Chapter 3
Settling the Bubble Economy in Real Terms and Establishing a Financial System Designed for the 21st Century

The outbreak and subsequent collapse of the bubble economy had an enormous influence on the Japanese financial system and, therefore, became one of the fundamental causes of the current seriously weak economy. Against the background of the slow progress of the disposal of non-performing claims held by financial institutions and the recession, confidence toward Japanese financial institutions by domestic and overseas investors has been diminishing. Moreover, the substantial decline of stock prices of the financial institutions results in actual decline of their capital, leading to the outbreak of market-led financial system uneasiness. Responding to the challenge of maintaining and raising capital ratios based on the Basle Accord and prompt corrective actions, the financial institutions have squeezed loan assets to avoid newly mounted non-performing claims that need to be written off. As a result of increasing concern over credit risk in the market, the problem of credit squeeze became more and more serious.
Thus, the Japanese indirect financial system has, by now, not functioned properly. The vicious circle comprised of the weak real economy and the credit squeeze, both of which influence the other, continues. Against the background of such a critical situation, the government responded aggressively such as to prepare the use of \60 trillion as public money, and to fulfill, to a large extent, lending and guarantee facilities for governmental financial institutions as a measure to counter the credit crunch. Moreover, the government made "non-viable banks" leave the market, with strong leadership. The government now conducts stricter examination and supervision procedures when assessing assets of the financial institutions, and induces proper provisions for non-performing claims based on the government's assessment. Also, the government intends to introduce capital injection based on incentive mechanisms such as promoting drastic restructuring and changing management strategy of the financial institutions. Those measures are in line with the proposal made by the Economic Strategy Council in "Appeal to the Coming Emergency Economic Package" (November 6, 1998), and we welcome the government's initiative.
Along with the government's initiative regarding capital injection and emergency measures related to utilize the governmental financial institutions, it is indispensable to dispose of huge non-performing claims of the financial institutions in real terms, which is the most negative legacy of the bubble economy. In addition, it is also indispensable to drastically reform the financial system, which could not cope with the current status of the economy, and to construct a financial system designed for the 21st century.

(1) Under recognition of the above, the Economic Strategy Council sets the next two years as "a period to settle the bubble economy in real terms" and recommends that the government deal with the disposal of the non-performing claims promptly and intensively. At the same time, it is important that the reorganization and liquidation of the financial institutions be induced in accordance with a financial system designed for the 21st century, by responsively applying measures based on prompt corrective actions before April 2001, during which pay-off is suspended. Huge excess liabilities of the corporations on the other side of the non-performing claims held by the financial institutions exist. When settling the bubble economy, it is also necessary to do away with the excess liabilities promptly at the side of the corporations (More detailed explanations will be presented in Chapter 4).

(2) It is inevitable that deflation pressure of some degree will persist during the process of settling the bubble economy in real terms. Some symptoms of deflation pressure have already been observed. It is mandatory that such deflation pressure should be lessened as much as possible, and we must avoid a deflation spiral. In order to accomplish this, not only fiscal policy but also monetary policy should play its role to properly cope with the current severe status of the economy and credit uneasiness; the traditional and conventional way of thinking must be shunned. In concrete terms, market operations should be fulfilled in the form of commercial paper to prevent the rise of short-term interest rates and government bonds to be held to maturity to prevent the rise of long-term interest rates. Including these measures, all thinkable means should be incorporated to soothe the excessive credit uneasiness in the financial markets and to heighten the effect of monetary easing in quantitative terms. At the same time, it goes without saying that maintaining fiscal discipline is important, and the Council should be cautious of the central bank underwriting the government bonds, which would most probably lead to easy expansion of government debt and the subsequent inflation.

(3) In addition to the promotion of sales and purchases of the non-performing claims, it is important to change the recognition of land and real estate from assets to "possess" to that of "utilizing the most and attaining profit." In order to do so, it is indispensable to transform the various resources and assets that are not performing or fixed at present, to performing assets which bear cash flow, and to enhance the profitability of investment. The following three measures should be promptly implemented.
1) In addition to promoting the sales and purchases of the non-performing claims held by the financial institutions, the environment should be consolidated, a step that will allow the disposal of real estate in real terms by selling and utilizing effectively the non-performing claims that are kept as collateral. This is much more than the provisions and write off of the non-performing claims on the balance sheet.

2) To vitalize the real estate market, the real estate investment market should be promptly consolidated by way of consolidating new methods of funding, creating incentives to real estate investments, and consolidating the infrastructure of the real estate market. It is important that the most effort be devoted to liquidation and securitization of real estate, including performing real estate.

