It is a pleasure to be invited to speak at the Forum on Leadership and Accountability. Especially, I would like to appreciate for this wonderful opportunity to meet with you.

I must confess, however, that some of my colleagues in the Japanese National Diet advised me that too close association with an international player is not always politically correct in Japan. Maybe true, but I came here tonight, since I strongly believe that Japan cannot survive without investment from abroad.

I was a bit surprised to know that almost all of the former speakers invited to this program were prominent regulators of SEC and FSA, and I am the only politician, who generally tends to have chances to become a culprit for the wrongdoings.

The reason a lawmaker was invited to speak today might be the fact that like Enron and Worldcom, a human being is always tempted by greed in the capitalism world, which is the same as in a communist nation like China, and we all make mistakes so easily. As in the cases of Sarbanes-Oxley Act in the U.S., not just the executive branch but also the legislative branch of the government must take actions to cope with the new mistakes. Here in Tokyo, today, there are a growing number of lawmakers who aim for a higher quality of the capitalism in Japan. We would appreciate if you watch our move with fair attention.

I have been engaging myself recently in the area of securities regulations, corporate law and antitrust law, all of which is not so delightful for my campaign fundraising purpose. However, I am now here feeling very comfortable, because I see a lot of Japanese individuals working here. You may even use some income tax deductions for higher brackets.

Of course I am going to speak today not for the sake of my fundraising, but because I am convinced that you may learn something about the important roles that policy makers expect you to play from a public policy viewpoint.


1. Hostile Take Over

Let me start by telling a story about Japan's new corporation law which will be passed shortly during this National Diet session. As a chairman of the subcommittee on the Commercial Code at the Liberal Democratic Party (LDP), I chaired the subcommittee meetings over 27 times to have discussions about the new corporation law, which consists of 979 articles, indeed the volume piles up to quite a few inches of pages, and it overhauls the entire corporation law in Japan for the first time in its history of nearly one hundred years.

Originally the legislation had been discussed for several years among Ministry of Justice bureaucrats and prominent law professors before it was presented to LDP, and in my view the new codes of the legislation were fairly sophisticated. From the first meeting of my subcommittee to the halfway through, only a few National Diet members, sometimes, only two or three, attended the meetings, because that law includes so many technical issues that were never considered to be politically important.

However, in February this year my subcommittee suddenly got crowded since the Livedoor incident, a hostile takeover attempt against Nippon Broadcasting. The Japanese established business executives were literally shocked by the news that a young IT capitalist launched hostile takeover and later, many politicians got ever more furious to know that the IT venture was financed by Lehman Brothers, which made huge profits under the acquisition financing scheme.

Many board of directors and politicians realized that given the big discrepancy in capital size between western and Japanese corporations, foreign companies more often than not may easily initiate hostile takeover against Japanese industries, and the foreign investment banks were seen as a kind of invaders.

However, it is fair to say that politician's understandings are practically inaccurate. One of the politicians whose district is famous for manufacturing tableware such as forks and knives in a local city in Niigata prefecture shouted in my subcommittee, saying that every small tableware company could be exposed to the risks of becoming a target of hostile takeover of foreign capital if the legislation were to be passed. Well, I asked him, are there any publicly listed tableware companies in your district? He answered clearly, no. They are generally mamas and papas manufacturers and typically hundred-percent owned by the family. Okay, I replied to him, you don't have to concern about hostile takeover at all, because it is impossible to buy closed corporation by the use of hostile takeover techniques, unless the family feels very happy to sell their stocks to a friendly acquisition offer.

As a consequence, I had to decide to compromise by postponing the implementation of the triangular merger provision by one year in the new corporation law in order to cope with the sudden fear emerged that domestic companies are not fully prepared to face a possible foreign hostile takeover. I used the word of "compromise," because many politicians in LDP went so far as to say that the whole set of legislation had to be suspended. However, after all, Livedoor is not a foreign company, and Lehman Brothers was just the quickest money provider among broker-dealers including Japanese firms which were requested by Livedoor.

This is puzzling, at least in a logical way, as the triangular merger scheme in this legislation requires consent of board of directors of a company being merged prior to the stock swap. But this is politics. This is the case where the reasonable policy decision-making process was disturbed by the pervasive misunderstandings and public images at the side of policymakers. Three months passed since then, panic is over. Not so many politicians remember what the poison pill means after all.


2. Misunderstanding by Foreign Business

There also be a case that comes from misunderstanding this time on the side of foreign companies.

It is about the issue of so-called pseudo-foreign company. In the new corporation law again, Article 821 seemed to prohibit the activity of Tokyo branches of foreign investment banks now typically incorporated under the laws of Cayman Islands or Hong Kong. Both the ACCJ and the European Business Council expressed concerns, demanding to delete Article 821.

However, that is based on a misinterpretation. A legal commentary book says that an interpretation of the current law about pseudo-foreign company is so vague that it could be possible to reject even legal status of such pseudo-foreign company. Indeed one hundred years ago there was one Supreme Court decision that denied the legality. The new law is just clarifying it, by permitting the legality on the one hand, and on the other hand by prohibiting substantive evasion of the provisions of Japanese corporation law, which is just as the same as the current law. Lawmakers don't see any changes in the policy.

