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Mitchell, Arthur "Symposium on Building the Financial System of the 21st Century" [2003] ADBLPRes 8 (5 October 2003)

Symposium on Building the Financial System of the 21st Century

Remarks
of
Arthur M. Mitchell
General Counsel
Asian Development Bank

An Agenda for Japan and the United States

October 3 – 5, 2003

1. Introduction
   • This symposium has been held for the past six years. Now is an appropriate time for some stocktaking.
   • Most of us are asked whether Japan is changing. The answer, of course, is yes, but the more interesting questions are:
     • How is Japan changing or more specifically what has changed since the introduction of the Big Bang reforms?
     • What will Japan’s role be in the architecture of the 21st century?
     • Indeed, what will be the role of the U.S., Europe, and the rest of the developing countries in the medium term?
     • How can those of us in this Symposium impact the trends we see?
2. Assessing the Big Bang Reforms
   In 1996, the Hashimoto Cabinet announced that, henceforth, Japanese capital markets would be governed by three principles:
   • Free
   • Fair
   • Global
3. A free financial market is one in which the government does not unreasonably interfere with investment decisions while at the same time regulating financial performance in the interest of the public.
   • A free financial market is also one where access is granted (or licensed) to all persons who meet reasonable technical qualifications and have adequate capital.
   • Based upon these concepts, it’s probably fair to say that the Japanese market is basically free although the interference with
     • the Shinsei Bank and
     • the potential purchase of Aozora bank by foreign interests, shows that there is further work to do in this area.
4. A fair financial system is one in which all players who are similarly situated are basically treated in the same way under similar circumstances. This is related to the access issue mentioned earlier, particularly foreign financial institutions seeking licenses or to acquire existing firms.
   • More importantly, it is an issue that is of key significance for domestic financial players who would like to become new entrants.
   • Of course, the opposite of free entry is easy exit from the financial system when the firm is no longer viable.
   • This issue is really about procedural fairness and the rule of law.
   • As compared to other countries in Asia, Japan is generally thought to have a very fair, competent and impartial judiciary.
   • While the financial regulators are understaffed, they, too, are thought to be generally competent and free from corruption although many in this room will no doubt complain about how some of the regulatory audits and supervision have been conducted.
   • Increasingly, the financial regulators are relying on explicit written regulations as the basis for their decisions as opposed to ad-hoc arrangements loosely categorized as administrative guidance.
   • So, I think that we can reasonably argue that Japan’s financial system is basically fair.
5. But is it global? I think that the answer is no.
   • “Global” means that business enterprises and financial institutions are operating beyond national boundaries in a way which contributes positively to the broad world economy.
   • Tremendous progress has occurred in changing Japan’s legal and regulatory framework, particularly with respect to
     • NPLs
     • M & A
     • Corporate reorganizations
     • Bankruptcies and workouts
     • Corporate governance
     But having the right laws or the books does not automatically lead to changes in behavior. It is a necessary but not sufficient condition.
   • Over the last six years, we have seen a massive retreat from international operations by both Japanese companies and financial institutions.
   • Despite some improvement in the economic outlook in the last quarter, almost no one expects a domestic turn around in Japan.
   • Bad debts continue to be a major problem with almost no end in sight.
   • Moribund companies continue to get life-support.
   • But, despite the fact that the basic legal framework for restructuring Japanese companies and financial institutions are in place, it seems different to conclude that Japan is currently preparing to play a major role in the financial architecture of the 21st century.
6. Architecture of the 21st Century

   The entire world trading and financial system is now inter-connected. Massive market failure in one part has negative impacts on the rest, as the 1997 Asian Financial Crisis and the Enron and other American corporate scandals have amply shown. The focus of future discussions at the symposium must be on the steps that are necessary to promote new business formation and reduce risk both in the bilateral US/Japan context and as part of the global financial architecture.

   Thank you.