3) From the perspective mentioned above, it is useful to conduct a "strategic pilot plan" coupled with urban renewal, to show the successful experience of the liquidation of the real estate.
(4) To revitalize the Japanese economy, perspectives how to utilize personal financial assets of \1,200 trillion as precious resources is important, along with promptly recovering the financial intermediary function, which is not working well. For this reason, a new financial route should be established to supplement and alternate the current indirect financial system. Moreover, it is important to promote the efficiency and diversification of financial services from both funding and investment aspects. Through these activities, customer convenience should be enhanced and development and revitalization of the Japanese financial market and that of the finance industry should be attained.
1) Japan's indirect financial system is based on land collateral; financial institutions take risks collectively with unrealized capital gains preserved by formerly acquired land and stocks as a buffer. Such a system is not sustainable when unrealized capital gains are diminishing and the soundness of the financial institutions are worsening accordingly as a result of the decline of land and stock prices. It is necessary to rid ourselves completely of the financial and economic system that is dependent on land, namely the land standard.

2) In the newly established financial system, each economic entity, including individuals (households), corporations, and financial institutions, acting as investors, debtors, and financial intermediaries respectively, will take risks widely and shallowly based on each entity's self-responsibility and the principle of the market mechanism. In concrete terms, non-recourse financing which limits the loan claims only to the amount of collateral real estate, securitization in the form of investment trust and asset-backed securities, and factoring business by non-bank banks are to be promoted to supplement the lessening function of the unilateral indirect financing system. Through these activities, market-oriented indirect financing is to be fostered and the financial intermediaries channels are to be widened.

3) The following measures to consolidate the various financial infrastructure need to be taken to promote efficiency and diversification of the financial services. (i).Promotion of participation by new players into the financial services business, and consolidation of the legal system across the financial services business; (ii)consolidation of convenient and efficient financial markets; and (iii)response to financial innovation in the field of information technology and electronics. Above all, a unified settlement system covering stocks, debentures, commercial paper, and other private financial instruments is to be established from the viewpoint of vitalization of securities and capital markets, because the settlement system is the basis of the financial system. From the aspect of consolidation of software infrastructure in the 21st century, the government should consider to facilitate the budget toward assisting the establishment of a unified settlement system.
(5) The financial system of the 21st century would completely eliminate the firewalls that separate the business of banks, securitiy firms, and insurance companies. Along with the process of unbundling the financial services functions, more entries into the financial businesses from inside and outside the financial businesses are encouraged and expected to be vitalized. In such a situation, many types of financial businesses will be competing. It is most probable that the needs toward financial services will be more and more diversified and sophisticated toward the 21st century, and the finance industry is expected to grow dramatically, augmented by economic growth and the continued development of information technology. When such a society is achieved, the financial services business will be reborn as a highly value-added industry utilizing effectively the personal financial assets that are abundant in Japan. Also it will provide high-quality employment opportunities. When the proper reforms are taken, it will be possible for Tokyo and Osaka to become thriving international financial markets.
1) Settlement service -- the traditional and proper business of banks -- will probably be also provided by distributors including convenience stores, information processing companies, transportation businesses, manufacturers, trading companies, etc., under the circumstance of diversified needs toward settlement service and technological advances. As a result, the traditional settlement service provided by banks may be the fund transfer business among deposit accounts, which is the last stage of settlement process.

2) Under these conditions, financial services, including the banking business, will be transformed to information services equipped with highly advanced financial technologies. These businesses will include asset management business such as securitization business and derivatives which utilize financial technological advances, and advisory business related to mergers and acquisitions. Therefore, it is indispensable for financial institutions to improve their risk management and financial instrument producing capability .

3) In order for the Japanese financial markets and the finance industry to be internationally attractive and competitive, it is important to construct a system that can cope with global financial standards regarding rules and regulations, taxes, and accounting standards. Financial rules and regulations need to be restructured drastically from the viewpoint of financial functions, apart from the conventional system of rules and regulations set by the different types of players. Financial taxes need to be based on a principles that are free, fair, and global. Income taxes should be amended drastically based on this principle. Japan's accounting system also needs to be drastically reformed in a transparent way to reflect the actual value of a corporation, such as the introduction of mark-to-market accounting and consolidated management.

4) In addition to assuring new entries into the finance industry, it is important to ensure equal footing in competition when constructing the financial system suitable for the 21st century. To do so, it is worthwhile to respect the unrestricted idea of the private sector; the government has to change drastically the philosophy of regulation to "let the private sector do the jobs it can manage." In this sense, the expanding and inefficient financial programs provided by the government, especially the postal savings and fiscal investment and loan program, need to be drastically reformed. Without such reform, it is impossible to reconstruct an efficient and stable financial system in Japan. Financial administration, including supervision, needs to be reformed to cope with the globalization of the economy and the market principle, apart from the conventional administrative style of the so-called convoy system which is deemed as being not transparent. The regulatory direction is from formality to the actual behavior of the financial institutions, and from ex ante rules to an ex post checking system.

