The Diet has recently enacted several laws that will speed the development of a thriving securitization industry in Japan. Regulators have lent their assistance by promulgating regulations that will help clarify some of the outstanding issues that plagued the development of Japanese asset securitization as a viable means of finance. After examining the development of Japanese asset securitization, I will discuss the recent developments and put Japanese securitization into context by outlining how the new legal and regulatory developments apply to different types of originators and assets. Finally, I will review the benefits of securitization for Japan while pointing out the remaining impediments.

But before we delve into the history of Japanese securitization and the new developments that will make make it popular, let’s get a perspective on the industry and its future prospects. By U.S. securitization standards, Japan is an emerging market. However, it has fantastic potential. By rights, Japan should be the world’s second largest securitization market, because it is the world’s second largest economy.1 (fig. 1).

The Japanese government has high expectations from securitization and sees its proliferation as an integral part of the financial liberalization program it is instituting¾ the Total Plan. 2 Indeed, while not yet near the levels seen in the U.S. and Europe, securitization is a growing industry in Japan. Daiwa Securities predicts that the market could grow to $770 billion in 5 to 10 years. (fig. 2).

The Japanese government also sees securitization as the solution to Japan’s bad loan crisis, which has reached the $1 trillion mark.3 To put this figure in perspective, the Japanese bad loan crisis is 4 times larger than the U.S. savings and loan workout. (fig. 3). The Japanese banking system is in dire need of liquidity and securitization is seen as a source of new capital. Further, public sentiment is strongly opposed to using tax revenue to solve the bad loan crisis. Securitization offers an option that will appease the Japanese taxpayer.

Recently, Japanese banks have been selling off property related non-performing loans to foreign investors for prices ranging from 0% to 20% of face value.4 But until now, Japan has been slow to adopt securitization because of the relationship between obligors and banks. Banks paid little attention to the profitability of the particular project or the obligor’s credit quality. 5

This year Standard & Poor’s predicts a record year in both volume and number of Japanese securitization transactions. Analysts agree that the outlook for Japanese securitization is strong. There are three main reasons for the sudden popularity of securitization: 1) new laws facilitate the securitization process as it is known in the U.S.; 2) financial institutions are using securitization more often to meet capital adequacy ratios instituted by the Ministry of Finance (MOF); and 3) companies are using securitization to raise funds during the current credit crunch.

These developments mean that Japan is now no longer an emerging market

for securitization. The world's second largest economy should soon become the second largest asset backed market. Now that Japanese laws and regulations are conducive to securitization, this will open the floodgates.

I. Development of Securitization

Securitization in Japan dates back as far as 1931, when the Diet enacted the first legislation relating to mortgage securities.6 Prior to the implementation of the MITI Law in 1993, Japan had several types of structured financing techniques in practice. These included securitized commercial real estate mortgages, securitized residential real estate mortgages, residential mortgage trusts, and non-housing bank loan securitizations.7 Furthermore, legal interests known as kumiai have sold divided interests in real property. Recently, however, most issues have had equipment leases as their underlying assets. Sakura Bank and Tokyo Mitsubishi Bank have used asset-backed debt to rebuild their balance sheets to meet the capital adequacy ratios instituted by the Bank of International Settlements (BIS). This method of raising cash is seen by the banks as necessary but expensive. 8

As recently as 1996, overregulation and prohibitive transaction costs led me to conclude that securitization would not develop in Japan as quickly as it had in the U.S.9 With the new developments, however, I will modify my prediction. But in order to understand the new developments more readily, we should first divide the originators into three types.

II. Types of Originators

There are three types of originators that are treated differently under Japanese laws and regulations: Non-banks, banks, and other companies.

A. Non-Bank Financial Institutions

A "non-bank" is a financial institution that does not take deposits from consumers. Leasing companies and credit card companies are good examples. At the present time, the securitization of auto loans and equipment lease receivables by non-banks are the most popular types of securitization in Japan.

