The severe effects of the global financial crisis on the Japanese economy have led to the adoption of temporary legislation to protect small and medium-sized enterprises (SMEs) and mortgage borrowers. Among other things, the law provides that SMEs and mortgage borrowers may apply to financial institutions to revise their loan terms; lenders are required to help and advise borrowers in good faith.
The enforcement of security interests has become a significant issue worldwide, with many receivables becoming uncollectable. Financial institutions providing financing to Japanese companies are looking for ways to create and manage security interests at the lowest cost. The security trust is an effective tool for doing precisely this.
In light of the widely recognized need to promote financing for small businesses, new legislation has introduced a system for electronic monetary claims. Such claims are intended to accelerate accounts receivable financing, but they have many other potential uses, including the liquidation of syndicated loans and the stabilization of cash management systems.
The Ministry of Justice has published a draft reform of the Law of Obligations, part of the Civil Code. The draft reform covers a wide range of topics, including several which could have a significant impact on banking practice: set-off, prescription, the assignment of claims and joint and several obligations.
An amendment to the Ordinance on the Enforcement of Banking Law is the first provision in Japanese law that clearly allows a subsidiary of a bank or a bank holding company to conduct Islamic finance. It covers transactions that are loan transactions in substance, but not in form, including murabaha and ijara - both forms of financing for purchase or rental.
The securities settlement system has been improved to enable paperless transactions in commercial paper, government bonds and corporate bonds in Japan. This update reviews the new book-entry transfer system for paperless shares in listed companies and the handling of security interests in such stock in secured financial transactions.
There has recently been a trend towards banking deregulation in Japan. This involves, primarily, the expansion of the types of financial products that banks are permitted to handle over the counter, as well as a greater number of sales channels that are available to banks. Moreover, amendments have recently been made to the legal framework surrounding these issues.
The amended Trust Business Law and Law on Concurrent Operations of Trust Businesses by Financial Institutions came into effect on December 30 2004. The range of assets that can be entrusted and the range of companies that can operate a trust business have been expanded. Moreover, there is now a greater number of customer service points for users of trust services.
In December 2004 an amendment to the Civil Code, effective as of April 1 2005, altered the system of revolving guarantees. The amended code prevents individuals from making unlimited revolving guarantees in relation to loan obligations. This was introduced in order to protect individual guarantors from the dangers associated with providing such guarantees.
The second petty bench of the Supreme Court has reversed a decision made by the High Court, which had ruled that a provision of the Money Lending Business Law that requires a creditor to return the benefit of any unjust enrichment did apply to a payment of interest made by an obligor in excess of the Interest Rate Restriction Law.
A failed second-tier regional bank has been effectively nationalized after being placed under special crisis management and becoming supported by public funds. The bank is disposing of bad loans and working to find a financial institution to assume its business, in order to return to normal operation as soon as possible.