Japan achieves medium overall compliance with international standards and codes, with a score of 44.17 out of 100 in our Standards Compliance Index. Japan's compliance in the area of macroeconomic fundamentals is high. Its compliance in the area of financial supervision, however, is difficult to assess, with two standards having insufficient publicly available information. For Japan's market infrastructure standards the picture is mixed. Accounting practices are not aligned with international standards, though there are plans in place to eliminate the major differences with International Financial Reporting Standards. However, convergence with the latest International Standards on Auditing has lagged. There have been comprehensive reforms to the insolvency framework but so far there has been no assessment of its compliance with the World Bank's Guidelines. Corporate governance practices have been strengthened. Japan’s systemically important payment systems largely conform to international best practices.

Macroeconomic Policy and Data Transparency

The International Monetary Fund's (IMF) Special Data Dissemination Standard (SDDS) website states that Japan has been a subscriber to the SDDS since July 1996, posted its metadata in November 1996, and started meeting its requirements in June 2000. Both the IMF's SDDS website and a 2007 observance report by the IMF note that Japan meets or exceeds SDDS standards of coverage, timeliness, and periodicity for most data. The country, however, takes the timeliness and periodicity flexibility option for certain data categories. The Japanese authorities provide advance release calendars for all data categories and information on the SDDS website indicates that statistical data for all entry points are being simultaneously released to all interested parties. Per the SDDS website, the integrity dimension largely meets the SDDS requirements, except that for several data categories information on identification of ministerial commentary is not provided. Most data categories provide information on terms and conditions for confidentiality, except for Central Government Debt, Central Government Operations, International reserves and foreign currency liquidity, and Merchandise Trade, where no information is available on the SDDS website. Information provided by the Japanese authorities on the IMF's SDDS website indicates that Japan generally fulfils SDDS requirements on the quality dimension; however for a few data categories like Central Government Debt, Central Government Operations, and Interest Rates, there is no information on the SDDS website regarding the SDDS requirement on dissemination of component details. More »

In its 2003 Financial System Stability Assessment (FSSA) of Japan, the IMF states that observance by the Bank of Japan (BoJ) with respect to transparency practices in the conduct of monetary policies met a high standard. This evaluation is reaffirmed and further buttressed by the IMF's 2006 and 2007 Article IV Consultations with Japan, which conclude that monetary policy transparency in Japan was appropriately accommodative. The BoJ is independent by virtue of the Bank of Japan Law of 1997 (BJL 1997), which also specifies the BoJ's roles and objectives as overseer of the day-to-day handling of monetary policy in Japan. Additionally, the roles, responsibilities and objectives of the central bank are clearly and comprehensively disclosed, described, and explained in a variety of BoJ-issued reports, publications and speeches by BoJ officials. All of these publications and pronouncements are posted on the BoJ's website. Also, Japan has a sufficiently transparent process for formulating and reporting all monetary policy frameworks. The BoJ reports its progress in quarterly, semi-annual and annual monetary policy reports, all of which are published on its website and address Japan's progress toward achieving its monetary policy objectives and on the evolving macroeconomic situation and their implications for monetary policy. Japan subscribes to the IMF's SDDS, and meets its specifications for the coverage, periodicity, and timeliness of monetary data. More »

According to the 2001 IMF Report on the Observance of Standards and Codes (ROSC) - Fiscal Transparency Module, Japan performs well against the IMF's Code of Good Practices on Fiscal Transparency. However, the ROSC does not specifically address Japan's compliance with any of the principles of the code. The Constitution of Japan defines the roles and responsibilities of general government and clearly sets Japan's main government sectors apart from the private sector. The Public Finance Law and the Public Account Law, along with their subsequent amendments, define and formalize the budget and financial management system. The ROSC also states that the Japanese government is required by law to publish and disseminate fiscal policy information. The Constitution of Japan requires the Cabinet to regularly report to the Japanese Diet on the country's fiscal condition. The Public Finance Law stipulates that the national budget and its supporting documentation be made available to the public as soon as it passes the Diet. Nevertheless, the 2001 IMF ROSC listed three important areas upon which Japan needed to improve: clarifying policy regarding the size of the Fiscal Investment and Loan Program (FILP) and assessing and reporting on the quality of FILP lending; setting fiscal policy in a longer-term context; and reducing the reliance on supplementary budgets and making the macroeconomic model and assumptions available for scrutiny by independent auditors. In its 2004 ROSC Fiscal Transparency Module - Update, the IMF observed that Japan had addressed all these issues. However, the 2004 ROSC Update also notes that Japan has only made limited progress in providing timely information on the consolidated central and general government fiscal balance. The ROSC Update recommends that Japan provide consolidated revenue and expenditure data for central and general government more frequently than is currently available, adding that such timely consolidation of fiscal data would require the standardization of accounting practices and reporting requirements. More »