1. Non-banks May Not Issue Corporate Bonds to On-lend

Unlike in the U.S., Japanese non-bank financial institutions are prohibited by law from raising funds they on-lend by issuing corporate bonds.10 The law commonly referred to as Shusshi Hô is interpreted by MOF to prohibit non-bank financial institutions from borrowing the money they lend from the public.11 Consequently, in the past, these financial institutions obtained most of their financing from banks through loans. This dependence on bank loans made some non-bank financial institutions unstable, and has ultimately impeded general economic development in Japan. 12

An amendment to Shusshi Hô could have a tremendous impact on issuer demand. An amendment that would alter the Ministry of Finance’s interpretation of a provision in Shusshi Hô which forbids non-bank lenders from using borrowed money in their lending was presented in the Diet last session but not discussed. It is expected to surface again in the next session.

2. MITI Law 13

The MITI Law provided non-bank leasing and credit institutions having specified claims with an alternative way to obtain financing—securitization. Securitization of claims, however, was a new method of raising money in Japan, and the government feared that securitization would be too complicated for investors to understand. Consequently, two goals of the new law were to create a legal framework for the securitization of specified claims and to provide measures to protect investors.

As securitization-related financial techniques continued to develop, the development of a general legal framework, which provided measures for investor protection, was necessary. For this purpose, structural reform legislation amended the Japanese Securities and Exchange Law (SEL) to expand the definition of a "security."14 Now SEL provides that any monetary claim may be designated a security by cabinet order if such designation is necessary and appropriate to ensure the public interest or investor protection in light of various factors including the transferability and economic nature of those claims. 15

In April 1996, the Cabinet Order that accompanied the Miti Law was revised to permit an SPC organized under the Miti Law to issue true asset backed securities. These securities are corporate bonds or commercial paper issued by the SPC, not "small lot claims," issued under the Miti Law.16 Asset backed securities are securities under the SEL, therefore, they may be traded freely on the secondary market. According to MITI, however, the face value of the asset backed securities must be $1 million or more, limiting investors to institutions. Despite its claim of flexibility, MITI has determined that, in order to create investor trust in the asset securitization market, it will ensure that the securities issued are of high quality.

B. Banks

There is a growing interest in Japan in securitization of collateralized bond obligations and collateralized loan obligations (CLOs). Nevertheless, Japanese banks hesitate to issue CLOs backed by loans to their domestic clients because of the perception that it will impair their relationships with their clients. This relationship exists in all cultures, but it has unique aspects in Japan.17 But the new Assignment Law will most likely mitigate the problem.

Bank securitization was formerly regulated by MOF Release No. 800. The release set eligibility requirements for loan purchasers, provided servicing standards for the purchased loans, and prohibited the resale of the purchased loans. The oft criticized Release 800 was abolished by MOF as part of the recent efforts to liberalize regulations regarding securitization.

Now, MOF has issued risk based capital regulations requiring banks to maintain 8% of the full value of the sold assets unless the percentage of any retained credit risks to which the bank might be exposed in a particular transaction is less than 8%. Previously, it was possible for banks to provide credit enhancement of more than 20% of the portfolio by purchasing subordinated notes issued by the SPV or by receiving a portion of the payment for the assets on a deferred or subordinated basis. Under U.S. law, these transactions may not meet the rating agency requirement that the transfer be a "true sale." They were made possible in Japan by the leeway Japanese law gives in the area of true sale.

A high level of subordination addresses the asset risk. That is the risk that the obligors will default on their obligations. Now MOF regulations make such an arrangement unfeasible. In light of the new regulations, Japanese issuers will lessen the subordination levels and procure other forms of credit enhancement, namely financial guarantees.

C. Other Companies

As was the case until recently in the U.S., there are no specific regulations pertaining to Japanese companies, other than non-bank financial institutions and banks, that securitize assets.18 Of course, general disclosure requirements under the SEL apply.

Many companies are raising funds by securitizing assets using ABCP programs sponsored by banks and by using trusts to sell beneficial trust ownership interests to investors. Interestingly, banks are actually encouraging their clients to use the ABCP programs as an alternative to traditional loans. ABCP financing allows the bank to continue to service its clients through an SPV without causing the additional assets to show up on the banks’ balance sheets. This relieves capital adequacy pressure.