1. Establishing a Scheme to Promote Disposal of Non-Performing Claims in Real Terms

When disposing the non-performing claims in real terms, it is not enough for the financial institutions to set loan provisions on the balance sheet. It is extremely important to transform the non-performing assets to performing ones that could bear cash flows by way of selling to third parties or utilizing effectively. While it goes without saying that encouraging the liquidation of the collateral real estate by improving the auction procedure is necessary, the most important thing is to establish a large-scale and comprehensive scheme to enhance the profitability of real estate itself. In concrete terms, it is recommended that consolidation of the system and the environment to promote urban renewal, and to realize the revitalization of the city through drastically reorganizing the structure of the cities of this country. Through these activities, a strategic perspective from liquidation and utilization of real estate is essential. At the same time, perspective from industry, which faces real economic problems daily, is also indispensable.

(1) Promotion of Liquidation and Effective Utilization Toward Drastic Reorganization of the City Structure

Japan's cities have been the focus of many disasters, including earthquakes and wars. They have inherited a negative legacy in the sense that various regions are especially vulnerable to disaster. In addition, non-performing collateral real estate and less utilized land are increasingly centering in large cities after the collapse of the bubble, and they became fetters to the recovery of the Japanese economy. This current situation, however, provides a precious opportunity to reconstruct Japan's cities. The drastic reconstruction of the structure of the cities and effective utilization of land to restore the housing and commercial function, together with the liquidation of the non-performing collateral real estate, is necessary. From this viewpoint, the Council proposes to establish "The Urban Reconstruction Commission," directly attached to the prime minister, that plans national strategic policies toward restructuring cities that are suitable for the 21st century. These policies should regard the advances of information technologies, environment, barrier-free technologies, and internationalization.

1. The Urban Reconstruction Commission
1) The Urban Reconstruction Commission shall study, plan, and propose bills regarding the comprehensive urban reconstruction plan. It also takes necessary actions to promote the effective utilization of land, together with liquidation of the non-performing collateral real estate, keeping close contact with the Financial Reconstruction Commission.
2) The Financial Reconstruction Commission shall consist of the chairman and a few other members. The chairman is expected to be a minister in charge of urban reconstruction. Other members will be appointed from academia and other areas.

2. Committee to Promote Urban Restructuring
1) To promote the comprehensive plan designed by the Urban Reconstruction Commission and to support the administrative execution, a "Committee to Promote Urban Restructuring" shall be established in each region. The committee shall be comprised of the central and local government, the Land Development Corporation, the Housing and Urban Development Corporation, the Organization for Promoting Urban Development, the Organization of Resolution and Collection, and the Cooperative Credit Purchasing Company, and will consolidate the know- how and a strong promotion system.
2) The Committee shall collectively compile information concerning less- utilized land and collateral real estate held by the comprising institutions and cooperate to effectively utilize the land.
3. Urgent Issues
1) Improvements in the so-called Special Purpose Company Law and amendments to Urban Renewal Act regarding tax measures and restrictions, which will be mentioned later, shall be urgently dealt with. It is requested that the special purpose company be established that will procure funds for redevelopment of the effective use of land.
2) Institutions consisting of the Committee to Promote Urban Restructuring will present of special purpose companies the real estate that each institution possesses in exchange for underwriting preferred participation shares. Private corporations and individuals will be able to present their real estate to the special purpose companies.
3) Funds are collected through issuing special debentures. For the time being, these debentures shall be guaranteed by governmental financial institutions. Whether the preferred participation shares and the debentures shall be listed accordingly must be discussed.
4) In conducting the actual development, planning, execution, and management should be carried out by the private sector as much as possible.
5) Public money should not be incorporated into the special purpose companies in principle except for the urgent and inevitable situations.

(2) Consolidation of Legal Framework for Promotion of the Renewal Project

1. Strengthening the System of Urban Renewal Projects
1) Smooth execution of the first category, urban renewal project
To promote the smooth execution of the first category, urban renewal project, Article 17 of the Urban Renewal Act is to be amended to clearly state the approval of all applications that meet the qualifications to ensure the effectiveness of the urban renewal system.
2) Respect to the majority votes of the unions when approving the transformation of rights
In the case of urban renewal project by the union, the transformation of rights is supposed to be decided by the majority vote. However, when governors of the prefectures approve the plan, it is often requested that all members of the union be in favor of the transformation, and the smooth execution may be hindered. Therefore, it is requested that the central government strongly direct the prefecture governments to respect the majority votes of the union when the governors approve the transformation of rights.
3) Utilization of the second category urban renewal project
Regarding private renewal projects that meet certain conditions, the second category urban renewal project, which is associated with land acquisition, should be utilized.

