| The Creation of a Domestic Commercial Paper Market in Japan - Footnotes |
Steven M. Dickinson *& Takeo Kosugi * *Footnotes* B.A., 1980; J.D., 1984, University of Washington. Admitted to practice in Washington. Attorney, Harris & Moure, Seattle, Washington. * * LL.B., 1966, University of Tokyo; LL.M., 1972, Harvard University. Admitted to practice in Japan. Attorney, Matsuo & Kosugi, Tokyo, Japan. 2. Japanese Commercial Paper Sees Strong Start in Blue-Chip Firms, Asian Wall St. J., Nov. 23, 1987, at 13, col. 1 [hereinafter Strong Start]. The currency exchange rate is assumed at ¥125 to the U.S. dollar. 3. Kokunai CP, 7-cho 7,200-oku En ni (Domestic CP Reaches 7.72 Billon Yen), Nihon Keizai Shimbun, Nov. 16, 1988, at 15. 6. As used in this article, the term "short-term financial market" means the entire deregulated-interest financial market in Japan with maturities of less than one year. This definition includes deregulated bank deposits and other deposit-type transactions. This article avoids the use of the term "money market," which usually excludes bank deposits and similar deposit-type transactions. 7. See generally Y. KAWAMURA, CP = KOMASHARU PEPA (CP = Commercial Paper) (1987); M. STIGUM, THE MONEY MARKET 625-48 (rev. ed. 1983). 8. Jirkovsky, The Money Markets and Money Market Instruments, in HANDBOOK OF MODERN FINANCE 5-1, 5-29 (D. Logue ed. 1984). 9. Y. KAWAMURA, supra note 7, at 22-30; M. STIGUM, supra note 7, at 626-27, 647-48. 10. "Securitization" is a term used to describe the general process of disintermediation, in which borrowers shift from indirect borrowing from financial intermediaries such as banks to direct borrowing in the financial market through the issuance of securities such as bonds and notes. See generally H. KUSUMOTO, SEKYURITAIZESHON (Securitization) (1987). 11. Y. KAWAMURA, supra note 7, at 99-102; M. STIGUM, supra note 7, at 648. 12. Y. KAWAMURA, supra note 7, at 114-37; TANKI KIN'YU SHIJO (The Short-Term Financial Market) 26 (Nihon Keizai Shimbunsha ed. 1987) [hereinafter SHORT-TERM FINANCIAL MARKET]. 13. Gaikoku Kawase Oyohi Gaikoku Baeki Kanriho, Law No. 228 of 1949 [hereinafter FECL], trans. in 5 EHS L. BULL. SERIES (AA). 14. Gaikoku Kawase Oyohi Gaikoku Boeki Kanriho no Ichihu o Kaiseisuru Horitsu (Law Amending in Part the Foreign Exchange and Foreign Trade Control Law), Law No. 65 of 1979. 15. For an excellent discussion of these factors, see Y. KAWAMURA, supra note 7, at l-15; SHORT-TERM FINANCIAL MARKET, supra note 12, at 12-28. 16. Gaishi ni Kansuru Horitsu, Law No. 163 of 1950, repealed by Law No. 65 of 1979. 17. Impact loans are foreign currency loans to Japanese residents by authorized foreign exchange banks with no restriction on the use of the funds. See SHORT-TERM FINANCIAL MARKET, supra note 12, at 145. 18. Y. KAWAMURA, supra note 7, at 3-4. For a brief discussion of recent trends in internationalization of the Japanese financial system, see FED'N OF BANKERS ASS'NS OF JAPAN, FINANCIAL LIBERALIZATION AND INTERNATIONALIZATION IN JAPAN (1987) [hereinafter FINANCIAL LIBERALIZATION]. 19. SHORT-TERM FINANCIAL MARKET, supra note 12, at 18. The Bank of Japan (BOJ) had been a proponent of financial liberalization and internationalization since at least 1978. Id. at 17. The MOF first openly advocated this position in two reports issued in 1984: NICHIBEl KYODO (OKURASHO-ZAIMUSHO) EN-DORU RETO, KIN'YU-SHIHON SHIJO MONDAI TOKUBETSU KAIGO SAGYOBUKAI HOKOKUSHO (The Report by the Working Group of the Joint Japan-U.S. (Ministry of Finance-Department of the Treasury) Special Conference on the Yen-Dollar Exchange Rate and Financial-Capital Market Issues) (May 29, 1984); OKURASHO (Ministry of Finance), KIN'YU NO JIYUKA OYOBI EN NO KOKUSAIKA NI TSUITE NO GENIO TO TENBO (The Present Situation and Future Prospect of Financial Liberalization and Internationalization of the Yen) (May 1984). See Y. KAWAMURA, supra note 7, at 4-5. For an assessment of the impact of the first report, which is commonly referred to as the Yen-Dollar Agreement, see E. LINCOLN, JAPAN: FACING ECONOMIC MATURITY 252-265 (1988). 20. SHORT-TERM FINANCIAL MARKET, supra note 12, at 25. 21. See Y. KAWAMURA, supra note 7, at 90-98. 22. See SHORT-TERM FINANCIAL MARKET, supra note 12, at 26-27. 23. For an excellent survey of the history and current status of the short-term financial market in Japan, see SHORT-TERM FINANCIAL MARKET, supra note 12, at 12-69. For a brief survey in English, see A. VINER, INSIDE JAPAN'S FINANCIAL MARKETS 186-203 (1987). 24. Y. KAWAMURA, supra note 7, at 6. 27. FED'N OF BANKERS ASS'NS OF JAPAN, BANKING SYSTEM IN JAPAN: 1984, at 96 (1984) [hereinafter BANKING SYSTEM]. 28. E. LINCOLN, supra note 19, at 191-92. 29. For a description in English of the gensaki market, see R. EMERY, THE JAPANESE MONEY MARKET 55-68 (1984). 