New stock markets for venture businesses are emerging in Japan. Last November, the Tokyo Stock Exchange opened “Mothers” (an acronym for “market for high-growth and emerging stocks”). This June, the U.S. National Association of Securities Dealers, Japan’s Softbank Corp. and the Osaka Securities Exchange will jointly establish Nasdaq Japan at the OSE.
To fight the new markets, Japanese brokerages that operate the over-the-counter market are moving to relax standards for the public offering of shares. It has been up to stock exchanges to approve or reject the listing of shares, but from now on they will be begging new companies to list. The exchanges will have to reform their systems to facilitate stock investments, in addition to offering help to companies.
In response to calls for the development of capital markets for venture businesses, the Securities Dealers Association of Japan in 1983 expanded the OTC market, using Nasdaq as a model. The OTC market remains a minor presence, however. The trading volume of the market stands at only 1 percent of that of the TSE’s first (major) section: The trading value is 2 percent of the comparable TSE figure.
In the U.S., Nasdaq has exceeded the New York Stock Exchange in trading volume since 1994 and is fast catching up with the NYSE in trading value, playing a major role as the capital market for venture businesses.
Only three companies are listed on Mothers, but more companies may try to list after the establishment of Nasdaq Japan in June.
To develop venture businesses, it is not enough only to establish capital markets for them. Brokerages handling the public offerings of venture-business shares must have the knowhow to make correct judgments on the risks and potential of the companies. In the U.S., financiers for venture businesses and investors known as “angels” offer management knowhow to the companies prior to the public offering. I hope Japanese corporate financiers will do the same.
Furthermore, efforts should be made to inform investors of the risks associated with capital markets for venture businesses. Nasdaq reports more listings and delistings than does Japan’s OTC market. In most of the 10 years following 1988, companies that left Nasdaq outnumbered newly listed companies. Institutional investors who have portfolio-investment expertise also exceed individual investors in Nasdaq stock ownership. In Japan, the government and the securities industry should refrain from luring uninformed individual investors into risky capital markets for venture businesses.
The fiscal 1999 Economic White Paper encouraged consumers to switch from postal savings and bank deposits to stock investments, saying investing in production activities was not gambling. However, strict rules should be established about selling risky financial products to the general public.
Britain implemented its financial-service law in 1986, when it introduced in “Big Bang” financial liberalization, which featured the deregulation of brokerage commissions. The law bans misleading sales-talk and door-to-door sales calls regarding investments.
The Japanese version of Big Bang has allowed commercial banks to sell investment trusts since December 1998 and deregulated brokerage commissions since last October. A financial service law that protects investors has yet to be enacted, however. A Finance Ministry advisory group is reviewing the proposed law.
In my opinion, the law should include these points:
(1) Financial products must be sold only to voluntary investors, since they require detailed knowledge for successful investment.
(2) Brokerages and other institutions must make detailed explanations of financial products to their customers.
(3) A cooling-off period must be established in the selling of financial products.
(4) An organization for voluntary supervision must be established to settle disputes quickly.
The development of capital markets for venture businesses is expected to activate the stock market. Toward that end, increased transparency is required for listed companies’ business performance to win investor confidence.
Specifically, publicly-held companies should be under tighter financial supervision. In corporate Japan, the president usually names the auditor and the certified public accountant for his company. Board of directors’ and shareholders’ meetings are only formalities.
I believe that Japanese companies should hire more outside directors and auditors, and empower them to select the certified public accountant for the company.
To prevent collusion between companies and CPAs, the latter should be periodically replaced and should be required to report to authorities any wrongdoing they have detected, as in the U.S.
Foreign investors already account for 40 percent of the TSE’s trading value and will play a larger role in the local capital market after Nasdaq Japan opens. Japan should not stick to its outdated corporate governance and financial disclosure systems.
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