2. Promotion of Land Readjustment Projects
Land readjustment projects to streamline small unused areas effectively should be widely promoted. At the same time, support measures for building premises should be granted to those forced to move to different places because of the land readjustment. A comprehensive planning system should be aggressively utilized in the streamlined city areas, and incentive measures should be made such as deregulation on volume restrictions.

3. Enhanced Utilization of Deregulation Measures Concerning City Planning and Building Regulations
1) By utilizing the most of such deregulation measures as "high-rise housing inducement district system" and "renewal of functions of the high space district system," high-space utilization of land is to be promoted.
2) Flexible holding of the City Planning Council meeting and flexible progress of city planning decisions should be promoted.
3) It is desired to ease the conditions of and promote the use of various volume restriction ratio transfer systems.
4) City planning zone regulations should be reviewed in the direction of abolishment or shrinkage.

(3) Smooth and Prompt Operation of Auction System

1.Reviewing Short-term Rent System
As the right of the short-term rent is set after the registration of the mortgagee's right, the rent right is subordinated to the mortgagee's right in principle. However, for the short-term rent rights which is regarded under the Article 395 of the Civil Law, the buyer cannot use the premise until the rent period expires, and the buyer is obliged to return the security deposit to the renter. Therefore, such premises are often largely undervalued. In practice, those related to the debtors often make bad use of this system and the liquidation of the collateral real estate is hindered. It is strongly requested that the rent right which is set after the mortgagee's right cannot counter the mortgagee's right of the buyer, by amending the civil law and the civil execution law.

2. Introduction of Forceful Management System
The current Civil Execution Law does not approve the mortgagees to appoint a property protection agent to manage, make profit from the business utilizing the collateral premise, and collect repayment from it. Therefore, even if the mortgagees assure the rent income from the performing collateral premise, the tenant conspires with the debtor to make bad use of the deposit system, or the tenant continuously sub-leases, making it difficult to identify the tenant. Therefore, it is proposed that a forceful management system to assure the system under which the court appoints a property protection agent at the request of the mortgagees. Moreover, the agent shall manage the collateral real estate and distribute the rent fees to the creditors.

3. Abolishment of Lowest Price Sales System
Under the current auction system, the court decides the lowest price for sales, and, the purchase of the premises is not allowed under the price set by the court. When the price set by the court is higher than the market price, the sales of the collateral real estate cannot proceed. After the amendment to the civil execution law, when the premise is not projected to be sold, the auction process may be suspended or canceled. The above system became especially troublesome after the amendment. Therefore, by amending the Article 60 of the Civil Execution Law, the current system of the least price sales should be abolished and the lowest price is determined by the participating traders under the conditions that the transparent procedure is assured.

4. Prompt Execution of the Auction The Civil Execution Law should be amended and the related measures should be taken to assure the prompt execution of the auction, in such a way that the on-site examination and study by the specialists of the court is conducted by the private sector.

(4) Promoting Disposal of Excess Liabilities of Enterprises

1. Consolidating an Environment for Consensus Building for Creditors and Debtors to Reconstruct Management
Policies must be taken to promote the disposal of structural excess liabilities of enterprises. In this context, an environment for consensus building for creditors and debtors to reconstruct management, including the establishment of the new system, should be promptly consolidated.

2. Utilization of Debt Equity Swap
When the reconstruction of the management of the debtors is projected and a consensus is reached among the creditors and debtors, it is useful to exchange the abandoned claims and stocks issued by the debtor. In this case, tax exempt write-off measures to the financial institutions should be allowed.

2. Promotion of Liquidation and Securitization of Performing Real Estate

It is not enough to understand the problem of fixed real estate to be only a mobilization of collateral non-performing real estate. From the viewpoint of effectiveness, it is useful to mobilize performing real estate. In this context, consolidating the real estate investment market is urgently requested, since (i) ensuring funding measures, (ii) giving incentives to real estate investment, and(iii) consolidating the infrastructure of the real estate market are essential.
At the same time, to stimulate momentum to the liquidation of real estate, it is important to conduct strategic pilot plans of real estate liquidation coupled with urban development within certain districts. This measure also serves to promote the country's "strategic plan of doubling living space."