III. New Legal and Regulatory Developments

A. Perfection Law

Perfection of a claims transfer must be made under the Japanese Civil Code. 19 The Civil Code requires written notification or consent of the obligee before a transfer can be perfected. These strict requirements have been a major impediment to the development of asset securitization. Giving written notice is cost prohibitive and obtaining consent after the contract is executed is virtually impossible.20 The MITI Law changed these requirements for non-bank originators gaining plan approval from MITI.

However, until now, there has not been a law that addresses the issue as to other types of originators. If an issuer is not able to separate the assets from the originator’s credit risk through perfection of the transfer, the issuer cannot usually obtain a rating for the ABS higher than the orginator’s credit rating. The MITI law solved this problem for non-banks and they have been able to garner higher ratings.

Other assignees tried to overcome this problem with "contingent perfection." The issuer does not actually perfect the transaction until certain trigger events occur. These triggers included, for example, the downgrading of the orginator’s credit rating and the filing of a bankruptcy petition against the orginator. Nevertheless, rating agencies were reluctant to grant a higher rating than the originator’s credit rating in such cases because the triggers may not work as planned and get the transfer perfected in time. Standard and Poor’s gave no weight to contingent perfection in its ratings analysis. Rating agencies that did give weight to the contingent perfection method required the originator to have a higher credit rating, thereby shutting out some originators.

In October 1998, the Perfection Law,21 provided two different methods of perfection. The first method perfects the assignment against third parties. The second method protects the assignment against the obligor. The Perfection Law only applies to monetary claims held by a corporation as an assignor.

The first method allows the parties to an assignment transaction to perfect the assignment against third parties by filing a registration with the Bureau of Legal Affairs. This registration may be filed electronically. Under the second method, if the assignee desires to enforce its rights against the obligor, it must first perfect the assignment as against that obligor under the Civil Code, as mentioned above, or send the obligor a certificate of registration issued by the Bureau of Legal Affairs.

The continuing concern that obligors will be upset if an originator transfers its claims against them still exists. The Perfection Law still requires that the parties provide the identity of the obligors in the registration documents, which are public. However, these concerns will lessen over time as obligors realize that securitization allows their bank to increase profitability and offer better interest rates for financing.

Another interesting issue is how the Perfection Law will handle the transfer of future receivables such as are transferred in credit card or trade receivables securitizations. MOF has suggested that future receivables could be registered under the Perfection Law merely by providing the period of time during which the future receivables will accrue and the approximate total amount of those receivables.

B. SPC Law

Securitization requires a bankruptcy remote bankruptcy remote special purpose company issuer (SPC). Until recently, Japanese law did not facilitate the creation of an SPC because Japanese companies have a minimum capital requirement of $100,000 and under the Commercial Code a company with debt greater than $20 million must appoint more than three statutory auditors and an independent accounting firm.

To date, offshore vehicles have been most often used in Japanese securitizations. This has been true even if ABS or ABCP are to be issued in Japan. However, the Diet has enacted a new law commonly called the SPC Law.22 The SPC Law reduces the cost of forming an SPC in Japan by reducing the minimum capital requirement to $30,000. It requires that only one director be appointed. The law specifically allows an SPC to issue ABS, ABCP and preferred interests to investors. The SPC may acquire different types of assets, that is, monetary obligations, property rights and beneficial interests in trusts. Finally, the new SPC offers tax advantages not available to regular Japanese corporations.

The SPC, however, is also regulated by the new SPC law. The SPC must register with the Financial Supervisory Agency (FSA). Additionally, the SPC must file an asset securitization plan with the government. Finally, the SPC may not engage in any business activities outside the asset securitization plan.

1. Registration Requirement for SPC

Once formed, the SPC must apply for registration with the newly created FSA. This registration is a requirement for conducting asset securitizations. The application forms require an "Asset Securitization Plan" that provides information such as the SPC’s business plan, target assets, that the SPC will issue Asset Backed Securities, and who will be the servicer of the assets. Cabinet Orders, regulations the FSA regulators themselves may require further information and documentation.

