Banks generally lack efforts to meet the needs of client companies with low credit ratings. The lower a client company’s debtor classification is, the less frequently a bank visits the company. 40% answered that banks will not provide loans without securing collateral or guarantee. 30% of the companies which faced a funding problem in the past year answered that they received no particular

support from banks.

Banks with a moderate decline of loan yields have a higher reputation from client companies with respect to both understanding clients’ businesses and providing effective consulting services.

The most frequently cited reason for choosing government-affiliated financial institutions over private ones is the favorable borrowing terms.

利回り低下幅が緩やかな銀行上位30行

利回り低下幅が大きい銀行下位30行

55.7%

49.1%

46.0%

49.8%

44.4%

39.8%

30% 40% 50% 60%

正常先上位

正常先下位

要注意先以下

正常先上位

正常先下位

要注意先以下

12.2%

17.1%

26.0%

11.6%

15.3%

18.4%

0% 10% 20% 30%

正常先上位

正常先下位

要注意先以下

正常先上位

正常先下位

要注意先以下

（Source) JFSA

Distinctive features of top 30 banks whose loan yields have declined moderately (from March 2013 to March 2017)

<Understanding of issues on clients’ businesses>

Q: Does your bank listen to your business concerns?

Top 30 banks whose loan yields have declined moderately

Worst 30 banks whose loan yields have declined severely

7

I. FINANCIAL STABILITY AND EFFECTIVE FINANCIAL INTERMEDIATION I-4. Regional banks (2/2)

<Effectiveness of consulting services>

Q: Do you think consulting services provided by your bank effective?

(Debtor classification) (Debtor classification)

Normal debtor

(upper class)

Normal debtor

(lower class)

Debtor under caution and

the below

Items Overall Normal debtor (upper class)

Normal debtor (lower class)

Debtor under caution and the

below

Visits by main-bank are rare or none at all 18% 9% 16% 29%

Main-bank does not provide loan without collaterals and personal guarantees

40% 23% 39% 54%

Client companies that experienced a cash-flow problem over the past year but did not received

particular support from main-bank 31% 18% 26% 37%

Reasons Response

rate Reasons

Response rate

1．More favorable borrowing terms at government-affiliated financial institutions

59% 4．Recommendation from private

financial institutions 8%

2．Needs to diversify funding sources 42% 5．Private financial institutions not

supportive 7%

3．Higher expertise of staff at government-affiliated financial institutions

9% 6．Marketing activities of government-

affiliated financial institutions more active

7%

(Source) JFSA

(Source) JFSA

Reason for choosing transaction with government-affiliated financial institutions

Assessment by debtor on main-banks’ efforts

Normal debtor

(upper class)

Normal debtor

(lower class)

Debtor under caution and

the below

3.4 3.3 3.3 3.3 3.3 3.3 3.5

4.1

4.6

5.1

5.6

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

06 07 08 09 10 11 12 13 14 15 16（年度）

（兆円）

Composition of annual growth of real estate loans

Elapsed years of real estate loans to the housing rental business and vacancy rates

▲6

▲4

▲2

0

2

4

6

8

10

12/3 13/3 14/3 15/3 16/3 17/3

(%)

▲6

▲4

▲2

0

2

4

6

8

10

12/3 13/3 14/3 15/3 16/3 17/3

(%)

大企業 中堅・中小企業（J-REITを含む）

地方公社等 個人による貸家業

SPC（不動産私募ファンドを含む） 合計

2.6%

7.1% 8.5%

11.6%

0.0%

5.0%

10.0%

15.0%

5Ｙ(n=222) 15Ｙ(n=67)

15 10 5 0

5 10 15 20 (elapsed years)

(vacancy rate, %) (Trillion yen) Major banks, etc. Regional banks

Deficits of housing rental business rise as the buildings become older.

(Source) JFSA, sample survey of real estate loans to the housing rental business provided by regional banks. (Source) BOJ

(Note) The “consumer loans and credit outstanding” are the total of overdraft loans, emergency loans and cash advances.

Large corporations

Local public corporations SPC (including privately placed real estate funds)

Small- and medium-sized companies (including J-REIT) Individual house lessers

Total

Fiscal Year

8

I. FINANCIAL STABILITY AND EFFECTIVE FINANCIAL INTERMEDIATION I-5. Real estate loans to the housing rental business and banks’ consumer loans

(Source) BOJ

Banks’ consumer loans and credit outstanding

(Real estate loans to the housing rental business ) The loans are increasing, especially at regional banks, mostly used as a landlords’ tax-saving measure of inheritance

tax. As the buildings become older, however, a rising number of borrowers face difficulty in covering repayment costs with revenue from the rent. Financial institutions should appropriately evaluate risks (e.g. the risks of interest rate rise, more vacant rooms and a rent decline) and make a plain explanation to loan applicants.

