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Japan
Score Rank
Financial Standards Index 38.33 out of 100 54
Business Indicator Index 11.23 out of 12 4

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Overall Standards Summary

Japan achieves low overall compliance with international standards and codes, with a score of 38.33 out of 100 in our Financial Standards 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. Convergence with the latest International Standards on Auditing has lagged, but Japan has committed to adopting the international standards. 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. However, the biggest issue in Japanese corporate governance is the lack of independence in the composition of boards of directors which are largely dominated by management. Japan’s systemically important payment systems were recently overhauled and there is no assessment available as to their compliance with international best practices.

Choose a standard for a detailed compliance report:
12 Key Standards for Sound Financial Systems

Compliance Level
Special Data Dissemination Standard
CP
Code of Good Practices on Transparency in Monetary Policy
FC
Code of Good Practices on Transparency in Fiscal Policy
CP
Effective Insolvency and Creditor Rights Systems
II
International Financial Reporting Standards
ID
Principles of Corporate Governance
ID
International Standards on Auditing
ID
Anti-Money Laundering/Combating Terrorist Financing Standard
ID
Core Principles for Systemically Important Payment Systems
II
Core Principles for Effective Banking Supervision
II
Objectives and Principles of Securities Regulation
CP
Insurance Core Principles
II
II = Insufficient Information | NC = No Compliance | ID = Intent Declared | EN = Enacted | CP = Compliance in Process | FC = Full Compliance

Macroeconomic Policy and Data Transparency

CPSpecial Data Dissemination Standard

Japan has been a subscriber to the International Monetary Fund's (IMF) Special Data Dissemination Standard (SDDS) since July 1996, posted its metadata in November 1996, and started meeting SDDS requirements in June 2000. The IMF published a data module of the Report on the Observation of Standards and Codes (ROSC) for Japan in 2006. The ROSC found that Japan's statistical regime was largely in compliance with the SDDS requirements, but noted a number of areas in which improvements could be achieved. These findings are reflected, as well, in the material available on the SDDS website, as well as in the findings of the 2008 Annual Observance Report by the IMF. The IMF's SDDS website discloses that Japan meets or exceeds SDDS standards on coverage, timeliness, and periodicity for most data categories. The country, however, takes timeliness and periodicity flexibility options for certain data categories. The website shows that Japanese authorities provide advance release calendars for all relevant data categories and statistical data are 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. For most data categories, confidentiality is protected by law, but for some datasets no information has been posted on the SDDS website as to confidentiality protections. Japan generally fulfils SDDS requirements on the quality dimension; however, for a few data categories like central government debt, central government operations, interest rates, and the share price index there is no information on the SDDS website regarding the SDDS requirement on dissemination of component details.

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FCCode of Good Practices on Transparency in Monetary Policy

In its 2003 Financial System Stability Assessment (FSSA) of Japan, the IMF stated that the Bank of Japan's (BoJ) observance of transparency practices in the conduct of monetary policy met a high standard. Subsequent IMF Article IV Consultations have reaffirmed this evaluation. The BoJ's independence is mandated by the 1997 Bank of Japan Law, which specifies the BoJ's roles and objectives as overseer of the day-to-day handling of monetary policy in Japan. The roles, responsibilities, and objectives of the BoJ are clearly and comprehensively disclosed, described, and explained in a variety of reports, publications, and speeches by BoJ officials, all of which are posted on the BoJ's website. The FSSA further found that Japan's procedures for formulating and reporting on its monetary policy frameworks is sufficiently transparent. The BoJ reports its progress in quarterly, semi-annual, and annual monetary policy reports, and makes these documents available on its website. These reports include discussion of Japan's progress toward achieving its monetary policy objectives, as well as a consideration of the evolving macroeconomic situation and its implications for monetary policy. Japan subscribes to the IMF's Special Data Dissemination Standard (SDDS), and meets its specifications for the coverage, periodicity, and timeliness of monetary data.

