It has emerged that the Japanese FSA last summer dismissed a proposal by the Japan Business Federation to introduce covered bond legislation, saying there was no immediate need for the funding tool and citing concerns about depositor subordination and the message such a move might convey.

According to an analyst at a Japanese bank, the Financial Services Agency’s position and government moves leading up to its verdict were made public by the government in December.

Keidanren offices(left), Tokyo

The Japan Business Federation (Keidanren) had submitted its written proposal to the Cabinet Office in March 2013 and this was passed on to the FSA in July last year.

However, according to the analyst, the FSA responded to the Cabinet Office on 31 July 2013 saying that the introduction of covered bonds was “not appropriate”. It said that there was “no immediate need by the industry” and that introducing legislation “may incur speculation that Japanese banks are facing funding difficulties”. It also said that covered bonds could result in “potential harm to depositors and to the deposit insurance system”.

The FSA was involved in the discussions partly because the introduction of covered bond legislation would require amendments to Japan’s Banking Law and Deposit Insurance Law, noted the analyst.

The possible introduction of covered bonds has been actively explored since at least 2011, when a covered bond study group was established by the Development Bank of Japan. DBJ was considered a potential issuer given that it is not a deposit-taking institution and the possible use of public sector assets to back covered bonds was an integral part of Japanese proposals.

In July 2012 the Japanese Cabinet adopted the introduction of covered bonds as a policy, but in spite of the industry’s lobbying efforts the FSA’s position has dimmed the prospects of the instrument being adopted in Japan. The Covered Bond Report understands that some members of the study group are continuing their lobbying efforts, although the analyst said that it would be a “struggle”.