7/86 TOKYO TAKES FOREX THIRD PLACE FROM HONG KONG & SINGAPORE--CURRENCY RULES FURTHER EASED

Trading in the Tokyo foreign exchange market during 1986 is expected to hit a level of $3 trillion, DOUBLE THE LEVEL OF 1985 and three times higher than 1981. Trading during the January-May, 1986 period had already hit $950 billion and was growing rapidly It is now estimated that foreign exchange trading on the Tokyo market was 50% of the level of the London market and 60% of the US market, clearly making Tokyo the third ranking market. The authorization of direct interbank trading in yen-dollar transactions was behind this increase in Tokyo activity. Another major factor is Japan's becoming the world's largest creditor nation investing about $50 billion a year in foreign bonds. Possibilities are high that the Ministry of Finance will ease foreign currency holding restrictions on Japan based banks from around October 1986. Presently major banks are permitted to hold about $80 million in their foreign exchange positions while the smaller banks are permitted about $30 million. Specifically, the Bank is considering excluding the gains from option trading in the holding levels as well as permitting interest income from foreign currency denominated investments to be kept in the original currencies without conversion into yen. This would in effect create additional currency accounts. Moreover, interest from swap deals and overseas subsidiaries would be added to the foreign exchange positions. The foreign currency position limits were originally created to limit the risks involved in the wide swings in foreign exchange rates. This system was, however, initiated at a time related to export and import trade. The system seems particularly inappropriate now that Japan is emerging as a major world financial center, handling massive capital and financial transactions, in addition to its long standing trade related transactions. The following is an outline of the proposed revisions for the system of foreign exchange holdings by banks.

1. Income and interest to be received in the future in fund transactions related to swap transactions, that are covered by futures, may be added to futures holdings levels.

2. Futures which are used for covering---the total of the overseas branches of authorized foreign exchange banks which are scheduled for transfers to the branch from the head office to the branch when there is a loss) and of (2) the dividend payments (based on investment) to foreign corporations whether definitely set even before the date of settlement, or set based on calculation methods of a reasonable certainty in view of consultations with financial authorities that are carried out on a continuous and rational manner---may be added for the transfer of profits etc to the head offices of foreign bank branches).

3. Options transactions are not included within the holding limits. Provided, however, that when, in view of consultations with the financial authorities, the option transactions are covered by ordinary futures transactions in a continuous and rational manner, or where a wide band futures transactions is covered by an option transactions, it will be permissible to exclude the futures from the holdings limit.

4. Where country risk reserves are reserved in foreign currencies, as an offsetting account against foreign currency denominated assets held, it will be permissible to include the reserve in foreign currency liability levels.

5. Interest receipts or payments arising out of the procurement or management of funds in transactions totally in foreign currencies, upon consultations with the financial authorities, shall be permitted as additions to foreign currency holding levels as interest to be received or interest to be paid, or when the interest has actually been paid or received, permitted as additions to assets or liabilities in foreign currency holding levels.

6. Foreign currency futures contracts which are in relation to the receipt or payment of interest in currency swap transactions may be excluded from holdings levels for futures.

7. The standard time for the calculation of holdings levels carried over to the next day at the end of business hours shall be, at the selection of the foreign exchange bank, either the end of the business hours for the Tokyo foreign exchange market, (3:00 PM) or 12:00 PM so long as the standard selected is consistent.

THE JAPAN LAWLETTER. July 1986. By Roderick Seeman