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CPCode of Good Practices on Transparency in Fiscal Policy

According to the fiscal transparency module of the 2001 IMF Report on the Observance of Standards and Codes (ROSC), 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 the individual principles of the code. Japan’s Constitution defines the roles and responsibilities of general government and clearly distinguishes Japan's main government sectors from the private sector. The Public Finance Law and Public Account Law define and formalize the budget and financial management system. The Japanese government is required by law to publish and disseminate fiscal policy information, and the Constitution requires the Cabinet to regularly report the country's fiscal condition to the Diet. 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. In its 2004 ROSC Update, the IMF observed that Japan had addressed all concerns raised by the IMF in its 2001 ROSC. However, the Update also noted that Japan had only made limited progress in providing timely information on the consolidated central and general government fiscal balance. The Update recommended that Japan provide consolidated revenue and expenditure data for central and general government more frequently than was available at the time, adding that such action would require the standardization of accounting practices and reporting requirements. Subsequent reports by the IMF through 2009 have not explicitly addressed this issue. The IMF's 2009 Article IV Consultation underscores the need for fiscal transparency, especially in light of the significant fiscal stimulus undertaken as a result of the global economic downturn.

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Institutional and Market Infrastructure

IIEffective Insolvency and Creditor Rights Systems

According to a variety of sources, including the U.S. Department of Commerce's 2010 Country Commercial Guide (CCG) to Japan and a 2007 paper by LeMaster, Downey, and Brewerton, 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. Both the CCG and a 2006 paper by 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 that directly addresses Japan's compliance with the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank.

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IDInternational Financial Reporting Standards

According to numerous publications on the subject, Japan is committed to converging national accounting practices with international standards. In 2005, the Accounting Standards Board of Japan (ASBJ) and the International Accounting Standards Board (IASB) launched a joint convergence project with discussions on harmonizing Japanese Generally Accepted Accounting Principles (JGAAP) and International Financial Reporting Standards (IFRSs). According to the Deloitte IAS Plus website, the convergence process was further accelerated in August 2007 with the signing of the "Tokyo Agreement" which laid out short term convergence projects to be completed by 2008. As a consequence, revisions were made to JGAAP and at the end of 2008, per a 2009 Business Accounting Council (BAC) Interim Report, the European Commission announced that Japanese GAAP is equivalent to the IFRSs adopted by the European Union. Furthermore, in line with its convergence objectives, per an April 2010 ASBJ press release, on April 12, 2010, the ASBJ released an updated Project Plan aligned with the IASB’s work plan. According to this plan, the ASBJ intends to work on the remaining differences between JGAAP and IFRSs and plans on issuing exposure drafts by the first half of 2011. Earlier, in December 2009, the Financial Services Agency (FSA) issued an order allowing certain listed companies to submit their financial statements based on “designated” IFRSs. Per the Deloitte IAS Plus website, “designated” IFRSs are approved by the FSA and the list includes all IFRSs and Interpretations issued on or before June 30, 2009. Mandatory adoption of IFRSs for listed entities is likely to begin 2015 or 2016, subject to the FSA’s final decision to be made in 2012.

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IDPrinciples of Corporate Governance

The Japanese corporate governance framework is based on codes, regulations and laws. The Tokyo Stock Exchange (TSE) issued Principles of Corporate Governance for Listed Companies in 2004 which were revised in December 2009 and a new Company Law came into force in May 2007, replacing provisions of the Commercial Code that relate to companies. In response to the corporate governance scandals of 2007, the Japanese government also introduced guidelines informally know as Japanese Sarbanes-Oxley or J-SOX which became effective in April 2008. Despite this progress, the Asian Corporate Governance Association's (ACGA) 2008 White Paper asserts that the lack of shareholder activism and extensive cross-shareholding impede structural change. Multiple sources on the subject point out that the biggest issue in Japanese corporate governance is the lack of independence in the composition of boards of directors which are largely dominated by management. Contrary to good corporate governance practices, a high proportion of company board members are promoted from among employees. Efforts are ongoing to address some of these issues. For instance, the TSE published new rules in December 2009 relating to independent directors. Earlier, in September 2009 the TSE laid out its Listing System Improvement Action Plan proposing at least one independent director or auditor and disclosure of names of the independent director/auditor. The Ministry of Economy, Trade and Industry established a Corporate Governance Study Group to deliberate on rules for improving corporate governance and the Financial Services Agency in 2009 issued a set of reports and proposals in order to address investor complaints about deficiencies in corporate governance.