Institutional and market infrastructure

According to LeMaster, Downey, and Brewerton's 2007 paper, Japan's current insolvency legal framework is based on several laws, including the Commercial Code, the Bankruptcy Law, the Company Reorganization Law, and the Civil Rehabilitation Law of 2000. Several sources including the U.S. Department of Commerce, the World Bank, and Ota and Tasaku, note that Japan's legal system offers five statutory insolvency procedures which can be divided in two groups: liquidation-type systems and reconstruction-type systems. Bankruptcy and special liquidation address corporate liquidation. The other three (company reorganization, civil rehabilitation and corporate arrangement) are employed in corporate reconstruction cases. As a result of a comprehensive reform of Japanese insolvency law most of the laws governing insolvency procedures in Japan were amended. Mori notes in his 2005 paper that as part of its insolvency law reform, Japan also introduced a new legal framework covering cross-border insolvency which was modeled on the UNCITRAL Model Law on Cross-Border Insolvency. There is, however, insufficient publicly available information as to Japan's compliance with the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank. More »

In 2005, the International Accounting Standards Board (IASB) and the Accounting Standards Board of Japan (ASBJ) announced their agreement to launch a joint project to reduce differences between International Financial Reporting Standards (IFRSs) and Japanese Generally Accepted Accounting Principles (GAAP). According to Deloitte, the convergence project covers the identification and assessment of differences in existing standards on the basis of the boards' respective conceptual frameworks or basic philosophies with the aim of reducing those differences where economic substance or market environments such as legal systems are equivalent. Per Deloitte's IAS Plus website, the ASBJ released its Project Plan Concerning the Development of Japanese Accounting Standards in October 2006 with the objective to clarify the status of its initiatives toward convergence with IFRSs. The ASBJ's plan, developed, in part, in response to the June 2005 Report to the European Commission from the Committee of European Securities Regulators (CESR), outlined the work planned to be achieved through the end of 2007 and the anticipated convergence status as of the beginning of 2008 for each of the 26 differences identified by the CESR. The initiative to accelerate convergence between Japanese GAAP and IFRSs, known as the 'Tokyo Agreement' was signed by the ASBJ and the IASB in August 2007. The Tokyo Agreement, according to a presentation made in April 2008 by the Chairman of the ASBJ, requires that Japan complete the short term convergence projects by 2008 by eliminating the major differences or provide compatible accounting standards for the items which the CESR advised remedies on. The long-term objective is to eliminate all major differences by June 2011. More »

The Japanese corporate governance framework is based on codes, regulations and laws. In October 2001 the Revised Corporate Governance Principles were published by the Japan Corporate Governance Forum, a private-sector association. In March 2004, the Listed Company Corporate Governance Committee, appointed by the Tokyo Stock Exchange (TSE), published its Principles of Corporate Governance for Listed Companies. A new Company Law came into force in May 2007, replacing provisions of the Commercial Code that relate to companies. As part of its 2007 Plan for Strengthening the Competitiveness of Japan's Financial and Capital Markets, Japan's Financial Services Agency has introduced an internal control report system, also known as the Japanese Sarbanes-Oxley Act (J-SOX), which took effect in April 2008. The TSE's policy for FY2008 comprises further improvements in the TSE listing system to strengthen governance of listed companies. Despite this progress in codifying good corporate governance practices, the Asian Corporate Governance Association's (ACGA) 2008 White Paper asserts that the lack of shareholder activism and extensive cross-shareholding impede structural change. The Economist Intelligence Unit's 2008 survey of Japan concurs that pressure from institutional investors has historically had a limited effect on corporate management. However, the ACGA's 2008 White Paper reports a positive development in the Japanese corporate governance framework through the increasing use of "hybrid" board structures, which follow the traditional statutory auditor (kansayaku) system, while appointing one or more external directors. More »

