VZCZCXRO8078
RR RUEHFK RUEHGH RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #2946/01 1790913
ZNR UUUUU ZZH
R 280913Z JUN 07
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 5004
INFO RUCPDOC/USDOC WASHDC
RUEATRS/TREASURY DEPT WASHDC
RUEHUL/AMEMBASSY SEOUL 3706
RUEHBY/AMEMBASSY CANBERRA 2204
RUEHBJ/AMEMBASSY BEIJING 7648
RUEHBK/AMEMBASSY BANGKOK 4237
RUEHIN/AIT TAIPEI 6484
RUEHOK/AMCONSUL OSAKA KOBE 5364
RUEHFK/AMCONSUL FUKUOKA 1787
RUEHKSO/AMCONSUL SAPPORO 2604
RUEHNAG/AMCONSUL NAGOYA 0909
RUEHGH/AMCONSUL SHANGHAI 0182
RUEHHK/AMCONSUL HONG KONG 6265
RUEHNH/AMCONSUL NAHA 4200
RUEHGV/USMISSION GENEVA 3117
RUEHBS/USEU BRUSSELS
RUEAWJA/USDOJ WASHDC

UNCLAS SECTION 01 OF 02 TOKYO 002946 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/J AND EB/OIA 
USDOC FOR 4410/ITA/MAC/OJ/NMELCHER 
STATE PASS USTR FOR BEEMAN, MEYERS AND DWEINER 
JUSTICE FOR ANTITRUST DIVISION - CHEMTOB 
TREASURY FOR IA/CARNES AND POGGI 
GENEVA ALSO FOR USTR 
PARIS FOR OECD 
 
E.O. 12958: N/A 
TAGS: EINV ECON EFIN JA
SUBJECT: TOKYO STOCK EXCHANGE TO INTRODUCE DEPOSITARY RECEIPTS BUT 
IMPACT UNCLEAR 
 
 
SENSITIVE BUT UNCLASSIFIED - PROTECT ACCORDINGLY 
 
¶1.  (SBU) The Tokyo Stock Exchange plans to introduce a system of 
Japanese Depositary Receipts (JDRs) starting in September 2007.  The 
system will provide a new option for foreign companies that want to 
access the Japanese capital markets, but that cannot or do not wish 
to list their shares directly.  JDRs will be domestic securities, 
priced in yen, with transactions settled by means of the regular 
Japanese clearing system.  For Japanese investors seeking to 
internationalize their portfolios, this makes JDRs more convenient 
than purchasing foreign stocks directly.  Both TSE and METI 
officials view the introduction of this new type of financial 
instrument in the Japanese markets as contributing to making Tokyo a 
more globalized financial center.  Whether significant numbers of 
foreign companies will be interested in a JDR listing remains 
unclear.  End Summary. 
 
¶2.  (U) Like the almost 80-year-old system of American Depositary 
Receipts under which shares of over 280 foreign firms trade on the 
New York Stock Exchange, the JDR would be a security issued by a 
domestic depositary bank that represents shares of a foreign 
corporation held by that institution, which in most cases would be 
an investment bank.  The TSE would quote prices for and trade JDRs 
alongside domestic shares.  Prices for the securities would be in 
yen and dividends paid in yen.  Investors would be able to hold the 
securities in their domestic investment accounts and to avoid 
opening the special accounts and paying the additional fees required 
to trade and own foreign securities in Japan.  In this way, the JDR 
represents a convenient way for Japanese investors to 
internationally diversify their portfolios. 
¶3.  (SBU) According to the Head of Product Development at the TSE 
Listing Department, foreign companies issuing JDRs will need to 
comply with the same disclosure rules as any other TSE-listed firm. 
They will also need to submit financial statements, in Japanese, to 
the Ministry of Finance and to offer potential investors a 
prospectus that includes the number of depository receipts on offer 
and their total value.  The firms must also publicly disclose any 
material changes, such as corrections of earnings results, via press 
releases or other public media in Japanese. 
¶4.  (SBU) Until recently, Japanese law provided no legal basis for a 
secondary security such as the JDR or for the Exchange Traded Fund 
(ETF) Beneficiary Certificates - a depositary receipt based on a 
foreign traded listed fund rather than an individual listed stock - 
that TSE plans to introduce at the same time.  The crux of the 
problem, according to METI's Director of Industrial Finance, was 
that under Japan's civil code there was no way to transfer the 
underlying rights inherent in the foreign share to the purchaser of 
the depositary receipt.  With the revision of Japan's Trust Law and 
the implementation of the new Financial Instruments and Exchange Law 
in September 2007, a legal basis for transfer of rights and payments 
between the issuer of the underlying stock the depositary 
institution and the ultimate beneficiary will exist.  TSE has 
already begun discussions with a number of foreign and domestic 
investment banks about participating as trustees in the scheme. 
 
¶5. (SBU) A JDR program has particular appeal to the TSE, which is 
looking for ways to expand its product portfolio and boost its 
overall profitability in advance of its expected 2009 initial public 
share offering.  Although TSE tells us it does not need explicit 
approval from the Financial Services Agency (FSA) to introduce these 
new products, the exchange has been in consultation with the agency, 
which had no objection.  TSE officials tell us they have found FSA 
officials far more receptive to the idea of new product offerings 
since public discussion of promoting Tokyo as a global financial 
center arose in recent months. 
 
TOKYO 00002946  002 OF 002 
 
 
 
¶6.  (SBU)  Neither TSE nor METI officials could provide clear 
projections of how many foreign firms they expected to take 
advantage of a JDR listing.  Nor could they say whether or how a JDR 
program would be better for a foreign firm than listing its shares 
directly.  Although outgoing TSE President Nishimuro had told EMIN 
in 2006 that increasing the number of foreign companies listed on 
the exchange was one of his priorities, the number of TSE's foreign 
company listings is less than 30 today, down from a high of over 120 
in the early 1990s. 
 
¶7.  (SBU) The Director of METI's Industrial Finance Division told us 
the most likely potential issuers of JDRs would be firms based in 
jurisdictions, such as India and Taiwan, which have laws explicitly 
prohibiting domestic companies from listing shares overseas. 
Medium-sized foreign companies may also find it cheaper to issue 
depository receipts rather than stock if the depositary bank 
prepares the necessary listing documentation and takes care of 
investor relations. Finally, some foreign firms considering the 
triangular merger mechanism -- a stock-swap acquisition via a 
subsidiary firm incorporated in Japan -- under Japan's new Company 
Law may chose to use JDRs instead of foreign-listed stock as 
consideration in the merger to make the deal more appealing to the 
target company's shareholders. 
 
¶8.  (SBU) Comment: In our discussions with TSE officials, there was 
no indication they had a clear calculation of the potential size of 
the JDR market.  Rather they viewed an expanded menu of investment 
products by itself as a benefit for the exchange and for Japanese 
investors in general.  It is unclear whether this new scheme will 
attract a significant number of foreign companies to list in Tokyo 
at a time when global capital markets are already awash in 
liquidity. 
 
SCHIEFFER