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IDInternational Standards on Auditing

According to a 2010 International Federation of Accountants (IFAC) publication, Japanese Generally Accepted Auditing Standards (GAAS) are “based” on International Standards on Auditing (ISAs) issued by the IFAC. Japanese GAAS primarily comprises auditing standards codified by the Business Accounting Council (BAC) of the Financial Services Agency (FSA) and the implementation guidance (Auditing Standards Committee Statements, ASCS) issued by the Japanese Institute of Certified Public Accountants (JICPA). However, as explained in the IFAC report, when a jurisdiction indicates that national GAAS is “based” on ISAs it is not clear if the modifications are in line with the IFAC Modifications Policy or if the latest amendments have been incorporated. Earlier, a 2006 comparison of Japanese GAAS and ISAs prepared by the JICPA pointed out that while some new and revised IFAC pronouncements were under consideration at the time of the assessment, other ISAs had neither been incorporated into national standards nor included in the work program of the JICPA. Also, the IFAC has since issued a set of Clarified ISAs effective December 15, 2009. In this respect, a 2010 JICPA Action Plan notes that the Institute is taking steps to further align local auditing standards with ISAs and since 2004 it has been issuing ASCSs corresponding to the new ISAs, including the Clarified ISAs. The BAC also acknowledges the significance of improving the quality of audits and stated that it will revise its Auditing Standards on a continuous basis in order to achieve compliance with the international standards.

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IDAnti-Money Laundering/Combating Terrorist Financing Standard

The Financial Action Task Force (FATF) conducted a mutual evaluation of Japan's Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regime against its 40 recommendations and 9 special recommendations (SR) in 2008. The FATF's 2008 report concludes that Japan is non-complaint with FATF Recommendation (R) 5 on customer due diligence (CDD), which is categorized by the FATF as a core recommendation. A country needs a rating of “compliant” or “largely compliant” with the core recommendations to be considered as having an effective AML/CFT regime. The report observes that CDD obligations with regards to identifying authorized persons, representatives and beneficiaries, or beneficial owners are not adequate and enhanced due diligence is not mandated for higher-risk customers, business relationships and transactions. Furthermore, Japan is only "partially compliant" with SR II on the criminalization of terrorist financing, another FATF core recommendation. However, efforts are ongoing to address some of these deficiencies. For instance, a 2009 Japan Financial Intelligence Center (JAFIC) Annual Report notes that amendments were made in 2009 to the Act on the Prevention of Transfer of Criminal Proceeds dealing with CDD requirements. Also, in 2009, in order to strengthen CDD practices a “Council on customer due diligence measures by business operators for anti money laundering” was established by the National Public Safety Commission in cooperation with relevant ministries. The FATF, in its 2008-2009 Annual Report, names Japan as one of the jurisdictions that have endorsed the FATF's 40+9 recommendations.

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IICore Principles for Systemically Important Payment Systems

The IMF, in its 2003 Financial System Stability Assessment (FSSA) noted that the Bank of Japan (BoJ) had, at the time, 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. Of the four, the BoJ-NET FTS is the core system, and in 2003 accounted 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 concluded that both modes of the BoJ-NET FTS, the real-time gross settlement mode and the deferred gross settlement mode, followed closely the Core Principles for Systemically Important Payment Systems (CPSIPS). The 2003 IMF assessment also noted that the Zengin System and the FXYCS observed all core principles with the exception of CP I, which they partly observed. The TCH-BCCS was found deficient in several respects and less robust in its observance of the CPSIPS by the FSSA. However, since these assessments the BoJ-NET FTS has been overhauled and in October 2008 its RTGS settlement mode was upgraded to the BoJ's Next-Generation RTGS. The upgrade included changes to the FXYCS and the Zengin System. In light of the above developments, there is insufficient information publicly available as to Japan’s current compliance with the CPSIPS.

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Financial Regulation and Supervision

IICore Principles for Effective Banking Supervision

In its 2009 Article IV Consultation report, the IMF noted the forceful response of the banking regulators to stabilize the Japanese financial markets hit hard by the global financial turmoil. In 2007, the Japanese banking supervisor, the Financial Services Agency (FSA) launched the “Better Regulation” initiative which promotes an optimal mix of rules-based and principle-based supervision to improve the regulatory environment and enhance the competitiveness of the Japanese financial market. The IMF in a 2005 report states that heightened supervisory efforts of the 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 Financial System Stability Assessment. 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. While the Program improved significantly the health of major banks, the IMF advocated bolder reforms and policies, which included raising profitability in the banking system, reducing reliance on real estate collateral, and improving risk management systems. These measures, per the IMF, would 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 Basel II, apply to all depository financial institutions in Japan. Despite the above descriptive information, none of the available sources directly addresses Japan's overall compliance with the Basel Core Principles for Effective Banking Supervision.