(1) Establishment of Drastic Securitization Scheme of Real Estate

1. Improvement of "Special Purpose Company Law"
The so-called "Special Purpose Company (SPC) Law" enacted in September 1998 is not flexible enough to adapt to a unforeseeable events, and is quite awkward in handling performing real estate. Amendment to the law should be urgently requested.
In concrete terms, the real estate purchase tax and registration tax when a special purpose company purchases real estate should be permanently exempt. The capital gains tax should be extended for a certain period of time when an asset is transferred from the asset holder to the special purpose company. By amending Article 38 of the law, underwriting the preferred participation shares at the exchange of the actual premise should be approved. The conditions in the special treatment of getting the participation shares at the exchange of the actual premise in the corporate tax law should be eased. Moreover, deregulation measures should be taken from the viewpoint of structuring attractive investment instruments, such as restrictions on out-source of the business (Article 144 of the SPC Law), limits of borrowing (Article 151), restrictions of disposal of special assets (Article 152), restrictions regarding the write-off of the preferred participation shares (Article 48,119)

2.Establishment of Real Estate Investment Fund
To vitalize the real estate securitization market, authentic real estate investment funds should be established by amending the investment trust law, in addition to the special purpose company scheme. Concretely, restrictions on investment in real estate by corporate-type investment trusts should be abolished and beneficial tax measures should be taken in the trade. An exemption measure should be taken that limits the purchase of stocks from the same company at the issue of special company securities. In addition, trust beneficiary rights and anonymous participation shares of unions should be categorized as securities under the Securities and Exchange Law and the related civil codes.

(2) Giving the Incentive to Investors
To promote the effective use of the land, it is indispensable for those who wish to use the land to acquire the land easily. It is proposed that by adopting the tax policy outlined below, liquidation of the land should be promoted.

1. Abolishment of Circulation Tax and Review of Possession Tax
Real estate registration tax and purchase tax are high compared with other countries. These taxes, which hinder active transactions of land need to be abolished. To promote the effective use of the land, the balance of property tax between building premise and the land should be corrected. Namely the property tax on buildings should be lessened, while at the same time a hike of property tax on land should be discussed. In doing so, regard should be paid so that the measure does not hinder the collection of tiny pieces of land.

2. Improvement in the Special Measure Stating the Purchase of Commercial Property To liquidate scattered unformed collateral real estate, it is necessary to exchange and collect peripheral areas to form the land. In doing so, the capital gains tax is applied to those peripheral areas and this hinders the exchange. When private developers proceed with the urban development, to maintain a sound asset balance, they need to sell the commercial assets and invest in more profitable projects. Support measures need to be taken to facilitate these activities. The special measure that currently allows the sale of 80% of a commercial asset to buy another asset needs to be raised to 100%.

(3) Consolidation of Infrastructure in Real Estate Market

1. Amending Land and Housing Lease Law
Because it is difficult for the landlord to foresee the future profit of the premises in advance, the pricing of the real estate is separate from its actual value and is not transparent under the current Land and Housing Lease Law. Also, in the case of the commercial building, because of the regulations by the Land and Housing Lease Law, rent differs from tenant to tenant, and this fact hinders the disclosure rent information, which is indispensable for a sound real estate investment market.
Therefore, it is requested that the article to terminate a lease contract only by "justifiable reasons" by landlords should henceforth be suspended in those contracted. Also considered is the introduction of a fixed-term rights to rent a house. It is important to construct a rational contract relationship between the landlord and the renter that is consistent with global standards to formulate a sound real estate investment market. In this regard, at least for the non-residential premises such as commercial and other buildings the above mentioned justifiable reasons in the land and housing lease law should be suspended for all contracts including those contracted already. This way, equal footing between the landlord and the renter is assured.

2. Consolidation of Infrastructure Regarding Disclosure It is indispensable for real estate investors to obtain information regarding the profitability of real estate. At present, however, tenant and rent information is not satisfactorily disclosed. Scarce disclosure increases the risk premium of real estate investment; this is one reason behind Japan's declining land prices. From this viewpoint, it is urgently requested that disclosure for investors to judge their own decisions autonomously should be warranted. A real estate index that shows the average profitability of an investment should be implemented.

(4) Execution of Strategic Pilot Projects to Liquidate Real Estate

1. Execution of Strategic Pilot Project
It is expected that comprehensive measures to promote strategic pilot projects designed for future cities will be executed within a limited area coupled with urban development. In these areas, measures to liquidate and securitize real estate -- performing and/or non-performing -- should be comprehensively executed in advance, leading to the successful experience of liquidation of real estate that has a widespread effect on other regions.

2. Effective Use of Public Real Estate
Publicly owned real estate in large cities should be effectively used, and value must be added. A securitization scheme should be implemented in selling, and markets in asset-backed securities should be fostered.

