The Changes of Accounting Standards and Structural Reform in Japanese companies

Yasuhiro Asami
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Yasuhiro Asami: Principal Fellow, Center for Research and Development Strategy, Japan Science and Technology Agency

Public Policy Review, 2006, vol. 2, issue 1, 233-282

Abstract: In the business year beginning on April 1 1999 or later our accounting standards have been greatly changed. Concretely (1) the disclosure of consolidated financial statements as audited documents, (2) consolidated statements of cash flows, and (3) tax consequences accounting have been introduced in the business year beginning on April 1 1999 or later. In addition (4) the standard for fair value accounting of financial instruments and (5) the accounting standard for employees' retirement benefits (Hereafter this accounting standard will be abbreviated to retirement benefits accounting) have been introduced in the business year beginning on April 1 2000 or later. This has been often called, 'Big Bang Reforms of Accounting Standards' in our country. The reforms of accounting standards are still now in progress. In this paper I tried to analyze not only the direct effects of the above 5 new accounting standards into the figures of financial statements of Japanese companies, but also the ripple effects into their behaviors and our economic performances on macro basis. Also I tried to consider the implications of the changes of Japanese companies caused by the Big Bang Reforms of Accounting Standards for economic policy makers. For the transition from the former accounting standards to the new ones, Japanese companies had been forced to report the huge amount of costs as extra-ordinary losses in FY1999, FY2000, and FY2001. However, the amount of extra-ordinary losses has continued to show a decrease since FY 2001. This could indicate that Japanese companies have made progress to adapt with new accounting standards. Additionally Japanese companies with the capital of 10 billion yens or more in particular have improved their performances of indicators such as ROA, ROE and turnover of tangible assets since FY2002. Moreover the close relationships between banks and private companies through cross-shareholding stocks, has been weak. These changes on micro basis could affect Japanese economy as a whole. One of the above possible positive effects may be that private investments have shown a recovery mainly due to the improvements of rate of return of Japanese companies as a natural effect of new accounting standards, accompanied by the export boom and strong demand for digital electronic devices. On the other hand, considering at least the following two examples, it may be meaningful to reconsider the effects of economic policy measures to private corporations' activities under the new accounting standards. (1) As many Japanese companies have been streamlined, there has been produced fund surplus in private non-financial corporations' sector as a whole. In contrast the amount of fund surplus in households sector has been decreased due to the lack of enough size of flow of fund from private non-financial corporations to household sector as well as to the effect of the aging population. If we should try to reduce fund shortage in general government sector on the assumption that the size of fund surplus in private corporations' sector would be unchanged, by definition, this might increase the size of fund shortage in overseas sector or decrease the size of fund surplus in households sector. However there may be limitations to the both above changes, whereas we cannot expect very much that private corporations will increase compensation of employees. (2) The retirement benefits accounting may weaken the effect of loose monetary policy. One example for this is that the low interest rate policy has been increasing the amount of retirement projected benefits obligation of companies through the decline of discount rate under retirement benefits accounting, and decreasing expected rate of return on pension assets, although it has much contributed to the decrease of interest repayments of companies with lots of liabilities. (Note) Any opinions and views in this paper should not be interpreted as those of the organization, which the author is belonging to. In addition any possible mistake in this paper is responsible exclusively for myself. I am very grateful to my colleagues in the Research and Statistics Department of the Policy Research Institute of Ministry of Finance for providing me with the relevant data and information on accounting standards and taxation system. Also I thank the people in Ministry of Finance and Financial Supervisory Agency for extremely helpful comments. Moreover I really appreciate the assistance of Ms. Nagai, and her colleague in Research Department of this institute to correct the tables and the charts in this paper from the initial stage.

Date: 2006
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