2. "Tax Qualifying SPC" Status

In order to become a "Tax Qualifying SPC" that will qualify for the deduction of dividends, various conditions must be satisfied. Nevertheless, there will be a reduction in various real estate transfer taxes and company registration taxes that will apply even if the various conditions for dividend deductibility have not been met.

To enjoy the income tax benefit of paying deductible dividends (i.e., to truly be a "Tax Qualifying SPC"), the following requirements must be met on a yearly basis.

 a) Financing.

 1) Securities Issuance. 

(a) The issue price of bonds publically issued by the SPC must be $1 million or more; or

(b) only Qualified Institutional Investors23 purchase the bonds issued; or 

2) Preferred Equity Ownership.

(a) preferred equity must be held by fifty or more investors, or 

(b) all preferred equity must be held by Qualified Institutional Investors.

b) Closely Held Company Prohibited. The SPC must not be "closely held" under corporate income tax rules.24 But when the SPC has qualified through a)1) above, i.e., the issue price of the SPC’s publically issued bonds is $1 million or more, or only Qualified Institutional Investors purchase the bonds issued, then, the SPC may be closely held;

c) 90% Distributions. More than 90% of distributable income in the fiscal year must be distributed;

d) Asset Management. The SPC’s assets must be managed by a Qualified Servicer25 or a trust bank; and

 e) Cabinet Order. Other conditions and requirements to be prescribed in a future Cabinet Order must be met.

3. Other Tax Advantages

An SPC will enjoy certain privileges that will apply whether or not the SPC also meets the test to be a "Tax Qualifying SPC." These privileges include:

a) Lower Corporate Registration Tax. Corporate registration tax on the SPC will be a flat $300 instead of the usual minimum of $1500 or 0.7% of issued share capital.

b) Lower Land and Building Registration Tax. The land and building registration and acquisition taxes on purchases of real estate prior to April 1, 2000 are reduced. 26

4. Scope of Activity and Restrictions

An SPC may invest in real estate and loan portfolios. In addition, it may take a beneficial interest in a trust that has its underlying assets in real estate or a loan portfolio. There must be an approved business plan for each portfolio of assets, however, there is no stated prohibition against an SPC investing in more than one portfolio.

Considerable restrictions and limitations may apply regarding the financing of the SPC’s activities and its use of liquid assets. There are limitations on the repatriation of cash to shareholders, the investment of excess funds, and the use of specified assets as collateral.

C. Servicer Law

Japanese lawyers, as a profession, enjoy an excellent reputation. Under the Bengoshi Hô, only Japanese lawyers may engage in the collection of debts for a third party. The purpose of the law is to discourage loan sharking and disreputable debt collection practices. Prior to the Bengoshi Hô, yakuza-related debt collectors would enter obligor’s homes and seize assets to satisfy debts. By requiring an attorney to collect debts, the Bengoshi Hô protects obligors from overreaching.

This is a laudable goal and a different way of approaching the problem compared to the U.S. Notably, the original version of the U.S. Fair Debt Collection Practices Act has been amended so that it applies to attorneys collecting debts. The U.S. law addresses the issue through a complex system of legal mandates, injunctions and penalties. The Bengoshi Hô limits securitization in that the servicer of a securitized portfolio of receivables, which must collect the loan payments from obligors, will probably not be a lawyer. This is especially true in Japan, where there are only about 13,00027 practicing lawyers in the entire country.

Consequently, the Diet enacted the Servicer Act, which allows a putative servicer to obtain a license to service portfolios from the Minister of Justice. Under the law, the servicer must have minimum capital of $5,000,000.28 Interestingly, the law still requires that at least one lawyer serve on the board of directors of the licensed servicing company.

Under the new law, a licensed servicer is allowed to collect its client’s debts. It is allowed to service loan receivables originated by both banks and non-banks, Specified Claims under the MITI Law, and other claims provided by Cabinet Order.