(Consumer loans by banks) Banks have been criticized for excessive provision of consumer loans under a low interest environment. They are

responding to such criticism in accordance with the voluntary guideline issued by the Japan Bankers Association. The JFSA: – will act promptly to ensure that banks resolve problems related to their consumer loan business,

considering the purpose of the Money Lending Act (i.e. aiming at preventing multiple debts); – will examine in detail how banks are conducting the consumer loan business; and – have commenced a telephone help desk to reach out and directly collect information from customers.

13%

7%

14%

6%

4%

1% 1%

36%

19%

1%

Investment trust funds comprised of Japan-domiciled stocksInvestment trust funds comprised of foreign-domiciled stocksbalanced-type investment trust funds (balanced funds)Investment trust funds comprised of Japan-domiciled bondsInvestment trust funds comprised of foreign-domiciled bondsMMFREIT, commodities, treasury stocks, and etc.DepositsInsuranceOthers

43%

25%

7%

5%

8%

6% 4%

1%

Equity fundsBalanced-type investment trust funds (balanced funds)

Treasury stocksREIT, commodities, and etc.

Bonds investment trust funds (bonds funds)GIC (principal/yield guaranteed insurance products), and etc.

MMF (USD denominated funds)Others

Asset allocations of Japan corporate-type DC

and US 401(k) Household financial assets in Japan and the US

Japan corporate-type DC US 401(k)

85 billion USD 4.4 trillion USD

(Note 1) Items in thick-bordered box are principal-guaranteed. (Note 2) Japan’s asset allocation and assets under management (net asset value: NAV)

reflect the data as of March-end 2016. (Note 3) The US asset allocation reflects the data as of the end of 2014. Asset under management reflects the balance as of the end of 2015. NAV was

converted to JPY at the exchange rate of 120.06 JPY/1 USD as of the end of 2015.

(Source) ICI/EBRI, Liaison council meeting of DC plan administrator

(Note 1) Unless stated, figures reflect the data as of the end of 2016. (Note 2) Exchange rates are as follows; (1 USD = JPY 102.9 as of the end of 1995, 1 USD =

JPY 116.9 as of the end of 2016) (Note 3) Growth rate of the US gross balance is calculated based on USD-denominated

figures. (Note 4) Earned wage income does not include actual wage/salary (compensation)

received by solo proprietors. Property income does not include capital gains and/or latent (unrealized) gains from financial assets and real estates.

(Source) BOJ, FRB, Bureau of Economic Analysis, Cabinet Office (Japan)

Japan US

Balance

Year 2016 （A） 15.5 trillion USD 75.85 trillion USD

Year 1995 （B） 11.5 trillion USD 22.8 trillion USD

Growth rate （A/B） 1.54x 3.32x

Growth rate of balance in relation to investment return compared with that in 1995 1.20x 2.45x

Ratio of cash and deposits 51.7％ 13.7％

Ratio of securities and investment trust funds (indirect holdings through pension plan and

insurance)

18.6％ （3.7％）

46.2％ （16.1％）

Ratio of earned wage to property income under household income ８：１ ３：１

9

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0

5

10

15

20

25

30

35

40

75 80 85 90 95 00 05 10 15

Proportion of corporate stocks and investment trusts to the

total household financial assets in the US（left axis）

Ratio of the total household financial assets to the GDP（right axis）

（%） （GDP=1）

(Note) Proportion of corporate equities and mutual fund shares represents direct holding of those assets but excludes indirect holding via pension funds and insurance policies. (Source) FRB, Bureau of Economic Analysis

Proportion of corporate equities and mutual fund shares to total household financial assets in the US

The current proportion in Japan (left axis)

Proportion of corporate equities and mutual fund shares to the total household financial assets in the US (left axis)

The growth of Japan’s household financial assets is far lower than that of the US over the past 20 years. (Japan : 1.54x, the US : 3.32x)

Big difference between Japan and US in the composition of household asset (In the US, corporate equities and mutual funds consist of 46.2% of total asset, while in Japan, cash and deposits are predominant with a share of 51.7%).