30. Negotiable certificates of deposit (CDs) were introduced in 1979. See generally J. HORNE, JAPAN'S FINANCIAL MARKETS 74-97 (1985). 31. FINANCIAL LIBERALIZATION, supra note 18, at 2. During October and November of . 1986, the short-term market reached a total balance of ¥110 trillion ($880 billion). The full range of different types of instruments and their proportional shares in the financial market at that time was as follows: (1) call market (8.1%), (2) bill-discount market (10.8%), (3) CDs (9.4%), (4) foreign currency deposits (17.1 %), (5) large-lot time deposits (13.8%), (6) dollar-call market (12.5%), (7) non-resident yen deposits (1.8%), (8) impact loans (3.9%), (9) money market certificates (5.9%), (10) mid-term government bonds funds (chugoku fando) (4.6%), (11) gensaki (7.9%), (12) foreign CDs and commercial paper (0.4%), (13) treasury bills (1.8%), and (14) funding bills (1.8%). SHORT-TERM FINANCIAL MARKET, supra note 12, at 161 (fig. 1). 32. Y. KAWAMURA, supra note 7, at 8. 34. Id. at 7-8; SHORT-TERM FINANCIAL MARKET, supra note 12, at 24-25, 160-61. 35. Of the fourteen instruments listed supra note 31, only treasury bills and federal funding bills are issued by non-financial companies. Securities companies dominate the mid-term government bonds fund, gensaki, and foreign CD and commercial paper markets. The remaining markets are controlled almost exclusively by the banking industry. 36. See E. LINCOLN, supra note 19, at 186-88; Yen Still Not Internationalized Enough, Bankers Say, Japan Times, Feb. 11, 1988, at 10, col. 3. In late 1986, treasury bills and federal funding bills constituted only 3.6% of the total short-term market. See supra note 31. For a general discussion of the treasury bill and federal funding bill markets, see SHORT-TERM FINANCIAL MARKET, supra note 12, at 160-73. 37. To raise funds in the gensaki market, it is necessary to have a large bond portfolio. To raise funds in the bankers' acceptance market, it is necessary to have access to some sort of trade bill. Neither of these is attractive or convenient to non-financial businesses. All other elements of the short-term market listed above, see supra note 31, are closed to non-financial businesses as a means of fund raising. 38. For a description of the response of the Japanese government and economy to the changes brought about by the shift from high to low growth, see E. LINCOLN, supra note 19, at 130-210; Y. SUZUKI, KIN'YU JIYUKA TO KIN'YU SEISAKU (Financial Liberalization and Financial Policy) (1985). 39. The following discussion relies primarily on Y. KAWAMURA, supra note 7, at 2-10, 159. 40. See E. LINCOLN, supra note 19, at 132-35. 41. For a description of the "main bank" system, see KIN'YU JITSUMU JITEN (Financial Business Dictionary) 1336 (1986). 42. See supra text accompanying notes 34-37. 43. Y. KAWAMURA, supra note 7, at 163-64. 44. Koizumi & Kawakita, Kokunai CP Shijo Sosetsu no Gaiyo (A Basic Outline of the Establishment of the Domestic CP Market), KIN'YO HOMU JIJO, June IS, 1987, at 23, 23. 45. SHORT-TERM FINANCIAL MARKET, supra note 12, at 22; Koizumi & Kawakita, supra note 44, at 24. 46. The bond purification movement is a term used to describe a decision by banks in 1933 to require the collateralization of all corporate bonds. The decision, taken in response to the plethora of bankruptcies during the Depression years, was designed to protect investors. A. VINER, supra note 23, at 110. 47. JAPAN SEC. RES. INST., SECURITIES MARKET IN JAPAN: 1988, at 75 (1988) [hereinafter SECURITIES MARKET]. 48. See E. LINCOLN, supra note 19, at 133-34; Kitamura, Kaigai CD-CP no Kokunai Hanbai ni Tsuite (Concerning Domestic Sales of Foreign CP and CDs), KIN'YO HOMU JIJO, May 15, 1984, at 20,23-24,25-26 n.10. 49. A hypothec is a civil law security interest in property roughly analogous to a common law mortgage. See generally Morii, Hypothec, in 4 DOING BUSINESS IN JAPAN V4-1 (Z. Kitagawa ed. 1987 50. See SECURITIES MARKET, supra note 47, at 76-77; A. VINER, supra note 23, at 110-12. 51. SECURITIES MARKET, supra note 47, at 76; cf. app. F (similar standards for the issuance of domestic commercial paper). 52. A. VINER, supra note 23, at Ill. 53. Shaken Torihikiho, Law No. 25 of 1948 [hereinafter SEL], trans. in JAPAN SEC. RES. INST., JAPANESE SECURITIES LAWS AND RELATED ORDERS 1 (1987). Article 65 provides in relevant part: No bank, trust corporation or such other financial institution . . . shall engage in any of the business enumerated in [article 2, paragraph 8]; [P]rovided, [t]hat any bank may purchase and sell securities upon the written order and solely for the account of clients, and any bank, trust corporation or such other financial institution .o. may purchase and sell securities for its own investment purpose and/or on the basis of trust contracts for its trustors['] accounts under the provisions of other laws.
