JFSA in Japan s Growth Strategy. February 2015 Shunsuke Shirakawa Financial Services Agency

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1 JFSA in Japan s Growth Strategy February 2015 Shunsuke Shirakawa Financial Services Agency

2 Realizing Virtuous Cycle for Sustainable Economic Growth Strategic financing for growth-oriented businesses is the key to successful implementation of initiatives for overcoming deflation and achieving sustainable economic growth under Abenomics. Deflation Funds held as cash or deposits End of deflation (2% inflation target) Funds shift to assets yielding higher than the inflation rate Vicious cycle Virtuous cycle Insufficient Financing to growing sectors Financing to growing sectors 1

3 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) Drafting the Corporate Governance Code, etc. Stimulating financial and capital markets 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. 2

4 Overview of FSA-related measures in Japan s Growth Strategy (2) Stimulating financial and capital markets (cont.) 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). 3

Promoting Growth Oriented Corporate Governance Corporate Governance Code Stewardship Code Principles of good practices for companies Responsibilities for shareholders and other stakeholders

5 Promoting Growth Oriented Corporate Governance Corporate Governance Code Stewardship Code Principles of good practices for companies Responsibilities for shareholders and other stakeholders Principles of good practices for institutional investors Responsibilities for the ultimate fund providers (thruster) Company Company Responsibilities for shareholders Shareholders Other Stakeholders (employees, creditors, customers, etc.) Institutional investors (shareholders) Constructive dialogues Stewardship responsibilities The FSA and the Tokyo Stock Exchange (TSE) published the key elements of the Corporate Governance Code in Dec 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 Ultimate fund providers (individuals, pensioners, insurance policyholders, etc.) 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

6 Outline of Japan s Corporate Governance Code [Exposure Draft] 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 The Code adopts the comply or explain approach (either comply with a principle or, if not, explain the reasons why not to do so). <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. Actions on sustainability issues including ESG matters Ensuring diversity including active participation of women <Ensuring Appropriate Information Disclosure and Transparency> Companies should appropriately conduct statutory disclosure and also provide accurate & useful information beyond that required by law. Proactive information disclosure including business principles & strategies <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 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. 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 <Dialogue with Shareholders> Companies should engage in constructive dialogue with shareholders in order to contribute to sustainable growth. Establishment of organizational structures for promoting constructive dialogue with shareholders 5

7 NISA(Nippon Individual Savings Account)(1) 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 Purpose 2 Supply of risk money for economic growth Item Outline Timing of the Introduction January 1,2014 Investment period Scope 10 years(2014~2023) 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 Eligible persons Withdrawing Profit/loss offset Number of accounts 5 years Residents of Japan(20 years old and above) Free(Reinvestment is not allowed) Tax losses generated in NISA accounts are not available Only 1 account per person 6

8 NISA(Nippon Individual Savings Account)(2) JPY1M 2022 JPY1M 2021 JPY1M 2020 JPY1M Investment Period: 10 years from JPY1M 2018 JPY1M 2017 JPY1M 2016 JPY1M 2015 JPY1M 2014 JPY1M Tax-exempt period : 5 years * 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. 7

9 NISA(Nippon Individual Savings Account)(3) NISA has made a successful start in attracting individual investors. JFSA continues efforts to improve the framework of NISA. 1. Purpose 2. Progress i) Changing households financial asset allocation ii) Increasing the number of individual investors iii) Enhancing financial literacy of households (long-term impact) 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) 3. Improvement Amendment to Income Tax Act: (1) Creation of Junior NISA (2) Increasing the annual investment limit for NISA 4. Forward Perspectives i) Aiming to JPY25 trillion in investment under NISA by 2020 ii) Further effort to improve the framework of NISA 8

Breakdown of NISA accounts (30 June 2014) 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.

10 Breakdown of NISA accounts (30 June 2014) 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 80 Above 歳以上 % 80s + 104,734.87m 70 s 70 歳代 24.3% 70s 379,436.33m 60 s 60 歳代 32.5% 60s 508,107.71m 50 s 50 歳代 16.4% 50s 256,228.04m 40 s 40 歳代 11.0% 63.5% (above 60) 40s 172,183.53m 30 歳代 30 s 6.9% 30s 108,261.85m 20 歳代 20 s 2.2% 20s 34,169.98m 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 9

Creation of Junior NISA 1 Issue: The current state of NISA usage is such that the great majority of accounts are held by

There is a need to facilitate inter-generational transfer of assets and to create opportunities for minors to start long-term

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

Funding Image of Junior NISA It is not possible to withdraw funds midway A person with parental authority can manage the

11 Creation of Junior NISA 1 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. Improvement 1: Creation of Junior NISA (tentative name) - It will be possible for minors aged 0 to 19 to open Junior NISA accounts. Parents, grandparents, etc. Funding Image of Junior NISA It is not possible to withdraw funds midway A person with parental authority can manage the accounts as representatives of minors Manager (A person with parental authority, etc.) Child, grandchild, etc. Investment trust / shares, etc. Withdrawal restrictions Taxes will be applied to past interest if funds are withdrawn Long-term investment for the child s/grandchild s future Junior NISA Account After age 18, it is possible to withdraw funds Adult NISA 0 to 17 years old 18 years old 20 years old Automatic shift to adult NISA 10

12 Creation of Junior NISA 2 Item Outline People able to use this system Annual investment limit Investments eligible for tax exemptions Investable period Tax exemption period Residents aged 0 to ,000 yen Listed shares, publicly-offered stock investment funds, etc. (in line with adult NISA) Until 2023 (in line with adult NISA) 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

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

2 million yen: 100,000 yen per month * 12 months) - 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

13 Increasing the NISA annual investment limit 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) - 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. B. In regard to the tax exemption framework of 1 million yen per year, I intend to invest that amount all at once 24% 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% Reference Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc. IV (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 NISAusing 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). 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 12

14 Companies Voluntarily Applying IFRSs in Japan 13

Government Pension Investment Fund (GPIF) Reform Recent Measures (conducted after the Japan Revitalization Strategy Revised in 2014 ) Adoption of New Policy Asset mix (October 31, 2014) As Japan is

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%)

15 Government Pension Investment Fund (GPIF) Reform Recent Measures (conducted after the Japan Revitalization Strategy Revised in 2014 ) 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. 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%) 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 Measures already adopted New investment policy on domestic equity announced on April 4, new indices including JPX-Nikkei 400 were employed. A Reshuffle of Members of Investment Committee of the GPIF on April 22, 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,

Japan Revitalization Strategy (Revised 2014) (Cabinet Decision on June 24, 2014) Major measures related to Financial and Capital Markets

Japan Revitalization Strategy (Revised 2014) (Cabinet Decision on June 24, 2014) Major measures related to Financial and Capital Markets Overview (1) Strategic financing for growth-oriented businesses