D. Accounting Regulations

Beginning in 1997, a new accounting regulation, FASB 125,29 applied to asset securitization in the U.S. Although FASB 125 does not apply outside the U.S., it became the de facto standard for securitization in Asia. FASB 125, which does not apply retroactively, superseded FASB 77, CMO Technical Bulletin 85-230 and EITF consensuses. It applies to public and private companies; public and private offerings; and all financial assets, including securities and direct financing leases.

There are four basic requirements for sale treatment under FASB 125. First, the assets must be beyond the reach of the originator and its creditors. Second, the SPV must be a qualifying special purpose entity.31 Third, the call option must be for clean up only. Furthermore, unlike FASB 77, put options will no longer disqualify the parties from sale treatment. Fourth, FASB 125 requires that the transferred assets be isolated from the assets of the originator.32 Isolation will require the parties to examine the same issues as under the legal requirement of a true sale. For example, if the originator has the ability to revoke the transfer under the sale contract, then the assets are probably not sufficiently isolated.

In June 1998, Japan’s Corporate Accounting Board of Japan issued a draft regulation designed to closely track FASB 125. The new Japanese accounting rule provides that the assets will be deemed to have moved off the transferor’s balance sheet only if the following requirements are satisfied: 1) the transferee’s interest in the assets is segregated and protected from being included in the transferor’s bankruptcy estate; 2) the transferee, either directly or indirectly, enjoys an ownership interest in the assets; and 3) the transferor does not have the right or the obligation to repurchase the assets prior to their maturity.

E. Credit Enhancement

Asset risk can be reduced by several external credit enhancement measures. In the U.S., there are four typical external methods of reducing this risk: 1) having a bank issue a letter of credit; 2) having an insurance company issue a surety bond; 3) having a financial assurance company issue a guarantee; or 4) using a subordinated loan from a third party. However, these methods have not been popular in Japan because Japan did not have in place the infrastructure necessary to provide such third party credit enhancement. Therefore, Japanese asset securitization, to date has relied on internal credit enhancement.

In the relatively few transactions where third party credit enhancement is provided, this service is provided by banks. The financial crisis, however, has downgraded the bank’s credit ratings, thereby degrading their ability to provide credit enhancement.

Japanese insurance companies have not been similarly downgraded. However, until recently, insurance law prohibited insurance companies from providing guarantees to certain types of principal obligations. In January 1998, the legislature removed these restrictions and permitted Japanese insurance companies to provide guarantees of payments on loan and securities, including ABS and ABCP. Insurance company involvement in the Japanese securitization industry will open the field to many new originators.

In fact, MBIA – AMBAC International, one of the world’s largest monoline financial insurance guarantors has already formed a strategic alliance with two of Japan’s largest non-life insurance companies, Mitsui Marine and Fire Insurance Co. Ltd. And Yasuda Fire and Marine Insurance Co. Ltd. Alliances of this type will provide the credit enhancement that is so necessary for securitization and bring the benefits of securitization to the companies in Japan that need it most.

IV. Benefits and Impediments

There are several benefits of securitization that can help Japan revive its economy. First, the investors in securitized instruments benefit from the increase in investment choices and from the saving on the cost of analysis for the investment. Cost of analysis decreases because the investment carries with it a rating assigned by a reputable agency. The investor, instead of spending resources conducting due diligence on the underlying investment, may rely on the rating assigned to the investment.

Second, securitized investments are freely transferable. They are a liquid investment. The diversity of a pool of assets allows the investor to rely less on its investigation of one particular loan, and rely more on the statistical evaluation of the entire pool.

Another benefit securitization can bring to distressed asset opportunities in Japan is tranching. Tranching allows the issuer of asset back securities to structure investments that appeal to investors with different risk-return profiles.

Furthermore, Japanese banks can reap the benefits of securitization and use it to solve their bad loan problem. They will be able to transfer the credit risks of their non-performing loans to investors willing to accept that risk. Furthermore, they can adjust their balance sheet in order to reflect the changes in asset quality. They will be able to diversify an asset base skewed toward troubled loans and limit their exposure to non-performing loans. This will improve earnings and eventually achieve higher liquidity and obtain much needed cash for new investments.