Article 2, paragraph 8 specifically defines the term "securities business" to mean "business ... other than banks." See infra note 79. Thus, article 65 serves to exclude banks from the securities business. For a discussion on article 65, see A. VINER, supra note 23, at 22-27.
54. The Glass-Steagall Act generally refers to sections 16, 20, 21, and 32 of the Banking Act of 1933, codified as amended at 12 U.S.C. §§ 24, 377, 378, 78 (1982). Section 16 of the Act provides in relevant part: The business of dealing in securities and stock by [a national bank] shall be limited to purchasing and selling of such securities and stock without recourse, solely upon the order, and for the account of, customers, and in no case for its own account, and the [national bank] shall not underwrite any issues of security or stock.
12 U.S.C. § 24(7) (1982).
55. The roles of the BOJ and the MOF bureaus are described in J. HORNE, supra note 30, at 32-34, 74-97. For a description of the official functions of the MOFs Banking and Securities Bureaus, see id. at 229-30. The BOJ is the central bank of Japan, serving as the issuer of currency and acting as the bank for private Japanese banks and government entities. See generally NIHON GINKO (The Bank of Japan) (K. Hagiwara & M. Masubuchi ed. 1986). 56. For summaries of the reasons given by banks for their opposition to the introduction of commercial paper, see Y. KAWAMURA, supra note 7, at 12, 15; SHORT-TERM FINANCIAL MARKET, supra note 12, at 288; Kitamura, supra note 48, at 23-24,25-26 n.l0. 57. The banking industry in Japan is dominated by thirteen city banks, among which are the four largest banks in the world and eight of the twenty-five largest banks in the world. A. VINER, supra note 23, at 150-51. The city banks "specialize in short-term loans to large corporations, although the loans are routinely rolled over so that they become [de facto] long-term loans. Further development of the short-term markets could threaten the banks because ... [d]epositors could move to investments in treasury bills and commercial paper, hurting the deposit base of the banks. Corporate borrowers could also turn to direct credit instruments such as commercial paper in lieu of bank loans." E. LINCOLN, supra note 19, at 188. 58. For descriptions of the events of this period, see Y. KAWAMURA, supra note 7, at 140-56; SHORT-TERM FINANCIAL MARKET, supra note 12, at 279-85; Kitamura, supra note 48, at 20-21. 59. Gaikoku Kawase Oyobi Gaikoku Boeki Kanriho no Ichibu o Kaiseisuru Horistu (Law Amending Part in the Foreign Exchange and Foreign Trade Control Law), Law No. 65 of 1979. The 1979 amendment came into effect on December I, 1980. See Miyazaki and Goodman, Guide to the Amended Foreign Exchange and Foreign Trade Control Law, JAPAN Bus. L.J., Feb. 1981, at 45, 47, 78 n.l. 60. FECL, art. 6, para. 1, item 11. 61. Id. art. 6, para. 1, item 7 (" 'Means of payment' shaIl mean bank notes, treasury notes, notes of smaIl denomination, coins, checks, bills of exchange, postal money orders, letters of credit, and other orders for payment, which are prescribed by Cabinet Order."). 62. FECL, art. 6, para. 1, item 11. 64. Article 2, paragraph 2 of the Cabinet Order Concerning Foreign Exchange Control (Gaikoku Kawase Kanrirel), Cabinet Order No. 260 of 1980, provides that "negotiable certificates of deposit, or other securities or documents as prescribed by Ministry of Finance Ordinance" are securities under the FECL. Under article 2 of the MOF's Ordinance Concerning Foreign Exchange Control (Gaikoku Kawase no Kanri ni Kansuru Shorei), Ministry of Finance Ordinance No. 44 of 1980, such "other securities" include commercial paper. 65. FECL, art. 20, para. 2 (guarantee of securities), para. 5 (purchase of securities), para. 6 (issuance of securities). 66. Id. art. 22, para. 1, items 2, 5. 67. Id. art. 22, para. 1, items 3, 6. 68. Id. art. 22, para. 1, item 1. 70. Four adverse effects are listed in article 23:
72. At that time, foreign commercial paper was synonymous with U.S. commercial paper because the only developed commercial paper market was in the United States. 73. Article 22, paragraph 1 provides that designated securities companies are exempt from the notice requirement imposed by that article for purchase of securities. A securities company is designated if it is licensed by the MOF under article 28 of the SEL or, in the case of a foreign securities company, under article 3 of the Law Concerning Foreign Securities Dealers (Gaikoku Shakengyasha ni Kansuru Haritsu), Law No.5 of 1971 [hereinafter LFSD]. 74. Y. KAWAMURA, supra note 7, at 142. 75. The term yuka shoken is often translated merely as "security," although the literal translation is "valuable security." This article uses the literal translation in order to distinguish yuka shoken (valuable security), the term used in the SEL, from shoken (security), the term used in the FECL. 76. Y. KAWAMURA, supra note 7, at 142. 77. The anti-fraud provisions of the SEL are: article 58 (prohibition of unfair transactions), article 125 (prohibition of washed sales and manipulation, and restriction of stabilizing operations) and article 197 (penal provisions). Article 58 of the SEL is a general anti-fraud provision, modeled after section 1O(b) of the U.S. Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982). Violation of article 58 can result in penal sanctions, SEL, art. 197, para.l, item 2, and an injunction order may be issued on application of the Minister of Finance. Id. art. 187. 78. T. SUZUKI & I. KAWAMOTO, SHOKEN TORIHIKIHO (The Securities and Exchange Law) 59-60 (rev. ed. 1984). Under the SEL, valuable securities are:
79. Domestic securities companies are regulated under the SEL, which defines "securities business" entirely in terms of dealings in valuable securities. SEL, art. 2, para. 8. Foreign securities companies are regulated under the LFSD, which uses the same definition. LFSD, art. 2, para. 4. The recently enacted Law Concerning the Regnlation, etc. of Investment Advisory Business Regarding Valuable Securities (Yukashoken ni Kakaru Toshi Komongyo no Kisoku nado ni Kansuru Horitsu), Law No. 74 of 1986, also limits its scope to transactions involving valuable securities. Id. art. 2, paras. 1, 2, 5. 80. See T. HAZEN, THE LAW OF SECURITES REGULATION 14-23 (1985). 82. SEL, art. 2, para. 1, item 9. 84. The FECL's definition of security can be also expanded to accommodate new financial instruments. FECL, art. 6, para. 1, item II. 86. SEL, art. 65; see supra note 53. 87. Y. KAWAMURA, supra note 7, at 143. The Banking Law (Ginkoho), Law No. 59 of 1981 [hereinafter Banking Law], was adopted on June 1, 1981 and came into force on April 1, 1982. T. SUZUKI & I. KAWAMOTO, supra note 78, at 63. 88. The SEL was revised by the Law to Amend in Part the Securities and Exchange Law (Shaken Torihikiho no Ichibu o Kaiseisuru Horitsu), Law No. 62 of 1981, which was enacted on June 1, 1981 and became effective on April 1, 1982. T. SUZUKI AND I. KAWAMOTO, supra note 78, at 62. 89. As amended, article 43 reads: No securities [company] shall be engaged in a business other than [the] securities business; [p]rovided, however, that this shall not apply to business[es] relating to [valuable] securities and other businesses relating to [the] securities business as the Minister of Finance appraise[s] and approve[s] those that [are not] inconsistent with the public interest or the protection of investors in conducting its securities business.
SEL, art. 43 (emphasis added). The italicized words were added by the 1981 amendment specifically to allow for securities companies to deal in CDs and commercial paper, which had been defined as securities under the FECL. T. SUZUKI & I. KAWAMOTO, supra note 78, at 340-43.
90. Shaken Gaisha no Kengyo no Shanin ni Tsuite (Concerning Approval of Subsidiary Business of Securities Companies), Ministry of Finance, Securities Bureau Circular No. 1879 of 1967, art. 1, para. 1, item 7 [hereinafter Subsidiary Business Circular], added by Kengyo Kankei Tsiitatsu no Ichibu Kaisei to Kore ni Tomonau Kanren Tsiitasu no Seibi (partial Amendment of Circulars Regarding Subsidiary Business and Accompanying Adjustment of Related Circulars). Ministry of Finance, Securities Bureau Circular No. 513 of 1982. See T. SUZUKI & I. KAWAMOTO, supra note 78, at 62-63. 91. Banking Law, art. 10, para. 2, item 5. 92. Ginkoho Shiko Kisoku (Enforcement Regulation of the Banking Law), Ministry of Finance Ordinance No. 10 of 1982, art. 12, para. 2. 93. Kaigai CD-CP no Toriatsukai Ruru (Mar. 31, 1982) [hereinafter Foreign CD-CP Rules], reprinted in KIN'YU HORITSU JIJO, May 15, 1984, at 27. 95. T. SUZUKI & I. KAWAMOTO, supra note 78, at 74. "Stated simply, administrative guidance occurs when administrators take action of no coercive legal effect that encourages regulated parties to act in a specific way in order to realize some administrative aim." Young, Administrative Guidance in the Courts: A Case Study in Doctrinal Adaptation, 17 LAW IN JAPAN 120, 120 (1984) (emphasis added). 96. T. SUZUKI & I. KAWAMOTO, supra note 78, at 72-74. 97. Kitamura, supra note 48, at 20-21. 98. See generally Kaigai CP-CD no Jisshitsu Endate o Meguru Mondaiten (On the Problems Associated with Foreign CP and CDs Effectively Denominated in Yen), KIN'YU HOMU JIJO, June 5, 1983, at 3. 99. Foreign CD-CP Rules, supra note 93, sec. 4. 100. Kitamura, supra note 48, at 25 n.3. 102. Y. KAWAMURA, supra note 7, at 145. 103. Kitamura, supra note 48, at 25 n.3. 105. See Y. KAWAMURA, supra note 7, at 149. 106. The final effective rules for dealing in foreign commercial paper and CDs were published as Concerning the Business of Dealing in Negotiable Certificates of Deposit and Commercial Paper Issued Abroad (Gaikoku de Hakkosareta Jotosei Yokin Shosho Oyobi Komasharu Pepa no Toriatsukai Gyomu ni Tsuite), Ministry of Finance, Banking Bureau Circular No. 833 of 1984 [hereinafter Foreign CP Circular]. reprinted in KIN'YU HOMU JIJO, May 15, 1984, at 26; see app. A. Details concerning the circular were further explained in Concerning Items of Concern in Relation to the Business of Dealing in Negotiable Certificates of Deposit and Commercial Paper Issued Abroad (Gaikoku de Hakkosareta Jotosei Yokin Shosho Oyobi Komasharu Pepa no Toriatsukai Gyomu ni Kakaru Ryui Jiko ni Tsuite), Ministry of Finance, Banking Bureau, Administrative Communication of Banking Section Chief and Medium and Small Finance Section Chief (March 30, 1984) [hereinafter Administrative Communication], reprinted in KIN'YU HOMU JIJO, May 15, 1984, at 26; see app. B. 107. Two groups in the Japanese financial community were concerned about this potential shift in short-term funds. First, Japanese banks were concerned that funds would be shifted from the Japanese money market, which is almost entirely under their control, to a dollar sector of the market that would be under the control of non-Japanese institutions. Cf. Y. KAWAMURA, supra note 7, at 146-47. Second, Japanese monetary authorities were concerned about the "hollowing-out" phenomenon, in which Japanese investors' funds would leave the yen market and be placed in a dollar market which is not under the control of the Japanese authorities and which may not support Japanese policy objectives. Cf. id. at 148. 