JFSA in Japan’s Growth Strategy

February 2015 Shunsuke Shirakawa

Financial Services Agency

JFSA in Japan’s Growth Strategy

Strategic financing for growth-oriented businesses is the key to successful implementation of initiatives for overcoming deflation and achieving sustainable economic growth under Abenomics.

End of deflation (2% inflation target)

Funds shift to assets yielding higher than

the inflation rate

Financing to growing sectors

Realizing Virtuous Cycle for Sustainable Economic Growth

Deflation Funds held as cash or deposits

Insufficient Financing to

growing sectors

Vicious cycle

Virtuous cycle

1

Drafting the Corporate Governance Code, etc.

Securing Japan’s status as an international financial center and realizing Asia’s growth potential

• Improve financial infrastructure (e.g. securities settlement systems) • Promote the standardization of bond issuance documentation and procedures in Asian

markets

Enhancing settlement systems • Realize real-time money transfers by financial institutions and companies.

Overview of FSA-related measures in Japan’s Growth Strategy (1)

FSA related Measures in “Japan Revitalization Strategy Revised in 2014”

Accelerating structural reform program (Vitalizing industries)

Stimulating financial and capital markets

2

Establishing a cycle in which abundant household assets flow into growing sectors

• Promote the use of NISAs • Enhance efficiency and transparency in the management of investment funds

Promoting voluntary adoption of the IFRS • Publish “the IFRS Adoption Report (tentative name)”, as a useful reference for

companies considering adoption of the IFRS.

Initiatives aimed at enhancing the competitiveness of companies • Encourage more widespread use of the JPX-Nikkei Index 400 (which consists of

companies selected with a focus on profitability and corporate governance).

Overview of FSA-related measures in Japan’s Growth Strategy (2)

Stimulating financial and capital markets (cont.)

3

Responsibilities for shareholders

Corporate Governance Code

♦ Principles of good practices for companies

♦ Responsibilities for shareholders and other stakeholders

Company

Shareholders Other Stakeholders (employees, creditors,

customers, etc.)

Ultimate fund providers (individuals, pensioners, insurance policyholders, etc.)

Institutional investors (shareholders)

Stewardship responsibilities

Constructive dialogues

Stewardship Code

♦ Principles of good practices for institutional investors

♦ Responsibilities for the ultimate fund providers (thruster)

Company

The Stewardship Code was finalized in February 2014 under the Japan Revitalization Strategy (Cabinet decision in June 2013). As many as 175 institutional investors have signed up to the Stewardship Code as of the end of Nov 2014.

⋅ The FSA and the Tokyo Stock Exchange (TSE) published the key elements of the Corporate Governance Code in Dec 2014.

⋅ The Code is consistent with the OECD Principles of Corporate Governance, and easy to use for Japanese companies

⋅ The TSE will formulate the Corporate Governance Code by June 2015.

Promoting Growth Oriented Corporate Governance

4

・ Promoting “growth-oriented corporate governance” which stimulates healthy entrepreneurship ・ Enhancing corporate value through cooperation with a variety of stakeholders including shareholders ・ Facilitating constructive dialogue between companies and their shareholders

<Securing the Rights and Equal Treatment of Shareholders> Companies should fully secure the rights and equal treatment of shareholders.

Securing the rights of shareholders effectively ⇒ Measures for giving shareholders sufficient time to consider the agenda of general shareholder meetings (e.g. Early delivery of convening notices of GSMs)

Explanation of cross-shareholdings ⇒ Disclosing a policy of cross-shareholdings Explanation of its objective and rationale based on examination of economic rationale

Establishment & disclosure of standards of the voting rights

<Cooperation with Stakeholders Other Than Shareholders> Companies should cooperate with stakeholders including employees, customers, business partners and local communities.

<Ensuring Appropriate Information Disclosure and Transparency> Companies should appropriately conduct statutory disclosure and also provide accurate & useful information beyond that required by law.

<Dialogue with Shareholders> Companies should engage in constructive dialogue with shareholders in order to contribute to sustainable growth.