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CPObjectives and Principles of Securities Regulation

Japan has either fully or broadly implemented most of the International Organization of Securities Commissions' Objectives and Principles of Securities Regulation, according to a 2003 Financial System Stability Assessment by the IMF. The assessment elaborates 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 were also evidenced 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, the assessment doubted the enforcement ability of the regulators and pointed out the potential for political pressure on their authority. 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. A 2009 IMF report also praises the forceful response of the Japanese regulatory authorities to stabilize the Japanese financial markets hit hard by the global financial turmoil. Further, as the FSA notes on its website, it launched the “Better Regulation” initiative in 2007, which promotes an optimal mix of rules-based and principle-based supervision to improve the regulatory environment and enhance the competitiveness of the Japanese financial market. In 2010 a blueprint for action was also developed by the FSA to strengthen capital market regulation in response to the market turmoil.

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IIInsurance Core Principles

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 Financial System Stability Assessment (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, it is unclear whether the authorities are capable of enforcing their requirements fully. The lack of a board with outside members also creates scope for the FSA to be subject to political pressures. However, the FSA, per information on its website, has launched the “Better Regulation” initiative which promotes an optimal mix of rules-based and principle-based supervision to improve the regulatory environment and enhance the competitiveness of the Japanese financial market. The drive also seeks to prioritize supervisory action, enhance regulatory transparency, and incentivize voluntary problem rectification by insurance entities. The legal framework of insurance supervision has also been updated with the revision of key laws and the promulgation of a new Insurance Contract Law in 2007-2008. In addition, a blueprint for action has been developed by the FSA in 2010 to strengthen financial market regulation in response to the market turmoil. Despite the information provided above, there is insufficient information publicly available regarding Japan's compliance with the more stringent ICPs promulgated by the IAIS in October 2003.

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Business Indicators

With an overall score of 11.23/12, Japan is at standard on the economic, legal, and political indicators that make up our Business Index. Japan is a market-based economy. Total government expenditures, including consumption and transfer payments, are high. Government spending increased to 36 percent of GDP in the most recent year for which data was available. This is in part due to the rising cost of social welfare as the aging population increases as well as efforts by the government to stimulate the domestic economy. The government is committed to increasing the amount of foreign investment in Japan and offers tax incentives to do so. However, some informal barriers to trade and a few restrictions to foreign investment exist. Property rights are protected, and contracts are highly respected. Corruption is of no concern, as reflected by Japan’s ranking of 17th out of 180 countries in Transparency International’s 2009 Corruption Perceptions Index.

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Global Indices & Quick Facts

Japan ranks in the 1st quintile for all but one of the global indices that benchmark its political, economic, business, and human capital climates, as shown below. Japan's placement near the top of the monitored indicators reflects its status as a developed free-market economy. The Heritage Foundation in its Index of Economic Freedom finds that economic freedom in Japan is higher than the Asia-Pacific regional average. The World Bank's Doing Business Index, however, does point to some areas where there could be improvement. For example, the World Bank measurements indicate that the time a medium-size company spends preparing taxes is almost double the OECD average. Corruption is not an issue, with levels well below regional and world averages according to the Transparency International Corruption Perceptions Index.

Name Year Rank Score Quintile
Bertelsmann Transformation Status Index 2010
Heritage Foundation Economic Freedom Index 2010 19/179 72.9% 1
Economic Freedom of the World Index 2009 30/141 7.46/10 2
World Economic Forum Global Competitiveness Index 2009 8/133 5.37/7 1
Milken Institute Capital Access Index 2009 15/122 6.96/10 1
World Bank Ease of Doing Business Index 2009 15/183 N/A 1
UNDP Human Development Index 2009 10/177 0.96/1 1
Transparency International Corruption Perceptions Index 2009 17/180 7.7/12 1
Freedom House Index 2009 Free 1.5/7

Credit Ratings

AA/Stable Fitch

Aa2/Stable Moody's

AA/Negative Standard & Poor's

Macroeconomic Data

2009 GDP (Current Prices): 4992.8 billion USD (IMF)

2009 GDP (Per Capita): 39116 USD (IMF)

2010 GDP (Growth Forecast): 1.7% (IMF)


2009 Inflation (CPI): -0.8% (IMF)

2008 Unemployment: 4% (CIA)


2008 Foreign Direct Investment

FDI (Inward): 24.4 billion USD (UNCTAD)

FDI (Outward): 128.00 billion USD (UNCTAD)


2007 Official Development Assistance

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

ODA (Disbursed): 7,679 million USD (OECD)

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