108. See Kitamura, supra note 48, at 23. 109. That the decision to issue foreign commercial paper at a yen-based interest rate would alleviate this concern is evident in the following example. Suppose that, in 1984, the yen short-term interest rate was 4.0% and the dollar rate was 6.0%. Everything being equal, the Japanese investor would take the dollar rate over the yen rate, leading to a shift to dollar based instruments (like U.S. treasury bonds). However, with yen-based foreign commercial paper, the interest was set at the yen rate of 4.0%, leaving the Japanese investor with no incentive to shift to the dollar rate. 110. Foreign CP Circular, supra note 106, art. 1, para. 2; Administrative Communication, supra note 106, art. 1, para. 2. This restriction was imposed to prevent foreign commercial paper from becoming a replacement for domestic commercial paper. Kitamura, supra note 48, at 24. 111. See SHORT-TERM FINANCIAL MARKET, supra note 12, at 284 (Table 14). 113. See Y. KAWAMURA, supra note 7, at 161-67; SHORT-TERM FINANCIAL MARKET, supra note 12, at 285-91. 114. In the same way that the thirteen major city banks dominate Japan's banking industry, the four major securities companies dominate Japan's securities industry. These companies are: Nomura Securities, Yamaichi Securities, Daiwa Securities and Nikko Securities. See A. VINER, supra note 23, at 12-22. 115. SHORT-TERM FINANCIAL MARKET, supra note 12, at 288. 117. Tegataho, Law No. 20 of 1932, art. 75 [hereinafter Law on Bills], trans. in 2 EHS L. BULL. SERIES (JB). 118. See infra text accompanying notes 144-146. 119. SHORT-TERM FINANCIAL MARKET, supra note 12, at 292. 120. Yoshikawa & Harada, Kokunai CP Shijo Sosetsu no Keii to Sono Gaiyo (The Circumstances and Basic Outline of the Establishment of a Domestic CP Market), KIN'YU HOMU JIJO, Nov. 25, 1987, at 7, 7. 121. The Securities and Exchange Council was formed pursuant to articles 165 to 170 of the SEL. It is composed of thirteen members from the academic and financial community, selected by the Minister of Finance. The Council is charged with investigating important matters relating to valuable securities. Studies published by the Council are usually the forerunner of major changes in the securities laws. The Board of Investigation of the Financial System does not have a statutory basis. It is an informal body appointed by the Minister of Finance. 122. Kokunai CP Shijo no Gutaian ni Tsuite [hereinafter Concrete Proposal], reprinted in Koizumi & Kawakita, Kokunai CP Shijo Sosetsu no Gaiyo (An Outline of the Establishment of the Domestic CP Market), K!N'YU HOMU JIJO, June 15, 1987, at 23, 24; see app. C. For an explanation of the Concrete Proposal and the events that led to its adoption, see Kawamura, Kokunai Komasharu Pepa no Sosetsu (The Establishment of Domestic Commercial Paper), SHOJI HOMU, Sept. 5, 1987, at 12; Koizumi & Kawakita, supra note 44; Miyauchi, Kokunai CP Shijo no Sosetsu to Sono Gaiyo (The Establishment of the Domestic CP Market and Its Basic Outline), GINKO JITSUMU, July 1987, at 16; Ogawa, Kokunai CP no Shohin Naiyo to Shijo Mekanizumu (The Content of the Domestic CP Product and Market Mechanism), GINKO JITSUMU, July 1987, at 22. 123. Like the Study Group and the Board of Investigation of the Financial System, this "group" had no official status. It was simply an informal working group convened by the MOF bureaus to work out the practical details of offering and underwriting commercial paper. The formation of such drafting work groups is common in Japan. For a description of the work of this group, see Yoshikawa & Harada, supra note 120, at 8-9. 124. The group developed three basic contracts: (1) an issuing-agent contract, (2) a dealer contract and (3) a backup credit line contract. The contracts are reproduced and explained in Satoyoshi, Shokeiyakusho no Seibi to Sono Gaiyo (Sono 1) (preparation of the Contracts and Their Basic Outline (part 1)), KIN'YU HOMU JIJO, Nov. 25, 1987, at 22 (issuing-agent and dealer contracts) [hereinafter Issuing-Agent and Dealer Contracts] and in Satoyoshi, Shokeiyakusho no Seibi to Sono Gaiyo (Sono 2-Kan) (preparation of the Contracts and Their Basic Outline (part 2-End)), KIN'UU HOMU JIJO, Dec. 15, 1987, at 21 (backup credit line contract) [hereinafter Backup Credit Line Contract]. A detailed description of all aspects of the commercial paper business procedures resulting from the basic contracts is given in Maeda, Kokunai CP Shijo no Shikumi ni Tsuite (Concerning the Structure of the Domestic CP Market), KIN'YU HOMU JIJO, Nov. 25, 1987, 14. The standard forms for the commercial paper instrument, bank transactions and other matters are described in Yabe, CP Sen'yo Yoshi no Toitsu Kikaku-Yoshiki Oyobi Toritate-Shiharai to Toriatsukai (Unified Forms for Use with CP and Procedures for Collection and Payment), KIN'YU HOMU JIJO Nov. 5, 1987, at 18. 