The share of corporate equities and mutual funds in the US households used to be at the same level as the current share in Japan. In the US, the 401 (k) plan and the IRA have promoted diversification of household asset. (Note) The 401(k) plan is a defined-contribution pension plan involving employer contributions, and the IRA is a defined-contribution

pension plan using individual retirement accounts. Japan needs to encourage long-term and diversified investment to steadily build household asset.

II. TRANSFORMING THE FLOW OF FUNDS II-1. Realizing the long-term and diversified investment

(Note) Data are samples from top 50 funds that recorded net increase (sampling period from December 1998 through June 2017). (Source) Japan Investment Trust Association

(Note 1) Data of Japan and the US indicate respective top 100 stocks (issues) (that exceed five years from their establishment) in terms of NAV as of May-end of 2017.

(Note 2) Japanese investment trusts indicate publicly offered investment trusts except ETF, DCIO (defined contribution investment only), and wrap/SMA (separately managed account) . US investment trusts indicate publicly offered investment trusts excluding ETF, DCIO (defined contribution investment only), and MMF.

(Note 3) Risk is standard deviation (annualized rate basis) of monthly return for the past five years. Return is the total return for the past five years (annualized rate basis).

(Note 4) Dotted line in the chart is a trend line. (Source) Bloomberg

0

5,000

10,000

15,000

20,000

25,000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

（円）

日経平均株価(右軸）

外国株式

(左軸）

国内株式

(左軸）

（年末）

0

5

10

15

20

25

30

0 5 10 15 20 25 30

日本

米国

（高）

（低）

リターン（％）

リスク（％） （高）（低）(LOW ) Risk (%) (HIGH)

(LO

W )

R

etu

rn (

%)

(HIG

H)

The US

Japan

Nikkei stock average (right axis)

Foreign stocks (left axis)

Domestic stocks (left axis)

▲6％

▲4％

▲2％

0 ％

2 ％

4 ％

6 ％

8 ％

10 ％

12 ％

0% 0.5% 1% 1.5% 2%

年率リターン

（過去

10年間、信託報酬控除後）

信託報酬（税抜き、年率）

国内株式アクティブ（リターンがプラス）

国内株式アクティブ（リターンがマイナス）

国内株式インデックス（日経225）

(Note 1) Data are 281 actively managed funds in which fund managers mainly manage domestic stocks that have sustained over a decade excluding DCIOs.

(Note 2) As to “fund of funds,” trust fees include trust fees of underlying funds. (Source) QUICK, Bloomberg

The return of 71% of actively managed investment trust funds comprised of Japan-domiciled stocks is lower than that of Nikkei 225 ETF.

An

nu

al r

ate

of

retu

rn

(in

th

e p

ast

dec

ade,

aft

er d

edu

ctin

g tr

ust

fee

s)

Actively-managed investment trusts comprised of Japan-domiciled stocks (with positive return)

Nikkei 225 (Japan-domiciled stocks)

Trust fees (tax excluded, annual rate) (horizontal axis)

10

II. TRANSFORMING THE FLOW OF FUNDS II-2. Customer-oriented asset management and intermediation

Retail sales of investment trusts in Japan are prone to have the following features: (a) The return is low relative to the risk, compared to the US. (b) Few actively-managed investment trusts are delivering good return. (c) Many investment trusts are theme-based products, which are difficult for investors to make a reasonable judgement to buy/sell. (d) High turnover (fast cycle of purchases and sales of investment trusts). (e) Expensive sales commissions and trust fees. (f) Close relationship between brokers and asset management companies.

Some financial institutions are shifting to a more customer-oriented business model. Furthermore, there are more investment trusts fulfilling the requirements for Installment Investing NISA (new NISA specialized in dollar-cost averaging), with low fees and suitable for long-term investment.

Share of equity investment trusts to total sales of investment trusts and Nikkei stock average

Trust fees and return of actively-managed investment trusts

Risk and return of top 100 investment trusts of Japan and the US

(Year end)

Actively-managed investment trusts comprised of Japan-domiciled stocks (with negative return)

II-3. Enhancing corporate value through engagements of asset owners and asset managers

II-4. Market surveillance

II-5. Improving the quality of disclosure, accounting standards and audit

II. TRANSFORMING THE FLOW OF FUNDS

The revised Stewardship Code has contributed to change the behaviors of major domestic institutional investors. For example, some investors have started to disclose voting records for each investee company.

To enable bold decision making in line with their capital cost, rather than to pile up retained earnings, the JFSA will encourage companies, through constructive engagement with institutional investors, – to develop business strategies for improving capital efficiency; and – to improve the quality of CEOs and boards of directors.

