Forex decontrols kick off ‘Big Bang’

The Diet enacted a law May 16 that ends the monopoly of banks in the foreign exchange business, allowing other companies and individuals to freely sell and buy foreign currencies and initiating the first of the “Big Bang” reforms.

The measure, to take effect next April, is intended to allow anyone to engage in the foreign exchange business. It all but completely liberalizes foreign currency settlements in place of yen settlements.

For example, convenience stores will be able to act as money changers, in effect allowing consumers to pay for goods with dollars or other foreign currencies.

Because anyone will be able to become a money changer, competition is expected to force exchange commissions down steeply. Currently, foreign currency trading is permitted only in authorized foreign exchange banks and hotels.

The bill to ease the Foreign Exchange and Foreign Trade Control Law was passed at a plenary session of the House of Councilors in accordance with Prime Minister Ryutaro Hashimoto’s stated goal of deregulating Japan’s financial markets by 2001.

The revision is regarded as the engine behind Japan’s Big Bang financial market deregulation and was prompted by fears that capital flight by individuals’ and companies’ financial resources may be triggered unless regulations are sufficiently relaxed.

The revised law scrapped the requirements for notification and prior approval in advance of capital transactions between Japan and overseas. The law will also allow Japanese individuals to freely open bank accounts abroad, either in yen or in foreign currencies.

Some believe the impact of the deregulation will be felt beyond the financial industry, leading to wider use of the dollar as an alternative to yen in shops.

A Finance Ministry official has predicted there will be coffee shops where customers can pay in dollars, and travelers from around the world may be able to use dollars to shop in Japan.

In addition to banks and hotels, convenience stores and travel agencies will be able to enter the exchange business. Any kind of company can make foreign currency-based settlements with any other firm, and individuals can lawfully exchange foreign currencies among themselves.

The law’s revision means Japanese financial and securities markets will be exposed to full competition with overseas markets. Also expected under the new law is an acceleration of cross-border fund movements in pursuit of more profitable financial investments.

Japan is expected to be pressed for further deregulation and review of the tax system to compete with U.S. and European markets.

In the course of parliamentary deliberations on the revision bill, some lawmakers voiced concerns that it would actually accelerate the outflow of personal financial assets from Japan, but Finance Minister Hiroshi Mitsuzuka said confidence in the yen will increase as the financial reforms progress toward their 2001 completion.

Asked for his view about these concerns in the day’s meeting of the House of Representatives special committee on administrative reform, Eisuke Sakakibara, director general of the Finance Ministry’s International Finance Bureau, said he does not expect the new law to prompt a quick flow of funds out of Japan. “Such concerns are often based on misunderstandings,” he said.