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Making securitization work in Japan

Recent changes in Japanese legislation have increased the range of securitizations possible. Christopher Stoakes reports

Consumer finance companies (CFCs) have become an increasingly important source of retail credit in Japan. The problem they have faced is how best to free up balance sheets to do further business following the recent credit crunch. Securitization provides an increasingly important alternative to traditional bank financing. In 1992, non-bank companies regulated by Japan's ministry of international trade and industry (MITI) became able, by virtue of MITI-sponsored legislation, to use securitization structures that overcame many of the legal obstacles to securitization prevalent in Japan.

Essentially, this permitted MITI-regulated companies to perfect assignments of certain types of receivables without giving individual notice to each obligor. Since then, there has been a spate of securitizations by MITI-regulated companies involving lease receivables, auto-loan receivables and installment credits.

Those originators regulated by the finance ministry (MoF), such as CFCs, were required to have recourse to Japan's civil code to ensure properly perfected assignments, a cumbersome and potentially costly process. Companies that did securitize used techniques, such as conveying to the assignee legal title to the rights assigned, that fell short of actually giving notice to the customers whose loans were the subject of the assignment to the special purpose vehicle (SPV).

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