<Responsibilities of the Board> To promote sustainable corporate growth and enhance earnings power & capital efficiency, the board should appropriately fulfill its roles and responsibilities, including: (1) Setting the broad direction of corporate strategy (2) Establishing an environment where appropriate risk-taking by the senior management is supported (3) Carrying out effective oversight of directors & the management

Actions on sustainability issues including ESG matters

Ensuring diversity including active participation of women

Effective use of independent directors

⇒ Appointment of at least 2 independent directors who are able to contribute constructive discussions

※ Disclosing a roadmap for appointment of at least 1/3 of directors as independent directors if the company believes it necessary to do so in its own judgment

The Code adopts the “comply or explain” approach (either comply with a principle or, if not, explain the reasons why not to do so).

Proactive information disclosure including business principles & strategies Establishment of organizational structures for promoting constructive

dialogue with shareholders

◎ The management may become risk-avoiding due to concerns about unexpected losses resulting from its business judgment.

⇒ The Code contributes to secure the reasonableness of management’s decision-making processes and supports appropriate risk-taking by companies.

Outline of Japan’s Corporate Governance Code [Exposure Draft]

5

Item Outline

Timing of the Introduction January １，２０１４

Investment period １０ years（２０１４～２０２３）

Scope Dividends and capital gains derived from listed shares and publicly-offered stock investment funds in NISA account

Annual investment limit JPY １ million (USD 9,800)

Tax-exempt period ５ years

Eligible persons Residents of Japan（２０ years old and above）

Withdrawing Free（Reinvestment is not allowed）

Profit/loss offset Tax losses generated in NISA accounts are not available

Number of accounts Only １ account per person

NISA stands for “Nippon Individual Savings Account”, and gives individual investors a tax exemption on dividends and capital gains derived from listed shares and investment trusts.

① Support of asset formation for households ② Supply of risk money for economic growth 【Purpose】

NISA（Nippon Individual Savings Account）(1)

6

* Income/capital gain from NISA is exempted from taxation for a maximum of 5 years. * After the 5-year exemption period, investors can: > continue tax exemption through newly available investment limit; or > transfer securities into an ordinary account.

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 ・・・

2023 ＪＰＹ１Ｍ










Investment Period: 10 years

from 2014

Tax-exempt period ： 5 years


7

NISA has made a successful start in attracting individual investors. JFSA continues efforts to improve the framework of NISA.

Number of NISA accounts: Approx. 7.3 million (as of June

2014) Total amount in NISA accounts: Approx. 1.6 trillion JPY (as of June

2014)

i) Changing households’ financial asset allocation

ii) Increasing the number of individual investors

iii) Enhancing financial literacy of households (long-term impact)

Amendment to Income Tax Act: (1) Creation of Junior NISA (2) Increasing the annual investment

limit for NISA

i) Aiming to JPY25 trillion in investment under NISA by 2020

ii) Further effort to improve the framework of NISA

1. Purpose 2. Progress

4. Forward Perspectives 3. Improvement


8

○ Total amount in NISA accounts: ¥1,563,122.26m Breakdown: Listed stocks: ¥494,914.94m (31.7％) Investment trusts: ¥1,039,599.73m (66.5％) ETFs ¥14,029.79m (0.9％) REITs ¥14,577.85m (0.9％)

○ 63.5% of total amount invested owned by people over 60 years old

80s + ¥104,734.87m

70s ¥379,436.33m

60s ¥508,107.71m

50s ¥256,228.04m

40s ¥172,183.53m

30s ¥108,261.85m

20s ¥34,169.98m

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

20歳代

30歳代

40歳代

50歳代

60歳代

70歳代

80歳以上

2.2%

6.9%

11.0%

16.4%

32.5%

24.3%

6.7%

63.5% (above 60)

Above 80

70’s

60’s

50’s

40’s

30’s

20’s

Breakdown of NISA accounts (30 June 2014)

9

Improvement 1: Creation of Junior NISA (tentative name) - It will be possible for minors aged 0 to 19 to open Junior NISA accounts.

