There are no limits to foreign investments in Japan's bond market. Regulations on prevention of fraud and bondholders rights are discussed in this section.
Investor Participation
There are no specific rules restricting the participation of retail and foreign investors in Japanese bond markets. To diversify the investor base for the Japanese Government Bonds (JGB) market, the Ministry of Finance (MOF) launched a special JGB series designed for retail investors. The instrument is available at most financial institutions (e.g., securities companies, banks, and post offices) and has a tenor, rate structure, and face value that cater specifically to retail investors.
To promote diversification of the JGB market investor base, MOF has implemented a number of tax-related incentives for nonresident individuals and other foreign investors, including foreign corporations. Lists of professional service providers, who are able to provide guidance to new investors in the Asian markets, are linked below.
Investor Protection
Prevention of Fraud
The Securities and Exchange Surveillance Commission investigates potential criminal offenses, such as violations of disclosure regulations, loss compensation, market manipulation, and insider trading.
Bondholder Rights
Japan's legal system does not specifically distinguish between bondholders and other similar creditors.
Bond documents (e.g., prospectus, term sheets, and subscription agreements) may also contain provisions and default and cross-default clauses that are specific to the bond issue and provide additional protection to bondholders.
The Asia-Pacific Restructuring and Insolvency Guide provides information on creditor rights in Japan.
The Ministry of Finance (MOF) governs cross-border portfolio investment. Under the 1998 Foreign Exchange and Foreign Trade Law, cross-border transactions do not require permission or prior notification by authorized foreign exchange banks to MOF. Reporting to MOF is only required once the transaction has been completed. MOF may impose restrictions on some cross-border transactions during times of economic emergency.
The Bank of Japan (BOJ) conducts processing of requests, notifications, reports of capital transactions, payments, and payment receipts between residents and nonresidents.
The International Monetary Fund’s (IMF) Annual Report on Exchange Arrangements and Exchange Restrictions provides a summary of arrangements and exchange restrictions on capital market transactions.
Capital Inflow
There are no restrictions on inward portfolio investments, although nonresident investments must be reported to MOF following the transaction. There are no restrictions on nonresidents purchasing money market securities, equities, or bonds.
Capital Outflow
Residents may invest abroad, though transactions must be reported to MOF once completed. There are no restrictions on nonresident repatriation of capital, transfer of profits, dividends, interest, royalties, or fees.
The majority of mutual funds in Japan take the form of investment trusts, of which 97% are open-ended.
The Bank of Japan (BOJ) estimated the market value for corporate pensions at JPY27 trillion as of December 2008. Since 2002, the Pension Fund Association has followed a strategy calling for the investment of 37% of its assets in domestic bonds and 7% in foreign bonds.
The Insurance Business Law sets asset-portfolio limits for certain types of life and non-life insurance assets under management: 30% for domestic equities, 30% for foreign currency-denominated assets, and 20% for domestic real estate.
The Ministry of Finance governs Japan’s foreign exchange system. Japan has maintained a free-floating exchange rate system since February 1973 with foreign exchange intervention conducted when necessary.
Under the new Foreign Exchange and Foreign Trade Law, individuals or companies may undertake foreign exchange transactions as an import/export agency or bureau de change. For purposes of monitoring balance of payments, understanding market trends and responding to international requirements, an ex-post facto reporting system has been established under this law.
Import/ Export of Currencies
There are no restrictions on the amount of foreign currency that can be brought into or taken out of Japan.
Domestic/ Foreign Currency Accounts
Foreign currency accounts held by residents in Japan or abroad are allowed without restrictions. Nonresidents are allowed to hold local and foreign currencies domestically.
Borrowing/Lending
No borrowing restrictions for resident and nonresidents individuals. Domestic and foreign-owned firms are permitted to borrow so long as they report the transactions to the MOF. Principal and payments on overseas loans are freely permitted. Amounts exceeding five million yen require prior notification to the MOF. Foreign-owned firms are allowed to raise funds in Japan.