Compliance: The Globalization of Regulation

J-Sox, the Japanese counterpart of the Sarbanes-Oxley legislation is slated to go into effect in April 2008.

Weighing in at 6500 pages, the similarities between the US and Japanese regulations are strong and go far beyond just the size and complexity of the verbage.

Japan is heavily influenced by trends in the US and often adopts similar legislation, like the retirement savings plan which most people refer in Japan to as the ‘Japanese 401(k)’. Japan has also been shaken by a recent series of scandals that have pushed them closer into considering stronger legislative oversight.
Mirroring the scandals in the US of Enron and Worldcom, there have been scandals in Japan that include companies like Kanebo, Livedoor, Murakami Fund, Seibu Railway and Nikko Cordial.

J-Sox replaces Japan’s Securities and Exchange Law that dates back to 1947. Financial instruments have evolved significantly since that, and the new legislation seeks to update and modernize the regulations.

Financial Service providers will now be required to disclose much more detailed information to investors.
It’s good news for Japanese households with about 1,500 trillion yen (about $13 trillion) in savings, and all but 5% is kept in savings accounts.
The financial markets are hoping that the promise of more transparency will lure more of the household savings into stocks and other types of financial instruments and doing so will charge their economy.

Like the US and elsewhere, the Japanese are finding that compliance regulations are expensive. For example, compliance costs for Japanese companies averaged $4.66 million in 2007 and the costs have doubled since the previous year. Analysts estimate that most of the increase can be attributed to companies preparing for the new J-Sox regulations. In total, Japanese company spending on compliance has increased from $844 million in 2006 to $2.1 billion in 2007.

The Japanese are worried that the new regulations could send some global companies that are doing business in Japan packing, much like the shift of companies listing on the US market exchanges to places like the London exchange. But the trend is clear. While compliance regulations come at high cost, countries are finding that overall the stability and safety that regulations like Sarbanes-Oxley and J-Sox provide outweigh the negatives. Early adopters to regulations may be experiencing adoption pain now, but ultimately, especially as the regulatory climate goes global, those companies that were early adoptors will be better prepared to compete in the global markets.