I am very happy to introduce the second writer of the Miyakodayori newsletter. Mr.Tatsuya Terazawa, whom you may already know, is the special research fellow of the RIETI. He is especially focused on the financial and economic issues.

"How to evaluate the stock market revitalization package?"

On February 9th, the coalition parties announced their policy package to "revitalize" the Japanese stock market. In spite of the three-week-long efforts of politicians and some support from the relevant ministries, the stock market did not respond favorably to the announcement. The press also gave the measures low marks.

I have to admit the immediate effects of the "package" are limited. But there was no magic that could prop up the stock market to begin with. I believe that the "package" should be evaluated not just on the basis of the immediate reaction of the stock market but also on the basis of the contents. A careful look into the measures can give us a slightly different picture of the "package".

Ironically, the best element of the "measures" was the absence of some "ugly" measures. This may sound strange to some readers but at some point in the discussion among politicians, there was a reasonable chance that a purchasing program of stocks backed by public money -the infamous PKO (Price Keeping Operation)- might have been included in the package. There was also an argument to delay the introduction of tougher accounting rules, including mark to the market accounting of cross share holdings. I believe that the defeat of such "ugly" measures can be viewed as the victory of sound policy judgment. I cannot overemphasize the significance of this victory considering the past history of various market-distorting measures taken after the burst of the bubble economy.

With regard to what was included in the "package", there were a few meaningful measures (albeit not dramatic enough to quickly turn around the stock market) measures that should be noted.

First, the coalition parties finally committed themselves to the early passage of a bill to introduce a 401K pension system to Japan. We understand the frustration among foreign financial institution the delay in the introduction, but the commitment by the coalition parties which control the majority of both houses of the Diet is significant enough to ensure early introduction.

Second, the necessary legal changes to the Commercial Code will be submitted to the current session of the Diet to facilitate stock split-offs to lower the per unit price of stocks to enable individual investors to invest in high price stocks. Today, the unit price of stocks for transactions can be more than a million yen for some IT stocks. For example to invest in a share of Yahoo! Japan, you would need almost 8 milion yen, or nearly 70 thousand dollars. To tap the huge savings held by the individuals, lowering the price per transaction unit is important. In this regard, I believe this measure will have a very positive, if not an immediate, impact on the stock market.

Third, the introduction of "treasury stocks" would broaden the options for the managers to buy back the stocks of their companies. While stock buy-backs are already possible in Japan, as long as the stocks bought back are voided, the introduction of "treasury stocks" will have a significant educational effect on the managers of Japanese companies to seriously consider stock buy-backs as a means to enhance shareholder value.

Fourth, the commitment to strengthen the Japanese SEC would bring in more discipline to the Japanese stock market and enhance its transparency. I believe a stronger Japanese SEC will be beneficial to the Japanese stock market in the long run.

In essence, the "package" has a very limited short-term effect on the stock market. But it does have some positive elements that can have a mid-term effect. What is important is the continuous effort to build on such positive elements to accelerate the necessary restructuring of the Japanese corporate sector and to develop a more efficient and dynamic stock market that can attract a broader base of individual investors.

Author, Tatsuya Terazawa
Special Research Fellow, RIETI, M.E.T.I.
e-mail: terazawa-tatsuya@meti.go.jp
tel: 03-3501-1480 fax: 03-3501-1704

Editor in Chief, Nobuo Tanaka
Executive Director, Research Institute of Economy, Trade and Industry, M.E.T.I.
e-mail: tanaka-nobuo@rieti.go.jp
tel: 03-3501-1362 fax: 03-3501-8391

The opinions expressed or implied in this paper are solely those of the author, and do not necessarily represent the views of the Ministry of Economy, Trade and Industry (METI), or of the Research Institute of Economy, Trade and Industry (RIETI).