For Improving the Quality of Financial Administration in Japan

Kazuhito IKEO (Professor, Keio University)

There are various factors that determine the competitiveness of financial and capital markets in a country. Among them, the quality and quantity of human resources as well as the quality of the regulatory environment are internationally recognized as especially important.

First of all, financial and capital markets must be "trustworthy," and the existence of strict regulatory and supervisory authorities, determined to prevent unfair trading, are indispensable as a last resort for public trust in the markets. In this respect, regulatory and supervisory authorities must take an uncompromising stance. Lax regulations might appear to be conducive to actual business activities. In fact, investors would turn away from the kind of market where loss could be incurred due to unfair trading. Thus, financial business cannot prosper in the long run, if regulatory and supervisory authorities are not rigorous enough to ensure investor protection.

At the same time, however, it is needless to say that regulatory and supervisory authorities should not be an obstacle to free and fair activities of participants in the market. Financial and capital markets cannot prosper either, if private business is interfered with unreasonably. Therefore, the system of regulation and supervision regarding financial and capital markets must have enough flexibility to adapt to constantly evolving market and technological conditions.

Furthermore, the ultimate purpose of regulation and supervision may be considered to realize the healthy development of financial and capital markets. If this is the case, then regulatory and supervisory authorities should not just passively avoid to become an obstacle, but rather actively facilitate innovations in financial and capital markets. In this respect, the regulatory and supervisory authorities must play a supportive role for creative ideas and activities of market participants.

Here, the problem is that it is easier said than done to reconcile the aspect of the authorities' uncompromising stance against unfair practices with the aspect of their supportive role to facilitate financial business in the market. Since these two aspects are often conflicting and not easy to be balanced with each other, the way these aspects are realized and reconciled may well determine the quality of the regulatory environment from the viewpoint of market participants.

In this sense, Japan's regulatory environment has not been regarded too highly. In the former aspect (against unfair trading), Japanese financial services agency is now widely known as an uncompromising authority, even sarcastically called the "financial punishment agency." In the latter aspect (facilitating innovations), however, Japan's financial agency cannot be given a high mark, and the two aspects have not been well balanced in the past.

Now, the financial services agency itself is aware of the necessity of improving the quality of the regulatory environment, and is placing its priority on the achievement of "better regulations." In fact, "realization of a better regulatory environment" is listed as one of the four main pillars of the governmental plan on competitive financial and capital markets in Japan, formally announced late last year.

This is certainly the right direction in which Japan's financial services agency should move itself. What is important, however, is not only efforts by financial authorities, but also proactive actions by market participants to move in the desirable direction, because the regulatory environment is not something to be imposed from above, but rather is to be created by cooperation between regulator authorities and market participants.

(The original Japanese article appeared in the March 1, 2008 issue of Weekly Toyo Keizai)