As a result of the adoption of the new auditing standards in January 2002, Japan's Generally Accepted Auditing Standards (GAAS) became, according to a 2004 Financial Services Agency (FSA) presentation, consistent with the International Standards on Auditing (ISAs) of the International Auditing and Assurance Standards Board (IAASB) existing at that time. Nevertheless, as stated in a 2006 comparison of Japanese GAAS and ISAs prepared by the Japanese Institute of Certified Public Accountants (JICPA), while some new and revised IAASB pronouncements are under consideration by the JICPA, other ISAs have neither been incorporated into national standards nor included in the work program of the JICPA. Per the JICPA's 2004 self-assessment, Japanese GAAS are comprised of the auditing standards issued by the Business Accounting Council (BAC) of the FSA and the implementation guidelines issued by the JICPA. Both the JICPA and the BAC are accountable to the Japanese Government. More »

As of June 2008, there is no comprehensive assessment publicly available on Japan's compliance with the Financial Action Task Force's (FATF) 40+9 Recommendations and Special Recommendations. Nevertheless, the IMF's 2004 ROSC indicates that Japan has made good progress in bringing its Anti-Money Laundering and Criminalizing the Financing of Terrorism regime into greater compliance with international standards. However, the report was prepared in 2003 and bases its findings on the 2002 FATF methodology rather than the latest (2004) methodology. Therefore, it cannot be used as an accurate measurement of Japan's compliance with the FATF's present requirements for this standard. Nevertheless, according to the IMF ROSC, Japan has a comprehensive legal and institutional framework. For example, money laundering was originally criminalized in Japan as it related to drug offenses through the Law Concerning Special Provisions for Narcotics and Psychotropic Control Law etc. and Other Matters for Prevention of Activities Encouraging Illicit Conduct and Other Activities Involving Controlled Substances of 1991. The Law for the Punishment of Organized Crimes, Control of Crime Proceeds and Other Matters of 1999 expanded the reach of predicate offenses beyond drug-related offenses to cover money laundering predicate offenses like financial crime. A 2008 U.S. Department of State (DoS) report notes that, in March 2007, the Japanese government enacted the Act on Prevention of Transfer of Criminal Proceeds, a new money laundering law designed to further Japan's compliance with the FATF's recommendations. Terrorist financing is criminalized pursuant to the Law on Punishment of the Financing of Offenses of Public Intimidation of 2002, which also facilitates the freezing of terrorist assets. More »

According to the IMF's 2003 FSSA, the BoJ has designated four systems, namely, the BoJ-NET Funds Transfer System (BoJ-NET FTS), the Tokyo Clearing House's Bill and Check Clearing Systems (TCH-BCCS), the Zengin Data Telecommunication System (Zengin System) and the Foreign Exchange Yen Clearing System (FXYCS) as systemically important payment systems (SIPS). The latter three systems are privately-run and operated by the Tokyo Bankers Association. Of the four, the BoJ-NET FTS is the core system, and accounts for about 65 percent of the aggregate value settled by the four SIPS. Furthermore, the three private systems settle their net obligations over the BoJ-NET FTS. The IMF FSSA concludes that both modes of the BoJ-NET FTS - the real-time gross settlement mode and the deferred gross settlement mode - accord closely with the Core Principles for Systemically Important Payment Systems (CPSIPS). According to the report, the deferred gross settlement mode of the BoJ-NET FTS broadly observes Core Principle (CP) III, and does not fully observe CP IV. A 2003 self assessment by the BoJ of its system, however, concludes that the BoJ-NET FTS is compliant with all 10 CPs. Nevertheless, the IMF assessment is a third party assessment and therefore its conclusions are a more adequate evaluation of BoJ-NET FTS' compliance with this standard. The 2003 IMF assessment also notes that the Zengin System and the FXYCS observe all core principles with the exception of CP I, which they partly observe. The FSSA, however, notes that the TCH-BCCS is deficient in several respects and less robust in its observance of the CPSIPS. The IMF assessors noted that at the time of the FSSA, in 2003, TCH-BCCS settled only 5 percent of the volume of transactions in the four SIPS. More »

