A bill tightening regulations on investment fund operators and boosting transparency in the financial markets cleared the Diet on Wednesday.
The legislative action came amid alleged securities law violations by investment fund manager Yoshiaki Murakami and Internet conglomerate Livedoor Co.
All steps under the legislation will take effect in 1 1/2 years.
The overhaul of the existing Securities and Exchange Law calls for strengthening penalties for insider trading, market manipulation and accounting fraud.
To deal more swiftly with crimes related to financial product trading, the stricter penalties will be applied to offenders 20 days from the promulgation of the law, ahead of the implementation of the legislation as a whole.
Under the new law, violations of insider trading rules could draw a prison term of up to five years or a fine of up to 5 million yen, up from three years or 3 million yen.
The maximum penalty for market manipulation and accounting fraud will be 10 years in prison or a fine of 10 million yen, up from the previous five years and 5 million yen.
Murakami, one of the nation's most high-profile investment fund managers, was arrested Monday for alleged insider trading.
Earlier this year, Livedoor founder Takafumi Horie and other now-former executives were arrested on suspicion of providing false financial information and cooking the books.
The new law requires institutional investors, including investment funds, to report within three weeks to the Financial Services Agency when they acquire more than 5 percent of shares in a listed company, compared with 3 1/2 months under the current law.