125. Shoken Gaisha ni Yoru Kokunai de Hakkosareru Komasharu Pepa no Toriatsukai ni Tsuite (Concerning Dealing in Domestic CP by Securities Companies), Ministry of Finance, Securities Bureau Circular No. 1830 of 1987 (for securities companies); Kokunai de Hakkosareru Komiisharu Pepa no Toriatsukai ni Tsuite (Concerning Dealing in Domestically Issued Commercial Paper), Ministry of Finance, Banking Bureau Circular No. 2825 of 1987 [hereinafter Domestic CP Circular] (for banks); see app. D. Because the two circulars are virtually identical, this article refers only to the latter circular in subsequent discussions. See generally Sonoda, Shoken Gaisha ni Yoru Kokunai CP no Toriatsukai ni Tsuite (Concerning Dealing in Domestic CP by Securities Companies), KIN'YO HOMU JIJO, Nov. 25, 1987, at 11. 126. Shaken Shea 52% (Securities Firms' Share at 52%), Nihon Keizai Shimbun, Dec. 22, 1987, at 1 [hereinafter 52% Share]. 127. See supra text accompanying notes 116-119. 128. Concrete Proposal, supra note 122, sec. II(2); Domestic CP Circular, supra note 125, art. 1. 129. The MOF considered two primary alternatives to treating commercial paper as a promissory note. Sonoda, supra 125, at 12. The first and most attractive option was simply to designate domestic commercial paper as a new type of financial instrument created by a special statute. The statute could have been drafted to provide special features attractive to companies and to investors. Given the tension between the securities companies and the banks, however, it was believed that a new statute would have been hard to design and might delay the creation of the domestic commercial paper market for a number of years. The second alternative was to treat commercial paper as a type of corporate debenture under the Commercial Code. SHOHO (Commercial Code), Law No. 48 of 1899, art. 296. The most obvious problem with this approach was that corporate debentures were "valuable securities" under the SEL. SEL, art. 2, para. 1, item 4. As such, banks would have been excluded from dealing in domestic commercial paper. See supra section IV.B. Because this would have contradicted the decision to allow both banks and securities companies to deal in domestic commercial paper, this option was never seriously considered. See generally Kosugi, Beikoku ni Okeru CP Sosho no Ronten to Waga Kuni no Hosoku (Issues Raised in CP Litigation in the United States and Legal Rules in Japan), KIN'YO HOMU JIJO, Sept. 5, 1981, at 18, 22. 130. The Law on Bills defines a promissory note as follows:
131. This credit is created in two ways. First, between banks and their customers, short-term lending is conducted by means of bank loans issued in exchange for bills and notes. Second, between businesses, bills and notes are customarily issued as an alternative to cash settlement of sales and other transactions. These bills and notes are then discounted with a bank and serve as working capital for the recipient. Tani, Function and Practice of Bills of Exchange and Promissory Notes, in 3 DOING BUSINESS IN JAPAN III 3-1, III 3-2 (Z. Kitagawa ed. 1987). 133. A uniform, prescribed form for domestic commercial paper promissory notes was chosen to prevent forgery and thereby to protect investors. It also allows for uniform procedures by financial institutions, such as cancellation by machine. Yabe, supra note 124, at 18. A sample note can be found in Issuing-Agent and Dealer Contracts, supra note 124, at 23. 134. The stamp tax issue is discussed in Kokunai CP no Kazei Mondai (On the Question of Taxation of Domestic CP), SHOJI HOMU, Nov. 5, 1987, at 48. A stamp tax is imposed on promissory notes by the Stamp Tax Law (Inshizeiho), Law No. 23 of 1967. 135. The rates are as follows:
136. Yoshikawa & Harada, supra note 120, at 8. 137. There is one additional minor problem. Commercial paper is typically issued as a bearer instrument, but the Law on Bills does not recognize bearer instruments. Law on Bills, art. 75, para. 5; art. 76. However, Japanese commercial practice accommodates this by issuing a promissory note with a blank space for the name of the payee. This is known as a shiraji tegata. The name of the payee is filled in before presentment of the note for payment, then the note is recognized as valid. See Kosugi, Beikoku no CP Ronso to Waga Kuni no Hoteki Ichitsuke (The United States CP Dispute and Its Legal Status in Japan), GINKO JITSUMU, July, 1987, at 18, 20-21. 138. The MOF's explanation for allowing both banks and securities companies to deal in commercial paper is that commercial paper has a dual nature. It has both the characteristics of investment securities, which are normally handled by securities companies, and of shortterm financial instruments, which are normally handled by banks. See Y. KWAWMURA, supra note 7, at 144 (statement of the chief of the MOF's Securities Bureau before the Finance Committee of Japan's House of Representatives on May 8, 1981). 140. Concrete Proposal, supra note 122, sec. 12. 141. Id.; Subsidiary Business Circular, supra note 92, art. 1, para. 1, item 13. Item 13 was added to the circular on November 2, 1987. "Shoken Gaisha no Kengyo no Shonin ni Tsuite" Tsutatsu no Ichibu Kaisei ni Tsuite (Concerning the Partial Revision of the Circular "Concerning Approval of Subsidiary Business of Securities Companies"), Ministry of Finance, Securities Bureau Circular No. 1828 of 1987. 145. Concrete Proposal, supra note 122, sec. 11(7). 