Issue: The current state of NISA usage is such that the great majority of accounts are held by middle-aged or elderly investors. There is a need to facilitate inter-generational transfer of assets and to create opportunities for minors to start long-term investment.

Image of Junior NISA

Adult NISA Junior NISA Account

It is not possible to withdraw funds midway

Taxes will be applied to past interest if funds are withdrawn

Withdrawal restrictions

Automatic shift to adult NISA

・・・ Long-term investment for the child’s/grandchild’s future

0 to 17 years old 18 years old

20 years old

After age 18, it is possible to withdraw funds

Funding

Parents, grandparents, etc.

Child, grandchild, etc.

Investment trust / shares, etc.

A person with parental authority can manage the accounts as representatives of minors

Manager (A person with parental

authority, etc.)

Creation of Junior NISA – 1

10

Item Outline People able to use this

system Residents aged 0 to 19

Annual investment limit 800,000 yen

Investments eligible for tax exemptions

Listed shares, publicly-offered stock investment funds, etc. (in line with adult NISA)

Investable period Until 2023 (in line with adult NISA)

Tax exemption period From the time of investment for a period of five years (in line with adult NISA)

Investment management and control

Investment is subject to the proxy of people with the parental authority, etc. or their consent. In principle, the investments in Junior NISA accounts cannot be withdrawn until the account holders turn 18.

Creation of Junior NISA – 2

11

Improvement 2: Increasing the annual investment limit for NISA - The annual investment limit will be revised to be suitable for monthly fixed-amount

investments (1.2 million yen: 100,000 yen per month * 12 months)

A. I want to save every month

9%

Between the two choices, I agree with A more

31% Between the two choices,

I agree with B more 36%

B. In regard to the tax exemption framework of 1 million yen per year, I intend to invest that amount all at once

24%

Source: Nomura Asset Management Division, “Fifth Opinion Survey on NISA (research conducted February 2014)”

Sample: 40,000 men and women aged 20 and up across Japan

- Approximately 40% of people say they would like to use the account to save money every month, with this trend being particularly strong among the young.

Increasing the NISA annual investment limit

Reference Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc.

IV-3-1-2 (8)

Points of Attention Regarding Solicitation of Transactions That Use Tax Exemption for Small-Amount Investments (excerpt)

(ii) Provision of Financial Instruments in Ways That Take into Consideration the Design and Purpose of the System

Whether the operator takes into account the purpose of NISA, which is to encourage asset building in the medium- to long-term by households, and provides financial instruments, etc., to NISA-using customers in ways that reflect NISA's design and purposes, for example by providing a scheduled fixed-amount investment service in which the effect of time-diversified investment can be obtained by dividing investments into portions executed at specific intervals… (abridged).

12

Companies Voluntarily Applying IFRSs in Japan

13

Adoption of New Policy Asset mix (October 31, 2014) As Japan is now on coming out of the long-term deflation, GPIF accelerated review process of its policy asset mix, which

should be more compatible with the changes of long-term economic prospect. Enhancing the governance structure of the GPIF In addition to the new policy asset mix, the Investment Advisory Committee adopted a resolution as to the reinforcement of the governance structure, which includes...

① Reinforcement of the internal control (creating “Governance Council” under the Investment Advisory Committee) ② Reinforcement of the risk management capabilities ③ Enhancement of human resource management

Domestic bonds Domestic stocks International bonds

International stocks

Short-term assets

Target allocation 60%（±8％） 12%（±6％） 11%（±5％） 12%（±5％） 5%

New portfolio 35%（±10％） 25%（±9％） 15%（±4％） 25%（±8％）

○New investment policy on domestic equity announced on April 4, 2014

3 new indices including JPX-Nikkei 400 were employed. ○A Reshuffle of Members of Investment Committee of the GPIF on April 22, 2014

6 new members were appointed (1 reappointed), most of whom are experts on asset management and/or international business.

○The GPIF adopted the Stewardship Code on May 30, 2014

Measures already adopted

Recent Measures (conducted after the “Japan Revitalization Strategy Revised in 2014”)

Government Pension Investment Fund (GPIF) Reform

14

Documents

JFSA in Japan’s Growth Strategy