3. Establishing a New Financial Intermediary Route to Supplement Indirect Financial System

The inability to function fully as a financial intermediary today stems from the fact that each financial institution has taken more credit risk than appropriate. This has revealed the limits of the financial intermediary structure based on the conventional indirect financial system. It is urgently requested to diversify and promptly stabilize funding measures and routes by such ways as asset-backed financing.

(1) Establishment of Various Funding Routes
1. Diversification of Funding Routes by Non-bank Banks
The Council is in favor of prompt enactment of the so-called non-bank banks' debenture issuance bill. The so-called money lending business law should be amended to eliminate the duty by the buyer of the claims to report to the original debtor, because such duty hinders the securitization of small claims. In concrete terms, when originators become the servicer and when claims are sold to special purpose companies or trusted, Article 24 of the money lending business law, which states the restriction of the sales of the claims, should be exempt.

2. Non-recourse Loans
It is useful to implement non-recourse loans that limit the claims to collateral real estate. In doing so, it is indispensable to consolidate an environment in which measuring the profitability of the real estate outlined above becomes possible.

3. Factoring
Factoring businesses, such as purchase of sale on credit, guaranteeing the payment, and collection of credit as an agent, are useful new tools to finance small to medium-sized enterprises. In doing so, consolidating a system that assures the public guarantee supplement function, such as utilization of guarantee by credit guarantee associations, the sales of claims to public institutions, and the legal status of the factoring.

(2) Consolidating a Legal Framework for Fostering the Asset Liquidation and Securitization Market

By asset liquidation and securitization, the financial intermediary function that was largely provided by banks shall be unbundled and will be provided by the new entities. It is necessary to assure the framework for those new entities to work efficiently. At the same time, it is important to protect the investors of the asset-backed securities and beneficiaries of the trust from the bankruptcy of these new entities.

1. Improvement of the So-called Servicer Law
The so-called Servicer Law enacted in October 1998 needs to be made more convenient, although it gives the legal framework for collection business of credit claims and helps to promote the liquidation of assets. In concrete terms, clarifying the definition of management and collection of credit (Article 2.2), improving the definition of the specified money claim (Article 2.1), and flexible implementation of the restrictions of business (Article 12) need to be done.

2. Assuring Protection Scheme for Bankruptcy
1) Investor protection scheme in special purpose companies
Necessary measures should be taken on the current Special Purpose Company Law as to restrictions on the application of bankruptcy by the SPC Law, segregation of the capital relationship between the special purpose company and the originator, and clarification of the actual transactions. As to the sales of the rent claims under the Special Purpose Company Law, they should be exempt from the implementation of Article 63 of the Bankruptcy Law and Article 103 of the Corporate Reorganization Law.

2) Protection of Beneficiaries in Investment Trusts
Securities managed separately by the trust banks are supposed to be regarded as investment trusts and could counter to the third party. However, it is difficult for ordinary investors to judge whether the investment trust is managed separately. Therefore, by amending Article 10 of the Trust Business Law, except for the case when the investors know that the trust companies do not separate the management of the trust asset at the time of the contract, the trust shall be able to counter to the third party in spite of Article 3 of the Trust Business Law.

(3) Securitizing the Assets Held by Governmental Institutions

To implement and stabilize the liquidation and securitization of assets, it is indispensable to foster the secondary market, in addition to the legal framework. In this respect, it is proposed that the securitization of good asset held by governmental institutions is to be promptly executed. Such claims include: loan claims of the Housing Finance Corporation, rent claims of the Housing and Urban Development Corporation, and private loan claims guaranteed by the Association of Credit Guarantee to Small and Medium Business. These securitized instruments shall function as benchmarks to the investment assessment, and shall be expected to contribute to the fostering of the secondary market. Promotion of such securitization shall also contribute to the shrinkage of the balance sheet of governmental institutions, and to the reform of the fiscal investment and loan program.

4. Consolidating a Financial Infrastructure Suitable for the 21st Century

To fully achieve Japan's big bang and financial technological advancement, diversification of financial products and services is needed. On the other hand, the current legal framework of finance is not satisfactory to cope with the reality. It is also essential to make rules and to establish a legal framework that regulates financial services, to clearly state overall fiduciary duties to conduct drastic deregulation such as liberalization of sales of insurance products and review of the prohibition clause for banks to do business other than banking, to improve the efficiency of financial markets, and to promote new players in the finance industry. It is expected to establish financial markets and the financial systems that can cope with global standards.

