Japan To Impose Controls On Short-Selling

by Mary Swire, Investors Offshore, Hong Kong

07 August 2002

Responding to increased international concern about the effect of short-selling on the health of equity markets (concern that is dismissed by most economists as misplaced), Japan's Financial Services Agency has announced a package of measures which it says will help to develop a securities market "easy for anyone to invest in," and establish a fair, transparent, efficient and competitive market.

The new measures will apply from September, and follow pricing curbs imposed in March on short-selling using borrowed shares. FSA officials said the latest regulations on short-selling would apply to institutional investors and brokerages that use margin transactions, but will exempt individual investors. Trades that seek to hedge against share price declines and arbitrage transactions with futures and other instruments will also be excluded, they said.

Hakuo Yanagisawa, the minister responsible for financial markets, denied the steps were specifically aimed at lifting the stock market, but said there were some spots of bright economic news: "There are some good economic indicators and I hope that investors take this into account when making their investment decisions," he said, adding: "I didn't think we would be making this announcement during such conditions," he said. However, he said he hoped the new measures would have a positive effect in the mid- to long-term.

Analysts said they thought the measures would be neutral in market terms; but the market gave its own opinion, falling more than 2% in the two trading days after the measures were trailed in local newspapers.

Apart from the short-selling rules, the FSA's package includes other steps aimed at developing a fair and transparent securities market. The government will encourage continuous disclosure of risk and other information, and quarterly financial information disclosures by securities issuers. The FSA said it would encourage stock exchanges to implement stricter delisting criteria and efficient securities settlement systems. It also plans to ask the government to implement tax incentives to favour equity and security investment.

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