Japan: TSE to be more foreigner-friendly

In its medium-term business plan, the Tokyo Stock Exchange Group refers to a “universal exchange.” Can you be more specific about that goal?

Atsushi Saito: With the universal exchange approach, we will make products traded on the TSE as universal as possible. At the same time, we will invite as many exchanges in the rest of Asia as possible to converge on Tokyo in one way and another, which is a key aspect of our universal exchange concept.

We will shortly create a new market exclusively for professionals—institutional investors – by tying up with the London Stock Exchange. The Alternative Investment Market of the LSE is a guide for us in launching the proposed new market. Once it comes into being, the Tokyo market will accept submissions of English-language financial data and financial statements as long as they are in compliance with international accounting standards.

I am sure that Tokyo will become accessible for Asian start-ups. Provided that start-ups in China, India, Vietnam, Indonesia, the Philippines, South Korea and Taiwan, among other Asian countries, actually begin using the proposed new market in Tokyo, the TSE will gather momentum.

What is wrong with the existing regulatory regime?

At present, our listing criteria require the use of the Japanese language and Japanese accounting standards. Naturally, it is costly to comply with such requirements. Many Asian countries now use the IFRS (International Financial Reporting Standards), adopted by more than 100 countries. In Japan, the GAAP (Generally Accepted Accounting Principles) of the US can be partly accepted but the basic rule is to apply Japanese accounting standards. Therefore, listing costs double since you have to pay fees twice. I think that this invisible barrier should be removed and we should have a single accounting norm that is compatible with what is prevailing internationally.

What do you think of corporate governance standards at Japanese businesses?

I am afraid that the current state of affairs concerning corporate governance has been somewhat exaggerated by the press. In reality, what is happening in Japan is identical to reactions and phenomena that can be seen elsewhere in the world in connection with corporate governance. I do not think something extraordinary is happening in Japan. Having said that, I want to point out, however, that the ¥1,500 trillion ($14 trillion) in financial assets held by Japanese households can be utilized more efficiently when Japanese corporations become more mindful of capital and management discipline.

Isn’t the cross-shareholding practice problematic?

Perhaps. The practice exists in some Asian countries but it is a phenomenon that is rarely seen in the countries that boast the world’s top-level gross domestic product. In the end, the portion of capital used for cross-shareholding purposes cannot be used for development.

Is the same true of corporate poison pill defences?

Corporate measures against takeover bids may be allowed on a case-by-case basis. There are cases in the world in which public-sector entities are allowed to prepare defensive measures against takeover bids. As for the case of Electric Power Development Co, also known as J-Power, I think the heart of the problem is not its defensive measures themselves but the absence of rules in Japan vis-à-vis overseas funds.

But this particular comment is only relevant to public-sector corporations. I would comment differently as to private-sector corporations’ similar measures to defend themselves from takeover bids. In my opinion, it is corporate managers’ responsibility to expose themselves to evaluations and criticisms from outside and use them in changing their way of running businesses with a view to ultimately raising quantitative returns.

What should be done to raise the presence of the Tokyo market in Asia?

We have to realize both qualitative and quantitative improvement. The latter is particularly important. If we allow the proliferation of insider trading and the repeated abuse of private placement rights to ward off takeover bids, we will only lose to other markets that are better disciplined and sophisticated. When we think of efficient cashflows, one key approach is deregulation, of course, and, though this may sound self-contradictory, the other is to regulate market activity to an appropriate extent.

This is a direct question, but I wonder if law and market regulations are not good enough to prevent insider trading?

Well, it is the morals of people concerned that are the most important factor to prevent insider trading.

Now that the marketplace has been highly globalized, the market mechanism itself is vulnerable to destruction from within if those who are associated with the system fail to respect ethical and moral obligations. What should be done to that end?

That is a difficult question to answer. In Europe – the UK in particular – there is a cultural tendency among people to avoid doing what should not be done from a moral viewpoint even if rules provide no prohibition. I think such a culture reflects their religious belief. In contrast, the well-regulated New York market was rocked by the Enron financial scandal. Despite the enactment of the Sarbanes-Oxley Act of 2002 or SOX – the Public Company Accounting Reform and Investor Protection Act – US banks and other financial institutions transferred bad debts from their balance sheets to their subsidiaries. Few incidents of the kind have taken place in Europe.

The so-called asymmetric information phenomenon is peculiar to the financial market – those who have lots of information may position themselves better to make money by providing financial products and services to others with little information. Therefore, the market would be ruined if members in the former group were unethical and did the latter an injustice.

I absolutely agree. I think what really matters is education.

Even in the planned market for professionals, investors who have little information about start-ups in Asia would find themselves helpless if there was a case in which an Asian start-up did something immoral by taking advantage of asymmetric information.