(1) Diversification of Financial Products and Services, Rule-Making, and Establishing Legal Framework in Response to Technological Advancement

1. Rule-making and Establishing a Legal Framework that Regulates All Types of Financial Institutions
1) Establishment of the Financial Services Act
To successfully achieve the financial big bang, it is essential to get rid of the conventional way of regulation by each financial business category and to establish a unified legal framework that covers all financial services. Incorporating the comprehensive definition of the securities, such as "investment contract" in the U.S. securities law, is one way. Another approach is to establish a legal framework similar to Britain's Financial Services Act, which regulates uniformly across securities, investment trusts, commodities, and insurance. In doing so, a unified and consistent investor and customer protection scheme should be incorporated. Also important is to establish a system that does not discourage the willingness of the financial technological innovation, such as to develop new financial instruments.

2) Establishment of the Securitization Law
The problem of regulating the collective investment scheme and dealers by the unit of each small category of business exists. For securities transactions, Securities Investment Trust Law is the ruling legislation. The Commodity Fund Law rules commodity futures transactions, the Real Estate Specified Co-Business Law : real estate, the Specified Claims Law and the Special Purpose Company Law :lease credit claims. Each legislation itself has its own rationale, and the setting is plausible. However, when constructing a securitization scheme, it is quite awkward that each legislation has to state a similar scheme. And it could hinder the sound development of the secondary market of the securitization. Therefore, in the medium term, establishing a comprehensive law under the name of securitization law to consolidate all securitized product is recommended.

2. Fiduciary Duty
Against the background of diversification and sophistication of the asset management need, the roles and the responsibility of the asset managers become more and more important. In the current laws, some fiduciary duties are not clearly stated. In the field of employee's pension funds, there is no statement in the law regarding the executives of the fund other than the duty to service faithfully. Therefore, the Council proposes to establish a comprehensive special law to clearly state the fiduciary duties.

3. Legal Framework to Protect Investors and Customers
It goes without saying that the principle of self-responsibility based on disclosure is the basis of financial transactions. But sophistication of financial products and diversification of providers of financial services deserve the review of the protection scheme of investors and customers. A legal framework to protect investors and customers across the financial services needs to be established. A consumer credit protection law regulating all different types of financial institutions is to be established with reference to the unified legislation in Europe and the United States.

(2) Consolidating the Environment in Response to Information and Technological Advances
It is expected that technological advances will be enhanced in the field of fund settlement such as financial electronic data interchange and electronic money. In light of these developments, confidence in the transaction, customer protection, and rule-making of sharing losses, when accidents and/or troubles occur, are indispensable to assure the smooth operation of the settlement system. Currently such legislation does not exist. The rule-making of the related industries within their articles of associations are still behind the technological advances. Studying the situation in other countries, including the U.S., consolidating and establishing a legal framework, such as Electronic Fund Transfer Law and/or Electronic Money Law consistent with international electronic fund transfer practices is needed.

(3) Improving the Environment for New Players to Participate in Finance
The environment surrounding the establishment of financial holding companies should be improved, for example by prompt introduction of a consolidated tax system and stock exchange system, and abolition of the capital gains tax.

(4) Establishing More Convenient and More Efficient Financial Markets

1. Drastic Reform of Commercial Paper Market
1) A new system that enables commercial paper transactions by electronic devices should be established. At the same time, abolition of the stamp duty should be discussed regarding commercial paper transactions.

2) The treatment of back-up line contracts in the Interest Payment Restriction Law and Stock Investment Law should be clearly stated.

2. Abolition of the Current Debenture Registration Law and Establishment of a New Legal Framework Concerning Debenture Registration System
1) The serial number management system should be abolished and be replaced by a new registration system that enables several registered institutions to register on behalf of others.

2) A unified settlement system of various private securities such as debentures, stocks, and commercial paper should be established. The system needs to meet the international standards. From the viewpoint of indispensable software infrastructure for the 21st century, the government shall consider to facilitate the budget assisting the establishment of a unified settlement system.

3) All withholding income tax on debentures should be exempted, in contrast with the current system that only the withholding tax of debentures registered under the names of financial institutions is exempted.

(5) Consolidation of Short-term Money Markets in Light of Internationalization of the Yen
It is essential to establish mature, wide, and deep financial markets for the market participants to fund and invest smoothly at any time. Especially for the short-term money market, it is urgent to establish a short-term government bond market that will become benchmark. From this point of view, a public auction system of the financing bill should be promptly implemented. This contributes to attractive investment opportunities for non-resident investors, and the enhancement of the internationalization of the yen.

(6) Drastic Reform of Tax System Regarding Financial Transactions

1. Drastic Change in Tax System Regarding Financial Transactions
In considering the tax system, rules of simplicity, neutrality, and response to international standards need to be kept in mind. Especially in the field of the tax system on financial transactions, the system should be as neutral as possible to funding and investing activities, in light of the fact that the international fund transfer are becoming more and more active. Also important is the consolidation of the financial environment for the 21st century that the financial assets are transacted smoothly in the market through sales and purchase, and collateral transactions. In this regard, the securities transaction tax, stock exchange tax, and stamp tax need to be abolished. In addition, drastic reform of the financial income gains tax should be promptly discussed, including the abolishment of the withholding tax, which tends to distort the pricing of the market.