These cases indicate how often serious misunderstandings could easily arise between policymakers and top managers of foreign companies in this country which tend to be seen with somewhat unbalanced view. I would point out that it is crucial for you to communicate with us in a more close and timely manner. Regulators and legislators would welcome to exchange views with top management in a fair and constructive way. It is also obvious that better accountability with regards to your business activities would always help establish such a sound relationship with the public policymakers.


3. Rule Changes

Let's move on to another subject, that is Seibu Railway group case. One important finding was that Mr. Tsutsumi, a controlling owner of the group, has held shares for the taxation purpose under the name of various individuals who relate to the company. Indeed, his sham holding has been a kind of open secret in a certain financial community, but at the same time material misstatements in the disclosure documents of Seibu Railway have lasted for over forty years.

After the Seibu incident was revealed, the Financial Supervisory Agency (FSA) ordered all the publicly listed companies to review their capital structures if there is such "nominal stock holding" which could lead to any material misstatements in disclosure documents. Surprisingly enough, 589 out of 4,538 listed companies reported such misstatements. In other words, nominal stock holding has been a prevailing practice and thus large shareholder pages of disclosure documents in Japan were revealed to be flatly doubtful. So this Seibu Railway incident worked just as Enron and Worldcom. Against this background, we at the LDP, lawmakers introduced a new bill which establishes civil monetary penalties against such violations of continuous disclosure requirements in this National Diet session.

A lesson to be learned in this case would be that long-lived practices suddenly become declared illegal by the change of rule in the game, in the context of public opinion and political pressure. I am not necessarily saying that Japanese government is arbitrary. Rather, our government is striving to move towards more transparent system in terms of both rule-making and law enforcement. However, you may have to be still focused on the shift of the rule which reflects public policy concerns. Sarbanes-Oxley Act without doubt has created such global trends that strengthen the responsibility as well as accountability of public companies. Improvement of internal control system of companies in Japan will be much more strongly addressed. You are expected to take part in such self-disciplined process in the private sector activities.


4. Changing Focus of Public Policy

In that context, nowadays, corporate governance issues even cast questions over the role of stock exchanges, because of the conflict of interests between self regulatory function and profit maximization of a publicly listed company. In Japan, Tokyo Stock Exchange is now under severe criticism, since two weeks ago it announced not to separate its self regulatory function from the influence of the board of directors and shareholders, even after its public listing scheduled later this year.

It was last decade that European stock exchanges opened the door of privatization and public listing of a stock exchange itself, against the background of the intense competition and it was for the purpose of strengthening its fundraising capability and efficient management. I think the focus of the public policy has clearly moved since then. We now have to question the quality of corporate governance such as independent directors of the stock exchange itself, since it has a public role in regulating corporate governance of all listed companies. What was right yesterday should be always tested from today's view.

I will share with you one last big issue. That is, the Investment Services Act, which is now under discussion within the Japanese FSA for the purpose of regulating all of the investment-related activities against the background of recent formations of financial conglomerates. There is no doubt that it is important to have a comprehensive and consistent legislation that regulates all the investment activities. But you may have to be careful that if FSA were to simply hold such rulemaking, monitoring, and enforcement function of the broader capital market activities, together with bank and insurance supervision within one single organization, as was the old MOF, we might run the risk of banking and insurance industry considerations again overriding the principles of disclosure and accounting, as we observed in the 90's.

Please remember Japanese FSA is a government body with government officials, whereas U.K.'s FSA, which has a strong historical basis on the self regulatory culture and the staff of which are not Crown servants. In the case of U.S. SEC, the budget is mostly financed by filing fee paid by the public companies. Here again, we together should consider what is better for the future of Japan's capital markets.

It is quite remarkable that the direction of the rule is decided within democratic policy-making process, by which I mean, you could always be a part of the voice as a full fledged participant of Tokyo financial market.


5. Conclusion

As I mentioned at the outset, politicians tend to oppose to the global capital flow. Even now a number of politicians often say to me that the Long Term Credit Bank (LTCB) must not have been nationalized in 1999, since foreign equity investors of the nationalized bank are now making profits out of Japanese taxpayer's money. I always rebuff them by saying this is their misunderstanding. First, taxpayer's money was basically used to protect Japanese depositors. Second, the only risk money provider with expertise that was willing to invest in the nationalized bank then was foreign investors. And it might be worth rewarding them for their decision to put money in insolvent banks and to revive them.

In addition, I would like to make the following three points. First, foreign investments have provided a safety net by offering jobs in our labor market especially for financial industry including those who have worked in the failed institutions. Second, they also have been providing risk money to the failed business, for example, golf courses that are located in certain politicians' electoral districts in Japan. Last, but not least, they have displayed guiding models for the Japanese in terms of both new business like restructuring finance and business ethics. In that sense, I would like to hope for high standards from you. Japan is a country which always has learned from the rest of the world, and the consistent attitude of openness has created Japan's remarkable history of economic growth and democracy. Bearing this in mind, again, I appreciate your leadership and I wish you a continued success on the basis of fair play.

Thank you.