The Financial System Reform Law enacted in the last Diet session mandates through sanctions that all financial institutions must fully disclose their problem loans. The FSA is also requiring stricter disclosure in order the make the Japanese banking system more transparent. Therefore, the most difficult issue that Japanese banks must face is the potential write down of loans similar to the loans contributed to the bad loan pool. Loans that remain on the books of the bank cannot realistically be valued at a higher level once similar loans have been sold for less.

There are five major impediments to the securitization of non-performing loans in Japan. First, investors may have difficulty assessing the credit risk involved. This impediment can be overcome by the use of ratings. A second concern is that the yield may not be sufficient to cover the high risks involved. This may be true even with over-collateralization. Underwriters will have a difficult time pricing the securities, especially in an initial offering. Third, is the necessity for liquidity. Investors will need a way to liquidate their positions easily. Even with institutional support, the market will probably be thin and characterized by wide spreads.

Fourth is the problem of disclosure. Even if investors decide that it is worth their time to investigate the securities, they may not have access to the information they need to make an informed decision. In the past, the Japanese bank would not have disclosed the information. However, FSA is moving towards greater disclosure, which should remedy this impediment. 33

Fifth is that Japan lacks the financial infrastructure necessary to support an economy of its size. Japan needs transparent impartial accounting standards and a system of binding legal precedent. The number of lawyers and accountants in Japan is ridiculously low. The legal and accounting professions must be built up to match the level necessary for a mature economy governed by market forces. Furthermore, Japan needs more participation by third parties to financial transactions, such as credit enhancers, ratings agencies and liquidity providers. These problems are currently being addressed by the new laws and regulations relating to securitization.

V. Conclusion

Securitization in general is gaining popularity worldwide. U.S. banks have found that by embracing securitization, rather than resisting it, they have been able to keep most of the returns on their loans while shedding most of the capital necessary to warehouse the loans. From 1986 to 1996 the U.S. financial industry has securitized more than U.S.$1.5 trillion in assets. Correspondingly the earnings on the banking industry have increased from U.S.$ 18 billion to more than U.S.$ 52 billion. After tax returns on equity have increased from 9.7% to more than 14%. Of course, securitization cannot take all the credit for this increase and profitability, however, it is certainly is an important factor.

Japanese politicians have embraced securitization. The FSA will be the major driving force behind securitization. Nevertheless, the FSA is under staffed and, probably, under qualified. Out of necessity, Japan will develop the necessary legal and accounting infrastructure to support the securitization of assets. The elements of a thriving securitization market are present in Japan: Increased demand for securitization due to economic factors; experience with several securitizations of various asset types; laws and regulations conducive to securitization; and increasing investor appetite for Japanese ABS. I will modify my earlier prediction—the outlook for the development of securitization in Japan is bright.

VI. Appendix: Glossary of Japanese Securitization Terms

1. The figures given are 1996 estimates in U.S. dollars. CIA World Fact Book 1997 at http://www.odci.gov/cia/publications/factbook/index.html. back

2. Federal News Service, Hearing of the Senate Finance Committee, "Japan's Role in the International Trading System," (witnesses: Mitshuhiro Fukao, Professor, Dept. of Econ., Keio University; Yasuo Kanzaki, Chairman Emeritus, Nikko Research Center, Ltd.; Akio Mikuni, President, Mikuni and Company) (July 14, 1998); Justin Pugsely, Japanese Securitization, A New Funding Source, Project & Trade Finance, Euromoney Publications, Wednesday, June 10, 1998. back

3. Some estimates run even higher. On December 25, 1998 the FSA announced that Japan's 17 largest banks had underreported their bad loans by $51 billion. "Authorities Investigating Japanese Bank Officials," Associated Press, December 29, 1998, in The Kansas City Star, at D4 (December 29, 1998). back

4. The bad loans that are given away typically involve yakuza, the Japanese Mafia. back

5.

