Mr. Junichi Nakajima, the Commissioner of the Financial Services Agency (FSA), joined the Ministry of Finance (MOF) in 1985 and took up his current post in July 2021 after having served as General Manager of the Japan External Trade Organization Vancouver, Director of the Debt Management Policy Division of the Financial Bureau at MOF, Deputy Director-General of the Planning and Coordination Bureau (responsible for financial markets and exchanges), Vice Commissioner for Strategy Development and Management Bureau, Director-General of the Policy and Markets Bureau, Director-General of the Strategy Development and Management Bureau, etc at FSA.
As Deputy Director-General of the Planning and Coordination Bureau (responsible for financial markets and exchanges), Mr. Nakajima was involved in the legal amendments (in 2017) to establish a new system in relation to High Speed Trading of shares and other types of financial instruments. He also took charge of establishing a comprehensive exchange as Director-General of the Policy and Markets Bureau and establishing the status of the Japanese market as an international financial center and promoting sustainable finance as Director-General of the Strategy Development and Management Bureau.
Mr. Nakajima graduated from the Faculty of Engineering at the University of Tokyo in 1985 and received his master’s degree in public administration from Harvard University in 1995.
FIA Japan: What are the key objectives for the Japan Financial Services Agency over the next 2 to 3 years. We would also be very happy to learn how your own career, experience, and vision plays a role in formulating these objectives.
At the FSA, we published “The JFSA Strategic Priorities July 2021-June 2022” at the end of August after repeated discussions by senior officials with experience and vision, including myself.
As our top priority for now, we will take all necessary actions to ensure that financial institutions firmly support business operators that have been seriously affected by the COVID-19 and to bring about a robust economic recovery.
Our big post-COVID goal is to build a vibrant economy and society by viewing changes in the world, such as advances in digitalization, as opportunities for growth. Therefore, it is important to achieve a smooth circulation of both international and domestic funds and develop a financial system that enables vigorous and creative financial services. Specifically, we will promote digital innovation in the financial sector, expand Japan’s role as an international financial center, promote sustainable finance and enhance the functions of the whole investment chain centered on the capital markets, to mention but a few of our objectives.
In addition, we consider it necessary to enhance our capability as a financial authority so that we can accurately address these challenges and contribute to the economy and society as the agency supporting financial services. Specially, we will make such efforts as fostering professional human resources, enhancing the sophistication of data analysis and strengthen our international networks.
FIA Japan: Prospect for the development of Japan as a world major financial center
The Government has set the goal of making Japan a major International Financial Center comparable to London and New York. FSA has since then introduced its Financial Market Entry Office, with services in English, as well as a dedicated website on this topic (International Financial Center Japan).
How do you envision the future of Japan as an international financial center? How do you hope to innovate or reform the Japanese markets? Where do you see competitive advantages offered by Japan when compared to global peers in North America, Europe, and Asia Pacific? Where do you see current competitive disadvantages, and what measures are being taken to address these disadvantages?
Japan’s strength lies in stable politics and a safe environment supported by a solid democracy centered around the rule of law. Japan also has the world’s third largest economy, a substantial stock market as well as some 1,900 trillion-yen worth of household financial assets. This creates massive potential for the asset management industry.
Amid the globally spreading risks of the pandemic, natural disasters and geopolitical issues, we think we can contribute to the international diversification of risk factors by establishing Japan’s status as an international financial center based on its many strengths and strong potential. At the same time, we expect that advanced financial service expertise offered by well-established financial professionals and the proper flow of investment funds to industry will ultimately lead to the creation of jobs and businesses and enhance the economic vitality of Japan as a whole.
At the same time, Japan’s competitive disadvantages are said to include its taxation system, the provision of services in English and visa obtention. We, therefore, are addressing the taxation system, administrative services in English, easing of visa requirements and other issues to attract advanced financial professionals from overseas financial institutions.
As one such effort, we opened the Financial Market Entry Office in January to offer a one-stop service point, ranging from the registration to the supervision of asset management companies. Four registrations were completed as of the end of August in a licensing procedure that was as fast as in other international financial centers. We also launched a dedicated website in March to provide exhaustive information on these Japanese programs.
By the end of this year, we will create further entry programs to facilitate entries by overseas investment management companies and others. We will also grapple intensively with energizing the capital markets through such means as reviewing firewall regulations separating banking and brokerage activities.
Combined with Japan’s overall strengths, we will proactively promote these programs to solidify the country’s status as an international financial center open to the world.
FIA Japan: How to expand the Japanese financial derivatives market
One of the weak points for Japan seems to be that the development of listed derivatives markets comes typically much later than the same in Chicago, New York, London and other Asian financial hubs. China is rapidly gathering pace in developing its derivatives markets. Liquid and sizable derivatives market may well supplement the underlying bond and equity market and help increase needs in labor force for financial and related businesses.
