2019 Reports

The Future of Japan’s Financial Market

Kinoshita, Nobuyuki

The subject of this paper is the relationship between developments in ICT and financial services and legislation, with a focus on the financial market.

The basic approach is as follows: the services for financial transactions are built on the latest ICT, while the legal implications are stipulated by existing financial legislation. Although the rapid development of ICT has put enormous pressure on the financial industry to innovate their services, a nation’s financial legislation might show remarkable delay because of the path-dependency of lawmaking and enforcement systems. The discrepancy between the progress of ICT and delayed legislation varies by country, which reflects the relative competitiveness of financial industries and markets.

Following this approach, I first show that the economic value produced by financial transactions consists of saving transaction costs. Transaction costs are basically information processing costs, which are determined by the level of ICT. Second, I explain the grand design of financial legislation and the peculiarities of Japan’s system. Generally speaking, the financial legislation of a country is composed of two categories. The first category is broad such as bankruptcy laws, and the second is narrow such as security exchange laws. Third, I examine the changes in financial transactions caused by ICT advancement in various countries and compare them to development in Japan. Fourth, I focus on current changes in financial markets by introducing examples from around the world. Former financial exchanges have transformed themselves into providers of financial market infrastructures. Global regulations have also changed in accordance with this transformation. Fifth, I identify two main challenges for Japan’s financial legislation in adapting to digital innovation.The first is how to design overall financial legislation, and the second is how to enforce individual legislation.

I hope this paper stimulates further research and widespread construction on this theme.