The Japanese financial system, which provided low-cost debt and equity capital as a package to major corporations through stable, interlocking relationships between large financial institutions and borrowing companies was, in fact, a hidden key factor for the unprecedented economic success of Japan after World War II. As Japan's economy successfully completes its catch-up phase and enters a mature stage, the traditional financial system is becoming more of a liability than an asset for achieving new economic priorities.

Masasuke Ide, Corporate Profitability and Stock Valuation in Japan, 52 FIN. ANAL. J. 40, 40 (Mar./Apr. 1996). back

6. Mortgage Securitization in Japan Evolving But Structures Still Rely on Guarantees, 8 ASSET SALES REP. 5 (Feb. 28, 1994). The law was called teitô shôken hô, which resulted in teitô shôken, or mortgage securities. back

7. Michael T. Kawachi, The New Law of Asset Securitization in Japan, 17 PUGET SOUND L. REV. 587, 590 (Spring 1994). back

8. Justin Pugsely, Japanese Securitization, A New Funding Source, Project & Trade Finance, Euromoney Publications, Wednesday, June 10, 1998. back

9. Roy B. True, Risk and Insolvency Issues in Japanese Asset Securitization, 28 N.Y.U. J. INT'L L. & POL. 505, 573 (Spring 1996). back

10. Shusshi no Ukeire, Azukarinkin oyobi Kinri nado no Torishimari ni Kansuru Hôritsu (Law Concerning the Regulation of Receiving of Capital Subscription, Deposits, Interest Rates, and Funds on Deposits), Law No. 195 of 1954 [hereinafter SHUSSHI HÔ]. back

11. SHUSSHI HÔ article 2 provides:

No person, except those who are authorized under special provisions of other laws to accept money deposits as a business, shall accept money deposits as a business.

2. "Money deposits" as mentioned in the preceding paragraph shall mean such acceptance of money from many and unspecified persons as having economically identical nature with the acceptance of money on deposit, savings or time deposit and borrowing, received in whatever form or manner of any of these or other title.

3. When a limited company (excluding banks and securities financing companies under the provision of Article 2 paragraph 13 of the Securities and Exchange Law (Law No. 25 of 1948)) which is engaged mainly in the business of lending money effects acceptance of lending funds from many and unspecified persons by means of issuing debenture, it shall be deemed to be engaged in accepting money deposits as a business.

Id. back

12. Masasuke Ide, Corporate Profitability and Stock Valuation in Japan, 52 FIN. ANAL. J. 40, 40 (Mar./Apr. 1996).

The Japanese financial system, which provided low-cost debt and equity capital as a package to major corporations through stable, interlocking relationships between large financial institutions and borrowing companies was, in fact, a hidden key factor for the unprecedented economic success of Japan after World War II. As Japan's economy successfully completes its catch-up phase and enters a mature stage, the traditional financial system is becoming more of a liability than an asset for achieving new economic priorities.

Id. back

13. A more detailed discussion of the MITI Law complete with diagrams can be found in Roy B. True, Risk and Insolvency Issues in Japanese Asset Securitization, 28 N.Y.U. J. INT'L L. & POL. 505, 513-541 (Spring 1996). back

14. KIN'YÛSEIDO OYOBI SHÔKENTORIHIKISEIDO NO KAIKAKU NO TAMENO KANKEIHÔRITSU NO SEIBI NADO NI KANSURU HÔRITSU (Law Regarding Adjustment of Related Laws for the Reform of the Financial System and Securities Transactions, etc.), Law No. 86 of 1992. back

15. SHÔKEN TORIHIKI HÔ (Securities Exchange Law) Law No. 75 of 1948, art. 2, as amended. See also Curtis J. Milhaupt, Financial Reform in Japan: Recent Legislation Leaves Some Unresolved Issues, 14 E. ASIAN EXECUTIVE REP. 9, 11 (Dec. 15, 1992). back

16. Securities under the Securities and Exchange Law are excluded from the definition of small lot claims. Miti Law art. 2.6. back