What do you observe are the reasons for the relatively slow development of derivatives market in Japan, and what are your prescriptions for catching up with the front runners? How does Japan plan to fill the need for more financial professionals?
We are aware that the slow development of derivatives markets in Japan is attributed to such factors as questionable means of soliciting individual investors, limited use by companies and institutional investors, and a shortage of products and liquidity as a result of divided markets in accordance with the underlying assets.
One of the characteristics of derivatives transactions is the concentration of cross-border transactions in more highly liquid and convenient markets. On the other hand, there are time differences between Asia and Europe/U.S. As Japan has huge economic activities and financial assets, we consider that companies, investors and financial institutions located in Japan have a great need for hedging their risk in Japan. Listed derivatives markets in Japan, therefore, have an opportunity to grow.
The first prescription for vitalizing a derivatives market is fundamental: namely, the improvement of user friendliness such as by enhancing liquidity and increasing the availability of products. Derivatives exchanges in Japan have greatly changed over the past 10 years, laying groundwork for the realization of a highly convenient market that will centrally handle financial and commodity derivatives. The consolidation of commodity derivatives trading from the Tokyo Commodity Exchange to the Osaka Exchange began in 2020. The Osaka Exchange is currently working on extending trading hours, introduce holiday trading and list new products to further improve its convenience to users. FSA will strongly support such efforts.
The second prescription is to create environments where financial institutions and investors located in Japan can appropriately utilize listed derivatives markets. It is said that Japanese institutional investors are not fully utilizing derivatives transactions. While we are promoting the enhancing of the asset management business, the effort will help vitalize listed derivatives markets. Individual investors having hedging needs are also important players. From the viewpoint of improving the tax environment, FSA is requesting the addition of securities market derivatives to the offsetting scope of profits and losses related to financial instruments, for the unification of financial income taxes as part of tax reform requests for the current fiscal year.
FIA Japan: Fin-Tech initiatives
1/ Within the many aspects of Fin-tech (such as block-chain, central banks’ digital currency and so on...) what areas hold the most interest to you? How do you envision some of these technologies may transform finance and the economy as a whole? How well is Japan positioned to take advantage of this latest “tech revolution”?
Because the financial sector deals with numbers, it has a natural affinity for digital technology. As advances in information and communication technology have eased quantitative, temporal, and locational constraints in data processing, business operators are creating innovative financial services based on their originality and ingenuity.
We have been attempting to cultivate services that can assist users in increasing convenience and resolving social issues while also ensuring user protection. We have promoted programs such as the creation of the “financial service brokerage” business which allows the provision of intermediary services in the banking, securities and insurance sectors under a single registration, in addition to providing support for Fin-Tech business operators.
Meanwhile, technological innovations, and their applications to the financial sector are advancing at breakneck speed. While gathering information on business, technology and other trends and strengthening communication with business operators both at home and overseas in order to respond quickly and effectively to such developments, we will continue to strengthen programs that promote both innovation and user protection. These include:
Consideration on how to support the digitalization of remittance transfers and securities products at the “Study Group on Digital and Decentralized Finance” newly set up in July 2021;
Contribution to international discussions on stablecoins, central bank digital currencies, and enhancing cross-border payments, among other topics; and
Contribution to discussions for solving global issues on the governance of decentralized financial systems through participation in the Blockchain Governance Initiative Network (BGIN).
FIA Japan: Fin-Tech initiatives
2/ Could you also address your view of the current state of the IT professional human resources and IT governance in the Japanese financial industries? Do you think that the current status is fit to take initiatives in the Fin-Tech field?
I recognize a shortage of IT human resources, not only in the financial industry, with the advanced skills indispensable to create new services and make digital transformation a reality, though there is an extremely strong market need for them. I think, therefore, it is important for financial institutions to work out plans to educate and ensure IT human resources, for instance, flexible recruitment, career path and training programs for those IT human resources.
If Japanese financial institutions wish to take the initiative in the Fin-tech field, I think it is important for them to link IT with their management strategies and exercise IT governance that brings corporate value. As the IT governance they should pursue differs in accordance with their business category, scale and feature, each financial institution needs to cope with the task through its own originality and ingenuity. We will support financial institutions’ programs to exercise IT governance by releasing useful information gained through dialogues with them and experts and have it understood widely and deeply through dialogues and other means.
FIA Japan: Fin-Tech initiatives
3/ Also, please address the current state of K-12 (i.e: primary/secondary) and post-Secondary education in Japan and how this plays into a future role for Japan as a leader in Fin-Tech initiatives.