Financial Regulation and Supervision

Financial system deregulation and international competitive pressure have drastically changed the banking sector in Japan. The IMF's 2005 Article IV Consultation report states that heightened supervisory efforts of the Financial Services Agency (FSA) have contributed to improvements in the banking system. The FSA notably improved recognition and provisioning for non-performing loans, strengthened bank capital, and reduced the role of government financial institutions. Furthermore, policies in the banking system, which were enhanced through the FSA's 2002 Program for Financial Revival, are broadly in line with the recommendations of the IMF's 2003 FSSA. However, extensive cross-shareholding remains within the financial sector and between financial and non-financial institutions. At the time of a 2005 IMF report, the FSA had adopted a Program for Further Financial Reform and was in the process of elaborating more detailed policies. While the Program improves significantly the health of major banks, the IMF advocates bolder reforms and policies, which include raising profitability in the banking system, reducing reliance on real estate collateral, and improving risk management systems. These measures should help prepare Japanese banks for the adoption of Basel II. As of March 31, 2007, according to a 2007 Global Survey by the Institute of International Bankers, capital adequacy standards, based on the new capital adequacy framework (Basel II), apply to all depository financial institutions in Japan. Despite the above descriptive information, none of the available sources directly address Japan's overall compliance with the Basel Core Principles. More »

The Tokyo Stock Exchange is the second largest stock market in the world by domestic market capitalization. Japan has either fully or broadly implemented the International Organization of Securities Commissions' Objectives and Principles of Securities Regulation, according to the IMF's 2003 FSSA. The assessment further concludes that the system of securities regulation in Japan is broadly designed to ensure investor protection, promote fair, efficient and transparent markets, and reduce systemic risk. Substantial improvements have also been made in the supervisory process since the Financial Services Agency (FSA) and the Securities and Exchange Surveillance Commission were set up as the securities regulators in July 2000. However, it is unclear whether the authorities are in a position to enforce their requirements fully, especially with regard to the valuation of assets and the quality of capital. The institutional structure also creates scope for both agencies to be subject to political pressures. In its 2006 Article IV Consultation, the IMF reiterates the importance of reducing the role of government financial intermediation, clarifying securities regulation, and improving financial risk management in order to enhance efficiency and stability of the financial system. As part of its 2007 Plan for Strengthening the Competitiveness of Japan's Financial and Capital Markets, Japan's FSA has introduced an internal control report system, also known as the Japanese Sarbanes-Oxley Act (J-SOX), which took effect in April 2008. More »

The insurance market in Japan has gradually been deregulated, but is still characterized by extensive cross-shareholdings between the banking and insurance sector. According to the IMF's 2003 FSSA, Japan has one of the largest insurance markets in the world, despite the relatively small number of licensed companies. The IMF's 2003 FSSA, which assesses Japan's observance of the Insurance Core Principles (ICPs) issued by the International Association of Insurance Supervisors (IAIS) in October 2000, states that the establishment of the Financial Services Agency (FSA) in 2000 was key in strengthening and integrating financial sector supervision, although further improvements in a number of areas were desirable. While the FSA has moved toward a more risk-focused approach for the supervision of insurance companies, the lack of a board creates scope for the FSA to be subject to political and industry pressures. Furthermore, it is unclear whether the authorities are capable of enforcing their requirements fully, especially with regard to the valuation of assets and the quality of capital. In February 2008, according to a 2008 International Financial Law Review article by the law firm Nagashima, Ohno & Tsunematsu, a legislative subcommittee on insurance laws under the Ministry of Justice published a draft, with the aim of revising the current insurance rules. The revision would constitute the first amendment to insurance law in 100 years. Despite the information provided above, given the IAIS's revision of the ICPs and Methodology in October 2003, there is insufficient information publicly available regarding Japan's compliance with these more stringent principles. More »

Legend:

Credit Ratings

Moody's Aaa/Stable

Fitch AA/Stable

Standard & Poor's AA/Stable

Macroeconomic Data

2007 GDP (Current Prices): 4,383.76 billion USD (IMF)

2007 GDP (Per Capita): 34,312 USD (IMF)

2008 GDP (Growth Forecast): 1.4% (IMF)

2008 Inflation (CPI): 0.6% (IMF)

2007 Unemployment: 4% (CIA)

2006 Foreign Direct Investment

FDI (Inward): -6.506 billion USD (UNCTAD)

FDI (Outward): 50.266 billion USD (UNCTAD)

2006 Official Development Assistance

ODA (Received): N/A million USD (OECD)

ODA (Disbursed): 11.187 million USD (OECD)