2. Introduction of Taxpayers' Code System
To assure the propriety of the tax system through precisely grasping income, and to realize a more neutral and comprehensive tax system, a taxpayers' code system is to be introduced.

5. Drastic Reform of the Public Finance and the Fiscal Investment and Loan Program and Financial Administration for the 21st Century

Public financial activities through governmental financial institutions have now exceeded the original function of supplementing private financial activities. Moreover, they are distorting the appropriate price formulation mechanism in the money and capital markets. Without drastically reforming the excessively enlarged public finance and the fiscal investment and loan program (FILP), the effect of the private financial system reform program highlighted by the big bang is extremely limited. To truly vitalize the Japanese financial market and the finance industry, financial reform not only of the private but also of the public sector needs to be completed through drastic reform of public finance and the FILP. At the same time, new financial administrative practices need to be established that are suitable for the new era with the principle of risk management and self-responsibility, apart from the so-called convoy system.

(1)Drastic Reform of the Public Finance and the FILP

1. Postal savings and public pensions
Public finance and FILP are regarded as a huge financial intermediary system offered by the government. Their existence not only hinders the development of the Japanese money and capital markets but also distorts the appropriate price formulation of the market. The postal savings and post office life insurance businesses are supposed to be transferred to the Postal Agency and then to the Postal Corporation according to the Basic Reform Law of the National Ministries. From the perspective mentioned above, the management style of the postal savings and the post office life insurance businesses should be reviewed after being transferred to the Postal Corporation. In addition, the system to rely on the employee's pension fund and national pension fund as a source of funds for FILP needs to be reviewed.
For the time being, deposits by the postal savings and post office life insurance funds to the government Fund Management Bureau (FMB) should be terminated in accordance with the Basic Reform Law of the Ministries; the funds need to be invested on their own. Thus the postal savings and public pension system should be placed outside the FILP. When doing so, de facto grants derived from being exempt from corporate and resident taxes, fixed property tax, deposit insurance fees, and opportunity cost of the compulsory deposits to the central bank that have been benefited from the government should be clarified to the public. Postal savings interest rates and deposit interest rates to the FMB must be determined based on market rates, which is consistent with credit risk premiums and the term structure of interest rates. These measures are indispensable to assure the equal footing of financial services offered by the public and the private sectors in Japan, especially after April 2001, when suspension of the pay-off for private financial institutions will be lifted.

2. On the Status of Governmental Financial Institutions
The business of individual FILP institutions needs to be strictly assessed by an independent policy assessment organization. Moreover, the business shall be either terminated or privatized unless its necessity as an activity of the government is convincingly proven. It should utilize the private capital market and promote its development. Thus, when its activity is deemed necessary for policy reasons, funding should be covered by issuing bonds by each of these institutions. Their business should be focused on guaranteeing and refinancing by the use of financial technologies such as securitization. These activities should contribute to the advancement of risk management technologies.

(2) Toward a More Desirable Financial Administration
In carrying out financial administration, including supervision and inspection, it should be kept in mind that the sound and smooth operation of the financial system is the basic foundation of the development of the economy. Financial administration should always be based on practical perspectives, and it should pay due regard to the influence it makes on other industries and on the economy as a whole. Keeping these principles, it should be flexible depending on the situation.

1. Unifying Financial Administration and Strengthening Human Resources
To ensure the separation of the fiscal and financial functions of government, a unified financial administration system, to be called the Financial Agency, must be must be established as quickly as possible. Human resources outside of bureaucratic circles should be also recruited, recruiting public accountants and experts from the legal world and from rating agencies. In conducting business, the financial administration should utilize outside resources as much as possible .

2. Effective Inspection and Supervisory Practice by Giving Incentives and Penalties to the Supervised Institutions
1) A more effective supervisory practice that utilizes risk control methods adopted by each supervised financial institution should be adopted. This practice should promote the risk management of each institution and let each institution do business at its own risk. This would be a completely different mode of operation from the conventional style of the convoy system. In doing so, the supervisory practice of clarified ex ante rule-setting coupled with ex post checking needs to be established. Also requested is a supervisory practice that pays due regard to the wide-ranging behavior of the financial institutions other than by simply assessing formal standards such as numerical requirements.

2) National treatment in accordance with the Basle Accord in such areas as uniform credit risk weight and unrealized capital gains that are currently included in Tier 2 should be reviewed.