Many of modern-day children and students have already experienced Fin-tech, including cashless payment, in their daily lives. To further draw attentions in Fin-tech and accelerate the development of Fin-tech savvy human resources, it is important to stimulate more in-depth awareness about what kinds of services are socially needed on top of technological aspects. Therefore, it is necessary to deepen people’s understanding of social mechanisms related to the economy and finance and the importance of household budget management and asset accumulation.
Taking this background into consideration, Japan has introduced financial and economic education starting with elementary education programs. Specifically, agenda about progress in cashless payment is included in junior high school programs, while students in high school learn economic and financial mechanisms in “Public” class and asset formation in “Home Economics.”
Students also have opportunities to learn some technical issues related to Fin-tech in programming and other classes and more professional matters, or through hands-on experience. Having said that, still a basic understanding of finance and economics, as well as financial literacy are the most important and fundamental keys to make Japan lead activities in the field of Fin-tech.
FIA Japan: How to incorporate ESG and climate change issues into financial transactions
Recently, ESG (Environment, Social and Governance) and climate change have become hot topics throughout the world. Can you tell us more about the global initiatives FSA is actively participating in, such as NGFS (Network of Central Banks and Supervisors for Greening the Financial System) and TCFD (Task-force of Climate related Financial Disclosure)?
How could we further incorporate ESG and climate issues in the financial world? How long will it take before we can implement global standards to effectively tackle those issues? Is this achievable?
At a time when the world is turning toward a sustainable society, finance that prompts a shift to a new industrial and social structure is becoming more important. In terms of climate change, the Group of 20 member countries, which account for 80% of global (greenhouse gas) emissions, are steadily progressing with their discussions on how to reduce emissions and disclose climate-related information ahead of the G20 summit in late October and the COP26 United Nations Climate Change Conference in November in the United Kingdom.
We have been actively participating in the advancement of discussions on international policy cooperation and rule-making. As the chair of a standing committee responsible for policy formation and regulatory supervision at the Financial Stability Board, for example, where financial authorities, central banks and others gather from around the world, we have been playing a leading role. In particular, we are working with the NGFS on climate change-related scenario analyses as a regulatory and supervisory approach to addressing climate-related risks for financial institutions. We reported to the G20 that we will promote the disclosure of consistent and high-quality climate data, based on the TCFD’s recommendations.
From a financial standpoint, we will advance programs to address challenges to ESG, particularly climate change, on a national level. The Financial System Council has already begun deliberations on how to disclose sustainability-related information. We will build an information platform to consolidate information and so forth on the acquisition of such certification, their issuance, and so on while studying the creation of a framework to objectively certify the investability of green bonds and other instruments. We will also develop supervisory guidance on financial institutions’ support for clients to whom they have extended loans, as well as risk management promotion.
We will conduct examinations as part of this process in order to accurately reflect Japan’s strength, such as correctly assessing each industrial sector’s “transition” programs to eventually achieve carbon neutrality and encouraging investment.
In terms of ESG, I believe that the entire society should address not only climate change, but also a variety of other issues such as empowering women, revitalizing regional communities, and making corporate directors more functional. However, given the wide range of issues involved, there are numerous obstacles to overcome, such as recognizing future risks, also known as the “tragedy of horizons”, and collecting and identifying data and contentious issues consistently, necessitating phased approaches. I believe it is critical for Japan to financially support various stakeholders’ reforms, including investors and businesses, by actively participating in international discussions and promoting long-term programs.
FIA Japan: International regulatory cooperation
FSA participates in a number of initiatives that regroup international regulators (such as IOSCO, Basel, G7, G20 etc). Can you tell us more about these and what topics you are focusing on?
We participate in a variety of initiatives and engage in cross-sectional regulatory supervision of the banking, securities, insurance and other sectors. Each initiative promotes programs aimed at resolving the following global issues:
Monitoring and sharing information on the financial stability risks from the COVID-19 pandemic;
Ensuring cybersecurity and operational resilience; and
Promotion and appropriate regulatory oversight of digital innovation, such as cross-border payments and global stablecoins.
With regard to policy responses to COVID-19, we are leading discussions on information sharing between supervisory authorities, cooperation in policy measures and so forth as chair of the Basel Committee on Banking Supervision and the FSB.
We will keep working on these issues actively in a globally consistent manner.
FIA Japan: role of FIA Japan
In your view, can FIA Japan provide assistance in achieving any of these policy goals you mentioned and what role can FIA Japan play in helping to further develop the Japanese financial markets?
It is important to accurately understand the conditions of financial transactions and the essence of problems in order to implement effective measures to further develop the Japanese financial markets amid Fin-tech, ESG and other great environmental changes taking place around finance.
I understand that FIA Japan is in a position to gather opinions from not only financial institutions but also exchanges, IT providers, law offices and a wide range of other parties related to the derivatives industry. We would like to continue exchanging views with FIA Japan for the sake of further developing the Japanese financial markets.