17. For a more in-depth discussion of this perception, see Roy B. True, Bald Hawk Investors: Will There be a Market for Bankruptcy Claims in Japan's Future?, BANKRUPTCY LITIGATION, Winter/Spring 1996, at 3. back

18. Until recently, the SEC declined to regulate asset backed financing under The Investment Company Act of 1940, 15 U.S.C. § 80a-3(a)(1) (1988). See Exclusion from the Definition of Investment Company for Structured Financings, 57 Fed. Reg. 56,248, 56,256 (1992) (to be codified at 17 C.F.R. § 270.3a-7(a)) (excluding virtually all structured financings from the definition of an "investment company"). For a more detailed discussion of asset securitization regulations that are in place in the U.S., see TAMAR FRANKEL, 1 SECRUITIZATION: STRUCTURED FINANCING, FINANCIAL ASSETS POOLS, AND ASSET-BACKED SECURITIES, Chapter 11, 451-516. At the time of this writing the SEC's Division of Corporation Finance is expected to release rule proposals addressing reform to the offering process under the U.S. Securities Act of 1933. These proposals, years in the making, have been dubbed the "aircraft carrier" proposals due to their size. The aircraft carrier proposals will likely address concepts that impinge on securitization transactions. See George B. Miller, Overview of Regulatory Developments Affecting Securitization, NEW DEVELOPMENTS IN SECURITIZATION 1998 (Gary Barnett, Ed.) p. 431. back

19. MITI LAW art. 5; MINPÔ arts. 178, 467. Moveable property, such as leased goods, must be perfected by possession under article 178. When an obligation, such as a credit or lease claim, is transferred, article 467 requires notification to or consent from the original obligee. back

20. Leasing and finance companies typically include provisions in their original contracts granting consent to transfer the claim. However, these adhesion contract clauses may not be enforceable in Japanese courts. back

21. Law Concerning Exceptions etc. to the Requirements for Perfection of Assignment of Receivables under the Civil Code. back

22. The Law Concerning Securitization of Specified Assets by a Special Purpose Corporation took effect in September 1998. back

23. As of this writing, there are no guidelines on the definition of "Qualified Institutional Investors." I assume that they will be institutional investors such as those listed in the MITI law. See STRUCTURED FINANCE INSTITUTE OF JAPAN, THE SPECIFIED CLAIMS LAW & STRUCTURED FINANCE PRODUCTS (1995). back

24. A closely held corporation under corporate income tax rules means that the three largest investors (and any related party investors) own 50% or more of the SPC. back

25. Again, there are as of this writing, no quidelines on the definition of "Qualified Servicer." back

26. These reductions are in addition to other reductions in such taxes generally applicable to purchases of land prior to January 1, 2000. back

27. The number of lawyers in the U.S. averages 900,000 and law schools churn out about 35,000 into the workforce each year. The Journal Record, November 29, 1996. back

28. For ease of comparison, all monetary figures are given in U.S. dollars. For purposes of this article, I have assumed a conversion rate of ¥100 = U.S.$1. back

29. Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities Statement of Financial Accounting Standards No. 125 (Fin. Accounting Standards Bd. 1996) (FASB 125). The standard was issued in June 1996 to become effective January 1, 1997. back

30. Accounting for Collateralized Mortgage Obligations (CMOs), Technical Bulletin of Financial Accounting Standards No. 85-2, (Fin. Accounting Standards Bd. 1985). back

31. The SPV must 1) have legal standing separate from the originator; and 2) the documents establishing it must limit its activities to the following: 1) holding title to the financial assets; 2) issuing beneficial interests, which can be either debt or equity; and 3) collecting, reinvesting and distributing cash to the holders of its beneficial interests. Marty Rosenblatt, Accounting for Securitizations under FASB 125, 3 HEADS UP: ACCT., TAX & REG. DEV. AFFECTING CAPITAL MARKETS INSTRUMENTS AND STRATEGIES, Jul. 1, 1996, at p. 2, Attachment 1. back

32. Id. at p. 1. back

33. But see, supra, note 4. back

 

(translation by Vicki L. Beyer)

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Temple University Japan