146. Sonoda, supra note 125, at 12. For example, virtually all of the rules for domestic commercial paper provided in the Concrete Proposal, supra note 122, and the Domestic CP Circular, supra note 125, are included in article 6 of the basic dealer contract. See Issuing Agent and Dealer Contracts, supra note 124, at 28. Thus, by working with the banks and securities companies to draft these basic contracts, the MOF was able to ensure that the parties to a domestic commercial paper transaction would consent to the conditions proposed by the ministry. This is an example of regulation by administrative guidance. See supra note 95. 147. Concrete Proposal, supra note 122, sec. 11(3); Domestic CP Circular, supra note 125, art. 1, para. 1. 148. Koizumi & Kawakita, supra note 44, at 25. 149. Sonoda, supra note 125, at 12. 150. See, e.g., CP Gets Fast Start, but Endurance Test Remains, Japan Econ. J., Feb. 13, 1988, at 4, col. 1 [hereinafter CP Starts]. 151. M. STIGUM, supra note 7, at 632. 152. Concrete Proposal, supra note 122, sec. II(5); Domestic CP Circular, supra note 125, art. 1, para. 3. 153. M. STIGUM, supra note 7, at 626. 154. Yoshikawa & Harada, supra note 120, at 10 n.2. 156. Miyauchi, supra note 122, at 17. 157. Concrete Proposal, supra note 122, sec. II(4); Domestic CP Circular, supra note 125, art. 1, para. 2. 158. Law on Bills, art. 5, para. 1 (interest permitted only on bills payable on sight or at a fixed period after sight). 159. See M. STIGUM, supra note 7, at 635-37. 160. See A. VINER, supra note 23, at 112; Waga Kuni ni Okeru Kakuzuke Seldo no Riyo Jokyo (The Condition of Use of the Rating System in Japan), SHOJI HOMU, Aug. 25,1987, at 36. There are currently five credit-rating services operating in Japan. Three of them are Japanese entities: The Japan Bond Research Institute (JBRI) (Nihon Koshasai Kenkyujo) was formed in 1979 by Nihon Keizai Shimbunsha, the publisher of the leading economic daily in Japan (Nihon Keizai Shimbun), and was spun off as a separate and independent entity in 1985; Nippon Investor's Service (NIS) (Nippon Inbestazu Sabisu) was formed in April 1985 by the major bond trustee banks and the big four securities firms; The Japan Credit Rating Agency (JCR) (Nihon Kakuzuke Kenkyujo) was founded in April 1985 by the Bank of Tokyo, the Long Term Credit Bank, trust banks, insurance companies and others. The two major U.S. rating services have also opened offices in Tokyo: Moody's Investor's Service in 1985 and Standard & Poor in 1986. There are some impediments to the effective creation of these rating services. The independence of NIS and JCR are questionable because they are clearly associated with financial institutions that are inclined to promote investment. Moody's and Standard & Poor are, of course, independent, but their activities in Japan to date have not been extensive. In addition, there is a general reluctance, even on the part of publicly-held Japanese companies, to allow any independent outsider to dig too deeply into their finances. Also, no rating system is really useful until it has established a good comparative base. That is, an A rating has no meaning except in comparison to other issues that have received a higher or lower rating. Thus, even if ratings are widely used, it will take some time before the system is of use to the investor. 161. Concrete Proposal, supra note 122, sec. 11(6)(1); see app. F. Approximately 170 to 180 companies currently fall under this standard. Maeda, supra note 124, at 15 n.1. For a discussion of unsecured straight bonds, see SECURITIES MARKET, supra note 47, at 76-77. 162. Maeda, supra note 124, at 15 n.1; see app. F. Companies falling under this standard include Japan's nine electric power companies, Nippon Telegraph and Telephone Corp. (NTT) and Kokusai Denwa Denshin (KDD). Id. For a discussion of general mortgage bonds, see SECURITIES MARKET, supra note 47, at 75. 163. See supra notes 161 & 162. Nihon Keizai Shimbunsha criticized the standards for issuance as being overly strict, and ascribed this to the excessive concern of the banks. It argued that the issuing standard for unsecured convertible debentures (about 380 companies) or secured convertible debentures (about 480 companies) would adequately protect investors and would aIlow greater participation in the issuing market. SHORT-TERM FINANCIAL MARKET, supra note 12, at 298. 164. See Sonoda, supra note 125, at 13. 165. Concrete Proposal, supra note 122, sec. II(6)(2). A backup line of credit is an agreement between an issuer and a bank that the bank will lend funds to the issuer on demand if the issuer determines that it will be unable to make timely payment on its outstanding commercial paper. A backup credit line does not extend any rights to a third party. A guarantee, on the other hand, is a commitment to stand in the place of the issuer if the issuer fails to make payment and, therefore, confers rights on the third party. Backup Credit Line Contract, supra note 124, at 21. 166. See M. STIGUM, supra note 7, at 632-35. 167. Most commercial paper is not repaid at maturity but is instead rolled over. Funds for the roll-over are obtained through new issues in the commercial paper market. This creates the risk that, in the event of a financial disturbance such as the failure of a major commercial paper issuer, even the most creditworthy company would be unable to borrow enough funds to meet the obligations on its outstanding commercial paper. Backup credit lines are obtained to prevent this. Backup Credit Line Contract, supra note 124, at 21. 