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Banking & Finance

Japan's financial watchdog sees life insurers as vehicle for reform

FSA hopes to strengthen regional banks amid dim business prospects

TOKYO -- Japan's Financial Services Agency is using its new stewardship code to get life insurers and trust banks to become more rigorous investors, which in turn would lead to much-needed reforms at regional banks.

Wait and see

The stewardship code for institutional investors, revised in May, urges life insurers and others to disclose specific votes they cast at shareholders meetings or otherwise explain the decision not to. Nippon Life Insurance has decided to do the latter. "We'd like to carefully gauge the impact" of the just-introduced guideline, Nippon Life President Yoshinobu Tsutsui said at a general meeting of representatives on July 4.

By choosing to explain nondisclosure, Nippon Life is asserting its own stance as the top life insurer in Japan, while others move to comply. Given its substantial presence in the stock market, the insurer decided that the disclosure would hamper the mid- to long-term growth of companies by spurring short-sighted trading based on the publicized votes.

The real aim

The FSA has been trying to reform the nation's regional banks from various angles, in light of difficult times expected in the future. It clearly has regional banks in its crosshairs this time, and life insurers are being pulled into the effort. Core operations aside, life insurers are coming under scrutiny as institutional investors.

The agency discourages life insurers from having cozy relationships with investment targets, pressing them instead to monitor management as an institutional investor entrusted with managing assets paid by customers as premiums. And this is connected to regional bank reform, because life insurers are often top shareholders of regional banks. The FSA is effectively asking the insurers to step up oversight.

The FSA also is urging life insurers to disclose commissions of insurance sales, among other insurer-specific information. But a stronger focus is on their role as a vehicle for reforming regional banks and asset management.

Trust banks, another type of institutional investor, are in a similar situation. In June, the Government Pension Investment Fund asked trust banks and asset management companies that manage equities on its behalf to disclose specific votes. The giant public pension fund holds 35 trillion yen ($309 billion) worth of Japanese shares, and a key criterion of choosing asset managers is their efforts to comply with the stewardship code. Many trust banks and major asset management companies have no choice but to listen to the GPIF.

Trio works together

Yasuhisa Shiozaki, who heads the Welfare Ministry, which oversees the GPIF, has experience drawing up a draft of the corporate governance code when he was acting chairman of the Liberal Democratic Party's Policy Research Council. And he is also close to FSA Commissioner Nobuchika Mori. Mori and GPIF President Norihiro Takahashi both graduated from the University of Tokyo in 1980.

These three men are working together to advance governance reform in the Japanese capital market. Both the regional bank reform and institutional investor reform are key components. The FSA is putting a finishing touch on the reforms by combining both "hard and soft tactics," an agency official said.

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