Perception of Financial Market Integrity Improves in Japan

02 July 2010 - Tokyo, Japan

CFA Institute today released the 2010 Financial Market Integrity IndexTM (FMI Index) report for Japan. Overall ratings of the 2010 FMI Index survey for Japan are generally higher than that of 2009. Respondents in the survey gave an overall rating of 3.3, out of 5, to Japan’s capital market, an improvement over the 3.1 ratings for the past two years.

"The result is an indication of the improved confidence level shown by investment professionals in the areas of integrity of financial professionals and the effectiveness of the capital market systems" said Alexander Flatscher, CFA, advocacy chair of CFA Society of Japan.

The FMI Index was designed to gauge CFA charterholders’ perceptions of the state of ethics and integrity of six major financial services markets globally, and how these perceptions change over time. The 2010 FMI Index survey was conducted to measure the level of integrity that CFA charterholders experienced in their respective markets – Canada, Germany, Hong Kong, Japan, the United Kingdom, and the United States. More than 2,700 investment professionals from 80 countries participated in the 2010 survey.

When asked to prioritize governance reforms, respondents felt most strongly about a need to introduce independent boards and statutory auditors. Respondents also favored allowing a company’s shareholders to determine the optimal board structure for publicly traded companies. On the other hand, respondents were somewhat evenly divided on whether cross-shareholdings are acceptable.

Respondents were more satisfied about the overall ethical behavior of Japan’s financial professionals in 2010 than they were in 2009, giving an above-average rating of 3.6 to all financial professionals. Among the nine professional categories surveyed, pension fund managers received the highest rating of 3.8, whereas hedge fund managers, private equity managers, and sell-side analysts received the largest ratings increases from the previous years.

Overall ratings on effectiveness of Japan’s regulatory system continue to show an upward trend since 2008. Overall market systems received a rating of 3.3 in 2010, compared to 3.0 in 2009 and 2.9 in 2008. Of the significant improvements in the market systems, corporate governance and accounting standards experienced the largest increase in ratings. Shareholder rights, on the other hand, earned the lowest rating of 2.8, only 0.1 higher than that of the year before.

The survey also asked respondents if they were willing to invest in Japan. Sixty-two percent of respondents in Japan said they were likely or very likely to recommend investing in Japan, little change from 2009, and a substantial improvement from the 55 percent in 2008. In contrast, only 33 percent of respondents outside Japan said they were likely or very likely to recommend investing in Japan, down slightly from 36 percent in 2009 and well below the 2008 level of 42 percent.

The survey found that respondents inside Japan generally gave higher ratings than those from outside Japan. Despite the differences, all 2010 ratings are higher than those of the previous year, both from in-market respondents and out-of-market respondents. Noting the diversity between the in-market and out-of-market respondents and the overall increases, Matthew Orsagh, CFA, director of Capital Markets Policy, CFA Institute, who is based in New York, said, “The upward trend in ratings perhaps indicates that those outside Japan are aware of efforts to implement reforms but are sending a signal that more needs to be done.”

A detailed Financial Market Integrity Index report of Japan can be found here.