The number of unfair transactions (e.g. insider trading and market manipulation) and inappropriate disclosure by listed companies have increased.

In response to changes in market structure due to globalization of financial transactions and development of IT technologies, the Securities and Exchange Surveillance Commission will:

– engage in market surveillance with a forward-looking approach based on the analysis of the market environment from the macro viewpoint, and point out the root causes of problems, and;

– enhance the market surveillance system, and review and upgrade the investigation methods.

For transforming the flow of funds and vitalizing the financial market, it is critical that information necessary for making investment decisions should be sufficiently disclosed in a timely, fair and accessible manner. The JFSA has introduced fair disclosure rules and initiated discussions to consider how listed companies should enhance information disclosure.

The JFSA has also taken steps to improve the quality of accounting standards so that financial statements appropriately reflect corporate activities, and to secure appropriate audits through developing the Audit Firm Governance Code.

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FinTech

Cyber security

High-speed trading

III. OTHER POLICY PRIORITIES

The JFSA has introduced a new regulation to require institutions engaging in high-speed trading to register, maintain proper risk control and report to the JFSA.

By smooth implementation of the new regulation, the JFSA could grasp high-speed trading in practice, to ensure integrity, transparency and stability of the market.

The JFSA has done a cross-sectoral survey and carried out the first financial industry-wide exercise (Delta Wall).

These results have been fed back to the financial industry to enhance their capability to deal with cyber incidents.

In line with FinTech innovation, financial businesses could shift from a “B to C” model to a “C to B” model. Given this possible change, it is necessary to make it more customer-friendly by promoting financial services innovation while ensuring customer protection.

In light of FinTech innovation, the JFSA has taken the following measures: Amended the Banking Act for promoting open innovation between financial institutions and FinTech companies while

ensuring customer protection; Developed a framework to support FinTech companies to promote practical application of innovative IT technologies; Promoted the improvement of settlement, including more efficient processes in companies; and Strengthened the international network by establishing a framework for cooperation with foreign authorities on FinTech.

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III-1. FinTech, cyber security, and high-speed trading

III-2. Global regulatory reforms, building global network

Global regulatory reforms Active contribution to improve global standards of audit through the IFIAR

Global network and cross-border cooperation

The JFSA’s proposals include

- Attaining both growth and stability

- Assessing the impact of reforms

international initiative has started

- Shifting the focus from static regulation to dynamic supervision

- Developing supervisory approaches to promote effective financial intermediation

In April 2017, the IFIAR* opened its secretariat office in Tokyo and held a plenary meeting. * International Forum of Independent Audit

Regulators

In December 2016, the Japan Network for IFIAR** was established to support the secretariat and contribute to audit quality improvement worldwide by raising awareness on audit quality in Japan. ** Comprised of stakeholders of audits in Japan.

This is a model case for active involvement in global financial regulatory agendas.

The JFSA had agreements with foreign authorities to strengthen cooperation in the FinTech field and supervision.

The Global Financial Partnership Center (GLOPAC) :

- invites officials from the authorities in emerging countries and provides training programs (88 participants from 25 countries and regions),

- maintains and strengthens the network of officials participated in the past.

GLOPAC : Participants from emerging countries IFIAR : Permanent Secretariat and Plenary Meeting (April 2017 in Tokyo)

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III. OTHER POLICY PRIORITIES

IV-1. Supervisory reform

IV-2. Reform of the JFSA

The measures will be implemented in order to transform the JFSA into an organization capable of self-evolution to respond to rapidly changing environments.

(1) Decision-making process open to external opinions Utilize a “monitoring post for financial administration” system with which independent private sector

experts seek opinions from financial institutions and other stakeholders and deliver them to the JFSA. Establishment of various advisory groups.

(2) Revision of human resources management policies Identify the capabilities required for respective levels and skills required for individual posts.

(3) Organizational reform from the following viewpoints (i) strengthening the strategic planning function; (ii) improving the expertise of staff; (iii) enhancing the capability to plan policies (including market regulation) and to respond to FinTech; and

(iv) integrating on-site/off-site monitoring of each financial sector.

The Advisory Group on Supervisory Approaches published a report titled “Transforming the JFSA’s supervisory approaches.” The report recommended that supervision should be reformed so as to shift emphasis from “Form” to “Substance” and outlined challenges to be tackled in order to carry out the reform.

The JFSA will explore a new approach to supervision taking into account the report and examine specific measures through dialogues with a broad range of stakeholders.

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IV. SUPERVISORY REFORM AND REFORM OF THE JFSA