168. Yoshikawa & Harada, supra note 120, at 8; see app. F. It is estimated that approximately forty companies meet the first three standards, and that Japan's nine electric power companies as well as NIT and KDD meet the fourth standard. Id. at 10 n.7. 169. Strong Start, supra note 2. 170. CP Starts, supra note 150. 171. Low CP Rates May Hinder Market, Japan Times, Feb. 26, 1988, at 7, col. 6 [hereinafter Low CP Rates]. 172. Trading Firms Increasing Issues, Japan Econ. J., Feb. 13, 1988, at 4, col. 3 [hereinafter Trading Firms]. 174. 52% Share, supra note 126; Nikko Securities Is Top Commercial Paper Underwriter, Japan Econ. J., Nov. 28, 1987, at 6, col. 4. 175. Top-Rated Companies to Issue First CPs Carrying Interest of About 4%, Japan Times, Nov. 20, 1987, at 6, col. 4. 176. See supra text accompanying notes 134-135. 177. Strong Start, supra note 2; "Saiaku no Jitai" Saketa CP (CP Avoids "Worst Situation"), Nihon Keizai Shimbun, Nov. 22. 1987, at 18 [hereinafter Worst Situation]. 178. Strong Start, supra note 2; Worst Situation, supra note 177. 179. Strong Start, supra note 2. 180. Trading Firms, supra note 172. 181. For an explanation of Euroyen commercial paper, see Miyazaki, Hikyojusha Yiiroen CP no Hakko Kaikin ni Tsuite (Concerning the Lifting of the Prohibition Against the Issuance of Euroyen CP by Non-Residents), KIN'YO HOMU JIJO, Dec. 15, 1987, at 26. Two days before the actual lifting took place, the MOF issued the Guidelines for Non-Residents Dealing in Euroyen CP (Hikyojusha Yiiroen CP no Toriatsukai Yoryo) in order to provide basic rules for Euroyen commercial paper. Id. at 27-28; see app. E. 182. Miyazaki, supra note 181, at 27. 192. A Yen for the CPs, INT'L FIN. L. REV., Jan. 1988, at 7. 193. CP Shijo Genjo Hokoku (A Report on the Current Condition of the CP Market), KIN'YU HOMU JIJO, Feb. 25, 1988, at 2, 3 (reporting that, as of February 25, 1988, only Svensk Exportkredit and Citicorp have issued Euroyen commercial paper) [hereinafter Current Condition]. 194. MOF: Foreign Firms to Issue Samurai CPs, Japan Econ. J., Jan. 30, 1988, at 19, col. 2. 195. T. AMAYA, UGOKlDASHITA CP (CP Begins Moving) 163-65 (1988); see app. G. 196. Id.; see supra section V.A.3. 197. Samurai Paper Isn't Attracting Foreign Firms, Asian Wall St. J., Jan. 30, 1988, at 13, col. 2 [hereinafter Samurai Paper]. The only issuer has been Dow Chemical Co. Id.; Current Condition, supra note 193, at 3. 198. Samurai Paper, supra note 197. 200. Ogawa, supra note 122, at 24-25. 201. See Shibaya, Tekisei Reto de Shijo Ikusei (Developing a Market with Proper Rates), Nihon Keizai Shinbun, Dec. 9, 1987, at 13. 202. Low CP Rates, supra note 171. 203. The Concrete Proposal provided for review one year after the establishment of the market. The amount and maturity restrictions would be lifted at this time. Concrete Proposal, supra note 122, sec. 12; see infra note 216. 204. For example, Sumitomo Trading Co. had five securities companies and nine banks underwrite its first issue. Oshima, 2-gatsu made Yosu-mi (Observing the State of Affairs Until February), Nihon Keizai Shimbun, Dec. 8, 1987, at 15. Because of this competition, Mitsubishi Trading Co. maintains contracts with over fifty banks and securities companies. Trading Firms, supra note 172. 205. This system includes a lead underwriter which represents the interests of the group in negotiations with the issuer. 206. "In Japan, ceilings on interest rates by type and maturity of deposits are set by notifications of the Finance Minister based on the Temporary Interest Rate Adjustment Law and on guidelines set forth by the Bank of Japan. The deregulation of interest rates is proceeding through the reduction of areas covered by these regulations." FINANCIAL LIBERALIZATION, supra note 18, at 3; see Rinji Kinri Choseiho (Temporary Interest Rate Adjustment Law), Law No. 181 of 1947, art. 2. 207. The dual interest rate structure and its effects are described in Y. SUZUKI, MONEY, FINANCE, AND MACROECONOMIC PERFORMANCE IN JAPAN 4-9 (R. Feldman trans. 1986). 209. See Short-Term Prime-Rate Fixing Method Likely to Be Revised in Near Future, Japan Times, Jan. 29, 1988, at 12, col. 4 [hereinafter Likely Revision]. 211. As of March 2, 1988, the CD rate was fluctuating between 4.29% and 4.45%. See Nikkei Kin'yu Shimbun, Mar. 3, 1988, at 3 (table of interest rates for short-term financial instruments). 212. As of March 2, 1988, the U.S. prime rate was 8.5%, while the CD rate varied between 6.23% and 6.63%. See Asian Wall St. J., Mar. 3, 1988 at 11, col. 6 (table of interest rates). 213. See Y. SUZUKI, supra note 207, at 5 (fig. 1.1). 214. See Likely Revision, supra note 209. 216. On December 2, 1988, the MOF announced new rules for domestic commercial paper, for domestic commercial paper issued by non-residents (samurai commercial paper), and for Euroyen commercial paper issued by non-residents. The new rules became effective on December 15. Kikan, 2-shukan Ijo 9-kagetsu-nai (Issuing Period to Be Between 2 Weeks and 9 Months), Nihon Keizai Shimbun, Dec. 3, 1988, at 5. The new domestic commercial paper rules contain the following new features:
As of November 20, 1989, the amount of yen-based commercial paper in Japan reached ¥8 trillion ($64 billion). Japan's CP Market Blossoms in 1st Year, Japan Econ. J., Dec. 3, 1988, at 22, co!. 1. |
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